Litigation and Trial - Max Kennerly : Philadelphia Trial Lawyer Max Kennerly : Business and Commercial Litigation : Civil Attorney : The Beasley Firm : Philadelphia Pennsylvania

As widely reported by every tech site on the internet, last week Oracle (which recently acquired Sun Microsystems) sued Google for infringing upon a variety of software patents Sun obtained while developing the Java software platform.

For the facts, I can't improve upon the fine commentary at Groklaw, CNet, and tech-specific sites like RedMonk. James Gosling, inventor of Java programming language, has even commented on it.

Two conclusions are inescapable:

• Sun could have, but chose not to, sue over the same patents, likely (at least in part) to preserve goodwill with the developers who used the Java framework;
• There's a real chance that all of the patents are invalid under Bilski v. Kappos, since they represent, as most, mere ideas.

Thus, the lawsuit represents a substantial business risk not just for Google, but also for Oracle. Oracle runs not just a risk that they'll lose the suit, but also a risk that they'll be worse off than where they started by squandering much of Sun's goodwill and invalidating patents so valuable that back in 2004 Microsoft paid Sun $900 million to settle an infringement suit over them.

The stakes are high.

So high that the case seems unlikely to settle, and thus may change patent law nationwide.

In some lawsuits, both sides generally agree from the onset that the case has merit. In the Deepwater Horizon spill, for example, there's no doubt that BP is liable to someone for some amount — the questions are to whom and for how much, and in many ways the litigation is nothing more than a continuation of negotiation by other means.

In most cases, however, it takes some time before the parties come to similar understandings of the merits and value of the claim. That's why so few cases settle before the close of discovery even though the vast majority eventually do settle.

The key point here, however, is that most cases eventually become negotiations by other means. In most cases, expert reports, summary judgments, motions in limine — sometimes even trials and appeals — are all just steps in that complicated dance, conceptually no different from a business negotiation.

A handful of cases, though, are anything but negotiation by other means; they are total war. The lawsuit will continue until all motions, trials, and appeals have been concluded and the sheriff has been called to enforce the judgment.

And so it seems to be the case with Oracle v. Google. Oracle isn't stupid — even if they were, David Boies, their lead counsel on the case, isn't stupid — and isn't going to suddenly realize that the Bilski opinion effectively killed the precedent upholding the validity of software patents, leaving the question of their validity wide open. Oracle knew that going in. Oracle is also not going to suddenly realize that Sun had good reasons for not suing Google over these same patents. Oracle knew that going in.

In other words: Oracle has launched total war.

Same goes for Google: unless Oracle effectively abandons the case and offers to settle it for little more than the cost of defense — which is unlikely — then Google has too much to lose by settling. More importantly, Google has too much to gain by winning, namely the invalidation of Oracle's (and potentially other companies') patents.

Which is why this case — and the central question of whether or not Sun's patents are valid — might make it all the way through up to the Court of Appeals for the Federal Circuit and possibly the Supreme Court. It's no stretch to say that billions of dollars hang on the answer.

(Thankfully, we might get an answer sooner rather than later. The Northern District of California, where the suit was filed, pioneered the use of local patent rules to expedite patent suits, making patent infringement suits much quicker to litigate and to decide, even cases of this scale.)

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Norm Pattis is weary of questions:

I realize this sounds harsh, but I am simply undone by the sorrow, the rage, the anger and sometimes the sheer irrationality of folks caught within the law's vice. My firm is a small shop, but we have one paralegal whose job it is to serve as the communication point for clients. He engages in a sort of triage with the thousand and one questions that arise in a day. Still, there are needs that go unmet, clients who believe that we do not pay enough attention to their needs.

The trickiest part of being a lawyer is knowing which cases to take. No lawyer can get along with everyone. There are simply bad marriages. I've had more than a few. I have moved to withdraw when some client's needs overwhelm me and my firm. We once represented a person who insisted they be consulted on each media call. The client wanted to write what lines we should recite when a reporter called. When we decided simply not to respond to media inquiries, fur flew. We were soon accused of working to undermine the client's interest. It was time to get out, and so we did. It was an unhappy parting.

In another case, I did not consult my client on each move in the case. I withdrew certain counts of a civil case when it became apparent to me that I could [not?] meet my burden of proof. I did not consult the client, who, early in the course of the litigation, started asking questions about whether the proceeds of the litigation were taxable. The client was counting chickens before they hatched; I was worried about the fox. I was grieved by the client in that case, and the federal grievance committee found probable cause to believe I had failed in my duty to communicate adequately. I moved to withdraw from that case as well. A later hearing before a District Court judge resulted in no discipline. The client now believes I was engaged in some [broad] and far-reaching conspiracy.

As Norm concedes, this failing makes him a "less than perfect lawyer." It does. A perfect lawyer informs the client of each and every event in the case, including informal correspondence with third parties or with opposing counsel.

But there are only so many hours in the day. Even if a lawyer obsessed about their cases every hour of the day — which we don't want them to do, since it will cloud their judgment — they still wouldn't be able to explain every hypothetical possibility to the client.

Fact is, if a client wants a perfect lawyer, they need to find one willing to devote their entire practice and personal life to their case alone.

The rest of us imperfect lawyers use two techniques: triage and ticklers.

Triage is just like in the hospitals: we attend to the most pressing matters first. David Dow, who represents defendants on Texas' death row, is one of the most respected lawyers in America, yet his The Autobiography of an Execution concedes letting cases go by the wayside for months, sometimes years. He's a less than perfect lawyer, and understandably so: he can't hunt down every trace of exculpatory evidence for a client whose execution is years away when another one of his clients is weeks, days or hours away from death. My triage in civil litigation doesn't carry as much gravity, but it's no less real: I must prioritize the most urgent matters. I do the same for every client when their matter becomes the most urgent matter.

A "tickler" (part of a "tickler file") is a funny name that lawyers dreamed up for "reminder." Litigators in particular are always on some sort of deadline, either by way of the statute of limitations, a deadline for filing or responding to a motion, the closing of discovery, the submission of expert reports, the preparation for a hearing, the taking of a deposition, or trial. Sometimes, the necessary work can be done in minutes. Sometimes it will take weeks. The ticklers are ways of interrupting the triage to point out that work due later needs to be started now.

In theory, it should be easy to incorporate client contact into this system by making ticklers for client conduct. There are, however, only so many hours in the day. More importantly, attention, like time, is a limited resource. I can only give a client a status update when I am in the office, which is only when I'm not at a court conference, a hearing, a deposition, on trial, or otherwise out. But when I'm in the office, I'm bombarded every day with dozens of calls, emails, letters, filings and, yes, ticklers for other matters. More distractions equals less attention.

I don't know the specifics of Norm's practice, but I presume that he, like most criminal defense lawyers, represents clients on a fixed fee. I represent clients on a contingent fee, and I bet Norm does, too, when he files civil suits. We are thus both not paid for our time, not paid to consult, not paid to teach; we are paid to fight the whole battle from start to finish.

If you want someone to teach you the intricacies and contradictions of the law, that's available, just be ready for $60 for each courtesy email. But if you've hired someone on a contingent or fixed fee to do battle, it's not unreasonable for them to contact you only as necessary and as useful for your case.

For my clients, if you haven't heard in a while and don't know the status, please write or call, and we'll put your call in the triage and the tickler file and get back to you. If we don't get back to you in a few days, call again. (Email is even better, since I get it outside the office.) If you've learned of or thought something interesting, please write or call, and I'll consider it. Otherwise, I'll contact you when necessary and useful for your case, such as when you need to review an allegation, prepare for discovery, or consider an offer, and I'll forward you the court filings I made on your behalf.

Norm considers this "harsh." I don't. The vast majority of my clients appropriately contact me when they genuinely have questions about the status of their case, then ask me a handful of questions. We discuss it until they understand, and then I get back to work. That's fine. It's reasonable and appropriate for clients to expect it.

My clients are, by and large, polite people with reasonable expectations. Indeed, some cases require substantial investigation pre-suit, are on appeal, or are delayed by the defendant's bankruptcy, leading to months of inactivity, and yet some of those clients apologize to me for interrupting my work when they check in after a few weeks. They don't have to; it's their case, their right.

Only a tiny fraction wear out their welcome. For those, there really isn't a question as to what should be done. The lawyer is unhappy with the client and the client is unhappy with the lawyer. Representation should not be undertaken or should be ended as soon as possible. Easy to say, hard to do.

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[UPDATE: The WSJ Law Blog has copies of the letters submitted to the Delaware Chancery Court. Professor Hazard is undoubtedly one of the pre-eminent experts in the field, and he makes a compelling argument that Cravath violated the Rules of Professional Conduct. Yet, showing a violation of the Rules is not enough — to disqualify counsel under Chancellor Chandler's standard, Airgas will have to show the violation will "materially advance" Air Product's position or undermine the fair and efficient administration of justice. So far, I haven't seen anything demonstrating that. The vague references made so far to Cravath's insider knowledge of Airgas's finances isn't enough, since a firewall within Cravath can likely cure that problem.

UPDATE II: As predicted, the Eastern District of Pennsylvania declined to enter an injunction against Cravath, and the Delaware Chancery Court did not disqualify them.]

As has been reported all over the legal media,

Industrial gas producer Airgas filed suit against Cravath, Swaine & Moore on Friday over the firm's role as legal adviser to rival Air Products on that company's $5.1 billion bid for Airgas.

... Air Products filed a complaint on Thursday in Delaware's Chancery Court against Airgas, claiming that the smaller company improperly blocked its board of directors from considering previous Air Products takeover offers. Cravath litigation partners Francis Barron, David Marriott and Gary Bornstein are representing Air Products in the Delaware litigation along with local counsel Kenneth Nachbar (he of sports gambling notoriety) and Jon Abramczyk from Morris, Nichols, Arsht & Tunnell. (Click here for the Chancery Court complaint, courtesy of The Times' Dealbook.)

Airgas responded by retaining Cozen O'Connor chairman Stephen Cozen, litigation chair Jeffrey Weil and litigation partner Thomas Wilkinson Jr., for a civil suit against Cravath in state court in Pennsylvania. In the suit, Airgas claims that Cravath has a conflict of interest and breached its fiduciary duty by representing Air Products because it previously advised Airgas on several financings. According to Airgas' complaint against Cravath, the company has had a client relationship with the firm for 10 years and has paid Cravath about $2 million, including a $320,000 payment last October.

There's an obvious question dangling over the Pennsylvania suit filed by Airgas: what basis — or power — does a state court in Pennsylvania have to preclude a New York law firm from representing a Delaware-registered company in Delaware state court litigation against another Delaware-registered company?

Unsurprisingly, that's just what Philadelphia Court of Common Pleas (Commerce Court) Judge Albert Sheppard Jr. wondered before denying Airgas' petition for a temporary restraining order:

In essence, I would be saying to a lawyer you can’t go to Delaware and represent your client. I find that difficult. I don’t want to do that.

Judge Sheppard only had it for two weeks, though, since Cravath, like virtually every out-of-state defendant, promptly removed the case to Federal court, i.e. the Eastern District of Pennsylvania, where it was assigned to Judge Eduardo Robreno (whose work in the Philadelphia Inquirer bankruptcy I've covered before).

Cravath (represented by a team at Conrad O'Brien*) has responded to the suit and has asked Judge Robreno to abstain from hearing the case at all:

First, whatever this Court may ultimately decide with respect to Airgas’s claim for money damages, Airgas’s request for a preliminary injunction is the functional equivalent of a motion to disqualify Cravath from appearing before the Delaware Chancery Court. With all due respect, Cravath submits that a motion precluding counsel from appearing in Delaware Chancery Court is more appropriately decided by Chancellor William B. Chandler III, who presides over the firstfiled Delaware litigation. Just as this Court has full authority over proceedings here, judicial comity warrants according Chancellor Chandler due authority over proceedings in his courtroom. ...

Second, the Delaware Chancery Court is aptly suited to decide the key issue presented by Airgas’s petition to this Court—whether Cravath should be disqualified. Indeed, the dispute concerning Cravath’s ability to represent Air Products is intertwined with the merits of the (firstfiled) Delaware litigation. ...

Third, whereas this Court’s ruling on Airgas’s petition for preliminary relief would be, by definition, provisional, the Delaware Chancery Court’s ruling on the question of whether Cravath should be disqualified will be a final decision on the merits.

(From Cravath's brief, available on RECAP.)

It's hard to argue with that; whatever the merits of the conflict-of-interest allegations, it seems they all relate to the Delaware litigation and so should be decided there.

Of course, there's a reason Cravath wants the case decided in Delaware's Chancery Court (and why Airgas wants it decided elsewhere). As Francis G.X. Pileggi notes:

[Airgas'] separate suit alleging a conflict was filed in Philadelphia. One might speculate that the suit was not filed in Delaware and it was not filed as a motion to disqualify, because the Delaware decisions recently have not granted many motions to disqualify. See, e.g., cases summarized on this blog here.

Indeed, one might speculate that. More on that in a moment.

Back in Delaware, it seems a war of correspondence has broken out:

Airgas (which has retained Wachtell, Lipton, Rosen & Katz) began the exchange of correspondence Monday, when it sent a letter to Chancellor William Chandler at Delaware's Court of Chancery ... In its Monday letter to Chandler, Airgas argues that a Pennsylvania courtroom is the proper place for the Cravath hearing. In response, Air Products and local counsel Kenneth Nachbar of Morris, Nichols, Arsht & Tunnell drafted their own letter to Chandler, urging him to decide on Cravath's fate in Delaware and accusing Airgas of trying to "circumvent" Chandler's authority by suing in Pennsylvania.

Airgas also has enlisted a legal ethics expert who has issued an opinion letter in which he claims Cravath was working under "a clear and serious conflict of interest" while it was helping Air Products formulate its takeover bid last fall, according to a copy of the letter obtained by The Am Law Daily. In his letter, Geoffrey Hazard Jr., a professor at the University of Pennsylvania Law School, says Cravath ... violated the so-called "hot potato" rule, which holds that a firm cannot get out of a conflict simply by dropping one client on short notice, Hazard wrote.

Like I wrote before, the hot potato rule lives. Here's a recent recitation of the rule:

Courts that have considered the issue have held that a firm will not be allowed to drop a client in order to shift resolution of the conflicts question from Rule 1.7 dealing with current clients, to the more lenient standard in Rule 1.9 dealing with former clients.

El Camino Res., LTD. v. Huntington Nat'l Bank, No. 1:07-cv-598, 2007 U.S. Dist. LEXIS 67813, at *39–40 (W.D. Mich. Sept. 13, 2007).

On the surface, that's not good for Cravath — if Chancellor Chandler applies a similar analysis, then Cravath will be evaluated as if it was simultaneously representing Airgas and Air Products on both sides of the litigation, which is expressly prohibited by the Delaware, Pennsylvania and New York rules.

But the final analysis is a practical one:

The finding of an ethical violation, however, does not automatically require disqualification. The court should order disqualification only where some specifically identifiable impropriety has actually occurred and the balance of relevant factors requires vindication of the integrity of the legal profession over defendant's interest in retaining counsel of its choice.

Id.

Returning again to why Cravath wants the issue decided in Delaware by Chancellor Chandler, it bears mention here that Chancellor Chandler took a strongly disqualification-unfriendly view in a similar case a year ago, in which Dow Chemical attempted to disqualify Wachtell from representing Rohm and Haas:

I am not persuaded that Wachtell’s access to this information will materially advance Rohm and Haas’s position or undermine the fair and efficient administration of justice. Dow’s defense to specific performance is that conditions in the market and within Dow have changed significantly since December 2008 and that it is no longer feasible for the merger to close. Dow has failed to convince me that the information Wachtell had access to regarding Dow’s strategies and asset values in 2006 and 2007 will substantially advance the interest of Rohm and Haas in this litigation. Additionally, Wachtell has assured the Court that its attorneys who obtained confidential Dow information have not and will not share Dow’s client confidences with the Wachtell attorneys working on this matter. While Dow is correct that the ethical rules impute knowledge of one attorney to other attorneys in the firm, the issue before the Court is not whether there was a violation of the ethical rules. To justify disqualification, the Court must find that allowing the representation to continue would threaten the fair and efficient administration of justice, a threat that is greatly reduced by a credible representation to the Court that the firm will ensure that the attorneys working on this matter do not have access to Dow’s client confidences. Dow has failed to point to information or confidences obtained by Wachtell in its 2006-2007 work for Dow that will have a material influence on the proceedings before me today.

Rohm and Haas Co. v. Dow Chem. Co., No. 4309-CC, 2009 WL 445609, at *3 (Del. Ch. Feb. 12, 2009)(also courtesy of Pileggi).

Truth be told, there's not much distinguishing the Rohm and Haas v. Dow situation from the present case with Cravath, except for the "hot potato" rule aspect, given how Cravath's work for Airgas was much more recent than Wachtell's work was for Dow. Indeed, it seems Cravath's work for Airgas unambiguously overlapped its work for Air Products.

As noted above, though, a mere violation of the rules isn't enough; the question is what prejudice the former client will suffer and if that prejudice can be avoided. Cravath's work for Airgas was comparatively small, and if Cravath sets up an ethical firewall that keeps the former Airgas attorneys away from the Air Products lawsuit, that will likely be enough to satisfy Chancellor Chandler.

- - -

* True story: when I interviewed at Conrad O'Brien, they took me to a nearby fancy seafood restaurant, where I was served a shrimp étouffée with a staple hidden in it. The following exchange ensued me and an attorney who was 'of counsel' with the firm:

Of counsel: Did you bite down on it?

Me: No, I noticed something was wrong and spit it out.

Of counsel [with a grin]: You know, I used to represent personal injury plaintiffs. So let me ask you again: did you bite down?

Other than the joke, however, all we got out of the experience was a free round of a coffee from the restaurant.

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Matthew Belloni at The Hollywood Reporter, Esq., has a copy of the 'Tonight Show' contract that's been the subject of much speculation over the past few weeks. He can't post the contract itself (I asked), but he described with considerable detail the parties' positions:

[W]e've finally tracked down a copy of the O’Brien contract, and -- lo and behold -- NBC did define “Tonight” as the series that airs at 11:35 as far back as 2002. However, what may have emboldened NBC to move the program anyway was the absence of that key language from later amendments to the deal.

Read the whole piece for more.

As Belloni continues,

Insiders familiar with settlement negotiations say NBC jumped on that fact to argue that the "operative" deal was silent on the timeslot issue and even contained some NBC profit-participation boilerplate allowing NBC discretion to move shows as it chooses. 

One problem with that argument: Any lawyer worth his 5% commission knows you've got to read an amended contract in the context of all other prenegotiated elements. O'Brien's 2004 deal incorporated by reference and ratified all the terms of his prior deals -- including the "Tonight Show" definition -- and says any conflicts between NBC's standard terms and the negotiated terms are governed by what's been negotiated.

Fact is, an amendment is still an amendment, not a new deal, even if you also call it a separate agreement. NBC's argument that the amendment — which specifically incorporated the old deal — was nonetheless actually a wholly-new deal would have been charitably described as "novel," which in the law is often synonymous with "bad." I don't doubt that O'Brien's lawyers saw right through NBC's argument and held firm throughout the negotiations.

Most importantly, congratulations to O'Brien and his lawyers for keeping their eye on the ball for all these years: they contracted for — and this is the language in the contract — the "Tonight Show" defined as the "series that airs at 11:35," more specifically the "second network series after the end of primetime."

As I wrote in Time-Tested Advice For Young Lawyers About Contracts Which They Should Ignore, 

In certain circumstances -- like some real estate transactions -- there is language used so frequently that it has become the standard against which all other grammar and syntax is measured. Any deviation will likely be interpreted against the person who suggested it.

If you have one of those situations, be sure you know what the "standard" language is. Otherwise, focus on making the text of the written agreement reflect the reality of the parties' understanding, not on adding in "gobbledygook" to make it look lawyerly.

O'Brien's lawyers realized that and didn't contract just for a particular name or for a bunch of legal gibberish, they contracted for a particular slot in the evening lineup. They understood the client's goals, recognized the potential risk, and dealt with both in the contract in a clear, unambiguous manner that withstood a serious challenge.

Crack open a bottle of champagne, Patty Glaser and Leigh Brecheen, and charge it to Conan's account. You earned it.

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Warren Buffet often gets credit for coining the phrase "skin in the game" — even though it's not his — and his definition is, shall we say, on the money. "Skin in the game" makes a difference:

Mutual funds whose directors have "skin in the game" significantly outperform their competitors, according to a study by Syracuse University Prof. David Weinbaum. His results confirm the commonly held belief that directors who are invested in the funds that they oversee act as better stewards than directors who don't have any money on the line.

It's not the first time Prof. Weinbaum has shown that.

I'm a big believer of "skin in the game" — virtually all of my clients are on a contingent fee — and have written before about how contingency fees reduce frivolous litigation and how third-party investment in lawsuits can level the playing field against well-funded defendants.

So I was happy to read Why Investment Bankers Should Have (Some) Personal Liability at The Harvard Law School Forum on Corporate Governance and Financial Regulation:

We have written a short paper for a symposium on the work of Adolf Berle in which we advocate reintroducing some measure of personal liability for bankers, as was the case in Berle’s day, and indeed up through the 1980’s. We describe in our paper the broad outlines of a proposal to impose some measure of personal liability for a bank’s debts on the most highly paid bankers. The proposal would revive two mechanisms that imposed personal liability in an earlier era: general partnership, which was common for investment banks prior to the 1980s, and assessable stock, which was relatively common in corporations including some commercial banks through the 1930s.

It is difficult to imagine the investment banking business returning to the partnerships of old. General partnership – with the illiquidity and liability it imposes on general partners and the constraints it imposes on a bank’s ability to raise capital – probably will not be considered a viable option. It is also difficult to imagine corporations in the financial services industry issuing assessable stock to all of their shareholders or regulators seeking to require them to do so.

Our objective is to design another way to impose some of the risks of unlimited liability on the most highly compensated managers and other decision makers at investment banks and other financial services and trading firms. We seek to do so without requiring the firm itself to switch to general partnership form or to make any other change in its organizational or capital structure. We discuss below two alternatives, each one based on historical precedent.

We could argue all day about whether the theoretical incentives investment bankers have are good enough to keep them from crashing the whole financial system — a whole cottage industry has developed in the pages of the Wall Street Journal, Forbes and Business Week to do just that. But the facts are undeniable: our banking industry is broken, dangerously so.

I don't see how we can fix that without giving the bankers some "skin in the game."

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Zubulake v. UBS Warburg LLC, 220 F.R.D. 212, 217 (S.D.N.Y. 2003) is, as I wrote before, the Tale of Genji for electronic discovery. It is as widely-cited as all but the most prominent of Supreme Court opinions.

Gregory P. Joseph brings us selections from Judge Scheindlin’s new magnum opus on the subject, Pension Comm. of Univ. of Montreal, 2010 U.S. Dist. LEXIS 4546 (S.D.N.Y. Jan. 15, 2010):

In an era where vast amounts of electronic information is available for review, discovery in certain cases has become increasingly complex and expensive. Courts cannot and do not expect that any party can meet a standard of perfection. Nonetheless, the courts have a right to expect that litigants and counsel will take the necessary steps to ensure that relevant records are preserved when litigation is reasonably anticipated, and that such records are collected, reviewed, and produced to the opposing party. As discussed six years ago in the Zubulake opinions, when this does not happen, the integrity of the judicial process is harmed and the courts are required to fashion a remedy. Once again, I have been compelled to closely review the discovery efforts of parties in a litigation, and once again have found that those efforts were flawed. As famously noted, "[t]hose who cannot remember the past are condemned to repeat it." By now, it should be abundantly clear that the duty to preserve means what it says and that a failure to preserve records — paper or electronic — and to search in the right places for those records, will inevitably result in the spoliation of evidence.

The Court granted sanctions in the form of an adverse inference / spolitation instruction and monetary compensation to opposing counsel.

Going forward, courts will no longer accept excuses when corporations allow relevant evidence to be destroyed by failing to implement adequate controls:

After a discovery duty is well established, the failure to adhere to contemporary standards can be considered gross negligence. Thus, after the final relevant Zubulake opinion in July, 2004, the following failures support a finding of gross negligence, when the duty to preserve has attached:

• to issue a written litigation hold;
• to identify all of the key players and to ensure that their electronic and paper records are preserved;
• to cease the deletion of email or to preserve the records of former employees that are in a party's possession, custody, or control; and
• to preserve backup tapes when they are the sole source of relevant information or when they relate to key players, if the relevant information maintained by those players is not obtainable from readily accessible sources.

(Emphasis and formatting added).

Consider yourselves warned.

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The Mohawk Industries v. Carpenter (08-678) slip opinion, written by Justice Sotomayor, is available here. Here is the core of the reasoning:

The crucial question, however, is not whether an interest is important in the abstract; it is whether deferring review until final judgment so imperils the interest as to justify the cost of allowing immediate appeal of the entire class of relevant orders. We routinely require litigants to wait until after final judgment to vindicate valuable rights, including rights central to our adversarial system.See, e.g., Richardson-Merrell, 472 U. S., at 426 (holding an order disqualifying counsel in a civil case did not qualify for immediate appeal under the collateral order doctrine); Flanagan v. United States, 465 U. S. 259, 260 (1984) (reaching the same result in a criminal case, notwithstanding the Sixth Amendment rights at stake). In Digital Equipment, we rejected an assertion that collateral order review was necessary to promote “the public policy favoring voluntary resolution of disputes.” 511 U. S., at 881. “It defies common sense,” we explained, “to maintain that parties’ readiness to settle will be significantly dampened (or the corresponding public interest impaired) by a rule that a district court’s decision to let allegedly barred litigation go forward may be challenged as a matter of favor.” Ibid.

We reach a similar conclusion here. In our estimation, postjudgment appeals generally suffice to protect the rights of litigants and assure the vitality of the attorney-client privilege. Appellate courts can remedy the improper disclosure of privileged material in the same way they remedy a host of other erroneous evidentiary rulings: by vacating an adverse judgment and remanding for a new trial in which the protected material and its fruits are excluded from evidence.

As hoped, Justice Sotomayor has brought her trial experience to bear, and has contributed a practical understanding of how the law works at the trial level previously unseen in Supreme Court opinions:

Moreover, were attorneys and clients to reflect upon their appellate options, they would find that litigants confronted with a particularly injurious or novel privilege ruling have several potential avenues of review apart from collateral order appeal. First, a party may ask the district court to certify, and the court of appeals to accept, an interlocutory appeal pursuant to 28 U. S. C. §1292(b). The preconditions for §1292(b) review—“a controlling question of law,” the prompt resolution of which “may materially advance the ultimate termination of the litigation”—are most likely to be satisfied when a privilege ruling involves a new legal question or is of special consequence, and district courts should not hesitate to certify an interlocutory appeal in such cases. Second, in extraordinary circumstances—i.e., when a disclosure order “amount[s] to a judicial usurpation of power or a clear abuse of discretion,” or otherwise works a manifest injustice—a party may petition the court of appeals for a writ of mandamus. Cheney v. United States Dist. Court for D. C., 542 U. S. 367, 390 (2004) (citation and internal quotation marks omitted); see also Firestone, 449 U. S., at 378–379, n. 13.3 While these discretionary review mechanisms do not provide relief in every case, they serve as useful “safety valve[s]” for promptly correcting serious errors. Digital Equipment, 511 U. S., at 883.

Another long-recognized option is for a party to defy a disclosure order and incur court-imposed sanctions. District courts have a range of sanctions from which to choose, including “directing that the matters embraced in the order or other designated facts be taken as established for purposes of the action,” “prohibiting the disobedient party from supporting or opposing designated claims or defenses,” or “striking pleadings in whole or in part.” Fed. Rule Civ. Proc. 37(b)(2)(i)–(iii). Such sanctions allow a party to obtain post judgment review without having to reveal its privileged information. Alternatively, when the circumstances warrant it, a district court may hold a noncomplying party in contempt. The party can then appeal directly from that ruling, at least when the con-tempt citation can be characterized as a criminal punishment. See, e.g., Church of Scientology of Cal. v. United States, 506 U. S. 9, 18, n. 11 (1992); Firestone, 449 U. S., at 377; Cobbledick v. United States, 309 U. S. 323, 328 (1940); see also Wright & Miller §3914.23, at 140–155.

(emphasis added).

I wrote before about Mohawk Industries v. Carpenter. Essentially, a host of corporate defense interests and, disturbingly, the ABA, urged the Supreme Court hold that large corporate defendants with the financial wherewithal to over-litigate cases were special and thus entitled to more appellate review than individuals.

The Supreme Court today held otherwise. It is a good ruling — by a unanimous court — that eliminates a one-sided rule that large corporations routinely used to frustrate and to delay cases. One of the most common tricks played by corporate defense lawyers goes something like this:

• First, the defense files a motion attaching cherry-picked internal documents supporting their defense, some of which were either reviewed by, or drafted by, the corporation's counsel;
• Second, when the plaintiff requests information related to those documents, the defendant asserts attorney-client privilege;
• Third, when the district court rules against the defendant, the defendant immediately files an appeal.

That game alone would add two or more years to litigation.

No longer.

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As I’ve written before, health care is “one of the ugliest businesses in America.” Health care litigation is often just as contentious.

Today’s example comes from Robotics v. Deviedma, No. 09-cv-3552, 2009 U.S. Dist. LEXIS 112077 (E.D. Pa. Nov. 30, 2009), which denied in part and granted in part Defendants’ motion to dismiss.

The facts:

Health Robotics, S.r.L. ("HRSRL") is an Italian company that designs, develops, markets and licences robotic medical preparation products. Plaintiff, Devon Robotics, signed two agreements with HRSRL for the distribution of two robotic medication preparation products for hospitals and health care facilities, i.v.Station and CytoCare. … At the time these agreements were negotiated and signed, Mr. DeViedma, one of the Defendants, served as General Counsel for HRSRL. These contracts between Devon Robotics and HRSRL contained an identical arbitration clause which requires all disputes arising from the agreement to be arbitrated in Switzerland.

Plaintiffs claim that on March 1, 2009, Mr. DeViedma was hired as Devon Robotics' Chief Operating Officer ("COO"). In his position as COO, DeViedma was solely responsible for the management of sales, marketing, support and installation of CytoCare robots on Devon's behalf. All of Devon Robotics' employees reported directly to DeViedma. Additionally, Mr. DeViedma served as the primary contact between Devon and HRSRL.

* * *

In December 2008, Devon Robotics began negotiating a contract with McKesson Corporation, another defendant, which would give McKesson the right to distribute CytoCare within a certain territory in the United States. DeViedma played a key role in negotiating the contract as Devon Robotics' COO. On December 22, 2008, Devon Robotics and McKesson entered into a Confidential Disclosure and Non-Competition Agreement prohibiting McKesson from divulging or using any confidential information for any purpose other than analyzing its deal with Devon. After executing the agreement, McKesson engaged in extensive due diligence. According to Plaintiffs, around March 2009, McKesson and Devon reached an oral agreement regarding the material terms of the Exclusive Distribution, Licensing, Services and Support Agreement. The only thing that was needed to finalize the agreement was to allow McKesson's due diligence of HRSRL in Italy. However, DeViedma, in his capacity as an officer of HRSRL, refused to permit McKesson representatives to visit Italy and complete the due diligence.

Later, after McKesson and Devon Robotics failed to come to an agreement, HRSRL terminated the CytoCare Agreement with Devon Robotics on July 30, 2009. Then on August 10, 2009, McKesson and HRSRL entered into a five year agreement granting McKesson distribution rights with regard to CytoCare in various areas in North America which had previously been controlled by Devon Robotics.

Naturally, Devon sued everyone, alleging breach of fiduciary duty, tortious interference with current and prospective contractual relations, defamation, and conspiracy.

Defendants first moved under Rule 12(b)(1) to dismiss on the grounds that the Devon/HRSRL agreements compelled arbitration:

[A]s this Court noted in Miron, the presumption of arbitrability has never been extended to claims by or against non-signatories. Miron v. BDO Seidman, LLP, 342 F. Supp. 2d 324 (E.D. Pa. 2004); see, e.g., Medtronic Ave Inc. v. Cordis Corp., 367 F.3d 147, 100 Fed. Appx. 865 (3rd Cir. 2004) (quoting Sweet Dreams Unlimited, Inc. v. Dial-A-Mattress International, Ltd., 1 F.3d 639, 642 (7th Cir. 1993)). Because arbitration is a matter of contract, exceptional circumstances must apply before a court will impose a contractual agreement to arbitrate on a non-contracting party. AT&T Tech., 475 U.S. at 650. However, as this Court again noted in Miron, there are five established theories under which non-signatories may be bound to the arbitration agreements of others: (1) incorporation by reference; (2) assumption; (3) agency; (4) veil-piercing/alter ego; and (5) estoppel. Thomson-CFS v. American Arbitration Association, 64 F.3d 773, 776 (2d Cir. 1995). Furthermore, where the party seeking enforcement of the arbitration clause is a willing non-signatory an alternative theory of reverse estoppel may apply. Thomson-CFS, 64 F.3d at 779.

The only theory under which DeViedma may be able to enforce the arbitration clause is the alternative estoppel theory. The alternative estoppel theory binds a signatory to arbitrate at a non-signatory's insistence where there is an obvious and close nexus between the non-signatories and the contract or the contracting parties. E.I. DuPont, 269 F.3d at 199. The two-part test for alternative estoppel requires a court to determine whether there is a 'close relationship between the entities involved,' and examine the 'relationship of the alleged wrongs to the nonsignatory's obligations and duties in the contract.' E.I. DuPont, 269 F.3d at 199 (citing Thomson-CSF, 64 F.3d at 779); see also Bannett, 331 F. Supp. 2d at 360. To satisfy the second part of the test, the non-signatory seeking enforcement of an arbitration agreement must show that the claims against them are 'intimately founded in and intertwined with' the underlying obligations of the contract to which they were not a party. E.I. DuPont, 269 F.3d at 199 (citing Thomson-CSF, 64 F.3d at 779).

The essential question in situations such as these is whether plaintiffs would have an independent right to recover against the non-signatory defendants even if the contract containing the arbitration clause were void. 'The plaintiff's actual dependence on the underlying contract in making out the claim against the nonsignatory defendant is therefore always the sine qua non of an appropriate situation for applying equitable estoppel.' Price Plaintiffs v. Humana Ins. Co., 285 F.3d 971, 976 (11th Cir. 2002) (rev'd on other grounds, PacifiCare Health Sys. v. Book, 538 U.S. 401, 123 S. Ct. 1531, 155 L. Ed. 2d 578 (2002)). In In re Humana, the Eleventh Circuit held that equitable estoppel was inappropriate where plaintiffs brought a RICO suit against a non-signatory defendant, because the RICO claims were based on a statutory remedy apart from any available remedy for breach of the underlying contract. In re Humana, 285 F.3d at 976."

Robotics v. Deviedma, No. 09-cv-3552, 2009 U.S. Dist. LEXIS 112077, at *11–13 (E.D. Pa. Nov. 30, 2009). Three strikes, one hit for the defendants:

It is not proper to dismiss this claim in favor of arbitration because the breach of fiduciary duty claim does not arise out of the various agreements between Devon Robotics and HRSRL. …

Plaintiffs' claim of tortious interference with current and prospective contractual relations is not subject to the arbitration clauses in the various agreements between Devon Robotics and HRSRL. Count V of Plaintiffs claim is based on DeViedma's alleged interference with various validation contracts. These contracts are not intimately intertwined with the i.v.Station and CytoCare agreements. …

Plaintiffs' claim of defamation is not subject to the arbitration clauses in the various agreements between Devon Robotics and HRSRL. …

To the extent that Plaintiffs' claim of conspiracy is based on the termination of the CytoCare agreement, their claim is dismissed. Plaintiffs' Complaint alleges that the Defendants conspired to wrongfully terminate the CytoCare agreement. The determination as to whether the agreement was wrongfully terminated will be intimately related to the terms of the agreement. Additionally, there is an extremely close nexus between the non-signatory parties and Devon Robotics.

Id. at 13–16.

Defendants next moved under Rule 12(b)(6) to dismiss the claims on the merits, with three strikes (on the breach of fiduciary duty, tortious interference with current contractual relations, and defamation claims) and hits on the rest. Most notably, “Devon Robotics has pled that it had several validation contracts with different hospitals, that DeViedma purposefully interfered with those contracts for his own benefit, without justification, and that as a result, Devon lost substantial amounts of business. These pleadings are sufficient to establish a claim for tortious interference with existing contractual relations.”

Though the Court “grant[ed] Plaintiffs leave to amend their tortious interference with prospective contractual relations to include any claims related to the McKesson negotiations,” it added the caveat that “Although the Court granted leave to amend the tortious interference claim and Plaintiffs may choose to attempt to amend their conspiracy claim, it should be noted that the Court likely lacks jurisdiction over any underlying torts asserted in support of the conspiracy claim based on the CytoCare or i.v.Station agreements due to the arbitration clauses in the agreements.”

A big win for Devon Robotics and a guide for future plaintiffs — in the face of an arguably applicable arbitration agreement, they kept alive the core of their suit: breach of fiduciary duty, tortious interference, and defamation.

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The Wall Street Journal's Law Blog points us to a WSJ story on the absurd language used in copyright contracts these days:

Decked out in sequined black and gold dresses, Anne Harrison and the other women in her Bulgarian folk-singing group were lined up to try out for NBC's "America's Got Talent" TV show when they noticed peculiar wording in the release papers they were asked to sign.

Any of their actions that day last February, the contract said, could be "edited, in all media, throughout the universe, in perpetuity."

She and the other singers, many of whom are librarians in the Washington, D.C., area, briefly contemplated whether they should give away the rights to hurtling their images and voices across the galaxies forever. Then, like thousands of other contestants, they signed their names.

...

The terms of use listed on Starwars.com, where people can post to message boards among other things, tell users that they give up the rights to any content submissions "throughout the universe and/or to incorporate it in other works in any form, media or technology now known or hereafter developed."

Lucasfilm Ltd., Star Wars creator George Lucas's entertainment company that runs the site, said the language is standard in Hollywood.

"But, to be honest with you, we have had very few cases of people trying to exploit rights on other planets," says Lynne Hale, a Lucasfilm spokeswoman.

In a May 15, 2008, "expedition agreement" between JWM Productions LLC, a film-production company, and Odyssey Marine Exploration Inc., a shipwreck-exploration outfit, JWM seeks the rights to footage from an Odyssey expedition. The contract covers rights "in any media, whether now known or hereafter devised, or in any form whether now known or hereafter devised, an unlimited number of times throughout the universe and forever, including, but not limited to, interactive television, CD-ROMs, computer services and the Internet."

It reminds me of a draft settlement I received not too long ago that, notwithstanding the statute of limitations, required my client release all claims "from the beginning of the world until the present." Just for fun, I negotiated that down to "from the dawn of mankind."

Ken Adams, the blogosphere expert on contract language (and who is interviewed in the article), blogged about the same problem nearly three years ago, and updated his post today to note:

The phrase occurs most often in contracts in which a consultant or employee assigns to a company all rights to any intellectual property the consultant or employee develops in the course of providing services under the contract. An example: "Employee hereby irrevocably assigns, licenses and grants to Company, throughout the universe, in perpetuity, all rights, if any, of Employee to ...." In that context, saying "all rights" is entirely comprehensive; adding "throughout the universe" constitutes needless elaboration.

Indeed, making your contract apply to "all rights ... throughout the universe" could be worse than applying to "all rights," because it redefines an unambiguous word and makes it more likely that other ambiguous parts of the contract will be interpreted against whoever inserted the "throughout the universe" language.

"All" means "all." "All rights... throughout the universe" means "all" with a caveat. When faced with unambiguous contract terms (e.g., "all") that are specifically defined by the parties (e.g., "throughout the universe"), a court will ask itself, why did someone try to further specify the unambiguous term?

The court will then presume there must have been some reason for the additional language and try to figure that reason out. The danger of needless elaboration like "throughout the universe" is that the court will view additional language as narrowing the unambiguous terms, which is usually not what the party demanding the additional language wanted.

Moreover, the court will presume that, if one party keeps adding language to "clarify" the meaning of general words (such as "all"), then any ambiguity in the contract should be interpreted against that party, because that party was the one with the most control over the contract's language.

In the contexts above, those distinctions are probably irrelevant. But, as Adams notes, "it’s symptomatic of the broader dysfunction in contract language." It's also a bad habit: once you become comfortable with this type of ridiculous language redefining the word "all," how do you know if the ambiguity will stop there?

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Two days ago, Ashby Jones at the WSJ Law Blog approvingly cited these remarks in Legal Week by Alex Novarese:

[W]hat surprised me was that there appeared to be a consistent anxiety regarding the pressures or expectations of winning business. On one hand, associates want early access to clients; indeed, they resent law firms that don't give them that access. But the idea of bringing in clients doesn't seem to be one that drives young lawyers, at least those at large commercial law firms. In some cases an ambivalence about partnership appears to be strongly connected with the belief that the role comes with an expectation of rainmaking prowess. A considerable number of aspiring lawyers fear they'll hit five years' PQE, bump up to senior associate and then find themselves unequipped for a world in which they must hunt what they eat.

Viewed from outside of the legal industry, this mindset is odd. In many commercial walks of life, especially service industries, aspiring professionals are benchmarked on their ability to bring in new work or relationships. It's one of the primary factors that marks people out for promotion and those entering such careers tend to seek out opportunities to prove themselves in this respect.

Except in law, apparently. I guess this is part of the institutionalism of young lawyers. At the best firms, they are the top performers in academic institutions, before moving on to well-established providers of vocational education and then into corporate law firms - which are themselves highly structured institutions. Little wonder these young workers are not programmed for a world of risk. Such sentiments are also a reminder that - for all the talk of law firms becoming businesses, the mindset of lawyers remains, to a considerable extent, that of a profession.

First, most associates at BigLaw don't care much for their work or for making partner. They want money to pay loans and to live well in a major city, and then they want to use the big firm's name to help them land a job they actually want.

Second, for those who want to be partners, the firm traps them in a Catch-22 by imposing absurdly high minimum billable hour targets at premium rates.

Clients, however, are not saps. They will pay premium rates only for experienced counsel.

Allow the great thespian Bruce Campbell to explain the dilemma:

So how does an associate build a book of business? Like Campbell said: "it." 

Experience.

Experience drives word of mouth, drives referrals, builds ability, builds confidence, and enables your practice to grow.

So how do associates get "it?"

Novarese mentions other industries. Let's talk about other industries. Like marketing, where Seth Godin recommends "consistent, persistent generosity." Or music, where Trent Reznor tells upcoming bands they need to make their music cheaply and "GIVE IT AWAY." Or venture capital, where Fred Wilson's favorite business model is to "give your service away for free."

That's how to get "it." Get clients in the door. You can't compete on experience, so compete on price, on selectivity, on service, on anything you can.

Maybe that means cutting rates. Maybe that means billing fewer hours. Maybe that means taking difficult, frustrating, unprofitable cases. Maybe that means jumping into other fields and wasting dozens of unbillable hours just making sure you've got the basics right. Maybe that means spending some time, off the clock, figuring out how potential clients in your field find lawyers, and figuring out how to make their name the first that a potential client hears.

That is to say, associates need to use the methods other entrepreneurs use to build business.

Yet, few of those methods are available to associates at BigLaw firms, because the business model — which generates most of its profits by creating unnecessary work for recent law graduates — is designed for the short-term compensation of the partners, not the long-term career of the associates. Experienced rainmakers can squeeze every last penny of profit out of a case by having you spend all weekend reviewing documents. You don't even have a case at all.

Which is why so many associates give up on rainmaking. After a few failed attempts (which likely got them reprimanded for falling below target billable hours, for interfering with client relations, or for setting rates or taking cases without approval), learned helplessness kicks in and they give up building outside business. Instead, they focus, like the firm encourages them to do, on pleasing partners and existing clients.

I.e., someone else's rainmaking.

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Really, you should:

The New York Court of Appeals held Pepper Hamilton had a duty to disclose in advance to the insurers the firm's potential involvement in litigation concerning fraudulent loan securitization activities by its client, Student Finance Corp., according to a New York Law Journal article reprinted in New York Lawyer (reg. req.). The court applied Pennsylvania law in the case, which the parties agreed was controlling.

...

But the undisclosed, foreseeable risk of a SFC-related claim against Pepper Hamilton and partner W. Roderick Gagné, even though they had not been involved in SFC's wrongdoing, violated a "prior knowledge" coverage-exclusion clause in the indemnity policies, the Court of Appeals held. Hence, the carriers are not required to indemnify the firm and Gagné in SFC-related claims.

"Given the law firm defendants' role in the securitization of the loans and Gagné's close involvement with SFC, a reasonable attorney with the law firm defendant's knowledge should have anticipated the possibility of a lawsuit, particularly when millions of dollars may have been lost from activities of which they were aware," writes Judge Theodore Jones Jr. in the court's unanimous 6-0 decision.

In 2002, when the law firm applied for the excess coverage, Gagné told Pepper Hamilton's general counsel, in response to a question about the insurance application, that he knew of two suits related to SFC transactions, the ruling recounts. He was, he told the GC, "not certain" about whether the law firm might be joined in the litigation in the future.

I don't fault Pepper Hamilton for trying, but, really, if there is a multi-million-dollar lawsuit out there related to a fraud perpetrated by a client whose business you were deep into, you should probably tell your insurer about it.

The context, too, was important: SFC went bankrupt and the bankruptcy trustee started looking to third-parties for recovery.

Want to guess where bankruptcy trustees start first?

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At Legal Ethics Blog, Professor Andrew Perlman posts a hypothetical:

I was recently a panelist at the Association of Corporate Counsel's annual conference, and someone in the audience posed an interesting hypothetical.

Imagine that in-house counsel is conducting an internal investigation and speaks with an employee whose conduct may have been unlawful. 

Let me interrupt to point out that the above hypothetical is one of the classical examples used to teach professional responsibility to law students. Employees are frequently confused about the role of the company's lawyers in internal investigations, and frequently do not understand that the lawyer there represents solely the company and not the employees themselves. The context of these interviews — typically involving nothing more than the lawyer coming into the employee's workplace — heightens the likelihood of confusion.

As such, corporate lawyers are under a duty (under Model Rule 1.13(f)) to explain the distinction whenever they deal with directors, officers, employees, members, shareholders or other corporate constituents.

But Perlman's hypothetical is a bit different:

The employee does not have her own counsel, so the in-house lawyer makes clear to the employee that the lawyer represents the company and not the employee herself. So far, so good.

But now let's imagine that the employee is reluctant to speak with the lawyer. The lawyer then says to the employee, "You are subject to the company's employment policies, which require you to speak with me about this matter."

Several audience members were convinced that such a statement was both commonplace and ethically permissible. It was my position that such a statement, which appears to be giving legal advice to an unrepresented (and potentially adverse) party regarding her obligations under the employment policy, could be unethical under Rule 4.3. What do you think?

Here's the whole text of Rule 4.3:

In dealing on behalf of a client with a person who is not represented by counsel, a lawyer shall not state or imply that the lawyer is disinterested. When the lawyer knows or reasonably should know that the unrepresented person misunderstands the lawyer’s role in the matter, the lawyer shall make reasonable efforts to correct the misunderstanding. The lawyer shall not give legal advice to an unrepresented person, other than the advice to secure counsel, if the lawyer knows or reasonably should know that the interests of such a person are or have a reasonable possibility of being in conflict with the interests of the client.

It's an interesting question. As I responded in the comments [with minor edits here], I think it comes down to context. If the context has made it clear to the employee that the employee's interests are, or could be adverse, then there is not much problem in the lawyer advancing the views of the company, since the concern about "misunderstanding" expressed by the rule is inapplicable.

If, however, the impression created is one of a neutral investigator, then it seems to be legal advice given to an adverse unrepresented party.

The precise wording also creates a problem for the attorney, because they did not merely assert that the company could do if the employee did not cooperate (e.g., terminate and/or sue them), but instead outright told the employee what their legal obligations were under the employment agreement. That's the essence of legal advice.

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Yesterday, after posting a link to a productivity guide recommending email be checked twice daily, I saw this leaked email from a big name at a litigation powerhouse:

Now more than ever there are many talented lawyers and law firms competing for our business. Doing really good legal work is not enough. Clients expect that and well they should given what we charge for our services You must all realize that we are in a service business. In this day and age of faxes, emails, internet, etc. clients expect you to be accessible 24\7. Of course, that is something of an exaggeration—but not much.

LESSON NUMBER ONE: You should check your emails early and often. That not only means when you are in the office, it also means after you leave the office as well. Unless you have very good reason not to (for example when you are asleep, in court or in a tunnel), you should be checking your emails every hour. One of the last things you should do before you retire for the night is to check your email. That is why we give you blackberries. I can assure you that all of our clients expect you to be checking your emails often. I am not asking you to do something we do not do ourselves. I can assure you that [other big names at the firm], etc. all check their emails often.

I check my email frequently except when I don't.

There's two reasons for those times that I don't.

First, to follow the advice of Seneca, himself a great trial lawyer, on keeping a law practice in perspective:

Look at those whose prosperity men flock to behold; they are smothered by their blessings. To how many are riches a burden! From how many do eloquence and the daily straining to display their powers draw forth blood! How many are pale from constant pleasures! To how many does the throng of clients that crowd about them leave no freedom! In short, run through the list of all these men from the lowest to the highest—this man desires an advocate, this one answers the call, that one is on trial, that one defends him, that one gives sentence; no one asserts his claim to himself, everyone is wasted for the sake of another.

But there are also less lofty reasons to avoid the siren song of the crackberry.

The second reason I take time off from email — both scheduled time and time as needed — is to follow Sun Tzu's command: "Ponder and deliberate before you make a move."

Cognitive science agrees:

After a 30-minute study period, the students were separated into three groups to test their understanding of the larger "big picture" relationship between the individual patterns: Group One was tested after a period of 20 minutes; Group Two was tested after a 12-hour period; and Group Three was tested after a 24-hour time span. In addition, approximately half of the students in Group Two slept during the 12-hour period, while the other half remained awake. All of the students in Group Three had a full night's sleep.

The test results showed striking differences among the three groups, especially between the students who had a period of sleep and those who remained awake.

"Group One, the students who were tested soon after their initial learning period, performed the worst," says Walker. "While they were able to learn and recall the component pieces [for example, Shape A is greater than Shape B, Shape B is greater than Shape C] they could not discern the hierarchical relationships between the pieces [Shape A is greater than Shape C] -- they couldn't yet see 'the big picture.'"

Groups Two and Three, on the other hand, demonstrated a clear understanding of the interrelationship between the pairs of shapes.

"These individuals were able to make leaps of inferential judgment just by letting the brain have time to unconsciously mull things over," he says. But, perhaps most notable, he adds, when the inferences were particularly difficult, the students who had had periods of sleep in between learning and testing significantly outperformed the other groups.

Strategic planning and tactical maneuvering in litigation requires a lot of thought, including the serious application of inferential judgment and relational memory, the types of cognitive work that demand contemplation and downtime.

Make room for that cognitive work. The crackberry can wait.

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I admire Judge Posner, one of the flag bearers for the law and economics movement. He is thoughtful, prolific, and has not succumbed to the extraordinary pressure judges feel to guard their actual thoughts and feelings. He is in every sense of the word an open book, and we should be grateful for that.

It also makes him the logical target for critics of any of the ideas he champions. Such is the case for my remarks below.

I rather enjoyed Posner's latest article, How I Became A Keynesian, which does as good a job as any at summarizing Keynes' core philosophy, until I came across this paragraph:

But the government may be able to arrest the decline--another of Keynes's central ideas, and one strongly resisted by the conservative economists of his time, as of today. It can reduce interest rates (by buying government bonds or other debt for cash, which increases the amount of money that banks are permitted to lend) in an effort to reduce the costs of active investment and thus encourage employment. Keynes urged this approach. But he also pointed out that it might not work well--as we have learned in the current downturn. The banks may lack confidence in "those who seek to borrow from them," so that "while the weakening of credit is sufficient to bring about a collapse, its strengthening, though a necessary condition of recovery, is not a sufficient condition." In fact, banks in America today are hoarding, rather than lending, most of the cash that they have received from the government's bailouts. The hoard may make the banks a little freer with lending, but the effect on economic activity, at least in the short run, may be tepid.

In sum: the government can "arrest" an economic decline by taking action to "reduce interest rates," but such has "not work[ed] well ... in the current downturn."

Perhaps he's correct. Then again, perhaps he was correct a month ago when he wrote that "the various factors that are responsible for the reduction in the rate of decline of output" last quarter are "probably impossible" to "disentangle:"

This assertion is groundless. No one has the faintest idea what effect the stimulus has had. My guess is that it has had some positive effect, because of its confidence-enhancing character that I mentiioned earlier and because some of the $100 billiion--though no one seems to know how much--has been spent rather than saved. But it is impossible to determine the net impact of the stimulus on GDP or employment because so much else has been happening to stimulate an economic recovery. Some people have had to dissave--turn savings into expenditures--because their income has fallen (maybe because they have become unemployed) below the level necessary to cover their basic expenses. Some people have had to replace durables that wore out. Foreign demand for U.S. products has risen some. (Dissaving, replacing durables, and export growth if the domestic currency loses value are standard nongovernmental spurs to recovery from a depression.) And the government has been doing a lot to stimulate recovery besides the stimulus--has in fact expended or guaranteed trillions of dollars in an effort to increase the amount of lending, which is essential to economic activity.

Disentangling the various factors that are responsible for the reduction in the rate of decline of output in the second quarter is probably impossible, but in any event has not, to my knowledge, been attempted--and certainly not in Romer's talk.

Which Posner do I believe? The one who asserts that "disentangling the various factors" affecting the economy "is probably impossible" (with whom economists vehemently disagree), or the one who asserts as a matter of fact that, of the "various factors" affecting the economy, government efforts to "reduce interest rates" "might not work well?"

Of course, Keynes himself famously responded to a critique that he had changed his mind about the causes of the Great Depression with: "When the facts change, I change my mind. What do you do, sir?"

The facts here, however, have not changed. The columns were published a month apart.

That, too, would be perfectly fine -- Richard Posner, the man, is entitled to his own thoughts and opinions and should change them as befits further thought, data, argument and experience -- but for the belief of many adherents to "law and economics"  that judges' interpretations and application of economic theory should color their judicial decisions.

There's a difference, of course, between the macroeconomics that trouble Posner and the microeconomics at play in most cases. And there's a difference, of course, between recognizing the contributions that economics can bring to legal policy decisions (which is what the original law and economics scholars, like Ronald Coase and Guido Calabresi, focused on) and enabling courts to decide cases by way of economic theories they are not even trained to understand, much less apply.

These distinctions, however, rapidly break down in actual practice. Witness the Twombly Supreme Court opinion, in which seven Justices, none of which have any formal training in economics, held the following as a matter of law:

The complaint makes its closest pass at a predicate for conspiracy with the claim that collusion was necessary because success by even one CLEC in an ILEC’s territory “would have revealed the degree to which competitive entry by CLECs would have been successful in the other territories.” Id., ¶50, App. 26–27. But, its logic aside, this general premise still fails to answer the point that there was just no need for joint encouragement to resist the 1996 Act; as the District Court said, “each ILEC has reason to want to avoid dealing with CLECs” and “each ILEC would attempt to keep CLECs out, regardless of the actions of the other ILECs.” ...

Plaintiffs’ second conspiracy theory rests on the competitive reticence among the ILECs themselves in the wake of the 1996 Act, which was supposedly passed in the “ ‘hop[e] that the large incumbent local monopoly companies … might attack their neighbors’ service areas, as they are the best situated to do so.’ ... Contrary to hope, the ILECs declined “ ‘to enter each other’s service territories in any significant way,’ ” Complaint ¶38, App. 20, and the local telephone and high speed Internet market remains highly compartmentalized geographically, with minimal competition. Based on this state of affairs, and perceiving the ILECs to be blessed with “especially attractive business opportunities” in surrounding markets dominated by other ILECs, the plaintiffs assert that the ILECs’ parallel conduct was “strongly suggestive of conspiracy.” Id., ¶40, App. 21.

But it was not suggestive of conspiracy, not if history teaches anything. In a traditionally unregulated industry with low barriers to entry, sparse competition among large firms dominating separate geographical segments of the market could very well signify illegal agreement, but here we have an obvious alternative explanation. In the decade preceding the 1996 Act and well before that, monopoly was the norm in telecommunications, not the exception. ... The ILECs were born in that world, doubtless liked the world the way it was, and surely knew the adage about him who lives by the sword. Hence, a natural explanation for the noncompetition alleged is that the former Government-sanctioned monopolists were sitting tight, expecting their neighbors to do the same thing.

 In fact, the complaint itself gives reasons to believe that the ILECs would see their best interests in keeping to their old turf. Although the complaint says generally that the ILECs passed up “especially attractive business opportunit[ies]” by declining to compete as CLECs against other ILECs, Complaint ¶40, App. 21, it does not allege that competition as CLECs was potentially any more lucrative than other opportunities being pursued by the ILECs during the same period and the complaint is replete with indications that any CLEC faced nearly insurmountable barriers to profitability owing to the ILECs’ flagrant resistance to the network sharing requirements of the 1996 Act, id., ¶47; App. 23–26. Not only that, but even without a monopolistic tradition and the peculiar difficulty of mandating shared networks, “[f]irms do not expand without limit and none of them enters every market that an outside observer might regard as profitable, or even a small portion of such markets.” Areeda & Hovenkamp ¶307d, at 155 (Supp. 2006) (commenting on the case at bar). The upshot is that Congress may have expected some ILECs to become CLECs in the legacy territories of other ILECs, but the disappointment does not make conspiracy plausible. We agree with the District Court’s assessment that antitrust conspiracy was not suggested by the facts adduced under either theory of the complaint, which thus fails to state a valid §1 claim.

Is the above economic analysis correct? We will never know -- even economists will never know -- since this economic theory was codified as law without anyone reviewing the empirical data, because the Supreme Court dismissed the case prior to any discovery.

Twombly is not some outlier case hurriedly drafted by an overworked trial judge. It is the thoughtfully considered, yet wholly uninformed, product of the highest court in the land.

That's the problem with law and economics: it creates the illusion of judicial competence to interpret and apply economic theories to individual cases. Such is particularly problematic these days because economics is in a state of intellectual collapse and is plagued by conflicts of interest, making it particularly ripe for misuse and abuse in other fields, like the law.

Now that Posner has seen the light and become a Keynesian, will he recognize the criticisms of law and economics and become a legal realist?

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Business Week points us to the major cases.

As Litigation & Trial is a legal, rather than a business, blog, I'm going to take their list of cases but replace their description of each with the actual legal issue at stake, along with links to SCOTUSWiki, which hosts all of the relevant briefs for your reading pleasure:

Bilski v. Kappos: Whether a “process” must be tied to a particular machine or apparatus, or transform a particular article into a different state or thing (”machine-or-transformation” test), to be eligible for patenting under 35 U.S.C. § 101 and whether the “machine-or-transformation” test for patent eligibility, contradicts Congressional intent that patents protect “method[s] of doing business” in 35 U.S.C. § 273.

Free Enterprise Fund v. Public Company Accounting Oversight Board, et al.: Whether the Sarbanes-Oxley Act is consistent with separation-of-powers principles - as the Public Company Accounting Oversight Board is overseen by the Securities and Exchange Commission, which is in turn overseen by the President - or contrary to the Appointments Clause of the Constitution, as the PCAOB members are appointed by the SEC.

Black et al. v. United States: Whether the “honest services” clause of 18 U.S.C. § 1346 applies in cases where the jury did not find - nor did the district court instruct them that they had to find - that the defendants “reasonably contemplated identifiable economic harm,” and if the defendants’ reversal claim is preserved for review after they objected to the government’s request for a special verdict.

American Needle Inc. v. NFL, et al.: Whether NFLP, the NFL, and the teams functioned as a “single entity” when granting the company an exclusive headwear license and therefore could not violate Section 1 of the Sherman Act, 15 U.S.C. 1, which requires proof of collective action involving “separate entities.”

United Student Aid Funds, Inc. v. Espinosa: Where a debtor declares to discharge a student loan debt in his Chapter 13 bankruptcy plan, has the debtor satisfied the due process requirements of Mullane v. Cent. Hanover Bank & Trust Co, and does the fact that the debtor failed to initiate an adversary proceeding render the enforceability of the discharge order under 11 U.S.C. 1327(a)inapplicable?

Shady Grove Orthopedic Associates, P.A. v. Allstate Insurance Company: Can a state legislature properly prohibit the federal courts from using the class action device for state law claims?

Hemi Group, LLC, et al v. City of New York: Whether city government meets the Racketeer Influenced and Corrupt Organizations Act standing requirement that a plaintiff be directly injured in its “business or property” by alleging non commercial injury resulting from non payment of taxes by non litigant third parties.

Graham County Soil and Water Conservation Dist v. ex rel. Wilson: Whether federal courts have jurisdiction over False Claims Act suits based on revelations in administrative reports or audits issued by state or local governments, as opposed to the federal government.

Stay tuned for more discussion of each in upcoming posts.

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As you may have heard, Judge Rakoff did not like the proposed SEC settlement with Bank of America (neither did I) in part because it blamed the bank's lawyers while refusing to waive attorney-client privilege and explain what, exactly, went wrong. A week ago, he rejected it entirely:

In a 13-page order available here at the New York Times's DealBook blog, Rakoff variously calls the settlement "trivial," "absurd," and "neither fair, nor reasonable, nor adequate." His primary objection seems to be that shareholders would indirectly pay for the alleged failure to disclose the bonuses, since the bank, not the individual executives who struck the merger agreement, would pay the fine. The SEC, according to Rakoff, says it cannot punish BofA executives because those executives did not craft the merger agreement in a way that--according to the agency--violated disclosure rules. Who did craft the merger agreement in such a way?

According to the SEC, that would be the lawyers who wrote the agreement--Wachtell, Lipton, Rosen & Katz for BofA and Shearman & Sterling for Merrill. Rakoff responds with a sentence that must frighten any M&A lawyer: "If that is the case, why are the penalties not then sought from the lawyers?"

As we've written at length, the pointing of the finger at outside counsel has raised serious questions about whether the bank waived attorney-client privilege in its talks with the SEC, and whether Rakoff may try to extend that waiver into his courtroom. The bank, for its part, has denied any wrongdoing, saying it is routine to conceal sensitive information, such as bonus payments, in confidential statements filed at the same time as public merger agreements.

Now Congress has jumped in:

The chairman of the House Committee on Oversight and Government Reform on Friday told Bank of America that it has questions concerning disclosures made surrounding the bank’s purchase of Merrill Lynch. The panel’s chairman, Edolphus Towns (D-NY), told the bank it can’t use the attorney-client privilege when dealing with Congress. Click here for more, from the NYT; here for earlier coverage of BacMerSaga, from the LB.

In a letter on Friday, Towns (pictured) said the bank must divulge when it became aware of the enormous losses at Merrill last year, when it received a commitment from the federal government for a second round of bailout money and what legal advice its management received about whether it had to disclose those developments to the bank’s shareholders. (Legal advice? Yipes! It means that, at least for the moment, the roles of Wachtell, Lipton and Shearman & Sterling will likely stay firmly in the spotlight.)

...

Bank of America acknowledged that Congress had the authority to disregard attorney-client privilege. That said, the bank’s Washington law firm, WilmerHale, argued that that would set a bad precedent. It’s a sentiment shared, writes the NYT, by the Association of Corporate Counsel, which came to BofA’s defense this month when the New York attorney general Andrew Cuomo asked the bank to give up its claim that its legal advice should remain private. The group issued a statement saying that it would be an “outrageous precedent” for other public companies if the bank had to give up its right to legal privacy.

As I wrote back when Judge Rakoff was still considering the settlement,

Courts often hold that clients cannot use attorney-client privilege as both a sword and a shield. That is, clients can either use lawyers' advice as a "sword" to defend themselves or they can use the privilege as a "shield" to keep communications private, in which case they're off limits entirely.

But they can't have it both ways. If they could, every defendant would just blame their lawyers and call it a day.

Bank of America's (current) lawyers have it exactly backwards: it would set a "outrageous precedent" if privilege was not waived here, because the bank itself interjected legal advice into the matter by blaming its lawyers for what happened.

The principle involved is not complicated. If you want to keep your legal advice out of the case, then do not use it in your defense. If you want to blame your lawyers and raise advice of counsel as a defense, then you lose the privilege.

Sword or shield. Not both.

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On Tuesday, The New York Times reported:

The finger-pointing in Merrill Lynch’s bonus troubles shifted to a new target on Monday in two court documents that essentially said: blame the lawyers.

Responding to questions posed by a federal judge, Bank of America and the Securities and Exchange Commission said the bank had relied on its outside lawyers to fill in the fine print in that firm’s controversial marriage with Bank of America.

That meant that lawyers at two firms — Wachtell, Lipton, Rosen & Katz as well as Shearman & Sterling — handled a decision to keep Merrill’s $3.6 billion in bonus payouts a secret from Bank of America’s shareholders, according to the filings.

It is unclear if the responses will satisfy the judge who requested them, Judge Jed S. Rakoff of the Southern District of New York. He has the power to decide whether to approve a $33 million settlement reached between Bank of America and the S.E.C. over the bank’s failure to disclose the bonuses to its shareholders.

I was going to write a post about how that bothered me, because, as the AmLaw Litigation Daily noted:

"The preparation of the joint proxy statement, including the decision not to attach the disclosure schedule setting forth the agreement on...bonuses or otherwise disclose its contents in the proxy statement, was made by the lawyers at Wachtell, Shearman, Bank of America and Merrill," the SEC brief says, adding that statements in the proxy materials deliberately misled investors into believing Merrill bonuses would not be paid.

Bank of America did not waive attorney-client privilege for the SEC investigation, so the SEC says its knowledge of what the Wachtell and Shearman lawyers said is limited. The government contends, moreover, that the executives' reliance on their lawyers shields them from fraud accusations because it would be hard to prove scienter.

Bank of America's lawyers at Cleary Gottlieb Steen & Hamilton--Lewis Liman and Shawn Chen--offered precious few of the specifics Judge Rakoff seemed to be asking for at the August 10 hearing. The names of Kenneth Lewis and John Thain, for instance, appear nowhere in BofA's submission. And as for the role of the outside lawyers, the brief merely says: "The parties were represented throughout the process by two law firms with preeminent experience in the field of mergers and acquisitions." Cleary offered no details on who or what those preeminent firms advised about disclosure materials.

Judge Rakoff, however, beat me to it:

Federal judge Jed S. Rakoff fired a new shot in his challenge to a $33 million settlement by Bank of America Corp. over investor disclosures, saying the government's justification for letting individual executives off the hook is "at war with common sense."

The Securities and Exchange Commission reached the settlement with the bank last month. The agency charged that a Bank of America proxy statement in November misled investors about bonuses for employees at Merrill Lynch, which was about to be acquired by the bank.

The SEC has said it couldn't investigate individual executives' culpability because they said they relied on lawyers' advice. Unless the executives waived their right to keep the advice private, the SEC said it would face "substantial obstacles" to building a case.

Judge Rakoff, who must approve any settlement, criticized that reasoning. If that were the regulator's policy, "it would seem that all a corporate officer who has produced a false proxy statement need offer by way of defense is that he or she relied on counsel." He said if the company insists on attorney-client privilege, there is no way to test the assertion and determine whether executives or their lawyers were culpable.

Exactly right. Courts often hold that clients cannot use attorney-client privilege as both a sword and a shield. That is, clients can either use lawyers' advice as a "sword" to defend themselves or they can use the privilege as a "shield" to keep communications private, in which case they're off limits entirely.

But they can't have it both ways. If they could, every defendant would just blame their lawyers and call it a day.

(If you're interested in more, AmLawDaily dug a bit deeper into the ethics issues raised by the litigation.)

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The Blog of The Legal Times talks about the Sotomayor confirmation hearings:

Under questioning from Sen. Ted Kaufman (D-Del.), she spoke in greater detail than she has before about her career as a commercial litigator. She said she learned the importance of predictability in business law when partners would revise the drafts of settlement agreements she had written. The partners, she said, replaced her plain language with what she considered "gobbledygook," in order to conform the agreements to court precedent.

"In business, the predictability of law may be the most necessary," she said, "in the sense that people organize their business relationships based on how they understand the courts interpret their contracts."

When I was a summer associate at a business and transactional firm, the managing partner told me a similar story. Back when he was an associate, a partner at the firm asked him to draft a real estate bill of sale. He did so, with considerable difficulty, and a considerable investment of time, and took it to the partner, who skimmed it and threw it away.

Why?

"Because I don't know what any of that means. I do, however, know what these old agreements I've been using mean. Their meaning hasn't changed in five hundred years."

It seems Sotomayor got the same lesson. Lots of lawyers do.

Let me tell you: the lesson is wrong.

It's not always wrong. In certain circumstances -- like some real estate transactions -- there is language used so frequently that it has become the standard against which all other grammar and syntax is measured. Any deviation will likely be interpreted against the person who suggested it.

If you have one of those situations, be sure you know what the "standard" language is. Otherwise, focus on making the text of the written agreement reflect the reality of the parties' understanding, not on adding in "gobbledygook" to make it look lawyerly.

But even where you have a "standard" contract, the lesson may lead you astray. Long ago, I lost track of the number of times a lawyer told me "court precedent" dictated the use of particular language yet couldn't produce any actual "court precedent" to back that up.

Do you think every partner who told Sotomayor how the contract "should" have been written actually reviewed that "court precedent" prior to rejecting Sotomayor's draft? I doubt it. I'm betting more than a few of those "replaced" agreements included "standard" language that meant something different from what their clients intended.

Pay heed your elders, but shepardize your cases.

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Following up on their own post a month ago, the dynamic defense duo at Drug & Device Law posted:

A couple of weeks ago, Herrmann noted in passing that, although many big firms now sponsor blogs, none of the ten firms with the highest profits per partner (that much-despised, but oft-cited metric) do. ...

Many folks contacted us, on or off-line, to suggest why lawyers at the most profitable firms don't blog.

Those ten most profitable large corporate firms -- Wachtell, Quinn Emanuel, Boies Schiller, Sullivan & Cromwell, Paul Weiss, Cravath, Simpson Thacher, Cleary, and Schulte Roth -- "have no apparent affiliation with any blogs at all."

D&D Law summarize the opinions offered to them as:

1. Lawyers at the most profitable firms are stupid.

2. Lawyers at the most profitable firms are too busy.

3. Lawyers at those firms won't stoop to blog.

4. Lawyers at those firms don't want to give away their product for free.

5. Lawyers at those firms lack the necessary skill set.

6. Lawyers at those firms believe that blogging is unlikely to yield a decent return on investment.

A little more detail at their site; sadly, they keep their conclusions to themselves. Maybe next time. Legal Blog Watch links to a few other arguments on the subject.

Let me take a page from another arena: content publishers. There's been a big hoopla in the blogosphere lately over Malcolm Gladwell's highly critical review in The New Yorker of Free, the new book by Wired Magazine's editor-in-chief Chris Anderson, whose blog ("The Long Tail") is here. If you're interested in that debate, Anderson's response is here, Seth Godin's take is here ("Malcolm is wrong"), and Clay Shirky's ruminations on the inevitable end of the newspaper is here.

More useful for our purposes is Michael Nielsen's thoughtful examination of the scientific publishing industry, in which he argues that "even smart and good organizations can fail in the face of disruptive change, and that there are common underlying structural reasons why that’s the case:"

[S]ome of the forces preventing change are strongest in the best run organizations. The reason is that those organizations are large, complex structures, and to survive and prosper they must contain a sort of organizational immune system dedicated to preserving that structure. If they didn’t have such an immune system, they’d fall apart in the ordinary course of events. Most of the time the immune system is a good thing, a way of preserving what’s good about an organization, and at the same time allowing healthy gradual change. But when an organization needs catastrophic gut-wrenching change to stay alive, the immune system becomes a liability.

Elite law firms' hostility to the concept of "blogging" is a function of those law firms' highly effective immune systems. The most profitable firms on those lists earned their way to the top by building effective, reputable practices that can command top fees for unique talent and experience. They are diversified, in demand, and have remained at the top of the field through multiple changes in leadership and in the marketplace. They have proven themselves.

Consequently, elite corporate law firms have built over time strong organizational immune systems, systems that, for example, quite literally reject foreign bodies from entering by way of resistance to lateral partners.

Mention blogging, social media, or the like and watch the immune system kick in. Why waste time messing with success? AmLawDaily picked up the phone, called the firms, and got exactly that answer:

[W]e put out calls to managing partners and spokesman at nine of the ten firms (we excluded Kirkland & Ellis, because, as Beck and Herrmann note, a Kirkland associate played a role in creating the popular Sports Law Blog) to ask them about their stance on blogging. The conversations we had centered on a general theme: The firms just don't see the point. They are already successful, so they don't feel the need to market themselves or prove their grasp of a particular subject matter in the limited spare time they have. 

We'll let Jonathan Schiller of Boies, Schiller & Flexner sum it up: "I think the lawyers here are just too busy," he says. "I'm too old to blog. I'd rather play golf if I have a bit of free time."

The real question is not why big firms don't "blog;" the answer is "because they don't want to blog." The immune system rejects blogging, much as it rejects changes to alternative fee arrangements and compensation structures.

The real question is if elite corporate law firms should blog and the answer is yes.

How do I presume to know that? Because, as the AmLawDaily further points out, most elite firms effectively blog and have blogged for some time:

We wonder, though, whether there is much difference between blogging and putting out so-called client memos and (often) displaying those memos on a firm's Web site. Wachtell, Lipton, Rosen & Katz, for instance, has about as austere a Web site as exists online anymore, and thus seems perhaps the least likely candidate in the Am Law 100 to produce an opinionated or less formal blog. But the firm regularly releases memos that are quite opinionated, including one in the fall that implored the SEC to reinstate the Uptick Rule to limit short-selling. That could just as easily have appeared on any high-brow economic law blog. (A firm spokeswoman and name partner David Katz did not respond to our messages seeking comment.)

You can read many of these Wachtell memos, along with memos from heavyweights at Cravath, Sullivan Cromwell, Latham Watkins, Gibson Dunn, et al, at The Harvard Law School Corporate Governance Forum, which refers to itself as a "blog." Skim down the list of "guest contributors" (not "guest bloggers") on the left side of the "Forum's" website -- might as well be a Wall Street Christmas party.

But they don't call it "blogging." They call it "updates" and "newsletters" and "forums" and "panels" and "discussions." 

The wording doesn't matter. They're out there every day showing off their expertise for free. Welcome to blogging, you blogging bloggers.

One more issue before we go. As Nielsen also noted:

The problem is that your newspaper has an organizational architecture which is, to use the physicists’ phrase, a local optimum. Relatively small changes to that architecture - like firing your photographers - don’t make your situation better, they make it worse. ... Unfortunately for you, there’s no way you can get to that new optimum without attempting passage through a deep and unfriendly valley. The incremental actions needed to get there would be hell on the newspaper. [Ed by MSK - more on this concept's application to business here]

Thus, the real real question is if this blogging or crypto-blogging is the major shift itself or merely a small experiment as part of a much larger "disruption" in the legal industry comprised of, inter alia, blogging, social media, transparency, alternative fee agreements, telecommuting, virtual workers, outsourcing, and collaborative / cooperative practice?

Put another way, are elite corporate law firms sitting in a "local optimum" that works now but keeps them from getting to where they want to be in the future? Elite firms are certainly considering the possibility, hence finding their "client memos," for free, alongside competitors' free "client memos," on a law school blog. They're also upending the structure of their compensation and associate training, even if clients don't believe them.

We may have to wait and see what the answer is. As described in Clay Shirky's piece linked above, in which he summarizes the turbulent transition following Gutenberg's invention of the printing press as "chaotic:"

When the Bible was translated into local languages some people saw it as an educational boon, others as the work of the devil. Erotic novels appeared, prompting the same sort of response. Copies of Aristotle and Galen circulated widely, but direct encounter with the relevant texts revealed that the two sources clashed, tarnishing faith in the Ancients. As novelty spread, old institutions seemed exhausted while new ones seemed untrustworthy; as a result, people almost literally didn’t know what to think. If you can’t trust Aristotle, who can you trust?

Only in retrospect were experiments undertaken during the wrenching transition to print revealed to be turning points. Aldus Manutius, a Venetian printer and publisher, invented the smaller octavo volume. What seemed like a minor change—take a book and shrink it—was in retrospect a key innovation in the democratization of the printed word. As books became cheaper, more portable, and therefore more desirable, they expanded the market for all publishers, heightening the value of literacy still further.

That is what real revolutions are like. The old stuff gets broken faster than the new stuff is put in its place. The importance of any given experiment isn’t apparent at the moment it appears; big changes stall, small changes spread. Ancient social bargains, once disrupted, can be neither mended nor quickly replaced, since any such bargain takes decades to solidify.

 

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At The National Law Journal, Nick Akerman, a partner at Dorsey & Whitney, has a thorough argument that the Computer Fraud and Abuse Act ("CFAA") should, and likely will, be applied against employees who leave with trade secrets or other proprietary / confidential information for use at their new jobs:

The Computer Fraud and Abuse Act, a federal criminal statute outlawing the theft of data, permits a company that "suffers damage or loss" by reason of a violation of the CFAA, to "maintain a civil action against the violator" for damages and injunctive relief. 18 U.S.C. 1030(g). Since [Pacific Aerospace & Electronics Inc. v. Taylor, 295 F. Supp. 2d 1188, 1196 (E.D. Wash. 2003)], there has developed a body of district court opinions that refuse to apply the CFAA against employees who steal their employer's data. This article will explain why these opinions are not likely to survive appellate review; it will also provide a strategy to avoid the application of these decisions.

Well worth reading if you come across trade secrets theft in your practice. Akerman may be the most experienced attorney in the country on this developing body of law, and it shows.

I agree with him, but for a more general reason. Since I practice in the Third Circuit (Pennsylvania, New Jersey and Delaware), I'll focus on the Third Circuit's most recent opinion on the CFAA:

The District Court focused on the criminal provisions and found it difficult to infer a civil application within the statutory framework and concluded that it could not do so, although the Court did acknowledge that several other courts had determined to the contrary. However, we conclude that not only the relevant case law, but also the plain language of the statute, militate in favor of the availability of a civil remedy, and specifically, the type of injunctive relief sought by the PC plaintiffs.

Numerous courts have recognized that a civil cause of action is apparent from the text of § 1030(g). Although we acknowledge the criminal thrust of the section in general, as it is found in Title 18, there is ample authority for permitting civil actions to proceed based on violations of the section pursuant to the language of § 1030(g). See, e.g., Theofel v. Farey-Jones, 359 F.3d 1066, 1078 (9th Cir. 2003) ('The civil remedy extends to 'any person who suffers damage or loss by reason of a violation of this section.'') (emphasis in original); I.M.S. Inquiry Mgmt. Sys., Ltd. v. Berkshire Info. Sys., Inc., 307 F. Supp. 2d 521, 526 (S.D.N.Y. 2004) (stating that § 1030(g) affords civil action for any violation of CFAA). Accordingly, we conclude that civil relief is available under § 1030(g).

P.C. Yonkers, Inc. v. Celebrations the Party & Seasonal Superstore, LLC, 428 F.3d 504, 511 (3d Cir. 2005).

In one sense, the above looks like a straightforward review of a criminal statute which permits a civil remedy. The statute says there's a remedy, so we'll enforce it.

In another sense, we're witnessing a big change in the way Circuit Courts and the Supreme Court interpret federal statutes which provide plaintiffs with civil relief for criminal conduct.

Like the CFAA, The Racketeer Influenced and Corrupt Organizations Act ("RICO") creates a civil remedy for those persons injured by racketeering activities, typically mail or wire fraud. Also like the CFAA, numerous District Courts have contorted the brief text of the RICO Act to enact confusing, complicated barriers to relief without much basis in the Act itself. For example, numerous District Courts required plaintiffs show "first-party reliance" on the alleged mail or wire fraud (rather than merely injury related to the racketeering as a whole) and required that the plaintiff prove the defendants used a formal racketeering structure.

In the past year, the Supreme Court has torn down both of these barriers. See Bridge v. Phoenix Bond & Indem. Co., 128 S. Ct. 2131, 2145 (2008)(eliminating the "reliance" requirement, noting "Whatever the merits of petitioners’ arguments as a policy matter, we are not at liberty to rewrite RICO to reflect their — or our — views of good policy. We have repeatedly refused to adopt narrowing constructions of RICO in order to make it conform to a preconceived notion of what Congress intended to proscribe."); Boyle v. United States, ___ U.S. ____, No. 07-1309, 2009 U.S. LEXIS 4159, at *22–23 (Jun. 8, 2009)(eliminating the "structure" requirement, noting "The fact that RICO has been applied in situations not expressly anticipated by Congress does not demonstrate ambiguity. It demonstrates breadth.”).

Like the RICO Act, the broad text of the CFAA "does not demostrate ambiguity[,] it demonstrates breadth." If the Circuit Courts and the Supreme Court interpret the CFAA the same way they've interpreted the RICO Act, we'll see a lot more of these claims in the future.

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The AmLawDaily reports Study: Law Firms Have "Little or No Interest in Change," CLOs Say:

Altman Weil's 2009 Chief Legal Officer Survey received responses from 183 CLOs--about 15 percent of the 1,222 corporate law departments invited to participate. Sixty-two percent of respondents worked for companies with over $2 billion in revenues. ...

The study revealed that 25 percent of CLOs surveyed said they were putting a 'high' amount of pressure on their outside panel firms to change "the value proposition in legal service delivery," as opposed to simply cutting costs. Another 37 percent rated the pressure as medium, while 38 percent said there was a low degree of pressure on outside law firms to change.

When asked how serious firms are in changing their service models, only five percent of CLOs surveyed said firms are serious about changing their structure. Another 20 percent gave firms some credit for implementing efforts towards change, but an overwhelming 75 percent rated firms as having "little or no interest in change."

Simultaneously, Legal Blog Watch reports on the many firms in fact 'changing their structure' by moving to an apprenticeship model:

With the economy down, law firms have less work. That means they've got more time -- or at least, slightly more appetite -- for training new associates. As the National Law Journal reports, a number of firms -- most recently, 659-lawyer firm Howrey -- are moving toward an apprenticeship model, with new associates spending time attending classes and shadowing partners on client matters. Associates participating in the Howrey program are still expected to generate billable hours, though the requirements are reduced to 700 hours in their first year. And to help subsidize the costs of the $3 million training program, the firm is cutting first-year salaries from $160,000 to $100,000, with a $25,000 bonus that can be applied to repay student loans.

Several other firms have launched similar efforts, including Drinker Biddle & Reath, Dallas-based Strasberger and Price, which recently introduced apprenticeship-type programs, and Atlanta-based Ford & Harrison, whose "Year One" training program was rolled out last year.

Law Marketing Portal goes into the details of the CLO survey:

“This combination of inside and outside reductions means not only that in-house lawyers will assume greater workloads, but also that Chief Legal Officers will need to become more strategic about triaging work, allocating resources, and, in some cases, tolerating higher levels of risk,” says DiLucchio.  “And when they do hire outside counsel, you can bet that they will be shopping for value.”

 

The importance of price when hiring outside counsel declines as the importance of the work being done increases, according to the survey.  In addition, there is a direct correlation between the importance of a firm’s capabilities and the importance of the matter to the corporation.

In normal industries, increasing value is often a matter of increasing productivity, and Law21 has a thorough post on the many new approaches for measuring lawyer productivity. On the whole, the legal industry is furiously searching for ways to provide better value to the client through new billing and compensation models -- they're even exploring a novel approach to training new hires.

Of course, I never miss an opportunity to criticize corporate law firm culture or the billable hour, but it sure looks like the big firms are trying to change. As noted by this insightful piece about the news and scientific publishing industries, it is extraordinarily hard even for a smart, adaptive, and willing organization to radically change and survive disruptions.

As also reported today, a number of corporate firms around here in Philadelphia are reducing associate and partner salaries; as I've discussed before, given the BigLaw business model, cutting salaries is a dangerous and desperate move. BigLaw is worried and trying to change.

Thus, I'm going to blame businesses for their unhappiness. Moreover, if you're still unhappy with BigLaw, stop using it. Are you defending a national antitrust case? Multi-district mass torts litigation? Are you acquiring a billion-dollar public company and taking it private?

No?

Perhaps you don't need a whole team of lawyers working day and night. Think about it.

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UPDATE III: The most thorough critique I've read of Iqbal is Professor Burbank's Senate testimony, available here (PDF). As an empirical matter, Iqbal has had a significant effect, particularly on constitutional rights plaintiffs:

The statistical analysis of 1,039 cases shows that 49% of 12(b)(6) motions were granted (with or without leave to amend) in the cases selected (from May 2005 to August 2009). Further, the rate of granting such motions increased from 46% of motions decided under Conley, to 48% of motions decided under Twombly, to 56% of motions decided under Iqbal. A multinomial logistic regression indicates that under Twombly/Iqbal, the odds of a 12(b)(6) motion being granted rather than denied are 1.5 times greater than under Conley, holding all other variables constant.

Moreover, the largest category of cases in which 12(b)(6) motions are filed was constitutional civil rights. Motions to dismiss in constitutional civil rights cases were granted at a higher rate (53%) than in cases overall (49%), and the rate of granting 12(b)(6) motions in constitutional civil rights cases increased in the cases selected from Conley (50%) to Twombly (55%) to Iqbal (60%).

Personally, I think the powers that be understated the degree to which cases were dismissed before, and now overstate the degree to which Iqbal will increase their likelihood of being dismissed. The odds are indeed worse now, but they're still generally 50/50.

UPDATE II: Judge Posner weighs in, wondering if Twombly and Iqbal are limited to complex cases or those with other compelling interests, such as ensuring high-level officials are not distracted from their duties by suits of doubtful merit. I have a new post referencing Posner's opinion and a separate opinion by Judge Easterbrook that throw cold water on those who believe Iqbal has doomed all but the sharpest of complaints.

UPDATE: The NYTimes has an article on the case as well, also believing it to be a death-knell for plaintiffs, noting that federal judges "have cited it more than 500 times in just the last two months." As I wrote below, citation is not the same thing as impact. The standard is not any different from what courts have been practically applying for years, except to add the word "plausible."

Indeed, you don't have to go far to see the limits of Iqbal; just last month the District Court in Padilla v. Yoo, a similar suit against a high-ranking government official, denied defendants' motion to dismiss, quoting Iqbal as follows:

“A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.”Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009) (citing Twombly, 550 U.S. at 556). “The plausibility standard is not akin to a ‘probability requirement,’ but it asks for more than a sheer possibility that a defendant has acted unlawfully.” Id. “Where a complaint pleads facts that are ‘merely consistent with’ a defendant’s liability, it ‘stops short of the line between possibility and plausibility of entitlement to relief.’” Id. (citing Twombly, 550 U.S. at 557 (brackets omitted))

To reiterate: the sky is not falling on plaintiffs. They need only plead "more than a sheer possibility that a defendant has acted unlawfully," something lawyers have been doing for centuries.]

Drug and Device Law points us to an article in Saturday's Wall Street Journal:

Ashcroft v. Iqbal, released in May, will make it harder to bring a lawsuit without specific factual evidence, raising the threshold for moving a case into expensive litigation and possibly saving companies millions of dollars in legal fees. The case was overshadowed by other business rulings on consumer lawsuits, environmental and employment law and other matters in a term set to end Monday, but legal experts said it may be the most important.

"It's the case that will be cited more than any other by a factor of 100," said Tom Goldstein, partner at Akin Gump Strauss Hauer & Feld LLP and founder of the Scotusblog Web site. He called the ruling "an unexpected gift for the business community."

In the case, a Pakistani named Javaid Iqbal sued government officials over his detainment after Sept. 11, 2001. The Supreme Court ruled that Mr. Iqbal didn't have sufficient factual evidence to proceed with his discrimination claims.

"While legal conclusions can provide the framework of a complaint, they must be supported by factual allegations," Justice Anthony Kennedy wrote in the 5-4 opinion. He cited the 2007 decision in Bell Atlantic Corp. v. Twombly, an antitrust case that outlined what plaintiffs must assert to make it through initial court proceedings.

As a result of the Iqbal ruling, businesses may find it easier to fend off lawsuits by persuading courts to dismiss complaints early in litigation.

I disagree. Maybe a handful of cases at the fringes with no factual allegations will be dismissed (most of these cases were already dismissed even prior to Twombly), but that's it. Iqbal's casual reference to pleading standards does not change the narrow focus of the actual opinion, which relates to the very specific issue of how "qualified immunity" applies to high-ranking officials in suits against the federal government for deprivations of constitutional rights.

Tom Goldstein is right that the Ashcroft v. Iqbal opinion will be cited all of the time by defendants' motions to dismiss, and will be cited by court opinions evaluating motions to dismiss, but that doesn't mean defendants will get much mileage out of it.

Rather than argue the details why, let me show you what will probably become my standard draft response to such motions:

Defendant's heavy reliance on Iqbal is misplaced. Iqbal was a Bivens action brought by a Pakistani national who alleged ethnically and racially discriminatory treatment in the post-September 11, 2001, period by numerous federal officials while he was detained for charges of defrauding the United States with regard to identification documents, charges to which he plead guilty, prompting his deportation. Iqbal, 556 U.S. ___; Slip op. 1. There was no dispute that the facts alleged by Iqbal stated a Bivens claim against all individuals directly and indirectly involved in his treatment. Id.

The narrow question in Iqbal was whether Bivens liability -- which indisputably does not extend to supervisors through respondeat superior (see Monell) -- attached where the complaint alleged "a supervisor’s mere knowledge of his subordinate’s discriminatory purpose." Slip op., 13. The Supreme Court reiterated that Bivens creates a unique, disfavored and limited cause of action disconnected from normal tort doctrines and reaffirmed that, "[a]bsent vicarious liability, each Government official, his or her title notwithstanding, is only liable for his or her own misconduct." Id.

Such a Bivens-specific holding bears no relationship to the business lawsuit sub judice. Importantly, though, and contra defendant's arguments, the Supreme Court reiterated in Iqbal that "a court must accept as true all of the allegations contained in a complaint" and that a plaintiff need only "state[] a plausible claim for relief [to] survive[] a motion to dismiss." Slip op. 14-15. Plaintiff has clearly done that here; defendants' heavy reliance on an irrelevant Bivens opinion reveals the lack of any support in existing case law for their request to throw plaintiff out of court entirely. The Supreme Court has always instructed, and continues to instruct, District Courts to assume the facts in the complaint to be true, to make reasonable inferences on behalf of plaintiff's allegations, and to deny dismissal where plaintiff has a "plausible" claim.

Finally, again contra defendants, Iqbal was specifically remanded to the Circuit Court to consider whether the plaintiff there should be permitted to amend his complaint to cure the deficiencies. Such is consistent with this Circuit's precedent, in which leave to amend is to be freely granted prior to dismissal unless such amendment is clearly futile or inequitable.

So there you go. Iqbal soundly rejects Bivens liability for high-ranking government officials merely potentially aware of misdeeds much further down the chain of command (and it reiterates the appealability of an order on qualified immunity), but that's it.

The sky has not fallen on business plaintiffs.

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At The Legal Intelligencer:

Moving beyond all the talk of alternative fee arrangements, Saul Ewing has put its fixed-fee programs in writing -- on its Web site at least.

 The firm launched this week its "cost certainty commitment" with two different programs in which either a fixed fee or a cost per-attorney, per-day will be used on specific types of matters the firm identified as lending themselves to such arrangements. ...

To start, Saul Ewing is offering a fixed, daily blended rate per attorney for due diligence work for investors, companies looking for capital and venture capital or private equity firms looking to have their portfolios evaluated.

The second program offers a fixed fee for representation at administrative hearings before the Pennsylvania Insurance Department. There are two packages under this plan, with the second having a higher cost to include some post-hearing work.

Antzis said the arrangements could be offered for certain types of labor and employment, intellectual property and litigation matters as well. ...

Law firms have been offering fixed fees for things like patent filings and the drafting of wills for years, Antzis said. But the firm's first significant foray beyond those areas came this year before the "cost containment commitment" had even been thought up.

Saul Ewing stole away work for a large grocery chain from a larger, national firm. Antzis said the chain brought its business to Saul Ewing because the firm agreed to a fixed cost for handling all of the chain's single-plaintiff employment discrimination claims in the region.

In other industries, they call this "meeting customer demand."

It has long been ridiculous to bill by the tenth of the hour for representation across hundreds of substantially similar matters which all follow the same procedures and all apply roughly the same law, like insurance regulator hearings. Large corporate law firms have inexplicably been able to resist billing and pricing reform for decades, but no longer, as revealed by that last quoted paragraph above.

Modern mid-size and large businesses are kept profitable in part by compartmentalizing costs and making them consistent over time. Just like how few businesses these days accept the risk of self-insurance or vertical integration, fewer and fewer will tolerate endless swings in legal costs they barely understand and can barely audit for performance.

The challenge for firms, then, is no longer figuring out the precise amount by which they can increase their hourly rate each year without driving off the client, but rather figuring out how to meet their clients' demand for bills that are regular and predictable.

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Two posts on the same day. Sarah Randag at ABA Journal Law News Now:

Jordan Furlong wonders in a recent post at Law 21 if "we’ll soon be closing the book on one of the legal profession’s most-used and least-understood phrases of the last decade: 'work-life balance.' "

With 10,000 law firm jobs lost in 2009, not to mention waves of announcements of pay cuts and associate deferrals, work-life balance has become a touchy subject.

"Even the most active WLB boosters have toned down talk that might earn them the dreaded 'entitlement' label," Furlong writes. "Realist observers like Dan Hull and Scott Greenfield have gained the upper hand in the WLB discussion," perhaps referring to a InsideCounsel SuperConference panel at which those two lawyers took on Millennials.

...

"If WLB stood for anything, it was for the fact that we all have the right and the obligation to make that tradeoff on the terms we want."

But Furlong agrees with work-life balance proponents that in their first few years of practice, saddled with increasingly high debt, lawyers understandably feel compelled to seek jobs with heavy workloads. And "billable-hour targets for associates at more than a few firms simply can’t be achieved without damage to one’s health or ethics, or both," he writes.

Furlong worries, that now that the moment has passed, "WLB will be relegated to the status of a mere generational quarrel during a freak economy."

Denise Howell at The American Lawyer (at law.com):

It's thus tempting to view balance as a fair-weather topic, brought up only when lawyers feel secure about their jobs and alternatives. ...

It's nothing short of depressing, and things seem likely to get worse before they get better. But even in a recession it's important not to shelve these policies completely.

It may seem counterintuitive, but flexibility and balance-oriented policies are tools that can help firms survive the conflagration. "Eat what you kill" is traditionally associated with the most cutthroat, internally competitive firms. A compensation system where one's career survival depends directly and constantly on the dollars one brings in the door has been seen -- historically, anyway -- as inflexible. But "eat what you kill" and "work/life balance" (with its "work less, make less" compensation system) share one goal: to pay lawyers only for work that enhances the bottom line.

As a result, the two systems can live together very well. Layoffs cost firms, both financially (the lost investment in laid-off lawyers, and the premium often paid in ramping back up) and in terms of reputation (from "They're going under" to "Remember what they did to associates back in '09?"). When those costs are taken into account, scaling back lawyer hours starts to look better and better.

Deborah Epstein Henry, founder and president of consulting firm Flex-Time Lawyers, urges firms to open their eyes to the reality that, unlike layoffs, promoting reduced hours cuts costs now, prevents future recruiting and training expenses, engenders loyalty, improves morale and quells the burnout and lack of productivity that may otherwise plague those left in a fragmented workplace.

If there's one lesson from the latest disruption in the legal world, it's there is no one way to run a law firm. Whether that disruption is from technology, demographics, or economics, there comes a time when you have to start finding 1,000 ways not to build a light bulb.

The NYTimes is overstating the change -- "Big, as a business model (let alone as an expression of the national mood), seems bound for obsolescence." -- but so are critics of "WLB" suggesting that efficiency or value-based lawyer employment is gone.

Indeed, a clear lesson from the "risky, transient" nature of big firms I discussed yesterday, is the danger of expanding too quickly, particularly expanding high fixed costs or becoming too reliant on unstable practice areas. 

"Work-life balance" has never been about being lazy or overpaid -- it was about matching what workers had to offer with what the market needed. Right, it seems a lot of firms "need" a lot less than they thought, something which many employees are more than happy to offer.

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Buried in this NYTimes article about the massive layoffs at White & Case, and the general reductions at big corporate law firms, is this critical fact:

That wall [i.e., the slowdown of work after Lehman Brothers' collapse] was especially hard because — remarkably like such ventures as the Mafia or the ice-cream vendor — many large firms operate on a cash-in-hand basis, with insufficient reserves to weather a slump.

With Wall Street in a meltdown, Big Law suddenly found it not just indecorous but impossible to pay young lawyers six months out of law school $160,000 a year to stare at their hands. (Indeed, after offering jobs to dozens of third-year law students last fall, White & Case told 60 percent of them they would have to wait a year to start.)

That's an insult to ice-cream vendors, who at least recognize the seasonal nature of their product.

Law students and young lawyers, burn that fact into your brain and never forget it: big corporate law firms are transient, risky businesses. Your first sign of a problem may be a friend texting you "sorry to hear about your firm."

Indeed, it's often worse than cash-in-hand, with many firms going deeply into short-term debt at the end of the year to fund the bonuses, debt which they then pay down throughout the year.

Don't let the big buildings, fancy summer associateship, corporate clients, or even decades-old names fool you. To the extent these firms remain extant these days, it is by swiftly firing people just like you.

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New to the site? Haven't been here in a while? Here are some of the most popular posts over the past few weeks.

Litigations and Trials:

• Three Ways To Lose Your Business Lawsuit - Wachtell and The Failed Hexion / Huntsman Merger
• Does The Fumo Juror's Twittering Warrant A Mistrial?
• Harvard Law Professor Bungles Rules of Civil Procedure for Deposing Third Parties
• American College of Trial Lawyers Report Encourages Frivolous Civil Discovery Objections
• Another Preventable Small Business Lawsuit Horror Story

Law Practice:

• How To Write Your Brief So That The Judge Will Hate You
• "How Low Could Associate Salaries Go?" Depends On How Desperate Firms Want To Appear
• Contingent Fee Business Lawyers As Venture Capitalists
• A Great Trial Lawyer, Lucius Seneca, On Keeping Your Law Practice In Perspective
• How To Deal With A "Non-Ruling" By A Trial Judge

Current Events:

• Another Mangled Prescription for Health Courts to Evaluate Medical Malpractice Claims
  
• How AIG Shareholders (Like the US Gov't) Can Sue to Get Back The Bonuses
• "The 'Hot News' Tort and the New Media" -- It's Too Late For Copyright To Sink Blogs
• LinkedIn's Terms of Use: We Own All Content, Ex-Users Agree To Update Our Database Forever 

Recent Court Opinions: 

• Third Circuit Predicts Pennsylvania Supreme Court Would Require Independently Actionable Conduct To Prove Tortious Interference With Contractual Relationships
• Third Circuit Upholds Philadelphia Police's Ban On Headscarves Without A Word On The First Amendment
• E.D.Pa. Threads The Needle On "Gist of the Action" and "Parol Evidence Rule" In Mixed Fraud / Breach of Contract Cases
• Ricci v. DeStefano: The Problem of Granting Certiorari After Summary Judgment

 

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In the middle of an otherwise good article in The Legal Intelligencer about the creative solutions local biglaw firms (Eckert Seamans, Ballard Spahr, Fox Rothschild) have taken to the shrinking supply of corporate legal work is this absurdity:

In response to the current economy and a clear shift to a buyer's market, firms are moving from the pyramid model of a few partners at the top and hoards of associates at the bottom to a diamond shape in which several senior associates and junior partners make up the bulk in the middle in an effort to maximize value for the client.

When you bill by the hour, the last thing you want to do is "maximize value for the client." It translates directly into "minimize profit for the law firm."

And that's what's so wrong with the "leverage" model, which is built on hourly billing: just like a "cost-reimbursement" (aka "cost-plus") contract, it creates a disincentive towards productivity, which is why the government has moved away from them. The incentive is to continually add resources -- particularly resources with a big spread between billing to client and cost to firm, like junior associates -- up until the very highest point tolerated by the client, and then to keep the matter going as long as possible.

Fact is, even when business is modest, junior associates at corporate law firms are very profitable. A top-of-the-market junior associate making $150,000 annually plus bonus will still, after bonus, benefits, malpractice insurance premium, and even 'lost opportunity' costs like office space, still need only bill a modest 1,750 hours annually at an abysmal $150/hour to return a substantial profit. Keep in mind that's a low rate for an associate working nowhere near the 2,000 hours most firms expect these days. Most do much better, frequently returning 30% profit margins or better on the firm's expenses on them.

The problem now is that businesses are unwilling to let firms overwork cases like before, leaving the hours available for the junior associates uncertain. The firm can no longer "make work" for them.

So, what to do? Simply removing the excess capacity is one solution, but it won't generate the same profits as before.

Hence the interest in alternative fee arrangements like fixed billing and the unique methods for dealing with first year associates. Particular credit goes out to those who, looking back to the history of the profession, have restored the "apprenticeship" model, which is likely fairer to clients and more useful for associates. (I've known many biglaw associates who, for their first year, learned absolutely nothing as they did "document review," often nothing more than unnecessary checks for attorney-client privilege among thousands of banal, irrelevant documents.)

There will always be a market for companies like, say, Comcast, hiring an armada to repel a legal invasion. We're not talking about them.

The million-dollar profit-per-partner question for everyone else, for the lawyers who represent companies with "only" millions in annual revenue is: who in biglaw can go from a culture of excess to a culture of frugality? Adopt the 'lean and mean' approach that contingent fee firms have been doing for years, thereby earning their profits the way most businesses do, through improve productivity?

Who, and how quickly?

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I'm somewhat surprised this issue comes up as often as it does:

"Scholarly commentary has recognized that Pennsylvania law has been riven with 'considerable confusion as to the nature of the covenant of good faith, when that covenant is implicated, and how claims arising from a breach of the covenant are enforced.' Seth William Goren, Looking for Law in all the Wrong Places: Problems in Applying the Implied Covenant of Good Faith Performance, 37 U.S.F. L. Rev. 257, 258 (2003). As the parties' discussion of the law illustrates, it has not always been clear 'whether the covenant is implicated in every contractual relationship or only some . . . and whether a breach of the covenant of good faith gives rise to an independent cause of action or is merely a tool of contract interpretation.' Id. at 260. According to Goren this confusion 'derived from confusing the contract-tort of bad faith with breaches of the general covenant [of good faith] present in all contracts.' Id. at 303. Whatever its source, this confusion has largely been resolved: 'The majority of Pennsylvania cases through the 1990s to today . . . have refused to permit independent claims for breach of the covenant of good faith outside of an insurer-insured relationship. Thus, in general, a 'breach of such covenant is a breach of contract action, not an independent action for a breach of a duty of good faith and fair dealing.'' Id. (footnote omitted) (quoting Seiple v. Comty. Hosp. of Lancaster, No. 97-cv- 8107, 1998 U.S. Dist. LEXIS 5093, 1998 WL 175593, at (E.D. Pa. April 14, 1998) ('Pennsylvania does not recognize a claim for breach of covenant of good faith and fair dealing as an independent cause of action.')).

Recent case law confirms this as the prevailing rule in Pennsylvania. See, e.g., LSI Title Agency, Inc. v. Eval. Servs., Inc., 2008 PA Super 126, 951 A.2d 384, 391 (Pa. Super.2008), appeal denied, 960 A.2d 841 (Pa.2008) (citing cases holding that Pennsylvania does not recognize separate breach of contractual duty of good faith and fair dealing where that claim is subsumed by separately pled breach of contract claim.); JHE, Inc. v. SEPTA, No. 1790 NOV. TERM 2001, 2002 Phila. Ct. Com. Pl. LEXIS 78, 2002 WL 101894,1 at (Pa. Com. Pl. May 17, 2002) (''[T]he implied covenant of good faith does not allow for a claim separate and distinct from a breach of contract claim . . . [A] claim arising from a breach of the covenant of good faith must be prosecuted as a breach of contract claim, as the covenant does nothing more than imply certain obligations into the contract itself.') (collecting cases from other jurisdictions adopting same rule) (emphasis in original); Commonwealth v. BASF Corp., No. 3127, 2001 Phila. Ct. Com. Pl. LEXIS 95, 2001 WL 1807788, at (Pa. Com. Pl. Mar.15, 2001) ('Pennsylvania law does not allow for a separate cause of action for breach of either an express or implied duty of good faith, absent a breach of the underlying contract.').

Federal courts construing Pennsylvania law have adhered to the same rule. See e.g., Chanel, Inc. v. Jupiter Group, Inc., Civ. No. 3:04-CV-1540, 2006 U.S. Dist. LEXIS 43363, 2006 WL 1793223, at (M.D .Pa., June 27, 2006) (agreeing and citing cases holding that claim for breach of good faith and fair dealing is not independent cause of action, but part of a breach of contract claim); In re K-Dur Antitrust Litig., 338 F. Supp.2d 517, 549 (D.N.J. 2004) ('Although Pennsylvania imposes a duty of good faith and fair dealing on each party in the performance of contracts, there is no separate cause of action for breach of these duties . . . .') (citations omitted); Blue Mt. Mushroom Co. v. Monterey Mushroom, Inc.., 246 F. Supp. 2d 394, 400-01 (E. D. Pa. 2002) ('Pennsylvania law does not recognize a separate claim for breach of implied covenant of good faith and fair dealing.'); McHale v. NuEnergy Group, No. Civ. A. 01- 4111, 2002 U.S. Dist. LEXIS 3307, 2002 WL 321797, at (E.D. Pa. Feb.27, 2002) (internal citations omitted) (same)."

McHolme/Waynesburg, LLC v. Wal-Mart Real Estate Bus. Trust, No. 08-961, 2009 U.S. Dist. LEXIS 38934, at *5–8 (W.D. Pa. May 7, 2009).

I suppose from the plaintiff's perspective it is an issue of "why not? If the claim is recognized, it could have been malpractice for me not to include it," but I wonder about the ramifications if a plaintiff actually gets one of these "independent" good faith claims through trial.

What are the elements of proving it? What are your damages? Do they overlap your breach of contract damages? Can you recover twice? 

Is there any doubt the defendant will appeal such a verdict? Any doubt it will get your case reversed and re-tried?

I think the down side including such a claim -- particularly the distraction from the real issues in the case and the loss of some credibility with the court -- outweigh any potential benefits.

Just include it as more evidence of the breach of contract.

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In the world of venture capitalism, Fred Wilson’s blog, “A VC” is essential reading, and Fred is particularly generous with his insight and information about the field.

I read Fred’s blog partly because it’s darn interesting and partly because there are a lot of parallels between venture capitalism and contingent fee litigation. We both take on a lot of risk and invest a lot of time and money for the potential of a big payoff down the road, as compared to regular and steady income.

Yesterday, Fred wrote an interesting post about the venture capitalism industry as a whole, and how the math doesn't add up. There are just not enough “exits” (through a merger / acquisition or an initial public offering) to justify the size of the venture capitalism industry as a whole.

So I commented, he responded, and we had a short conversation about the economics of contingent fee litigation and the potential for creating a market for contingent patent infringement defense.

But that’s not what this post is about. At the end, Brad Feld chimed in: 

If they did one-way loser pays (e.g. plaintiff has to cover defendants cost if the plaintiff loses) and they prohibited contingency fee relationships that would solve a lot of problems.

That’s a common sentiment among businesses, from big corporations to entrepreneurs to mom and pop stores, a sentiment that usually disappears the moment they need an attorney but can't afford the risk of paying for years of litigation without a guaranteed return.

I’ve written before about loser pays and how it’s unfair to penalize the party that bears the burden of proof on an issue from failing to meet that burden, and that loser pays serves as a strong deterrent against meritorious claims.

But let me focus on the contingent fee aspect. As part of my discussion with Fred, I talked about some of the numbers when the plaintiff wins a big case:

[A big win in the litigation business] depends on the resources devoted to it, so let me give some examples based on actual costs and number of attorneys on the case.

(Someone might ask, "why not use billable hours for resources?" Well, contingent fee attorneys almost never devote themselves entirely to one case, and each minute spent on the case instantly becomes a sunk cost, so we generally ignore time already spent on a case and focus on two things: actual costs and opportunity cost due to the lawyer(s) having to turn down other work. I refer to the latter as "bandwidth," i.e. the availability of a lawyer to take on other work. Keep in mind also you're paying these attorneys (including yourself) a salary, and thus have a significant carry cost, although the salary on a 'per case' basis is quite low given how most attorneys have over 10 cases, even those on substantial matters.)

A large-damages personal injury / product liability / medical malpractice lawsuit can be done by one or two attorneys and costs below $250,000, with recovery of $5-$10m within 1.5-3 years. That's a big win: you put in $250k out of pocket, likely didn't impair bandwidth, and recovered $2-$4m in attorneys' fees.

The numbers aren't too much different for most small business cases, with breach of contract, unfair competition, etc.

A regional-market antitrust / mid-sized patent infringement case can be done with 3-6 attorneys, $1-$5m in costs, with a recovery of $15-$50m in 2-4 years. Another big win: you put in $1-$5m out of pocket, moderately impaired bandwidth, and recovered $7-$20m in attorneys' fees.

A massive shareholder class action / national antitrust / large patent infringement case can be done with 10-40 attorneys, $10-40m in costs, and a recovery of >$100m in 4-10 years. Think of the Blackberry patent infringement case, which ended with a $612m settlement and over $200m in fees (resulting in profits-per-partner than year over $4m).

Big money, right? Why not file lawsuits all day long?

The difference is, those are the big winners, the venture capital equivalent of starting a company that gets bought out by Microsoft or which enters the public market with a heralded IPO proceeded by weeks of favorable press, like Google. It’s great, but it’s also rare.

Day in and day out, the primary thing a contingent fee law firm does is spend lots of money. In addition to all the normal costs of a business (rent, staff, etc.), you have to pay your attorneys salaries which are competitive in the market, even against hourly billing firms, and you have to dump loads of money and time into cases for experts, motions, discovery, trials, appeals and negotiations, none of which earn you a dime until the very end.

So I'd say it's no different from Brad's or Fred's ventures: we have as strong an incentive against taking frivolous or vexatious claims as they have against investing in unprofitable businesses. The last thing I want to do is spend years of my life and five, six or seven-figures pursuing a case that returns nothing. Like a venture capital fund, our contingent fee law firm turns down far more cases than it accepts.

Do vexatious or extortionate law suits happen? Sure, potentially more for cases which are high stakes and expensive to defend, like shareholder class actions or patent infringement. That's why I think a limited form of fee-shifting is appropriate, like when the patent being sued upon is declared invalid as a matter of law.

But loser pays and no contingency would close the courthouse doors to all but the wealthiest of parties, since no one would be able to afford pursuing even the best of claims without a massive war chest, particularly in the extremely-expensive shareholder class action, antitrust and patent infringement contexts.

It'd be like stripping venture capital funds of limited liability and restricting them to using secured debt, not equity, to fund investments, forcing them to do little more than invest in the biggest companies in the world.

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Via @walterolson, CQ Politics reported yesterday:

The Senate rejected a bid Thursday to impose new limits on whistleblower awards as it moved toward passage of legislation to beef up the government’s ability to combat financial fraud.

By 31-61, the Senate rejected an amendment by Jon Kyl , R-Ariz., that sought to set a $50 million maximum on the amount that a whistleblower could receive through a False Claims Act lawsuit to recoup taxpayer funds lost to fraud. Currently, awards can reach 30 percent of the total recovered for the federal government, if a judge approves that much.

Kyl said whistleblowers who pinpoint fraud by government contractors and other recipients of taxpayer funds “deserve to be compensated when they save the government money.” But he said the current percentage formula can result in some successful litigants being “grossly overcompensated.”

Senate Judiciary Chairman Patrick J. Leahy , D-Vt., sponsor of the antifraud bill, and Sen. Charles E. Grassley , R-Iowa, author of the 1986 False Claims Act provisions that reward citizens for suing on behalf of taxpayers, opposed Kyl’s effort to cap the awards.

The law, Leahy said, “is very well balanced the way it is, with a judge having to make a final decision on the award. ...I don’t want to fix something that’s not broken.”

Grassley said whistleblower suits under the False Claims Act have recovered $22 billion for the government since 1986.

False Claims Act cases, sometimes known as qui tam (an abbreviation of qui tam pro domino rege quam pro se ipso in hac parte sequitur, meaning "[he] who sues in this matter for the king as [well as] for himself"), are unique and complicated beasts dating back to the 13th century in England. 1986 is when the most recent amendments to the Act were passed.

The cases are initially filed in under seal for review by the U.S. Attorney, who then decides if they want to pursue the action themselves. If they decline, then the whistleblower can proceed as a "relator" of the United States, fighting the action on the government's behalf. There's already a huge backlog of these cases waiting for Department of Justice review, unable to proceed.

I don't blame them for the delay. The cases combine the legal complexity of interpreting federal regulations and procurement contracts with the factual difficulty of proving mens rea in a white collar criminal case, making them difficult and time-consuming just to screen, much less pursue.

The reason whistleblowers and law firms take them -- with extraordinary risk to the whistleblower's career and livelihood, and substantial investments in time and money by the law firm, which usually represents the plaintiff on a contingent fee -- is because they can result in tremendous damages if proven at trial. Under 37 U.S.C. § 3729, anyone proven to have knowingly presented a false claim "is liable to the United States Government for a civil penalty of not less than $5,000 and not more than $10,000 [for each false claim], plus 3 times the amount of damages which the Government sustains because of the act of that person," as well as "costs of a civil action brought to recover any such penalty or damages."

The whistleblower -- assuming they can prove entitlement by, among other elements, being the "original source" of the information -- gets a portion of the recovery, which they then split with the lawyers who represented them on the contingent fee.

The question is: why would anyone want to cap these incentive awards at $50 million?

The vast majority of qui tam / False Claims Act cases don't get anywhere near that. Some recent large settlements have been for $325 million against Northrop Grumman, with the plaintiff / relator receiving $48.7 million, and for $128 million against Network Appliance, with the plaintiff / relator receiving $19.2 million. One of the very few cases in which the award broke $50 million was the $1.4 billion Eli Lilly Zyprexa case, in which the four different plaintiff / relators together received $78,870,877, about 5% of the overall recovery. It's unclear if even that would have hit Senator Kyl's proposed cap, since it was divided among the plaintiffs.

The answer becomes clearer when you talk about massive cases, particularly those in which the government declines to intervene.

Assuming a 40% contingent fee agreement, a $50 million cap results in a $20 million cap on the attorney's fees. Sounds like a lot until you consider that litigation and trial over the meaning of a few documents and involving only half a million pages of documents, 124 trial witnesses, and 80 depositions, can cost $60 million for each side. For the In re Visa Check/Mastermoney Antitrust Litigation, 297 F. Supp. 2d 503 (E.D.N.Y., 2003), had plaintiffs' lawyers been billing by the hour, they would have worked in just the litigation the equivalent of $62,545,603 -- trial would have been extra.

But the plaintiffs' firms weren't billing by the hour -- they took on the risk themselves, much as most False Claims Act firms do. Can you imagine what it would take to actually prove at trial, as the DoJ press release says, "Northrop provided and billed the National Reconnaissance Office (NRO) for defective microelectronic parts, known as Heterojunction Bipolar Transistors (HBTs)?"

What about something bigger? What if there are serious problems with more than just the "Heterojunction Bipolar Transistors" in the $337 billion F-35 joint strike fighter? What if private military contractors in Iraq have been overbilling the more than $100 billion they've received? What about the next Zyprexa fraud?

Such cases would be enormously costly, time-consuming and difficult to pursue, undoubtedly many times larger than the $120-million-in-fees Princeton case and at least as large as the more-than-$120 million Visa antitrust case. Most importantly, such would be exceedingly risky, as the plaintiffs would have to prove "knowing" fraud among millions of documents, thousands of transactions, and hundreds of pages of complicated regulations.

What if the Department of Justice wasn't able to commit the resources to do that? The government can't always get David Boies and his team, eager to promote their new firm, for half price, like they did in the antitrust case against Microsoft.

Keep in mind, the core purpose of qui tam is not only to encourage whistleblowers, but to outsource the heavy lifting of carrying a lawsuit through to recovery. As noted by Justice Scalia, "The FCA can reasonably be regarded as effecting a partial assignment of the Government’s damages claim," critical because "the assignee of a claim has standing to assert the injury in fact suffered by the assignor. " Vermont Agency of Natural Resources v. United States ex. rel. Stevens, 529 U.S. 765 (2000).

An upper limit on recovery of $20 million -- or even, say, $40 million, if we doubled the contingent fee to 80% -- isn't enough to justify pursuing a case of that magnitude, which leaves us, the taxpayer, holding the bag for someone else's fraud on the government.

Senator Kyl has never been a fan of open government. Is there a particular case brewing that he has in mind? 

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Trial courts in Pennsylvania (particularly the United States District Court for the Eastern District of Pennsylvania) continue their organic development of the "gist of the action" doctrine in the absence of explicit guidance from the Pennsylvania Supreme Court.*

The latest comes from EDPA Judge Jan E. DuBois in Farmaceutisk Laboratorium Ferring A/S v. Shire United States, Inc., CA NO. 08-941 2009 U.S. Dist. LEXIS 30209 (April 8, 2009), who finds an interesting way to thread the needle between the gist of the action doctrine, the parol evidence rule, and the common sense acknowledgment that fraud can and does occur amongst the parties to a contract.

First, the gist of the action:

Pennsylvania's gist of the action doctrine "bars claims for allegedly tortious conduct where the gist of the alleged conduct sounds in contract rather than tort." Hospicomm, Inc. v. Fleet Bank, N.A., 338 F. Supp. 2d 578, 582 (E.D. Pa. 2004) (internal quotation marks & citations omitted). The purpose of the doctrine is to "preclude[] plaintiffs from re-casting ordinary breach of contract claims into tort claims." eToll v. Elias/Savion Adver., Inc., 811 A.2d 10, 14 (Pa. Super. Ct. 2002) (citation omitted). Although a breach of contract can give rise to an actionable tort, "to be construed as in tort, . . . the wrong ascribed to defendant must be the gist of the action, the contract being collateral." Bash v. Bell Tel. Co., 601 A.2d 825, 829 (Pa. Super. 1992) (internal quotation marks & citation omitted). "In other words, a claim should be limited to a contract claim when 'the parties' obligations are defined by the terms of the contracts, and not by the larger social policies  embodied by the law of torts.'" Bohler-Uddeholm Am., Inc. v. Ellwood Group, Inc., 247 F.3d 79, 104 (3d Cir. Pa. 2001) (citing Bash, 601 A.2d at 830).

Fraud in the inducement claims are not barred by the gist of the action doctrine where the fraud involves representations of fact independent of promises of performance made in the contract. See eToll, 811 A.2d at 17; TruePosition, Inc. v. Sunon, Inc., No. 05-CV-3023, 2006 WL 1451496, at *3 (E.D. Pa. May 25, 2006) (DuBois, J.); Air Prods. & Chems., Inc. v. Eaton Metal Prods. Co., 256 F. Supp. 2d 329, 341 (E.D. Pa. 2003). "[F]raud to induce a person to enter into a contract is generally collateral to (i.e., not interwoven with) the terms of the contract itself." Air Prods., 256 F. Supp. 2d at 341 (citing eToll, 811 A.2d at 17) (internal quotation marks omitted). On the other hand, when fraud in the inducement is based on statements made with regard to performance of the contract, such claims are barred under that doctrine. In such circumstances a plaintiff's remedy lies in contract. See Williams v. Hilton Group PLC, 93 F. App'x 384, 386-87 (3d Cir. 2004) (finding that fraud in the inducement claim that defendant had no intention of honoring [*25] the contract was barred by gist of the action doctrine). "Moreover, promises made to induce a party to enter into a contract that eventually become part of the contract itself cannot be the basis for a fraud-in-the-inducement claim under the gist of the action doctrine." Freedom Props., L.P. v. Landsdale Warehouse Co., No. 06-CV-5469, 2007 WL 2254422, at *6 (E.D. Pa. Aug. 2, 2007) (citations omitted).

The Court notes that "caution should be exercised in determining the gist of an action at the motion to dismiss stage. Judicial caution is appropriate because often times, without further evidence presented during discovery, the court cannot determine whether the gist of the claim is in contract or tort." Interwave Tech., Inc. v. Rockwell Automation, Inc., No. 05-CV-398, 2005 WL 3605272, at *13 (E.D. Pa. Dec. 30, 2005) (internal quotation marks & citations omitted).

And now the parole evidence rule:

Pennsylvania law concerning the application of the parol evidence rule to claims of fraudulent inducement is well established. The Pennsylvania Supreme Court has explained the law as follows:

Where the alleged prior or contemporaneous oral representations or agreements concern a subject which is specifically dealt with in the written contract, and the written contract covers or purports to cover the entire agreement of the parties, the law is now clearly and well settled that in the absence of fraud, accident or mistake the alleged oral representations or agreements are merged in or superseded by the subsequent written contract, and parol evidence to vary, modify or superseded the written contract is inadmissible in evidence.

HCB Contractors v. Liberty Place Hotel Assocs., 652 A.2d 1278, 1279 (Pa. 1995) (internal quotation marks and citations omitted). The exception to the parol evidence rule for fraud covers fraud in the execution, i.e., the oral representations were fraudulently omitted from the contract, not fraud in the inducement. Dayhoff, Inc. v. H.J. Heinz Co., 86 F.3d 1287, 1300 (3d Cir. 1996); Freedom Props., L.P. v. Landsdale Warehouse Co., No. 06-CV-5469, 2007 WL 2254422, at *3 (E.D. Pa. Aug. 2, 2007); Interwave Tech., Inc. v. Rockwell Automation, Inc., No. 05-CV-398, 2005 WL 3605272, at *16 (E.D. Pa. Dec. 30, 2005). Applying the parol evidence rule to bar claims of fraudulent inducement, as in Pennsylvania, is the minority rule. Regent Nat'l Bank v. Dealers Choice Auto. Planning, Inc., No. 96-CV-7930, 1997 WL 786468, at *6 (E.D. Pa. Nov. 26, 1997). Pennsylvania courts justify this position under the rationale that if the parties "relied on any understanding, promises, representations or agreements made prior to the execution of the written contract . . . , they should have protected themselves by incorporating into the written agreement the promises or representations upon which they now rely . . . ." 1726 Cherry St. P'ship v. Bell Atl. Props., Inc., 653 A.2d 663, 666 (Pa. Super. Ct. 1995) (internal quotation marks & citation omitted). Thus, where there is an integrated agreement and the asserted misrepresentations giving rise to fraud in the inducement are addressed by the agreement, the parol evidence rule bars extrinsic evidence of such a fraud claim.

To apply the HCB Contractors rule, courts must determine whether there is an integrated agreement and whether the asserted prior representations are specifically covered by the written agreement. Interwave Tech., 2005 WL 3605272, at *17; Quorum Health Res. v. Carbon-Schuylkill Cmty. Hosp., Inc., 49 F. Supp. 2d 430, 433 (E.D. Pa. 1999). One key factor in concluding whether an agreement is integrated is the presence or absence of an integration or merger clause in the written agreement. See HCB Contractors, 652 A.2d at 1280; Interwave Tech., 2005 WL 3605272, at *18; Quorum Health, 49 F. Supp. 2d at 433; G. Daniel Glass v. Singer Optical Group, Inc., No. 95-CV-308, 1995 WL 717411, at *3-4 (E.D. Pa. Dec. 1, 1995). To determine whether the written contract specifically addresses the subject of the oral representations, courts ask whether "they relate to the same subject matter and are so interrelated that both would be executed at the same time and in the same contract . . . ." Hershey Foods Corp. v. Ralph Chapek, Inc., 828 F.2d 989, 995 (3d Cir. 1987) [*31] (internal citation omitted).

In this case, the 2005 Settlement Agreement does not contain an integration or merger clause.  ... The only section of the 2005 Settlement Agreement that possibly covers such a representation is section 2.4 As discussed in Part III.D, supra, the language of section 2.4 is ambiguous, particularly with respect to whether it requires defendant to market all new oral 5-ASA drugs as PENTASA(R). In light of this ambiguity, the Court cannot determine at this stage whether the written agreement specifically addresses the content of the alleged oral representations such that they would be barred by the parol evidence rule. "For the Pennsylvania parol evidence rule to bar a claim for fraudulent inducement, the contract must be written, unambiguous, and fully integrated." Coram Healthcare Corp. v. Aetna U.S. Healthcare, Inc., 94 F. Supp. 2d 589, 594-95 (E.D. Pa. 1999). As the Court concludes that the 2005 Settlement Agreement is ambiguous and not fully integrated, it will not dismiss plaintiffs' fraudulent inducement claim as barred by the parol evidence rule.

Defendant's Motion for Judgment on the Pleadings was thus denied. I don't agree with the whole approach here -- I think Bell and eToll hold only that a plaintiff can't simultaneously recover under negligence and breach of contract -- but, importantly, Judge DuBois didn't throw out half of plaintiff's claims for failure to "prove" an issue that should be left to the jury. However phrased or theorized, the core ability to recover where one party may have defrauded the other in the context of a contract is preserved.

* I don't mean to imply it's necessarily wrong for the Pennsylvania Supreme Court to permit this organic development. The United States Supreme Court, for example, routinely denies cert on cases up until a general consensus has development among the Circuit Courts of Appeal.

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Amy Kolz has an extensive article at The American Lawyer detailing a merger debacle which settled last winter for $1 billion after "Vice-Chancellor Stephen Lamb [of the Delaware Chancery Court] declared that Wachtell's client, an Apollo Management, L.P., portfolio company called Hexion Specialty Chemicals, Inc., had 'knowingly and intentionally breached' its merger agreement with Huntsman Corporation in a deliberate effort to walk away from their $10.6 billion deal."

If you're interested in the subject, you should read the article.

I highlight three elements fundamental to their defeat, and the defeat of many business litigation plaintiffs:

Evading The Obvious Spirit of the Agreement:

Huntsman and its lawyers at Shearman & Sterling and Vinson & Elkins were able to negotiate a merger agreement that all but locked Hexion into the acquisition. There was no "financing out," which meant that Hexion would have to pay a $325 million termination fee if it failed-despite using best efforts-to obtain debt financing. The material adverse effect clause, as Lamb would later remark, was also "narrowly tailored." And though one of the parties had to deliver a solvency letter to the banks funding the deal, there was no "solvency out" for Hexion.

The deal also included a provision that later proved harmful to Apollo. Though the agreement capped Hexion's liability at $325 million if it couldn't complete the deal despite making "best efforts," it allowed for uncapped damages in the event of a "knowing and intentional breach of any covenant" by Hexion, a provision more often seen in deals with strategic acquirors.

If you want to be able to back out of an agreement, leave in place mechanisms by which you can. Huntsman smartly negotiated an agreement locking Hexion / Apollo into the deal.

I've seen plenty of sophisticated individuals and business make or break contracts in a manner charitably described as commercially unreasonable. I can't fix those mistakes. If you walked away from a good deal because you were afraid, I can't enforce it. If you consented to an air-tight contract because you desperately wanted the deal, I can't undo it. There's a lot I can do, but where the case would revolve around an issue fairly negotiated and clearly incorporated into the contract, that usually ends the story unless you can show fraud or fraudulent misrepresentation.

I don't know what fee arrangement Apollo had with Wachtell; Wachtell does a fair amount of contingent fee work, particularly in the mergers & acquisitions arena, and it seems like they really believed in their case, as Marty Lipton apparently assured Apollo victory at trial.

But that's not always the situation. We represent business litigation clients on a contingent fee, most of whom quickly pick up on the idea of a partnership in the litigation. Frankly, if your lawyer isn't willing to shoulder some of the risk of your lawsuit, you should ask yourself why not.

Making The Facts Fit Your Lawyer's Strategy:

Apollo arrived at the meeting, according to testimony from Apollo partner Jordan Zaken, focused on the contract's material adverse effect clause: If Huntsman's declining numbers constituted an MAE, Hexion could walk away without even paying the deal's $325 million termination fee. But Wolinsky had to know that was a long shot. Delaware courts have never found a MAE in the context of a merger agreement, and Wolinsky himself helped to litigate the precedent-setting case on the issue, IBP, Inc. v. Tyson Foods, Inc., in 2001.

Instead, Apollo and Wachtell began to consider the combined company's potential insolvency as a possible way out of the merger. The strategy was certainly intriguing. If the merger would result in an insolvent company, the banks could refuse to finance it, leaving Hexion with no choice but to abandon the deal. And if it were the banks-not Hexion-scuttling the deal, Hexion would be liable for, at most, the breakup fee.

Lawyers are smart, creative and innovative (or should be). They can change their strategies to meet a wide variety of fact patterns.

But facts are stubborn things. Trying to create facts, even in the midst of litigation, create a huge risk that the judge or jury will find your whole case to be a farce constructed for their benefit, which is what happened here: Judge Lamb ruled that insolvency wasn't even ripe for judgment.

Voiding Your Legal Protections, Like Attorney-Client Privilege:

Wolinsky explained that Wachtell was potentially interested in a formal solvency opinion, but also wanted to hire Duff in a "consultative arrangement to assess the solvency analysis," according to testimony from Duff's Philip Wisler. The firm would use Duff & Phelps, in other words, for two roles: a litigation consulting team that would provide various financial analyses to assess the possibility of deal litigation, and an opinion team that would be engaged if Hexion decided "to go forward with a particular course of action," namely litigation to end the merger.

...

From the beginning, Duff's efforts to separate the consulting and opinion teams were imperfect, at best. Wisler, for instance, attended the May 20 kickoff meeting for the litigation consulting team at Apollo's New York offices, even though he was to be the author of the insolvency opinion. The same Duff expert performed modeling work for both teams. And litigation team leader Pfeiffer, at Wachtell's request, e-mailed Wisler various deal models for the opinion analysis; Wisler later testified that he was unaware he was supposed to be walled off from Pfeiffer's work.

...

The blurry line between Duff's consulting and opinion work would later come back to haunt Wachtell in Delaware. Vice-Chancellor Lamb ultimately concluded that Duff's consulting assignment cast doubt on the objectivity of its solvency opinion. Moreover, the dual role destroyed any potential work-product privilege claim over the Hexion team's communications with both the Duff litigation consultants and solvency experts. Duff had to provide comprehensive discovery to Huntsman, which was a huge gift to Huntsman's Vinson & Elkins litigators.

Remember the Watchmen suit where a witness' testimony was so guarded and unhelpful the Court precluded the witness from testifying on the subject again, thereby warranting summary judgment?

If you misuse or abuse the law's protections and privileges, you run the risk of having them deemed waived or void by the court, as happened here. It's the same when clever businesses set up a variety of undercapitalized or alter ego LLCs and S-Corporations to evade liability -- odds are good the court will respond by striking the house of cards and seeing what's left standing, often nothing.

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Fresh off the presses is Acumed LLC v. Advanced Surgical Servs., 2009 U.S. App. LEXIS 5854 (3d Cir., March 20, 2009), a charming setup in the insanely hostile and competitive world of medical devices:

Acumed is a manufacturer of surgical implants and related devices, and appellant [Morris] and [Advanced Surgical Services] are in the business of distributing surgical implants and other medical devices for various manufacturers, including Acumed, to hospitals and surgeons. ... At the trial, Ryan Crognale, a sales representative for appellant, explained his view of the events that Casey described at Nazareth Hospital. Crognale testified that Morris directed him to deliver the implants to Nazareth and to attend the surgery. He then stated that after his earlier delivery of Acumed implants, he returned to the hospital and saw Casey in the operating room and observed that the physician doing the procedure was "not using my stuff anyway." Consequently, Crognale took the tray of instruments he previously had delivered and left the operating room. Thus, it appears that the physician performing the procedure used materials Acumed supplied through Surgical, its authorized representative.

As Crognale was leaving the surgery center, he encountered Casey, and an argument between the two representatives ensued. Appellant contends that during the argument Casey loudly accused Crognale of illegally selling Acumed inventory, an incident that appellant contends led Dr. Robert Frederick, a doctor at Nazareth, to stop doing business with it. Moreover, appellant contends that because of Dr. Frederick's connection with a large group of physicians in Philadelphia, the confrontation was a factor in a decision by Jefferson Hospital in Philadelphia to exclude Morris from its operating theater for one year. As a result of the incident at Nazareth Hospital, Acumed sent another notice to its customers stating that Surgical was its only authorized representative in eastern Pennsylvania and southern New Jersey.

Can you guess what happened next?

Appellees filed the complaint in this action against appellant in the District Court charging it with violation of the Lanham Act, 15 U.S.C. § 1125, violation of Pennsylvania's Anti-Dilution statute, 54 Pa. Cons. Stat. Ann. § 1124 (West 1996), unfair competition, breach of a non-disclosure provision in the Advanced-Acumed Agreement, conversion, unjust enrichment, and tortious interference with existing or prospective contractual relationships.

...

Appellant filed a four-count counterclaim against appellees. In counts I, II, and III appellant charged that Acumed breached its contract with appellant by not providing timely notice of termination of their relationship and by failing to pay the contractually required buy-out fee that became due to appellant when Acumed terminated their relationship. In addition, appellant charged that Acumed's failure to pay the buy-out fee violated the Pennsylvania Commissioned Sales Representatives statute, 43 P.S. §§ 1471 et seq. (West 1991). In count IV ("counterclaim IV") appellant alleged that Acumed and Surgical ". . .converted property belonging to Advanced, defamed and disparaged Advanced maliciously and falsely, intentionally interfered with Advanced's contractual and business relationships and competed unfairly against Advanced."

After a little more than a week of trial...

The jury returned a verdict on March 21, 2007, finding for appellees on their count against appellant for tortious interference with existing or prospective contractual relationships with appellees' customers. The jury, however, rejected appellees' claim that appellant had tortiously interfered with Acumed's and Surgical's contractual relationship between themselves and also rejected appellees' other claims, including appellees' Lanham Act claims. The jury also found against appellant on the portions of its counterclaims that had survived the District Court's dismissals, i.e., the claims predicated on breach of contract and violation of the Pennsylvania Commissioned Sales Representatives statute. The jury awarded $ 20,000 in compensatory damages to Surgical and $ 0 in compensatory damages to Acumed on the tortious interference claim but found that both Acumed and Surgical were entitled to punitive damages. ... The jury then returned a verdict awarding $ 1 in nominal damages to Acumed and punitive damages to both Acumed and Surgical Resources in the amount of $ 100,000 each.

Uh oh.

As we indicated above, to recover on a tortious intentional interference with existing or prospective contractual relationships claim in Pennsylvania, a plaintiff must prove that the defendant was not privileged or justified in interfering with its contracts: "While some jurisdictions consider a justification for a defendant's interference to be an affirmative defense, Pennsylvania courts require the plaintiff, as part of his prima facie case, to show that the defendant's conduct was not justified." Triffin v. Janssen, 426 Pa. Super. 57, 626 A.2d 571, 574 n.3 (Pa. Super. Ct. 1993) (citing Thompson Coal 412 A.2d at 471 n.7); Silver v. Mendel, 894 F.2d 598, 602 n.6 (3d Cir. 1990). We hasten to add, however, that our conclusion does not depend on the allocation of the burden of proof on the privilege issue, as we would reach our result even if appellant had the burden of proof to establish the privilege as a defense, because the evidence established conclusively that appellant did so.

Pennsylvania has adopted section 768 of the Restatement (Second) of Torts, which recognizes that competitors, in certain circumstances, are privileged in the course of competition to interfere with others' prospective contractual relationships. See Gilbert v. Otterson, 379 Pa. Super. 481, 550 A.2d 550, 554 (Pa. Super. Ct. 1988). The law necessarily recognizes this privilege because if more than one party seeks to sell similar products to prospective purchasers, both necessarily are interfering with the other's attempt to do the same thing. Moreover, even if an entity has an existing contractual relationship with another entity, a stranger to the relationship must be privileged to seek to replace one of the entities lest competition be stifled. Thus, under section 768: "[o]ne who intentionally causes a third person not to enter into a prospective contractual relation with another who is his competitor or not to continue an existing contract terminable at will does not interfere improperly with the other's relation if: (a) the relation concerns [*37] a matter involved in the competition between the actor and the other; (b) the actor does not employ wrongful means; (c) his action does not create or continue an unlawful restraint of trade; and (d) his purpose is at least in part to advance his interest in competing with the other."

...

Comment e to section 768 elaborates on the type of conduct that constitutes wrongful means: "If the actor employs wrongful means, he is not justified under the rule stated in this Section. The predatory means discussed in § 767, Comment c, physical violence, fraud, civil suits and criminal prosecutions, are all wrongful in the situation covered by this Section." Courts relying on comment e have interpreted the wrongful means element to require that a plaintiff, to be successful in a tortious interference action, demonstrate that a defendant engaged in conduct that was actionable on a basis independent of the interference claim. See Brokerage Concepts, 140 F.3d at 531 (citing DP-Tek, Inc. v. A T & T Global Info. Solutions Co., 100 F.3d 828, 833-35 (10th Cir. 1996)). Moreover, we noted in 2000 that even though the Pennsylvania courts have not interpreted the "wrongful means" element of section 768, it is likely that the Pennsylvania Supreme Court would adopt this meaning, that is, for conduct to be wrongful it must be actionable for a reason independent from the claim of tortious interference itself. See Nat'l Data Payment Sys., Inc. v. Meridian Bank, 212 F.3d 849, 858 (3d Cir. 2000); see also CGB Occupational Therapy, Inc. v. RHA Health Servs. Inc., 357 F.3d 375, 389 (3d Cir. 2004). Nothing in later Pennsylvania Supreme Court decisions to which the parties have directed our attention or of which we are aware leads us to change our view of this issue.

I'm sure you can imagine what happened next.

We therefore will reverse the District Court's order of May 21, 2007, to the extent that it denied appellant a judgment as a matter of law on the tortious interference claim, and will remand the case to the District Court for it to enter judgment as a matter of law in favor of appellant on that claim and to set aside the prior judgment on the claim. As a result, we also will reverse the jury's award of compensatory and punitive damages against appellant and the District Court's grant of an injunction in appellees' favor.

That's why business contingent fee cases demand such a high fee and why commercial litigators have to be so selective in the cases they take. On the most basic level, appellees won in the District Court and at trial and post-trial after years of complicated, intense litigation and trial.

How complicated? The Third Circuit Court of Appeal's opinion is a whopping 18,785 words, about one-fifth the length of a typical paperback novel. The briefs from the complaint to the appeal no doubt exceeded 100,000 words.

And the plaintiffs walked away with nothing.

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In law school, financial fraud is so simple -- Gollum tells Frodo something that isn't true, Frodo relies on the false statement, then Gollum steals the precious and runs away.

The reality is a little more complicated. Take, for example, what New Line Cinema did to Peter Jackson for the Lord of the Rings trilogy, prompting Jackson to sue:

The suit charges that the company used pre-emptive bidding (meaning a process closed to external parties) rather than open bidding for subsidiary rights to such things as "Lord of the Rings" books, DVD's and merchandise. Therefore, New Line received far less than market value for these rights, the suit says.

Most of those rights went to other companies in the New Line family or under the Time Warner corporate umbrella, like Warner Brothers International, Warner Records and Warner Books. So while the deals would not hurt Time Warner's bottom line, they would lower the overall gross revenues related to the film, which is the figure Mr. Jackson's percentage is based on.

According to people on both sides of Mr. Jackson's lawsuit, the claim strikes at the heart of the modern vertically integrated media company. One of the apparent - though largely unproven - benefits of media integration is the ability of conglomerates like the Walt Disney Company, Time Warner, the News Corporation, Viacom, Sony and General Electric to sell subsidiary rights to the many divisions within the company.

After 408 docket entries, including such fun as a $125,000 sanction order for defendant's refusal to comply with discovery, the case was settled.

In my own practice, these types of unfair insider deals with alter-ego entities comprise the bulk of financial fraud amongst members of a partnership, limited liability company (LLC), or corporation. The method of the fraud is dependent upon the target. If a partner wants to defraud another partner, they will set up a sham alter-ego entity and then engage in blatantly unfair transactions with it. If a partner or group of partners want to defraud an outside auditor or shareholders, they will set up a sham alter-ego entity and then unload assets or liabilities onto that entity.

That's what Enron and AIG both did to hide the fact that both were taking on liabilities and debt far greater than they could hope to repay if the market went south: they created baloney entities and deals that masked the source and destination of funds, assets and liabilities.

Given the frequency of this fraud, and Wall Street's evident skill in utilizing it, I was none too pleased to see Geithner's WSJ Op-Ed and this announcement:

• The Process for Purchasing Assets Through The Legacy Loans Program: Purchasing assets in the Legacy Loans Program will occur through the following process:
  • Banks Identify the Assets They Wish to Sell: To start the process, banks will decide which assets – usually a pool of loans – they would like to sell. The FDIC will conduct an analysis to determine the amount of funding it is willing to guarantee. Leverage will not exceed a 6-to-1 debt-to-equity ratio. Assets eligible for purchase will be determined by the participating banks, their primary regulators, the FDIC and Treasury. Financial institutions of all sizes will be eligible to sell assets.
  • Pools Are Auctioned Off to the Highest Bidder: The FDIC will conduct an auction for these pools of loans. The highest bidder will have access to the Public-Private Investment Program to fund 50 percent of the equity requirement of their purchase.
  • Financing Is Provided Through FDIC Guarantee: If the seller accepts the purchase price, the buyer would receive financing by issuing debt guaranteed by the FDIC. The FDIC-guaranteed debt would be collateralized by the purchased assets and the FDIC would receive a fee in return for its guarantee.
  • Private Sector Partners Manage the Assets:Once the assets have been sold, private fund managers will control and manage the assets until final liquidation, subject to strict FDIC oversight.

Liberal economists like Paul Krugman are on balance opposed, with the notable exception of Brad Delong.

But let's put aside economics and look at it from the perspective of a Wall Street banker.

Considering the Treasury's stubborn refusal to even identify the recipients of existing bailout funds (with rare exceptions, like the partial list of AIG counterparties) and penchant for creating its own slew of vehicles (for example, the Term Auction Facility, the Term Securities Lending Facility, the Primary Dealer Credit Facility, the Commercial Paper Funding Facility, the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Money Market Investor Funding Facility, and Maiden Lane I, II and III), I have little doubt the new process will be as transparent as a chunk of coal.

Wall Street and their lawyers -- one of whom almost got a top spot at Treasury -- will have little trouble creating a slew of Special Purpose Vehicles / Entities (or repurposing existing, loss-laden hedge funds) for the sole purpose of bidding the price even higher than the expected value and unleashing that huge, 85% no-recourse Federal loan guarantee.

That makes the whole thing a win-win for Wall Street: it's like setting up "Toxic Assets LLC" then using an >85% government subsidy to "buy" everything at your own garage sale at inflated prices.

If your junk is worthless, it doesn't matter, since you set a price more than high enough to make a profit when you first sold it, taking into consideration the modest capital you put into Toxic Assets LLC.

I'm sure Treasury will put together a handful of half-hearted competitive bidding limitations that will say the exact same company that owns the assets can't bid on them, and I'm sure Wall Street will have no trouble finding its way around these limitations. I then expect to see these "legacy assets" go for sale at impressive, expectation-shattering levels, which will be hailed as a success.

A few months or years later, totally unexpected, the entities that bought these "legacy assets" will go bankrupt, pleading that they did the best they could to help the American taxpayer, and, gee whiz, we lost some money, too.

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The top officials at Treasury have already set aside all of the broad governmental powers available (claiming we are a "nation of laws"), so let's look at the United States purely as an angel investor which saw a large company faltering and swooped in with an 80% equity investment. Uncle Sam has just learned about the following (AIGFP is the “Financial Products” division of AIG, the morons responsible for wiring the global economy to explode by writing trillions of dollars in undercapitalized “credit default swap” policies):

In the first quarter of 2008 [a few months prior to the equity purchase], AIGFP adopted a retention plan for about 400 employees that provided guaranteed payments to employees if they worked through specified payment dates (or either resigned for good reason or was terminated without cause before the relevant dates). At the time, AIGFP was expected to have a valuable, on-going role at AIG. The plan was implemented because there was a significant risk of departures among employees at AIGFP, and given the $2.7 trillion of derivative positions at AIGFP at that time, retention incentives appeared to be in the best interest of all of AIG’s stakeholders. The program was evidenced by a written plan distributed to employees and by individual agreements executed by them.

For senior management the plan provides that 2008 and 2009 compensation will be 75% of 2007 expected compensation levels. Other participants are set at the full 2007 level. This resulted in a $313 million total for 2008 and a $327 million total for 2009 (because some employees who had other guaranteed compensation for 2008 were excluded for that year).

Frustratingly, had AIG merely gone bankrupt instead being saved by the investment, then these would likely be voidable by the trustee as excessive insider transactions under 11 USC § 547. (Indeed, if AIG goes bankrupt soon, we’re still within the “1 year and 90 days” window to use § 547.)

At the moment, we don’t have the text of the contracts, and so can’t determine if any of the doctrines listed in this exhaustive Concurring Opinions post would apply. Personally, I think commercial impracticability / frustration of purpose are realistic options here given AIG’s total dependence upon the government’s grace.

But let’s assume the contract is, on its face, iron-clad, properly drafted, formed, accepted, and with all conditions met.

What’s a cheated shareholder to do?

Unsurprisingly, American International Group, Inc., was incorporated in Delaware, the least-shareholder-friendly jurisdiction in the country (which is why management loves it), so we’ll look to Delaware law.

Generally, prior to launching a derivative suit on behalf of the company, a shareholder must send a demand letter to the board of directors, demanding they, in this instance, not go through with the transaction. Here, however, a court would likely find the demand letter requirement excused as “futile” given AIG CEO Edward Liddy’s letter to Treasury Secretary Geithner asserting that AIG intended to go through with the payments despite his complaints.

So we’re past the first hurdle, and can sue on behalf of AIG, as shareholders at the time this payment is being made. But the bar is set quite high for us. Unsurprisingly,

The AIG certificate of incorporation has a § 102(b)(7) clause that insulates AIG's directors from liability for monetary damages for any harm flowing from their gross negligence. See Malpiede v. Townson, 780 A.2d 1075, 1095-96 (Del. 2001) (affirming the dismissal of a duty of care claim where the corporation's charter had an exculpatory provision).

We'll get to the source of this quote in a minute. For now, "gross negligence" isn't even enough to sue a director.

So who do we sue and what do we allege?

Like most plaintiffs, we start hobbled by a lack of information. What the heck does the white paper mean that “This amount is due pursuant to a retention plan entered into in early 2008?” Entered into by whom, and with whom, after what process?

Talking Points Memo points us to the NY Daily News regarding how AIGFP functioned:

Company auditor Joseph St. Denis became concerned about the Financial Products unit, but [Joseph Cassano, head of AIG Financial Products] barred him from checking.

St. Denis later quoted Cassano as saying, "I have deliberately excluded you ... because I was concerned that you would pollute the process."

St. Denis would recall Cassano saying he did not want to be promoted even further up the corporate ladder "because it would separate [him] from the money." St. Denis would remember Cassano telling him "AIG's corporate management was "scared to death" of him."

Oh my. That's not much of an internal process at all. It sounds like they're just running a criminal organization in there, or at the very least had inadequate internal controls that were too easily bypassed by the insiders.

We don't have to look far to figure out if we can sue for that. Just a month ago, the Delaware Court of Chancery (New Castle) refused to dismiss a shareholder complaint against AIG because,

The Complaint fairly supports the assertion that AIG's Inner Circle led a -- and I use this term with knowledge of its strength -- criminal organization. The diversity, pervasiveness, and materiality of the alleged financial wrongdoing at AIG is extraordinary. The proposition that Matthews and Tizzio, who the Complaint fairly alleges were directly knowledgeable of and involved in much of the wrongdoing, did not also know that AIG's internal controls were inadequate and too easily bypassed is not, for present purposes, an interpretation to ground a Rule 12(b)(6) dismissal order on. Indeed, for present purposes, it is inferable that even when Matthews and Tizzio were not directly complicitous in the wrongful schemes, they were aware of the schemes and knowingly failed to stop them. In that regard, I find it inferable that Matthews and Tizzio were aware of misconduct that should have been brought to the attention of AIG's independent directors (including the Audit Committee) but chose to conceal their knowledge, despite having a fiduciary duty to speak."

Am. Int'l Group, Inc. v. Greenberg, No. C.A. No. 769-VCS, 2009 Del. Ch. LEXIS 15, at *77–78 (Del. Ch. Feb. 10, 2009). For more, see the Delaware Corporate & Commercial Litigation Blog which, alongside The D&O Diary and the Harvard Law School Corporate Governance Forum, sets the bar for reporting on these cases.

In that suit, Greenberg, Matthews and Tizzio were all directors, who are the normal targets of shareholder suits, because their actions are generally insured by policies previously paid for by the company.

But we're not limited to them -- recent amendments to 10 Del. C. § 3114 assure us jurisdiction in Delaware over directors, trustees, members and officers of all corporations incorporated in Delaware. It's not clear exactly what Cassano's position was, but the "head" of anything is generally an officer of some sort. So we've got him, even if he's never set foot in Delaware. At the very least, we can sue whatever directors or officers were involved in this transaction -- several hundred million dollars doesn't walk out the door without someone blessing it.

Then what? Assuming even we can't prove outright fraud by these 400 employees, we still have the blatant breach of fiduciary duty by excluding the auditor. As such, the whole plan, even as it relates to "innocent" parties, can be reformulated under Delaware law:

The glaring problem with the defendants' argument is again a category error -- this is not a contract case involving the reformation of a contract to effectuate the parties' intent; it is a fiduciary duty case, and this court has broad discretion to remedy breaches of fiduciary duty, including reformation when, as here, that is appropriate to remedy a fiduciary violation. See, e.g., Thorpe v. CERBCO, Inc., 676 A.2d 436, 445 (Del. 1996) ('Delaware law dictates that the scope of recovery for a breach of the duty of loyalty is not to be determined narrowly.'); Taylor v. Jones, 2006 Del. Ch. LEXIS 100, 2006 WL 1510437, at (Del. Ch. May 25, 2006) (noting that a resulting trust may be an appropriate remedy even though the prerequisites to a resulting trust under the modern, majority approach were not present and that this court's 'historical readiness to adapt to the circumstances of each case and craft appropriate remedies . . . should not be lightly discarded or circumscribed'); Cantor Fitzgerald L.P. v. Cantor, 2001 Del. Ch. LEXIS 70, 2001 WL 536911, at (Del. Ch. May 11, 2001) (awarding fee shifting in as a remedy for a breach of the duty of loyalty despite an express contractual provision providing otherwise and explaining that 'when the facts demonstrate behavior as egregious as that here, the Court's normal deference to pre-negotiated partnership agreement provisions will yield to a conscientious effort to craft an appropriate remedy')."

GPC XLI L.L.C. v. Loral Space & Communs. Consol. Litig. (In re Loral Space & Communs. Consol. Litig.), C.A. No. 2808-VCS, C.A. No. 3022-VCS, 2008 Del. Ch. LEXIS 136, at *7–123–5–3–124 n.161 (Del. Ch. Sept. 19, 2008).

If we are a "nation of laws," why not use some of them?

UPDATE Steven M. Davidoff at DealBook gets it:

This was not a boilerplate contract. Rather, it was highly negotiated. And it was highly negotiated to pay retention fees at high levels without regard to performance. This is obviously shocking. But it makes me wonder: perhaps one area of direction here should be actually looking at who negotiated this and why?

It strikes me that the A.I.G. financial products division received an unbelievably sweet deal. Did its managers slip it under the radar? Did the managers act in good faith? And who at A.I.G. signed off on this and did they focus on the risks and rewards? Yet more avenues for possible litigation.

But of course, this is all merely a diversion for what should be the main focus: Where did the $170 billion go that taxpayers spent on A.I.G and why, and what we are going to do with A.I.G. going forward.

 

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It's an article of faith among many businesses and lawyers: Delaware. It doesn't matter what the question is. Where should you incorporate? What should the governing law of your contract be? 

Delaware! Delaware's good for business.

Right?

Not necessarily. Much ink has been spilled over why, exactly, businesses constantly incorporate in Delaware and/or insert Delaware into choice of law provisions in their contracts. Among the most common reasons is: Delaware has more developed and thus stable precedent than any other jurisdiction.

I'm not sure this reason stands even on its own merits. E.g., the law of malpractice and negligence is very well-developed and yet we still find plenty of legal issues to litigate, and still rarely settle until immediately before trial. 

This "stability" has long been under fire, most recently as noted by The Harvard Law School Corporate Governance Blog, addressing two recent Chancery Court opinions on shareholder suits against Citigroup and AIG:

These cases seem to support the claim by William Carney and George Shepherd in The Mystery of Delaware Law’s Continuing Success (William Carney & George Shepherd, 2009 U. ILL. L. REV. 1) that Delaware law is infected by costly indeterminacy. After these cases, where, exactly, does a duty of loyalty claim for breach ofCaremark duties stand?

The courts in these cases distinguished a claim that directors ignored the inadequate controls of patent business risks (Citigroup) from one that the directors ignored inadequate controls of insider wrongdoing (AIG). While these distinctions seem clear, and the cases seem rightly decided on their facts, the distinctions fray at the edges. Deliberately and knowingly ignoring either kind of risk can give rise to a claim. The defendants in Citigroup, even if careless, did not sink to that standard, while the AIG defendants did. So how does insider wrongdoing affect the determination? Must the flags be redder to trigger liability where there is no insider wrongdoing, but the risk could bring the company down? If so, how much redder? Is there a sliding scale for the degree of insider wrongdoing the defendants allegedly ignored. In AIG, the complaint supported an assertion that the insiders led, in Vice Chancellor Strine’s words, a “criminal organization.” Would the result be different if the alleged wrongdoing had been somewhat less pervasive? But does not the pervasiveness tie to the defendants’ knowledge, which leads back to square one?

 

In fairness, though, this does not necessarily support a criticism of Delaware law. As Chancellor Chandler wrote (with Anthony A. Rickey) in responding to Carney & Shepherd’s criticism in Manufacturing Mystery: A Response to Professors Carney and Shepherd’s “The Mystery of Delaware Law’s Continuing Success (2009 U. Ill. L. Rev. 95), Delaware is at least no more indeterminate than other jurisdictions.

Indeed, I argued in my own response to Carney & Shepherd, The Uncorporation and Corporate Indeterminacy, (2009 U. ILL. L. REV. 131), that indeterminacy is inherent in corporate law rather than specifically in Delaware jurisprudence. The solution is to turn to “uncorporate” law, which leads directly to my next two points.

 

Well said, and the whole post (as well as its references to Wachtell, Lipton, Rosen & Katz client memorandum posted here and Francis Pileggi's own comments here) are required-reading for those interested in shareholder derivative suits.

The overarching theme bears repeating -- the law is fundamentally "indeterminate." Businesses aren't going to be able to change that by just doing what every other business does because they think they should.

The problem is compounded by the way many businesses "choose" Delaware law, often in conjunction with an arbitration or choice of venue provision that ensures that Delaware law will be "applied" by a court or arbitrator with no experience in Delaware law. How "stable" and "determinate" can that possibly be?

 

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New to the site? Haven't been here in a while? Here are some of the most popular posts over the past few weeks.

Litigations and Trials:

• Managing Expectations in Defamation Cases: A Legendary Trial Lawyer Faces His First Malpractice Suit
• $120 Million In Hourly Billing For A Single Trial: What Happened In Robertson v. Princeton?
• How Not To Spend $120 Million In Hourly Fees On A Single Trial: A Few Questions for Robertson v. Princeton
• The Watchmen Movie Ruling: How Typical Lawyer Obstructionism Can Destroy Your Case
• "Quinn Emanuel Hit With Malpractice Suit" -- More Business Contingent-Fee Madness

Law Practice:

• Creating "The Black Triangle," A Critical Step Before Any Trial, Deposition or Brief
• "The End of Leverage"? What Are BigLaw Associates Really Worth?
• "Remember That Profits Equal Revenues Minus Costs" - The Real Reason for the Billable Hour's Impending Demise

Current Events:

• Can the Octuplets Sue for Medical Malpractice? (Part 1 of 2)
• Differential Diagnosis, Defensive Medicine and Medical Malpractice: Coumadin Edition
• 25 Things About Facebook's Terms of Use and Your Rights
• Facebook and the Law of Stealth Changes in Consumer Contracts

Recent Court Opinions:

• Pennsylvania Commonwealth Court Limits the Special Value to the Plaintiff Damages Doctrine
• Reminder: Contract Disputes Act Requires You Exhaust Administrative Remedies Before Suing the United States Government
• An Ounce of Prevention: Dismissal Upheld In Derivative Suit Because of Independent Inquiry
• The Third Circuit's 1:1 Punitive Damages Ruling: The Lingering Complications of State Farm v. Campbell

 

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One of the few interesting parts of law school Professional Responsibility classes lives on in this article at The Recorder:

A San Francisco Bluetooth headset maker says Fish & Richardson played an unseemly game of hot potato by dropping it as a client and then turning around and suing for patent infringement the very next day.

Aliph Inc. moved to disqualify Fish from representing Bluetooth rival Plantronics in the patent case two weeks ago, arguing that the firm shouldn't be allowed to sue its own client or get out of the mess by suddenly disowning Aliph at 8:30 p.m. the night before.

...

Aliph's lawyers say that Fish's behavior is condemned by the so-called "hot potato doctrine," which frowns on a law firm creating a conflict so it can drop a smaller client for a more lucrative one.

As part of the engagement letter, Fish did have a prospective conflict waiver, stating, "In the past, when we have been retained for regulatory work only, we have made it an express condition of our representation that the firm not be conflicted from taking any intellectual property work that might otherwise be adverse to our clients."

Although most lawyers know (or at least have heard of) the hot potato doctrine, and law students are told the courts "frown" on it, there are not many cases actually applying it. A quick search reveals fewer than two dozen nationwide, at least of cases that actually refer to it as the "hot potato doctrine."

It's nonetheless a powerful doctrine, one that can easily get a lawyer disqualified from a lawsuit.

First, a simple question: what good does it do a lawyer or law firm to drop a client on the eve of suing them?

Lawyers have different obligations to current clients than they do former clients. Perusing the Model Rules of Professional Conduct, a version of which is in place in most states (New York is one exception), we find Rule 1.7 (relating to current clients) strictly prohibits lawyers from representing new clients "directly adverse to another client" whereas Rule 1.9 (relating to former clients) merely prohibits lawyers from working on "the same or a substantially related matter" as they did for the former client.

Fish & Richardson (allegedly) dropped Aliph, a regulatory client, because they were about to take a position "directly adverse" to Aliph, a current client, which is prohibited. They wanted the standard to be that they would be prohibited only if the Plantronics intellectual property matter was "the same or a substantially related matter" to the work they did for Aliph, which it wasn't, since it was different fields, different lawyers, different everything.

Too bad for F&R: there are good odds the court will apply the "hot potato doctrine" and apply the rules for current clients to them.

Pepper Hamilton was disqualified from a suit in Michigan a year and a half ago because...

Courts that have considered the issue have held that a firm will not be allowed to drop a client in order to shift resolution of the conflicts question from Rule 1.7 dealing with current clients, to the more lenient standard in Rule 1.9 dealing with former clients.

El Camino Res., LTD. v. Huntington Nat'l Bank, No. 1:07-cv-598, 2007 U.S. Dist. LEXIS 67813, at *39–40 (W.D. Mich. Sept. 13, 2007) quoting Ethics Committee of the State Bar of Michigan Opinion RI-139 (Aug. 7, 1992).

Fish & Richardson has plenty of defenses, including that they didn't summarily drop the client but in fact gave them extended notice of the problem, albeit in a vague form, without identifying the client. And, of course, there's the big "so what?" question arising from the fact that, in reality, it's unlikely Aliph will be prejudiced by F&R representing Plantronics.

Moreover, "The finding of an ethical violation, however, does not automatically require disqualification. The court should order disqualification only where some 'specifically identifiable impropriety' has actually occurred and the balance of relevant factors requires vindication of the integrity of the legal profession over defendant's interest in retaining counsel of its choice." Id., at *54.

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Paul Lippe at the AmLawDaily opines that corporate spending on BigLaw will go down over the next few years, imperiling the "leverage" model whereby equity partners "leverage" their own time by delegating much of their work to associates, whom they bill out at a substantial premium. BigLaw leverage runs from one associate for each partner up to eight(!) associates per partner. Here's two of Lippe's reasons why:

First, associate time is a pricing mechanism, not an indicator of value. Like so much in the modern law firm model, the explosion in associate hours, rates, and leverage began with the Cravath IBM antitrust defense in the 1970s and 1980s, when the firm discovered that in the quintessential "bet the company" case IBM would willingly pay full freight for associate time on massive and pretty routine document review, and that in turn would drive up Cravath's profits dramatically. Since this wasn't particularly compelling work for the associates, the firm had to raise salaries to hold onto folks, triggering the great associate salary escalation.

Second, clients have always recognized that associate time is overpriced. Every client I know views associate time as the price for getting access to partner time and to the firm "brand." In truth, there are two billable hours: the partner's, which should reflect deep expertise and judgment about the client, the law, and best practices, and the associate's, which is generally spent on some form of information processing, which clients recognize as relatively poorly managed compared to other arenas of information processing. As Susan Hackett, general counsel of the Association of Corporate Counsel, recently put it, "I don’t have a problem with the $1,000-an-hour lawyer, but the $350-an-hour junior associate isn't worth it."

(emphasis mine)

I agree with Lippe's final conclusion that firm revenues will go down, forcing firms to look for profit elsewhere through alternative fee arrangements (contingent fee, fixed fee, blended fee, etc), as I've discussed before.

But the two reasons given above are fundamentally inconsistent with one another. If IBM will "willingly pay full freight for associate time on massive and pretty routine document review," then they obviously find it "worth it" to pay a junior associate $350-an-hour to comb through documents. It's not like these arrangements developed by accident; leverage has been a long, slow dance between BigLaw and Corporate America.

But why are companies willing to pay such outsized attorneys' fees? Because if you're the type of in-house counsel or executive who demands a "$1,000-an-hour lawyer" at the century-old firm in a famous building in Manhattan, then you're almost certainly the type of person who would throw a fit if you learned that some loser from Fordham or Vanderbilt or -- the horror! -- a state-supported law school was doing document review in a third-rate hillbilly village like Cincinnati or Albuquerque.

But the bigger issue is: big companies that hire big firms aren't looking for "value," they're looking to show to their opponents, competitors and themselves that they hired "the best."

Sure, there's internal pressure for executives and general counsel to keep legal costs in line, but there's far more pressure to "spare no expense." Even moreso, if things go wrong -- as they often do in corporate transactions or corporate litigation -- then who takes the blame?

An executive or vice president who put down six, seven or eight figures to get "the best" firm "to go all out" will rarely shoulder the blame when the bigshot firm adds 179 contracts to the billion-dollar Lehman / Barclay deal or reveals the $65 million-dollar confidential Facebook settlement.

What if that had happened after a VP or general counsel had smartly set up a monthly flat fee with a non-Manhattan boutique? The fear alone keeps many big companies firmly in BigLaw's grasp.

And that's just basic errors -- what about "bet the company" or big ticket litigation? No one ever got sacked for hiring Cravath, Wachtell or Sullivan & Cromwell and losing miserably. The same cannot be said for executives or VPs who were "cheap" and hired some "lesser" firm.

Finally, there's the psychological "leverage" that clients think they have when name-dropping a big firm with hundreds of lawyers, as if the whole firm is prepared to storm the bastille. Given the way people talk about some of these firms, I sometimes wonder if companies believe that judges decide cases on numerical superiority alone.

Overall, the internal dynamics in big corporations are far more important in determining the biglaw market than objective evaluations of "value." When all is said and done, complaints about leverage are largely that -- complaints. If they wanted to do something about it, there's an ample market of boutique firms ready and waiting, firms which, like mine, have no trouble picking up corporate clients where the leadership is focused protecting the company, not their own backside.

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A VC (a.k.a. Fred Wilson, a venture capitalist and principal of Union Square Ventures), commenting on a WSJ story, makes a simple, but powerful point about many of the tech startup companies floating around:

As Chris said in his WSJ piece, Facebook has been widely derided for the low CPMs it generates (pennies in Chris' words). But instead of deriding the revenues that Facebook is generating, maybe we should be in awe of a $350mm revenue stream coming from a company that produces no content of its own. Why does Facebook need 1000 employees? Why does it need to spend $300mm per year?

...

The web can create incredibly high operating margin businesses. Craigslist has an operating margin of 90%. Google's keyword business has an operating margin north of 60% (based on net revenues) and possibly higher. Could Facebook and Digg copy those models and create a lot of value on revenue numbers that many think are pitifully small? I think so.

...

I think that's an important part of the economics of the web that are left out of most discussions of Internet business models. Yes, we are turning analog dollars into digital pennies in many cases. But we are also doing the same thing on the cost side, maybe even more so. And I think that "operating leverage" is going to create a lot of value.

It's true for every business except for the hourly-billing law firm: reducing costs improves profit just as well as increasing revenue.

In the hourly-billing law firm, "costs" take on a much more narrow form than in other businesses, since the bulk of them are charged directly to the client, often at a premium. In an hourly-billing law firm, "cost" on the firm's bottom line usually only represents the money spent keeping the office open -- e.g., staff salaries, rent and insurance -- and not the money spent actually doing the work, like copying charges, filing fees, and, most importantly, the time spent on the task at hand.

Worse, since these costs, particularly the cost of attorney time, are charged to the client, they actually show up as revenue on the firm's balance sheet.

Reducing such costs is effectively the responsibility of the client, who is not in any position to know how to reduce them or to improve productivity. The end result is a system that encourages waste and everyone complains about, just as behavioral economics would suggest.

But there's a hidden problem to this system: the billable hour imposes boundaries on the degree to which lawyers' profits can be improved by reducing costs.

Bruce MacEwen at Adam Smith Esq. caught this same critical point in response to a NYTimes article ("Billable Hours Giving Ground at Law Firms") talking with Evan Chesler, Presiding Partner at Cravath, about the (long-predicted) demise of the billable hour:

Ultimately, it limits law firms' revenue. (Clients--you can skip this paragraph.) Each of the variables that goes into revenue under the billable hour model has intrinsic limits: Rates, hours, realization, and leverage.

Exactly right, but I wouldn't limit it to just "revenue" -- the billable hour limits profits as well.

Since I generally work on a contingent fee, it's easy for me to improve profits by reducing costs: I find ways to improve productivity. It's why I use digital dictation and voice recognition software, and why I scan everything and use document management. Because that's how I work faster, so I can both take on more cases and devote more time to each case to improve my results.

That equation does not exist in the hourly-billing firm. A lawyer who, say, comes up with a faster way to get briefs in order is rewarded with marginally less work. Sure, there is a supposed economic incentive towards this improve productivity by making clients happier, presumably enabling the lawyer to increase rates in the future, but that's not how it works in practice, particularly not at big law firms where it is exceedingly unlikely the client will even recognize minor improvements in productivity.

And that's where Evan Chesler is going: his clients are tired of him increasing hourly rates, while he and his associates are tired of increasing partner-to-associate leverage or associate hours. So he wants to stop looking at the top number -- revenue -- and look a line down to costs.

That's the new frontier driving the demise of the billable hour: alternative fee arrangements enable lawyers to bill clients the same (possibly less!) while taking home more because they're working faster. A win-win.

 

After drafting the above, I saw that Patrick J. Lamb had unethically and irresponsibly stolen my idea the day before I had even published it:

If a firm pays associates (or advances them) based on work quality and hours, associates will be committing career suicide by working more efficiently.  (See here for an example.)  If the firm doesn't reward associates for performing "good enough work efficiently" when that kind of work is all that is required, how can a client have any comfort that the fee proposal reflects the cost savings that such an approach generates?

This telepathic piracy will not be tolerated!

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Erik Sherman at Corporate Secretary Magazine wades into the law of corporate / employee blogs, quoting yours truly:

A company cannot stop blog readers from drawing unfortunate inferences. ‘An unofficial employee blog may end up being confused with the company itself, as unfortunately happened to the ‘Patry copyright blog’, formerly run by a lawyer who had the misfortune, so to speak, of becoming Google’s chief copyright counsel,’ says Maxwell Kennerly, a litigator with the Beasley Firm and a blogger himself. ‘No matter what he did, his posts were construed as representing Google’s official position, so he gave up.’

You can read William Patry's "End of Blog" post here. Here's a portion:

I started the blog when I was still in private practice with the above goals in mind and one more: I felt there was no blog devoted to the geekery of copyright; meaning a blog where people who loved copyright could come and discuss copyright issues in a non-partisan way. In order to encourage open discussion I permitted not only comments but anonymous and pseudonymous comments. I did that because I wanted to encourage the largest number of people to participate, and after four years I believe that was the right decision. But it is also the right decision to end the blog. While in private practice I never had the experience of people attributing my views to my firm or to my clients. I moved from private practice to Google I put a disclaimer to the effect that the views in the blog (as in the past) were strictly mine. I also set a policy, which I strictly adhered to, of never discussing cases Google was involved in, and I refrained from criticizing those with whom Google was involved in lawsuits. I did not run ads, including not using Google's AdSense program. I cannot see what more I could have done to make what was a personal blog more separate from my employer.

For the first year after joining Google, with some exceptions, people honored the personal nature of the blog, but no longer. When other blogs or news stories refer to the blog, the inevitable opening sentence now is: "William Patry, Google's Senior Copyright Counsel said," or "Google's top copyright lawyer said... ." There is nothing I can do to stop this false implication that I am speaking on Google's behalf. And that's just those who do so because they are lazy. Others, for partisan purposes, insist on on misdescribing the blog as a Google blog, or in one case involving a think tank, darkly indicating also a la Senator Joe McCarthy, that in addition to funding from Google, there may be other sources of funding too. On Blogger, blogs are free. The blog had no funding because it doesn't cost anything, because I don't run ads, and because it was my personal blog, started before I joined Google.

On the whole, I don't see corporate blogs to be as great a risk as the Corporate Secretary article makes them out to be, but I see why the story was framed that way. Corporate directors and officers usually want to hear risks first, rewards second.

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Legal Blog Watch links to a post by Larry Ribstein at Ideoblog about the decline and collapse of several big law firms:

Most other industries could evolve to meet the new challenges. But the law business can’t change as easily because it’s choked by ethical rules that developed based on a century-old model of law practice that seeks to preserve the illusion that law practice is a “profession” rather than what it plainly is – a business. …

 

These rules have been developed by lawyers, for lawyers. They are not in clients' long run interests.

 

The obvious retort is that, while the ethical rules governing lawyers are old (at least as a matter of practice – as a matter of codified rules, the American Bar Association’s Model Rules of Professional Responsibility are less than 100 years old, younger than some of the firms which have collapsed), they are no more “archaic” than the Code of Hammurabi or the Ten Commandments.

 

That is, the passage of time has not shown the criminal prohibition of, say, theft to be any less a good idea than it was thousands of years ago. Similarly, the ethical prohibition on representing clients with a conflict of interest is still the primary mechanism we have for insuring the legal system functions smoothly without even an appearance of impropriety.

 

But Ribstein’s post is first an empirical argument – that ethics rules are “choking” law practices in a way that is detrimental to clients – and so deserves first an empirical analysis. Let’s take a look at some of Ribstein’s evidence (which he quoted from a WSJ story):

 

"Many law firms are susceptible to the phenomenon that led to Heller's collapse. Their main assets are their senior lawyers. * * * [L]awyers with big books of business now commonly shop themselves to more profitable firms that can offer larger compensation packages."

 

"The economic downturn has prompted lawyers to jump to firms perceived to be more financially stable. If enough partners head for the exit, a firm can crater in a hurry."

 

I look at that and reach opposite conclusions from Ribstein. Note how the “senior lawyers” with “big books of business” have no trouble jumping from firm to firm. Does that sound like a "choked" market?

 

Indeed, as the chairman of Sullivan & Cromwell recently noted “clients are extraordinarily understanding.” If a client wants a particular lawyer, odds are they’ll get them, no matter where they are.

 

The sole “problem” appears in the context of one massive law firm attempting to merge with another. But that’s to be expected – the world of corporate America, billion-dollar deals, and eight-figure-plus litigation is a finite size. What are the odds of one major firm not having multiple direct conflicts of interest with another firm?

 

Continuing down that rabbit hole, what, exactly, is the benefit to consumers of legal services by permitting every last proposed merger to occur? The firms involved have every opportunity to locate these conflicts and then, if needed, ask certain lawyers with irreconcilable conflicts not to come along.

 

Off the top of my head I can recall a recent instance of that in the Philadelphia area, when Eckert Seamans absorbed the bulk of McKissock & Hoffman, which dissolved, unable to bring aboard all of M&H’s attorneys due to conflicts. Certainly tough for the lawyers, but definitely not tough for the clients – any client who wanted their lawyer to go along could have waived the conflicts and let them go.

 

Indeed, I see the question to be exactly the opposite: how do consumers of legal services benefit from rampant mergers and acquisitions creating ever-larger law firms? Rarely does the consumer gain from M&A activity in a mature market; just look at telecommunications.

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Starting January 1st, PGW bumped up rates by over 5%, even as natural gas prices remain low and consumers elsewhere see cuts.

Why? Because CDR Financial Products, the financial advisory firm close to former Mayor Street (and previously, and currently, under FBI investigation), was paid $225,000 to set up a terrible "bond" deal with JP Morgan to finance $310 million PGW bonds in 2006 that netted JPM millions and will leave PGW's customers holding the bag.

Part of the deal was merely a bad idea: instead of issuing traditional fixed-rate bonds, PGW engaged in an "interest-rate swap," which is a specialty of CDR, a complicated form of variable-rate financing in which the borrower generally ends up taking on some risk of interest rates rising, but not as much as if they had simply issued a variable-rate bond.

Interest rates rose and now PGW is paying an extra $6 million per year over what they could have had with a fixed-rate bond issue. The fixed rate would have been 5.25; the original 'effective rate' of the swap was 3.67 and is now 7.25, hence the additional payments.

That happens, it's an accepted risk of interest-rate swaps, and a lot of entities and municipalities were still foolishly investing in variable-rate products in 2006, despite the obvious interest rate increases on the horizon.

The "biggest problem," however, as described by the Philadelphia Inquirer, is not so understandable:

When bond markets froze in the summer, FSA, like most other bond insurers, saw its credit ratings cut, and investors started fearing the bonds could default. They began dumping PGW bonds back to JPMorgan and the other banks.

...

JPMorgan told PGW in the fall that it couldn't afford to keep owning the bonds indefinitely. Under the deal, if the bonds can't be sold by July, PGW must pay the banks $60 million a year, for the next five years, until the value of the bonds is paid off. PGW says it can't afford that with its other debt.

PGW can cancel the swap agreement but, under the deal, might have to pay JPMorgan more than $30 million to compensate the bank for ending the arrangement early.

Or it can find a new lender willing to sell new bonds, probably at higher rates, Bisgaier added. "We have six months to fix this."

None of that should be PGW's problem. JPMorgan agreed to underwrite the bonds; at that point, the bonds should have become JPMorgan's responsibility. Normally, if the underwriter can't place the bonds, they hold on to them. If bondholders have clauses in their purchase agreement with JPM permitting them to rescind the deal and send the bonds back to JPM, that should be JPM's problem.

But that's not what happened here. For a less than 2% discount on the initial interest rate, PGW took on all of the risk of the bonds, including the risk of increased interest rates, the risk of bond insurer rating decline, and the risk of investors and their underwriter changing their minds.

That's exactly the opposite of how a 'bond' is supposed to work. A bond is supposed to provide the borrower with capital under the single requirement that they make timely interest and premium payments, which PGW continues to do. It should be just like a mortgage -- so long as the interest and premium is paid, a bank can't simply call a mulligan and ask for the money back if it's unhappy with the market for mortgages.

Indeed, the rigid nature of instruments like interest rate swaps is supposedly a big part of what's causing so much trouble on Wall Street, and why the Federal government has already provided banks $350 billion-plus in assistance to help them with these assets, with a loss of $64 billion and counting.

More questions need to be asked about this "deal" -- in the midst of systemic bank malfeasance and irrational exhuberance, how did PGW, and not JPM, end up on the losing end of a commonplace transaction? 

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The American Lawyer describes the case:

Quinn Emanuel Urquhart Oliver & Hedges has been hit with a malpractice lawsuit that claims the firm botched a $48.8 million settlement even as it took in some $12 million in contingency fees.

... The complaint against Quinn Emanuel highlights how -- as a result of a contingency agreement that essentially guaranteed Quinn Emanuel half of any amount recovered up to $20 million and 20 percent thereafter -- the firm has received approximately $12 million in fees for representing Kurtin. That amount is equal to what Kurtin himself has gotten to date from the settlement, which was reached a little more than four months after Quinn Emanuel took on the case.

... An initial payment of $21 million, which Quinn Emanuel essentially split with Kurtin, was received. But, according to court documents, a payment due June 30, 2006, of $13.1 million, as well as an additional payment outlined in the settlement agreement, was never sent.

... Kurtin initially retained Quinn Emanuel again to try to enforce the settlement agreement through arbitration. The firm even offered up the services of litigation partners Ken Chiate, Jeff McFarland and Bruce Van Dalsem at its "half-rate" of $300 per hour. According to the amended engagement agreement, those partners usually bill out at between $650 and $775.

I've written about Quinn Emmanuel's contingency-fee practice before; it's not quite the plaintiff's firm writ large it's reputed to be, since the bulk of their work is not on a contingency fee.

I'm baffled by this new story. Under the fee agreement as described, Quinn is entitled to another 20% of the remaining $27.8 million, yet they were unwilling to enforce the agreement except on a discounted hourly rate?

Maybe I'm charitable, but I don't think I would need someone to pay me more by the hour to chase down $5.56 million in fees via arbitration of an iron-clad settlement agreement. In fact, it sounds like the additional hourly fees with be comparatively small even at >$650 -- you're arbitrating a settlement agreement you executed! -- and would cause more client dissatisfaction than they would be worth.

There's another wrinkle:

A public relations representative at SunCal Cos. did not return calls seeking comment. In an interview in March with the Orange County Register, a company executive said that Kurtin's suit was without merit and that the company had previously met all its obligations to him.

In general, a lawyer's comment to the media is one of three possibilities: 

1. The other side's case is frivolous garbage.
2. There may be legitimate issues, but I'll win.
3. No comment.

I would expect a party that was knowingly in default of a settlement agreement to go with #3 since a properly drafted settlement agreement should be easily enforceable. To hear the settlor go with #1 suggests they really don't think they are in default, which makes me wonder how the two parties to the settlement could have such radically differing views of their obligations. Sure, commercial litigation settlements can be complicated, but this settlement seemed pretty simple: it's just money instead of a continuing relationship.

Which leaves us to ponder only two explanations for Quinn Emmanuel's proposed hourly rates:

1. Quinn Emmanuel thought their client's settlement enforcement action had merit, but chose to let $5.56 million in their own fees sit unless they could bill $300 an additional hour recovering them.
2. Quinn Emmanuel thought their client's settlement enforcement action had no merit but were willing to fight it anyway, on a discount.

#1 does not make any sense. #2 could have a lot of possible explanations, none of them flattering.

Maybe the story is incorrect or incomplete. Maybe the case will reveal some more important facts. As it stands, this case does not look good for them.

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Yesterday we discussed the outrageous attorneys fees in the Robertson v. Princeton suit, which amounted to $80 million in pre-trial litigation costs and $40 million in projected trial costs. Based on those fees, it seems each side had a team of 6 lawyers working all day, every day, for all 6.5 years of the litigation, all for a case more comparable in size to a complicated personal injury / wrongful death case than a major commercial or business case.

It's time to ask some basic business / commercial litigation questions.

Did the lawyers engage in 'total war' litigation? Did the clients understand that decision?

Unfortunately, Mercer County (in New Jersey, where the litigation took place) doesn't keep its hearing and docket lists up permanently or publish its orders. Did the Robertsons decide it would be tactically advantageous to pummel Princeton with discovery requests? Did Princeton decide it would be tactically advantageous to stonewall every discovery request? Did everything require a motion or two?

When there's a paying client (as opposed to an insurance carrier or a contingent fee agreement), most litigators will sit down with their client early in the case and ask: how do you want me to handle it? If a client asks for 'the works,' an experienced, tough litigator would have no trouble churning through $500,000 in fees on a simple bread-and-butter business contract dispute. Add in any variables -- like sophisticated accounting, extensive documentation or novel issues -- and you'll start the process at $1 million, breaching $5 million well before trial.

But that's still not $40 million apiece.

Did the clients understand the workflow at the law firms?

Even if we generously assume that some of the $80 million comes from work in the years preceding the actual lawsuit, we still have whole teams of lawyers working full time.

Pareto's 80/20 rule applies just as much to litigation as it does to any other business. Did either of these clients recognize what, exactly, the firms were doing?

• Did the lawyers assert privilege as broadly as possible and then force litigation on every issue?
• Did the lawyers apply any thought to whom they should depose, or did they depose everyone who arguably was aware of discoverable facts?
• Was every brief right at the page limit, chock full of barely-relevant cases that took hours to track down even on issues where the judge had considerable discretion?

That is to say, did either party hire a liitigation consultant, ask their in-house counsel, or use their common sense to assess if the work was really needed or if the litigation attorneys were churning through hours as fast as they could?

Did the lawyers and clients consider alternative dispute resolution?

The core of Robertson involved dry and technical issues of legal interpretation, accounting and oversight. There was no "pain and suffering" component. Witness credibility was not the critical factor. All of the main reasons a party would either want non-lawyers or a jury of twelve reviewing a case were absent.

Why, then, did the parties subject the Mercer County Superior Court to this punishment? Did the clients really understand the ramifications of staying in state court and the delays and additional attorneys' fees that usually come with such a decision? Did the parties even consider arbitration?

In an antitrust case much larger than Robertson (a different antitrust case from the one mentioned above), Visa, Mastercard and AmEx resolved their multi-billion-dollar largely-legal dispute in arbitration. Why not here? Discovery probably would have gone much more smoothly, with Princeton more easily obtaining confidentiality and the Robertsons more easily obtaining documents.

Did the lawyers and clients consider alternative fee arrangements?

The Robertsons, as plaintiffs, paid an effective fee of 44% of their total recovery of $90 million.

A 40% gross-recovery contingent fee agreement is not uncommon in complex, expensive and/or risky business disputes; here, however, the client received none of the benefits of a contingent fee. As best I can tell, the lawyers bore no risk and paid no expenses out of pocket -- the clients did.

Did the Robertsons consider a contingent fee agreement? 40% would have been cheaper and during the six years of litigation their foundation could have held onto the money, investing it tax-free. They could also have done a blended agreement, with the Robertsons covering costs and expenses and the attorneys claiming, say, one-third of the recovery.

Princeton, in turn, paid $40 million over six years to defend a claim they later settled for $90 million. Making matters worse, the $40 million likely came in the unpredictable form that managers hate, with huge swings depending on the litigation, invoiced in a manner completely opaque to non-lawyers and lawyers not familiar with the case.

Did Princeton consider, say, a flat fee? The controversy had been brewing for almost forty years, with Princeton well aware of the major factual issues. The major legal issues are all apparent on the face of the complaint, which is only 68 pages long. Obviously, there will be an extensive accounting, lots of discovery and document review, and a couple big motions for summary judgment with regard to characterizations of various payments and the duties of your clients.

It's a big case but it's not unbounded in scope. It's not a class action or antitrust case sprawling over dozens of parties and whole industries; it's a dispute between a university and a foundation over a specific sum of money and a specific grant.

You could do it with the "feeding frenzy" team: two lead attorneys and a handful of associates and paralegals.

They could have blended that fee as well: Princeton covers external costs and expenses, like the accounting firm and deposition costs, with a flat fee payable every six months for attorneys' fees. Going off of our big firm average hourly rate of $348, estimating the case will take up half of their 12,000 billable hours per year available time, puts us at $1 million every six months. Princeton would have ended the case for less than $18 million, including all costs and expenses. 

These are all just ideas, any one of which would have likely saved millions.

Was anyone really looking out for the client? Are non-profits the new profit centers for lawyers?

Maybe in the end we have another example of the dangers of using "OPM." No individual or for-profit enterprise paid a dime for this excess and waste; it all came out of "charity."

The Robertsons paid for the suit via the Banbury Fund, which they control. As best I can tell, they exhausted most of the Fund's assets on this suit, though they are being reimbursed under the settlement.

Princeton paid for it out of their multi-billion-dollar endowment; as part of the settlement, the funds expended will be deducted from the Robertson Foundation as it is dissolved into Princeton's general endowment.

So, there you have it. $80 million in litigation fees to move $50 million from one charity to another. Princeton President Shirley M. Tilghman called the whole case "a tragedy" because the legal fees could have been spent on education. I'd agree, except that I can't help but wonder what steps Princeton could have taken to reign in their costs; you can't blame the other side for everything.

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Thomas Friedman misses the boat:

I have no sympathy for Madoff. But the fact is, his alleged Ponzi scheme was only slightly more outrageous than the "legal" scheme that Wall Street was running, fueled by cheap credit, low standards and high greed. What do you call giving a worker who makes only $14,000 a year a nothing-down and nothing-to-pay-for-two-years mortgage to buy a $750,000 home, and then bundling that mortgage with 100 others into bonds — which Moody's or Standard & Poors rate AAA — and then selling them to banks and pension funds the world over? That is what our financial industry was doing. If that isn't a pyramid scheme, what is?

Funny thing is, there really was a "legal" scheme connected to Madoff: it appears a substantial part of the money invested with him was not directly from clients, but through investment advisers who were specifically being paid huge sums of money (some on the 2% investment / 20% returns hedge fund fee scale) to perform due diligence and to ensure the investments were safe.

A number of these "advisers" -- perhaps all of them given the obviousness of the fraud -- did absolutely nothing at all to earn their money other than hand the money over to Madoff, no questions asked.

Textbook breach of fiduciary duty. If they misrepresented what due diligence they did, it's fraud, too.

There will be a reckoning.

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Here's the original (now replaced) cover to the latest issue of MaxPlanckForschung, the flagship journal of the Max Planck Institute:

 As MPF later explained,

The cover of the most recent German-language edition of MaxPlanckForschung (3/2008) depicts a Chinese text which had been chosen by our editorial office in order to symbolically illustrate the magazine's focus on "China". ...

Prior to publication, the editorial office had consulted a German sinologist for a translation of the relevant text. The sinologist concluded that the text in question depicted classical Chinese characters in a non-controversial context. To our sincere regret, however, it has now emerged that the text contains deeper levels of meaning, which are not immediately accessible to a non-native speaker.

Contracts are a lot like a foreign language. There's a whole body of interpretation -- i.e. case law -- of which non-lawyers are generally unaware. There are also numerous known unknowns and unknown unknowns with regard to the interpretation of a specific contract in a given factual scenario. That is, there are times when an MBA who has done a lot of contracts will, like a German sinologist, not suffice.

Language Log has a long explanation of the deeper meaning here. I've posted their rough translation below the fold.

With high salaries, we have cordially invited for an extended series of matinées

KK and Jiamei as directors, who will personally lead jade-like girls in the spring of youth,

Beauties from the north who have a distinguished air of elegance and allure,

Young housewives having figures that will turn you on;

Their enchanting and coquettish performance will begin within the next few days.

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Slashdot led me to this erroneous article at The Industry Standard:

According to a recent legal filing (see page 7) in the Psystar vs Apple antitrust case, Apple employees are responsible for maintaining their own documents such as emails, memos, and voicemails. In other words, there is no company-wide policy for archiving, saving, or deleting these documents.

...

An e-discovery lawyer, who asked not to be named because his employer (a firm you probably have heard of) doesn't want him speaking to the press, explained the basic legal requirements surrounding email and document retention to The Standard. "If litigation is anticipated, the party has a duty to preserve potentially relevant documents," he said.

"An employee retention program with no organization or coordination is effectively incapable of compliance," he continued, "barring an act of God, or luck akin to picking every game right in an NCAA pool. Apple's retention policy is negligent."

(Emphasis added). I dissent. Apple did have a policy once the litigation was anticipated:

... Apple claims in the Psystar document that its policy is fine because once the company anticipated litigation:

[Apple] identified a group of employees who could potentially have documents relevant to the issues reasonably evident in this action. Apple then provided those individuals with a document retention notice which included a request for the retention of any relevant documents.

I think the problem here is that the lawyer and/or reporter presumed that, in the absence of a company-enforced "litigation hold" on documents, the employees would not or could not comply fully with that hold.

But that's because they presume Apple works like most companies, destroying documents and files as quickly as they can so as not to leave evidence of anything, thereby (they hope) frustrating plaintiffs' cases.

Yet, as noted by the article itself, Apple also had no deletion policy. As such, relevant documents are likely scattered all over their systems in multiple places, many easily accessible, and, "As a general rule, then, a party need not preserve all backup tapes even when it reasonably anticipates litigation." Zubulake, see below.

Apple would likely be able to preserve most of the relevant and unique information by duplicating their internal servers and instructing the key officers and employees to duplicate and produce any documents that could be relevant.

If carried out honestly, such an ad hoc policy would probably work better than most corporate litigation hold "policies," in which the company deliberately retains a pile of useless garbage to dump on the plaintiff's lawyers while also failing to instruct those unaware of the litigation to take reasonable preservation steps.

The duty to preserve is for most companies not that complicated: once a company is aware of litigation, the company should put automatic destruction policies on hold and instruct relevant employees not to destroy anything until the company can find a way to preserve everything that might be relevant to the litigation. Here's how Zubulake, the Tale of Genji for electronic discovery, described it:

anyone who anticipates being a party or is a party to a lawsuit must not destroy unique, relevant evidence that might be useful to an adversary. While a litigant is under no duty to keep or retain every document in its possession . . . it is under a duty to preserve what it knows, or reasonably should know, is relevant in the action, is reasonably calculated to lead to the discovery of admissible evidence, is reasonably likely to be requested during discovery and/or is the subject of a pending discovery request.

Zubulake v. UBS Warburg LLC, 220 F.R.D. 212, 217 (S.D.N.Y. 2003).

Aside from case law, there's no explicit rule or statute on preservation; one could do worse than following this modified Federal criminal obstruction of justice statute, 18 U.S.C. § 1519:

Whoever knowingly, reckless or negligently alters, destroys, mutilates, conceals, covers up, falsifies, or makes a false entry in any record, document, or tangible object with the intent to, or which has the effect to, impede, obstruct, or influence [civil litigation of which they are aware] shall be subject to sanctions, fines, adverse inference, and humiliation by trial lawyers.

That's a good rule unless, of course, the company was doing something wrong and intends to hide it, in which case they will start coming up with sneaky ways to pretend to comply with the rules while destroying everything detrimental to their defense.

But beware: even without evidence of intentional destruction, if a plaintiff's lawyer catches a company fooling around with document retention and failing to keep important documents, the plaintiff's lawyer will use it as an excuse to argue the missing documents say whatever the plaintiff's lawyer wants them to say.

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David Giacalone has kept the conversation about alleged client concerns over associate bonuses at firms like Cravath going at his site, f/k/a, where I have replied in comments. My reply is also below in the extended entry if you're interested.

I don't disagree with most of what you wrote, particularly about value billing, which can be a ripoff in many circumstances, particularly 'basic' representation. Let me focus on one sentence in your post: "In the market for legal services, then, every "sane" client should very much care whether sellers are operating efficiently and savings are passed on to buyers."

That's true and, as noted elsewhere, if you want to approximate that, look at PPP (and RPL), which clients can, and should, do for firms like Cravath. Compare that to the rates, billables and output and you can see if the pie is getting bigger or if someone's stealing your pieces.

But associate bonuses are another story: associate bonuses do not represent how "efficient" the firm is or if the firm is passing savings onto the clients. Associate bonuses represent the extent to which partners are passing profits onto associates, a split that is irrelevant to the clients. Is that split relevant to the firm's future fees and quality of services? Sure. But to see how -- to see the balance between retaining and attracting the best partners versus the best associates -- requires you operate at Bruce MacEwen's level. That is to say, it's micromanaging if done by a client.

If, at the end of the day, your lawyers -- the partners, the ones you know and hire -- take home $3 million a year, what more do you need to know about "efficiency?" The system is clearly extraordinarily "efficient." There are $3 million per partner in "savings" you are not receiving.

Let's look at an actual Cravath client: IBM. Does IBM have recruiters every year at Yale Law and Harvard Law reporting back on the student reaction to Cravath? Nope. Does IBM have detailed records on every associate who has voluntarily left Cravath? Nope. Does IBM send its management throughout the New York City legal community year round to determine competitive new partner compensation? Nope. Does IBM spend hours negotiating with rainmaker partners at Cravath to keep them onboard? Nope. Does IBM perform detailed internal analysis at Cravath to maximize associate retention? Nope.

And why should they? It's not their business. IBM knows what Cravath and its competitors charge, what IBM gets from Cravath, and, unlike most service providers, what Cravath partners take home on average. Why would they want to spoil the good information they have about appropriate pricing with a concern about the details of an internal transaction at Cravath that they only barely understand?

My point is: they don't. They might as well ask about the cleaning service Cravath uses and if people turn the lights out every night. IBM doesn't really care or, if they do, they're wasting their time meddling. IBM knows that Cravath doesn't set associate bonuses high out of a sense of charity, that Cravath would like nothing better than to make them all unpaid interns.

Partners care, since the associate bonus is, as described above, the direct split of profits between associates and partners, a split that cannot be billed to clients except through overall rate increases, the method of increasing billing most hated by clients (in contrast to more hours or higher value work). Frankly, unless the next PPP numbers show a dramatic drop, I think this was a big mistake by Cravath, particularly in blaming clients for the change. What better way to make your staff hate your customers than to say multiple unnamed customers complained about staff pay?

Finally, whatever the theoretical purposes of a year-end bonus, fact is that they had come to be "normal" at big corporate firms, particularly at a supposedly elite firm like Cravath. To me -- and to many of the associates, federal clerks, and law students I've heard from -- Cravath just announced it is no longer an elite firm capable of weathering any storm. Fair? Doesn't matter. It's reality.

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So I was talking with the Kevin at LexBlog about what he pays those support people I interact with when -- wait, no, none of that happened, because I don't care and it's none of my business.

LexBlog provides a service. I thought the fee was fair and reasonable and that I got a great service. So I paid the fee and got the service. If the salaries or working conditions LexBlog provide intentionally violate labor, employment or discrimination laws, then we've got a problem. Otherwise, I have better things to do than micromanage my service provider's business.

Same for most clients, though that doesn't stop the inevitable rumors -- present in both good and bad economic conditions -- that clients are demanding their law firms cut back on associate salaries (via Above The Law, which routinely spills the beans on bonuses).

Baloney.

What About Clients? agrees. In this economic climate, a business client fretting about excessive law firm associate bonuses -- which have never been billed to them -- is a business about to go under for mismanagement. A business client who drops a supposedly trusted, effective law firm for "excessive associate bonuses" is being polite. What they mean is: you're not worth your fees.

A partner who says "clients don't like bonuses" means "I don't want to pay you a bonus since it comes out of my pocket, not the client's."

What about, say, the evidence that bonuses don't increase productivity? Shouldn't clients be concerned?

Maybe that's something worth forwarding to Kevin, just like how I frequently tell my clients or providers about technology or management techniques that I've found useful. But let's be serious here: if I find his service is not living up to expectations, I'll tell him and we'll figure out a solution. It's none of my business how he splits his profits.

I've got better things to do. So do clients.

[Update: Carolyn Elefant at the Legal Blog Watch links here alongside other posts and an American Lawyer article on Cravath's decision to reduce bonuses. Feel free to join the conversation in her comments section.]

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In theory, Pennsylvania recognizes a duty in every contract for both parties to act with the utmost good faith and to engage only in fair dealing with one another.

In practice, these claims rarely succeed, like a week ago in the United States District Court for the Eastern District of Pennsylvania:

Pennsylvania law recognizes an independent cause of action for breach of the duty of good faith and fair dealing only in "very limited circumstances," such as insureds' dealings with insurers and franchisees' dealings with franchisees. Northview Motors, Inc. v. Chrysler Motors Corp., 227 F.3d 78, 91 (3d Cir. 2000) (citing Creeger Brick and Building Supply, Inc. v. Mid-State Bank and Trust Co., 560 A.2d 151, 153-53 (Pa. Super. Ct. 1989). In Northview Motors, the United States Court of Appeals for the Third Circuit predicted that Pennsylvania courts would limit the application of claims for breach of the covenant to situations where they were "essential" and would not recognize an independent cause of action for breach of the covenant where the parties had entered into a detailed contract setting forth their obligations and rights. Id.; see also McHale v. NuEnergy Group, 2002 WL 321797 at *8 (E.D. Pa. February 27, 2002) (finding that "Pennsylvania law would not recognize a claim for breach of [the] covenant of good faith and fair dealing as an independent cause of action" where the allegations underlying the breach of covenant claims are "essentially the same" as those underlying the plaintiff's claim for breach of contract).

The Court similarly finds that Pennsylvania would not recognize an independent claim for breach of the covenant of good faith and fair dealing in this case. As in Northview Motors, the parties here entered into a detailed contract setting forth their rights and obligations with respect to the purchase of the property at issue. The facts that Sentry Paint alleges give rise to its claim for breach of the implied duty of good faith and fair dealing are the same as those that form the basis for its breach of contract claims. Under these circumstances, Sentry Paint's breach of covenant claims are subsumed in its breach of contract claims and cannot be maintained as a separate cause of action. Fn 20:

Fn 20: In support of its separate cause of action for breach of the covenant of good faith and fair dealing, Sentry Paint cites to the Pennsylvania Supreme Court's decision in Birth Center v. St. Paul Co., 787 A.2d 376 (Pa. 2001) and the decision of the Lawrence County Court of Common Pleas in Harlan v. Erie Ins. Group, 2006 WL 1374502 (Lawrence Co. CCP February 16, 2006). Both Birth Center and Harlan involved contractual bad faith claims by an insured against an insurer, one of the "limited circumstances" in which Pennsylvania recognizes an independent cause of action for breach of the covenant of good faith and fair dealing. Neither case supports recognizing an independent cause of action here in an action involving an arms-length purchase of property.

Sentry Paint Techs. v. Topth (EDPa, October 31, 2008, McLaughlin, J.).

C'est la vie. Hard to know what their damages would be anyway in this case, if not damages arising out of a breach of the explicit terms of the contract. To me, outside of those quasi-fiduciary situations described above, the "good faith and fair dealing" seemed like a catch-all where it was hard to prove exactly what the breach was, except for a bad faith failure to perform.

But don't despair, business plaintiff trial lawyers — this case was at summary judgment, so you can even use it in support of alleging the claim in your complaint when they file a motion to dismiss or motion for judgment on the pleadings.

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If you've ever done business or commercial litigation, you've done tortious interference with contractual / business relations. It's alleged virtually every time a party switches suppliers or customers, and virtually every time the lawsuit involves more than two parties.

But did you know you can claim non-pecuniary damages (so long as you have some economic damages) and get an injunction  before the damage occurs?

From the Eastern District of Pennsylvania:

The damages element of a claim for intentional interference with contractual relations (the fourth element) requires a plaintiff to prove that the alleged interference has caused an actual pecuniary loss, the benefits of which flowed from the contract itself. Although an actual pecuniary loss must be established, non-pecuniary harms are also recoverable under this tort. Shiner v. Moriarty, 706 A.2d 1228, 1239 (Pa.Super. 1998); Perry v. H&R Block Eastern Enterprises, Inc., 2007 U.S. Dist. LEXIS 22406, 2007 WL 954129, at *10 (E.D.Pa. March 27, 2007)(McLaughlin, J.).

Moreover, the actual pecuniary loss requirement does not defeat actions for tortious interference with contractual relations, such as this one, which seek to enjoin the interfering conduct before it is successful. In Adler, Barish, Daniels, Levin & Creskoff v. Epstein, 482 Pa. 416, 436 n.21, 393 A.2d 1175, 1185 n.21 (1978), the Supreme Court of Pennsylvania specifically held that notwithstanding the actual pecuniary loss requirement, "[i]t  is well settled that equity will act to prevent unjustified interference with contractual relations." See also Restatement (Second) of Torts § 766, comment u.

Similarly, in affirming the issuance of a preliminary injunction in a case based upon tortious interference with contractual relations and trespass claims, the Third Circuit recognized that injunctive relief may be appropriate before an actual pecuniary loss is sustained. In this regard, the Third Circuit held that a preliminary injunction may issue where the claimant has demonstrated that there is a "presently existing actual threat of injury". Ride the Ducks of Philadelphia, LLC v. Duck Boat Tours, Inc., 138 Fed.Appx. 431, 434 (3d Cir. 2005) (citing Continental Group, Inc. v. Amoco Chemicals Corporation, 614 F.2d 351, 359 (3d Cir. 1980)).

Hospitality Assocs. of Lancaster, L.P. v. Lancaster Land Development, 2008 U.S. Dist. LEXIS 76772 (September 20, 3008, Gardner, J.).

Shiner v. Moriarty, cited above, quotes Pawlowski v. Smorto, 403 Pa. Super. 71, 588 A.2d 36 (Pa.Super. 1991), for the damage element of the tort involving "the loss of the benefits of the contract or prospective relation or consequential, emotional or reputational losses resulting from the defendant's conduct."

Did you plead all that last time? If not, perhaps you should consider amending...

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The plain meaning rule is to litigators what hammers are to contractors. It may be easy to use, but since you're going to use it on every job, you need to get good with it.

When interpreting a statute, rule, regulation, contract, or other legal document, courts first look to the plain meaning of the language in the document itself. If the language is unambiguous, then that plain meaning will be applied, regardless of any external factors or policy interpretations.

The bailout bill added the following to Section 13(c) of the Federal Deposit Insurance Act (12 U.S.C. 1823(c)) [the bolded language is the most relevant here]:

(11) UNENFORCEABILITY OF CERTAIN AGREEMENTS. No provision contained in any existing or future standstill, confidentiality, or other agreement that, directly or indirectly

"(A) affects, restricts, or limits the ability of any person to offer to acquire or acquire,

"(B) prohibits any person from offering to acquire or acquiring, or

"(C) prohibits any person from using any previously disclosed information in connection with any such offer to acquire or acquisition of,

all or part of any insured depository institution, including any liabilities, assets, or interest therein, in connection with any transaction in which the Corporation exercises its authority under section 11 or 13, shall be enforceable against or impose any liability on such person, as such enforcement or liability shall be contrary to public policy.

Assume Citigroup has an "agreement"  with Wachovia, an "insured depository instutition," that contains a "provision" that "directly... limits the ability of any person to offer to acquire or acquire" Wachovia. Then Wells Fargo comes in and acquires Wachovia.

Citigroup sues for damages. What result?

There is no law whatsoever interpreting the above language. Thus, Wachovia offered a restrained 15 pages explaining how the above is so unambiguous it needs no further argument, while Citigroup filed a downright svelte 7 pages of argument as to how the statute reflectled a precisely contrary unambiguous meaning. (Both briefs are available at the WSJ Law Blog).

I believe Congress did not mean what it wrote, and that the Court will ignore the "plain meaning" rule to get at what Congress probably did mean.

Citigroup has a very strong argument that 126(c) limits enforceability and liability only of the "person" described immediately above, which would be the acquirer (Wells Fargo), and not the institution (Wachovia). If Congress, say, wanted to void the provision entirely, they could have do so by writing:

Any provision in an agreement that purports to limit the ability of a person to acquire, or to offer to acquire, all or part of any insured depository institution is hereby declared void.

In that case, the provision would have been blown up, eliminating all liability. It's not like Congress didn't know how to "void" an agreement. Here's what happens if a shifty promoter tries to skirt securities exchange regulations protecting investors, as per 15 USCS § 78cc:

(a) Waiver provisions. Any condition, stipulation, or provision binding any person to waive compliance with any provision of this title [15 USCS §§ 78a et seq.] or of any rule or regulation thereunder, or of any rule of an exchange required thereby shall be void.

Blammo! The "provision ... shall be void."

And here's what happens when a Member of Congress tries to make a deal with the United States or its agencies, as per 18 USCS § 431:

Whoever, being a Member of or Delegate to Congress, or a Resident Commissioner, either before or after he has qualified, directly or indirectly, himself, or by any other person in trust for him, or for his use or benefit, or on his account, undertakes, executes, holds, or enjoys, in whole or in part, any contract or agreement, made or entered into in behalf of the United States or any agency thereof, by any officer or person authorized to make contracts on its behalf, shall be fined under this title.
 
All contracts or agreements made in violation of this section shall be void; and whenever any sum of money is advanced by the United States or any agency thereof, in consideration of any such contract or agreement, it shall forthwith be repaid; and in case of failure or refusal to repay the same when demanded by the proper officer of the department or agency under whose authority such contract or agreement shall have been made or entered into, suit shall at once be brought against the person so failing or refusing and his sureties for the recovery of the money so advanced.

Wham! "All ... agreements ... shall be void."

Here, however, in 126(c), Congress didn't do that. They gave us a long, detailed description of a "provision" they thought should not "be enforceable against or impose liability on such person," a "person" they specifically described above as one who was attempting to acquire or actually acquiring an institution.

Congress knew how to "void" an unwanted provision of an agreement and chose not to do so here. That weighs heavily in Citigroup's favor.

But there's a problem: how would an agreement between Citigroup and Wachovia ever "be enforceable" or "impose [ ] liability" on Wells Fargo? 

Wells Fargo is a third-party to the agreement between Citigroup and Wachovia. The agreement creates much that can be enforced against, and which imposes liability on, Wachovia, because it is a party to the agreement. Wells Fargo, though, is not bound at all by the agreement.

That's not to say Wells Fargo is without liability. The claim here is simple: Citigroup is suing Wachovia for breach of contract and Wells Fargo for tortious interference with contractual relations. That's it; Citigroup's claim against Wells Fargo arises as a matter of tort, not as a matter of contract.

Citigroup thus has not and cannot allege that Wells Fargo somehow breached an agreement with Citigroup, since there isn't one.

So here's our problem: if you read the the statute literally, the plain meaning destroys a type of "enforceability" and "liability" that rarely, if ever, exists. Not unless the acquirer had some type of non-competition agreement with a second company not to attempt to acquire a third-party institution, which is not the case here. Frankly, such an agreement — e.g., Wells Fargo agreeing with Citigroup not to acquire Wachovia — would likely invite an antitrust inquiry, not to mention a very upset Hank Paulson asking why they're trying to deep freeze an already frozen market.

So 126(c) is like a law excusing me from enforcement or liability arising from the agreement you have with your phone company. I was never obligated to follow that agreement in the first place.

So, now what? Here is where I suspect the plain meaning rule will fail, and the court will disregard an unambiguous meaning to reach the result it believes Congress intended.

As described above, I think the "plain meaning" interpretation of the section is clear: any agreement in which a potential acquiring company has agreed not to acquire an FDIC-institution is unenforceable. That's not the situation in the Citigroup versus Wells Fargo case (since Wells Fargo was not party to any such agreement), and so the statute is wholly inapplicable. Period. The suit goes forward against both Wells Fargo and Wachovia.

But that is probably not what will happen. 126(c) was obviously intended to apply to this deal specifically, hence the "in connection with any transaction in which the Corporation exercises its authority under section 11 or 13," which describes the FDIC-approved Citigroup/Wachovia deal. As such, I predict the court will read this statute as an attempt by Congress to protect Wells Fargo from liability arising from that agreement, even if the "plain meaning" would seem only to apply if Wells Fargo itself signed on to that agreement.

Wachovia, however, has a much longer road ahead. I think it's fatal to their defense that Congress didn't just up and void the whole agreement.

Given how Congress works, maybe the above really is what they intended: Wells Fargo gets Wachovia, but in the process they have to pay Citigroup's damages. Indeed, Citigroup's "negotiated" agreement to withdraw the request for injunctive relief suggests to me that's precisely the compromise, likely entered into with Federal, shall we say, persuasion.

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If you've been following the multi-billion-dollar fight going on for Wachovia (Scribd copy of the Exclusivity Agreement at issue here, courtesy of Dealbook), you may have noticed the following:

In the Sunday night ruling, the Appellate Division of [New York] State Supreme Court threw out an order by Justice Charles Ramos issued late Saturday at the request of Citigroup; the order would have extended the time under which Wachovia and Citigroup had to complete their deal.

Citigroup, which announced on Sept. 29 that it had received federal government backing to acquire the banking assets of Wachovia Corp. for $2.1 billion, or the equivalent of about $1 a share, said it would appeal the decision.

The fight was also waged in federal court, where Wachovia asked U.S. District Judge John Koeltl to declare invalid part of the Citigroup deal that would have restricted Wachovia from considering competing bids.

Citigroup sued Wachovia and Wells Fargo in state court to enjoin them and order specific performance of the agreement, while Wachovia filed in federal court for a declaratory judgment affirming the enforceability of the Wells Fargo deal. The claims are analytically distinct, but factually exactly opposite: C wants to blow up WF's deal and enforce C's deal, while W & WF want to blow up C's deal and enforce W & WF's deal.

Now what?

Of course, the issue could have been partly resolved back when C and W reached their agreement by choosing a single court in which the agreement and its enforceability would be interpreted, but instead they went for the same boilerplate language you will find on almost all business contracts:

This agreement shall be governed by, and construed in accordance with, the laws of the State of New York. The parties hereby irrevocably and unconditionally submit to the exclusive jurisdiction of any state or federal courts sitting in New York City, Borough of Manhattan, over any suit, action or proceeding arising out of or relating to this letter agreement.

Why do businesses always consent to "state or federal" jurisdiction? Presumably, the advanages of one over the other are apparent at the time of the signing, so it would make sense to pick one or the other. "Flexibility" doesn't make sense as an explanation — you just end up with the situation we have here.

One would think the problem of simultaneous federal and state suits would have been addressed by the Constitution itself, but it's wholly silent on the issue. The answer arises from the Anti-Injunction Act of 1793, which in its current form reads:

A court of the United States may not grant an injunction to stay proceedings in a state court except as expressly authorized by Act of Congress, or where necessary in aid of its jurisdiction, or to protect or effectuate its judgments.

The Act has teeth: unless one of the statutory exceptions applies, a federal injunction restraining prosecution of a lawsuit in state court is absolutely prohibited. Mitchum v. Foster, 407 U.S. 225, 228-29, 32 L. Ed. 2d 705, 92 S. Ct. 2151 (1972). Moreover, "The mere existence of a parallel action in state court does not rise to the level of interference with federal jurisdiction necessary to permit injunctive relief under the 'necessary in aid of' exception." Lou v. Belzberg, 834 F.2d 730 (9th Cir., 1987).

Thus, the federal court cannot stop the state court even if it wanted to, nor can the state court stop the federal court.

So what happens? Usually, one of them voluntarily bows out.

In Pennsylvania, the challenge of a "prior pending action" falls under the general rubric of lis pendens, requiring the challenger establish the following three prongs:

A plea of former suit pending must allege that the case is the same, the parties the same, and the rights asserted and the relief prayed for the same...

Hillgartner v. Port Auth., 936 A.2d 131 (Pa. Commw. Ct., 2007). In Hillgartner, the state court pulled out in light of a parallel federal court action "because the first action in federal court includes and therefore adequately protects all Plaintiffs' state claims for compensatory and punitive damages. Thus, Plaintiffs seek the same amount of money damages measured in the same way in both federal and state courts ..."

On the flip side, Federal courts will frequently decline to exercise jurisdiction over primarily state law questions (like the interpretation of contracts), which is what everyone expects to happen here, hence Wachovia's novel "federal" argument:

Wells and Wachovia went to federal court to argue that a provision in the new $700 billion Economic Stabilization Act, signed into law on Friday, made the dispute a federal matter. Last night, U.S. District Court Judge John G. Koetl gave lawyers until tomorrow to file briefs. According to Tulane law prof Elizabeth Nowicki, who reached out to us yesterday, Wachovia is arguing that, under federal law, Section 126(c) of the bailout bill voids the exclusivity agreement between itself and Citi, meaning that that Wachovia is free to negotiate with any entity it pleases. While Judge Koetl is apparently willing to entertain that argument, Professor Nowicki tells us she thinks the argument is a non-starter.

You can read more about Section 126(c) at the link above, then you can pause to marvel how the Senate passed a bill specifically addressing this exclusivity deal fewer than 48 hours after it was reached, in spite of Art. I, Sec. 10 of the Constituion, which prohibits laws impairing the obligations of contracts. Now that's what I call lobbying power.

At the end of the day, there's more than enough leeway in the law for both courts to keep going simultaneously, engaging in the dreaded and unseemly 'race to judgment.' My bet is that the Federal court will either bow out or drag its feet as a lesson to those who would try to make a federal case out of their humdrum multibillion-dollar contracts.

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This isn't a political post, at least not intentionally.

The Wall Street Journal on Saturday carried a story about the legal troubles of the Wasilla sports complex which was built under Sarah Palin's watch (the story isn't new, see these links). It gives us a good window into the two main types of "legal advice" a lawyer can give to an organization or business -- i.e., advice for avoiding certain legal risks and advice that weighs different possible legal outcomes -- and how organizations and businesses should respond to that advice. The story's been picked up as an example of poor executive judgment by Sarah Palin; it may be, but it's not that simple.

Short story: in the late 1990s Wasilla reached an agreement to buy a 145-acre lot for $126,000. The seller then went with another buyer, Wasilla sued, won initially, began construction, was reversed, and had to eminent domain the most important 80 acres. At the end of the day, Wasilla paid $250,000 in legal fees and was ordered by an arbitrator to pay $836,378, plus $336,000 in interest, for the land.

Since all land is unique, failed-and-repurchased real estate deals rarely fail for a fraction of the original price. They fail for a multiple of the original price. So it's not surprising that, once the deal failed the first time, Wasilla ended up getting a little over half of what they "bought" for ten times the price they negotiated. Lawyers and real estate brokers know that happens.

In essence, two things went wrong for Wasilla:

• Wasilla never finalized the initial deal;
• Wasilla relied on a federal district judge's order in 2001 in their favor, which was later reversed.

The former is a classic example of an avoidable legal risk. When lawyers study for the bar exam, few things are pounded in their heads so forcefully as the need to follow precisely the requirements for the transfer of real estate. For example, the failure to 'record' a real estate purchase typically voids the putative buyer's title. It's that serious.

So it's a bit surprising to see this paragraph:

City officials negotiated a price of $126,000. Months passed without the city's securing a signed purchase agreement, according to the city's attorney, Tom Klinkner of Birch, Horton, Bittner & Cherot.

An oral agreement to purchase real estate is unenforceable, barred by the statute of frauds every state, including Alaska. Little wonder the seller (the Nature Conservancy) thought it could sell it to another buyer, and the buyer thought they could buy it.

The real question is: who let a fully negotiated real estate deal sit around? Did their lawyer fail to tell them they had to get moving if they wanted to make it enforceable? Did the city sit on its hands, perhaps fretting about tendering the cash? Someone dropped the ball; it's that simple.

After Wasilla sued to enforce their unenforceable deal, I haven't the foggiest clue how they convinced the Federal District Court Judge to rule anything in their favor, but apparently they did.

Which brings us to the latter, which was likely either a failure of the lawyer to weigh the legal risks appropriately or a failure of the executive to appreciate the consequences of those legal risks once presented to her. After the order in Wasilla's favor,

Ms. Palin marched ahead, making the public case for a sales-tax increase and $14.7 million bond issue to pay for the sports center, which was to feature a running track, basketball courts and a hockey rink. At the time, the city's annual budget was about $20 million. In a March 2002 referendum, residents approved the mayor's plan by a 20-vote margin, 306 to 286. The city cleared roads, installed utilities and made preparations to build.

Not necessarily the wrong decision. They had an order in hand, plus unlimited eminent domain power if something went wrong. If they wanted the land, they were going to be able to get it, the question was just how much they would pay (including legal fees) and how long until the ordeal was over.

But recall the circumstance -- a failed real estate deal -- in which the eventual price may need to be many multiples of the original deal. Those numbers aren't insignificant in this context, and they had the capability to explode into a significant fraction of the city's budget. Order or not, both the lawyer and the city should have been concerned.

"[T]he city believed it would prevail ..." I haven't seen the briefs or the order, so I have to speculate. Wasilla had prevailed in the first instance, which itself makes it reasonable to think it could hold up on appeal.

But a lawyer is held to a higher standard than what could be reasonable; they're hired not to make plausible judgments, but to make sound ones. Did the lawyer not advise the city of the high odds of reversal of their enforcement of an oral real estate agreement? Did the city ignore that advice and then not bother with less risky/costly solutions, like settling with the other buyer before committing $14 million to that lot?

Maybe the City was advised of, and considered, the risk of reversal followed by an expensive eminent domain process, and charged through anyway, firing up the bond issue, construction, et cetera. That's not necessarily a bad decision, though it may be rash given the numbers involved.

At the end of the day, I just can't help but think that at least one, and possibly two or more major mistakes in judgment were made in this whole endeavor.

Someone let the initial purchase agreement lapse, as simple and plain an error as ever was. It wasn't even a bad judgment call; it was a failure to minimize an obvious legal risk.

Then someone didn't properly weigh the risks of the litigation, a more subtle, but here more costly, error.

There's a distinction between "weighing the risk of litigation" and "predicting the outcome." No one can do the latter, nor should they try. The former, though, must be done, and it involves two separate exercises of judgment: the legal judgment of the lawyer in determining the possible outcomes and their likelihood, and the business / administrative judgment of the city in assessing the effect of those outcomes on the city and the best course in context.

One of those two was missing here. Which one?

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An interesting aside from Sovereign Bank v. BJ's Wholesale Club, Inc., 533 F.3d 162 (3d Cir. 2008), a complex business dispute discussed in my prior post.

Here's the deposition testimony given by a Visa corporate representative, on which the Third Circuit relied in reversing summary judgment in favor of the Acquirer:

Q: [by Acquirer's counsel] Is it fair to say that the operating regulations are not intended to benefit a single group of participants, but the Visa payment system as a whole?

Objection. Leading.

A: [by Visa rep] It's fair to say that the core purpose of the operating regulations is to set up the conditions for participation in the system, to set up rules and standards that apply to that ultimately for the benefit of the Visa payment system, the members that participate in it and other stakeholders such as cardholders, merchants and others who may participate in the system as well. (emphasis added).

Q: They may have some incidental benefit; is that correct?

Objection

Leading, and calls for a legal conclusion.

A: The bylaws and operating regulations, by their terms, apply only to members. So to the extent you mean they might have benefits beyond the rules that apply to other stakeholders, that's correct. They're not directly parties to these rules. (emphasis added)

Stop for one second and consider: these questions were asked by the Acquirer's counsel. They were blatantly leading ("is it fair to say") and tried to get legal conclusions ("incidental benefit"), resulting in the Visa corporate representative rejecting their argument, providing fodder for the Third Circuit to overturn their summary judgment.

I don't mean to question the tactical decisions of the Acquirer's lawyers. Indeed, given the absence of other deposition excerpts in support of the Issuer's argument, there seems to have been a reasonable basis for the Acquirer's lawyer to think the Visa corporate representative was going to give them exactly what they wanted to hear.

But the representative did not, and instead gave the appellate court grounds to overturn summary judgment when, as mentioned above, it appears there was little other testimony favorable to the Issuer.

Just something to keep in mind: as tempting as the coup de grace may be, it rarely works as planned.

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Courtesy of the complicated mess that is Sovereign Bank v. BJ's Wholesale Club, Inc., 533 F.3d 162 (3d Cir. 2008), in which credit card "Issuers" sued credit card "Acquirers" and "Merchants" (Acquirers are the companies that process transactions for the Merchants) after a bunch of credit card numbers were stolen from the Merchant.

The big issue is: are Issuers intended beneficiaries of the Merchant and Acquirer's agreement with the Visa network, which includes a number of anti-fraud regulations that the Merchant and Acquirer allegedly didn't follow?

Historically, under Pennsylvania law, "in order for a third party beneficiary to have standing to recover on a contract, both contracting parties must have expressed an intention that the third-party be a beneficiary, and that intention must have affirmatively appeared in the contract itself." Scarpitti v. Weborg, 530 Pa. 366, 609 A.2d 147, 149 (Pa. 1992) (citation omitted). Sovereign appropriately concedes that it is not an express third-party beneficiary of the Visa-Fifth Third Member Agreement. However, in Scarpitti, the Pennsylvania Supreme Court adopted § 302 of the Restatement (Second) of Contracts. Id. That provision allows an "intended beneficiary" to recover for breach of contract even though the actual parties to the contract did not express an intent to benefit the third party. Section 302 provides as follows:

Intended and Incidental Beneficiaries

 (1) Unless otherwise agreed between promisor and promisee, a beneficiary of a promise is an intended beneficiary if recognition of a right to performance in the beneficiary is appropriate to effectuate the intentions of the parties and either

(a) the performance of the promise will satisfy an obligation of the promisee to pay money to the beneficiary; or

(b) the circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance.

(2) An incidental beneficiary is a beneficiary who is not an intended beneficiary.

Got all that? Summary judgment reversed, based upon a memorandum and deposition testimony indicating that the regulations were for the benefit of all the members, as discussed in the next post.

Update: for some reason, movable type ate most of my post, which has been corrected.

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[UPDATE: the Ninth Circuit eviscerated the verdict, as well as the trial court's imposition of a constructive trust and an injunction.]

As mentioned yesterday, a jury awarded Mattel $100 million* for the Bratz infringement, one-twentieth of the $2 billion requested in their closing argument, just over three times the $30 million suggested by MGA (and which may be reduced to $40 million, discussed below).

* see end of post, damages are apparently only $20 million due to duplication on verdict sheet

What happened? Mattel misjudged the jury's outrage and overshot.

Here's the jury's breakdown:

The jury awarded damages of $20 million against MGA and $10 million against [MGA CEO] Larian in each of three causes of action, intentional interference with contractual relations, aiding and abetting breach of fiduciary duty, and aiding and abetting breach of the duty of loyalty.

They also found that MGA owed Mattel $6 million for copyright infringement, while Larian owed $3 million in distributions he'd received from Bratz-related sales, and MGA Hong Kong owed $1 million.

Here is what each side claimed:

Quinn said MGA owed Mattel for the entire Bratz empire, amounting to at least $1 billion in Bratz profits and interest. Quinn argued that Larian, too, personally gained nearly $800 million in stock value and distributions flowing from the success of the dolls.

...

MGA attorneys countered that the jury should award Mattel as little as $30 million because the company had built the doll line's value with smart additions, branding and packaging.

(emphasis added) And here's a critical fact:

The four original dolls made just $4 million in profit their first year and comprised only 2.5% of MGA's entire Bratz revenue, said Raoul Kennedy, one of MGA's attorneys.

In the past seven years, MGA has built the popular brand to include more than 40 characters and expanded it with spin-offs such as Bratz Babyz, Bratz Petz, Bratz Boyz and items like helmets, backpacks and bedsheets.

(emphasis added) Recall that excellent Learned Hand quote unearthed by the Eleventh Circuit (and discussed in my post on the Watchmen lawsuit:

It must be obvious to every one familiar with equitable principles that it is inequitable for the owner of a copyright, with full notice of an intended infringement, to stand inactive while the proposed infringer spends large sums of money in its exploitation, and to intervene only when his speculation has proved a success. Delay under such circumstances allows the owner to speculate without risk with the other's money; he cannot possibly lose, and he may win.

I don't believe the Bratz trial addressed laches and the suit was somewhat timely filed from what I can tell, perhaps two years after the infringement was discovered. I doubt any of the jurors were familiar with Learned Hand, but the core idea is well-accepted in America: expanding upon others' ideas is a legitimate enterprize.

The jury essentially found that MGA was entitled to 95% of the Bratz empire's profits, despite accepting that:

• the original idea was wrongfully lifted from Mattel;
• MGA willfully interfered with Mattel's business;
• MGA aided and abetting in breaches of fiduciary duties;
• MGA aided and abetting in breaches of the duty of loyalty duties.

Despite that, the jury accepted MGA's proposed $30 million and then, perhaps as a deliberations compromise or perhaps in confusion, awarded it thrice. That alone presents a big problem for Mattel, as it's possible the judge will strike two of the three $30 million awards as duplicative, resulting in a $40 million final verdict.

After, say, a 40% gross contingency fee (which is probably on the high end, given the massive damages both Mattel and Quinn thought they could get, but which is common in commercial and business litigation) and costs, that would leave Mattel with about $20-24 million, or less than 5% of their annual profit. Yikes.

For MGA's greedy, unjustified, wrongful conduct, the jury awarded $0 in punitive damages and a fraction of the plaintiff's proposed compensatory damages. What the heck happened?

I'm not in a position to question the tactical decisions of Mattel's counsel, so I won't. With the benefit of hindsight, though, I believe Mattel dramatically overshot. It's indisputable that MGA did virtually all of the work and invested virtually all of the funds that made Bratz the success it is today. They didn't start the fire, but they gathered all the wood, they sheltered it from the rain, and they used it to kindle others. Yet, Mattel claimed it was entitled to everything, that for MGA's risk it should be granted all the reward.

There were three elements missing, at least two of which are essential for a large verdict:

1. fairness,
2. the absence of a windfall, and
3. outrage.

First, jurors try very hard to be fair. What Mattel proposed was not fair. Sure, Mattel may be entitled to it under the law, and it was unfair that their design was stolen. But it's just as unfair to all the people at MGA who didn't know they were working with stolen goods, and, indeed, it's unfair to the infringing parties themselves, since it denies their own contribution to the final work.

Second, jurors don't like to give money for nothing. Mattel proposed a windfall. Why should they get all the profits? Mattel did almost nothing to earn those profits, it just had some design sketchs stolen. Big whoop -- for that you get an entire empire that someone else built?

Third, If the jury had been outraged by MGA's conduct, "fairness" would have already been decided in the plaintiff's favor, and the windfall would have mattered less. But they weren't outraged; they thought it was an unjustified way to do business, but obviously not enough to warrant punishment.

And here's where I think Mattel made its biggest mistake: Mattel only asked for a number, while MGA gave them the tools to reach their own decision in a way that was favorable to MGA. How do I know the jury used MGA's tools? Look at the numbers they used, right out of MGA's closing: $30 million, around 2.5% of $1 billion in Bratz profit.

It can't be said enough: in closing arguments, arm your jurors with the arguments they need to prevail over the others in liability and the tools they need to reach your proposed award.

Either way, MGA is breathing a deep sign of relief today. And Mattel is digging deeply through the transcript to find something warranting a retrial.

UPDATE: MGA has been pushing heavily in the press that it's apparently undisputed the damages were overlapping, so the final sum really is just $20 million. Which means the jury took Mattel's damages instructions almost verbatim. I have cleaned up slightly (typo) and moved the old discussion of that issue below the fold, to keep around for posterity, and pasted the MGA press release.

OLD DISCUSSION

Indeed, it looks like the jury entered deliberations with barely any tools to work with, considering that the meaning of the verdict slip is already in dispute. The jury awarded exactly $30 million thrice on parallel claims. That doesn't make any sense: if the jury thought the damages were really $30 million, which they clearly did, but wanted to punish MGA, they had a punitive damages element readily available. If the jury thought $90 million was the damage, they likely would have apportioned it across the entites in relation to their involvement.

MGA PRESS RELEASE

LOS ANGELES--(BUSINESS WIRE)--In light of the verdict in MGA Entertainment’s trial against Mattel, MGA today said that certain media reports regarding the damages awarded in the trial are inaccurate.

The jury awarded $20 million to Mattel in damages. Some media reports have incorrectly reported that Mattel was awarded $100 million.

MGA said that the jury made its award pursuant to a variety of legal claims, each based on the same damages theory, and subject to the Court's instruction not to be concerned about duplicative damages. MGA pointed out that during the trial Mattel even conceded that the damages it sought were overlapping and duplicative.

MGA further stated that it intends to appeal any amount of awarded damages at the end of the case.

“We are pleased to have this trial behind us,” said Isaac Larian, CEO of MGA Entertainment. “We can now concentrate all of our energies on what we do best - providing dolls and other toys that are the consumers’ first choice.”

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Interesting:

A federal jury in Riverside, Calif., just returned a $100 million verdict for Mattel, according to an early Reuters report, about $1.9 billion less than the company asked for. Quinn Emanuel’s John Quinn, who repped Mattel, asked the jury for $2 billion for stealing the conceptual drawings of the Bratz doll — at least $1 billion in Bratz profit and interest, and another nearly $800 million for the complicity of MGA’s CEO, Isaac Larian.

I say "interesting" because I doubt the $2 billion was pulled out of thin air. If you win liability, and get a real shot at serious damages, you try very hard not to overshoot and have the jury turn on you.

Maybe Quinn didn't follow the "don't kill the defendant" advice in asking for punitive damages, i.e. that juries will rarely award enough to destroy the defendant's business.

I wonder what drove that figure. Compromise on liability? Respect for the underdog, even where underhanded?

From what I know the infringement wasn't a complete and total slam dunk -- Bratz appeared to have substantially improved the design on its own. Maybe that was part of it.

We'll learn more over the next few days.

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Victoria Pynchon at Settle It Now says she has spotted a settlement unicorn out in the wild. Indeed, she says she actually caught it and fully and finally released its to become the certified check it always wanted to be.

I dispute the taxonomy. What she caught was nice, but it was at most a narwhal. The case, a medical malpractice action, had already progressed through substantial discovery, including the plaintiff's deposition and, I presume, the written discovery, which usually happens before the major depositions. Moreover, there seems to be an element of res ipsa, too, as it was not just an unwanted scar after surgery but after plastic surgery, and the substantial focus paid to it by the lawyers and insurance adjuster suggests to me that the scar represented not only the damages but much of the breach of the standard of care as well.

Most importantly, the damages and ultimate settlement value did not appear to be substantially greater than the cost to the insurer of defending the case through trial.

Given how it was a scar case, with the plaintiff initially demanding $500,000 (and the insurer initially offering nuisance value), I would presume the case settled for $150-250,000 in an urban jurisdiction or $75-150,000 elsewhere. That's more than the cost of defending the case at trial, but not much more. Defending a simple plastic surgery malpractice case is probably between $75-125,000, including attorneys' fees and experts and costs. Could be less if they're lucky, could certainly be more.

Which brings me to the biggest question here: why did they agree to mediation? I think I know the answer. Given where they were in the litigation, the parties had not yet spent substantial sums on expert fees. The plaintiff's lawyer had had probably spent less than $5,000 on experts, depending on their relationship with the experts (some get the experts heavily involved from day one to help guide them, others are comfortable with their own knowledge up until discovery has been substantially completed). The defense expert fees were minimal, as the insurance company has a much larger roster of experts and did not yet need to select them and fully brief them.

Thus, when the parties agreed to mediate, there was likely $40-60,000 "on the table," which could either be used to help settle the case or could be thrown away on experts. As noted above, that sum alone -- putting aside attorneys' fees and all the other costs and issues -- likely represented between one quarter and one half of the eventual settlement value, and the lawyers, whom I am guessing were experienced in medical malpractice, both deserve credit for recognizing this economic waste.

But that's why I just can't verify this as an actual sighting of the mighty unicorn. To me, it's analytically similar to my initial example of two businesses who resolve their dispute not because they really reach an agreement, but because the cost of the dispute is less than the value of their continuing relationship. The equation above doesn't work in a wrongful death or birth injury case. It frequently doesn't apply in cases worth more than $250,000 and virtually never applies to cases worth more than $500,000.

Frankly, in those cases, I can't blame defendants and insurance companies from making me work for it. As a purely economic analysis, why not spend $50-100,000 just to see if I get a crummy expert or if I bungle a deposition or are unable to pry those incriminating e-mails out of their servers?

I know, it sounds like I'm changing the definition of the unicorn by taking these smaller cases off the table and by discounting settlements reached after substantial discovery. I'm not trying to create a moving target, I'm trying to figure something out. At the end of the day, I just can't see how to bring parties to the table without an external factor narrowing the issues, whether that factor be an ongoing business relationship, the "money on the table" that exists before expert and other fees, or, most commonly, the discovery and litigation that reveals in detail the strengths and weaknesses of each other's position.

To put it another way, I can't see, as a matter of game theory, how to convince a defendant to settle a large case prior to them exhausting all their options in litigation.

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We're aiming for new heights of nerdom here at Litigation & Trial, combining comic books, movies, old law school contract cases, equitable principles, permanent injunctions, and recent circuit splits in one post. The Watchmen lawsuit -- which is less copyright infringement and more commercial litigation, since the dispute is largely over contract terms -- gives us license (har har) to do so.

Graphic novels (née "comic books") are serious money these days, at least when adapted for the big screen. In addition to the normal superhero adaptations, like Iron Man and The Incredible Hulk (which have generally done quite well), particular attention has been paid to noir comics like Sin City and 300. (The Nolans' Batman adaptations are a hybrid, drawing from noir variations on Batman, like The Dark Knight Returns.)

Watchmen, published in 1986-87, is perhaps the most heralded of the noir comics, a complex and character-driven drama set in a alternative-history 1980s United States in which superheroes (the bulk of which have no obvious superpower) have been suppressed as unaccountable vigilantes, while Nixon is on his fifth term as president.

Such a complicated tale obviously presents numerous visual, thematic and temporal problems for moviemakers, in addition to normal stress of taking a work revered by a subculture and making it widely appealing without offending the subculture or alienating the masses. Multiple attempts to make the movie since the story was published have fizzled out; even Terry Gilliam, who has no trouble bringing madness to the big screen, deemed it unfilmable.

But Zack Snyder, who directed the enormously successful 300 (which made $450 million on a $60 million budget), has apparently done it and done it well.

Since he's appearing on this blog, you can guess what happened next: the production company, Warner Brothers, was sued.

The movie buzz is that the case has substantial merit and could turn the movie into a loss for WB, and the original documents are available online for your perusal. In essence, Fox bought the complete rights to Watchmen, tried to begin production, gave up, quitclaimed the rights to the producer (with the terms of that quitclaim disputed), then entered into multiple disputed subsequent agreements. Here's the Court's outline (as formatted by Deadline Hollywood):

1986-90: Fox acquires motion picture rights in The Watchmen.

1990: Fox enters into a domestic distribution agreement with Largo Entertainment, a joint venture of JVC Entertainment Inc., Golar (Larry Gordon), and BOH, Inc. The “Largo Agreement” established Fox’s domestic distribution rights, through a license from Largo, in “subject pictures” as defined in the agreement.

June 1991: Fox enters into a “Quitclaim Agreement” with Largo International, through which Fox “quitclaims to Purchaser all of Fox’s right, title and interest in and to the Motion Picture project presently entitled Watchmen, which included specifically described literary materials. Notably, the agreement provides that, “if Purchaser elects to proceed to production, the Picture shall be produced by Purchaser and shall be distributed by Fox as a Subject Picture pursuant to the terms of the Largo Agreement ...” In consideration for the rights to Watchmen, Fox was to be reimbursed for its development costs ($435,600) plus interest plus a profit participation in the worldwide net proceeds of any Watchmen picture.

Nov. 1991: The Largo Agreement was amended; Watchmen was listed as a project quitclaimed to Largo.

Nov. 1993: Larry Gordon, through Golar, withdraws from the Largo Entertainment joint venture; Largo conveys any rights it has in Watchmen to Gordon/Golar. Based on the 1991 quitclaim, the Court may infer that Gordon now stood in the shoes of Largo with respect to Watchmen and held whatever rights it acquired through the 1991 Quitclaim, which left Fox with the distribution rights it retained through that agreement.

1994: Fox negotiated a “Settlement and Release” agreement with Gordon which contemplated that the Watchmen project would be put in “perpetual turnaround” to Lawrence Gordon Productions, Inc. The “turnaround notice” gave Lawrence Gordon Productions “the perpetual right . . . to acquire all of the right, title and interest of Fox [Watchmen] pursuant to the terms and conditions herein provided.” The turnaround notice then described the formula for determining the buy-out price in the event that Gordon elected to acquire Fox’s interest. Thus, the document suggests that Gordon acquired an option to acquire Fox’s interest in Watchmen for a price. In fact, the notice obligated Gordon to pay the buy-out price on the commencement of any production of a Watchmen film. The notice also provided that the agreement was personal to Gordon and that, “prior to payment of the Buy-Out Price,” he could not assign rights or authorize any person to take any action with respect to the project.

(emphasis mine) WB now argues the full rights were quitclaimed multiple times; Fox claims they granted an option the producer failed to exercise, so the rights are still their's. A court last week denied WB's motion to dismiss. Variety summarizes:

At the heart of Fox’s suit, filed in February, is the contention that it never ceded rights to the property. And according to the federal Judge Gary Allen Feess, Fox retained distribution rights to the graphic novel penned by Alan Moore and illustrated by Dave Gibbons through a 1991 claim. Furthermore, Feess appears to agree that under a 1994 turnaround deal with producer Larry Gordon, Gordon acquired an option to acquire Fox’s remaining interest in "Watchmen," which was never exercised, thereby leaving Fox with its rights under the 1994 agreement.

Frankly, I agree with the Court's ruling (denying the motion to dismiss) but not the reasoning, which I'll get to below. For now, it's a motion to dismiss: all disputed facts and ambiguities are resolved in the plaintiff's favor and all reasonable inferences are  made in the plaintiff's favor. The meaning could be as Fox alleges, but that'll require some testimony and extrinsic evidence.

But that's not what this post is about. This post is about the remedy requested in paragraph 30 of Fox's complaint:

Fox is entitled to preliminary and permanent injunctive relief enjoining and preventing Defendants, their agents' and employees, and all persons acting in concert or participation with Defendants, from having, copying, distributing, displaying or making any other unauthorized use of The Watchmen in a manner inconsistent with Fox's rights as detailed herein.

As a practical matter, I can assure all graphic novel fans that no one wants to stop or even delay this movie. Fox doesn't want to scrap the picture, they want as big a piece as they can get, and they want the injunction for leverage. We're watching a negotiation-by-litigation.

Yet, as a legal matter, if they prevail, they can halt distribution entirely.

But, you say, recalling first year contract law, wouldn't that be a tremendous waste of money, the type of economic destruction generally discouraged by a long line of post-formalist, legal realism cases, like Jacob & Youngs v Kent, 230 NY 239; 129 NE 889 (N.Y. 1921, Cardozo, J.)(denying specific performance where home contractor used wrong brand of plumbing pipes)? Yes, but that's the choice you made through your elected representatives and the copyright laws they have enacted.

So how can the law allow Fox to sit by while WB (and their producers, directors, actors, etc) pours their sweat, tears and money into a work, just to later bring a lawsuit requesting not a cut of the profits but total destruction of the work?

It may not sit by. The doctrine of laches was created to thwart people to squat on their rights, lie in wait, and choose not to sue until it will most damage and prejudice the other party.

The doctrine of laches is a judicial escape hatch enabling courts to dismiss or limit lawsuits that, though brought within the statute of limitations, would be inequitable to permit because of the conduct of the party bringing the lawsuit. It's closely related to the doctrine of unclean hands, a similar tool courts use to deny equitable remedies to those who have behaved badly in the context of the dispute.

Since the doctrine of laches has its roots back in the English common law, the elements in all 50 states are roughly the same, so we might as well look to Pennsylvania:

Laches bars relief when the plaintiff's lack of due diligence in failing to timely institute an action results in prejudice to another. Because it is an affirmative defense, the burden of proof is on the defendant or respondent to demonstrate unreasonable delay and prejudice. See Weinberg v. State Bd. of Exam'rs. of Pub. Accountants, 509 Pa. 143, 147, 501 A.2d 239, 242 (1985). Thus, "[t]he party asserting laches as a defense must present evidence demonstrating prejudice from a lapse of time . . . [such as] that a witness has died or become unavailable, that substantiating records were lost, or that the defendant has changed [her] position in anticipation the opposing party has waived his claims." Richard, 561 Pa. at 496, 751 A.2d at 651. Furthermore, "[t]he question of laches is factual and is determined by examining the circumstances of each case." Weinberg, 509 Pa. at 148, 501 A.2d at 242 (quoting Leedom v. Thomas, 473 Pa. 193, 200-01, 373 A.2d 1329, 1332 (1977)).

Commonwealth ex rel. Corbett v. Griffin, 946 A.2d 668, 676-677 (Pa. 2008). Like most equitable doctrines, it has essentially no elements: the court finds it or it does not.

Obviously, such equitable powers apply to common law claims. Can it apply to statutory claims like copyright infringement?

In most circuits, yes. The Eleventh Circuit just grappled with that in Peter Letterese & Assocs. v. World Inst. of Scientology Enterprises et al, 2008 U.S. App. LEXIS 14496; Copy. L. Rep. (CCH) P29,589 (July 8, 2008). They unearthed a fantastic Learned Hand quote:

It must be obvious to every one familiar with equitable principles that it is inequitable for the owner of a copyright, with full notice of an intended infringement, to stand inactive while the proposed infringer spends large sums of money in its exploitation, and to intervene only when his speculation has proved a success. Delay under such circumstances allows the owner to speculate without risk with the other's money; he cannot possibly lose, and he may win.

That describes Fox's conduct precisely: they couldn't make it, so they waited for someone else to get it together then filed suit after WB tests Synder and crew out on 300, figures out a plausible script, puts together a cast and crew, films it, and makes its way through a good deal of post-production. But that was before there was an explicit 3-year federal statute of limitations for copyright claims. What now? The Eleventh Circuit sums up other responses:

In answering the question of whether the defense of laches may be interposed in a copyright infringement suit, therefore, we cannot agree with the conclusion of the Fourth Circuit, which is an unqualified "no." See Lyons P'ship, L.P. v. Morris Costumes, Inc., 243 F.3d 789, 798 (4th Cir. 2001). Prather recognized the applicability of general equitable doctrines, and like tolling, laches falls into that category. Cf. Teamsters & Employers Welfare Trust of Ill. v. Gorman Bros. Ready Mix, 283 F.3d 877, 882 (7th Cir. 2002) ("What is sauce for the goose (the plaintiff seeking to extend the statute of limitations) is sauce for the gander (the defendant seeking to contract it)."). However, we remain mindful of the Fourth Circuit's invocation of separation of powers principles which counsel against the use of "the judicially created doctrine of laches to bar a federal statutory claim that has been timely filed under an express statute of limitations." Lyons P'ship, 243 F.3d at 798. We therefore answer this question with a presumptive "no"; there is a strong presumption that a plaintiff's suit is timely if it is filed before the statute of limitations has run. Only in the most extraordinary circumstances will laches be recognized as a defense. Cf. Chirco v. Crosswinds Communities, Inc., 474 F.3d 227, 234 (6th Cir. 2007) (noting the limited applicability of laches to copyright cases in "what can best be described as unusual circumstances"); Jacobsen v. Deseret Book Co., 287 F.3d 936, 951 (10th Cir. 2002) ("Although it is possible, in rare cases, that a statute of limitations can be cut short by the doctrine of laches, we see no reason to supplant the statute of limitations in this case." (internal quotation marks and citation omitted)).

But we're not yet done:

Even where such extraordinary circumstances exist, however, laches serves as a bar only to the recovery of retrospective damages, not to prospective relief. As the former Fifth Circuit explained in a patent infringement action:

Although laches and estoppel are related concepts, there is a clear distinction between the two. The defense of laches may be invoked where the plaintiff has unreasonably and inexcusably delayed in prosecuting its rights and where that delay has resulted in material prejudice to the defendant. The effect of laches is merely to withhold damages for infringement which occurred prior to the filing of the suit.

Estoppel, on the other hand, "arises only when one has so acted as to mislead another and the one thus misled has relied upon the action of the inducing party to his prejudice." Estoppel forecloses the patentee from enforcing his patent prospectively through an injunction or through damages for continuing infringement.

Studiengesellschaft Kohle mbH v. Eastman Kodak Co., 616 F.2d 1315, 1325 (5th Cir. 1980) (internal citations omitted).

Arguably, the big damages here have yet to occur, and will occur when the film is distributed for hundreds of millions of dollars. But I still don't understand why WB didn't raise laches as an affirmative defense in their Answer to Fox's Complaint. There's a legitimate argument that the real infringement damages occured during scripting, casting, filming, and post-production, where Fox was shut out of the creative process it presumably wanted to control.

Moreover, the quitclaim agreement itself (the source of most of Fox's claimed rights) includes a clause where, if the movie is ever made, Fox is entitled to the money it initially spent (at least half a million, circa 1990) plus interest. That's serious money by now, at least enough to warrant adding one line about laches to your Answer and briefing the issue.

THE POINT (other than to learn):

There's been a lot of hoopla about this sentence in the judge's order:

It is particularly noteworthy that nothing on the face of the complaint or the documents supplied to the Court establishes that Gordon, the claimed source of Warner Brothers' interest in 'Watchmen,' ever acquired any rights in 'Watchmen.'

That's a problem, but it's not the end of the road. Let's presume Fox still legally has the rights to Watchmen. Now what? Do they get an injunction?

As the Eleventh Circuit continued,

Rather, under "well-established principles of equity, a plaintiff seeking a permanent injunction must satisfy a four-factor test before a court may grant such relief," and a court's decision to grant or deny such relief is within the exercise of its discretion.  [eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388, 391, 126 S. Ct. 1837, 1839 (2006)]

A plaintiff must demonstrate: (1) that it has suffered an irreparable injury; (2) that remedies available at law, such as monetary damages, are inadequate to compensate for that injury; (3) that, considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted; and (4) that the public interest would not be disserved by a permanent injunction.

Id.

Even if laches doesn't directly apply, and even though "irreparable injury" is presumed in copyright cases, Fox may have waived its "irreparable injury" by allowing virtually all of Watchmen to be completed (excepting some post-production) before filing suit in February 2008. Fox did exactly what Learned Hand complained about: waiting for WB to finish what Fox could not, then suing when they got wind that it was good.

They're no longer in it for protection of their creative endeavor; they're in it just for the money. That won't do. WB's goal is to show that to the judge.

But I think Fox has a bigger problem: the 1994 agreement. Under that, the last of all agreements with Fox, Gordon (the producer) has a perpetual right to exercise his option to make the film. Fox's complaint mentions the 1994 agreement but does not claim breach of it, just breach of the 1991 quitclaim, which means Gordon (now WB) can still exercise the option, buying out the rights.

And that raises yet another problem for Fox when they then try to claim their due under the 1994 option: laches, which can completely bar a contract claim, not just pre-suit damages. When did Fox first know Gordon was trying to make the movie? Recall from the Court's outline, "The notice also provided that the agreement was personal to Gordon and that, “prior to payment of the Buy-Out Price,” he could not "assign rights or authorize any person to take any action with respect to the project."

Here's a 2001 article about an attempt, long after the relevant agreements with Fox. Did Fox move to protect its rights then? Did it tell Gordon not to "authorize any person to take any action with respect to the project?" Here's a rumor:

[P]rivately, Warner Bros execs are decrying to me what they say is Fox's "opportunistic claim," noting that "Fox sat on its so-called rights for years while other studios in town developed this property. In fact, Paramount greenlit the movie for production and Fox never said a word! Fox even had an opportunity to re-acquire the project at some point and it passed on it!"

Did Fox try to "speculate without risk with the other's money?"

I'd say "we shall see," but we probably won't. Once the injunction and the option are decided, the case will likely be sufficiently narrowed to be settled easily; the spread won't be worth the risk anymore.

 

UPDATE: On December 24, 2008, District Judge Gary A. Feess issued a brief ruling holding "Fox owns a copyright interest consisting of, at the very least, the right to distribute the Watchmen motion picture," with a promise to issue a more definite ruling soon. It's hard to say what the practical effect is of such a holding (it's obviously not good news for WB); I still believe an injunction is unlikely. I'll write more when the full order comes out.

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Carolyn Elefant picks up Dan Hull discussing the tendency of lawyers to be risk-averse. She asks:

Not sure about the answer to Hull's questions, but Los Angeles-based Quinn, Emanuel, Urquhart, Oliver and Hedges is one firm that doesn't sit on the sidelines, at least as it's described in this Fast Company profile. (For more background, see The American Lawyer's 2006 profile of the firm.)  As the article reports:

Quinn Emmanuel has adopted the strategy, attitude, and accoutrements of a Red Bull-fueled startup. It focuses only on business litigation: no tax, real estate, or other common corporate practices. Even more galling to the tradition-bound large full-service firms that are its competitors, the firm takes some cases on contingency, meaning that it doesn't get paid if it doesn't win. That forces Quinn Emanuel to cast the wary eye of an investor on potential cases, in search of the ones that can strike gold, and it's unafraid to use litigation's nuclear option -- a jury trial -- to get outsize results.

So why aren't more firms adopting the Quinn Emanuel model?  Is the answer -- as Hull suggests -- that they've become too risk averse?  Or is it that the Quinn model is unique to business litigation and more traditional types of law demands traditional lawyers who are willing to remain behind the scenes?

Quinn Emanuel isn't a swashbuckling contingent-fee firm by my standards: Fast Company says "Quinn Emanuel's contingency business makes up less than 10% of total hours."

I'd call that "risk-averse." More importantly, their own website says half of their litigation work is intellectual property litigation, an area ripe for contingent fees because it combines big verdicts with extraordinary costs that can frequently exceed $1 million pre-trial.

So, primarily working in an area ripe for contingent fees, Quinn Emanuel devotes at most 20% of its time even in that area to contingent fee work.

Contingent-fee makes up >90% of my hours. It's a specialized economic proposition that requires a situation involving substantial risks, substantial costs, and the potential for substantial recovery. Take out any of those, and either the client or the lawyer won't go for it (or, if they do, they did so in ignorance).

Fact is, the vast majority of legal work fails one of those criteria, and the swings in capital inherent in the business would inevitably destroy a "contingent-fee" firm the size of the AmLaw 100 players, just like how the swings in financial markets routinely crush investors who don't hedge properly. A 200-person contingent-fee business litigation could easily find itself more than $50 million in the red during the normal course of business; it wouldn't be that hard to double or triple that amount in rough times.

Let's run a really generalized calculation, using a random equity curve simulator. Assume that the cases you win earn 3 times the cost of the cases you lose, and that you win half of the time.

Odds are, after 200 cases, you'll likely have three times the capital you started with, not including salaries, rent, taxes, or any other cost not reimbursed by the cases.

Ouch -- how long would it take to finish 200 cases? Long enough not to be eaten alive by the salaries, rent, and taxes?

Plenty of lawyers take risks, look at all the fine solo and small firms out there, just not with their money.

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Vault's annual survey has been 'updated,' at least with new numbers, if not any new rankings.

Corporate counsel has updated its annual survey of who represents the Fortune 100, and in what fields.

Shall we cross-reference Vault ranking by corporate clients?

1    Wachtell, Lipton, Rosen & Katz   

Corporate Transactions for Altria; Bank of America; Cardinal Health; Home Depot; Sears Holdings; Walgreen's;

Labor Litigation for Citigroup; Travelers;

2    Cravath, Swaine & Moore LLP

Corporate Transactions for Citigroup; IBM; JP Morgan Chase; Kraft; Pfizer;

Commercial Litigation for Alcoa;

3    Sullivan & Cromwell LLP

Corporate Transactions for Goldman Sachs; Medco Health; United Technologies; Wachovia; AT&T; AIG;

Torts / Negligence for Goldman Sachs;

IP / Patent Litigation for Morgan Stanley;

4    Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates

Corporate Transactions for AT&T; Abbott Laboratories; Alcoa; American Express; Bank of America; Citigroup; Coca-Cola; Delphi; Ford; Merrill Lynch; News Corp; PepsiCo; Travelers; Disney;

Commercial Litigation for Merrill Lynch; Washington Mutual;

Torts / Negligence for Chevron;

Employment / Labor Law for Citigroup;

IP / Patent Litigation for Morgan Stanley;

5     Davis Polk & Wardwell

Corporate Transactions for Aetna; Altria; American Express; CVS Caremark; Comcast; Hartford Financial Services; Honeywell; IBM; Kraft; Morgan Stanley;

Torts / Negligence for Altria;

Employment / Labor Law for Bank of America;

Commercial Litigation for Comcast;

IP / Patent Litigation for Comcast;

So there you go. All the cool firms represent banks in corporate transactions, notwithstanding the late labor law talk.

Probably the most intriguing chart is this one, tabulating overall mentions of firms in particular areas. Wachtell is mentioned once, at the bottom of corporate transactions. Cravath doesn't appear at all.

That says a lot about the role of prestige in legal business. Based on Vault alone, you'd think Wachtell and Cravath would have a lock on certain segments of the market, or at least would keep up contacts amongst all the largest corporations.

In fact, they both have the same mix of clients -- some blockbusters, some low-profile repeat customers, some one-time-only (e.g., Walgreen's for Wachtell) -- rolling through like the rest of us. Indeed, the most profitable company in America has most of its connections well down the "prestige" list, and Wachtell actively focuses on single-transaction representation.

There's a lot to be said on this score, in due time. For now, the key point is: these firms don't make their money and prestige off of "position" alone.

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GCs and in-house counsel are clamping down, driven by a weak economy, bringing litigation cost containment back into the spotlight (as well as general counsel peevishness).

Stewart Weltman, who wrote that second linked article, was generous enough to chime in on my post on a few suggestions for cutting costs (if you get a chance, see his blog -- inspiring stuff for lean and mean plaintiff's lawyers):

It is one thing to say the words but it is another thing to put it in practice. For instance, while unnecessary depositions are one of the biggest black holes of discovery costs, suggesting that depositions be replaced by witness statements reflects a naivety and superficiality about the actual process of preparing for trial.

Of course you try to obtain witness statements if you can, but anyone who has handled complex litigation matters knows that obtaining (1) witness statements from hostile witnesses is an impossibility, (2) witness statements from neutral witnesses can be beneficial but because most lawyer up usually provides little benefits and (3) witness statements from friendly witnesses is rarely a good tack.

All true, though in my experience there's plenty of room for fat to be trimmed from the typical business / commercial litigation deposition. I can't count how many times I've seen:

• multiple lawyers defending a deposition;
• lawyers flying out to meet with clients the day before a brief phone deposition;
• depositions of employees / corporate representatives who only know facts that could have been or already have been answered by written discovery;
• day-long depositions of witness' spouses, siblings, parents;
• depositions where I make a witness read in a handwritten text, because opposing counsel refused to stipulate anything; and,
• depositions where I make a witness read through extensive materials in order to answer questions, because opposing counsel instructed them not to review any materials, in spite of my notice of deposition.

All of those tactics can have a place, particularly if you're playing hardball. Ordinarily, they're a complete waste of everyone's time, which is a big problem if you're paying the lawyers by the hour.

It's true, I rarely get useful "signed witness statements," but I frequently get useful interrogatory answer in lieu of whole depositions. If defendants were willing to stipulate to more (and defense is usually what businesses are complaining about), they'd save a lot of time and money.

The biggest problem with that is how a good deal of "defenses" are stupid and so the "defense" is predicated on confusing the issues as much as possible, which encourages forcing the plaintiff to prove even the most basic facts. Can't help GCs there -- consider paying up.

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Rees Morrison sees the value of "Three litigation cost controls: motions, depositions, and attendees at court conferences and depositions:"

As published in Met. Corp. Counsel, Vol. 16, July 2008 at 39, the steps are (1) permit no motions to be made without your approval; ...

Among the several other cost-control measures they advocate is to try to get signed witness statements. Those statements are “easier, better, more effective and often achieved at a fraction of the cost” of a deposition. According to them, “Only truly material witnesses should be deposed.”

As a third method to pare litigation costs, “Rarely is there a need for more than one attorney to be present at court conferences or depositions.” ...

All good ideas. As a plaintiffs' attorney, who is rarely paid by the hour (and thus for whom time is money), I can tell you that we watch our budgets by not filing too many motions, by trying to have written discovery answer the basics, and by generally using one attorney.

That said, my goals are not just the opposite of defense counsel's but are substantially different in character. I'm trying to build a coherent trial record and case theory that supports my claims and smokes out potential problems. Defense counsel, in contrast, is either trying to poke holes in my theories or is trying to drive me into the ground (or both).

The former can be done on a lean budget; the latter is a bit harder. Note: the latter works far, far, far less frequently than defense lawyers and defendants believe it will. You can bet that, if I took a case, I already judged it as having some inherent strength, which means you likely can't bury it even if I screw it up.

My biggest recommendation would be for general counsel / in-house counsel and their litigators to sit down, early in a case, and figure out their goals. That does not mean choosing between "giving in" and "fighting it." "Fight it" means diddley-squat in litigation, yet I hear that all the time; of course it can be "fought."

The questions are much more complicated than that; if your litigator can't explain why it's more complicated, then you should start demanding they explain how they're looking out for your strategic interests and not just churning the hours.

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The Financial Accounting Standards Board ("FASB") has proposed a rule whereby companies are to disclose to their investors the estimated costs of litigation.

Unsurprisingly, the Wall Street Journal objects to anything increasing transparency in our "free" market, raising two contradictory arguments:

Under the proposed change, a company facing a lawsuit would have to list on its financial statement its best-guess estimate of what that litigation could end up costing -- not just in attorney fees, but in any potential payout. For a company in high-stakes litigation, that means showing its hand to plaintiffs' attorneys, allowing them to gauge management's upper estimate of what the case is worth.

The effect will be to force corporate defendants to fight lawsuits with one hand tied behind their backs -- assuming the company can even figure the "fair value" of a lawsuit it has no idea if it will win or lose. Predicting the trajectory of complex, often multiyear litigation is inherently unscientific. As we saw with Merck and Vioxx, a company's stock price can jump or fall depending on jury verdicts whose results are impossible to predict.

So... the numbers are considered to be "inherently unscientific," just a guess at something "impossible to predict," and yet they will be interpreted by plaintiffs' attorneys as a precise "upper estimate of what the case is worth."

Look: I know how much a case might be worth. I even know what numbers you should, if you've got any brains, consider a possibility. If you tell your investors the same range of liability that everyone from the bailiff to the court reporter has already figured out, that won't change my settlement position one bit.

Before I took the case, I thought long and hard about the likelihood of winning and the size of damages. As more evidence comes in, I think about both again and again. Contrary to popular defense lawyer / defendant belief, telling me that my case is worthless will not dissuade me, it will encourage me, since I will interpret it as bluffing, a sign of fear and weakness, or baffonery, a failure to evaluate and to defend adequately.

Putting a public number on the case -- a number everyone recognizes is at best an approximation of a worst-case scenario you're working to avoid -- will only reveal to me that you're paying a sliver of attention.

I would write more, except that, seeing the source of this critique to be the editorial page of the Wall Street Journal, I expected it to be misleading and/or poorly researched. I was not let down. Reading the actual proposed FASB guideline  reveals this language:

For certain contingencies, such as pending or threatened litigation, disclosure of
certain information about the contingency may be prejudicial to an entity’s position (that
is, disclosure of the information could affect, to the entity’s detriment, the outcome of the
contingency itself). In those circumstances, an entity may aggregate the disclosures
required by paragraph 7 at a level higher than by the nature of the contingency such that
disclosure of the information is not prejudicial. In those rare instances in which the
disclosure of the information required by paragraph 7, when aggregated at a level higher
than by the nature of the contingency, or of the tabular reconciliation would be prejudicial
(for example, if an entity is involved in only one legal dispute), the entity may forgo
disclosing only the information that would be prejudicial to the entity’s position. In those
circumstances, an entity shall disclose the fact that, and the reason why, the information
has not been disclosed. In no circumstance may an entity forgo disclosing the amount of
the claim or assessment against the entity (or, if there is no claim amount, an estimate of
the entity’s maximum exposure to loss); providing a description of the loss contingency,
including how it arose, its legal or contractual basis, its current status, and the anticipated
timing of its resolution; and providing a description of the factors that are likely to affect
the ultimate outcome of the contingency along with the potential impact on the outcome.

I guess that takes care of everything they're worried about. The only thing a company can't do under these guidelines is intentionally or negligently fail to inform investors of a potential source of substantial liability. Is that really so hard? What are "senior litigators from 13 companies, including Pfizer, General Electric, DuPont, Boeing and McDonald's" so afraid of? What have they been hiding from investors all this time?

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What on earth were they doing?

 Following negotiations, on November 12, 2002, the parties entered into a settlement and release agreement (release agreement) ...

On November 8, 2004, [ESI] filed a praecipe for Writ of Summons. [ESI] thereafter filed a five count complaint on April 7, 2005. In their complaint, [ESI] asserted that the release agreement was invalid because [LSI] induced them to sign it by means of fraudulent misrepresentations. On May 1, 2006, by the consent of [ESI], the trial court issued an order discontinuing counts III, IV and V of their complaint. Accordingly, only counts I and II of [ESI's] complaint proceeded to resolution on summary judgment. ...

On August 7, 2006, the trial court granted LSI's motion for summary judgment and this Court affirmed that decision on October 1, 2007. ...

On October 18, 2006, counsel for ESI sent a letter to the American Arbitration Association (AAA), indicating that the CA entered into by the parties and two amendments to the CA provide for arbitration and that having received no response to its September 12, 2006 letter to counsel for LSI, ESI was "now request[ing] that the American Arbitration Association initiate the process through which an arbitrator will be appointed for the claim initiated by [ESI]." ...

By letter, dated October 30, 2006, ESI's counsel informed the AAA that its October 18th letter was not a formal demand for arbitration, but rather was a request for advice "as to how to proceed" and that if a case number had been assigned it should be voided. Thereafter, the AAA closed the matter, but on November 21, 2006, ESI again corresponded with the AAA and formally demanded that arbitration be initiated against LSI.  ...

LSI responded to ESI's November 21, 2006 letter, again asserting that the claim ESI was attempting to submit to arbitration was the same as the claim that ESI agreed to withdraw with prejudice during the pre-trial conciliation before Judge Scanlon and as memorialized by the May 1, 2006 court order. ...

Receiving no response to its December 1, 2006 letter, LSI filed a complaint on December 14, 2006, seeking "a declaratory judgment that [ESI] cannot re-litigate in arbitration a claim that was previously dismissed with prejudice…."

LSI Title Agency, Inc. v. Evaluation Servs., 2008 PA Super 126.

Big surprise: ESI lost. They can't arbitrate the same claims they permitted to be dismissed "with prejudice." (As an aside: they tried to get a new claim in by saying they were arbitrating "breach of the duty of good faith and fair dealing," which, the court reminded, is not an independent claim outside of breach of contract.)

It's simple: arbitration is not a parallel universe, where collateral litigation is but a passing fancy. If you submit your claim to one or the other, then that's that (like here). There are limited ways to preserve the options initially, but, once you go through the gauntlet, they're not going to let you try it again on the other side.

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Defendant here did a splendid job of waiving its rights and annoying Judge Pollak:

Second, defendant, in a footnote, suggests that this matter should be referred for arbitration in accordance with the grievance procedures outlined in the CBA. See Pl.'s Ex. 4, at § 1.05-09. Defendant's presentation of this argument is, to say the least, underwhelming. Whether a dispute is subject to mandatory arbitration is a question of too much consequence to be relegated to a one-sentence footnote in an opposition to a motion for summary judgment. Section 3 of the Federal Arbitration Act is instructive:

 If any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration under an agreement in writing for such arbitration, the court in which such suit is pending, upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration under such an agreement, shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the  terms of the agreement, providing the applicant for the stay is not in default in proceeding with such arbitration.

9 U.S.C. § 3 (emphasis added). Parties desiring an order compelling arbitration must make application to the court for such an order. The manner of this application should, in accordance with Rule 7(b) of the Federal Rules of Civil Procedure, be a formal motion. Such a motion should, in accordance with Local Rule 7.1(c), be accompanied by a memorandum explaining the grounds for the party's request. Here, rather than following these basic rules for requesting action from a federal district court, defendant has styled its request for relief as an alternative argument (that is, alternative to its main argument, which appears in the text of its opposition papers, that summary judgment is inappropriate on the merits) and tucked it into a footnote.

The court will deny defendant's alternative request for arbitration for three reasons.

First, the request is not made in the form of a motion, as Rule 7(b) requires, nor it is briefed, as Local Rule 7.1(c) requires. Few rules of civil procedure are as easy to follow as Rule 7(b) and Local Rule 7.1(c). All these rules require is a formal  [*21] motion and a statement of grounds. If defendant cannot be bothered to submit a formal motion and a statement of grounds, then it cannot be serious about the relief it purports to desire. Moreover, the court could not easily rule on defendant's request, as the court has not been provided a complete copy of the arbitration portion of the CBA. The copy submitted by plaintiffs does not include anything following the third line of § 1.09, which makes sense given that this section has nothing to do with plaintiffs' argument. Defendant, however, has not submitted a complete copy to accompany its footnote request, nor has it made any argument as to how the grievance procedure works or how it applies. Without providing a complete copy of the arbitration agreement and some explanation of why defendant believes it applies here, the court cannot find that defendant has adequately demonstrated that this dispute is subject to arbitration.

Second, defendant has waived any right to arbitration by not raising the issue in motions practice before now. Although waiver by delay is not favored, the Third Circuit has held that the right to arbitration is waived when defendant's delay causes prejudice. Hoxworth v. Blinder, Robinson & Co., 980 F.2d at 912, 926-27 (3d Cir. 1992). Here, defendant has, without a peep, submitted to full discovery in this matter. Discovery is now complete, and the case, having been pending for more than a year, is ready for disposition, either by summary judgment or by trial. Plaintiffs have doubtless spent substantial time, effort, and expense in getting this case ready for summary judgment practice and trial. The sheer number of exhibits and depositions submitted attests to plaintiffs' efforts, which, particularly considering that this is not a high-dollar-value case, are significant. Moreover, the arbitration procedure outlined in those portions of the CBA available to the court do not appear to contemplate discovery. Thus, having accepted the benefit of discovery from plaintiffs, and having put plaintiffs to the expense of discovery, defendant should not now be allowed to stay these proceedings and access an arbitral forum. See id. at 926. The court acknowledges that it appears that defendant raised the issue of arbitration in its answer, and that there has not been, before now, any other substantial formal motions practice 6 (aside from the motions practice associated with vacating defendant's default), id. at 927; nevertheless,  the court believes that, for the reasons just discussed, submitting this case to arbitration at this late stage would cause plaintiff prejudice, and should not be allowed.

Third, defendant's alternative request for an order compelling arbitration bears a striking resemblance to forum shopping. The thrust of its opposition to plaintiff's motion for summary judgment is that this court should deny plaintiff's motion on the merits. But, just in case the court disagrees, it attempts to preserve an argument for arbitration in a footnote. This form of argument is not attractive, nor is it persuasive.

Ibew Local Union No. 380 Health & Welfare Fund v. Travis Electric, Inc., 2008 U.S. Dist. LEXIS 58037 (E.D. Pa. July 31, 2008)(emphasis added).

What were they thinking? The only good explanation I can think of is that the defendant didn't actually want to arbitrate, and decided such long ago, yet tucked in the remark as some form of collateral persuasion, where you toss in barely-relevant arguments in the hopes that it will, by sheer inertia, carry your other arguments further.

Otherwise, someone dropped the ball, or perhaps never even picked up the ball since they were so busy churning the billable hours on the litigation...

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So sayeth 3si Sec. Sys. v. Protek, 2008 U.S. Dist. LEXIS 56283 (E.D. Pa. July 23, 2008), more routine commercial litigation:

The gist of the action doctrine "precludes plaintiffs from re-casting ordinary breach of contract claims into tort claims." eToll, Inc. v. Elias/Savion Adver., 811 A.2d 10, 14 (Pa. Super. Ct. 2002) citing Bash v. Bell Tel. Co., 601 A.2d 825, 829 (Pa. Super. Ct. 1992). The difference between a cause of action for tort and breach of contract is that "tort actions lie for breaches of duties imposed by law as a matter of social policy, while contract actions lie only for breaches of duties imposed by mutual consensus agreements between particular individuals." Bash, 601 A.2d at 829. A breach of contract may give rise to a tort claim only when defendant's wrongful conduct is the gist of the action, and the contract is collateral. Pittsburgh Constr. Co. v. Griffith, 834 A.2d 572, 582 (Pa. Super. Ct. 2003) citing Bash, 601 A.2d at 829)

To successfully prove a negligence claim a plaintiff must demonstrate the following elements: (1) a duty of care was owed by defendant; (2) defendant breached this duty; and (3) the breach resulted in injury. McCandless v. Edwards, 908 A.2d 900, 904 (Pa. Super. Ct. 2006) (citations omitted). Because Defendant's obligation to provide Plaintiff with FlexPac batteries arose from the contract and not from a general duty of care, Plaintiff's negligence claim should be barred by the gist of the action doctrine.

In Factory Market v. Schuller Intl, defendant guaranteed plaintiff it would install a watertight roof. 987 F. Supp. 387, 388 (E.D. Pa. Jan. 9, 1997). Defendant promised to pay for any repairs needed to maintain the roof in a watertight condition. Id. at 389. From the onset "the roof was plagued with leaking problems," which defendant attempted to fix on a number of occasions. Id. Upon various unsuccessful  attempts by defendant to repair the roof, plaintiff brought suit against defendant alleging breach of contract, negligence, and fraud. Id. at 391. The court held that plaintiff's negligence claim sounded more in contract than in tort. Id. at 394. Plaintiff merely alleged that defendant's repairs were negligently performed, and as a result the roof was not watertight despite defendant's guarantee. Id. at 394-95. The court ruled that defendant did not owe plaintiff a duty of care; rather defendant's obligation to repair the faulty roof was imposed by way of the contract, and without the contract plaintiff "simply would not have [had] a claim." Id. at 395. Therefore, the court barred plaintiff's negligence claim. Id.

(emphasis added).

Without fail, defendants raise the "gist of the action" doctrine in every single breach of contract case that also includes other claims. It doesn't matter if the other claim is unjust enrichment, tortious interference, fraud, defamation, professional malpractice, or any other entirely appropriate claim that can rest alongside a breach of contract. If there's a contract, and there's another claim, the preliminary objections / 12(b)(6) are inevitable.

And it's usually wrong.

The doctrine is simple: the "gist of the action" doctrine precludes negligence claims where, under the facts alleged, the defendant has no duty to the plaintiff except for those created by contract. The "gist" is contractual -- there are no duties between the parties except for those created by the contract.

A reminder: everyone has a duty not to defraud others. Everyone has a duty not to tortious interfere in others' business. Everyone has a duty not to defame others. If someone defrauded you, that's wrong; you don't need to first have a signed and sealed Agreement Not To Defraud Me.

Ergo, there's really only one instance in which, at the complaint stage, the "gist of the action" doctrine applies: where a complaint alleges breach of contract and negligence based solely upon that contract. That a plaintiff cannot do.

Fraud and breach of contract? That's fine -- indeed, they're usually entirely appropriate forms of alternative relief which a plaintiff should allege if they have the factual basis.

But if you're alleging negligence, there must be an independent duty outside from the contract itself.

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In response to shareholder upheaval, billions in losses, and a 60% fall in stock price, CitiGroup completely revamps its Board of Directors:

Board member John Deutch, who previously held no chairmanships, has been named to lead the audit and risk committee, Citigroup said in a July 22 press release. Richard Parsons, former chair of the compensation committee, will head the nomination committee, while former nomination panel chair Alain Belda will lead the compensation committee.

Whoa, there, slow down. That's a lot of change for just a year of failure.

Thank goodness they'll wait another year or two and see how it goes before rocking the boat again.

That's why "I still believe there will be a continuing move to private equity, [with] a corresponding rise in intra-company commercial litigation and arbitration there, as I wrote before."

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A reminder courtesy of the Pennsylvania Superior Court:

Initially, we must address the Seller's position that since Buyer appealed from the order denying post-trial motions rather than the pretrial ruling limiting his claim for consequential damages, we "lack jurisdiction" to "hear his complaints about the pretrial ruling." Brief of Appellee and Cross-Appellant Michael Bupp at 24, 26. The law is to the contrary.

The pretrial order in question was an interlocutory order because it merely limited the damages recoverable in this action and did not resolve all issues as to all parties or otherwise terminate the litigation. See Pa.R.A.P. 341(b). The final order in this action was the one that disposed of post-trial motions, which resolved all outstanding claims as to the two parties and from which Buyer filed his timely appeal. It is established that a notice of appeal filed from the entry of the final order in an action draws into question the propriety of any prior non-final orders. K.H. v. J.R., 573 Pa. 481, 826 A.2d 863 (Pa. 2003). As we recently stated:

[I]nterlocutory orders that are not subject to immediate appeal as of right may be reviewed in a subsequent timely appeal of a final appealable order or judgment. Stephens v. Messick, 2002 PA Super 117, 799 A.2d 793, 798 (Pa.Super. 2002); see also Bird Hill Farms, Inc. v. United States Cargo & Courier Service, Inc., 2004 PA Super 66, 845 A.2d 900, 903 (Pa.Super. 2004) (stating that "[o]nce an appeal is filed from a final order, all prior interlocutory orders are subject to review"). Accordingly, interlocutory orders . . . become reviewable on appeal upon the trial court's entry of a final order[.]

Basile v. H & R Block, Inc., 2007 PA Super 159, 926 A.2d 493, 498 (Pa.Super. 2007).

Seller also suggests that Buyer did not "otherwise" preserve his issues for appellate review. Brief of Appellee and Cross-Appellant Michael Bupp at 24. Again, we disagree. Buyer raised the propriety of the order limiting his consequential damages in his post-trial motions, which are devoted entirely to this question. The ruling also was contested pretrial. Thus, we cannot ascertain the basis upon which Buyer urges a finding of waiver.

Quinn v. Bupp, 2008 PA Super 161 * 13 (emphasis added).

Of course, don't throw the book at the appellate court. See Kanter v. Epstein, 2004 PA Super 470 (by overwhelming the court with issues, "[Defendants] frustrat[ed] this Court's ability to engage in a meaningful and effective appellate review process"). But make sure all the important court orders, not just the post-trial ones, are addressed.

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The Recorder digs up this lawsuit by McAfee against WilmerHale for "fraud, theft, negligence and breach of fiduciary duty" for billing $12 million to defend their Chief Financial Officer in his accounting fraud case (he was convicted).

Here's the claim:

"[WilmerHale] intentionally overworked and churned the representation of Goyal; shamelessly employing over 100 WilmerHale timekeepers in the feeding frenzy," McAfee alleged in a complaint filed in the Eastern District of Texas earlier this year. "Defendant's bills reflect at least 16 partners, 34 associate attorneys, 10 legal assistants and 49 staff personnel -- how else could they amass this enormous trove of cash?" the complaint read.

...

Martin Rose, the Dallas lawyer representing McAfee in the fee dispute, alleges in his latest complaint that WilmerHale, which brought in East Coast lawyers to represent Goyal in a San Francisco trial, charged almost $200,000 in expenses for luxury hotel rooms, limousines and charges for room service and bar tabs. The software company described WilmerHale as "unrepentant in its greed."

And the response:

Paul Yetter, the Houston lawyer representing WilmerHale in the fee dispute, said by e-mail Monday that "over 80 percent of the defense work was done by two lead WilmerHale partners and a handful of associates. The bulk of other timekeepers were needed for review of 1.2 million documents in the case."

He stated that the fees were in line with similar cases, including the backdating trial of Brocade Communications CEO Gregory Reyes.

Yetter, of Yetter, Warden & Coleman, also provided a statement from WilmerHale that said its fees "reflect legal services that were necessary and reasonable in a lengthy and complex matter encompassing five separate cases, particularly one in which Mr. Goyal's very liberty is at stake. Indeed, the California judge commended the firm's efforts as 'extremely well-tried.'"

Initially, the above truly is "in line with similar cases." The pro bono defense of former Illinois Governor George Ryan was estimated to have been worth $10 million in fees, with another $10 million in lost business. 

More importantly, what, exactly, did McAfee expect from WilmerHale? Did they come to WilmerHale and say, "now, we know that, on average, your lawyers bring in over $900,000 in revenue every year, but we're hoping you can run this white collar case the way a small firm would, with, you know, a big emphasis on productivity and perhaps outsourcing review of the bulk of the 1.2 million documents to law students and paralegals?"

Or did they pass over dozens of former judges, former prosecutors, experienced trial lawyers, and leaders of the bar in solo, small and mid-sized firms to run to a gigantic corporate empire begging they spare no expense, leave no stone unturned, and dedicate their most expensive partners and associates to the case full time?

I have my suspicions. Maybe this can be a lesson to general counsels everywhere: if you demand big, you'll be billed big.

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The normal rule is that a party cannot get an injunction without demonstrating "irreparable harm," and that monetary harm is not "irreparable." Plaintiffs always try to get around this limitation by coming up with novel ways that the particular harm is "irreparable." In Bennington Foods LLC v. St. Croix Renaissance Group, LLP, 528 F.3d 176 (3d Cir. 2008), plaintiff claimed the damage to business goodwill was "irreparable," won in the District Court, then lost at the Court of Appeals:

The District Court found that failing to issue a mandatory injunction would cause irreparable harm to Bennington. Specifically, it found that failure to issue the injunction would harm Bennington's reputation for being able to deliver scrap metal on time. How ever, a plaintiff in a breach of contract case cannot convert monetary harm into irreparable harm simply by claiming that the breach of contract has prevented it from performing contracts with others and that this subsequent failure to perform will harm the plaintiff's reputation. ...

The inability to gain possession of the scrap metal at issue here creates at most a monetary loss. In the event that subsequent failure to deliver scrap metal to others might create a cognizable risk of irreparable harm to the plaintiff's reputation, Bennington has not demonstrated, except by Bennington's president's personal assertions, that the scrap metal business is different from other types of commerce in such a way that normal breach of contract remedies could not provide a remedy. Nor has Bennington identified any contracts to resell the scrap metal which it has been unable to perform, any third parties with whom it has suffered a loss of reputation, or any attempts—futile or otherwise—it has made to fulfill contracts to deliver scrap metal by obtaining it from other sources.

The Third Circuit goes on to note that damage to ordinary business goodwill is different from continuing trademark infringement (Pappan Enterprises, Inc. v. Hardee's Food Systems, Inc., 143 F.3d 800 (3d Cir. 1998)) and a suspension from horse racing for suspected cheating (Fitzgerald v. Mountain Laurel Racing, Inc., 607 F.2d 589 (3d Cir. 1979)), both of which cause "irreparable" harm.

They then note an apparent split with the Fourth Circuit:

Bennington, however, cites to Blackwelder Furniture co. of Statesville, Inc. v. Seilig Manufacturing Co., Inc., 550 F.2d 189, 197 (4th Cir. 1977), a case in which the trial court denied a preliminary injunction. The Fourth Circuit Court of Appeals reversed, holding that the district court's finding of no irreparable harm was clearly erroneous. Id. at 196. In so concluding, the court stated that

The harm posed to Blackwelder's general goodwill by its inability to fill outstanding and accumulating orders in excess of $ 15,000 for furniture listed in its catalogues is incalculable not incalculably great or small, just incalculable.

Id. at 197.

We are not bound by the holding in Blackwelder and we question whether irreparable harm was sufficiently demonstrated there. In addition, we note that Blackwelder has been distinguished from other preliminary injunction cases on the basis that Blackwelder “involved a manufacturer's refusal to supply its entire product line to a particular retailer, treatment which discriminated against that particular dealer.” ... As we mention above, there is nothing in the record before us to demonstrate that Bennington was unable to fulfill any contracts, was unable to find other sources of scrap metal when the Virgin Islands scrap metal could not be shipped, or lost reputation with any specific customers.

I boldfaced those two parts to show that the apparent against showing irreparable harm through secondary harm to business goodwill isn't really the problem, the problem is a failure to produce evidence.

But there's a chicken and egg problem -- in determining an injunction, factual questions are left to the discretion of the district court judge, who here had evidence of the damage to goodwill: the testimony by Bennington's president. So, really, the problem wasn't a failure to produce any evidence, but a failure to produce sufficient evidence.

I suppose, then, that the rule here recognizes business goodwill as capable of "irreparable harm," it just requires a showing of unfulfilled contracts, inability to find other providers, and/or harm to specific customers.

Good to know.

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If you are bringing a shareholder derivative suit, always make a demand:

The Complaint in this shareholder derivative action was filed on May 6, 2008, along with a motion for a temporary restraining order and preliminary injunction.  [*4] The Complaint asserts claims for breach of fiduciary duty, abuse of control, corporate waste, unjust enrichment and gross mismanagement, alleging that the Defendants, consisting of the entire Alcoa Board of Directors as well as certain senior executives and agents, breached their fiduciary duties to Alcoa  by participating in and/or failing to prevent the misconduct alleged in the Alba Action. All of the claims are derivative in nature. In connection with its action, Plaintiff also sought a TRO and preliminary injunction enjoining any Alcoa Directors or officers identified as subjects or targets of the DOJ investigation from participating in Board decisions relating to Alcoa's response to the investigation and any criminal charges ensuing therefrom.

Serious stuff! Oops:

The vast majority of Plaintiff's opposition to the motion to dismiss discusses allegations as to whether Alcoa's Board, the Special Committee appointed by the Board, and its counsel, are sufficiently independent to properly evaluate a demand. (See Pl. Opp. Br. at 10-19.) In the context of Defendants' motion to dismiss for failure to make a pre-suit demand, this discussion is wholly irrelevant. I reiterate: had Plaintiff made a demand on the Board back in late March or April, it may now have been in a position to raise these arguments. However, having chosen not to make a demand, Plaintiff must lie in the bed that it has made.

Note also the heavy reliance on the ALI Principles, which I noted earlier:

In furtherance of these principles, and to assist trial courts in their application, the Pennsylvania Supreme Court adopted certain provisions of 2 ALI, Principles of Corporate Governance: Analysis and Recommendations (1994), specifically sections 7.02 (standing), 7.03 (the demand requirement), 7.04 (procedure in derivative action), 7.05 (board authority in derivative action), 7.06 (judicial stay of derivative action), 7.07, 7.08, and 7.09 (dismissal of derivative actions), 7.10 (standard of judicial review), and 7.13 (judicial  [*15] procedures).

Hawaii Structural Ironworkers Pension Trust Fund, Derivatively on Behalf of Alcoa, Inc. vs. Alain J.P. Belda, et al., 2008 U.S. Dist. LEXIS 52888 (July 9, 2008).

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There's a lot of chatter (at Election Law Blog and Concurring Opinions) about this footnote in Exxon v. Baker (by Souter, writing for the Court):

The Court is aware of a body of literature running parallel to anecdotal reports, examining the predictability of punitive awards by conducting numerous “mock juries,” where different “jurors” are confronted with the same hypothetical case. See, e.g., C. Sunstein, R. Hastie, J. Payne, D. Schkade, W. Viscusi, Punitive Damages: How Juries Decide (2002); Schkade, Sunstein, & Kahneman, Deliberating About Dollars: The Severity Shift, 100 Colum. L. Rev. 1139 (2000); Hastie, Schkade, & Payne, Juror Judgments in Civil Cases: Effects of Plaintiff’s Requests and Plaintiff’s Identity on Punitive Damage Awards, 23 Law & Hum. Behav. 445 (1999); Sunstein, Kahneman, & Schkade, Assessing Punitive Damages (with Notes on Cognition and Valuation in Law), 107 Yale L. J. 2071 (1998). Because this research was funded in part by Exxon, we decline to rely on it.

(emphasis supplied by ELB and CO). What's interesting, too, is that they tagged Columbia Law Review, Yale Law Journal, and Law & Human Behavior as well.

I'm with Hoffman at CO on it -- the Court isn't laying down a rule excluding litigant-funded research, they're just declining to consider there, and offering a rebuke to academics who taint their own work by accepting funding from parties with multi-billion-dollar interests in their outcome.

Moreover, it bears note that the record here included nothing about the predictability of punitive damages awards -- it's a case about an oil tanker spill -- all of that information came in through judicial notice. So let's review Federal Rule of Evidence 201:

Rule 201. Judicial Notice of Adjudicative Facts

(a) Scope of rule.

This rule governs only judicial notice of adjudicative facts.

(b) Kinds of facts.

A judicially noticed fact must be one not subject to reasonable dispute in that it is either (1) generally known within the territorial jurisdiction of the trial court or (2) capable of accurate and ready determination by resort to sources whose accuracy cannot reasonably be questioned.

(c) When discretionary.

A court may take judicial notice, whether requested or not.

(d) When mandatory.

A court shall take judicial notice if requested by a party and supplied with the necessary information.

(e) Opportunity to be heard.

A party is entitled upon timely request to an opportunity to be heard as to the propriety of taking judicial notice and the tenor of the matter noticed. In the absence of prior notification, the request may be made after judicial notice has been taken.

(f) Time of taking notice.

Judicial notice may be taken at any stage of the proceeding.

(g) Instructing jury.

In a civil action or proceeding, the court shall instruct the jury to accept as conclusive any fact judicially noticed. In a criminal case, the court shall instruct the jury that it may, but is not required to, accept as conclusive any fact judicially noticed.

First, the "fact" here is obviously open to reasonable dispute. Second, the source of the information obviously opens up questions about its accuracy.

Finally, the Court was declining to exercise judicial notice of that research, a decision that, even when done at the trial level, stands essentially unreviewable. If a trial court wants to make you prove the sun rises in the east and sets in the west, that's its prerogative. If the fact is so obvious, you should be able to prove it easily.

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Bruce MacEwen, great as ever, on assessing the quality of legal representation in the general counsel / big firm context:

On a 1 to 5 score, from unacceptable through mediocre, good, and very good to excellent, the criteria [for evaluating all lawyers a company uses] are:

• Understood client's goals
• Expertise
• Efficiency
• Responsiveness
• Predictive accuracy (about budget and results); and
• Effectiveness.

Then there is the uber-question:  "Would you recommend that we use this attorney/firm for similar work in the future?"

Really, what more do you need to know to assess performance? Any more 'detail' would be an illusion -- legal representation is too complicated for more precision.

There's nothing limiting this approach to corporation / business legal representation. Use it in a personal injury practice. You can assess your own expertise, among others, and your effectiveness. Then, after a while, look at the data itself, not just your recollection that you've done well on, say, corporate negligence claims.

The beauty of self-assessments, usually real data, is that they never fail to reveal something surprising. Perhaps a particular type of case or a particular client makes you far less efficient -- what would happen if you stopping taking those cases and focused on your strengths?

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Fortune Legal Pad on the French eBay injunction:

On June 30, the Commercial Court of Paris granted a sweeping injunction sought by LVMH Moët Hennessy Louis Vuitton (LVMUY) that would not only require eBay to block all sales of counterfeit Louis Vuitton Malletier and Christian Dior Couture products on its site — a feat eBay has claimed is not technologically feasible — but  also to block all sales of genuine LVMH perfumes being sold there by unauthorized distributors.

The latter prohibition would effectively force eBay to block all sales of the specified perfumes — Christian Dior, Guerlain, Givenchy, and Kenzo — since no licensed LVMH distributor is authorized to sell over eBay. The practice of selling genuine products through unauthorized channels — sometimes called gray marketeering — is generally lawful in the United States because it is thought to benefit the consumer.

The commercial court also ordered eBay to pay various LVMH units $60.8 million in damages for past counterfeit or unauthorized sales. The key issues presented by the decision (available here in French) are well summarized in this New York Times article. (eBay’s official statement about the ruling is here; LVMH’s is here.)

The day the commercial court ruled, eBay asked the French Court of Appeals to stay the injunctive portion of it while it appealed the rest of the lower court’s ruling. Without the stay, the injunction — enforceable by daily fines of 50,000 euros (about $80,000) — takes effect as soon as copies of the decision have been formally delivered to eBay’s headquarters in San Jose, California, and its international subsidiary in Berne, Switzerland. (It’s unclear if that has happened yet.) LVMH has agreed to postpone enforcement, however, until the Court of Appeals rules on the stay application, according to an eBay spokesperson. That court told the lawyers today that it would rule Friday.

It's quite a fascinating case, particularly as it touches upon appealability in the European system, the distinction of internet service providers being merely a "host" versus a "broker," and Louis Vuittion's (I think outrageous) attempts to halt re-sale of their products.

My focus, however, is on how powerful the remedy here is -- the fine is huge and the equitable remedy requires eBay do something they claim they can't.

In normal commercial litigation, it is very rare for a court to order a losing defendant change their practices in a way that could potentially destroy the business. Normally, the defendant pays compensation for what they have done wrong and goes about their business again; indeed, in Pennsylvania and the general rule is that punitive damages are not available in breach of contract cases.

Such restraint vanishes in the realms of copyright and patent (particularly patent), where the very idea appears to be strong deterrence against either the defendant or anyone else behaving like that ever again.

The end result is, liking securities litigation, few copyright or patent claims actually reach a resolution on the merits, because the stakes are simply too high, and lawyers tend to believe that such cases are so complicated that there's a high likelihood jurors, judges or arbitrators will become confused even in a slam-dunk case, resulting in uncertainty about the outcome. (See this legal malpractice case arising from a large, complex commercial dispute where "The company claims Linklaters advised it that its case had a 70 percent chance of success if it were to go to arbitration, but at a later date reduced that to 50 percent. It says that, based on Linklaters' advice, it turned down three settlement offers.")

The initial application of bad for business lawyers is obvious, and, indeed, in most business lawyers will recommend their client cease and desist the moment there's any copyright or patent claim that isn't clearly frivolous.

But I think there is another lesson learned here. Big cases settle. Notice how eBay and LVMH are still trying to figure it out.

Except sometimes they don't. How about: big cases should settle; where the law forces the case to be big, it usually settles.

So how can we, as litigators and trial lawyers, make clear to the other side that our case is really big? I'll address that more in latter posts.

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The Unincorporated Business Law Prof Blog says:

Prof. Larry Ribstein has posted Reforming Limited Liability Company Fiduciary Litigation on SSRN.  He presented this paper at last week's LLCs at 20 symposium at Suffolk.  Here's the abstract:

Derivative suits are designed for publicly held corporations. In limited liability companies, the remedy creates significant costs and complications. These costs are unnecessary because more appropriate remedies member-authorized and direct suits are available. The application of the derivative remedy to LLCs is an example of lawmakers applying rules across business entities without adequately thinking through which rules belong in a coherent business association statute.

I'm not sure that I agree.  If nothing else, minority-member lawsuits are likely to get labeled at "entity" lawsuits, rather than direct, individual lawsuits.

(Note: Pennsylvania law (15 Pa.C.S. § 8992) permits derivative actions in limited liability companies.)

There are plenty of issues in an LLC that cannot be addressed appropriately by direct action. More importantly, retaining derivative actions answers two questions that have frustrated and confused a number of lawyers and judges: do individual members of an LLC have standing to sue when the majority of LLC members engage in tortious or intentional conduct, and, if so, what remedies are available?

Answering that question by reference only to contract law is usually impossible, because the vast majority of the LLC operating agreement have no provision for what should happen in the event of a breach, they just generally affirm the principle of majority rule. Viewed literally, most LLC operating agreements permit, by silence, the majority members to frustrate the reasonable expectations of the minority members and freeze them out of the business.

Courts are supposed to avoid absurd and unjust results, and most will not allow an operating agreement to cheat a minority member merely because of the absence of a "don't cheat" provision.

How do courts do then? There are a variety of options, including the common law proposition that "bad faith conduct" constitutes a breach of contract, regardless of whether the conduct specifically breaches the text of the agreement. But each one of those options relies heavily on discretion, resulting in inconsistent outcomes across similar cases before different judges.

I think the bigger question is: what's the harm of allowing a derivative action? A lawsuit is a lawsuit, and I fail to see how a derivative lawsuit in an LLC will result in any more discovery, costs, or anything else. In the context of an LLC, it's largely a different style of pleading.

Indeed, even if there is a harm, the American Law Institute’s Principles of Corporate Governance (2-7 § 7.01) says, in the case of a closely held corporation, the court in its discretion may treat an action raising derivative claims as a direct action, exempt it from those restrictions and defenses applicable only to derivative actions, and order an individual recovery, if it finds that to do so will not (i) unfairly expose the corporation or the defendants to a multiplicity of actions, (ii) materially prejudice the interests of creditors of the corporation, or (iii) interfere with a fair distribution of the recovery among all interested persons.

That, in essence, can make all derivative actions direct if the court is so inclined, creating an escape hatch for situations in which derivative actions are inappropriate. No corollary exception exists to permit derivative recovery where direct is inappropriate; that's why it needs to be there by statute.

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Another Pennsylvania business law / organizational dispute question:

May an attorney director of a school for the blind, act as both director-client and attorney, control legal services, not consult with the board, and build up $250,00[?] in fees to his own firm?

And my reply:

It's not inherently wrong for a director of an organization to hire their own firm to perform work for the organization.

Such 'self-dealing,' though, must be fair and must occur in the open. What you have described sounds awfully suspicious -- no director of any organization, non-profit or for-profit, can simply hire themselves (or their firms) to do work without any oversight whatsoever.

You may first want to check into what oversight there has been of the relationship; perhaps it has been approved, but through other channels. For example, chief executives (or other officers) usually have the power to hire third-parties to perform work for the organization without consulting the directors for each and every transaction.

If, however, he's doing everything on his own, and the other directors object, then there's a problem, and you may want to speak with an attorney.

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What About Clients on "easy" defense representation in a declining economy:

So you think you will win your case on a dispositive motion (and you do, eventually). You are right on the merits--and any law professor in the U.S. would agree with you. The "case" your long-time GC just handed you is silly, right? And a piece of cake. Beneath you, you tell yourself. An "easy win", right?

Well, think again, Skippy.

Your GC couldn't have hired you to do anything more difficult. "Winning" just took on a new and more complicated meaning. Because now--especially if you were just handed a defense counsel's dream and stone "winner" of a case--you will have to work harder, and be smarter, than if you were defending a good faith or meritorious suit in which your client had the lion's share of bad facts. The trick now is to win cheap*. An easy-to-win business suit handled by the most efficient defense counsel on earth can have defense fees and costs well over $100,000, even with minimal or no discovery. You really think that your GC or client rep will be happy the day you tell him or her about your great win on all counts based on your brilliant Rule 12(b)(6) or Rule 56 motion?

Don't bet on it. For the experienced client, the cost of the lawsuit is part of the "victory" analysis. In a down American economy, litigation tends to increase. More suits are filed. And in my view clients and their plaintiff's lawyers file more questionable suits, i.e., ranging from Rule 11 violations and frivolous to iffy and wasteful. Employee and business nuisance cases are a big chunk of those filings.

In some sense, I understand the desire not to resolve "iffy" cases on any level, because you don't want to encourage more of them.

On the other hand, a lot of "iffy" cases are simply weak, not frivolous. The distinction is critical. A "weak" case is valid and meritorious but difficult to prove, like a soft tissue injury case. Plenty of people have serious soft tissue injuries, resulting from negligence, that restrict their ability to work and have hampered their personal lives. But they have an uphill battle at trial attempting to prove the extent of their injuries, given the nature of juries these days, and even if they win the recovery usually isn't that large.

But the possibility of recovery is there (as is the possibility of a substantial recovery) and, just as important, the ethical duty to right a wrong is there, too. Same goes for any business case: if there's a claim in any sense there, there's a chance it will carry the day, and a chance it should carry the day. Which brings me to my real point: everyone, both plaintiffs and defendants, should always consider actually resolving the case, rather than "litigating" it, which does nothing good for the clients.

If that takes mediation or arbitration or some other ADR, so be it; if it takes cutting off your own billing (or slashing your contingency agreement), so be it. Just always keep in mind that your role is to resolve conflict, not create it.

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The court speaks frankly in this breach of contract action:

Church contends: "In order to establish a cause of action for breach of a construction contract by a contractor, the owner must allow the contractor a reasonable time to rectify the alleged defects." Appellant's brief at 11, citing Hood v. Meininger, 377 Pa. 342, 105 A.2d 126 (1954). Church contends the Tentarellis failed to establish they gave him the opportunity to cure after terminating him on July 22, 2003, and, as such, he was entitled to a compulsory non-suit on the Tentarellis' counter-claim.

Both the legal premise and the factual conclusion of Church's argument are irreparably flawed. Church's reliance on Hood is wholly misplaced. Hood does not stand for the proposition that a plaintiff must establish he gave a contractor a reasonable opportunity to rectify defects in order to establish a cause of action for breach of a construction contract, and no case of which we are aware cites Hood for this proposition. Frankly, we are unaware of any case which stands for this proposition. While cure and mitigation are unquestionably relevant to the issue of damages in a contract dispute as a general matter, there is simply no support in our caselaw for the proposition Church advances. Notably, Church does not contend the Tentarellis' alleged failure to allow him to cure warrants a diminution of the Tentarellis' damage award.

Church v. Tentarelli, 2008 PA Super 139 (June 30, 2008). It seems to be the natural progression after LJL Transp., Inc. v. Pilot Air Freight Corp., 2006 PA Super 176; 905 A.2d 991(2006)("there are circumstances where the nature of the breach permits the aggrieved party to immediately terminate the contract despite a "cure" provision.").

That said, I think the Superior Court went a little bit far. There's precedent suggesting the party be offered an opportunity to cure the defect. For example,

In determining materiality for purposes of breaching a contract, we consider the following factors:

    a) the extent to which the injured party will be deprived of the benefit which he reasonably expected;
    
    b) the extent to which the injured party can be adequately compensated for that part of the benefit of which he will be deprived;
    
    c) the extent to which the party failing to perform or to offer to perform will suffer forfeiture;
    
    d) the likelihood that the party failing to perform or offer to perform will cure his failure, taking account of all the circumstancesincluding any reasonable assurances;
    
    e) the extent to which the behavior of the party failing to perform or offer to perform comports with standards of good faith and fair dealing.

Restatement (Second) of Contracts § 241 (1981). Accord Jennings v. League of Civic Organizations of Erie County, 180 Pa. Super. 398, 119 A.2d 608 (1956).

Either way, it's worth noting the apparent shift towards not requiring the breaching party be offered an opportunity to cure their failure, even where the contract specifically says they should be.

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The Conglomerate is mad at the NYT's "The Ethicist:"

Anyway, this Sunday Cohen is asked by Patrick Hebron of Brooklyn whether it is "ethical" for him to give a young artist friend $9,000 in return for a 1% share of his "lifetime earnings" no matter what time of work the artist does.  Cohen claims that this is not unethical but might be a bad deal for the investor.  Cohen likens this arrangement to three things, which should raise red flags.  First, Cohen likens the arrangement to "investing in a corporation."  Bingo!  And we call that buying a security, which are required to be registered with the SEC unless covered by an exemption.  So, Mr. Hebron, Cohen has just given you the go ahead to possibly break the law.  Cohen, who seems to focus on whether this creates an indentured servitude aspect, says the arrangement are like the Bowie bonds.  But of course, the arrangement is nothing like the Bowie Bonds, which are the mere securitization of royalties from songs already written and recorded.  The moral hazard of the artist that Mr. Hebron is worried about is not present in the Bowie Bonds.  Cohen also likens the arrangement to "French Open tennis champion Ana Ivanovic, who received the backing of a Swiss businessman when she was 14 in exchange for repayment if she hit it big one day."  The businessman actually became her business manager and covered her expenses with an interest-free loan, hiring a coach for her and setting her up in Switzerland after she had to flee from Serbia.  That's called a loan.

And, indeed, it looks like an exception would apply under Regulation D, given the size of the offering and the number of people solicited. (Moreover, the person arguably violating SEC rules is the artist, not the investor).

As for Bowie Bonds, The Conglomerate has Cohen dead to rights, there is a definitely a distinction between offering part of the royalties for finished songs and offering future royalties for the whole future.

I think the bigger issue here is one of contract drafting. The artist has art, and possibly talent, but no money. The investor has money. Surely there's a reasonable, ethical way for the two to work together? Why not, say, put an upper limit on the contract? "Such royalties not to exceed $100,000."

That's what eventually happened when this was tried before with the Yale Tuition Postponement Plan:

Yale University officials said today that they would erase the remaining debts of alumni who borrowed money in the 1970's under two programs that were meant to further altruistic careers like missionary work but instead saddled some students with years of payments.

About 3,900 alumni from the classes of 1971 to 1978 received loans under the Tuition Postponement Option or the Contingent Repayment Option. For each $1,000 borrowed from the university, the students pledged 0.04 percent of their future earnings for 35 years, or until the whole class paid off its aggregate debt, whichever came first.

'It had some of those bents of the 1970's: 'Hey, let's all take on the loan and those among us who become the wealthy industrialists will carry the burden for the rest,' '' said Juan Leon of Norcross, Ga., a 1974 graduate.

Mr. Leon, who today sells airplanes, borrowed $1,700. He has repaid roughly $7,000, yet he still owed the university money because some classmates failed to make payments.

His experience was not unusual. The programs doled out $8 million in loans, but despite paying about $25 million in principal and interest, no class has paid off its debt because about 20 percent of the students fell into default.

At some point it became silly, which is the worry of Cohen and the person who wrote in. So why not add an "in case of silliness" clause? Then you can both reach a fair and appropriate value for silliness and move on with your lives.

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Via Settle It Now,

Gini Nelson of Engaging Conflicts ran a six-part series recently on "Adding Cooperative Practice to the ADR Toolkit."  Her final part in this series -- linked supra -- is the final entry of Guest Blogger Law Professor John Lande’s posts.  Linked here is his article The Promise and Perils of Collaborative Law -- which is also linked in Gini's blog with her comments here.

Before you run over to Gini's site to read Lande's excellent post or his great article, I'd like to simply bullet-point some observations based upon my four-years of full-time mediation and arbitration practice.

• when I co-arbitrate with some of the best commercial arbitrators in the business -- these are Ivy League lawyers with many decades of experience representing Fortune 50 Companies in AmLaw 100 Law Firms, the ultimate decision changes many times during the course of deliberations and almost always could go either way.
• having spent a considerable time in the Los Angeles Complex Court as an experienced commercial litigator "externing" for credit to earn my LL.M in '06, I can tell you that the deliberations in chambers of these highly respected jurists is not much different that those in which I have engaged when sitting on an arbitration panel

The take away?  No matter who is hearing your case, your chances of winning are 50-50.  Flip a coin.  Think this doesn't apply to you?  I have arbitrated cases being handled by the top ten law firms in the country.  I have seen those same type of firms litigate and try cases in the Complex Court.  It's 50-50 friends.

Here's from Lande's series:

In mediation, an impartial third party helps parties to negotiate an agreement. In Collaborative Law, at the beginning of a case, lawyers and parties sign a “participation agreement” to negotiate in good faith and disclose all relevant facts. The participation agreement includes a “disqualification” clause which provides that if any party decides to litigate, the Collaborative lawyers are disqualified from representing the parties, who must hire new lawyers if they want representation in litigation. The formal difference between Cooperative Practice and Collaborative Practice is that Cooperative Practice participation agreement does not include the disqualification provision.

...

Since a Cooperative process does not include a disqualification clause as in Collaborative cases, some people wonder if Cooperative process is any different from negotiation in litigated cases.

Although many lawyers negotiate cooperatively at times, a Cooperative process can provide greater predictability and confidence than in litigation. DCI members say that a Cooperative process creates a legal culture where cooperation is the norm. Traditional litigation-oriented practice normally does not involve an explicit process agreement. In litigation, lawyers often are not sure about the other side’s intentions and each side may feel that it needs to take tough positions to protect themselves. This sometimes creates a cycle of adversarial behavior that is hard to break out of.

I appreciate new approaches to the practice of law, I really do. But I both (1) don't agree all litigation is 50-50 and (2) fail to see how any of the above is different from good legal practice.

Regarding the first, I'm always suspicious of anything meant to be more persuasive by the inclusion of such terms as "Ivy League" and "top ten." You can see my post about the real motivations of General Counsel for some of the reasons I'm suspicious, given how none of them are immune from completely dropping the ball, obliterating their client's interests.

More importantly, I refuse to believe that any case is 50-50, much less all of them. It is absolutely true that anything could happen at trial and that slamdunk cases lose every day. It is also true that a rational argument can be made for almost anything, and that a factfinder, judge, mediator, arbitrator, or any other neutral would be derelict in their duty if they did not give serious consideration to the arguments made before them.

That said, in the real world people are innocent or guilty. People make mistakes or don't make mistakes. What they did was outrageous or it was not. Are there gray areas? Sure. That's why the law includes explicit burdens of proof and persuasion. In a criminal case, if a factfinder has a doubt about guilt that is founded in reason, they should return an innocent verdict. In a civil case, if a plaintiff has proven their claims are more likely true than not, the jury or judge should return a verdict in the plaintiff's favor.

Have you ever seen a situation in life in which, after complete consideration, you were still totally unable to reach any conclusion? Were you really Buridan's donkey? Spinoza doubted any rational person could find themselves in such a situation and I agree. If you can see a wide array of evidence and argument, which it is your sworn duty to evaluate, and yet you remain totally unmoved, then the problem lies with you, not with the inherent unknowability of the world.

Regarding the second, any plaintiff or defense attorney who truly has their eye on the client's interest will always keep in mind the possibility of resolving the matter. Just like I said above, slamdunk cases lose every single day of the week. I'm sure defense attorneys can chime in that completely frivolous cases can return extraordinary verdicts.

A good lawyer always has that in mind, as well as the financial and emotional cost of litigation. If referring to that process of continual re-evaluation and resolution as "cooperative law" makes it more likely to happen, then that is certainly a benefit to the profession, but litigators and trial lawyers shouldn't be told they're doing it wrong just because they don't use the name.

Same with "collaborative law." If the clients are willing to disclose everything upfront, then by all means we should take all steps to facilitate their resolution. Yet, I have to believe that such openness can only come from the clients, and then only for reasons external to the litigation itself. Disputes simply don't up and resolve themselves by changing the name of the process.

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Martin Lipton, who knows a thing or two about corporations, presents:

On June 25, I presented a paper entitled “Shareholder Activism and the “Eclipse of the Public Corporation”: Is the Current Wave of Activism Causing Another  Tectonic Shift in the American Corporate World?” at the 2008 Directors Forum of The University of Minnesota Law School. The paper discusses the pressures that have been pervasively eroding the centrality of the board of directors and transforming its role in the governance structure of public companies, with the end game being a new conception of the corporate organization. Against the backdrop of the subprime and leveraged loan financial crisis and other recent events, the paper addresses what I regard as the crux of the issue affecting public companies today: whether the institution of the corporate board can cope with these pressures and survive as the vital governing organ of public companies. Or, will a forced migration from director-centric governance to shareholder-centric governance, along with a concomitant transformation of the role of the board from guiding and advising management to ensuring compliance and performing due diligence, simply overwhelm American business corporations?

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The WSJ Law Blog on a malpractice suit, alleging that discovery mistakes led to a $107 million settlement [to which] the company would not have otherwise agreed:

According to the complaint, the North Carolina federal court in which the underlying litigation occurred, held that it was “under Kaye Scholer’s watch” that Celanese was sanctioned for “discovery abuse,” which the Court described as “egregious.” The North Carolina court, as quoted in the complaint filed against Kaye Scholer, wrote: “The court is not unmindful of the positions urged by [Celanese], but in the context of the trove of documents it held in the wings just out of sight of the non-class plaintiffs, these positions can’t be seen as coherent or compelling.”

In a June 2006 order, a North Carolina judge sanctioned Celanese $114,000 in fees and expenses, but said he would consider further sanctions on evaluating the impact of the discovery misconduct. An October 2006 sanctions motion by plaintiffs asked for a range of findings against Celanese, according to the NYLJ, including one that the company acted in bad faith and that an adverse inference should be drawn against it on key issues.

The judge said he would evaluate the need for such sanctions as the case proceeded. Celanese said in its suit that the prospect of sanctions that would have hampered its ability to defend itself at trial forced it to enter into a settlement in May 2008.

Hmmm. That is a tough argument. While an actual order instructing the jury to draw an adverse inference against the company would have prejudiced its interests, it is hard to say that a motion requesting an order is a but for cause of an unfavorable settlement.

Obviously, in the real world settlement takes place in the totality of circumstances, and I'm sure the pending motion was on their minds, but I have serious doubts that the motion would itself cause the defendants to settle for over $100 million.

I am willing to bet the documents withheld by Kaye Scholer were devastating to Celanese (otherwise, why withhold them?); once the plaintiffs had them, it was simply a discussion of numbers, with or without the adverse inference.

Moreover, an adverse inference would not have, standing alone, "hampered its ability to defend itself at trial." It would merely have been a unfavorable jury instruction at the end of trial, one that defense counsel would be permitted to argue to the jury was inappropriate because it was the lawyer's fault, not the client's. Every day in America defendants blame their lawyers at trial -- what would have stopped them here?

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Kudos to David Boies:

Fresh off his depiction in “Recount” — the HBO movie about the 2000 election fiasco — David Boies, along with partner Don Flexner, have, on behalf of American Express, negotiated one of the largest antitrust settlements ever for an individual company: $1.8 billion. The settlement with Mastercard comes on the heels of a similar $2.25 billion settlement, also handled by Boies, between AmEx and Visa.

The background: The Supreme Court ruled in 2004 that Visa and MasterCard violated antitrust laws by prohibiting their member banks from offering credit cards that could be used on rival payment networks. AmEx and Discover sued. Here are reports from the WSJ and NYT.

Really, though, kudos to Mr. Feinberg:

Kenneth R. Feinberg, who handled the earlier settlement with Visa and who also oversaw administration of the 9/11 compensation fund, acted as arbitrator in the case during secret negotiations that lasted eight weeks.

And while we're at it, don't forget to review the AAA rules for large, complex commercial disputes. There are two myths about commercial arbitration worth dispelling while on the subject.

First, you are generally not entitled to three arbitrators; you can ask for them, but the only time you'll get them is if you and the other party cannot agree on arbitrators and the case is worth more than $1 million.

Second, there is no rule prohibiting discovery in commercial arbitration, there just isn't any entitlement to it. I frequently recommend following the Federal Rules of Civil Procedure with regard to written discovery, except for depositions, which are limited usually to just the principle witnesses.

Of course, the best part of arbitration from the plaintiff's perspective is the finality, where the pressure of an unappealable award strongly encourages settlement. When you litigate a case through the civil system, there is virtually no chance of settlement prior to scheduling of trial, and, indeed, a good number of cases have to get through verdict and at least some of the appeal before the offers become reasonable. That takes years.

As you can see from the AmEx arbitration, nearly $2 billion dollars changing hands took eight weeks.

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From Wartsila Nsd N. Am., Inc. v. Hill Int'l, Inc., 2008 U.S. App. LEXIS 13099, a business litigation opinion just released:

Three exceptions have been identified where the public interest will render an exculpatory clause [in a contract] unenforceable: (1) when the party protected by the clause intentionally causes harm or engages in acts of reckless, wanton, or gross negligence; (2) when the bargaining power of one party to the contract is so grossly unequal so as to put that party at the mercy of the other's negligence; and (3) when the transaction involves the public interest. Wolf, 644 A.2d at 525-26. None of these exceptions is applicable here.

Although the jury concluded that Hill was negligent, there was no evidence that Hill engaged in willful misconduct, such as "intentional harms" or "the more extreme forms of negligence, i.e., reckless, wanton, or gross." Id. at 525. At trial, Wartsila argued that Hill violated the Agreement by committing fraud. The jury expressly concluded in its verdict, however, that Hill had not committed fraud. This finding eviscerates any argument that the exculpatory clause should be disregarded because of the nature of Hill's alleged misconduct.

To get around the exculpatory clause, all the plaintiff had to do was prove the defendant's conduct was reckless, wanton, or grossly negligent. Yet, apparently they only asked the jury if the defendant was negligent or if they committed fraud.

It is thus entirely possible that every single juror thought the defendant was grossly negligent, a factual finding that would have destroyed the exculpatory clause, a yet on the facts presented to the Third Circuit plaintiff's claim has been "eviscerated."

Oops.

Continuing on:

The District Court erred in failing to exclude evidence of "incidental,  special, indirect, or consequential" damages. Further, the Court did not ask the jury to identify which portion of its award was based on Hill's breach of contract or its alleged negligence. Thus, we cannot tell from the jury's verdict what portion of its award of damages was based on direct damages and what amount was based on consequential damages. In order to give effect to the exculpatory clause agreed to by these parties, there must be a new trial on the issue of damages.

Again, the jury could have already answered this question, but now the parties have to go back for new trial, and the plaintiff is denied resolution and compensation another day.

Maybe that is in their best interest, since they just had the exculpatory clause enforced as a matter of law, and now they can focus their case on the permissible damages. Somehow I doubt that was their plan all along...

UPDATE: See Philly JD's comment below -- the outcome is even worse than I thought, as the final verdict is now capped at a level that makes re-trial unprofitable for the client and the attorney.

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Adam Smith, Esq. hosts a high-level discussion on competition in the legal market and whether general counsels really want change.

I am, obviously, neither a general counsel of a large company nor an attorney at a large corporate firm, so I won't speak to that. Some comments (not necessarily by Bruce, he quotes others liberally there) bear comment. If you care, continue on...

Alarmed at large law firm recalcitrance, I consulted my economist friend Madam Smythe, who told me: “On first glance, the legal market looks competitive. The scores of large, global law firms with good reputations should not fool you. Once a company retains a firm, a mini-monopoly ensues; just one bite at the apple - then switching costs skyrocket. It’s diabolical. I’ve run the numbers: law firms are natural monopolies. They have too much market power, which they use artificially to raise rates and corner the market on talent.”

And here's one reply:

Here I think the problem is the regulatory structure of legal markets--which are among the most heavily regulated in the economy. It's just that the regulation is supplied by lawyers themselves through bar associations and the judiciary. The complexity of law is attributable, I think, to the closed nature of the markets here: without the ability to form corporations, seek venture capital, attract innovators who have not been through the training process of lawyers, it is very hard for the market to spur the only real type of change that can reduce complexity and cost and that is innovation in the underlying dimensions of legal inputs.

And another:

But I actually have a more subversive suggestion, which falls under "E. Other" in Paul's schema: I don't believe GC's really want things to change, for all their trashmouth game talk. GC's want their backsides protected by the imprimatur of the Magic Circle, the New York Elite, or the Skadden/Latham brand name. GC's don't want "good enough" quality; they want top-drawer quality.

And I submit this is not irrational. Legal fees as a percent of deal value (unless you're smaller than the attendees at the Portugal event) are typically not material compared to the i-bankers' fees or the opportunity and other costs of corporate personnel assigned to the deal. Do I think Gillian is wrong that 100 pages of appellate opinion interpreting a garden variety contract clause is idiotic? No, of course it is. But the answer is to eliminate regulation of the bar by the bar and watch a thousand flowers bloom.

I really agree with the underlined comment. No one was ever fired from an international bank because they hired the most expensive and well-known law firm. Not once, not ever, despite hundreds of stories of large firms completely botching major cases by missing appeal deadlines, walking clients into obstruction of justice, and filing inadequate patents. Note that all of the preceding have not simply been described as "good," but as the best in the business.

Plenty of people, however, have gotten themselves into trouble by hiring "cheap" professionals and then having things go wrong. Why didn't you hire the best? Are you in on the deal? Do you know someone who works there? Are you an idiot? It doesn't matter if the lawyer had nothing to do with the outcome.

In some sense, the persistence of reputation (and the relationship of size to reputation) is completely understandable. Have you ever bought a brand name medication instead of the generic? Why? Do you actually know if Tylenol is really any safer or more effective than mere acetominophen? It could be far less safe, it could be processed in a worse factory. But you presume otherwise, for a variety of reasons. It's silly to think the same thought processes won't affect major companies and banks just because they're big and dealing with a lot of money.

I don't think the 'regulation' aspect of the law is really the problem. I think the problem is that it is impossible to evaluate and compare legal services with any accuracy or precision, because the work is by and large kept confidential and is largely invisible even to the client.

How could a client possibly know that the preparation I did prior to a hearing (or negotiation, or trial, or whatever) made the difference between winning and losing, and that the other lawyers they were considering would not have done that? I don't even know if that's true. I don't think anyone can know if that's true.

Which leaves lawyers and clients, unfortunately, subject to amorphous customer satisfaction. I know many truly terrible lawyers who have repeatedly prejudiced their clients' interests through their poor performance who nonetheless maintain an uncanny rapport with their clients. Much of this problem is inherent to other professions, like medicine, where it's a lot easier to discern negligence than excellence, and much of it has no easy solution.

I think the core point for businesses to take home is that, in the big scheme of things, they actually have a lot less to lose than most clients in any given situation, since they spend a lot more time around lawyers. A personal injury plaintiff really only has one shot at trial, and if they ended up with a bad trial lawyer -- a fact that would not be apparent to them until it was too late -- then too bad.

Businesses, however, can generally spread work around and see what they think of the results. More importantly, they can take the time to come up with concrete definitions of customer satisfaction. If I could only give one piece of advice to business, it would be: you should be able to figure out what your lawyers are doing. If it means reading a brief, evaluating a contract (including with the other side proposed), attending a hearing, or listening in on a phone call, the law should not be a mystery to you. Your lawyer should be able to explain what they are doing and why they chose that route over other possibilities. Don't get just updates -- get explanations.

The big problem with that proposal is that it adds yet another layer of bureaucracy, with businesses spending time reviewing the work of another who, at the end of the day, has nothing to do with their actual business.  But that's a question for each individual business, and I bet a number of businesses could do far more to reexamine the actual work performed (and not just the hours or results) by outside counsel.

My suspicion is that, in the not too distant future, the legal profession will reach a point where, like the financial sector, there exists businesses that do nothing but rate the other businesses. Avvo is a step in that direction, though it's closer to personal services like, say, LinkedIn, rather than business services like, say, a bond rating agency or the securities review wing of an investment bank.

Perhaps that's the way Bruce's LegalOnRamp is going...

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Via Boing Boing is this research paper:

"Happy Birthday to You" is the best-known and most frequently sung song in the world. Many - including Justice Breyer in his dissent in Eldred v. Ashcroft - have portrayed it as an unoriginal work that is hardly worthy of copyright protection, but nonetheless remains under copyright. Yet close historical scrutiny reveals both of those assumptions to be false. The song that became "Happy Birthday to You," originally written with different lyrics as "Good Morning to All," was the product of intense creative labor, undertaken with copyright protection in mind. However, it is almost certainly no longer under copyright, due to a lack of evidence about who wrote the words; defective copyright notice; and a failure to file a proper renewal application.

The falsity of the standard story about the song demonstrates the dangers of relying on anecdotes without thorough research and analysis. It also reveals collective action barriers to mounting challenges to copyright validity: the song generates an estimated $2 million per year, and yet no one has ever sought adjudication of the validity of its copyright. Finally, the true story of the song demonstrates that a long, unitary copyright term requires changes in copyright doctrine and administration. With such a term, copyright law needs a doctrine like adverse possession to clear title and protect expectations generated when, as with this song, putative owners do not challenge distribution of unauthorized copies for more than 20 years. And Copyright Office recordkeeping policy, which currently calls for discarding correspondence after 20 years and most registration denials and deposits after five years, must be improved to facilitate resolution of disputes involving older works.

Over two hundred unpublished documents found in six archives across the United States have been made available on a website that will serve as an online appendix to this article.

Of course, the fact that "it is almost certainly no longer under copyright" hasn't stopped the following: "By the early 1990s, the song was generating well over $1 million per year,89 and by 1996, reported Forbes magazine, it was “pull[ing] in slightly less than $2 million a year.”"

It's always possible to be totally, completely wrong on the law and nonetheless make a killing. Much business litigation arises from the same: one party is totally, completely wrong, and yet is making money anyway until someone has the persistence and resources to sue them into compliance.

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From National Law Journal. Best I can tell these are all trial strategies, despite the article referring to the attorneys as "litigators." There also seems to be a bias towards business lawyers; even the criminal defense is business-oriented.

Nonetheless, worth a read, not least because there's nothing new about any of them. It's the same stuff you learn in any trial advocacy program, like:

• humanize your client and get their story (not just their 'position' or 'claim / defense' in front of the jury)
• give misleading witnesses enough rope to hang themselves
• "I learned that lawyers better be straight with that jury. Don't mislead 'em, don't con 'em. Don't be too slick. Don't be slick at all."
• have a single, simple, coherent theory of the case

They're cliches and maxims for a reason: they work.

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I spotted this intriguing entry with regard to the Bear Stearns indictment and the duty of corporate counsel to employees:

[Defendant Tannin] raised the issue of whether to approach a lawyer regarding his doubts about the market. “Who do we talk to about this?” wrote Tannin in an e-mail, sent from his private account, to co-defendant Ralph Cioffi. “Outside counsel? (And here we have to be careful because our outside counsel is [Bear Stearns Asset Management’s counsel] NOT our counsel — This is another very big issue we at least need to think about.)”

He was right -- if he had talked to Bear Stearns' lawyer, they would not have told him what was in his best interest. They would have told him what was in the best interest of the company. More below the fold.
Let me quote the American Bar Associations's Model Rule for Professional Conduct 1.13:

(a) A lawyer employed or retained by an organization represents the organization acting through its duly authorized constituents.

(b) If a lawyer for an organization knows that an officer, employee or other person associated with the organization is engaged in action, intends to act or refuses to act in a matter related to the representation that is a violation of a legal obligation to the organization, or a violation of law that reasonably might be imputed to the organization, and that is likely to result in substantial injury to the organization, then the lawyer shall proceed as is reasonably necessary in the best interest of the organization.  ...

A company's lawyer is just that: a lawyer for the company. Never believe that they will protect any confidences with you personally, because they don't have any duty to represent employees individually.

Don't they have to tell me that?

Sort of:

(f) In dealing with an organization's directors, officers, employees, members, shareholders or other constituents, a lawyer shall explain the identity of the client when the lawyer knows or reasonably should know that the organization's interests are adverse to those of the constituents with whom the lawyer is dealing.

Note how it doesn't say "if the employee was confused, the attorney must keep what they learned confidential," because the attorney doesn't have to. Frequently, the attorney -- regardless of what they really thought -- can later claim they did not know the employee's interests were "adverse" until after they learned something damaging about the employee, which they were then duty bound to report to the organization.

When talking with them, will they tell you when they think you've transcended some line imperiling your own legal interests, making you liable for criminal fraud? Probably not. Will they tell you when they think you've said something that you probably don't want the rest of the company to know? Probably not.

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