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

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

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

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

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

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

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

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

Allow the great thespian Bruce Campbell to explain the dilemma:

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

Experience.

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

So how do associates get "it?"

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

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

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

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

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

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

I.e., someone else's rainmaking.

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That's the conclusion of new scholarship by law professors Dave Hoffman and Cristy Boyd, in a draft just published here on SSRN, with blogging about it here. After analyzing 690 cases that sought to pierce the corporate veil between 2000 and 2005, they conclude:

The part that extra-legal influences play in veil piercing cases should caution corporate lawyers and scholars. Although jurists have focused on the influence of law and lawyers' craft on the likelihood of defending the veil, we find that two previously ignored factors – ideology, and firm size, play as important a role, if not more so. This finding reminds us that legal rules create only loose constraints on judges, even those in the trial courts. ...

We contest the conventional wisdom not just in its specifics but in its general theme that veil piercing doctrine is especially random and freakish. We think that the patterns we have observed fit well with a set of cases influenced by selection. Plaintiffs do win far more often during litigation than popular accounts of the doctrine's rare nature would have had us expect, but their ultimate chance of obtaining relief on the merits is obscured by settlement, which disposes two of three veil piercing cases filed in federal court. ...

Litigation results can tell us nothing more, and nothing less, than the kinds of factors
courts have found important in previous decided cases. Here, two extra-factors appear to be both important and surprising: ideology and firm size. Formalities, plaintiffs' tactics, and defendants' legal planning, have modest relationships to observed outcomes. To owners of the smallest of businesses, the message coming from this data is unfortunately both clear and unsatisfying: neither reliance on legal formalities nor pat expectations about the pro-business orientation of conservative judges will protect your firm from the need to dispute its veil in
court. To scholars, the message is also unsettling: to predict how judges will react to veil piercing facts, and to understand their motivations, observation must yield to experiment.

In short, they found that the smaller the company, or the more conservative the judge, the more likely it is that the veil will be pierced and the owners of the company held personally liable.

One might think that smaller company size was positively correlated with veil piercing success because "undercapitalization," which is generally the most effecive veil piercing theory, is closely correlated with company size. (Common sense suggests that, although it's easy to set up a fly-by-night small business, it's quite difficult to establish an large corporation, even an "undercapitalized" one.) The above findings, however, control for factors like the type of veil piercing claim (i.e., "undercapitalization" as compared to "alter ego" or the like), which means that company size alone is a significant factor in veil piercing. That suggests something else at work, possibly a systematic bias against smaller companies (or a bias in favor of larger companies).

Frankly, I was surprised to see that "in nearly 78% of litigations, plaintiffs likely realized some value from their veil piercing claims" because the veil piercing claims had either (a) succeeded or (b) had not been dismissed at the time of settlement.

I don't believe all of those plaintiffs realized some value from it -- the mere fact that a claim has not yet been dismissed doesn't necessarily mean the defendant sees a reasonable chance of it succeeding -- but the sheer size of that figure (almost four in five!) is hard to argue with. Veil piercing claims apparently have a lot more traction than most lawyers believe.

Then again, the presumption among most plaintiff's lawyers that veil piercing is inordinately difficult and rare likely leads to a strong selection bias prior to filing suit, such that only the strongest veil piercing claims are ever brought at all.

I recommend the authors journey down this road:

This relationship also implies that the particular grounds for relief asserted in complaints generally reflect the underlying facts of the case. To some, this result will surprise, as notice pleading rules, together with the expectation that plaintiffs will learn and shape their cases through discovery, might lead scholars to expect that the framing of the complaint functions as mere rhetorical gloss, insignificant in its particulars. Our contrary finding suggests that complaints are themselves objects worthy of further study beyond the confines of this particular project.

In the world of Ashcroft v. Iqbal, complaints are anything but "rhetorical gloss." These days, they're often the strongest case the plaintiff can put forward.

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

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

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

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

Now Congress has jumped in:

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

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

...

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

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

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

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

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

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

Sword or shield. Not both.

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On Tuesday, The New York Times reported:

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

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

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

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

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

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

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

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

Judge Rakoff, however, beat me to it:

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

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

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

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

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

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

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

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Amazon just paid a little under a billion dollars for Zappos, a shoe-company with legendary customer service. Of interest to those of us in the litigation business is this post at peHUB:

One of the sources says Zappos was financially strong enough to wait for the IPO market to recover, if it chose to go that route. The source, a Zappos shareholder who has seen the company’s income statement reports, said that the company did over $1 billion in gross revenue in 2008, $625 million in net revenue and had an EBITA greater than $40 million.

Zappos had raised $49.1 million from venture investors since its inception, most of it from Sequoia, according Thomson Reuters (publisher of PEHub.com). The Zappos shareholder, who says he has seen the company’s capitalization tables, says Sequoia had a 3x or 3.5x liquidity preference associated with the shares it purchased.

“When Mike [Moritz, a GP with Sequoia] came in, he came in at a high valuation, but he countered that with a very high liquidation preference,” the shareholder says. “It puts management on one side of the table and investors on the other. Then there’s always pressure to sell the company.”

At least two sources who do not hold board seats, but are directly involved with Zappos, indicated that Moritz and Zappos CEO Tony Hsieh came into conflict about the company’s future. Moritz, the sources say, wanted Zappos to sell while Hsieh wanted to remain independent.

Such a dispute, if true (Zappos has sort-of denied it), could have  turned into a bitter lawsuit that, at the least, frustrated the sale to Amazon.

It didn't. Perhaps that's because Zappos' management just didn't want to do that.

But perhaps it's also because, from the get-go, the parties realized that their interests were not entirely aligned, and so intentionally framed the deal in a way that recognized and dealt with this conflict, rather than papering over it or punting it to the future.

Sure, it was easier for Sequoia and Zappos to see this coming, since venture capitalists (and most private equity investors) understand the inherent conflict between management and investors when it comes time for an exit, and so routinely frame their contracts around it.

Nonetheless, it's a good example for every business, investor and partner who gets caught up in the exuberance of signing onto a project without stopping to think about the likely disputes down the line. The more you think about these potential disputes, the less time you'll spend dealing with people like me.

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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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