Legal Profession Blog

Straddling: Reactions to Rasmussen and Baird on Corporate Governance

Posted by Jeff Lipshaw

It's Saturday afternoon and I could watch the Tigers-Athletics game over at Cooter Brown's or Fat Harry's or I can sit here in the faculty lounge and multi-task by following the game and reading The Prime Directive, posted last month on SSRN by Robert Rasmussen (Vanderbilt, left) and Douglas Baird (Chicago, right).  The paper has at least four things going for it off the bat:  (1) it is short; (2) it is highly readable; (3) it doesn't seem to be working off a political or theoretical agenda, and just wants to get it right; and (4) it makes a lot of sense.  Here's the abstract: 

Agency costs dominate academic thinking about corporate governance. The central challenge is to devise legal rules to align the interests of the managers (the agents) with those of the shareholders (the principals). This preoccupation is misplaced. Whether it is finding a baby-sitter or a dean, the challenge of hiring the right person dwarfs the challenge of aligning that person's incentives. The central task for corporate governance - its Prime Directive - is to ensure that the right person is running the business. In this essay, we suggest that the challenge of aligning the managers' incentives has been drastically overstated and the way in which legal rules affect hiring (and firing) decisions has been too often ignored.

Putting the emphasis on agency costs may lead to rules that slight what matters most. The current preoccupation with executive compensation runs the risk of inducing the board to worry more about the details of the employment contract rather than selecting the best person in the first instance. More important, the law can play an important role ensuring bad managers are fired. Once hired, all managers need to be mentored, monitored and, when necessary, replaced. There is little to suggest that a single entity is well-situated to perform all three. There is tension between the roles of confidant and policeman. Here, debt contracts play a crucial and largely neglected role. Covenants in debt contracts can insure that underperforming managers are called to task. Private debt holders' role in monitoring a business and ensuring that underperforming managers are replaced may be as important as the market for corporate control.

The fifth thing going for it is that the descriptive portion (I'll get to the prescriptive portion below the fold) comports with my own experience on the tensions that might exist between a board and a CEO.  (See "Background of the Merger" beginning at page 29 of the S-4 Registration Statement filed in connection with the merger between Great Lakes Chemical Corporation and Crompton Corporation.)  Board members are human beings.  I think the paper's attribution of perceived inaction to commitment bias is far more plausible than attribution by Bebchuk, Fried and others to capture of the board by the CEO.  There's an Occam's Razor aspect to this - does it make more sense that highly successful Type AAA directors are "captured" by another CEO, or that they are subject to the same bias as we would observe in any other group?  Capture is certainly a possibility - for all my regard for Sidney Poiter as a man and an actor, I wasn't quite sure what he would bring to the Disney board.  (I would have loved to see him stand up to Michael Eisner in the middle of a board meeting and announce:  "They call me... Mr. ..." Well, you get it.)  I agree with Rasmussen and Baird that capture ought to be the exception, not the rule.

For a little more, go below the fold.

I have more reservation about the prescriptive portion of the paper, which, consistent with Professor Baird's long-standing and iconic status in the creditors' rights area, suggests that the law somehow give lenders a place at the table in the board's deliberation over the retention or firing of the CEO.  The reservation is simple:  if, as the authors suggest, there is so little substance in the distinction between equity and debt investors in an enterprise, large institutional shareholders ought to have the same influence as lenders.  (Nothing in the securities laws prevents a large shareholder from bitching to the board about a CEO's performance, as far as I know.  Regulation FD deals with the flow of information in the opposite direction.)  Now it may be that large shareholders do not act like lenders unless they have very large positions, but I wonder if there is empirical work out there on the relationship between concentrated institutional ownership and CEO turnover.

(I would mention that the Tigers just scored two runs to tie the game up (go get 'em, Tigers!), but that would probably jinx them, so I won't.)

UPDATE (on Sunday, Oct. 15):  Well, I didn't jinx the Tigers.  It was probably a little bizarre that a grown man was jumping up and down in front of a TV in an otherwise deserted faculty lounge in an otherwise deserted law school at 7:00 p.m. CDT on a Saturday evening, but I don't care.

In looking at the post again, I realize I made an inadvertent pun about what the article had going for it "off the bat."  Let me add in retrospect, (a) the article does not come out of left field, (b) its position, in my mind, is right down the heart of the plate, (c) stylistically, it's a nice pitch, and (d) the topic is clearly right in the wheelhouse of both authors.   In short, a home run.

Katrina, Professor Houck, and Speed Bumps

Posted by Jeff Lipshaw

The Tulane Law Review just completed a highly successful and fascinating symposium "Hurricane Katrina: Reshaping the Legal Landscape of the Gulf South."  One of the treats was the chance to spend a couple days with uber-blogger Jim Chen, whose presentation on urban planning issues in post-Katrina New Orleans is posted over at Jurisdynamics.

One of the windfall (sorry) benefits of coming to Tulane is the honor of sharing a suite with Professor Oliver Houck, who was one of the three presenters on the environmental panel (with Richard Lazarus of Georgetown and Daniel Farber of Boalt Hall).    Professor Houck embodies the kind of passion and vision that, whether or not you agree with him about everything (and he's certainly persuaded me on the environmental issues around land loss in Louisiana), inspire our students and bring honor to our profession.  Not to mention, as he demonstrated last night at Mulate's, he does a hell of a Texas two-step. 

One of my prized possessions now is an autographed copy of the just published Volume 19 of the Tulane Environmental Law Journal which contains his essay "Can We Save New Orleans?"  Get it and read it. This is not your father's law review article.  Here's a taste:

It is Tuesday afternoon and we don't know a thing.  The storm has blown through, some trees are down, poles, wires, pieces of roof.  The only station we can get on the radio is a call-in and they begin Oh Jerry I've Always Loved Your Show and then they say something about water coming up to the front steps.  I go stand outside.  A couple comes down the street with plastic bags in both hands, full of clothes, picking their way over the branches.  I say, just making conversation, where's the water?  He says, its about four blocks up.  Then she says, and there's a body in it, shot through the head.  Then he says, and they ain't coming to pick him up.  Then I say to Lisa, ok, you win, I think we'd better go.

* * *

We have also know that the coastal marshes act just like a levee, only a flat one.  They knock down storm surges, and over the 80-some miles between New Orleans and the Gulf that amounts to the height of a tall man, 6 feet or more.  That's a lot of free levee.  All we had to do is nurture it and leave it alone.  Instead, of course, we starved the marshes from the main River and then started cutting them up with canals.  The combination was devastating.

And lest you think Professor Houck is a johnny-come-lately to this issue, see Oliver A. Houck, "Landloss in Coastal Louisiana: Causes, Consequences, and Remedies," 58 Tul. L. Rev. 3 (1983).

Call 4 Papers: Law & Society Ass'n

The annual meeting of the Law & Society Association will be held July 25-28, 2007, in Berlin, in conjunction with the International Sociological Association's research committee on the sociology of law.  The call for papers and participation sets a due date for January 12.

"The theme of the meeting, Law and Society in the 21st Century: Transformations, Resistances, Futures, is intended to encourage debate on the transformations that are redefining law and society in the new century."    [Posted by Alan Childress]

Daubert's Infiltration into Law Offices

Herbert Kritzer (U. Wisc., poly sci) offers one of his patented get-your-hands-dirty studies, this one of the culture and impact he observed within law offices practicing evidence and insurance-defense law (after Daubert had redefined admission of scientific evidence).  It's on SSRN as a torts piece.  Maybe I find myself recommending it here more from my evidence/torts teaching sides than my legal ethics one, or just because I admire Bert's law-and-society work.  But I note that his focus in it is on the impact within legal practice decision-making and the litigation process, not the usual collection of "court results in recent cases applying Daubert," so I'd say it relates to some "legal profession" (if not legal ethics) aspects of this important evidence case.  Regardless, full abstract after the jump.  [posted by Alan Childress]

Bert's abstract on SSRN:

The U.S. Supreme Court's pronouncements on the
standards that should govern the admission of scientific and
other expert testimony, what is commonly referred to as the
Daubert Trilogy, has produced substantial legal commentary and a
growing body of empirical research. Most of that research focuses
on decisions by courts on Daubert challenges; while there is some
speculative discussions on the broader impact of Daubert, there
is minimal empirical research assessing the impact of Daubert
more broadly on the litigation process. Drawing on a combination
of observation in a law firm and a series of interviews with
practitioners, this paper describes the process of decision
making about Daubert related issues. The conclusion drawn from
the analysis is that Daubert has become a routinized aspect of
the litigation process in a range of cases, few of which deal
with the kind of controversial or innovative science at the heart
of the original Daubert case.

The article is entitled Daubert in the Law Office:  Routinizing Procedural Change.   

Info on Problems Textbook by Dzienkowski & Burton

posted by Alan Childress

Just out from John Dzienkowski (U. Texas) and Amon Burton (Texas lawyer and adjunct at UT) is a collection of case studies and problems, Ethical Dilemmas in the Practice of Law (West), for use stand-alone (e.g., a 2-hr. class) or to supplement more case-law oriented ethics books (like, I'd say, Gillers, or Dzienkowski's own traditional casebook).  It presents 12 case studies on attorney- client relationships, confidentiality, conflicts, candor to the court, and fees.  The scenarios include real documents--wills, motions, contracts, etc. 

Their goal is to simulate the way lawyers encounter and think through problems in practice.  Take this one, echoing NY's Belge case: Babysitter disappears and child is missing.  Amber alert finds the woman in Kansas City.  A PD meets with her and a map is drawn showing burial site for child.  Authorities learn that a map has been drawn and seek its production.  The woman’s lawyer refuses and a proceeding is initiated to produce the map.  Is the map confidential?  Privileged?  This chapter uses newspaper articles, lawyer affidavits, statements by the woman, and a hearing transcript to present the problem to students as they might see it live.  There's also a documented case study involving a NY law firm’s representation of an aggressor in a takeover against a company that had used the firm in shaping some [unrelated?] anti-takeover advice.  More details below the fold.

Further highlights of note: (1) Several attorney-client agreements used to evaluate the ethical dilemmas involving fees and attorney control over the client matter; (2) Annotated attorney-client consent letter in a multiple client representation; and (3) A case study on the criminal trial of Arthur Andersen.  You can see all the coverage and case scenarios clearly below from its table of contents--which are unfortunately absent from the West sales page linked above.

To me, what sets this book apart is its displays of actual documentation such as the client waiver form above.  The real cases we use in class from otherwise-great casebooks always refer to such paperwork but the students only see it if we bring in a copy from our own former practice.  It's also pretty cheap for a law book--$30--so the students may not scream at its use as a supplement.  That's particularly cheap given that West is analogizing it to a new car by releasing it now and copyrighting it 2007.

Dzienkowski, pictured above (and most easily pronounced as 3 simple words: zen COW ski) is an editor ar the legal ethics forum blog.

Ch. 1 - Forming Attorney-Client Relationships

• Case Study - The Japanese Investors

• Case Study - The Murray Ohio Tender Offer

• Case Study - Motion to Disqualify a Spouse's Law Firm in a Divorce

  Ch. 2 - Confidentiality

• Case Study - The Missing Baby and the Map

• Case Study - Secretly Changing Joint Wills

  Ch. 3 - Selected Issues in Conflicts of Interest

• Case Study - The Boutique Law Firm and Advance Consent

• Case Study - Motion to Disqualify a Law Firm of a Co-Defendant to a Joint Defense Agreement

• Case Study - Forming a Closely Held Entity

• Case Study - Trading Legal Services for Client Stock

  Ch. 4 - Candor to the Court

• Case Study - Not Disclosing a Winning Lottery Ticket to a Spouse in a Divorce

• Case Study - The Criminal Trial in Arthur Andersen

  Ch. 5 - Fee Agreements

• Case Study - Fee Agreement in a Case Challenging a Prenuptial Agreement

• Contingent Fee Agreement in a Personal Injury Case

• Contingent Fee Agreement in Commercial Litigation

• Engagement Letter in a Trademark Representation

Civility and the Rational Frog

Posted by Jeff Lipshaw

Frank Pasquale at Madisonian.net has a typically thoughtful and provocative counterview on "civility" requirements to be in force on the new Northwestern sponsored blog.  Frank asks whether ostensibly neutral civility norms can contain hidden bias against the weak or oppressed, suggesting that perhaps harshness is "a weapon of the weak, a quick register of outrage from those too busy or inarticulate to deconstruct a post’s errors with precision and patience? Might certain sentiments only be expressible via a particularly forceful turn of phrase?"

I'm not sure that "forceful turn of phrase" equals "harshness" equals "incivility."  I'm also leery of the "weapon of the weak" justification, having last heard it several weeks ago in connection with the justification why Hezbollah rockets aimed at Israel were more moral than Israeli bombs aimed at Lebanon.

Finally, does our tolerance of macro-incivility when contemplating the broad issues of deliberative democracy (the point, I think, of Frank's link over to the Gutmann-Thompson book) equate to a tolerance of micro-incivility as between real people?  It made me think of a phrase I've cited often:  Posner's statement that "the concept of rationality used by the economist is objective rather than subjective, so that it would not be a solecism to speak of a rational frog."  Perhaps that is a valid assumption in formulating broad social theories, like deliberative democracy or welfare maximization.  But I don't think that equates to a justification of micro-incivility any more than thinking like an economist means that we see individual people as rational frogs.

Note:  I have not accused Frank of being an "idiot," "utterly confused," "idiotically confused," or even "confused."  (See his post for this reference.)  Were I a utilitarian, this would be easy.  Frank is a lot bigger than I am, and I wouldn't think of getting him mad at me.  But we here at Legal Profession Blog (a division of the Caron Empire) would be appalled at an uncivil discussion of civility on a purely deontological basis.

The Ultimate Blog Post: Backdating, Instrumentalism, the Good, Executive Compensation, the Right, Paris Hilton, and Delaware Law

Posted by Jeff Lipshaw

The front page of Thursday's Wall Street Journal features two stories as to which the horse is probably not only beaten (apologies to Ani Satz for this insensitve figure of speech) but has been sent to the knackers (why am I thinking of poor old Boxer?  "I will work harder" and "Napoleon is always right"): a redux of the general discussion of executive pay and the more specific discussion of backdating.

The debates continues to interest me, not so much for the specific criticisms and defenses of either, but for the gap between town and gown (with lawyers generally falling into a variant of gown).  While much in "town" values leave nothing to write home about (otherwise why would there be a Paris Hilton?), there's an underlying good sense out there somewhere.  Indeed, I wondered, looking at Brian Tamanaha's posts on his new book, whether his perception of "the spread of an instrumental view of law within the legal culture, concomitant with a loss of faith in the social good" is a thesis of intellectual history or social history.  I'd argue that Warren Buffett's use of the front page test to judge practices like backdating points to some shared notion of social right, if not social good.  The distinction here is between (a) the idea there is communal agreement on what makes all better off, and (b) the idea there is communal agreement on what is right, regardless of consequence.

More on this below the fold.

Let's look at the two juxtaposed articles on the front page of the October 12 Wall Street Journal.  The first was a story about how the effort to cause the market to limit executive pay through proxy disclosures backfired.  Instead of shaming executives into reduced pay packages, "[a]s it turns out, disclosure can push pay higher by revealing to CEOs what their peers receive.  Limiting one type of compensation often encourages new types of pay, such as stock options, which were pushed as a solution only to become tainted by scandal."  Even more interesting were comments from Charles Munger, the vice-chairman of Berkshire Hathaway, and long-time associate of Warren Buffett.  (Full disclosure:  I don't know Mr. Munger, but he and his wife Nancy have donated $45 million to my alma mater, the Stanford Law School, for new law student housing.)  Mr. Munger described executive compensation as "wretched excess" and says "he hears complaints from 'Republicans who grumble on the country-club porch' about the resulting political turmoil over the pay question."

The second was a report on more CEOs taking a fall over backdated options:  most recently, the CEOs of CNET Networks and McAfee, Inc. have stepped down after option backdating has been discovered.  More relevant to our little piece of the world here, GCs are taking the fall as well.

What does this have to do with "town versus gown" and instrumentalism?

It seems to me there is, out in the world beyond the academy, some shared notions of the social right that are more than mere instrumentalism, even though those shared notions may be buried in the otherwise unsightly moshpit of popular culture.

On one hand, the rich people on Main Street don't worry about the paradox or contradictions of a country club sensibility about taking care not to be too showy with one's wealth (either because it's just not right, because of some recognition that luck plays a role in the accumulation of wealth, hence noblesse oblige, or fear of unleashing just the kind of populist backlash we see now).  It's okay to be rich, but not too rich.  Or, it's okay to be rich, but not tastelessly rich.  The not-so-rich people on Main Street don't care about the contradictions.  I've said before that I think what passes for moral outrage on this is really a political argument about wealth distribution, and good old American populism.  In either case, nobody is seriously suggesting hugely radical solutions (we never get too close to killing the golden egg laying goose) - it's a debate about how much is too much.

A less reflective Main Street may be more willing than academia to accept good old fashioned horse sense (whether populist or country-club), because no expression of the social right ever really stands up to the kind of intense epistemology inquiry we find in the academy.  The same basic arguments have been circling around since Plato and Aristotle, and at some point we find ourselves back in the consequentialist/empiricist versus deontological/rationalist dew loop.  A few of us in the legal academy muddle around, furtively and surreptitiously, in metaphysics, but the rest of us conclude that scientism/pragmatism/instrumentalism is the only productive use of our time and intellects.

As I have already blogged over at PrawfsBlawg on the compensation and backdating issues, I'm fairly well persuaded by Larry Ribstein and others (see Truth on the Market) of the scientific view that there's no economic harm in backdating the options, but I'm also not willing to discount the moral sense out there on Main Street that something is wrong, particularly when the sense is coming from all quarters.  If markets are efficient, if lying on the option about the date of its issuance is "no harm, no foul," if everything comes out in the disclosure wash, why is it still a story?

I'm continuing to work on a thesis sparked by blog discussion about business environments and the right to lie, albeit in the context of acquisition agreements, disclaimers, and damage limitations.  (The Tulane faculty will hear it on October 25, and the Texas Wesleyan faculty on October 30.)  It's fascinating to see how the various schools of thought deal with the lie.  Judge Posner has a quick and dismissive conclusion that a lie is somehow different from mere non-disclosure.  "The liar makes a positive investment in manufacturing and disseminating misinformation.  This investment is completely wasted from a social standpoint, so naturally we do not reward him for his lie." (Posner, Economic Analysis of Law, 6th ed., p. 111).  I'm not so sure that's the case.  Investment in white lies may not be wasteful at all.  Or consider Vice-Chancellor Strine's struggle with the deliberate contractual misrepresentation in the Abry case (the subject of the above thesis) under Delaware law:

I use the plain word "lie" intentionally because there is a moral difference between a lie and an unintentional mis-representation of fact. This moral difference also explains many of the cases in the fraus omnia corrumpit strain, which arose when the concept of fraud was more typically construed as involving lying, and thus it is understandable that courts would find it distasteful to enforce contracts excusing liars for responsibility for the harm their lies caused.

Something more than mere instrumentalism is at work here.  I will suggest that, as much as Vice Chancellor Strine would like to be able to justify this moral conclusion in science (he cites the Posner quote above as the only authority for the inefficiency of lying), there is a notion of social right - a product of town rather than gown - that nevertheless creeps back into the law.

 

Call 4 Papers: Ethics & Representing Families

Posted by Alan Childress

UMKC's Barbara Glesner Fines, co-editor of the Family Law Prof Blog, issued this call for papers (and we appreciate her letting us know):

The UMKC Law Review invites articles for inclusion in its 2007-08 symposium issue on Ethics and the Representation of Families.

This symposium issue will focus on selected ethical issues in the representation of families (including representation in estate planning, divorce, custody, abuse & neglect and juvenile cases).  There are a number of signs that attorneys are not doing very well in rising to the challenges of practice in the unique world of representing families.  Complaints to disciplinary agencies, malpractice rates, and a public increasingly looking to other professionals to assist them in adjusting family relationships are all signs of a profession that could do a better job serving its clients. Guidance for ethical practice in these critical and challenging fields of law is thin.  The rules of professional conduct regulating attorneys conceive of legal practice in a balanced adversarial or corporate setting.  Family representation is rarely central in debates over professional regulation standards.  It is no wonder that the most prominent examples of “supplemental ethics codes” are developed in fields relating to family law practice.  This symposium issue will address some of the most difficult ethical dilemmas in representing families to provide guidance for practitioners and policy makers in developing ethical standards. 

The publication schedule for the symposium anticipates a December 15 deadline for article submissions.  Inquiries may be directed to the faculty symposium sponsor Professor Barbara Glesner Fines at  glesnerb@umkc.edu  or 816.235.2380.

I note that this follows on the heels of UNLV's January '06 conference on a related but not necessarily synonymous topic:  ethics in representing children, which we summarized here.

When an Attorney Turns in a Client?

Posted by Alan Childress

That's the question puzzling -- rightly I'd say, under California law -- Peter Henning over at the White Collar Crime Prof Blog (presumably a site not about law profs accused of white collar crime).  In a nice post from yesterday, Henning, a Wayne State professor [right], reports on an alleged Ponzi scheme and a press release by the U.S. Attorney's Office in L.A. announcing the accused's upcoming  criminal trial date.  Henning finds particularly "interesting" a throwaway line in the USAO release to the effect that the fraud investigation started by the accused's attorney reporting the criminal conduct to the USAO.  Henning wonders, assuming the press release is accurate, how that happened without violating the current California Rules of Professional Conduct (linked here).  He points out that California did not adopt any of the ABA Model Rules versions which extend a future-crime exception to financial harm, instead tightly limiting permissive disclosure in Rule 3-100 to future physical violence.  I'd add that California also did not adopt the MR exception based on a lawyer's participation in the crime or fraud.  I'd add further that even California's proposed major revisions to its Rules, out now for public comment, will follow numbering like the ABA but do not yet propose to adopt any new exceptions to confidentiality.  That's not surprising, given how strongly the California Business & Professions Code is traditionally seen to protect confidentiality and privilege.  Nor is the lawyer ethically permitted to induce others to violate these principles (Rule 1-120) or interfere with privilege (B&P Code sec. 6217), raising the additional question whether the USAO could encourage the defendant's attorney to reveal information. 

So I don't have an answer for Henning either, except to agree with his puzzlement.  Maybe the scheme had effects and victims in California allowing prosecution there, but the lawyer represented the Ponz in one of the growing number of states adopting newer versions of the ABA MR which include economic crime as well as criminal acts which the lawyer helped advance?  Maybe one of the ethical readers of this blog has a better answer than I do?  Plus Henning should update us if he finds out more details, please; I will bet there is a simple explanation for this not at all like the Al Pacino character in "...And Justice For All" in his willingness to give up his license for the supposed greater good of telling the court that his client and everyone else were "all out of order!"  For an interesting study of a government [DOJ ethics] lawyer willing to risk exactly that, to disclose her view that the Bush administration -- very likely her client -- had withheld information on the questioning of John Walker Lindh, see this analysis by David McGowan, on which Jeff had previously opined (on other grounds).  Anyway, like Henning, I don't get it here.

Blog Posts as Prior Art?

There's an interesting dialogue going on over at Conglomerate on the question posed by Usha Rodrigues whether blogging on an idea establishes a "claim" to the idea.  Gordon Smith observes in a comment:

Take your Delaware judges idea. If I write a piece on the publishing propensity of Delaware judges and I explain that propensity on their status as corporate law experts, does that preempt you from offering a different explanation? Or would you think that I should be preempted from even addressing the subject?

Rather than thinking about this as preemption, I think it makes more sense to think about citations. If you get an idea from a blog post and you write that idea up in a paper, you should cite to the blog post in your paper.

We were just talking about this here.  I would think of Gordon's article as analogous to a patent claim, and all the other stuff out there as prior art.  Some prior art is stronger and more accessible than other.  So if Gordon writes his paper, he has a presumption of having advanced the academic art.  But if turns out there was a blog on the topic, he is subject to an analog to a validity dispute in the "court" of his academic peers.  It continues to be "valid" if it is an advancement on the prior art.  It is "invalid" if it is not novel over the pre-existing "claim."

By the way, I think my analogy breaks down on obviousness versus novelty, but the Madisonian.net guys will have to tell me.  [Warning:  I am about to practice IP law without a license.]  You invalidate for lack of novelty if the entire claim is covered by one piece of prior art.  You invalidate for obviousness if more than one piece of prior art covered the claim, but it would have been obvious to combine them to one skilled in the art.  Most of what we do, I think, is synthesis of ideas, and if it's a new synthesis, almost by definition it's okay.

By the way, I take dibbies on this idea.

[Jeff Lipshaw]

Hawai'i Supremes Slam Prosecutor

by Mike Frisch [Updated with a link to find the opinion]

An effective attorney discipline system depends in large part on the ability of Bar Counsel to seek and obtain information from the accused lawyer, who often is the main source of information about the complaint. The attorney is duty-bound to cooperate and respond to the claims of misconduct. This duty provides an important justification for regulation of lawyers by lawyers.

A case just decided by the Hawai'i Supreme Court [go to link; click on Sept. 2006, go to 9/22/06, and open Breiner] tests the bounds of the duty to cooperate. The Court took the unprecedented step of removing the special disciplinary counsel from the case and ordered the Disciplinary Board to propose rules to protect accused attorneys from investigations that are too broad in scope and  allowing protective orders against Disciplinary Counsel. Breiner v. Sunderland, decided September 22, 2006. 

Myles Breiner is the subject of two bar complaints. Special Disciplinary Counsel asked him to respond to 26 questions in one complaint and over 150 questions with subparts in the other. Breiner sought and was granted a writ of prohibition. The Court found that the questions improperly sought admissions and legal conclusions on matters where the prosecutor had the burden of proof. The questions were characterized as "offensively imperious", reflected a "complete misunderstanding of the rules at best or... harassment at worst" and were "overbroad, uncivil, and abusive." The Court ordered the prosecutor removed, directed expedited review of the underlying complaints with dismissal as the remedy if the investigation takes more than six months and tasked its Board with proposing new rules regarding limits on subject matters that disciplinary counsel may investigate.

When an outlier case like this one comes along, there is the danger of an overeaction that can hamper the ability of the bar to investigate complaints of ethical misconduct. In D. C., the duty to cooperate was gutted by decisions that held that a general denial of misconduct sasified the duty to cooperate. We can only hope that the actions of one overly zealous prosecutor in Hawai'i will not intimidate disciplinary counsel around the country from doing their duty to fully and fairly investigate complaints.

Eu-stress and Di-stress

Posted by Jeff Lipshaw

Andrew Siegel, guest-blogging over at my once and future visitor stomping grounds, PrawfsBlawg, has a post designed to answer the age-old question "so you are a law professor and you teach six hours a week.  What do you do the rest of the time?"  He also links back to the question raised by my friend Paul Secunda: if being a law professor is such a great job, why are we always so stressed?

I have previously posted on why I think this is a great job.   But I didn't discuss stress.  A fellow named Speed Leas who specializes in the mediation of inter-congregational disputes (I was on the board of a Reform Jewish temple that needed such a mediator - badly!) taught me a word I like: eustress.  Eustress is the opposite of distress.  We all recognize how debilitating distress can be; eustress has precisely the opposite effect.  We are energized, not exhausted, by it.

Here's a theory:  passion for the task at hand transforms distress into eustress (or perhaps overwhelms the distress).   I think the most significant source of distress in my professional career was the obligation to bill hours.  If you are the sublimated warrior who lives for trial, then the fact that you write the time down on a sheet of paper is secondary.  I was a big law firm litigator for ten years, but I'm not a sublimated warrior, and billing hours was a way to make a nice living (it paid more than twisting bolts onto a car frame) but I had no passion for it.  Passion has to do with vision and goals and fulfillment.  To the extent that they are self-imposed, I want to suggest that the stress created is eustress, not distress.  So imagine the difference between spitting out your 2,000 billable hours for Dewey, Cheatham & Howe versus spending the same amount of time in building your own firm with three or four of your closest friends.

Unquestionably there are distress aspects to being a law professor - finding a job, promotion and tenure, saving for the kids' college, coming up with research ideas.  But it seems to me a month like Andrew's reeks of eustress.

Judicial Ethics and the Appearance of Impropriety

Posted by Alan Childress

It struck me -- in reading today both Jeff’s advice from Warren Buffett and Mike’s note of the uncertainty in applying the Rule 11 standard to 11th Circuit litigation that was deemed frivolous but the lawyer used her discretion to stick with the client -- that the tangential intersection between these two posts touches on a good question on "reforming" the Model Code of Judicial Coduct.  An ABA proposal (new Rule 1.02) would turn the "appearance of impropriety" heading into an actual rule -- and obviously invites lots of satellite litigation not over whether the judge actually did anything wrong, or would do anything wrong, but instead whether he or she would look like he or she would do something wrong. In effect the ABA is proposing to make Buffett’s folksy saw pitched to business people including their PR (public relations) concerns -– Don’t do it if it’d irk readers of the newspaper’s front pages -– and turn it into an actual rule of conduct for judges. Worse, a rule for advocates to seek disqualification of judges without having to show a potential breach of any specific rule.

The "appearance of impropriety" test, growing new teeth in the judicial context, suffers from the same target-audience dilemma Jeff raised for Warren’s advice. Here, does that mean the front page of the L.A. Daily Journal for lawyers and the other judges, or the front page of the N.Y. Daily News for subway riders? Even just the "looks like" test for lawyers invites trouble, given their perceived ethical duty to try to disqualify a judge if that's best for their client. I have no issue with it as general guidance and a caution to judges (as it seems to be now in its heading format): an inquiry they should make themselves and choose to err on the side of caution. Subway riders matter, and perception ought to be considered by judges in applying their ethical rules. But a test that makes judges recuse themselves if the general public would feel queasy, whatever its PR value, may be practically unworkable in certain situations where a bit more nuanced analysis reveals that the judge has done nothing wrong by traditional standards and has no significant risk of doing so in this particular situation. Do we really want to pay the price for that amorphous inquiry in a much larger number of cases? Those costs are well analyzed in an excellent article by Ronald Rotunda (George Mason U., right, though his webpage features Spock) , in which he tackles the issue highly logically. (It's forthcoming in Hofstra Law Review and is on SSRN here; find it also 4th on Jeff’s latest top ten list, without a bullet.) Rotunda’s abstract starts by scoffing: "We sometimes think, loosely, that ethics is good and that therefore more is better than less."

Even if those costs do not overwhelm, I wonder if the PR value to the profession and judiciary would be real or worth whatever costs do arise.  More after the fold.

As to the public relations value of the proposals, I think a lot more motions filed questioning judges' ethics, along with many of them having to be denied even under the 'appearance' test, virtually invites a public perception that the judiciary is rampant with bias and conflicts -- but is protecting its own (a point examined by Rotunda, in addition to the burdens of a vague standard). Because opinions won’t be able to cite a specific rule of compliance to justify remaining in the case, it’ll be a PR battle of discretionary views as to what is an "appearance of impropriety." I don’t think either the public or the profession is a winner in that ephemeral debate.

It seems as though the ABA will have come full circle if it makes this change. One of the reasons it abandoned its Model Code for lawyers with its rules+"ethical considerations" (and even its own perceived "appearance of impropriety" test at least as developed in case law) was to give clearer guidance and less Chamber of Commerce rhetoric. The Model Rules try to tell where the line is. Of course that does not end the application of discretion and good judgment in practicing generally and in applying the MR specifically. Mike’s post on Rule 11 reminds us of yet another area where a debate over the actual test to apply to the attorney’s conduct is really a battle over the use of good judgment and ethical discretion. Whether she was right or wrong, the plaintiff’s attorney was clearly applying judgment and not a hard and fast rule. I don’t deny that being professional is all about using judgment. I just deny it is helped by "standards" to guide that judgment which are based more on perception than reality. Especially in the judicial context, there is no substitute for good judgment – yet the imposition of a standardless "appearance" standard is not about maximizing judgment but rather mystifying it.

To the extent "appearance of impropriety" is a helpful inquiry for judges and a guiding principle in their own discretionary and professional judgment, it already finds its place in the current judicial rules. That’s where it belongs, and in the hearts of good-faith judges everywhere. But not in the endless pages of motions lawyers will file understandably seeking litigation advantage at every turn. At bottom, I would have thought the ABA would have learned from its own experience in rule-making, and wish they’d listen a little less to the Daily News headlines.

Rule 11 Redux

by Michael S. Frisch

Attorneys confront potential liability from a variety of directions: malpractice claims from clients or others who claim quasi-client status, bar discipline that threatens the license to practice and sanctions from courts for instituting or maintaining frivolous claims. A recent case from the Eleventh Circuit, Amlong & Amlong, P.A. v. Denny's Inc., 457 F.3d 1180, decided July 31, 2006, raises interesting issues regarding an attorneys duty of ongoing loyalty to her client in the face of evidence that casts doubt on the validity of the client's case. The court overturned a trial judge's order imposing sanctions in excess of $400,000 by a 2-1 vote.

The lawyers took over a case alleging that an employee of Denny's "had suffered a horrific pattern of sexual harassment, rape and assault" by her supervisor. The client had limited English skills and a Haitian interpreter participated in the eight days of depostion of the client, translating the questions and answers. The client testified falsely about issues related to her immigration status but corrected the testimony on her lawyer's advice. There were no corroborating witnesses. Concerned about the client's credibility, the lawyers retained a respected polygraph expert, who concluded that the client was telling the truth on the core allegations.

The lawyers filed an extensive errata sheet after the deposition. The errata sheet corrections were in some respects harmful to the case but provided details that the client had not been able to remember when deposed. Eventually, the case was dismissed as a sanction for failure to comply with an order reopening discovery.

A Magistrate conducted a sanctions hearing and concluded that the attorneys had acted in good faith in presenting the case. Without a hearing, the District Judge disagreed and ordered a hefty monetary sanction. The 11th Circuit overturned the sanction, finding error in the rejection of the credibility determinations of the Magistrate. The dissent characterized the majority opinion as "holding that an attorney's subjective good intentions may relieve her from liability for sanctions for her objectively reckless pursuit of a patently frivolous claim."

The case underscores the dilemma that plaintiffs attorneys confront with a difficult client who alleges severe damages without corroborating witnesses or physical evidence. The lawyers could have moved to withdraw after the deposition but decided to press forward after the polygraph test supported the client's credibility. The majority decision provides some comfort to such lawyers who come down on the client's side despite the potential liability for maintaining a frivolous case. However, the question of whether a lawyer's subjective belief in the client's case trumps the ethical duty to refrain from frivolous litigation remains a live one.

H.L.A. Buffett? Or Warren Wittgenstein?

Posted by Jeff Lipshaw

The Wall Street Journal reported on a memo Warren Buffett sent to the managers at Berkshire Hathaway in connection with the recent backdating scandals.  In a statement that seems to place him among the "soft positivists," the Sage of Omaha counseled "let’s start with what is legal, but always go on to what we would feel comfortable about being printed on the front page of our local paper, and never proceed forward simply on the basis of the fact that other people are doing it."  Indeed, Mr. Buffett observed that the five most dangerous words in business are "everybody else is doing it."

I've used this "Detroit Free Press" test as a means of counseling, but I wonder just how one applies the standard nowadays.   "Everybody else is doing it" is certainly a powerful means of rationalization, and I've argued elsewhere that law and lawyers, if nothing else, are ably equipped to rationalize otherwise judgmentally-challenged decisions.  Does the "front page" test provide a workable standard?  Would well-meaning people ever apply a different one?  Isn't the problem that nobody really knows, except in the easiest cases, how a decision plays on the front page?  And is the standard the front page of The Economist, or the Omaha Herald?  Or a sound bite on CNN?  Are you okay with a decision that looks bad on page one, but may become more defensible with in-depth coverage?

What  Mr. Buffett is really advocating is not, I think, a reduction to the least controversial common denominator, but to a Main Street kind of horse sense.  Perhaps it is time to revisit Frederick Schauer's Playing by the Rules: A Philosophical Examination of Rule-Based Decision-Making in Law and Life, particularly the discussion of rules as entrenched generalizations - where generalizations (i.e. rules) control in circumstances that no longer serve the justification for the generalization.  I think the "front page" standard is less likely to become an entrenched generalization than much of what passes for prescription in the corporate governance area these days (director independence being one, as to which Usha Rodrigues speculates over at Conglomerate), but it doesn't take long for reification to set in even on horse sense maxims.   

Sanctioning Misconduct: Where the Rubber Meets the Road

by Michael S. Frisch

The Rules of Professional Conduct as adopted by the various states require the imposition of professional sanction for ethical misbehavior. In the main, the sanctions are, in contrast to earlier times, a matter of public record. Some jurisdictions still allow for private admonition or non-public diversion for minor violations. For more serious ethical breaches, jurisdictions vary in the evaluation of mitigating factors in determining the appropriate quantum of discipline for misconduct. The consideration of aggravating and mitigating factors present important policy questions with respect to the regulation of the legal profession.

When I was a disciplinary prosecutor, it seemed like every lawyer who engaged in serious misconduct had an excuse/justification for lying, cheating and/or stealing. My jurisdiction determined that if alcoholism caused the misconduct and the attorney was recovering, probation was appropriate in lieu of disbarment. The same result was reached if the violations were caused by abuse of prescription drugs. However, the courts "drew the line" (pun intended)in holding that cocaine abuse would not be treated as a mitigating factor. The alcohol holding did open a floodgate of claims of mitigation ranging from ADD as an excuse for neglect of client matters to a diagnosed sexual disorder as mitigation for criminal sexual abuse of a child.

The rare case where the attorney acknowledged that the misconduct was a result of a moral lapse rather than claiming that demon rum or some other condition caused the violations was so refreshing to me that I would consider "taking personal responsibility" the most important mitigating factor of all.

Ethics Journal Symposium

On October 21, 2006, the Georgetown Journal of Legal Ethics will celebrate "Twenty Years of Legal Ethics" under the leadership of faculty advisor Robert Drinan, S.J. with a keynote address by Prof. Stephen Gillers, the Emily Kempin Professor of Law at New York University. After brunch, a distinguished panel will offer insights into the future of legal ethics as part of the celebration of the journal's twentieth year. The symposium is part of Georgetown's alumni weekend and was organized by the journal's present editor-in-chief Lauren Weeman.

[Mike Frisch]

"We Thought They'd Be Busy Filing Their Returns Until April 15"

Today's Wall Street Journal features a story about the efforts of the Internal Revenue Service to recruit top law grads.  Already outgunned by the ability of private firms to pay the big bucks, the IRS (this is no joke, read the article) recently discovered, after years of recruiting in the spring, that the prime season for recruiting law students is the fall.  Even now there are glitches.  One student reported that it took the Service five weeks to get around to arranging a callback, and then it was for a different job than originally advertised.  Not to worry, however.  The Service is rolling out a new line of slick marketing and recruiting material.

[Jeff Lipshaw]

Phelps on Entrepreneurial Capitalism and Everything Else

2006 Nobel Laureate in Economics Edmund S. Phelps has a full page op-ed in the Wall Street Journal today (Oct. 10) laying out his vision of dynamic, entrepreneurial capitalism and economic justice.  It is particularly helpful as a guide to the distinctions between U.S. and European attitudes toward the market, even among business people.  Along the way, there are references to Hayek, D.H. Lawrence, Aristotle, Cervantes, Kant, Schumpeter, Ayn Rand, Tocqueville and Rawls.

[Jeff Lipshaw]

Top Ten Papers - Legal Ethics and Professional Responsibility

Posted by Jeff Lipshaw

We have a new number one (because of SSRN's policy of rolling off the papers after 60 days), and new papers moving into the top ten at numbers 3 and 7.  The current top ten downloaded papers as reported by SSRN for its Legal Ethics and Professional Responsibility Journal, as of October 10, 2006:

1 Therapeutic Jurisprudence and Readiness for Rehabilitation David B. Wexler, University of Arizona - James E. Rogers College of Law

2 Politics, Office Politics, and Legal Ethics: A Case Study in the Strategy of Judgment David McGowan, University of San Diego - School of Law

3  Southwest Airlines:  Hedging and Shareholder Value  Michael R. Ingrassia, Georgetown Law Center, Victor Fleischer, University of Colorado School of Law

4 Judicial Ethics, the Appearance of Impropriety, and the Proposed New ABA Judicial Code Ronald D. Rotunda, George Mason University - School of Law

5 I Can Tell When You're Telling Lies: Metadata in Litigation and Transactional Practice David C. Hricik, Mercer University - Walter F. George School of Law

6 The Images of Lawyers Fred C. Zacharias, University of San Diego - School of Law

7 Plato, Hegel, and Democracy, Thom Brooks, University of Newcastle upon Tyne

8 Judicial Opinions as Minefields of Misinformation: Antecedents, Consequences and Remedies Jacob Jacoby, New York University - Department of Marketing

9 Ethics and Corporate Responsibility Marina Ricci, Valparaiso University School of Law

10 Legal Hazard: Corporate Crime, Advancement of Executives' Defense Costs, and the Federal Courts Peter Margulies, Roger Williams University School of Law