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

At Electronic Discovery Law:

Last month, the Seventh Circuit’s Electronic Discovery Pilot Program Committee released its report on phase one of its Electronic Discovery Pilot Program.  Initiated as a “multi-year, multi-phase process to develop, implement, evaluate, and improve pretrial litigation procedures that would provide fairness and justice to all parties while seeking to reduce the cost and burden of electronic discovery consistent with Rule 1 of the Federal Rules of Civil Procedure”, the first phase of the program ended on May 1, 2010, after a seven month period in which the committee’s Principles Relating to the Discovery of Electronically Stored Information were tested in practice. ...

Too lengthy to summarize, the full report is available here.

I had my fingers crossed for something better than the electronic discovery report released last year by the American College of Trial Lawyers, which, if adopted, would do little more than encourage frivolous discovery objections.

The Seventh Circuit report is far better; I've posted on Scribd a copy of their proposed standing electronic discovery order.

I am concerned, though, by the heavy reliance upon having attorneys meet-and-confer to discuss issues relating to electronically-stored information.

Sometimes attorneys aren't so candid when it comes to ESI, like in Grider v. Keystone Health:

As stated in Finding of Fact 26, on March 1, 2004 Attorney Summers sent a letter to the court attaching a series of Declarations which affirmatively represented to the court that plaintiffs’ allegations of bundling and downcoding lacked any factual basis, and that those claims were “without merit”. Thereafter, defendant Keystone, through its counsel, Attorney Summers, refused to produce the underlying documents and data compilations which supported the Declarations on a number of frequently changing bases. Initially, Attorney Summers withheld the underlying documents and data compilations because they allegedly constituted lay opinion. Next, Attorney Summers withheld the information on the basis that it was expert opinion and immune from discovery. Finally, Attorney Summers asserted that the underlying information was privileged material pursuant to either the attorney-client privilege or the attorney work product doctrine.

As noted by my colleague Senior United States District Judge J. William Ditter, Jr., “It is not good faith for a lawyer to frustrate discovery requests...with successive objections like a magician pulling another and another and then still another rabbit out of a hat.” Massachusetts School of Law at Andover, Inc. v. American Bar Association, 914 F.Supp. 1172, 1177 (E.D.Pa. 1996). * * * 

The most egregious instance of late production involves Keystone’s late production of claims data. Keystone claimed for years that it was unable to provide claims data. During the same time that Keystone and its counsel were feigning an inability to produce claims data (which it owned according to the ASA agreement with Synertech), Keystone was using claims data for its own self-serving purposes (i.e., the Declarations sent to the court on March 1, 2005). * * *

This case is about claims processing. To deny plaintiffs the data which Keystone owns is equivalent to denying plaintiffs their day in court. Without this data it will be more difficult for plaintiffs to prove their claims. I conclude that this is exactly what defendant Keystone hoped to accomplish by thwarting discovery in this case.

The District Court sanctioned them, but sanction is more the exception than the rule, and the Third Circuit eventually reversed the sanction anyway, even though it found the conduct sanctionable.

Fact is, if defense counsel doesn't have enough of an incentive to be candid in discussing the availability of ESI — like if they face no real threat of sanction or a spoliation ruling — then odds are they won't be. 

If the Seventh Circuit wants parties to successfully meet-and-confer, they should require the parties to submit to each other affidavits discussing the available sources of ESI to the best of the party's information, knowledge and belief. That will mean a lot more, and will be a lot more useful in the litigation, than a phone call or letter from an attorney whose primary goal is to conceal evidence.

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"Once the lawyers get involved..."

There are a hundred ways to end that sentence. Once the lawyers get involved, everything falls apart. It takes ten times as long to finish a deal. A lawsuit is inevitable. The hysterics start.

Few of the potential endings are favorable towards lawyers. Perhaps the most common sentiment is: once the lawyers get involved, the truth gets buried.

To some extent, it's true. The first thing a criminal defense lawyer says to a new client? Remain silent. The first thing a litigator says to a new client? Let's get your story straight. The first thing a transactional lawyer says to a new client? Let me do the talking.

Once the lawyers get involved, everything goes through a filter. The truth comes out, but in a sanitized and selective manner. Sometimes only part of the truth comes out. Sometimes a little more than the truth comes out.

But it's not a problem limited to lawyers. It's a problem of middlemen.

Where there's a middleman, there's deniability. There's confusion. There's misunderstandings. There's excuses. There's a way for one side to throw its hands up and say, hey, it wasn't me. There was a middleman. Something went wrong in the middle.

And that seems to be the case with two hot stories lately, the SEC's enforcement action against Goldman Sachs and the "lost" prototype iPhone that Gizmodo disassembled on their webpage.

Take your pick for sources on both stories. Felix Salmon has a lot to say on Goldman Sachs. Daring Fireball has a lot to say on the iPhone saga.

Don't let the volume of paper produced about these stories fool you: both stories are very simple.

Goldman Sachs was paid $15 million to push a crummy deal, which they did by concealing how the whole deal had been structured by someone betting against it, someone who walked away with $1 billion when all was said and done. Gawker Media, publisher of Gizmodo, paid $10,000 to the "finder" of a "lost" prototype iPhone.

Don't blame them, of course. Something went wrong in the middle.

Does the law provide for relief when that happens?

Sometimes so, sometimes not. There's no unambiguous rule that says Gawker is, or is not, liable for theft or that Goldman Sachs is, or is not, liable for fraud when they filter the deception through a middleman.

Answering that question is why we have lawyers and courts.

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Via Blawgletter (and a couple other sources), the whole eleven-judge Federal Circuit issued a rare en banc opinion that held, 9-2, that Harvard, MIT, the Whitehead Institute for Biomedical Research, and Ariad Pharmaceuticals, Inc. couldn't, well, I'll let Barry Barnett explain:

Ariad, MIT, the Whitehead Institute, and Harvard claimed that Eli Lilly infringed their patent on ways to reduce the symptoms of some diseases by causing a protein -- Nuclear Factor kappaB* -- to behave.  The problem (as Blawgletter gleans from the judges' five opinions) arises from the fact that the inventors seem not to have figured out how to suppress symptom-causing NF-kB activity.  They appear simply to have discovered that NF-kB existed and guessed that somehow bringing it to heel would help sick people feel better.

Ariad, MIT, Whitehead, and Harvard urged that the first paragraph of section 12 requires a patent to say only enough to "enable" an in-the-know person to build something that makes NF-kB curtail its hurtful conduct inside human cells.

I knew some of the folks at those places were smart, but I never realized they were so smart they didn't have to actually invent anything to get a patent. Instead, they can just describe a problem and then claim a patent over someone else's solution.

To call the case "significant" is an understatement. Among those submitting amicus briefs to the Federal Circuit were:

• The University of California
• Federal Circuit Bar Association
• Monsanto Company
• GlaxoSmithKline
• Microsoft Corporation
• Google Inc.
• Verizon Communications, Inc.

...and a dozen other schools and technology, pharmaceutical, and research companies who make—or pay—billions of dollars related to broad patents that claim to cover discoveries, but not necessarily inventions, in scientific fields.

The Federal Circuit, however, is even smarter still:

[A] separate requirement to describe one’s invention is basic to patent law. Every patent must describe an invention. It is part of the quid pro quo of a patent; one describes an invention, and, if the law’s other requirements are met, one obtains a patent. The specification must then, of course, describe how to make and use the invention (i.e., enable it), but that is a different task. A description of the claimed invention allows the United States Patent and Trademark Office (“PTO”) to examine applications effectively; courts to understand the invention, determine compliance with the statute, and to construe the claims; and the public to understand and improve upon the invention and to avoid the claimed boundaries of the patentee’s exclusive rights.

[...]

Perhaps there is little difference in some fields between describing an invention and enabling one to make and use it, but that is not always true of certain inventions, including chemical and chemical-like inventions. Thus, although written description and enablement often rise and fall together, requiring a written description of the invention plays a vital role in curtailing claims that do not require undue experimentation to make and use, and thus satisfy enablement, but that have not been invented, and thus cannot be described. For example, a propyl or butyl compound may be made by a process analogous to a disclosed methyl compound, but, in the absence of a statement that the inventor invented propyl and butyl compounds, such compounds have not been described and are not entitled to a patent.

Ariad Pharmaceuticals, Inc. v. Eli Lilly and Co., pp. 12, 26.

Specific to the patent at issue,

The ’516 patent discloses no working or even prophetic examples of methods that reduce NF-κB activity, and no completed syntheses of any of the molecules prophesized to be capable of reducing NF-κB activity. The state of the art at the time of filing was primitive and uncertain, leaving Ariad with an insufficient supply of prior art knowledge with which to fill the gaping holes in its disclosure. See Capon, 418 F.3d at 1358 (“It is well-recognized that in the unpredictable fields of science, it is appropriate to recognize the variability in the science in determining the scope of the coverage to which the inventor is entitled.”).

Whatever thin thread of support a jury might find in the decoy-molecule hypothetical simply cannot bear the weight of the vast scope of these generic claims. ... Here, the specification at best describes decoy molecule structures and hypothesizes with no accompanying description that they could be used to reduce NF-κB activity. Yet the asserted claims are far broader.

Thus, the patent was invalid.

The Federal Circuit's opinion, though, goes much farther than the facts of the case, with a broad rule for future "discovery" patents:

Ariad complains that the doctrine disadvantages universities to the extent that basic research cannot be patented. But the patent law has always been directed to the “useful Arts,” U.S. Const. art. I, § 8, cl. 8, meaning inventions with a practical use, see Brenner v. Manson, 383 U.S. 519, 532-36 (1966). Much university research relates to basic research, including research into scientific principles and mechanisms of action, see, e.g., Rochester, 358 F.3d 916, and universities may not have the resources or inclination to work out the practical implications of all such research, i.e., finding and identifying compounds able to affect the mechanism discovered. That is no failure of the law’s interpretation, but its intention. Patents are not awarded for academic theories, no matter how groundbreaking or necessary to the later patentable inventions of others. “[A] patent is not a hunting license. It is not a reward for the search, but compensation for its successful conclusion.” Id. at 930 n.10 (quoting Brenner, 383 U.S. at 536). Requiring a written description of the invention limits patent protection to those who actually perform the difficult work of “invention”—that is, conceive of the complete and final invention with all its claimed limitations—and disclose the fruits of that effort to the public.

That research hypotheses do not qualify for patent protection possibly results in some loss of incentive, although Ariad presents no evidence of any discernable impact on the pace of innovation or the number of patents obtained by universities. But claims to research plans also impose costs on downstream research, discouraging later invention. The goal is to get the right balance, and the written description doctrine does so by giving the incentive to actual invention and not “attempt[s] to preempt the future before it has arrived.” Fiers, 984 F.2d at 1171. As this court has repeatedly stated, the purpose of the written description requirement is to “ensure that the scope of the right to exclude, as set forth in the claims, does not overreach the scope of the inventor’s contribution to the field of art as described in the patent specification.” Rochester, 358 F.3d at 920 (quoting Reiffin v. Microsoft Corp., 214 F.3d 1342, 1345 (Fed. Cir. 2000)). It is part of the quid pro quo of the patent grant and ensures that the public receives a meaningful disclosure in exchange for being excluded from practicing an invention for a period of time. Enzo, 323 F.3d at 970.

Id., pp. 28-29 (emphases added).

I think the Federal Circuit made the right decision both on the statute and on the policy—there's a substantial consensus today that our patent system is unjustly overprotective in many areas, including biochemical research—but the decision is not without some costs. As the Circuit recognized with the "loss of incentive" part above, it was already hard for scientists to justify to non-scientist corporate managers or school trustees the value of basic research without referencing the financial upside of patentable discoveries. Now that will be even harder, since the financial upside is less lucrative and less secure.

That said, basic research progressed well enough for hundreds of years without the over-patenting we have today, and even a small increase in government funding could likely make up for any new losses due to reduced patentability. Thus, on the whole, the case is a victory for law and for science.

- - -

* NF-kB, says Wikipedia,

is a protein complex that controls the transcription of DNA. NF-κB is found in almost all animal cell types and is involved in cellular responses to stimuli such as stress, cytokines, free radicals, ultraviolet irradiation, oxidized LDL, and bacterial or viral antigens.^{[1][2][3][4][5]} NF-κB plays a key role in regulating the immune response to infection. Conversely, incorrect regulation of NF-κB has been linked to cancer, inflammatory and autoimmune diseases, septic shock, viral infection, and improper immune development. NF-κB has also been implicated in processes of synaptic plasticity and memory.

 

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Last week, Prof. Edward A. Hartnett (of Seton Hall University School of Law) posted Responding to Twombly and Iqbal: Where Do We Go from Here?

Hartnett's idea was eminently reasonable:

I also offer my own proposal, which focuses on the core issue at stake in debates about Twombly and Iqbal: should a plaintiff be able to obtain discovery in an effort to uncover evidence without which he or she cannot prevail?

Hartnett proposes amending Rule 12 of the Federal Rules of Civil Procedure to include:

Rule 12(j): Allegations Likely To Have Evidentiary Support After a Reasonable Opportunity for Discovery

If, on a motion under Rule 12(b)(6) or 12(c) that has not been deferred until trial, the claim sought to be dismissed includes an allegation specifically identified as provided in Rule 11(b)(3) as likely to have evidentiary support after a reasonable opportunity for discovery, the court must either (1) assume the truth of the allegation, or (2) decide whether the allegation is likely to have evidentiary support after a reasonable opportunity for discovery. In deciding whether an allegation is likely to have evidentiary support after a reasonable opportunity for discovery, the court must consider the parties‘ access to evidence in the absence of discovery and state on the record the reason for its decision.

If the court decides that the allegation is likely to have evidentiary support after a reasonable opportunity for discovery, it must allow for that discovery, under the standards of Rule 26, and deny the motion to dismiss. If the court decides that the allegation is not likely to have evidentiary support after a reasonable opportunity for discovery, the court must treat the motion as one for summary judgment under Rule 56, and provide all parties a reasonable opportunity to present all the material that is pertinent to the motion.

Again, eminently reasonable. Such an addition would immediately focus litigation on the real issues, thereby (1) enabling plaintiffs to conduct discovery into the most important areas while also (2) empowering defendants to have cases dismissed—prior to full discovery—if the plaintiff won't be able to prove an essential element of their case.

How could anyone think that was unfair?

The defense bar champions at Drug and Device Law tried to manufacturer an objection, but the argument degenerated into blather and insults. They barely even mention the details of Hartnett's proposal. Instead, they summarily dismissed him with:

Most of these proposals (except Professor Burbank's) actually go far beyond Twombly/Iqbal and would overrule all or most of the prior precedent we cited above. That strikes us as facially overkill and indicative of unexpressed (and in some cases, ulterior) motives at work.

...

We understand that a lot of academics feel that they have to help their students get jobs, or else eventually they won’t have jobs either.  Thus, they tend to support anything and everything that results in more, rather than less, litigation.

Oh, snap.

Then again, an accusation of "ulterior motives" probably would have meant more if it didn't come from someone paid by the hour to ensure corporations pay as little as possible to the people and families they hurt.

Frankly, reading through the post, I can't help but wonder if Beck et al. indeed have some "ulterior motive" in misrepresenting how defense lawyers use Ashcroft v. Iqbal in their practice:

So when we get a complaint, we look to see whether, there’s at least one actual fact pleaded that supports each essential element of a cause of action.  A plaintiff can plead more if s/he so pleases, but there has to be at least one – otherwise we’ll probably file a Twombly/Iqbal motion.

The implied concession there—that they won't file a motion to dismiss if "there's at least one actual fact pleaded that supports each essential element of a cause of action"—is rubbish. They don't run a charity over there at Dechert: if you file a case against one of their clients, they will come up with any argument they can to get it dismissed.

And that's where the problem with Twombly / Iqbal—really, just Iqbal—comes in. Every time a case is filed today, the defendant inevitably files a motion to dismiss claiming that the "actual facts" plead aren't "facts" at all, they're "conclusions," and so are not, under Iqbal, entitled to an assumption of truth.

What's the difference between a "fact" and a "conclusion?" Merriam-Webster says:

fact: an actual occurrence

conclusion: a reasoned judgment

Let me ask you, Dear Reader: who really won more votes in Florida in 2000, Bush or Gore?

Is your answer a "fact" or a "conclusion?" Do you know it as an actual occurrence, or did you make a reasoned judgment?

The problem with Iqbal is that it instructs courts—at the very beginning of the lawsuit, when they have nothing in front of them but a "short and plain" complaint—to perform a wildly subjective analysis about which allegations are merely "conclusions" and which of the non-conclusory allegations are "plausible." 

There's nothing new about that problem. It's the same problem that prompted Rule 8—the Rule supposedly interpreted by Iqbal—to be enacted in the first place:

You used to have the requirement that a complaint must allege the “facts” constituting the “cause of action.” I can show you thousands of cases that have gone wrong on dialectical, psychological, and technical argument as to whether a pleading contained a “cause of action”; and of whether certain allegations were allegations of “fact” or were “conclusions of law” or were merely “evidentiary” as distinguished from “ultimate” facts. In these rules there is no requirement that the pleader must plead a technically perfect “cause of action” or that he must allege “facts” or “ultimate facts.”

Rules of Civil Procedure for the District Courts of the United States: Hearings Before the H. Comm. on the Judiciary, 75th Cong. 94 (1938) (statement of Edgar B. Tolman, Secretary of the Advisory Committee on Rules for Civil Procedure Appointed by the Supreme Court); quoted by p.4 of Professor Stephen Burbank's testimony before the Senate.

The whole point of Rule 8 was to ensure that the right to civil justice didn't turn on metaphysical word games.

And yet we're supposed to come full circle because, as Beck et al. continue,

Twombly/Iqbal are about reining in the cost of litigation; we might feel differently about Professor Hartnett's proposal if it required payment of all a defendant’s costs of “appropriate” (the Article's term) discovery – should designated allegations nonetheless turn out to be unfounded.  But under the proposal as offered, there’s no penalty for over-designation.  If it’s one thing that the fifty-year life span of Conley established, it’s that unrestrained pleading imposes huge discovery costs on defendants.  Even Professor Burbank (who really tried hard) was reduced to relying upon a single study of tiny cases in which even then 25% of the parties believed the process was too expensive.  The excessive cost of modern discovery is simply not a issue capable of dispute any longer.

At least Burbank actually cited something. Defense lawyers think they're entitled to assert the cost of discovery—a cost due primarily to their own practice of relentlessly frustrating discovery at every turn—is "excessive" through sheer ipse dixit.

Sounds like a "conclusion" to me, not an "actual fact."

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Felix Salmon at Reuters caught something interesting:

[T]he facts of the case are pretty clear. The relationship between JP Morgan and Televisa goes back decades, and so JP Morgan was the natural choice for Televisa to turn to when it decided to buy a fiber-optic cable company called Bestel for $325 million, $225 million of which was to come from Televisa subsidiary Cablevisión.

JP Morgan intended to syndicate the loan, but the timing was bad: the deal closed in 2008, when credit markets were all but closed, and as a result JP Morgan ended up owning all of it. After an attempt by Televisa to help JP Morgan syndicate the loan fell through, JP Morgan then turned to Inbursa, Carlos Slim’s bank.

This was not an obvious choice from the point of view of serving one’s client. Slim and Cablevisión compete fiercely in the telecommunications space, where Slim is the dominant monopolist and Cablevisión is selling telephony and internet access in competition with him. And the rivalry is all the tougher due to the history between the two groups: Slim used to be a major shareholder in Televisa, and to this day Inbursa owns a 22% stake in Cablevisión.

Now there were two ways of selling this loan: JP Morgan could either assign it to Inbursa, which would require Cablevisión’s permission, or else it could participate it to Inbursa, which would not. At first, JPM tried to assign the loan, but unsurprisingly Cablevisión refused to grant their permission for that deal to happen.

You can imagine what happened next: JP Morgan dressed up the "assignment" as a "participation." As Judge Rakoff described it in his order,

JP Morgan, acting in bad faith, used the guise of a purported “participation” to effectuate what is in substance a forbidden assignment, with unusual provisions demanded by Inbursa that are calculated to give Inbursa exactly what the assignment veto in the Credit Agreement was designed to prevent. JP Morgan thereby violated, at a minimum, the covenant of good faith and fair dealing automatically implied by law in the Credit Agreement…

Televisa's request for a preliminary injunction halting the agreement was thus granted.

Salmon wonders what JPMorgan's response to all these allegations is:

So for JP Morgan’s side of the story, all I have to go on is their 40-page memorandum of law in the case, which is quite narrowly legalistic, which was roundly rejected by Rakoff, and which obviously can’t respond to Rakoff’s ruling since it was filed before Rakoff made his ruling.

Since JPMorgan moved for summary judgment pursuant to Fed. R. Civ. P. 56, they, like Televisa, were entitled to submit affidavits in support of their position, and it appears they submitted declarations from "Sheldon L. Pollock" and "Jaquelina Truzzell." Both declarations have been unsealed by Judge Rakoff's order, but neither is on the docket.

I doubt the declarations say much; JPMorgan's memorandum of law primarily references the Pollock and Truzzell declarations when discussing side matters, like telephone calls and Televisa's motives for opposing the assignment / participation. Truzzell apparently affirms there are "no side agreements" with Inbursa and that JPMorgan would not release "confidential" information, but that's it. There's nothing about how JPMorgan came to participation terms with Inbursa that, at least on their face, entitle Inbursa to a treasure trove of information about Televisa, far more than provided by JPMorgan's standard participation agreement.

Which I find telling. Though the standard response of most defendants is — for tactical reasons like avoiding getting pinned down to a particular version of events — to "deny and delay" rather than to come forth with an affirmative opposition, under the facts here, JPMorgan really needed to make a better showing. Here's the full quote (excerpted above) from Judge Rakoff's order:

In opposing a preliminary injunction, JPMorgan argues that the Participation Agreement is technically consistent with the Credit Agreement. Superficially, this may be correct. For example, with respect to Cablevisión’s concerns about confidential information, the Credit Agreement permits disclosure of information about the borrower, not just to assignees (who can be vetoed) but also to participants (who cannot), provided that such information is given on a confidential basis. Credit Agreement § 9.16(f)(i). This includes “all information received from the Borrower . . . relating to the Borrower, any of its Related Parties or their respective businesses.” Id. § 9.16. Similarly, there is no express restriction in the Credit Agreement on providing a participant with its pro-rata share of fees received by the lender or an option of first refusal for any further transfer of the loan. Finally, under the Credit Agreement, assignment of the loan without borrower consent is expressly permitted when there is an Event of Default. Id. § 9.04(b)(i).

But this narrow focus obscures the gist of Cablevisión’s argument, which is that JPMorgan, acting in bad faith, used the guise of a purported “participation” to effectuate what is in substance a forbidden assignment, with unusual provisions demanded by Inbursa that are calculated to give Inbursa exactly what the assignment veto in the Credit Agreement was designed to prevent. JPMorgan thereby violated, at a minimum, the covenant of good faith and fair dealing automatically implied by law in the Credit Agreement.

The Court agrees.

JPMorgan could have done more factually, rather than just legally, to rebut the appearance of bad faith. But they didn't; they just argued that they were entitled to do what they did, rather than show that their conduct with Inbursa was appropriate.

Such silence could be, in part, an attempt by JPMorgan to protect Inbursa's confidences, which arguably would have been appropriate. (I say "arguably" because the totality of the circumstances here — primarily Inbursa's attempt to negotiate terms more favorable than those typically provided by a participation agreement — imply that Inbursa has waived its right to keep those discussions confidential from Televisa.) But there's nothing on the docket reflecting an attempt to have Judge Rakoff review any pertinent materials in camera, and so there's no reason for us to speculate that JPMorgan's silence was a product of confidentiality.

It thus may be more appropriate to speculate that JPMorgan's silence was the product of not having a good defense. Again: facts win cases. "Technically consistent" legal arguments don't.

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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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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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Oh, Ashcroft v. Iqbal, will we ever stop blogging about you?

The newest online debate pits the class action defense lawyers at Drug & Device Law against University of Pennsylvania Law School Professor Stephen Burbank at PENNumbra, the online supplement to UPenn's Law Review.

Beck and Herrmann open with a defense of Iqbal on several grounds, including:

[C]ourts have no legitimate basis for favoring plaintiffs when interpreting pleading standards. A just system does not pick sides in advance, but instead establishes neutral rules. We reject the normative view that it is somehow “better” to let unmeritorious cases proceed than to risk that meritorious cases will be dismissed. Either way represents error, and neither error is inherently better than the other. Indeed, given the enormous transaction costs that litigation entails, Type II errors (false negatives) are probably preferable to Type I errors (false positives) from a purely economic perspective.

From a "purely economic perspective" it is better if corporations stop wrongfully causing damage in the first place, which they will only do if they have an economic incentive like the threat of legal liability.

But there's a bigger problem with Beck and Herrmann's argument.

It is an "error" when a court dismisses a meritorious case. It is a particularly unjust, unfair, and avoidable "error" when a court dismisses a meritorious case prior to any discovery.

It is not, however, an "error" for a court to refuse to dismiss a case that may be unmeritorious.

Why not? Because the case may be meritorious and, if it is not, the defendant has four more opportunities to resolve the case favorably by testing the merits of plaintiff's claim: judgment on the pleadings, summary judgment, trial, and post-trial relief. That is to say, even after the motion to dismiss, Plaintiff's claims will be assessed, re-assessed, re-re-assessed, then re-re-re-assessed. Then there's an appeal to re-re-re-re-assess each and every element of plaintiff's claims and each and every element of plaintiff's damages.

When a court declines to dismiss an unmeritorious case, there is ample room for error-correction down the road to ensure plaintiff's claims have merit. It's why we have a civil justice system: to provide a thorough airing and evaluation of disputes.

When a court dismisses a meritorious case, however, the only error-correction is a single appeal that will be evaluated under the same unfair anti-plaintiff standard established by Iqbal.

Beck and Herrmann have it exactly backwards: there is "no legitimate basis" for not favoring plaintiffs when interpreting pleading standards. Their "neutral" interpretation of pleading rules is not "neutral" at all, but rather a "normative view" that plaintiffs are not entitled to the same error-correcting procedures to which defendants are entitled.

A "just system" wouldn't pick defendant's side in advance.

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[UPDATE: Welcome, io9 readers! If you would like to learn more about this area, you should check out the Stanford Copyright & Fair Use Center.]

The sharp readers of io9, themselves a collective Library of Alexandria of science fiction, noted surprising common elements between James Cameron's Avatar and a 1957 short story by Poul Anderson, "Call Me Joe:"

Like Avatar, Call Me Joe centers on a paraplegic — Ed Anglesey — who telepathically connects with an artificially created life form in order to explore a harsh planet (in this case, Jupiter). Anglesey, like Avatar's Jake Sully, revels in the freedom and strength of his artificial created body, battles predators on the surface of Jupiter, and gradually goes native as he spends more time connected to his artificial body.

James Cameron's been here before. After foolishly telling the truth that elements of The Terminator had been inspired by two Harlan Ellison The Outer Limits episodes, Cameron was promptly sued:

Ellison filed suit against the studio claiming that THE TERMINATOR was plagiarized from his two teleplays for THE OUTER LIMITS. One was  "Soldier" (based on a short story he written years before), in which a soldier is zapped from a future war zone into the present and causes all sorts of problems. In addition to basic plot similarities, the scenes of the future in THE TERMINATOR are very similar in look and feel to those in "Soldier".

The other teleplay was "Demon With a Glass Hand", in which a lone man with a glass-and-computer-chips hand and a woman he meets up with are on the run from some unknown enemy. He has amnesia and doesn't know a thing about who he is, or why he's in his current situation. Eventually, he finds out that he's from the future and was sent to the present on a mission to save the human race.

Cameron settled for an undisclosed amount. All versions of The Terminator distributed today include an acknowledgment to Ellison.

Of course, the paralyzed hero with a telepathic connection to extraterrestrials isn't the entirety of Avatar, and, if Wikipedia is to be believed, "Call Me Joe" has none of the elements of colonialism, rebellion, spy-turned-double-agent and whatever else is going on in this epic helicopters vs. pterodactyls trailer.

Moreover, there's nothing new about an author taking elements from pre-existing stories and re-working them. Ever see the play about the prince who feigns madness in response to his mother's hasty marriage to a usurper and, after a complicated series of manipulations, kills a spy and himself?

No, not Hamlet. I'm talking about Vita Amlethi, written four-hundred years earlier by Saxo Grammaticus. (See the connection between "Amleth" and "Hamlet?")

If Shakespeare can do it, can James Cameron?

Probably so.

Let's a take a peek at the filings in a lawsuit filed last year by the estate of the author of It Had To Be Murder (the basis for Hitchcock's Rear Window) against Steven Spielberg, Dreamworks, and others over the movie Disturbia:

Steven Spielberg and major Hollywood studios stole the plot from Alfred Hitchcock's classic 1954 film "Rear Window" in making last year's "Disturbia," a lawsuit filed in Manhattan federal court on Monday said.

Dreamworks, its parent company Viacom Inc, and Universal Pictures, a unit of General Electric Co's NBC Universal, are accused of copyright infringement and breach of contract for making "Disturbia" without first obtaining permission from the copyright holders, the suit said.

Spielberg, a Dreamworks founder, is named as a defendant. The film grossed about $80 million at the U.S. box office.

According to the lawsuit, filed by the Sheldon Abend Revocable Trust, the basis for Hitchcock's 1954 film was "Murder from a Fixed Viewpoint," a short story by Cornell Woolrich.

Hitchcock and actor James Stewart obtained the motion picture rights to the story in 1953. The lawsuit argues that Dreamworks should have done the same.

"What the defendants have been unwilling to do openly, legitimately and legally, (they) have done surreptitiously, by their back-door use of the 'Rear Window' story without paying compensation," the lawsuit said.

As Spielberg's motion for summary judgment argues,

"It is well settled that copyright law protects only plaintiffs particular expression of his ideas, not the ideas themselves." Arden, 908 F. Supp. at 1258; 17 U.S.C. § 102(b).7 As this principle is applied to literary works, general plot ideas of a work are not protected under the Copyright Act. Nichols v. Universal Pictures Corp., 45 F.2d 119, 122 (2d Cir. 1930)(a plaintiff can have no "monopoly" over a general plot idea); Arden, 908 F. Supp. at 1259-60 (generalized plot ideas are not protected, "even if first conceived by plaintiff'). ...

Simply put, no one can own a general plot idea for a story. Davis, 547 F. Supp. at 726 (no protection for plot "about the Vietnam War and its effects on people's lives, and ... love triangles in which the betrayed member ofthe triangle commits suicide"); Giangrasso v. CBS, Inc., 534 F. Supp. 472,476 (E.D.N.Y. 1982) (plot ofa live radio broadcast from a remote location being interrupted by a man with a gun - not protectable); Midwood v. Paramount Picture Corp., 1981 WL 1373 at *1, *3 & *5 (S.D.N.Y. 1981) (plot idea of sheriff whose own posse and townspeople desert him and capitulate to outlaws, and sheriffs search for the outlaws -unprotectable); Berkic v. Crichton, 761 F.2d 1289,1293 (9th Cir. 1985) (plot of "criminal organizations that murder healthy young people, then remove and sell their vital organs to wealthy people in need of organ transplants" and "the adventures of a young professional who courageously investigates, and finally exposes, the criminal organization" - not protected because "[n]o one can own the basic idea for a story").

It seems Avatar might go down that road. If Anderson's heirs can prove that the idea of telepathic control of an alien was entirely Anderson's creation — which I doubt — then they might have a claim. The paralyzed hero is likely a wash; consider Rear Window.

It'd be better for everyone, and for art in general, if Cameron could simply acknowledge the inspiration, credit Anderson's work, and thereby promote continued sales of Anderson's work.

But that won't happen without a lawsuit, not with what happened to Cameron last time he acknowledged inspiration.

Just one of the consequences of having courts of law, not courts of justice.

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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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I've written before about Contingent Fee Business Lawyers As Venture Capitalists and Lawyers Who "Don't Take Possible Losers," so I was thrilled to read the NYTimes yesterday:

Richard W. Fields says he has come up with a win-win financial strategy for the downturn. He is investing in lawsuits.

Not in trip-and-fall cases, mind you, but in disputes that are far larger, more costly and potentially more lucrative, often pitting major corporations against each other.

Mr. Fields is chief executive of Juridica Capital Management. which runs a fund that invests in one side of a lawsuit in exchange for a share of any winnings.

Larry Ribstein has the most thorough commentary on it:

Litigation financing can be viewed as simply another way for the capital markets to help firms exploit productive assets. Of course there are special problems relating to outsiders stirring up claims by simply funding actions by others (maintenance), particularly where the investor gets some of the proceeds (champerty) or the claims are groundless (barratry).  Also, confidentiality and privilege rules may forbid disclosure of litigation information to outside funders, making these particularly difficult investments. The basic problem, as discussed in my earlier blog post, is that "it turns litigation into a business rather than the search for corrective justice."

With respect to the excessive litigation point, it's worth noting that the hedge funds aren't financing the most abusive types of strike suits. These aren’t consumer class actions, but b2b litigation. ...

I asked Larry in comments for some support for that latter point, to no avail, and I stick by my point that "There's no shortage of patent, copyright, antitrust and securities regulation defense attorneys willing to opine that those 'b2b' areas are as ripe with abuse as any other legal field."

In any event, we already have an industry in which billions (potentially trillions) of dollars of investments are pooled to fund litigation directed towards a particular result. We call it "insurance."

There is a good reason that plaintiff's trial lawyers up against insurance companies (not just in personal injury cases like wrongful death or medical malpractice, but also a variety of "b2b" claims like director & officer liability) accept it as an article of faith that they will not get any reasonable settlement offers until the eve of trial. The economic relationship between insurance companies, defense lawyers, and policyholders creates a situation in which no one mentally accepts the legitimacy of the claim -- much less a reasonable value of it -- until they are staring down the barrel of a verdict.

Thanks to defense liability insurance, even the most obvious of cases will be met with denial and furious litigating of any and all liability, including a denial of basic common sense principles such as a truck driver being the "agent" of the trucking company or a hospital having a duty to its patients.

Why?

To roll the dice: spending a couple thousand dollars litigating the issue could save them the cost of the entire judgment, or at least cause the plaintiff and their lawyer to worry and accept a smaller settlement.

So count me as deeply unimpressed by fears that these hedge funds will spur frivolous plaintiff's litigation: we've already got plenty of frivolous defense litigation and no one raises a peep.

Moreover, as I've mentioned time and again, investing in lawsuits is a risky business. The potential downside is 100%. Look at Juridica's cautious business model:

The investing companies say that because they do not take control of the lawsuit from the company and lawyers waging it, their most important task is identifying cases likely to produce a substantial return. That means, for example, rejecting claims that raise novel legal questions or that will probably end up before a jury, Mr. Fields said.

“Juries are a coin toss,” and that is too much uncertainty, he said. The company also avoids cases where the outcomes are difficult to predict because they could draw political attention or could be reversed on appeal, and cases in which the other side lacks deep pockets.

Let me reiterate that: these litigation investment hedge funds only take non-jury cases with simple issues and low odds of appeal.

That's a small fraction of the litigation and trial market, one with no "frivolous" cases at all. The funds are investing solely in the cases they believe are very likely to win.

The "danger" of frivolous cases is thus non-existent: the real "danger" is when plaintiffs with meritorous cases can't afford to pursue them.

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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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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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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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At the National Law Journal:

The American College of Trial Lawyers and a legal think tank have called for a sweeping overhaul of civil discovery rules to curtail expensive, time-consuming battles for documents, in a study released on March 11.

The most radical of the changes would impose strict limits on discovery after initial up-front disclosure by both sides.

...

The 30-page report contains more than two dozen proposals and general principles for overhauling the discovery rules used in both federal and state courts. It was an 18-month joint project of the ACTL and the Institute for the Advancement of the American Legal System at the University of Denver.

Saunders said the task force, drawn from the experienced trial lawyers of the ACTL, came from both the plaintiffs' and defense bar. The proposals fall no harder on the plantiffs' bar than on the defense, he said.

There's a lot to be said about this report; let me start with the most basic problem.

When I file suit, I generally have my client's story and a little bit of paperwork. The defendant possesses the bulk of the proof. If I do not pry deeply into the defendants' materials, I will lose, either at the inevitable summary judgment motion that blames me for not having the evidence I was denied, or at the trial where a sweet-talking defense lawyer points their finger at my client demanding "where's the proof?"

Under the current, supposedly excessive discovery rules, more than half of my discovery requests are already met with unfounded objections like "unduly burdensome" or "not reasonably calculated to lead to discoverable evidence," objections often sustained by courts which already apply de facto limits on discovery in an effort to move cases along. If you want a glimpse of how quickly these judgments are made by courts (as a matter of necessity given the volume), spend a morning in Philadelphia City Hall's Courtroom 285, where 200+ discovery motions are decided before lunch.

The ACTL proposals dramatically raise the incentive defendants' already have in filing frivolous objectives by giving defendants all new bases upon which to object, creating whole new anti-discovery principles such as "Proportionality should be the most important principle applied to all discovery" and "All facts are not necessarily subject to discovery." Yet, even as they greatly expand the field of possible objections, the ACTL proposals take no steps towards reducing the filing of frivolous objections.

Thus, my case is supposed to be held to defendants' self-selected "initial disclosures" followed by time-pressured "limited" additional discovery, but defendants suffer no consequences whatsoever if they initially disclose a tiny fraction of the relevant information then frivolously object to every last one of my requests, tying up the courts (and my practice) by forcing judges to determine the "limited" nature of every last discovery request.

Putting it all together: the proposals eviscerate plaintiffs' ability to seek out evidence in discovery while increasing defendants' incentives to file excessive objections.

I wouldn't say such a lopsided outcome "falls as hard" on plaintiffs as defendants; for contingent-fee plaintiffs' lawyers, it's crippling, as it hampers their ability to prove their cases while also making discovery more time-consuming, whereas for hourly-paid defense lawyers, it's a goldmine, permitting them to litigate the heck out of a case before inevitably winning it. Hourly-paid plaintiffs' lawyers (a rare beast that appears largely in the mid-to-large-size corporate world) get a boon as well, even if they keep losing their cases, too.

If the ACTL truly wants to make discovery more just, speedy and efficient, I can see three easy ways to level the playing field under these proposals:

1. Mandate spoliation and/or adverse inference sanctions for parties that do not produce adequate initial disclosures in a timely fashion;
2. Modify the summary judgment burden of persuasion to eliminate the non-movant's requirement to produce specific evidence in rebuttal (since they're less likely to have it);
3. Mandate attorneys' fees and/or sanctions against parties which lose (not merely "frivolously file," since courts rarely hold that) motions for protective orders and other discovery objections.

To put it another way: the reason I have to send so many interrogatories and requests for production of documents is because fewer than 1 in 10 gets a candid answer, usually then only after sending threatening letters and filing a motion. Put some teeth behind the principle of "disclosure" and then we'll get somewhere.

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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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I so often see the Board of Directors at a company acting badly that it’s almost is heartening to see things done the right way.

After a protracted period of familial disputes over the company, including a prior lawsuit, one side sent a Demand Letter, as is proper, alleging various Board members “breached their fiduciary duties and engaged in wrongful, self-serving and bad faith acts and omissions … which have resulted in catastrophic injury to [the Company] and corresponding and substantial loss of value to [the challenger’s] stock [in the Company].”

That prompted a Board Meeting where:

Attorney Sonnenfeld discussed the Demand Letter, corresponding ALI Principles, and the duty of care owed by the board to respond to the Demand Letter. He advised, 'evaluation of the demand should be made by independent and disinterested directors.' At that point, [the Members accused of wrongdoing] were excused from the meeting. 'The meeting continued, attended by the independent and disinterested Directors … ' At that point, Attorney Sonnenfeld discussed the proper formation of a special litigation committee to address the issues in the Demand Letter. He advised that such committee retain independent counsel 'to develop a response to the demand letter' and he provided a preliminary list of candidates and their qualifications. He further 'discussed the possible role and functions of the Committee in conjunction with the independent counsel.' "

Lemenestrel v. Warden, 2008 PA Super 295 (Pa. Super. Ct. 2008)(emphasis added).

The company then hired independent counsel to perform an internal investigation of the claims, who concluded “there was no basis or evidence upon which to support a suit by the Company against the Wardens and that, therefore, pursuing those claims through litigation would not be in the best interests of the Company.”

Since the Board followed all the appropriate procedures, the Superior Court upheld the Court of Common Pleas’ holding that the Board’s decision not to pursue litigation was protected under the business judgment rule:

'Decisions regarding litigation by or on behalf of a corporation, including shareholder derivative actions, are business decisions as much as any other financial decision. As such, they are within the province of the board of directors.' The Cuker Court cautioned that, 'if a court makes a preliminary determination that a business decision was made under proper circumstances, however that concept is currently defined, then the business judgment rule prohibits the court from going further and examining the merits of the underlying business decision.' In other words: 'Without considering the merits of the action, a court should determine the validity of the board's decision to terminate the litigation; if that decision was made in accordance with the appropriate standards, then the court should dismiss the derivative action prior to litigation on the merits.'

Id., citing Cuker v. Mikalauskas, 547 Pa. 600, 692 A.2d 1042 (Pa. 1997), which adopted The American Law Institute's Principles of Corporate Governance: Analysis and Recommendations ("ALI Principles"), particularly sections 7.07-7.10 and 7.13.

I'm sure the internal investigation was both a substantial burden on time and attention and a considerable expense, but look what it accomplished. An ounce of prevention is worth a pound of cure.

 

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On Christmas Eve, Judge Feess in the Warner Brothers / Fox dispute over the movie rights to the noir comic The Watchmen gave Fox what might be a nine-figure Christmas gift: granting, in part, Fox’s motion for summary judgment. You can read a copy of the initial order, which Judge Feess has promised to expand upon, over at Corante's Copyfight.

If you are not familiar with the dispute, here is all you need to know if you don't want to read my prior post): Fox initially purchased the movie rights to Watchmen, was unable to do anything useful with them and so entered into a series of complicated agreements with a producer, Lawrence Gordon, and his company, agreements which, arguably, preserved Fox’s distribution rights for the movie, and provided for a number of options and scenarios that were never exercised (even though many of them could have been exercised).

Initially, Judge Feess ruled that a jury trial would be necessary because, even though the dispute rose entirely under legal interpretations of undisputed documents, there were a number of factual ambiguities that a jury would have to decide before the court could rule on the legal issues. Trial is scheduled to begin this month.

Such was the case until, as Judge Feess’ order describes it,

Gordon’s testimony regarding the facts, circumstances, and events surrounding the negotiation of the 1994 agreements would have been of assistance to the Court in evaluating the objectives of the parties at that time. However, Gordon refused to testify on that subject during his deposition because he supposedly could not separate what he knows based on his own recollection from what he learned from counsel. Gordon’s counsel therefore asserted the attorney/client privilege and instructed Gordon not to answer any questions on the subject.

There are a couple of potential explanations for Gordon’s lawyer recommending Gordon assert privilege to avoid discussing the most pivotal issues in the case, including:

• A genuine concern that, in the middle of the deposition, his multi-millionaire successful businessman client would blurt out damaging and heretofore privileged conversations with his attorney;
• A concern that every arguable waiver of privilege necessarily translates into a complete and total waiver of attorney-client privilege for every discussion relating to the case;
• A reflexive expression of years of habitually frustrating opponents depositions with each and every potentially viable objection; or,
• A fit of madness.

Judge Feess was, shall we say, unimpressed with this tactical decision:

The Court takes a dim view of this conduct and questions whether the assertion of the privilege was proper. Moreover, the assertion of the privilege does have a consequence: having now reached a decision based on the record before it, the Court will not, during the remainder of this case, receive any evidence from Gordon that attempts to contradict any aspect of this Court’s ruling on the copyright issues under discussion.

Thus, with a single obtuscatory tactic at a deposition, Gordon’s lawyer was able to permanently foreclose Gordon from contesting Fox’s version of the facts, resulting in there being no further genuine issues of material fact, making summary judgment appropriate.

I was not there and I do not know what potentially privileged information Gordon and his lawyer were trying to keep secret.

I do know, however, that one of the worst things a party to a lawsuit can do is to refuse to answer a question in discovery, at a deposition or at trial. You might as well paint a target on your back. A half-decent trial lawyer will have no trouble forging the molten steel of a refusal into the weapon of the trial lawyer’s choice.

And that’s the best case scenario. The worst case scenario is for the court to conclude that you are trying to play games with the legal system and to destroy your claims accordingly.
 

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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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The blog "How Appealing" has plenty of links on the $90 million settlement of the donor-intent suit brought against Princeton University by the heirs to the Great Atlantic & Pacific Tea Co. (and now A&P supermarket) fortune, alleging misuse of a 1961 donation of $35 million which had swelled in value to over half a billion dollar.

The case was scheduled to go to trial in New Jersey state court in January. Pretrial litigation costs were $40 million for each side. Princeton expected its own trial costs to reach $20 million; it's fair to assume that the Robertson's trial costs would have been the same if not greater.

$80 million to litigate and another $40 million to try a breach of fiduciary duty, accounting and breach of contract dispute between two parties. No appeals, certs, or retrials included.

How could that be? Let's look at how those numbers compare to other complicated cases like patent infringement, white collar criminal defense, and antitrust.

According to the American Intellectual Property Law Association, the average per-party cost to take through litigation and trial a large (over $25 million at stake) patent infringement / dispute is $5 million. (For all patent cases, the average is $1 million). Patent cases are document intensive, involve numerous expensive experts, and typically require dozens of depositions and motions. They're often more complicated than large commercial litigation or breach of fiduciary duty cases.

Yet, the Robertson case would have cost twelve times what the biggest patent cases typically do.

Remember the white collar criminal defense that got WilmerHale sued? That "feeding frenzy" of billing was over $12 million in hourly fees, less than one-third what either side here charged, and it involved more than double the documents of Robertson.

So what happened in Robertson?

Sure, the case wasn't a slip-and-fall:

The university says it produced more than half a million pages of documents in pretrial discovery. The trial witness list had 124 names, 80 witnesses had been deposed, 3,000 pages of briefs were required and 5,000 trial exhibits were identified.

But it wasn't that big. Here's how the District Court described the Visa / Mastercard merchant and debit card antitrust case, which settled just before trial a few years ago:

Class Counsel have litigated this case -- which did not culminate in settlement until the eve of trial -- for seven years. During that time, there were almost 400 depositions of witnesses, including 21 experts who issued 54 expert reports; four rounds of class certification briefing (through the Supreme Court); 16 summary judgment motions, 31 motions in limine, and three Daubert motions; and a pretrial order identifying 230,000 pages of trial exhibits, 730 trial witnesses, and more than 17,000 deposition designations

In re Visa Check/Mastermoney Antitrust Litig., 297 F. Supp. 2d 503 (E.D.N.Y., 2003). Now that's big.

Yet, that much work -- several orders of magnitude larger than Robertson -- resulted in a "lodestar" (hours times prevailing rates) fee calculation of $62,545,603 for plaintiffs' counsel, or one and a half times each side's bill in Robertson.

The Robertson case was filed July 17, 2002. In the 6 years, 4 months, and 24 days leading up to the settlement announcement, the parties averaged $34,202.65 in costs every single day, or about the same as if each side had one of the most expensive partners in the country (each at $1,000 an hour) and two of the most expensive associates in the country ($600 an hour per associate) working every single day, including weekends and holidays, from 8am to 6pm, taking no more than 2.2 hours in their work day to do anything else, including eating, twittering or answering angry phone calls from their abandoned spouses.

Using more reasonable numbers, like an average rate of $348 an hour, and seven hours of actual, billable hours per day, we still end up with the ridiculous conclusion that each side had seven lawyers working full time for them every day, including weekends and holidays.

Some of these numbers may be unfair. For instance, both sides hired major accounting firms to prepare extensive expert reports. So let' s very generously assume that these firms performed the same level of accounting work as required for companies with under $1 billion in annual revenue to ensure complete Sarbanes-Oxley compliance: $2.8 million (which I think is a high estimate) for each side.

Let's also assume "costs," like copying, postage, phone calls and research equal about 5% of overall billing, as is often the case in business representation. I think that's actually generous here -- $2 million per side will get you an awful lot of copies.

Adding in those expert fees and costs drops the attorneys' fees to $70.4 million, or a mere $30,098.33 every single day. Using our "reasonable" hourly rates and billable hours, that's a team of six lawyers working full time every day, including weekends and holidays. For each side.

That's outrageous: other than the fees, Robertson was closer in size to complicated personal injury litigation than a large, complex commercial dispute like a patent, antitrust, or securities case.

Multi-defendant, multi-claim personal injury cases -- e.g., a catastrophic injury or wrongful death at a construction site that raises both product liability and negligence issues -- frequently exceed 100,000 documents, 100 potential witnesses, 50 depositions, and 1,000 trial exhibits. I can't judge what the article meant by 3,000 pages of "briefs," but, based on the motions and orders available online, I assume that number includes pleadings, motions and exhibits, which is not at all impressive.

Tomorrow we'll look at how not to spend $120 million bringing a case to trial.

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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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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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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 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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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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A reminder: failure to pay general contractor / subcontractor disputes can get expensive, per 73 P.S. § 512:

§ 512.  Penalty and attorney fee

(a) PENALTY FOR FAILURE TO COMPLY WITH ACT.-- If arbitration or litigation is commenced to recover payment due under this act and it is determined that an owner, contractor or subcontractor has failed to comply with the payment terms of this act, the arbitrator or court shall award, in addition to all other damages due, a penalty equal to 1% per month of the amount that was wrongfully withheld. An amount shall not be deemed to have been wrongfully withheld to the extent it bears a reasonable relation to the value of any claim held in good faith by the owner, contractor or subcontractor against whom the contractor or subcontractor is seeking to recover payment.
 
(b) AWARD OF ATTORNEY FEE AND EXPENSES.-- Notwithstanding any agreement to the contrary, the substantially prevailing party in any proceeding to recover any payment under this act shall be awarded a reasonable attorney fee in an amount to be determined by the court or arbitrator, together with expenses.

Prevailing defendants can recover attorneys' fees, too. Zavatchen v. RHF Holdings, Inc., 2006 PA Super 240, 907 A.2d 607, 2006 Pa. Super. LEXIS 2221 (Pa. Super. Ct. 2006), appeal denied by 591 Pa. 685, 917 A.2d 315, 2007 Pa. LEXIS 345 (2007).
 

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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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Barry Barnett passes along a classic legal analysis of a copyright claim, courtesy of Groucho Marx.

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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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Another day, another breach of contract case alleging "fraud in the inducement, unjust enrichment, and tortious interference with contractual and business relationships." Sheinman Provisions, Inc. v. Nat'l Deli, LLC, 2008 U.S. Dist. LEXIS 54357 (E.D.Pa. 2008). Here's what inevitably happens:

Based upon the parties' pleadings and the Court's own review of the contract at issue, we find that the Asset Rental Agreement is a fully integrated contract, which contains an express provision stating that in entering the Asset Rental Agreement, neither party has relied on any claims, representations or warranties made by the other, except as expressly set forth therein. Therefore, the parole evidence rule squarely applies here because Plaintiff is seeking to offer evidence of representations made prior to the execution of the Asset Rental Agreement to contradict an express provision thereof. As it is well established that "fully integrated contracts preclude fraudulent inducement claims," this claim will be dismissed as barred by the parole evidence rule. Because the fraudulent inducement claim is defeated by the parole evidence rule, we do not need to address Defendant's arguments based on the gist of the action doctrine and Rule 9(b).

...

In this case, the agreement at issue is a fully integrated contract and, by its terms, it governs the entire relationship of the parties. Therefore, we disagree with Plaintiff's argument that Rule 8(d)(2) allows pleading in the alternative in this case. Rule 8 only allows alternative claims to be plead if all of the claims are sufficient on their own. Here, even if the breach of contract claim fails, the unjust enrichment claim is still insufficient because Pennsylvania law prohibits unjust enrichment claims where a contract governs the relationship of  the parties, as is the case here. The bar to this type of claim is not altered when unjust enrichment is plead in the alternative to an unsuccessful breach of contract claim as the relationship of the parties is still governed by a valid contract, and therefore, there is no reason to apply the quasi-contract doctrine of unjust enrichment. Plaintiff's unjust enrichment claim will be dismissed.

...

Sheinman's tortious interference claim alleges almost identical facts: that Defendant intentionally interfered with Plaintiff's business and contractual relationships to cause its customers, vendors and suppliers to discontinue purchasing from Plaintiff and deal directly with Defendant. Following the Third Circuit's holding in Chemtech, we find that the duties allegedly breached by Defendant were not imposed as a matter of social policy, but rather flowed from the Asset Rental Agreement. Therefore, the gist of the action doctrine bars Plaintiff's tortious interference claim here as the duties  allegedly breached were grounded in the contract between the parties.

Ouch! Those all look like pleading problems: if you're doing to allege claims outside breach of contract, make sure the facts you allege can support them -- the claims can't simply be naked alternatives to your breach of contract. From looking at the facts (a wholly integrated contract only breached in a few, but important, ways), I really don't see how the plaintiffs could have pulled it off.

I can't blame the plaintiffs for trying, though: if they had not alleged these claims, and then evidence later revealed they should have, the defendants would have inevitably cried foul with the statute of limitations, and probably would have won, since the amendment would have been for entirely new claims. It was largely a waste of everyone's time, but unless defense counsel's in the mood for a tolling agreement (hint: they're not), you don't have a choice.

Hate the game, not the players.

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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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John F. Olson and Amy L. Goodman, partners at Gibson, Dunn & Crutcher LLP, follow up on Marty Lipton's article (which I previously discussed here):

In our upcoming paper, we will address some of the issues that deserve focus from shareholders, directors, business executives and other interested stakeholders.

• First, and not necessarily in order of importance, we need to develop effective methods of board/shareholder communication that build on new electronic capabilities but are not burdensome and do not increase liability risks.

• Second, boards and business executives need to effectively and regularly communicate corporate strategy and the board’s oversight role to investors, the business press and analysts, once again without fear of increased liability.

• Third, companies need to make good investor relations, and “good listening” a day to day corporate priority, and shareholders need to take advantage of these opportunities to present their views to business executives and directors.

• Fourth, shareholders need to think for themselves and reduce their reliance on proxy advisory services and be more transparent in their proxy voting decision-making processes.

• Fifth, companies, boards and their advisors need to figure out a way for directors to spend more time addressing strategy and risk and less time on compliance.

• Finally, while efforts to better educate directors about corporate governance and their fiduciary responsibilities has been salutary, we now need to shift our efforts to better educating directors in understanding the businesses, including the risks, of their companies.

Hey, that sounds like what I wrote:

I thus foresee over the next few years growth in mid-size and large private corporations where the investors have extensive access to the records in real-time; perhaps not the same level as in a small private company, but far more than investors and public companies now have. We've already started to see that trend with the recent explosion of private equity groups like Blackstone

But I don't think any of them will change the fundamental problem of the public corporation, in which the investor experiences a 'distance' from the nuts and bolts of the operation that is hard to accept in the rapid pace of the 21st century. Hence I still believe there will be a continuing move to private equity, which a corresponding rise in intra-company commercial litigation and arbitration there, as I wrote before.

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A Pennsylvania business / partnership question:

Can I remove my property from a failing business without my partners knowledge and not face criminal charges?

My reply:

In theory, yes. In practice, no, don't remove anything without your partners' knowledge.

Generally,  partners are entitled to retrieve property that has remained in their personal ownership, but not entitled to seize, unilaterally, assets that are owned by the partnership (because such assets are owned by all the partners together).

You might think it is crystal clear that whatever you're talking about is "your" property, but if you are wrong, you may in fact end up facing criminal charges as well as a civil lawsuit.

I strongly advise you speak with an attorney who can review all of partnership material and make an assessment about the status of the property in question.

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If you're looking for contact information, please go to my Contact page.

The Beasley Firm's main website also profiles our Areas of Expertise.

The Beasley Firm typically represents plaintiffs in civil litigation and trials in Pennsylvania, New Jersey, Delaware and, on occasion, Washington, DC, and New York City. We take difficult plaintiffs' cases and see them all the way through investigation, filing, pleadings, discovery and trial, and through appeal and re-trial, too.

The Beasley Firm is a full-service civil litigation and trial law firm with a forty-year history of excellence. Our reputation as trial lawyers is unparalleled, with multiple record-setting verdicts, and the record (held by the founder) for million-dollar verdicts by a single attorney. Slade McLaughlin and I set a new verdict record -- for punitive damages in a Pennsylvania medical malpractice case -- in May of 2008.

The Beasley Firm is unique in that it has many attorneys who specialize in particular areas like automobile accidents or medical malpractice, multiple appellate attorneys, and many general practitioners who focus on cases that don't fit the normal pattern, all under one roof that retains the nimble energy of a boutique firm where everyone knows each other and bounces ideas off one another. We adapt as the case demands; if a case needs a dozen attorneys and assistants, it gets them.

Most firms put up lists of the types of cases they work on; it's hard to do that for us. In the past year we've worked on automobile accidents, aviation accidents, breach of contract breach of fiduciary duty, business torts, civil rights, commercial litigation, copyright infringement, defamation, dram shop, employment discrimination, fraud, insurance coverage / bad faith denials, medical malpractice, private equity / shareholder disputes, personal injury, product liability, wrongful death, and wrongful use of civil proceedings / abuse of process cases.

We use alternative dispute resolution methods like mediation frequently and have experience in commercial arbitration, including large, complex commercial disputes.

My practice is largely unlimited -- at any given time, I generally have multiple cases representing people who have been physically injured in accidents or through medical malpractice, and multiple cases representing people and businesses who have been financially injured through breaches of contract, breaches of fiduciary duty, or downright fraud.

If you think you have a case, please contact our offices for a case review. We don't charge to review cases and we generally represent plaintiffs on a contingent fee, where our fee depends upon our success. Please see the Contact page for contact info.

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