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

Over at the [non]billable hour, Matthew Homann posted a hilarious Venn Diagram for "What Lawyers Put In Their Biographies" vs. "What Clients Look For In Lawyer Biographies."

The diagram is so true it hurts to look at it. The first line in What Clients Look For — "will you return my calls?" — touches on an issue I have been thinking about again lately. Sometimes, I worry about the exaggerated importance placed on a lawyer's "responsiveness" to client contact.

I've written about client contact before. Maybe I'm so troubled by the issue because I represent most of my clients on a contingent fee; my job isn't to make them think that I'm a good lawyer (and thus justify paying me by the hour), my job is to win cases, and that takes precedence over everything else.

Don't get me wrong: a lawyer not only should keep their client informed about the status of their case, but in fact is ethically required to do so, and should get consent before making major decisions relating to the case. Similarly, if a client has an emergency, that's a different story entirely.

My worry doesn't relate to whether or not clients should be upset or concerned if they are kept totally in the dark — of course they should be upset and concerned — but rather relates to the amount of "responsiveness" that a client should expect of an attorney, and the extent to which "responsiveness" should be a factor in assessing the work performed by an attorney.

Two issues come to mind.

First, the speed at which a lawyer returns a call is no indication of that lawyer's quality. There are plenty of lawyers who, over the years, have developed a knack for smooth-talking clients into choosing courses of action that create the least amount of work for the lawyer while still creating the appearance of work and thus justifying the fee. The criminal defense lawyers who do little more than chat with the prosecutor to get a slightly better plea bargain offer; the plaintiffs' lawyers who never think twice about trial and rarely spend the time and money for thorough discovery and credible experts; the business attorneys who recommend a few pointless changes and spit out some legalese to the client over the phone. Many of these lawyers have learned to be available for clients 24/7, notwithstanding their poor work, and are quick-witted enough to have a soothing answer for every problem that arises during a case, right up until they tell the client that the jig is up and there's no hope but to accept a bad plea bargain, or a crummy nuisance-value settlement, or a contract that bears no resemblance to the transaction.

Second, I know it's blasphemy for me to say it, but client contact comes second. Not first. Second. First comes competent representation: meeting deadlines, developing the case, and facing problems in the case head-on by devoting all of your time, energy and attention to the problem until it is resolved or avoided. That type of dedication to each case necessarily impacts your ability to respond to all the other clients whose cases just aren't as urgent at the moment.

Is that ideal? Of course not. Ideally, a lawyer can juggle all of these balls at the same time, but let's be honest: few lawyers can really devote themselves to their work while simultaneously guaranteeing every client that they'll get a call back within 24, 48, or even 72 hours of a non-urgent call. Only two types of lawyers can do that: the types with few clients, and the types who are good only at sweet-talking clients.

But at least it's fair: I can say with a straight face that, for all of my clients, for every time when I did not respond to a client's non-urgent phone call or e-mail because I was focusing on a more urgent matter, there is a corresponding time when I was focusing on their case and not responding to someone else's non-urgent call.

Do I wish I could do better? Absolutely. Any lawyer who isn't always trying to do better shouldn't be practicing. But there are only so many hours in the day, and I have no intention of cutting back on my representation so that I can get better at my marketing.

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At the WSJ Law Blog:

The U.S. Chamber of Commerce’s Legal Newsline reported on Wednesday that the U.S. Department of Treasury may be about to grant plaintiffs’ attorneys long-sought tax write-offs for the costs associated with fronting contingency-fee lawsuits.

...

Apparently at the heart of the matter is an April letter Sens. Max Baucus (D., Mont.) and Richard Durbin (D., Ill.) sent to Michael Mundaca, assistant secretary for tax policy seeking clarity on the 9^th Circuit ruling in the 1995 case of Boccardo v. Commissioner.

In the Boccardo case, the IRS asserted that out-of-pocket expenses incurred by attorneys on behalf of clients while prosecuting contingency cases are not deductible because the law firm expects reimbursement upon getting a settlement or judgment. The Tax Court agreed.

The 9^th Circuit took up the matter. The letter sums up the ruling like this:

The court “held that attorneys who represent clients in contingency fee cases may treat litigation costs that are paid by the attorneys, such as filing fees and witness expenses as deductible ordinary and necessary business expenses . . . when the attorney and client agree to a specific fee arrangement known as a gross fee contract.”

The IRS issued a memo saying that the ruling applied only to attorneys in the 9^th Circuit. But the Tax Court has since recognized the validity of the decision in at least one other case, according to the letter.

Of course, every other business in American gets to deduct its expenses. Some favored industries, like oil companies, get to deduct more than just their expenses:

Percentage depletion allows an independent oil company to deduct from its taxes about 15 percent from the revenue generated from a well, even if that amount exceeds the well’s total value. This means that oil companies take a deduction as long as a well is producing oil, without regard to how much, or whether, the well is still declining in value. Companies in other industries are only allowed to deduct an amount that represents the decline in their investment’s value that year. The administration expects that eliminating this subsidy to produce budget savings of about $10 billion over 10 years.

That's just one of the goodies Congress doles out to upstanding corporate citizens like BP, which will pay at least $10 billion less in taxes as the result of its own oil spill, since it gets to deduct all of the cleanup costs, the compensation it pays out to victims, and the loss in value of the well.

But not plaintiff's lawyers. The IRS requires that we treat expenses on our cases as actually being profits, since we might, years down the road, recover those costs. (Nevermind that, even then, it's not profit, it's just a recovery of expenses.)

Since small businesses (like law firms) have an effective tax rate around 20-25%, such disparate tax treatment ends up making the costs on plaintiff's litigation one-fifth to one-quarter more than the costs of any other business, including the business of defending the exact same lawsuit.

A little over a year ago I posted about Contingent Fee Business Lawyers As Venture Capitalists, giving a few sample numbers:

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

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

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

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

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

The Duck Boat accident, for example, was a major maritime accident with two wrongful deaths and more than two dozen personal injury claims that will involve two primary defendants (K-Sea and Ride The Ducks) and a handful of their employees. Litigating the Limitation of Liability Act issues like "seaworthiness" will probably take at least a year or two, after which the litigation will begin in earnest, probably lasting another two-to-five years (though possibly more), with costs of at least $1,000,000. Those costs could be doubled or tripled if there's a need to do extensive testing on the seaworthiness of the tugboat or the duck boat. Some sample potential costs:

• renting an identical tugboat and barge to do visibility tests;
• buying a duck boat and then ramming it to see how easily it sinks; and,
• buying a dozen duck boat engines and running them day and night to see how long it takes for them to overheat.

None of that would be unusual or unexpected. Cases against car manufacturers that allege inadequate "crashworthiness" routinely require the destruction of a few identical cars to see how they holdup and how alternative designs would have worked better.

That's where the lack of a tax deduction has a big bite: when most businesses think of "$1 million in costs," they think of them in terms of deductible costs. For a plaintiff's lawyer, then, they have to see "$1 million in costs" as being more like "$1.25 million in costs" to any other business, since the plaintiff's lawyer will be taxed on the costs. Given the time value of money, if we assume the case takes five years, and that the taxes paid could have been invested at a modest 5% annual return, then the lack of a tax deduction adds an additional $320,000 in costs to that $1 million in expenses. If the case costs $3 million on paper, it'll cost $4 million once the lack of a tax deduction is figured in.

In contrast, the defendants and their insurers will be able to immediately deduct every penny they spend on their defense.

Is that fair? Of course not, but it's been the law for years, just another way in which the deck is stacked against plaintiff's lawyers, another reason why we have to be so selective about cases and charge such a large contingent fee.

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Marcia Lowry and Ira Lustbader are extraordinary lawyers. They are the public interest lawyers at Children's Rights who, with the assistance of Don Keenan (remember him?) and attorneys at Bondurant, Mixson & Elmore, sued the State of Georgia:

In June 2002, Children’s Rights filed a class action against state and county officials responsible for the foster care system in metropolitan Atlanta, on behalf of the approximately 3,000 children in foster care in Atlanta. The federal complaint cites numerous systemic problems with dangerous consequences for children, among them:

• Children languish for months in dangerous emergency shelters without necessary treatment and services, exposed to violence, sexual assault, and other illegal activity;
• Children in foster care experience high levels of abuse and neglect;
• Children are routinely shuffled from foster home to foster home, spending many years in state custody; and
• Children in foster care receive inadequate health care and educational services.
• Children in foster care are denied adequate legal representation in the Juvenile Courts due to high caseloads of attorneys assigned to represent children.

Case overview here. Complaint here.

Together, the attorneys and their staff put over 30,000 hours into the case, including reviewing a half-million documents and conducting 60 depositions. In addition to the time spent on the case, they incurred $1.65 million in out-of-pocket costs.

With that devotion and investment, they achieved an extraordinary result:

A settlement agreement was reached with Georgia officials in July 2005, requiring infrastructure changes, service guarantees, and improved oversight over child safety; and requiring the state to meet 31 specific benchmarks in reforming the child welfare system. The federal court approved the settlement in October 2005 and appointed two independent monitors to report on the state’s performance in implementing the required reforms.

Two additional settlements were subsequently reached with Fulton and DeKalb counties (metro Atlanta) which guarantee every child the right to effective legal representation throughout their involvement with the child welfare system. In May 2006, the federal court approved the right-to-counsel settlements and appointed two separate, independent monitors for Fulton and DeKalb counties, respectively. The reports issued by those independent monitors reflect how legal representation for children has improved as a result of the right-to-counsel settlements. In Fulton County, caseloads have been reduced and an independent Child Advocate Attorney’s Office has been created, but the County still has far to go to implement the required reforms. However, the legal representation of foster children in DeKalb County has improved so dramatically that in October 2008, the federal judge ended court oversight of the County’s compliance, following the monitor’s finding that DeKalb was meeting or exceeding all of the requirements of the settlement.

It's no stretch to say those lawyers single-handedly reformed the foster care system in metropolitan Atlanta.

And they did that by spending their own money and putting in their own time, with no guarantee they would recoup any of their out-of-pocket costs, much less get paid a fee for their services. Had they been paid by the hour as they went along, their services would have been worth more than $7 million.

But they weren't paid by the hour to pursue the case. They were paid nothing at all; instead, they paid money — $1.65 million — for the privilege of cleaning up abuse and neglect in the foster care system.

As Blawgletter explains, there's a big difference between getting paid to defend a case and paying to pursue one. The former is safe and simple and can be done in perpetuity. The latter is risky and complicated and can only be done for as long as funds are available. 

Class actions are, by their nature, extraordinary. Few firms pursue them; they're too expensive, too time-consuming, and too risky. Just ask Jan Schlichtmann. We do them and, like most plaintiffs' firms, are very selective about which ones we take.

The District Court that oversaw the litigation against the State of Georgia recognized that risk, recognized the protracted and contentious nature of the litigation, and recognized that the plaintiffs' attorneys had displayed "a higher degree of skill, commitment, dedication, and professionalism . . . than the Court has seen displayed by the attorneys in any other case during its 27 years on the bench." The District Court also recognized that, "[a]fter 58 years as a practicing attorney and federal judge, the Court is unaware of any other case in which a plaintiff class has achieved such a favorable result on such a comprehensive scale.”

Accordingly, the District Court, pursuant to 42 U.S.C. § 1988, awarded the plaintiffs' attorneys their costs, their $7 million or so in hourly fees, and then gave them an "enhancement" of $4.5 million.

Not so fast, the Supreme Court said yesterday in Perdue v. Kenny A.

Despite the risk and expense, the Court said, the plaintiffs' attorneys should only receive a fee "that roughly approximates the fee that the prevailing attorney would have received if he or she had been representing a paying client who was billed by the hour in a comparable case." Slip op., 7.

Such is commonly known as the "lodestar" analysis. The "lodestar" analysis instructs District Courts to ignore the fiscal reality of contingent fee litigation — like, as here, civil rights class actions — and pretend, after the fact, that the plaintiffs' lawyers had been paid the whole time, just like the defense lawyers, and that the plaintiffs' lawyers didn't advance a dime on the case.

It's a legal fiction, of course, adopted for a specific purpose: to penalize lawyers who pursue class action cases, despite Congress' laws and the discretion District Courts are afforded in determining fee awards.

Sure, the Supreme Court made a few remarks about how departures from the "lodestar" could be allowed in "extraordinary" situations, and it allowed the plaintiffs' lawyers to take another shot at "enhancement,"  but it also didn't provide much explanation for what would make a particular case "extraordinary," other than to say that it's "rare."

Which begs the question: if these lawyers aren't extraordinary, then who is?

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One of my most popular posts was "Investing in Lawsuits" - The Free Market Counterpart to Liability Insurance, which analyzed a New York Times article on Juridica, a company that finances business litigation on the plaintiff's side. The post drew a thoughtful comment from Richard Fields, CEO and Chairman of Juridica, about their business model.

Via Legal Theory Blog, Dr. Maya Steinitz at Columbia Law School has posted a draft of Whose Claim is this Anyway? Third Party Litigation Funding:

This article is among the first to address litigation finance by institutional investors in the U.S. It describes the empirical reality of the industry; identifies and addresses the emergence of a secondary market in legal claims and the prospect of securitization of legal claims; discusses third party funding of international arbitration and; applies a bargaining analysis to understanding the systemic effects of the practice. Specifically, the article asks what happens when, through litigation funding, litigation ceases to be expensive and uncertain and when parties “bargain in the shadow of financing.” Using bargaining theory the article offers a three-step argument for a move away from a prohibition of litigation funding towards nuanced regulation of the industry.

After reading the abstract, I started rolling my eyes, and was sure that I'd have to drag out the most common tool in the lawyer-blogger's toolbox: the accusation that some pointy head ivory tower academic doesn't know how the real world works.

Here's why. As I wrote before:

[W]e 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.

Virtually none of the articles about litigation funding even mention — much less to fairly evaluate — the fact that we are ready have a multi-trillion dollar market for litigation funding on the defense side. Such blindness makes it hard for plaintiffs' lawyers like me to see the articles as anything more than ignorance or propaganda.

I was thus pleasantly surprised to see Steinitz's article note,

Third party litigation funding is “a group of funding methods that rely on funding from the insurance markets or capital markets instead of, or in addition to, a litigant’s own funds.” In other words, it is the provision of funds by companies who have no other connection with the litigation. When provided to plaintiffs, third party funding promotes access to justice by enabling plaintiffs who have meritorious cases to bring litigation they would otherwise be unable to bring and to avoid premature settlements at a discount due to exhaustion of funds. When provided to defendants, it allows corporations who can afford to litigate but who do not want to incur any of the costs or risks associated with litigation to shift the costs and hedge the risks.

The door swings both ways; if we're going to worry about funding the plaintiffs' side of litigation then we need to worry about funding the defendants' side, too.

The most interesting development mentioned by Steinitz's article is this one:

The rise of the litigation funding industry i.e., of a primary market in legal claims, had an additional effect besides competitive pressures on global law firms. The last couple of years have also ushered in a secondary market in legal claims. Predominantly, this secondary market takes the form of litigation funding firms going public – selling shares to the public and listing on stock exchanges. But it is possible that in the foreseeable future we will also be witnessing the creation of a new form of securities—legal claims-backed securities. Reportedly, some tort litigation lenders are already in the practice of aggregating the claims they acquire and selling shares of the composite funds i.e., are engaged in a rudimentary form of securitization.

Now that's an interesting idea. And why not? We already have a secondary securitized markets for everything else — including liability insurance, which is often sold off through re-insurance — so why not for litigation, too?  

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Scott Greenfield isn't happy with people wasting his time:

Marketers teach lawyers who turn to them because they need business ways to "sell" the client.  We offer free consultations, which clients interpret as a free hour of a lawyer's time to provide free legal advice which they can then take away and use.  I get many inquiries from people asking if I give free consultations.  There's only one reason for them to ask.  I don't.  But they expect lawyers to do so, and will be happy to enjoy a free consultation when they need answers from a lawyer.  This is because we teach them to expect free consultations.

Clients call or write for a free answer to a legal question.  They've been taught to expect that too.  Think Avvo Answers.

When a question or consultation won't suffice, they want to negotiate, or pay the fee over time, as they would on replacement windows.  Many lawyers will negotiate their fees, lest a potential client walk away. Others will take payments over time, praying that the second, then third payment will come. 

The questions that Brian writes about are rarely a problem for me anymore.  I vet potential clients before making an appointment with them.  It's quite common for callers to tell me that they have a problem and would like an appointment.  I ask them what the problem is.  Most are refused an appointment.  There's no reason to sit down with someone when there is no possibility of my taking their case, whether because the nature of the case isn't suited to my practice or they aren't able to pay the legal fee. 

Callers are shocked that they can't have an appointment; they have been taught to believe they are entitled to one.

As Abraham Lincoln said, "a lawyer's time and advice is his stock in trade."  (I've always seen that attributed to Lincoln but have never seen it verified.  As Lincoln also said, "the problem with quotes on the Internet is that it is very hard to authenticate them.")

Lincoln was, like Greenfield, a defense lawyer, though Lincoln was a civil defense lawyer.  In both situations, it's a misnomer to call the initial client contact a "consultation." There is little upon which the potential client needs "consultation:" the potential client has been sued or indicted, and has no choice but to enter the legal system and defend themselves. If they're going to defend themselves at all, they're going to need a lawyer for a lot more than a mere "consultation."

Lincoln and Greenfield thus have every reason to demand compensation for all of the time and advice they contribute to a potential client's cause: that's their business.

The same isn't true for contingent fee plaintiff's litigation, like personal injury, medical malpractice, class actions, antitrust, false claims act, copyright / patent infringement, business torts, and the dozens of other claims available to vindicate the legal rights of the injured. In those cases, there is an issue worthy of "consultation:" whether or not a lawsuit should be initiated.

In contingent fee litigation, the attorney has chosen to offer as their stock in trade something other than their time and advice. Instead, the lawyer offers their firm's resources. The contingent fee lawyer agrees to provide all attorney attention and firm funds available as the lawyer believes is necessary and appropriate to achieve a financial recovery that is satisfactory to the client. 

My time is, for better or worse, irrelevant. This bargain is immensely profitable when I achieve a large recovery with a comparatively small investment of time and money; this bargain is also profoundly unprofitable when I'm forced to litigate a case for years without end, paying costs the entire time, without any recovery at all. At the initial "consultation," I try to figure out which the case is likely going to be.

That's the nature of the business.  In such a business, it's foolish for me to charge for consultations, since the money I would recover from that initial fee would be trivial in comparison to the overall profit or loss. For us, a consultation fee is little more than a barrier between me and potential clients — many of whom have minimal resources due to the injury in question — who know they have been wronged, but do not know if they have any legal rights or remedies, and so are indeed in need of a "consultation."

Thus, I suppose I am guilty as charged by Greenfield: though I have never told anyone they can get criminal defense advice for free, I have contributed to the impression that a lawyer's time is not a central component of their representation. To me, it isn't.

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Yesterday, the Supreme Court released its opinion in Shady Grove v. Allstate.

On the whole, the issue was quite simple:

New York law prohibits class actions in suits seeking penalties or statutory minimum damages. We consider whether this precludes a federal district court sitting in diversity from entertaining a class action under Federal Rule of Civil Procedure 23.

The answer was no: 

The question in dispute is whether Shady Grove’s suit may proceed as a class action. Rule 23 provides an answer. It states that “[a] class action may be maintained” if two conditions are met: The suit must satisfy the criteria set forth in subdivision (a) (i.e., numerosity, commonality, typicality, and adequacy of representation), and it alsomust fit into one of the three categories described in subdivision (b). Fed. Rule Civ. Proc. 23(b). By its terms this creates a categorical rule entitling a plaintiff whose suit meets the specified criteria to pursue his claim as a class action. (The Federal Rules regularly use “may” to confer categorical permission, see, e.g., Fed. Rules Civ. Proc. 8(d)(2)–(3), 14(a)(1), 18(a)–(b), 20(a)(1)–(2), 27(a)(1),30(a)(1), as do federal statutes that establish procedural entitlements, see, e.g., 29 U. S. C. §626(c)(1); 42 U. S. C. §2000e–5(f)(1).) Thus, Rule 23 provides a one-size-fits-all formula for deciding the class-action question. Because §901(b) attempts to answer the same question—i.e., it states that Shady Grove’s suit “may not be maintained as a class action” (emphasis added) because of the relief it seeks—it cannot apply in diversity suits [...] .

In short, States cannot preclude state-law class actions from being filed in federal court because the federal rules specifically permit class actions.

The way in which the Supreme Court got there, however, was anything but simple:

SCALIA, J., announced the judgment of the Court and delivered the opinion of the Court with respect to Parts I and II–A, in which ROBERTS, C. J., and STEVENS, THOMAS, and SOTOMAYOR, JJ., joined, an opinion with respect to Parts II–B and II–D, in which ROBERTS, C. J., and THOMAS, and SOTOMAYOR, JJ., joined, and an opinion with respect to Part II–C, in which ROBERTS, C. J., and, THOMAS, J., joined. STEVENS, J., filed an opinion concurring in part and concurring in the judgment. GINSBURG, J., filed a dissenting opinion, in which KENNEDY, BREYER, and ALITO, JJ., joined.

Yikes.

Let's break that down.

Scalia wrote an opinion that was broken up into Parts I, II-A, II-B, II-C, and II-D.

Five justices agreed with Parts I and II-A: Scalia, Roberts, Stevens, Thomas and Sotomayor. Those two parts are thus the law of the land.

Four justices agreed with Parts II-B and II-D: Scalia, Roberts, Thomas and Sotomayor.

Three justices agreed with Part II-C: Scalia, Roberts and Thomas.

Stevens, in addition to joining Parts I and II-A, wrote a separate concurrence.

Ginsburg disagreed with all of it, so wrote a dissent, with which Kennedy, Breyer and Alito agreed.

Here's the interesting part. Stevens agreed with the result and with Parts I and II-A of Scalia's opinion, but didn't agree with the rest, so he wrote a concurrence explaining why he didn't also join Parts II-B, II-C, and II-D.

Sotomayor, in contrast, agreed with Parts I, II-A, II-B, and II-D, but not with II-C. Let's take a look at the beginning of Part II-C to figure out why not:

A few words in response to the concurrence. We understand it to accept the framework we apply—which requires first, determining whether the federal and state rules can be reconciled (because they answer different questions), and second, if they cannot, determining whether the Federal Rule runs afoul of §2072(b). Post, at 5–7 (STEVENS, J., concurring in part and concurring in judgment). The concurrence agrees with us that Rule 23and §901(b) conflict, post, at 15–16, and departs from usonly with respect to the second part of the test, i.e., whether application of the Federal Rule violates §2072(b), post, at 7–13. Like us, it answers no, but for a reason different from ours. Post, at 17–22.

The concurrence would decide this case on the basis, not that Rule 23 is procedural, but that the state law it displaces is procedural, in the sense that it does not “function as a part of the State’s definition of substantive rights and remedies.” Post, at 1. A state procedural rule is not preempted, according to the concurrence, so long as it is “so bound up with,” or “sufficiently intertwined with,” a substantive state-law right or remedy “that it defines the scope of that substantive right or remedy,” post, at 4, 13.

This analysis squarely conflicts with Sibbach, which established the rule we apply. [...]

Presumably, since Sotomayor did not join Part II-C, she disagreed with its criticisms of Stevens' concurrence.

Yet, she also didn't join Stevens' concurrence. She didn't give any indication as to what she thought about the debate between Part II-C (i.e., Scalia, Roberts and Thomas) and Stevens' concurrence.

Why not? We may never know.

You, however, are reading a blog, so let's speculate.

As I wrote before about Sotomayor's first opinion, in Mohawk Industries v. Carpenter, "As hoped, Justice Sotomayor has brought her trial experience to bear, and has contributed a practical understanding of how the law works at the trial level previously unseen in Supreme Court opinions."

My speculation is: Sotomayor understood that the debate between Scalia, Roberts, Thomas and Stevens was irrelevant to deciding the case at hand. The debate was, in legal terms, little more than dictum proprium that would serve only to confuse lower courts.

Every time a Supreme Court nomination comes up, politicians throw around the terms "judicial temperament" and "judicial restraint."

If you want to know what these terms mean, look no further than Justice Sotomayor.

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One of the most common "tort reform" (and "patent litigation reform" and "anti-SLAPP") ideas is to enact "loser pays," in which the side that lost has to pay the attorney's fees or costs to the side that won.

In theory, "loser pays" (more officially known as "fee-shifting") will create a disincentive against filing frivolous lawsuits.

As you can tell from the linked posts, I'm not a fan of fee-shifting. First, plaintiffs and plaintiffs' lawyers have ample incentive not to file a weak cases and tremendous incentive not to file frivolous cases, which by definition have no chance of success. Second, fee-shifting punishes plaintiffs for doing nothing more than exercising their civil rights and punishes defendants for doing nothing more than mounting a defense. There are some special cases — e.g., those involving systematic fraud, like with False Claims Act or RICO Act cases — where fee-shifting makes sense, but not for common law tort cases like this one:

The Topeka, Kansas-based Westboro Baptist Church, led by Rev. Fred Phelps, preaches an anti-homosexual message. Members maintain that combat deaths in Iraq and Afghanistan are God's retribution for America's tolerance of gay men and lesbian women.

Church members have promoted that agenda with a series of intentionally provocative demonstrations outside funerals of servicemen and women who were killed in combat, during which they chant and hold signs bearing messages such as "Thank God For Dead Soldiers."

Church members staged such a protest outside the funeral for Snyder's son, Marine Lance Cpl. Matthew Snyder, in Westminster, Md. Snyder's son was killed in Iraq in 2006 when his Humvee overturned.

Snyder sued.

Does anyone doubt that Snyder was appropriately exercising his right to civil justice? Does anyone believe Synder should not be entitled to have a court and jury assess his claim?

Certainly the District Court and the jury did not: they awarded him $5 million dollars for invasion of privacy and emotional distress.

Westboro Baptist Church appealed. The Federal Rules of Appellate Procedure have their own cost-shifting provision, Rule 39:

(a) Against Whom Assessed. The following rules apply unless the law provides or the court orders otherwise: 

(1) if an appeal is dismissed, costs are taxed against the appellant, unless the parties agree otherwise;

(2) if a judgment is affirmed, costs are taxed against the appellant;

(3) if a judgment is reversed, costs are taxed against the appellee;

(4) if a judgment is affirmed in part, reversed in part, modified, or vacated, costs are taxed only as the court orders. 

The Fourth Circuit Court of Appeals reserved the judgment in Snyder's favor on First Amendment grounds.

Thus, Synder now owes the Westboro Baptist Church $16,500 in costs. Thankfully there's no Federal Anti-SLAPP law: if there had been one, Synder would have been on the hook for all of Westboro's attorney's fees and costs, not merely the costs on appeal.

Civil it may be, but justice it is not.

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Kevin LaCroix at The D&O Diary reports,

On March 24, 2010, Cornerstone Research released its annual study of securities class action lawsuit settlements. The most recent study, which is entitled "Securities Class Action Settlements: 2009 Review and Analysis" and is written by Ellen M. Ryan and Laura E. Simmons, can be found here. Cornerstone’s March 24, 2010 press release concerning the study can be found here.

The study reflects a number of interesting observations about median and average securities class action lawsuit settlements that were approved during 2009. The study also includes a useful analysis of the factors that affect settlement size, and concludes with some commentary about likely future settlement trends.

The WSJ Law Blog has more links here.

Though the overall settlement numbers get the headlines — Bloomberg titles their report, "Securities Class-Action Settlements Rose 39% to $3.8 Billion" — those numbers are always skewed by the two or three biggest cases of the year, which generally comprise one-third to one-half of the total, and so don't tell us much about the industry as a whole.

More interesting to me are the factors correlated with a successful settlement, including:

Institutional Investors Plaintiffs: Cases involving institutional investors as lead plaintiffs are associated with significantly higher settlements. The higher settlements are associated with cases involving public pension plans as lead plaintiffs as opposed to union funds or other institutional investors. These larger settlements may be due to the fact that the sophisticated investors get involved in the stronger cases and the larger cases. However, even when controlling for case size and other factors the presence of a public pension plan as lead plaintiff is still associated with a statistically significant increase in settlement size.

That's important, given the never-ending chorus complaining that "pay-for-play" drives public pension plan securities fraud class actions. The Cornerstone Research study confirms that public pension plans don't file frivolous lawsuits because some trial lawyer contributed to a politician's campaign; the public pension plans file and join the strongest cases. 

Coincidentally, a recent analysis of public pension plans' securities litigation from 2003 through 2006 — when most of the suits settled in 2009 were originally filed — concluded:

“[P]ay-to-play” is, at most, a marginal factor in the funds’ participation in securities class actions.

[...]

(1) politicians and political control of pension fund boards negatively correlate with lead plaintiff appointments;

(2) beneficiary board members—and outright beneficiary control of the board—positively correlate with such appointments; and

(3) the degree of a pension fund’s underfunding positively correlates with lead plaintiff appointments, particularly when the fund is controlled by beneficiaries.

This evidence suggests that beneficiary board members, not politicians, drive these cases for reasons having to do with the financial soundness of the fund.

Fact is, it doesn't matter how much "pay-for-play" is going on among the public pension plans: to get a securities fraud settlement out of a major corporation, you still need a viable lawsuit. No amount of campaign contributions or fancy dinners can buy a trial lawyer that.

The Cornerstone Research study confirms, once again, that the primary drivers of securities fraud class actions are the merits of the cases, which is why SEC Enforcement — as good a proxy as any for the merit of the case — was also positively correlated with higher settlements.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(Emphasis and formatting added).

Consider yourselves warned.

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In today's Wall Street Journal:

Good news: The Pennsylvania Supreme Court has agreed to hear an unusual but important legal challenge in a case involving Governor Ed Rendell’s hiring of a contingency fee law firm to sue a drug manufacturer on behalf of the state.

The lawsuit—which we first wrote about in April—concerns Bailey Perrin & Bailey, a Houston law firm tapped by the Rendell administration to prosecute Janssen Phamaceuticals over the marketing of its antipsychotic drug Risperdal. When states lack the resources or expertise to bring certain suits, it’s not uncommon for them to seek help from private lawyers. ...

In agreeing to hear the challenge, the state Supreme Court said it will consider, among other things, “whether Bailey Perrin Bailey, LLP, should be disqualified because the due process guarantees of the United States and Pennsylvania Constitutions prohibit the Commonwealth from delegating the exercise of its sovereign powers to private counsel with a direct contingent financial interest in the outcome of the litigation.”

The WSJ makes a big deal out of donations the firm made to Governor Rendell's campaign while negotiating the contract. If there's an issue there, this appeal won't address it.

Drug & Device Law has a copy of the petition for review, which bizarrely claimed companies accused of ripping off taxpayers have a due process right to force the government to hire only lawyers who are "impartial."

Of course, everyone wants government officials to be "impartial." But once those impartial officials have made the decision to sue, common sense dictates they hire lawyers who will "act with commitment and dedication to the interests of the client and with zeal in advocacy upon the client’s behalf," as required by the Pennsylvania Rules of Professional Conduct.

The real issue is whether the Commonwealth may hire lawyers on the same terms as businesses and individuals do every day or if the Commonwealth is forced to use a particularly wasteful system invented by corporate lawyers that came to prominence in the 1970s (and is being rejected today) as a means of extracting greater profits from business clients by creating unnecessary work for recent law graduates.

You can guess what I think: the appeal is a blatant attempt to make litigation more expensive for the government, thereby making it harder for the government to sue companies when they cheat or injure taxpayers.

If there was pay-for-play, that's obviously illegal and unethical, but contingent fee litigation itself is a win-win for taxpayers, as it protects the public coffers (no fee if they lose), preserves state cash for other use (no billables to pay at the end of each month), and ensures the matter will be prosecuted in a prompt and efficient manner, rather than through the relentless fee churning that characterizes complex litigation billed by the hour.

Examples of waste by the hour aren't hard to find: the litigation (excluding trial) of a few trust documents at Princeton was reached $40 million for each side. The white collar criminal defense of an executive for accounting fraud was a "feeding frenzy" of $12 million. Compare that to the $0.00 that Pennsylvania taxpayers have paid so far for the prosecution of Commonwealth of Pennsylvania v. Janssen Pharmaceutica, Inc.

It should be noted that the "among other things" to be considered by the Pennsylvania Supreme Court are:

A. Whether 71 P.S. § 732-103 dictates that Petitioner lacks standing to
seek disqualification of Bailey Perrin Bailey, LLP on the basis of alleged
violations of constitutional law.

B. Whether the Attorneys Act, 71 P.S. § 732-101 et seq., authorizes the Office
of General Counsel’s contingent fee arrangement with Bailey Perrin Bailey, LLP.

C. Whether Bailey Perrin Bailey, LLP, should be disqualified because the
General Assembly did not authorize the contingent fee arrangement between
the Office of General Counsel and the law firm, such that the agreement
violates Article III, § 24 and the separation of powers mandate of the
Pennsylvania Constitution.

The first question is a substantial one. 71 P.S. § 732-103 reads in full:

No party to an action, other than a Commonwealth agency including the Departments of Auditor General and State Treasury and the Public Utility Commission, shall have standing to question the authority of the legal representation of the agency.

Such would appear to be a clear indication by the General Assembly that choice of counsel is a political question.

Nonetheless, an interesting and important case to watch. Will Pennsylvania taxpayers be required to open their wallets again?

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At The Legal Intelligencer:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

...

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Litigations and Trials:

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

Law Practice:

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

Current Events:

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

Recent Court Opinions: 

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

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

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

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

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

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

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

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

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

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

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

Who, and how quickly?

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Following up on yesterday’s discussion of an emergency physician’s critique of medical malpractice reform in Pennsylvania, in which the physician claimed, without any evidence, that the number of defendants in malpractice cases has risen recently, negating many of the benefits of malpractice reform.

Put simply, he missed the boat. The number of defendants does not have much to do with the premiums by healthcare providers. It is just not an issue.

Three of the primary reforms of the Medical Care Availability and Reduction of Error (MCARE) Act of March 20, 2002, however, did have a substantial impact on medical malpractice in Pennsylvania.

Before we get to those though, let me reference another post of mine about contingent fee lawyers as venture capitalists. Medical malpractice plaintiffs are almost exclusively represented on a contingent fee basis, with the plaintiff’s law firm advancing all costs in the matter and not collecting any fee unless the injured patient recovers through a settlement or verdict. If the injured patient does recover, the firm will have its costs reimbursed from that recovery and will take a portion of the recovery as its attorneys fees.

All of which is to say that plaintiffs' attorneys already have a big financial incentive to bring only meritorious cases, since they don’t get paid and don’t get their expenses reimbursed if they lose.

Three of the major changes by the MCARE Act were:

1. tightening of requirements for qualifying expert physician witnesses,
2. requiring plaintiffs file a “certificate of merit” signed by a qualified physician prior to filing suit, and
3. requiring plaintiffs bring suit in the venue in which the malpractice occurred.

The expert witness qualifications and certificate of merit both have the same effect on medical malpractice cases: they make it a lot more expensive to file, litigate and try cases.

Expert fees are by far the largest cost in medical malpractice cases. An initial review by a non-specialist physician for purposes of obtaining a certificate of merit will cost a thousand dollars at least, often more, while a full review and expert report (not including trial testimony) will cost at least $10,000, usually much more. In complicated cases involving specialist physicians or multiple experts, expert fees alone will easily exceed $50,000 and can, in a single malpractice case, exceed $200,000.

The certificate of merit thus operates as a tax: if you want to file a medical malpractice suit, you will have to spend several thousand dollars before you can even start the process. The expert qualifications, in turn, removes from the potential pool a number of less qualified – and thus less expensive – experts.

For a well capitalized firm like The Beasley Firm with multiple established medical malpractice attorneys and a focus on trial, the effect of these two provisions is minor. Even without MCARE, all of our cases are reviewed extensively prior to agreeing to representation and filing suit, including through the use of outside expert physicians as consultants. Moreover, as a matter of pure trial advocacy, we seek out highly qualified experts, more than qualified under MCARE’s guidelines, because they are more effective in litigation and more credible at trial.

But that’s not the case for everyone, and the effect of the two expert provisions was to consolidate the medical malpractice market, with most solo and generalized personal injury attorneys leaving it altogether and referring their cases to more established and specialized attorneys and law firms.

The two expert provisions are probably the biggest reason for the drop in number of filings: now the bulk of cases are referred to and reviewed by firms better equipped to assess the viability of the claims, resulting in more rejections of weaker cases pre-suit.

Although I believe the MCARE expert requirements can be a bit tight in very specialized areas where the number of "qualified" experts across the country is in the double digits, it’s hard for me to complain about a procedural change that shuttles business to my firm while not substantially increasing costs (for the same reasons, you should probably take what I say with a grain of salt, as I am not unbiased here).

With regard to the venue restriction, normally a plaintiff (in any case) files in the county in which the “transaction or occurrence” happened. There are, however, numerous exceptions to this rule, leading to a concern about plaintiffs “gaming” the system by, for example, adding physicians located in plaintiff-friendly counties (like Philadelphia and Allegheny counties) for purposes of establishing venue then later dismissing them.

With the institution of the certificate of merit rules, the possibility of “gaming” was significantly, but not entirely, reduced, as it became much harder to simply add a defendant-physician to a lawsuit.

Although the venue provision likely only had a moderate effect on the number of filings, it likely had a substantial effect on the size of payouts made for settlements or verdicts. The reason for that is simple: by and large, suburban and rural juries award less to plaintiffs than urban juries. Moreover, regardless of the extent of such a phenomena, defense and plaintiffs' lawyers believe it to be the case, and so respectively offer and accept lower settlements.

If you are of the “tort reform” mindset, that is a good thing, since you presume that juries in general award too much.

I do not think I will change anyone’s mind on this subject, but I do want to raise the point that suburban and rural juries view medical malpractice liability in a different context from urban juries. The former are generally subjected to far more propaganda from the insurance lobby, a relentless assault of horror stories about hospitals closing and doctors leaving and greedy trial lawyers playing the jury slot machine on the road to jackpot justice. Suburban and rural jurors also typically have access to one, and only one, hospital, and are prohibited by law from knowing the amount of their verdict which will be covered by insurance rather than the hospital itself.

As such, I submit to you that plaintiffs in suburban and rural venues are not given a fair chance, as suburban and rural jurors are led to believe that they are in essence entering awards against themselves, rather than an insurance company.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Judge Timothy J. Savage of the United States District Court for the Eastern District of Pennsylvania had a straightforward job.

All he had to do was:

• survey the laws of all fifty states with regard to unjust enrichment and breach of the implied warranty of merchantability,
  • Huber v. Taylor, 469 F.3d 67, 82-83 (3d. Cir. 2006) (consideration of the requirements for certification must be conducted in light of the correct jurisdiction's law); see also In re Sch. Asbestos Litig., 789 F.2d 996, 1010 (3d Cir. 1986).;
• determine whether there were actual or real conflicts between those laws,
  • Hammersmith v. TIG Ins. Co., 480 F.3d 220, 230-31 (3d Cir. 2007)
• where there was such a conflict, assess which state has the greater interest in the application of its law to determining the liability for defective aircraft crankshafts that were allegedly more vulnerable to stresses in their ordinary and foreseeable use,
  • Cipolla v. Shaposka, 439 Pa. 563, 267 A.2d 854, 856 (Pa. 1970); Melville v. Am. Home Assurance Co., 584 F.2d 1306, 1311 (3d Cir. 1978)
• and consider whether applying that law to all plaintiffs and class members violates the Due Process and Full Faith and Credit Clauses through individualized scrutiny of the claims asserted by each member of the plaintiff class.
  • Allstate Ins. Co. v. Hague, 449 U.S. 302, 312-13, 101 S. Ct. 633, 66 L. Ed. 2d 521 (1981) (plurality opinion); see generally, 1 Joseph M. McLaughlin, McLaughlin on Class Actions: Law and Practice § 5:46 (4th ed. 2007).

Simple, right? Apparently not:

Our review of the record persuades us that the choice-of-law examination here had its shortcomings. As one instance, the District Court observed in its unjust enrichment analysis that a true conflict existed between the relevant states' laws because Pennsylvania and some others preclude recovery if the parties had an express contract.  Believing unjust enrichment to be a hybrid of contract and tort law, the Court purportedly weighed the factors from sections 188 (concerning contracts) and 148 (relating to torts involving fraud and misrepresentation) of the Restatement (Second) Conflict of Laws and concluded that Pennsylvania 'has the most significant relationship to the transaction and the parties.' Defendants were sued in Pennsylvania, manufactured the crankshafts there, 'issued service bulletins and instructions . . . about the crankshafts . . . in Pennsylvania, and plan[] to replace [them] [t]here.'"

Powers v. Lycoming Engines, No. 07-4710, 2009 U.S. App. LEXIS 6785, at *10–12 (3d Cir. Mar. 31, 2009).

Unfortunately, the above was in error because:

Pennsylvania, however, does not consider unjust enrichment to be either an action in tort or contract. Unjust enrichment, rather, an equitable remedy and synonym for quantum meruit, is 'a form of restitution.' Mitchell v. Moore, 1999 PA Super 77, 729 A.2d 1200, 1202 n.2 (Pa. Super. Ct. 1999); see also Ne. Fence & Iron Works, Inc. v. Murphy Quigley Co., 2007 PA Super 287, 933 A.2d 664, 667 (Pa. Super. Ct. 2007); Sack v. Feinman, 495 Pa. 100, 432 A.2d 971, 974 (Pa. 1981) (citing Restatement of Restitution § 1 (1937) as a source for the elements of an unjust enrichment claim); Meehan v. Cheltenham Twp., 410 Pa. 446, 189 A.2d 593, 595 (Pa. 1963) (same). The Restatement views restitution as an area of the law 'which is neither contract nor tort.' Restatement (Second) of Conflict of Laws § 221 introductory note (1971)."

If there is a claim under Pennsylvania law that falls within the scope of restitution under the Restatement (Second) Conflict of Laws, [Fn 3] the following factors should have been addressed in the choice-of-law examination: (1) the place where the parties' relationship was centered; (2) the state where defendants received the alleged benefit or enrichment; (3) the location where the act bestowing the enrichment or benefit was done; (4) the parties' domicile, residence, place of business, and place of incorporation; and (5) the jurisdiction "where a physical thing . . . , which was substantially related to the enrichment, was situated at the time of the enrichment." Id. § 221(2) (1971).

Id. Footnote 3 notes:

Although we have found no instance in which Pennsylvania has adopted section 221, our case law, in explaining the state's choice-of-law approach, directs courts to "use the Second Restatement of Conflict of laws as a starting point." Berg Chilling Sys., Inc. v. Hull Corp., 435 F.3d 455, 463 (3d Cir. 2006). "[T]o properly apply the Second Restatement and remain true to the spirit of Pennsylvania's 'flexible approach,' [courts] must . . . characterize the particular issue . . . in order to settle on a given section of the Restatement for guidance." Id. Because Pennsylvania considers unjust enrichment to be a form of restitution, we believe applying section 221 would be proper.

In other words, Judge Savage, having no Pennsylvania precedent at all to rely on, incorrectly predicted which way Pennsylvania would go in making the archaic distinction between claims in law and claims in equity in the choice of law context. The Third Circuit predicted that, if Pennsylvania courts had to decide if unjust enrichment was a tort or contract claim, the Pennsylvania courts would say, "neither, it's a claim in equity," and so should be evaluated under different standards in determining which state's laws should be evaluated for potential application in a class action filed in Pennsylvania.

Oh.

Nonetheless, in light of Judge Savage's lengthy opinion analyzing most of the relevant issues under the similar, but erroneous, standard he used, it's hard to see how the outcome will change by this ruling.

A model of efficiency, class actions are not.

I don't have an easy answer for how class actions should be prosecuted and evaluated. Judge Savage and the Appellate Judges (Ambro, Weis and Van Antwerpen) clearly did the best they could; fact is, class actions are complicated, time-consuming, expensive and just plain hard to litigate and to decide. It's not uncommon to bounce back and forth between the trial court and the appellate court several times prior to even beginning discovery, much less trial. Then comes the "real" post-trial appeal from a final order.

Plaintiff's complaint was filed July 10, 2006, more than two-and-a-half years ago. Plaintiff and his lawyers have gone essentially nowhere since then, and still have years of litigation ahead, all at substantial time and expense to the plaintiff's counsel, who likely represents plaintiff on a contingent fee, a fee that will depend not only on winning, but on the judge's own evaluation of whether the claimed fee is fair and reasonable. All years down the road.

Something to keep in mind when you hear about all these "unfair" counsel fees in class actions.

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Via @walterolson, CQ Politics reported yesterday:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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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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You can't click two links on a law practice website these days without getting a good dose of how important it is that lawyers get up to speed with social media. Kevin O'Keefe, head of LexBlog (which hosts this site), suggests focusing on the big three: blogs, Twitter, and LinkedIn.

I got my blog. I got my Twitter.

LinkedIn?

Here's how Gina Rubel, as part of her extensive "Social Media for Lawyers" series at The Legal Intelligencer's blog, described LinkedIn:

Linkedin is one of the oldest and most established professional networking sites on the Web. ... Linkedin is conservative, professional, adheres to a strict set of rules, business-oriented, highly visible in search engines and an easy point of entry for lawyers. For the most part, it serves as an online curriculum vitae (C.V.) or resume which can be linked to your firm’s Web site.

True. It's also true that LinkedIn treats users with same respect in drafting its terms of service that consumers have come to expect from used car dealers, credit card companies, and subprime lenders.

Read their User Agreement:

1.  Your Obligations — What You Must Do

License and warrant your submissions: You do not have to submit anything to us, but if you choose to submit something (including any User generated content, ideas, concepts, techniques and data), you must grant, and you actually grant by concluding this Agreement, a nonexclusive, irrevocable, worldwide, perpetual, unlimited, assignable, sublicenseable, fully paid up and royaltyfree right to us to copy, prepare derivative works of, improve, distribute, publish, remove, retain, add, and use and commercialize, in any way now known or in the future discovered, anything that you submit to us, without any further consent, notice and/or compensation to you or to any third parties. By submitting any information to us, you represent and warrant that such submission is accurate, is not confidential, and is not in violation of any contractual restrictions or other third party rights. You further agree to inform LinkedIn in the event that any such information has changed since your registration with LinkedIn and, if appropriate, you agree to make such modifications yourself to your profile.

It's just as bad as Facebook's hated and rescinded Terms of Use, which claimed to own all of your content forever, with an added bonus in the last two sentences: you agree that everything you submitted is accurate and you agree to keep LinkedIn's information up-to-date.

Got that? Apparently most people don't; I found only one blog post on the subject, a month ago at Web.Tech.Law. Technorati says no one has linked to it. I found one link on a "social media roundup."

That needs to change.

LinkedIn is building its Web 2.0 Yellow Pages, and by ever submitting anything -- like your name, address, place of business, connections, recommendations and content like forum posts -- you agree to let LinkedIn use it forever and that you will take the initiative to update all of it if any of it ever changes.

But what if I terminate my account?

You granted them an "irrevocable" and "perpetual" license to all content and information you ever submit to the site, and imposed a duty on yourself to keep that content and information accurate and current, so what makes you think it could really be a "revocable" or "limited duration" license?

Before you turn those wheels, note that their User Agreement details exactly what happens when you terminate:

7.  Consequences of Termination

Upon termination, you lose access to LinkedIn. The terms of this Agreement shall survive any termination, except Sections 2 and 3 hereof.

The perpetual duty for users to supply accurate and current information for LinkedIn's business is in Section 1. It "survives."

What gets terminated? Section 2, "Your Rights — What You May Do" and Section 3, "Our Rights and Obligations — What We Must And May Do." Termination ends only "Your Rights" and Their "Obligations."

Will LinkedIn ever exercise these rights in an adversarial fashion? 

Probably not. Like I wrote yesterday, "A right with a remedy worse than the harm is not a right anyone will enforce." Trying to enforce these rights would likely cause a mass exodus from the platform.

But that's just theory, contradicted by the plain meaning of the words in the agreement. Moreover, all bets are off if the company goes into distress. Regardless, the core question remains: if LinkedIn doesn't plan on compelling users to keep its professional database accurate and current or to use its users' content commercial without permission, then why does it need these terms?

Ask a used car dealer.

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The New York Law Journal has an excellent, detailed article by Stephen M. Kramarsky on a recent 2nd Circuit opinion:

An overly narrow view of the scope of copyright protection risks harming the commercial market for entire classes of works; an overly broad view risks chilling creativity and creating impermissible monopolies on facts. Courts examining the line between fact and expression must keep these concerns in mind, particularly when considering cases that lie entirely outside of the traditional scope of copyright protection, as the court did recently in Associated Press v. All Headline News Corp.

...

The [Associated Press] asserts that it is particularly focused on providing reports of "breaking" news. Among other things, the AP makes its stories available to clients for use on their Web sites. Each story contains written copyright information that identifies the AP as author and/or owner of the story, and the AP registers copyrights in its news stories and photographs (a prerequisite to suit and certain kinds of statutory damages).

All Headline News Corp., according to the complaint, does not undertake any original reporting. Instead, its employees search the Internet for stories that they rewrite or repackage for republication (either in full or as excerpts). Some of AHN's stories are based on AP articles, but they are marketed to AHN's clients as originating with AHN. AHN distributes its articles to paying clients who publish them on their sites.

AP filed suit against AHN based on its alleged "free riding" on AP's original reporting, asserting claims for copyright infringement, violations of the Digital Millennium Copyright Act, misappropriation of "hot news" and various Lanham Act violations.

If you're interested in New York law, read the article for the scoop on the "hot news" state law tort, which has surprisingly thrived this long without being ruled as completely pre-empted by Congress' copyright legislation. Kramarsky concludes:

All of this aggregation and customization is becoming mainstream precisely because the Internet has greatly increased the number of information sources available, and consumers are struggling to work out how to package it.

Any limitations on that conduct are likely to harm not only consumers, but their information suppliers as well. Although the Associated Press court can hardly be faulted for its reading of New York law, its careful decision may have considerable unintended repercussions.

Keep in mind the facts of that case, which a respected practitioner in a nationally-published law journal has argued nonetheless goes too far, and focus on the bigger picture here, the federal copyright and DMCA issues (the DMCA, Kramarsky notes, "prohibits intentionally removing or altering any "copyright management information" or trafficking in works with removed or altered copyright management information." There's almost no case law on that section.).

A month ago Whet Moser at the Chicago Reader's Chicagoland bemoaned the "aggregation" done by Huffington Post, which exploited the inverted triangle followed by reporters:

On the left side [of HuffPo] there is a blog. Aside from the generic complaint about people who write for free, most people have come to accept that there are bloggers who quote things and link to them.

On the right side there are headlines. Here's where it gets tricky so pay attention and hopefully I won't have to explain this ever again. If you click on the headline, you go to another site--fine. If you click on "Quick Read," you get a piece of the article that the headline goes to, with an ad. If you click on "comment" you get that piece of the article with a comment box. ...

Those first couple paragraphs are written by a person who is paid to write that, often at great expense and with generous health benefits.

So: why do I think bloggers should get away with that? Why is the left side of ChuffPo fine and the right side questionable? People should be able to write about things. They should have the right to use them for: "purposes such as criticism, comment, news reporting, teaching." The person blogging about news things at ChuffPo is doing something unique, whether that person is insightful or an idiot. There's societal value to both. It's a tremendously important freedom and it's why the blogosphere is so rich. On the other hand, just slapping up a quote above a comments section--which, odds are, the other site has as well--feels cheap (and, technically, is cheap, that's the business model).

I don't know of anyone who says authors shouldn't be able to sue those who simply cut-and-paste without adding value, as is apparently the case with the "right side" of those Huffington Post "blogs." The issue there is one of degree.

The bigger question for bloggers (the "left side"), all of whom strive to add more value than they copy in their quest for credibility, is: does quoting some of an article as part of my larger work trigger copyright liability?

Just nine months ago the Associated Press tried to answer "yes," started enforcing per-word quotation licensing on bloggers, and got trashed everywhere. So they gave up.

The market has moved -- we're almost 15 years into the attention economy -- and there's no stopping it now. The AP's policy nominally requires paid licensing for quotes shorter than a tweet on twitter.

That won't do these days. Not when information is everywhere, when the best way you can make money is through permission marketing, getting the people who other people trust to say they trust your product or service. Not when Robert Scoble is arguing that even Twitter isn't the future of business advertising, that you need to get closer and more personal with people.

The big content producers "know" that, or at least know what they're doing isn't going to work much longer, and they're slowly getting it. Lawsuits won't "protect" their content, it will render that content invisible.

Which is why blogs will be fine, even with laws on the books that, arguably, permit a cause of action against them defended only by a vague "fair use" exception. A right with a "remedy" worse than the harm is not a right anyone will enforce.

[UPDATE: Just a few days after this post, the Associated Press announced it would "take legal action against Web sites that use newspaper articles without legal permission, the group said on Monday, in a clear shot at aggregators like Google." I do not think their chances of success are very high, for the reasons above. Moreover, this strategy -- going for the 800-lbs gorilla first, instead of low-hanging fruit -- is more evidence of a conscious decision not target bloggers, who are more likely to cause controversy.]

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

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

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

Can you guess what happened next?

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

...

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

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

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

Uh oh.

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

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

...

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

I'm sure you can imagine what happened next.

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

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

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

And the plaintiffs walked away with nothing.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(emphasis mine)

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

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

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

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

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

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

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

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

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

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

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

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

...

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

...

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

This telepathic piracy will not be tolerated!

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