November 11, 2006
More Signs of Forthcoming SEC Guidance on SOX Compliance
The Washington Post reported Saturday that the SEC has moved closer to issuing new guidelines to ease compliance and audit requirements under SOX, especially on smaller institutions and for certain types or levels of transactions. The article: "SEC, Accounting Board Officials To Weigh Sarbanes-Oxley Update." SEC leaders and a panel from the accounting profession will meet Sunday to discuss changes to accountability controls and internal audit procedures. If such industry meetings produce specific proposals, they are expected to be played out starting next month in open meetings with public comment.
This development, along with SEC Chair Christopher Cox's phone comments to the Post, apparently confirms earlier hints and suggestions that new 'SOX 404 guidance' would work toward more flexible and context-based expectations for companies. In addition, portions of a letter written by Cox and released this week supported cost-consciousness and flexibility in further implementation of SOX, four years later. Business groups had objected to compliance costs and uncertainty, and the SEC--among others--seems to have listened. [Alan Childress]
UPDATE: The Business Law Prof Blog has a nice rant on this 404 issue and especially the media's treating SEC steps as a big story when Congress needs to act.
Novelist Turow to Speak at Fordham Law 12/5
On the heels of the release of his novel Limitations, Scott Turow will speak at Fordham Law School Dec. 5, 8:00 pm, in New York City's One Time Warner Center. His appearance, announced here, is part of Fordham's series on law, culture and society. Turow will speak on the book and his role as a novelist and still-practicing lawyer -- and annotate clips to be screened from the film version of 1990's Presumed Innocent. (This reminds me that the late Raul Julia's superbly understated performance as Sandy Stern should be mentioned in our recent nostalgia about lawyer movie roles, despite the intended moral ambiguity of his methods in defending Rusty Sabich: "You tell me...was justice done?") Attendance is free and allows online sign-up. [Alan Childress]
UPDATE: Here is a link to a remarkable essay by Scott Turow in the Sunday NYTimes Magazine (upcoming 11/26), who posits that the administration's war on terror may meet unusual and unexpected resistance in the Court from Justice Scalia, the civil libertarian.
Antinomies and the Life of a Corporate Lawyer
Posted by Jeff Lipshaw
I will work with the Wikipedia definition of an antinomy as developed in Kant's work: "the equally rational but contradictory results of applying to the universe of pure thought the categories or criteria of reason proper to the universe of sensible perception." So, for example, starting from the same empirical data, pure reason is capable of deducing the thesis that the universe has a beginning point, and the antithesis, that it does not. Or reason is capable of deducing the thesis that causality means everything is determined, and the antithesis, that we have free will.
And so we find the corporate lawyer and the corporate executive faced with such antimonies, as pointed out in an eminently sensible way by Joe Nocera in the New York Times (November 11, Business Today) under the headline "The Paradoxes of Business as Do-Gooders." The occasion is the annual Business for Social Responsibility conference in New York this weekend, at which companies like Starbucks, Time Warner, Chevron, Pfizer, and others are explaining why being good corporate citizens makes business sense.
Nocera observes, sensibly, that it is much easier to be a good citizen in a profitable company. Indeed, that's consistent with the observation that environmentalism is a luxury of the developed countries; you don't worry too much about externalities when you are struggling just to house and feed people. But the paradoxes and antinomies of the real world, faced by corporate lawyers and executives every day, are hardly the stuff of a solid, non-contradictory theory of human behavior. So from an empirical base, one side, represented in Nocera's article by Isaac Post (right) of the Competitive Enterprise Institute, says that corporate social responsibility "is a misguided attempt by a subcategory of business managers to deal with the crisis of corporate legitimacy." Russell Roberts, an economist at George Mason University, adds "Doesn't it make sense to have companies do what they do best, make good products at fair prices, and then let consumers use the savings for the charity of their choice?"
But the nature of antinomy is that you can't win. According to Nocera, "[f]rom the left, the essential criticism of corporate social responsibility is that it is little more than window dressing, intended to give companies a good name without having to back it up with real deeds." Ah, would that the world were simple enough to explain by resort to the fruits of pure reason, notwithstanding that the same set of circumstances allows us to reason to wholly antithetical conclusions.
Last night, I had the pleasure of speaking for an hour, mainly answering questions about the life of a corporate lawyer, to the mergers and acquisition class taught by Professor Antony Page (left) at the Indiana University School of Law - Indianapolis. The central question was - what does a general counsel do during an acquisition? My response was that the general counsel has to understand the business deal and its importance to the company well enough to overrule high-powered Wall Street lawyers who are recommending that such-and-such a provision really should go into the agreement "to cover you just in case this-and-that happens," but also at the same time to understand when the language of a particular provision is important enough to stop the deal in its tracks. That is the antimony of deal lawyering, because from the center of any such problem, you can always argue your way to either antithetical conclusion. And so the students asked: "how do you know which way to go?" My only response is that of the Geoffrey Rush character in Shakespeare in Love who explained why everything in the hectic production of a play always works out, despite that "the natural condition [of the theater business] is one of insurmountable obstacles on the road to imminent disaster."
"I don't know; it's a mystery."
Are the Low Numbers of Female Supreme Court Law Clerks a Statistical Blip? (Or: 'Let's Ask Justice Thomas to Check')
Posted by Alan Childress
David Kaye (Ariz. State, Law) and Joseph Gastwirth (GW, Arts & Sci. [Stats Dept.]) have just posted on SSRN Law & Soc'y: Legal Prof., their new article, "Where Have All the Women Gone? 'Random Variation' in the Supreme Court Clerkship Lottery." Only 7 of 37 of this year's Supreme Court law clerks are women, a drop nearing 50%, leading to a popular-media outcry. Justices Breyer and Souter have publicly defended the low numbers as the product of "random variation in the applicant pool," but apparently did not convince many onlookers, some of whom assert "insidious discrimination" in the drop.
The authors test the claim using their experience with statistics (David Kaye, for instance, is one of the most respected statisticians in the law school world and coauthor of the book Prove It With Figures; and Gastwirth edited Statistical Science in the Courtroom). They conclude that the numbers are not improbable and within an expected range, given the applicant pool. [Elsewhere they have reported, similarly, that this year's drop is not "statistically significant," adding "that for all the raised eyebrows, the numbers are not so dramatic as to establish that this year's decline is anything other than the 'random variation' asserted by Souter and Breyer."] But this relatively clean bill of health only works, they note in the SSRN article, court-wide. Some individual Justices have numbers so low that it is hard to explain them by chance or fluctuations.
In any event, all the statistics-crunching and the conclusion, they point out, depend to some extent upon the foundational truth of public assertions about who applies and particularly the claim that women are underrepresented in that source pool. The authors do not claim, of course, that the numbers may be chance when compared to the larger population of women law students or even students with particular credentials. That was not their investigation. And they ackowledge that their job was hampered by working from public statements rather than disclosed real data about the applicant pool. They call for public disclosure of information on applications and hiring.
The full abstract is below the fold. Also find my take on the matter, especially the problem of using the 'pool' as the reason for this year's dip, or generally for such inquiries.
I would add (and the authors are no doubt aware) that even if the Court's public statement about the available applicants happens to be true, that pool is not randomly created. It is not "neutral" itself, to explain how a drop in numbers might well be neutral. Particular feeder judges, inflexible credential requirements, repeat-player recommenders, and all sorts of other non-random variables initially create the pool. Earlier I argued (as to clerks' influencing decision-making) that "it must be kept in mind that the hiring of the clerks is not a random and independent act--their ideologies are often taken into account both directly and through their references, feeder judges, and mentors." The same may be said for their diversity in terms of gender and race. Pointing to a blip in the source pool does not really explain the intuitively low hiring rate, particularly when the non-randomness of the pool (beyond even the hiring criteria) is controlled to a significant extent by the Justices' actions and traditions themselves.
If the Justices are not going to look for hiring factors other than those 'tried and true,' or find new feeder judges--or else at least impress upon their current sources the importance of their being more diverse in hiring--then all the statistical 'neutrality' of the Scotus hires for matching the "available pool" (or more accurately, the study suggests, for falling within an expected range in that pool, if only at the shallow end) is wholly meaningless. The Court can do better, and should.
The authors, of course, do not deny this. But the conclusion of possibly neutral numbers (and especially their more supportive conclusion as reported elsewhere) is only as good as the randomness of the source pool. That reserve is unarguably filtered through all sorts of sieves that the Justices might not accept from other institutions.
Certainly unarguable is the authors' call for public disclosure of data on which fuller examination can be made. I doubt the Court will do this anytime soon, since the Justices could say they don't answer to federal law since they are federal law. Or they could say nothing. But they did not say nothing or tell us to mind our business; instead they publicly proclaimed this a product of statistically blippery and asked us to trust them without (as far as I know) having either: (a) consulted a trained statistician, (b) consulted a court employee who has experience heading an office for years whose main job was to compile and crunch hiring numbers and claims of mere blips--hey, that's Clarence Thomas!, or (c) provided the audience with source data to verify it.
The Justices really have a duty to give such information, in my mind, now that some of them have come out in public to claim this is neutral and not an issue--once they have effectively referred to the "available pool" as an explanation. Fine, let's see that pool. And even if the source pool is down this year and so is itself not very diverse, the Court should be scrambling to find a cooler pool. [Alan Childress]
In the world of American law, a Supreme Court clerkship is a position desired by many but attained by few. Considering the career trajectory of many clerks, perhaps it is not surprising that the New York Times would give front page coverage to some disturbing facts about this year's clerks -- only seven out of the 37 -- a mere 19 percent -- are women. This outcome, moreover, represents a shocking 50 percent drop from preceding years. Yet, two Justices portrayed this year's percentage as the result of “random variation,” a claim that strikes many observers as incredible.
This essay applies standard statistical reasoning to answer two questions -- what do the numbers prove, and how strongly do they prove it? We show that this year's decline in women is not at all improbable. Likewise, if the percentage of women applying for these clerkships is in the range of what one Justice suggested, then the small proportion of women is about what one would expect.
The situation seems different, however, when one examines statistics on each Justice. Some Justices hire considerably fewer women than would be expected by chance, while others hire somewhat more. There are many possible explanations for this pattern. We marshal data to assess the plausibility of some of them, but in the end, the available records do not allow a definitive conclusion. To assure public confidence in the Justices' assurances of gender neutrality, we recommend that the Court make statistics on the characteristics of those who apply for and receive clerkships publicly available.
November 10, 2006
Being Right Redux: Is Demonizing the Fruit of Modernization?
Posted by Jeff Lipshaw
The morning after the election there was an interesting column in the Wall Street Journal by a former Boston Globe columnist turned Sand Hill Road venture capitalist (hmm, interesting) named John Ellis on the strange death wish that seemed to underlie negative political advertising.
Entitled "All Slander All the Time," it focused on Gallup polling showing that the overwhelming majority of voters in six states with closely contest Senate races viewed the advertising "as either 'somewhat negative,' 'very negative' or 'extremely negative.' Roughly a third of those surveyed in each state said 'extremely negative.'" And Ellis notes the ironic effect:
What makes our politics so sensationally awful is not just the amount of money spent denigrating the category and the profession, but the equally stunning amount of energy that is expended by party apparatchiks to amplify the negative in news-media coverage of politics. And the news media are only to happy to comply. The truth is they can't get enough of it.
The net effect of this constant and unrelenting assault on politicians and the political process is voter resignation and ultimately a kind of doomed acceptance. It must be true. They must all be hypocrites, fools, thieves and scoundrels. They're talking about themselves, after all. It's $1 billion of self-portraiture.
For what it's worth, I couldn't help but juxtapose this with a blog post on combativeness and demonizing from several weeks ago: the paper by Andrea K. Schneider (left, Marquette) and Nancy Mills entitled What Family Lawyers are Really Doing When They Negotiate. To repeat, this was survey data indicating that in twenty-five years (1976 to 2000), the number of lawyers perceived as being adversarial/competitive versus problem-solving/cooperative has risen from 27% to 36% as a percentage of the total bar, and the number of perceived ineffective lawyers has risen from 12% to 22%. Moreover, the aggressive lawyers are getting "more negative and nastier. Twenty-five years ago, the effective competitive lawyers still had plenty of positive adjectives describing them, including convincing and experienced. Today, that situation is quite different - the top seven adjectives describing adversarial lawyers are stubborn, headstrong, arrogant, assertive, irritating, argumentative and egotistical."
I'll add one more anecdote from practice. Back in the eighties, I was a young pup lawyer on an antitrust case in which a dealer of a consumer product accused the manufacturers in that particular industry of a concerted refusal to deal, on the theory that the dealer was a price cutter. Each of the defendants had the antitrust guru of one of the big local firms representing it, and there was a longstanding relational aspect to the interaction of defense counsel. They had been in this position in other cases in other industries, and would likely be so again in the future. At a certain point, one of the defendants decided this perceived coziness was not in its interest, and a lawyer from one of the big Chicago firms substituted in on its behalf. He proceeded to conduct the litigation with an almost psychopathic obnoxiousness, which was obviously intended to provoke a quick settlement so as not to have to deal with him anymore. The irony of all this is the lawyer ended up on the wrong end of a grievance, as a pro hac vice member of the U.S. District Court bar no less, in our jurisdiction.
I know my JSP-educated co-editor Childress gets nervous when I stray into sociology, but is this obnoxiousness and demonizing the fruit of the gemeinschaft (community) to gesellschaft (organization) modernization theory articulated by the German sociologist Ferdinand Tönnies (note we are not umlaut-challenged here at LPB)? As the community ties break down, there is less social norming, less compromising, less "life is too short for this fight." Remorse and sympathy are as much forms of conflict resolution as proving that one is right. To tie back into Professor Schneider's area (as to which I retain my amateur standing!), think about how you might have successfully resolved a fight with a spouse or partner. I suspect it had more to do with remorse or sympathy than proving to the other that you were right. (On the political side of things, think about the organized effort to reconciliation in post-apartheid South Africa.) But there is increasing reliance, within in the family or without, on systems and mechanisms of formal win-lose resolution, whether they are Robert's Rules of Order, litigation, or popular vote.
Ironically, Tönnies also observed that the community to organization trend of modernization is not consistently linear in that direction. If we can think about stemming the tide of global warming, or the erosion of wetlands in the Mississippi delta, maybe it's not beyond our capacity to do some mid-course corrections on our need to be right and to show opponents not only to be wrong, but to be demons.
Internet Referral Service Prohibited
by Mike Frisch
A recent ethics opinion from the Arizona State Bar holds that an online service that matches clients with lawyers who are "verified" by the service is a lawyer referral service within the meaning of Arizona Ethical Rule 7.2(b). The service is a for-profit entity that requires the participating lawyer to apply for membership and pay a fee. Arizona lawyers may not use the service without running afoul of the applicable Rule. The opinion also collects and provides citation to opinions from several other state bars.
November 9, 2006
Nomination For The Most Obvious Case for Attorney Discipline, Part 3
Posted by Alan Childress
I stand by my earlier nomination of the most self-explanatory and predictable case for attorney discipline (a state Supreme Court's declining to reinstate the disbarred lawyer who had threatened to "summarily execute" all seven justices of that Supreme Court). And I appreciate Mike Frisch's effort at naming one as Part 2. Still, I must give an Honorable Mention to a case involving this finding of fact:
Respondent is guilty of serious misconduct. He, along with [his client], broke into the home of [client's ex-wife], intending to take materials having evidentiary value in pending litigation. Once inside, they rummaged through the house, taking items of personal property, spilling alcohol, and somehow clogging the toilet. The respondent placed the [family] cat in the microwave oven and activated the oven, killing the cat. This is outrageous behavior, a world apart from what this Court, the profession, and the public is entitled to expect from members of the bar.
Attorney Grievance Comm'n of Maryland v. Protokowicz, 329 Md. 252, 619 A.2d 100 (Ct. Apl. 1993). The Court considered as well the Rule 3.3 "candor" implications of Respondent's repeatedly swearing "that he accidentally turned the microwave oven on when the cat was in it." Nonetheless, the sanction imposed (in a decision sure to make our own Mike fume) was. . .suspension with the right to seek reinstatement after a year.
There are times when you read the facts of a judicial opinion (in torts, con law, etc.) and have in your mind the picture that it wondrously paints. And then find the jarring conclusion to be like the end of an M. Night Shyamalan movie or a date with an Up With People castmember. I am reminded of a recent Fourth Circuit opinion finding no hostile work environment where ethnic slurs were repeatedly hurled at the plaintiff but, you know, in jest. Here, I will only observe that the punishment imposed above was at the end of an opinion that earlier contained these words:
On Friday, October 18, [the opposing client] used her microwave oven for the first time since the death of Max. She was defrosting a bagel and smelled the distinct odor of cat. Upon examining the interior of the microwave, she observed cat hair. It was then she realized how Max had died.
Polinsky & Shavell on Voluntary Disclosure of Product Risks
Posted by Alan Childress
Law-and-econ giants A. Mitchell Polinsky (Stanford, law) and Steven Shavell (Harvard, law) have posted on SSRN-LSN Tort & Prod. Liab. Law their new article, "Mandatory versus Voluntary Disclosure of Product Risks." It is obviously not about the ethics issues as such, but rather the liability implications involved in mandatory versus voluntary disclosure rules. But it seems to be indirectly important to legal ethics--at the very least in the sense of a proper calculus of the risks and benefits of risk disclosure in advising clients, as well as the Rule 1.6 confidentiality implications of disclosure (now that newer versions of the MR exception cover long-term personal harm and not just criminal acts producing imminent harm). Its abstract:
We analyze a model in which firms are able to acquire information about product risks and may or may not be required to disclose this information. We initially study the effect of disclosure rules assuming that firms are not liable for the harm caused by their products. Although mandatory disclosure obviously is superior to voluntary disclosure given the information about product risks that firms possess - since such information has value to consumers - voluntary disclosure induces firms to acquire more information about product risks because they can keep silent if the information is unfavorable. The latter effect could lead to higher social welfare under voluntary disclosure. The same results hold if firms are liable for harm under the negligence standard of liability. Under strict liability, however, firms are indifferent about revealing information concerning product risk, and mandatory and voluntary disclosure rules are equivalent.
My 'legal ethics' red flags went up on reading this abstract because I, like many legal profession profs, teach confidentiality by reference to the Belge buried-body case (can you disclose the location of your client's victim's body? should you? would you? well, then, advise the client to?). Then we segue to the modern reality that the same difficult gut-check of legal- versus real- ethics is not avoided by saying "I don't do crim law." Products liability and malpractice defense pose the same dilemma, and invoke (or not) similar exceptions in states which have updated their Model Rules.
One easy "out" that the students always look for is the convenience that it's best for the client's own interest to disclose early and avoid the public relations and liability firestorm of hiding it (cover up worse than crime, exposure to punitive damages, Ford Pinto, etc.). That's not a bad out and it may be supported by this article, but at the least the calculus should be informed by the economic and liability consequences of voluntary disclosure. A bit more after the jump...
Of course, the article seems more about how liability rules drive incentives for various rules for disclosure, a la Coase Theorem, rather than the other way around. Its implications fall more directly to regulatory regimes and encouraging efficient behavior. [Further, I am facially skeptical that a strict liability rule does not change disclosing behavior (even recognizing that it would not change safety behavior, a la Coase), because there are still different fears of inviting suit. And anyway the postulate that there is full information in the market does not hold true if a firm successfully hides defects).] But this should prove to be helpful reading on the unwittingly related ethics issues of disclosure and advising clients about risk.
Rebitzer & Taylor on the Structure and Economics of Large Law Firms
Posted by Alan Childress
Newly posted on the SSRN Law & Soc'y: Legal Prof. journal is this article by James Rebitzer (Case Western Res., Econ. Dept. [below left]) and Lowell Taylor (Carnegie Mellon U., Public Policy & Mgmt. [right], who often writes on minimum wage). It is entitled, "When Knowledge is an Asset: Explaining the Organizational Structure of Large Law Firms." Here is its abstract:
We study the economics of employment relationships through theoretical and empirical analyses of an unusual set of firms, large law firms. Our point of departure is the "property rights" approach that emphasizes the centrality of ownership's legal rights to control important, nonhuman assets of the enterprise. From this perspective, large law firms are an interesting and potentially important object of study, because the most valuable assets of these firms take the form of knowledge — particularly knowledge of the needs and interests of clients. We argue that the two most distinctive organizational features of large law firms, the use of "up or out" promotion contests and the practice of having winners become residual claimants in the firm, emerge naturally in this setting. In addition to explaining otherwise anomalous features of the up-or-out partnership system, this paper suggests a general framework for analyzing organizations where assets reside in the brains of employees.
ABA's CLE Program on Ethics Issues in Representing a Client After a Disaster (Mainly the Client's Disaster)
Here is a link to an ABA-sponsored ethics webcast, scheduled for Tuesday, Nov. 28, on issues in representing clients after a disaster (including pre-planning to make sure the clients are cared for in spite of the lawyer's and client's troubles). Such disasters include extreme ones like hurricane and office fire and also more personal ones like family illness and call-up to military service–-basically life-changing events that make clients vulnerable and raise unique issues of ethics and professionalism (such as practice across state lines and rules about active-duty military clients). Its format is a 90-minute live audio webcast or teleconference. I don't know anything about four of the five listed speakers (from all over), but I can tell you that the fifth--New Orleans attorney Malcolm Meyer--is an experienced adjunct ethics teacher who cares about these issues and recently lived them through Katrina. [Alan Childress]
by Mike Frisch
The imposition of reciprocal discipline -- summary sanction imposed by courts and tribunals that share disciplinary authority with a court that has sanctioned an attorney -- is an important component of sensible regulation of the legal profession. The overarching theory of reciprocal discipline is that an accused lawyer is entitled to one full and fair adjudication of charges. Once that decision is made, it should be respected and applied by all other courts that have admitted the lawyer to practice. The operation of reciprocal discipline has been greatly improved as a result of the creation of a data bank of sanctioned lawyers by the ABA. All states report their discipline to the data bank and all other jurisdictions have access to the information. Thus, the old problem of lawyers who are disbarred or suspended simply relocating to other states and continuing to practice has been greatly reduced.
A case decided today by the District of Columbia Court of Appeals decided an important and recurring local issue. The governing court rule requires a sanction from a "disciplining court" with authority to suspend or disbar as a predicate to reciprocal sanction. The District, so far as I can tell, does more reciprocal business than any court in the country, likely because there are so many lawyers admitted there who principally practice elsewhere. The case holds that reciprocal discipline may not be imposed where the sanction is imposed by a court-created body that itself does not have the power to suspend or disbar. Thus, non-suspensory sanctions by Boards or Bar Counsel from other states cannot form the basis for summary reciprocal discipline. [Here is a link to the PDF of the D.C. decision, handed down today.]
Bar Counsel cannot, as a practical matter, prosecute these reprimand-type cases from other jurisdictions from scratch. Thus, these cases likely will fall between the reciprocal cracks and give lawyers with a disciplinary history elsewhere a clean bill of health in D.C. I would guess that the court will consider an amendment expanding its definition of a "disciplining court" to cure this problem.
Small Ball, the Dead Zone of Entrepreneurship, and a Capstone Opportunity for Business Law
Posted by Jeff Lipshaw
There is some interesting data about the bursting of the dot.com bubble in yesterday's Wall Street Journal, and it plays to what I think is a fascinating curricular possibility. Consider this part of the dialogue Gordon Smith started over at Conglomerate on the subject of law and entrepreneurship. Gordon's post is a take on the scholarship of entrepreneurship; I want to focus on the programmatic and curricular setting into which that scholarship might be placed.
In his "Portals" column (Nov. 8, 2006), Lee Gomes highlights a paper coming out in the Journal of Financial Economics, authored by David Kirsch (Univ. of Maryland Business School, right) and others, suggesting that the actual failure rate of dot.com start-ups was far lower than popularly perceived, and in line with failure rates of firms in other industrial booms (like the development of the automobile industry). According to the article, Kirsch says the popular conception, no doubt fueled by mega-failures like Webvan, eToys, and Pets.com, is that only a few dot.coms survived the bursting of the bubble. But, in fact, there is something like an 80% survival rate.
Most of these survivors, though, aren't the titans like Amazon or eBay, but much smaller efforts such as wrestlinggear.com, which sells equipment to high-school and college wrestlers, what Prof. Kirsch called precisely the sort of demanding niche market for which Web shopping was invented.
These far more modest achievements stand in contrast to the "we are the next Microsoft" philosophy prevalent among those in the start-up and venture capital communities in the late nineties. The study zeroed in on something I saw: the Get Big Fast strategy. Now I was not in one of the real hotbeds: Silicon Valley, Austin, the Dulles Corridor, Boston. I was trying to develop a practice in the Ann Arbor area, leveraging tech transfer out of the University of Michigan. I'm not sure how many deals ever got done as a percentage of the ideas that got floated in our community, but there was a lot of venture capital money looking for investment, including Arbor Partners, a group that had come out of Comshare, Inc.; Avalon Partners, founded by the ex-president of Gateway; Woodland Ventures, looking for investments in the health care area; and the Enterprise Development Fund, founded by my friend, Tom Porter, and his business partner, Mary Campbell, the two of them really the godparents of early stage funding in the area.
How this translates into an opportunity for law school curricula below the fold.
But "get big fast" was the mantra (even though getting big fast was far more difficult when the technology required FDA approvals for safety and efficacy, an aspect of health care products, versus getting through the beta testing on software). I can't count any more the number of times I heard an entrepreneur pitching a business plan, in which the line went something like "the global market for this particular thing is $12 billion; we only need to get 2% of that market over the next five years to be a $60 million company." Right. And I'm going to be 007 in the next Bond flick.
But when companies were going from start-up to IPO in eighteen months in Silicon Valley, you could form a law firm like the Venture Law Group, the brainchild of Craig Johnson (left) and others formerly at Wilson, Sonsini, in which the lawyers bet on the success of the company, and recouped the cash-free layout of services on the back-end of the initial public offering. Despite having a law school classmate who was a founder partner in VLG, I have no inside information on the ultimate success of that business plan. I only know, like everyone else, that VLG now only exists as a group within the Heller Ehrman law firm.
But VLG epitomized the "three-run homer" strategy of entrepreneurship law, and we watched in envy from the Midwest, as venture capitalists told us "you don't get it" and took their business to VLG or to Testa Hurwitz in Boston.
What we saw in Ann Arbor was, I think, far more common: the dead zone of start-up funding. I served for a time as a member of the board of directors of the New Enterprise Forum, the venture capital club in Ann Arbor. Once a month, the organization would host an evening in a ballroom of the local Holiday Inn, in which there would be a presentations, usually by the very popular money folks (like Tom Porter), a featured entrepreneur (doing the equivalent of a law professor's job talk on the business plan), and the "pass the mike" session, in which everyone in the room identified themselves and had a chance to talk for a minute about his or her vision for making a lot of money. What always struck me, however, was that for every entrepreneur looking for funding (and not successfully, given their reappearance every month), there were at least a half dozen each of various kinds of fee-for-service providers: lawyers, insurance agents, business plan writers, strategy consultants, accountants, personal coaches, and the like. And that is why it was the dead zone: the entrepreneurs faced the Catch-22 of needing those services to attract funding, but not having the funding to pay for the services. At Prestigious and Large But Midwestern and Regional Law Firm, we tried to emulate VLG with a fixed-fee startup package, but even our ridiculously low price for "all-you-can-eat" basic legal service put us out of reach of most entrepreneurs.
Here's the curricular opportunity. Law school grads who want to be business lawyers usually think about the large ball of big law firms and corporations. Even in the venture capital area, business people and lawyers are playing large ball in the high tech corridors. But the reality is that most entrepreneurship lawyering is the small ball of routine business law and business planning, mixed in with common sense, and a touch of business acumen, and is not the domain, much less the exclusive domain, of the most elite grads of the most elite schools.
As Prof. Kirsch noted in the Wall Street Journal article, "It turns out there were lots of nooks and crannies for entrepreneurial action.... But those nooks and crannies might have been $5 million or $10 million businesses well worth doing, though not necessarily for VCs." Indeed, I taught a two-credit class at the Indiana University School of Law - Indianapolis called "Technology Startups and Venture Capital" and the challenge is finding any legal doctrine that is unique to the area. The one interesting doctrinal area is the law of down-round financing (see Gordon Smith's work), but otherwise we find ourselves, in an interdisciplinary way, looking, for example, at the sociology of lawyering to entrepreneurs (see Mark Suchman & Mia Cahill's canonical article in Law & Social Inquiry on Silicon Valley lawyers), or the economic development issues of entrepreneurship. But the legal issues (as opposed to, for example, the economic or sociological or valuation issues, which I also taught) are otherwise the nuts-and-bolts corporate and tax and contract work of small business lawyers. (And I think Gordon's synopsis of Law and Entrepreneurship Redux reflects the fact that the interesting scholarship is not in doctrinal law of entrepreneurship.)
So what are the curricular opportunities? This is an area ripe for interdisciplinary programmatic innovation, with the basics of business organization, financial services, and commercial law currently offered, as well as advanced seminars in say, economics and ethics for business lawyers, or creative problem-solving for business lawyers. And the capstone ought to be hands-on experience in the small business clinics (whether based in university technology transfer or low-tech entrepreneurship, or urban or minority entrepreneurship) that are springing up at law schools across the country (as to which Tom Morsch (right) at Northwestern has been one of the guiding lights). And that seems to me to be the perfect way to address, from a social policy and economic development standpoint, some of the dead zone issues, at least for some of the really good but VC-unfundable business plans.
There is untold untapped opportunity in teaching small ball business law. There were plenty of bright, motivated, entrepreneurial law students at IU-Indianapolis - I know because some of them were my students - who saw this kind of small ball as an alternative to the big firms. The downside for young lawyers starting off in small ball law is the loss of training those firms provide, but providing that training (within or without the traditional three year law school term) is the curricular opportunity for all of us. And maybe even some good scholarship about the dead zone.
November 8, 2006
SEC Guidance on SOX Forthcoming
Over at Banking Law Prof Blog, Ann Graham (Texas Tech) reports that the SEC plans to issue "SOX 404 guidance" to aid compliance. Professor Graham also helpfully links to an October 12 speech by SEC Commissioner Annette Nazareth at an ALI-ABA Sarbanes-Oxley Institute, the text of which suggests to Graham that the guidance will be "principles based" and allow for flexibility based on institutional size and circumstance. [Alan Childress]
Worse Than Talking Loudly on the Cell Phone in Public
...is responding to a critic of that cell phone etiquette by . . . shooting him. People don't kill people; cell phones kill people. Fortunately in this case the guy who told Jerk to quiet down was not killed, and is in a Tampa hospital recovering from bullet fragments in his stomach. (Luckily the assailant was not backed up by that SWAT team standing behind Verizon Boy.) One can only hope that shooting while on the cell phone is a sentence enhancer under the Guidelines. [Alan Childress]
More on "Limited Representations" or "Unbundling" Pilot Projects: Beyond Massachusetts
Posted by Alan Childress
Earlier, this blog and others reported on a pilot project in certain Massachusetts family-law and probate courts that allows lawyers to make limited appearances for discrete pieces of the case only, or even ghost-write briefs for otherwise "self-help" litigants. Here is a further website, devoted to self-help, that noted that several other states have started similar pilot projects in some of their courts too. Apparently the vocabulary for this trend is "unbundling" or "discrete task representation" because the attorney does not take on the matter as a whole or represent the client generally. States include Nevada, Maine, Idaho, and Florida. The site cites an earlier ABA Journal article on this subject and particularly the Florida experience, and links to a political organization called UnbundledLaw.org (with materials and forms, though its updates are through Jan. 04). And the National Center for State Courts links to many other states' takes on unbundling for pro se litigants.
Most expansively, and more recently, the California courts are on the verge (likely effective 1/1/07) of allowing "limited scope representation" generally in civil cases, far beyond its initial family-law pilot project. This is an area with potentially profound consequences for the currently perceived attorney-client relationship. And it will, I think, have to be worked out and reflected in ethics rules as well, not just court procedures (if only to strengthen the ethical duties to clarify with the client the nature and scope of the representation). Plus there may be new and unanticipated overlaps with Rule 11 sanctions-type issues, malpractice liability, and disciplinary rules promoting candor and disclosure to the court. For example, in California, "One new rule allows attorneys to assist with document preparation (ghostwriting) without disclosing their identity," as reported by the self-help website in endorsing the trend. Moves like that make me worry there is more heavy lifting to be done in this area before all the ethical and professional issues are resolved.
Fortune Magazine on the Flamboyant Fall of the Milberg Weiss Firm
The Nov. 13 Fortune Magazine is reporting in splashy detail the fascinating story of extravagant greed, deception, and conflicts (of interest and personal) permeating the class action churn-firm Milberg Weiss. This includes the unusual detail of a fake-stolen Picasso in California, connected oddly to a domestic violence charge in Cleveland, which handed the feds an inside witness to the firm's sins: its star named plaintiff. The article is called "The fall of America's meanest law firm," and is reported by Peter Elkind. Here is a link to the on-line version through CNNmoney.com. As the story unfolds in this article, you can be reminded yet again that truth is stranger than fiction. [Alan Childress]
The Joy of Winning and Other Atavisms
Posted by Jeff Lipshaw
Back in my youth, even the mid-term elections caused the major networks to have all-evening news coverage. But, along with gavel-to-gavel convention coverage (thank God), that disappeared, but CNN and MSNBC are going full time. Let's see: how many times have I heard the phrase "Democratic tsunami"? Chris Matthews and Keith Olbermann over at MSNBC are the least annoying of the anchors, plus they get appearances from Tim Russert and Tom Brokaw.
A line from Patton's famous speech to the troops came to mind: "Americans love a winner. Americans will not tolerate a loser." I am watching various Democratic candidate headquarters, where they are whooping and cheering their victories. And it struck me tonight that you can say all you want about "win-win," but there's nothing like "win-lose" to release what seems to me an incomparable and atavistic joy. Understand I cannot speak to this from personal experience. I never won anything in the political arena. I ran for some kind of office every year in primary and secondary school from about sixth grade on, and never won a thing (well, not quite, I was president of the United Nations Study Group as a senior, but that's because nobody else was willing to do it).
But in these contexts, what does the joy of winning that provokes the whooping have to do with doing the job well? I want to float a comparison from my practice and academic experience. I whooped in litigation practice when we won a big decision. I whooped (in the privacy of my living room) the first time I ever placed a law review article. My thesis is that to whoop requires a zero-sum game. It is not enough to win; somebody else has to lose.
One of my commercial litigation partners was known for his distaste for getting involved in settlement negotiations shortly before trial, and I doubt he was the only one with this idiosyncrasy. Getting prepared to win, and to cause someone else to lose, simply required a different emotional orientation to the world. Another partner once told me that he discovered he liked settling cases better than fighting them, and that the transactional area was all about settling, not fighting.
I have closed a lot of deals, and been very, very happy to get them done, but I don't remember whooping with the joy of winning.
November 7, 2006
Bar Counsel Organization Features Case on Federal Readmission Not Violating Supremacy Clause
The National Organization of Bar Counsel, or NOBC, summarizes this interesting disciplinary case as its latest featured "ruling of the month." The U.S. District Court for the Southern District of Indiana conditioned petitioner's readmission to the federal court bar upon her reinstatement by her state bar (back home in Indiana, right, where she remained suspended for nonpayment of disciplinary costs of $6k imposed upon her from an earlier matter). She argued that such a condition or deference violates the Supremacy Clause--it makes the federal ruling contingent on a state matter, i.e., "the state suspension essentially dictated the terms of her federal suspension." But on appeal, the Seventh Circuit rejected the argument, in an unpublished order. The site notes that there is authority in the Third Circuit suggesting the same argument has merit there. [Alan Childress]
Interesting Orrick Case on Successive Conflicts of Interest
Posted by Alan Childress
The New York Lawyer reported last week that a judge has denied as "tactical" Orrick's motion to disqualify opposing counsel in a lawsuit against Orrick brought by a former attorney-associate with the firm who was denied a partnership. The plaintiff's counsel had also previously represented another Orrick attorney in an employment dispute but that associate does not want it public that he had had a disagreement with Orrick (which was apparently resolved in some way). That associate's anonymous affidavit supported a motion by Orrick to disqualify opposing counsel for successive conflict of interest. The NY Supreme Court Judge denied the motion as "tactical" and, it appears, effectively "waived" by the anonymous associate's having recommended in the first place to the current plaintiff that he, too, should retain the same counsel against Orrick.
The story [linked here, though the NYL site requires a subscription, which is apparently free but requires several annoying steps], is entitled, "Ex-NY Associate Can Keep Lawyer in Suit Over Promise of Biglaw Partnership." Here is a link to the PDF of the opinion, also from the NYL site.
One of the reported aspects that troubles me is the reasoning that the former client may have implicitly waived a later successive conflict by having recommended and introduced his attorney to the other associate (this plaintiff) who was disputing employment with Orrick. I don't believe such introduction -- or even an explicit agreement to be co-represented in a joint representation and waiving the concurrent conflict issues that may have occurred then -- is in any way a waiver of a later successive conflict. To be sure, the opinion rests on more than this (the judge finds that there is no secret or confidence from the former representation, and no material adversity) but the public reporting seems to focus on such a waiver and it should not become picked up as the rule of this case. Instead it should be clear that the very reason we worry about joint representations is that later the two clients' interests and goals may diverge, incorrigibly. That risk is why an attorney is supposed to be cautious about taking on joint representations in the first place, not an implicit waiver later of the conflict which may arise when those interests do happen to split and now one client wants the attorney -- who knows his name and his troubles with the common defendant -- to withdraw. More below the fold.
Once those interests do [eventually] diverge, and absent consent by the former client, it appears that the attorney is in the untenable position of advancing his current client's cause at the expense of the old one's (on a substantially related matter), or else in the equally untenable (but concurrent conflict) position of not being able to use the old client's facts and situation as part of the proof for the new client. Does the judge not see that eventually the attorney may have to call the former client as a hostile and unwitting witness to testify against someone he does not want to testify against (maybe his current partners)? The ABA long ago advised in two advisory opinions that cross-examining a former client even on unrelated matters raises near-insoluble issues of successive conflict. And already the plaintiff's attorney has served Orrick with document requests specifically about his anonymous former client.
Even if the decision is better justified on other grounds, I also worry that a client's identity and dispute may not be the kind of privileged information that avoids court-ordered disclosure under the rules of evidence, but it may well be the kind of ethically protected information which still triggers client protections against successive conflicts. And just because the information may have failed privilege when it was shared among the three initially cannot mean that it is not grounds for a successive conflict. Plenty of cases have held that successive conflicts are based on a continuing duty of loyalty even if the information, whether not privileged or confidential, is no longer protected.
At bottom, I think the Orrick motion has more merit than this opinion gives it, even if it is motivated by the firm's tactics (I care more about the former client's interests and expectations, and do not think he should have to file to 'intervene' just to have the court look out for him more in the dispute). To my mind, the mere existence of the prior dispute can be the kind of confidential fact that easily could be materially adverse to the old client's current interest, and I don't particularly care whether that was so when they were first co-represented. That's the risk one takes in a joint rep--including the possibility that one of the clients will want you off the case later.
Investigation of "Vague" Billing Practices by Law Firms to Client Amtrak
The National Law Journal reports this extensive story today (from Legal Times reporter Anna Palmer) on a DOT probe into legal bills fees and firm overhead charges, including billing practices of 6 of 10 law firms representing Amtrak from 2002-05. "While the investigation focused largely on Amtrak’s in-house legal team, outside counsel were not without fault," the article states. A DOT report finds that bills were vague and did not comply with Amtrak regulations, included overhead inappropriately, and may have exceeded government-client hourly rates. According to the report, the law firms in question include Pillsbury Winthrop; DLA Piper; Manatt, Phelps & Phillips; and Morgan, Lewis & Bockius. [Alan Childress]