Legal Profession Blog

A Question Of Fact

A case summary from the Kentucky Court of Appeals:

The Court reversed and remanded a summary judgment in favor of a lawyer and law firm on appellant’s claim for reimbursement of all or part of a $10,000 fee paid during representation of appellant in a criminal matter after he plead guilty in lieu of going to trial. The Court held that the written fee agreement between the parties for trial preparation and trial, consisting of letters between the parties, was ambiguous as to the question of whether appellant would be entitled to a partial reimbursement of the subject fee in the event that the case did not proceed to trial. In light of the ambiguous nature of the parties’ fee agreement, there were genuine issues of material fact that could not properly be resolved via summary judgment. Because the parties did not create a fee contract that addressed the issue of who was entitled to what in the event that a trial did not take place, the question would have to be resolved by a finder of fact.

The opinion is linked here. (Mike Frisch)

Withdrawal Granted For Substantial Fianancial Hardship

From the web page of the Rhode Island Supreme Court:

NAIAD Inflatables of Newport, Inc. (NAIAD), engaged the law firm of Duffy & Sweeney, Ltd. (D&S) to defend it in a civil lawsuit brought in 2005 by the plaintiff, Stafford J. King, III.  Soon, however, NAIAD became delinquent in its financial obligations to D&S.  Concerned with both a large receivable and a looming trial date, D&S filed a motion to withdraw from the case.  This motion was unopposed by the client or by opposing counsel.  A justice of the Superior Court denied the firm’s motion.  On the grounds of abuse of discretion by the hearing justice, the law firm timely appealed.

 D&S filed a motion to withdraw based upon NAIAD’s failure to fulfill its financial obligations under the engagement agreement.  Supported by an affidavit of counsel, the motion was properly certified and forwarded to all parties of interest in compliance with the Rules of Civil Procedure.  Providing its client with ample notice, D&S made numerous requests for payments, sent reminder invoices, and warned NAIAD that D&S—based on a signed engagement agreement between the parties—would seek to withdraw as counsel if the client failed to bring the balance current.  Further, D&S informed NAIAD that it would have the right to object before the Superior Court in the event that such a motion was filed.  Denying the unopposed motion, the hearing justice cited Article V, Rule 1.16 of the Supreme Court Rules of Professional Conduct, and ruled that granting the motion would have a “materially adverse effect” on the interests of the clients.

In reversing the Superior Court’s denial of counsel’s motion to withdraw, the Supreme Court said that the hearing justice did not accord adequate weight to the hardship and substantial financial burden that would befall D&S if the law firm were required to continue in its representation of a nonpaying client.  Moreover, the Court was of the opinion that the law firm’s request to withdraw was not presented at such a critical point in the litigation process that withdrawal would be detrimental to either the court or the client.

The opinion is linked here. (Mike Frisch)

Plotting Wall Street Bankers on the Saddam Hussein - Salem Witch Trials Continuum

Posted by Jeff Lipshaw

Imagine how difficult public debate in these partisan times can be for someone like me whose motto is "extremism in the pursuit of moderation is no vice."  I haven't seen Inside Job, but I have read the reviews, good and bad, and I think I get the point.  I confess to never having seen a Michael Moore "documentary," A Civil Action, or Erin Brockovitch.  But this is from a reviewer, Keith Uhlich in TimeOut New York, who liked it, and it doesn't inspire me to fork over the twelve bucks:  "Ferguson uses innumerable tricks of the slick-doc trade (pop-music montages; gotcha smash cuts; celebrity narration—in this case, Matt Damon). Even the title is a loaded, tragedy-invoking provocation."  Nor am I enticed by the appeal to post-partisanship in the pursuit of outrage, as Uhlich describes it:  "Ferguson’s trying to move beyond the political dichotomies that divide us into bellowing factions and show how rampant greed screws us all."

Since I'm about to fly off to Minneapolis to give a milk-toasty response (see above motto) to the question "Did Capitalism Fail?" (my answer:  Capitalism Didn't Fail, But the Metaphors Got a "C"), I decided I ought to think for a little bit this morning whether I was wrong, and director Ferguson was right.  I thought that particularly because my friend Frank Pasquale at Concurring Opinions also liked the movie a lot, and that means I have to take it seriously, if for no other reason that Frank has taught me so much on other issues.  As I expected, Frank gets past the slick doc stuff (I cringe at the idea of watching the 60 Minutes-style "did you stop beating your wife?" questions) and suggests there are four arguments being made:  (1) Wall Street compensation is loopy; (2) the Obama administration hasn't done anything to create reform, instead relying on the same bankers as the Bush administration; (3) the Obama administration is as taken with the revolving door cabal of "Goldman Sach alums and fail-upward regulators" in which it is no longer possible to determine who captured whom; and (4) the U.S. has turned into a financial (rather than mechanical, civil, bio, or electrical) engineering power bound to lose out to China and others in the long run.  I also think Frank's review is honest in describing its own position (see contra my motto above):  "I’ll be looking beyond the core of the economics profession for a compelling account of a fair and just society. When it comes to finance, progressives should also realize they have few friends in the current administration."

I realize, however, that my milk-toasty approach hasn't quite failed me (I can't speak for others).  My essay is about the relationship between causation, as scientists would explore it, and meaning, as the rest of us would derive it.  The approach of Inside Job is less an explanation of what happened than a narrative of its meaning.  I'm still agnostic on the question whether "rampant greed screws us all" mainly because I like my MacBook and my iPhone, and I think they are the products of rampant greed.  On the other hand, I recently turned down the opportunity to invest in a derivative akin to a synthetic CDO in part because the idea of it bugged me, even though I had no good response to my broker why it was any worse than investing in the underlying market.*  As I note in the essay, one way to interpret events for their meaning is to decide whether misfortune is the result of gods or demons, and sometimes it is.  Sometimes, however, it is "stuff happens."  (I decided I wanted this post printable someday in a family newspaper.)  We are, however, imbued with a tendency to teleology, that is, the seeing of purpose (even if purpose is no more than "function") when things like solar systems, automobiles, and macro-economies seem to work with a predictability regularity.  I like graphs, however, and I came up with this one as I was walking to the T this morning:

As you can see, I had no problem placing the Salem "witches," Saddam Hussein, and Andrew Fastow, one of the architects of the Enron scam, on the continuum.  In the spirit of the movie, however, I wasn't quite sure where to place the rest of these names (or the myriad others - like God, the boogie-man, the Trilateral Commission, or the Bohemian Grove - that occurred to me).

My point is not that there are never culpable demons, but that sometimes those who we think are culpable demons are not.  I have not yet been persuaded by the level of public discourse (Ann Coulter?  Sarah Palin?  Michael Moore?  Glenn Beck?  Jon Stewart?  Stephen Colbert?) that we can say we've reached a level of rationality such that witch trials were then, and now is now.  What is comforting is that at least I can have a reasoned and civil discussion with Frank, without the sound bites, even if we don't agree!

*UPDATE:  Actually, I did come up with a reason or rationalization but it's almost as complicated as the investment vehicle, so I won't bother explaining it.

Arbitration Rule Enforced

An attorney filed suit in Maryland Circuit Court for a declaratory judgment to enforce his claim to 50% of an award affirmed on appeal.  He in turn appealed a decision that removed the case to the District of Columbia Bar's fee arbitration process and thereafter enforced the award in favor of the client.

The attorney argued that there was no arbitration provision in his retainer agreement with the client. The Maryland Court of Special Appeals held that the attorney was obligated to arbitrate and affirmed the judgment:

...when [the attorney] elected to avail himself of the right to practice in the District of Columbia, he agreed to abide by the Rules established by the District of Columbia Court of Appeals. Pursuant to [applicable rules], [he] agreed to arbitrate a fee dispute with [the client] upon her request. [The attorney's] contention that there was no agreement to arbitrate fee disputes is without merit.

The court also rejected the contention that the issue between the parties was not a fee dispute.

The client's case involved injuries sustained at a hotel in the District of Columbia. (Mike Frisch)

A Private Matter

The Maryland Court of Appeals has held that fees awarded in debt collection matters are not determined by the lodestar method. Homeowners associations had sought review of fee awards arguing  that the method was appropriate. The court here disagreed, noting that the litigation was "strictly a private matter and does not address any broader public ills. " Thus, the starting point in determining an award in a fee-shifting situation is Rule 1.5 of the Rules of Professional Conduct. (Mike Frisch)

Disqualification Ordered

An order denying the disqualification of Buchanan Ingersoll based on a former client conflict  was reversed by the West Virginia Supreme Court, which granted a writ of prohibition. The court recited the following facts:

Bluestone Coal and Bluestone Coal Sales, the petitioners herein, are companies engaged in the production and sale of coal. Both Bluestone companies are part of a conglomerate of twenty-nine affiliated closely-held companies owned and operated by James C. Justice, II (hereinafter “Mr. Justice”). These affiliated companies share one common General Counsel, Mr. Stephen W. Ball (hereinafter “Mr. Ball”), and the majority of these companies, including the two Bluestone companies involved in this case, are headquartered in the same office building in Beckley, West Virginia.

            Mountain State, one of the respondents herein, owns and operates a coke plant in Follansbee, West Virginia, and purchases coal to convert into coke; Mountain State's principal place of business is in Wheeling, West Virginia. On October 5, 2007, Mountain State and Bluestone Coal Sales entered into a coal supply agreement whereby Bluestone Coal Sales agreed to supply all of the coal required by Mountain State's Follansbee coke operations. Bluestone Coal served as the guarantor for Bluestone Coal Sales' obligations under this agreement. When Bluestone Coal Sales failed to deliver the requisite amount of coal in accordance with the agreement's terms, Mountain State filed suit against both Bluestone Coal Sales and Bluestone Coal in the Circuit Court of Ohio County on September 9, 2008.

            The law firm representing Mountain State in the underlying litigation, whose disqualification the Bluestone companies seek, is Buchanan Ingersoll. Buchanan Ingersoll is a large, nationwide, law firm, whose principal place of business is in Pittsburgh, Pennsylvania. At various times, Buchanan Ingersoll has been retained as counsel for certain of Mr. Justice's companies, including Dynamic Energy, Inc.; Harlan Development Corporation; James C. Justice Companies LLC; and Sequoia Energy, LLC, for which representations engagement letters were signed. Buchanan Ingersoll also has either directly represented or provided legal counsel to both Bluestone Coal and Bluestone Coal Sales; however, the exact nature of the relationship between Buchanan Ingersoll and the Bluestone companies, as well as whether there currently exists an attorney-client relationship between these entities, is disputed by the parties and will be discussed in further detail in Section III.B. of this opinion. See Section III.B., infra. It appears that Buchanan Ingersoll began
providing legal services for both Mountain State and Mr. Justice's companies in approximately 2005.

            Following Buchanan Ingersoll's institution of Mountain State's Ohio County lawsuit, the Bluestone companies moved the circuit court to disqualify Buchanan Ingersoll from continuing its representation of Mountain State. In support of their motion, the Bluestone companies variously contended that they were current clients of Buchanan Ingersoll such that continued representation of Mountain State in an adverse capacity would violate Rule 1.7 of the West Virginia Rules of Professional Conduct; that they were former clients of the law firm such that continued representation would violate Rule 1.9; and that, because certain, individual attorneys had formerly represented the Bluestone companies, their disqualification should be imputed to the entire law firm in accordance with Rule 1.10. By order entered November 20, 2009, the circuit court denied the Bluestone companies' motion to disqualify Buchanan Ingersoll, ruling that “no disqualifying conflict exists with respect to Buchanan Ingersoll & Rooney, LLP's representation of Mountain State Carbon, LLC, Plaintiff, in this action.”

The court found the matters substantially related:

...it is apparent that the nature of Buchanan Ingersoll's representation of Mountain State in the underlying proceedings is “substantially related” to its prior representation of Bluestone Coal insofar as both the former and subsequent representations concern the Bluestone companies' performance, or lack thereof, under coal supply agreements under the factual, circumstantial, and legal contexts of the two cases.

            Factually, the two representations are virtually the same. Both the Coal Sourcing case and the instant litigation involve the same type of contract: a coal supply agreement. The agreements both involve the same mine, i.e., the Keystone Mine, and the same coal from that same mine. In both proceedings, Bluestone Coal has been named as a party defendant with respect to the failure to deliver coal as specified by the subject coal supply agreements and is ultimately liable for any obligations arising thereunder.

            Circumstantially, the two representations also are substantially related and strikingly similar insofar as “the current matter involves the work the lawyer performed for the former client.” Both cases allege deficient performance of a coal supply agreement, which is precisely the type of case in which Buchanan Ingersoll formerly represented Bluestone Coal. Specifically, Buchanan Ingersoll formerly represented Bluestone Coal as a defendant defending against allegations of a failure to perform a coal supply agreement in the Coal Sourcing case, and now is currently representing Mountain State as a plaintiff claiming that the coal for which it had contracted has not been delivered pursuant to the governing coal supply agreement in the instant litigation.

Legally, the two representations are nearly identical such that “there is a substantial risk that representation of the present client will involve the use of information acquired in the course of representing the former client, unless that information has become generally known.” ...Under the facts of this case, not only is there a substantial risk that the attorney could have used information obtained from the former client in the prior representation, there is actual evidence that such knowledge has been used to the former client's detriment. In both cases, Bluestone Coal was named as a party defendant. During the course of the Coal Sourcing litigation, Bluestone Coal asserted a defense of force majeure to excuse its nonperformance of the subject coal supply agreement. Reliance on this defense required Bluestone Coal to reveal its confidential coal supply agreements to its counsel. During the litigation initiated by Mountain State, Buchanan Ingersoll, on behalf of Mountain State, requested documents from Bluestone Coal regarding its prior reliance on the defense of force majeurebefore Bluestone Coal had filed an answer to Mountain State's complaint or had indicated what, if any, defenses it intended to assert in response to such claims. Because Bluestone Coal had not yet attempted to rely upon the defense of force majeure, and had not even had an opportunity to respond to Mountain State's complaint, it is apparent that Buchanan Ingersoll, from its former representation, possessed sufficient knowledge of Bluestone Coal to anticipate the defense upon which it may have relied in response to Mountain State's complaint. This strategy indicates that Buchanan Ingersoll used information it obtained from its former representation of Bluestone Coal to the detriment of its former client. Thus, because the subject matter of Buchanan Ingersoll's former and subsequent representations are virtually the same, it is clear that the third criterion for disqualification has been satisfied.

The court found that the elements of a prohibited former client conflict had been established. (Mike Frisch)

Public Policy, Punitive Damages And Fee Awards

The web page of the Ohio Supreme Court reports:

The Supreme Court of Ohio ruled today that an award of attorney fees in a civil lawsuit is distinct from an award of punitive damages, and the public policy of the state does not prevent an insurance policy from providing coverage for attorney fees when they are awarded solely as a result of an award for punitive damages.

Applying that analysis to a Cuyahoga County personal injury case, the Court found that an auto insurance policy issued to Linda Lahman provided coverage for a jury’s award of attorney fees to another motorist, Kimberly Neal-Pettit, who was injured in an auto accident caused by Lahman. The court’s 4-2 majority decision was authored by Justice Judith Ann Lanzinger.

Neal-Pettit was injured in 2003 when her vehicle was hit by Lahman, who was driving while intoxicated and fleeing the scene of an earlier collision. Neal-Pettit sued Lahman for damages arising from her injuries.

A jury awarded Neal-Pettit compensatory damages of $113,800 and an additional $75,000 in punitive damages. Based on a finding that Lahman had acted “with malice” in causing Neal Pettit’s injuries, the jury also awarded Neal-Pettit attorney fees that the court later set at $46,825 along with an additional sum for litigation expenses. Lahman’s insurance company, Allstate, paid Neal-Pettit the amounts awarded as compensatory damages, interest and expenses, but denied any coverage under its policy for either the punitive damages or attorney fees awarded by the jury.

Neal-Pettit filed suit against Allstate in the Cuyahoga County Court of Common Pleas seeking payment for the attorney fee portion of the jury verdict.  The trial court granted summary judgment in favor of Neal-Pettit.  Allstate appealed, arguing that it had not contracted to pay attorney fees and that an attorney-fee award is an element of punitive damages, which public policy prevents an insurer from covering. The 8^th District Court of Appeals affirmed the trial court’s decision, holding that attorney fees are “conceptually distinct” from punitive damages and that attorney fees were not expressly excluded from coverage by the language of the Allstate policy issued to Lahman. Allstate sought and was granted Supreme Court review of the 8^th District’s decision.

In today’s decision affirming the 8^th District, Justice Lanzinger rejected Allstate’s argument that the attorney fee award is an element of the jury’s award of punitive damages because both types of relief are based on a finding that the defendant acted “with malice.” Quoting from the Supreme Court of Ohio’s 1859 decision in Roberts v. Mason, she wrote:  “(T)he fact that the awards have similar bases is irrelevant. We have recognized that attorney-fee awards and punitive-damages awards are distinct: ‘In an action to recover damages for a tort which involves the ingredients of fraud, malice, or insult, a jury may go beyond the rule of mere compensation to the party aggrieved, and award exemplary or punitive damages ...  In such a case, the jury may, in their estimate of compensatory damages, take into consideration and include reasonable fees of counsel employed by the plaintiff in the prosecution of his action.’”

With regard to an exclusion of coverage in Lahman’s policy for “punitive or exemplary damages, fines or penalties,” Justice Lanzinger wrote:  “(T)he exclusion does not refer in any way to attorney fees or litigation expenses.  It specifically mentions only punitive or exemplary damages, which, as we have discussed, are conceptually distinct from attorney fees. Therefore, the term ‘punitive or exemplary damages’ does not clearly and unambiguously encompass an award of attorney fees. We decline to read such language into the contract.  We instead construe the policy strictly against the insurer.  ... Allstate, as the drafter, is responsible for ensuring that the policy states clearly what it does and does not cover.”

Finally, the Court disagreed with Allstate’s claim that it would be against public policy for an insurer to pay attorney fees on behalf of a policyholder when those fees are awarded solely as a result of a punitive damages award. 

Justice Lanzinger wrote: “It is true that public policy prevents insurance contracts from insuring against claims for punitive damages based upon an insured’s malicious conduct. … In addition, R.C. 3937.182(B) prohibits insurance coverage of punitive damages:  ‘No policy of automobile or motor vehicle insurance  ...  shall provide coverage for judgments or claims against an insured for punitive or exemplary damages.’  But R.C. 3937.182(B) mentions only punitive and exemplary damages, not attorney fees.  The General Assembly chose not to mention attorney fees when it drafted the statute, and we decline to add them. ...  Our holding will not encourage wrongful behavior merely because it permits insurers to cover attorney fees for which tortfeasors become liable. The tortfeasors remain liable for punitive damages awarded for their malicious actions, and these punitive damages remain uninsurable.  Payment by the insurer of an attorney-fee award violates neither public policy nor R.C. 3937.182(B).”

Justice Lanzinger’s opinion was joined by Justices Paul E. Pfeifer, Maureen O’Connor and Robert R. Cupp.

Justice Evelyn Lundberg Stratton entered a dissenting opinion, joined by Justice Terrence O’Donnell, in which she disputed the majority’s conclusion that an award of attorney fees that is based solely on an award of punitive damages is nevertheless separate and distinct from those punitive damages.

Justice Stratton wrote: “The Allstate policy here agrees to pay for damages because of bodily injury and property damage. The policy excludes coverage for ‘punitive or exemplary damages, fines or penalties.’  There is an attorney-fee award in this case only because of the punitive-damages award; thus, the attorney-fee award is a ‘penalty’ designed to punish.  The attorney fees are not compensable damages ‘because of bodily injury.’  I believe that the award is punitive in nature and is expressly excluded by the Allstate policy. Because of the punitive nature of an attorney-fee award, I also believe that it is against public policy for an insurer to pay attorney fees on behalf of its insured when the fees are awarded in connection with and as a direct result of a punitive-damages award.”

Chief Justice Eric Brown did not participate in the Court’s deliberations or decision in the case.

The decision is linked here. (Mike Frisch)

Fee Shifting For Pro Bono Services

The Maryland Court of Appeals affirmed a trial judge's order that a husband pay his wife's attorney's fees in a case involving custody, visitation and child support for the couple's minor children. The wife's submissions documented legal work on her behalf by a non-profit domestic violence clinic that had represented her on a pro bono basis. The trial judge awarded the wife custody of the children and ordered the husband to pay $5,000.00 to the clinic for its legal work on her behalf.

The court here rejected the claim that the fee award was improper. Fees may be awarded when it is "just and proper under all the circumstances." The fees may be paid directly to the clinic pursuant to Family Law Article provisions that govern fee shifting in domestic cases. (Mike Frisch)

Support For Immigration Clients "Fraught With Danger"

The District of Columbia Bar Legal Ethics Committee has recently opined on the practice by immigration attorneys of executing affidavits of support for their clients. The conclusion:

Lawyers in immigration matters may not execute an Affidavit of Support (U.S. Citizenship and Immigration Services Form I-864) on the immigrant’s behalf as a joint–sponsor while continuing to represent the immigrant in the matter. Typically, a person who signs an Affidavit of Support agrees to support the immigrant at an annual income that is not less than 125% of the federal poverty level so that the immigrant will not become a public charge. The ensuing contractual obligations continue for years after the immigrant is admitted on the basis of the Affidavit of Support. The Affidavit of Support is a guarantee of financial assistance to a client. Such guarantees are generally prohibited by Rule 1.8(d). Because the obligations continue long after the completion of the immigration proceeding, the undertaking does not fit within the narrow safe harbor of Rule 1.8(d)(2), which allows, but does not require, financial support strictly necessary to sustain the client during a proceeding. An Affidavit of Support undertaking by a lawyer to a client is also fraught with peril under Rule 1.7(b)(4) (conflicts of interest). Thus, a lawyer who wishes to serve as a joint sponsor for an immigration client by executing an Affidavit of Support on the immigrant’s behalf must withdraw from the representation of that client before doing so.

(Mike Frisch)

Not In Good Standing

The Connecticut Appellate Court affirmed the dismissal of a case brought by a student who had attended law school at Quinnipiac University. The student requested that the university issue certificates of good standing in order for her to enroll and take courses as a visiting student for transfer credits and to submit transfer applications to institutions that included the University of Minnesota Law School. The student had an unpaid tuition balance and the university refused to issue transcripts and a letter of good standing so long as the balance remained unpaid. An associate dean wrote a letter to the Dean of Minnesota Law advising that the student was no longer in good standing.

The student filed a diversity action in federal court alleging that the associate dean's letter was defamatory. The case was dismissed at the close of the plaintiff's case-in-chief based, among other things, on the legal conclusion that financial delinquency was a ground for denial of the issuance of a certificate of good standing.

The student then filed a state court action, which was dismissed after a six-day trial in which the student represented herself. The court here affirmed the judgment. (Mike Frisch)

Outside Traditional Boundaries

The Rhode Island Supreme Court granted the application of James Sokolove to register Sokolove Law LLC to practice law as a Rhode Island limited liability entity pursuant to rules governing admission to practice. The court noted that it had never before been confronted with an objection to such an application.

The objection to the petition came from several law firms, who had also filed bar complaints alleging that Sokolove's television and print advertisements violated Rhode Island ethics rules. The complaint was dismissed by a screening panel of the Disciplinary Board on a finding that the evidence "did not rise to the requisite clear and convincing standard." The objectors then filed an unauthorized practice complaint, which resulted in a finding of probable cause and an informal resolution.

Here, the court described Sokolove LLC as "a national law firm with a complex referral system that can refer clients to attorneys throughout the country." The firm practices in every jurisdiction except South Dakota and Rhode Island. The Rhode Island entity would have an office in the state staffed by a member of the Rhode Island Bar.

The court concludes that "[n]othing in the [licensing] rule requires that each member of the LLC must be licensed to practice law in Rhode Island." The court discussed concerns about fee-sharing and referrals, noting that attorneys must strictly adhere to the rules governing fees and that "we are confident that Disciplinary Counsel will pay close attention to these concerns." As to possible unauthorized practice, "[the court] note[s] that, although Sokolove LLC, may not fall within the traditional boundaries of the practice of law in Rhode Island, we are hopeful that, as represented, the LLC will operate in compliance with our rules."  (Mike Frisch)

Call for Papers: Northwestern U Holding Conference on Law of the Entrepreneur June 2010

                                            CALL FOR PAPERS

SEARLE CENTER - THIRD ANNUAL RESEARCH SYMPOSIUM ON THE ECONOMICS AND LAW OF THE ENTREPRENEUR

Northwestern School of Law    --    Thursday, June 17th, 2010 Friday, June 18th, 2010

The Searle Center on Law, Regulation, and Economic Growth is issuing a call for original research papers to be presented at the Third Annual Research Symposium on The Economics and Law of the Entrepreneur at Northwestern University School of Law. The Symposium will run from approximately 12:00 P.M. on Thursday, June 17th, 2010 to 3:00 PM on Friday, June 18th, 2010. The goal of this Research Symposium is to provide a forum where economists and legal scholars can gather together with Northwestern's own distinguished faculty to present and discuss high quality research relevant to the economics and law of the entrepreneur.

Papers for the conference should be submitted to the following email address: d-gundersen@law.northwestern.edu .   Potential attendees should indicate their interest in receiving an invitation at: searlecenter@law.northwestern.edu .  Authors will receive an honorarium of $1,200 per paper to cover reasonable transportation expenses. Government employees and non-US residents may be reimbursed for travel expenses up to the honorarium amount. Authors are expected to attend and participate in the full duration of the symposium. If more than one author attends the symposium, the honorarium or travel reimbursement will be divided equally between the attending authors. The Searle Center will make hotel reservations and pay for rooms for authors and discussants for the night of Thursday, June 17th.

[Alan Childress]

For The Benefit Of Consumers

An ethics opinion from North Carolina concludes that a lawyer or law firm may include information about prior results on a web page:

The consumer of legal services benefits from the dissemination of accurate information in choosing legal representation. See D.C. Legal Ethics Comm., Op. 335 (2006). Lawyers also benefit from the dissemination of accurate information when seeking to enlist the aid of co-counsel in a particular matter. A consumer researching law firms on the internet expects a law firm's website to include information about the firm's past successes, and many firm websites currently include a "verdict and settlements" section. The law firm's duty is to provide that information to the consumer without creating an unjustified expectation about the results the lawyer can achieve. However, the requirements set out in 2000 FEO 1 may be so burdensome that they discourage lawyers from providing any information about verdicts and settlements and thereby effectively prevent consumers from getting helpful information.

Therefore, a website may include a "case summary" section if there is sufficient information about each case included on the webpage to comply with Rule 7.1(a). Some of the required disclosures set out in 2000 FEO 1 should be included in the case summary section of the website. The summary should reference the complexity of the matter; whether liability and/or damages were contested; whether the opposing party was represented by legal counsel; and, if applicable, the firm's success in actually collecting the judgment. Providing specific information about the factual and legal circumstances of the cases reported, in conjunction with the inclusion of an appropriate disclaimer, precludes a finding that the webpage is likely to create unjustified expectations or otherwise mislead a prospective client.

 

An earlier opinion was modified to the extent it was inconsistent with this opinion. (MIke Frisch)

 

Blogging, the Difference Between Talking and Writing, and How Blogging as Writing Supports Scholarship

Posted by Jeff Lipshaw

One of the reasons I like blogging is that it forces me to write my thoughts instead of speaking my thoughts.  I worry about e-mail, and instant messaging, and Tweet, because they all blur the distinction between what is meant to be read and what is meant to be heard.  Many years ago, I argued a case in the Michigan Supreme Court, and not to put too fine a point on it, the appellee's brief was moderately incoherent.  I thought then the reason was it clearly had been dictated and transcribed, and not written.  That was talking when it should have been writing.

On the other hand, blogging as though you're writing can be boring.  There's certainly a lighter and more conversation style.  I'm using it right now.  But there is something about seeing the letters appear magically in the text box that imposes (on me, at least) a certain discipline.  Unlike my spoken words, which evaporate as they are spoken (be quiet!), the written ones, even in cyberspace, live on. 

That gray area between talking and writing has an analog in the production of scholarly thinking.  I'm not sure if it's passe now, but only a couple years ago there was a whole day colloquium at Harvard on whether blogging counted as scholarship (I remember sitting in my home office in Indianapolis, which means it was early 2006, listening to a web cast and hearing Kate Litvak dis it, and Larry Solum promote it).  Not that I would ever go out of my way to do an ego-search on Westlaw (cough, cough), but as long as I was there, I noticed that the last several citations to my work have been blog posts, not articles!

Over at The Conglomerate, Darian Ibrahim scribed some interesting thoughts on rational actor economics and behavioral economics as the theoretical bases of regulation, particularly comparing entrepreneurial markets and public markets.  I wrote a comment, and when I got done, I realized that I had capsuled a point better there than I had in my paper to which I referred.  It was, I am sure, the discipline of writing, even if ephemerally.   This morning I just got done modifying it into the concluding paragraph of the introductory section of The Epistemology of the Financial Crisis:  Complexity, Causation, Law, and Judgment (happily soon to appear in a prestigious law review near you!).  For what it's worth, here's the paragraph:

The overriding theme is that regulation needs to have an epistemological modesty about it, a certain lack of presumptuousness, all of which is belied by disciplines that think that critical causes can be reduced to (a) simple utility functions (rational actor economics), (b) complex functions that can actually model the world's almost infinite contingency (behavioral economics), or (c) an after-the-fact ascription of blame (law). The right answer, I suggest, is that broad policy requires relatively simple models, the necessary downside being there is only so much regulation of a complex world can accomplish. The crisis of epistemology in 1755 was that even after Newton's accomplishments in physical science, an earthquake still destroyed Lisbon, and the crisis of epistemology in 2009 is that all the algorithms in the world are not going to stop financial bubbles. The problem is endemic to all forward-looking judgments. Nobody knows until after the fact whether the entrepreneur is a peerless visionary or a self-deluded wacko, any more than I really know until after the fact that today is the day I should jump ship from the public securities markets because today they became a bubble.

Hmm. I wonder if the law review editors are going to want to take out "wacko"?

Drawing the Right Lessions from the Bleak Entry-Level Legal Job Market

[by Bill Henderson, co-posted to the ELS Blog]

As the fall progresses, many law students and law school administers will be trying to assess the direction of three market trends: (1) the number or percentage of summer associates who receive offers of permanent employment; (2) the prevalence of deferrals among those lucky enough to be offered jobs; and (3) the volume of summer offers coming out of this year's OCI process. Nobody expects cheery numbers.  But as the market information comes in over the next few months, law schools will be in a better position to assess the new landscape. 

In a nutshell, here is the issue:  Since the last major legal recession of the early 1990s, elite law schools adapted their business model to the seeming certainty of virtually guaranteed high paying jobs for their graduates.  This meant increasing tuition, hiring more faculty, reducing teaching loads, and generally loading more debt onto students.  For at least the last 15 years, the sizzling corporate legal market made this high-cost model financially viable, even though the only thing these models maximized (or strongly incentivized) was faculty scholarship.  Because corporate counsel are fundamentally changing how they value and buy outside legal services, there may not be enough high-paying entry level jobs to support the very high cost of legal education, even at elite schools. 

Yet, unbelievably, due to the weighting of per pupil direct expenditures, schools with higher cost structures generally fare better in the US News rankings.   Among elite schools, direct expense (financed with high tuition, high student debt, and large endowments) is the input that keeps the elite schools at the top of the pecking order -- Yale's is three times the average, and Harvard, Stanford, NYU, and Columbia are more than double.  Of course, less elite law schools wishing to become more elite--i.e., pretty much every school with a few exceptions-- have tried to keep up by modeling themselves after elite schools, including a "scholarship-first" strategy.  Thus, the cost structure at virtually all law schools has climbed far in excess of the earning capacity of the median law school graduate. See Morriss & Henderson, The New Math of Legal Education, ABA Young Lawyer (July 2008). Yet, due to deficiencies in (a) information, and (b) how information is analyzed, the status quo rolls on.  

I can think of at least four reasons for these information inefficiencies. 

• Naivete.  The modal student entering law school is not homo economicus. Rather, he or she is young, inexperienced, and overly impressed with branding--largely through US News--and the opinions of peers. IQ does not shield the young from overconfidence and the reflexive desire to impress others through the acquisition of positional goods.  Indeed, sometimes intelligence in the absence of commonsense can make matters worse.  

• Poorly Priced Credit.  Banks have lent students funds without a sharp eye to repayment risk. The terms of loans are largely the same regardless of law school attended, geographic market conditions, and law school performance.  Yes, historically law students have repaid their loans.  But that is the same sloppy logic that created the housing bubble.  The only way the math works is if the vast majority of law school graduates, despite low or no starting salaries, experience a steady, multi-year surge in income.  This is a foolish assumption for anyone who understands the current state of law firm economics.  Of course, just like most home mortgages, student debt over and above the Federal Stafford Loans, often get bundled together, turned into securities, and sold.

• Law Schools are Self-Interested and Locked in a Positional Competition.  This is not a criticism; it is a statement of fact.  Law schools work very hard to manage their market position, including their US News rank, because students and alumni can be completely demoralized with a significant decline. It does not matter if the decline in quality is illusory; stakeholders will declare the patient sick.  This may surprise naive law students, but law schools cannot be counted on to be an objective broker.  We need a regulator to level the playing field and force us to be transparent.  Which brings me to my fourth point ... .

• Failure of Self-Regulation.  The ABA Section on Legal Education and Admission to the Bar bears some responsibility here, but not become it has accredited too many law schools -- the antitrust implications of barring market entry are real.  Rather, the Section has become too focused on the comfort of its law school members.  If the Section collected and published detailed employment outcome information in a way that facilitated school-to-school comparisons--yes, just like US News--the information would trickle down to potential law schools.  It is not helpful to say that 15% of a school's graduates work in business -- they need to know how many of those 15% are waiting tables, driving a cab, or selling insurance.  Re jobs in private practice, how many are working as contract attorneys?  Nobody really knows, and the issue is not on the Section's agenda.  If these data are published, some law schools would probably go out of business.

With corporate firms experiencing sluggish demand and tremendous downward pressure on fees, changes in hiring patterns (both the number of jobs and their remuneration) are going to exert tremendous pressure on law schools to rethink their business models.  To my mind, the proper response is for law schools to really think through how they can maximally enhance the human capital of law school graduates.  (Others might think the proper response is offer the same quality at a lower price, which is the situation confronted by most law firms these days.) 

Here, the greatest risk is drawing the wrong inferences from the historical record and confusing market signals with professional education that truly enhances the decision-making and judgment of young lawyers.  For the last several decades, entry level-lawyer remuneration--a tempting market-based metric of value-added--has been based on a combination of branding and sorting of raw inputs.  In other words, it is not the curriculum at Harvard or Yale, or the massive scholarly output of the faculty, that drove the demand for their graduates.  Rather, it was the Ivy-League brand (think Pavlov's dog) buttressed by statistics that these schools had admitted students with very high IQs.  In turn, firms used this information to signal their superior collective credentials to their clients.  At end of the day, pedigree definitely has CYA value for many general counsel.  But the Bi-Modal distribution suggests that this signal became dramatically overvalued. See Henderson, The Bursting of the Pedigree Bubble, NALP Bulletin (July 2009).

So the open question goes to the very heart of professional education:  what type of law school curriculum and teaching methods are really worth the price paid by today's students?  Even if law schools instituted a moratorium on the writing of law review articles for an entire academic year, our collective brain power may be inadequate to answer this question.  But I guarantee that the answer requires a strong engagement with practicing lawyers and recourse to empirical methods -- not necessarily to publish articles (that is a mere second order effect) but to refashion and retool what and how we teach. The schools that rise to this challenge are, in the long run, going to fare better than those who continue to be believe that more faculty law review articles will raise the school's ranking, thus enticing more employers to hire their students.

Third Party Fiduciary Obligations

From the web page of the Ohio Supreme Court:

The Supreme Court of Ohio will accept public comment until Sept. 30 on a proposed rule change about lawyers’ duty to safeguard client funds and property in which third persons claim an interest.

The proposed amendments to Prof. Cond. R. 1.15(d) and Comment [4] are based on a 2007 Advisory Opinion issued by the Board of Commissioners on Grievances & Discipline and recommendations issued in late 2008 by a special Ohio State Bar Association committee.

The current rule requires a lawyer to protect the interest of a third-party in client funds and property held by the client, unless the claim is frivolous. The proposed rule changes specify that a lawyer must have “actual knowledge” of a third person’s interest and that the claimed interest must be “a statutory lien, a final judgment addressing disposition of the funds or property, or a written agreement by the client of the lawyer on behalf of the client guaranteeing payment from the funds or property.”

Changes proposed to the comment portion of the rule offer guidance about a lawyer’s ethical duties depending on whether the funds or property is in dispute and whether the client or third person’s claim to the funds or property is lawful. Where there is a dispute over interest in the funds or property, a lawyer must hold the funds or property in a trust account separate from the lawyer’s funds, until the dispute is resolved.

Update: go to this link and click on Opinion No. 07-007 to find the Advisory Opinion.

(Mike Frisch)

Thinking About the Financial Crisis - It's Scary When We Don't Know What We Don't Know

Posted by Jeff Lipshaw

At the end of April, I attended a fascinating day-long symposium organized by fellow blogger Dave Hoffman and two of his colleagues at Temple, Jonathan Lipson and Peter Huang, on issues of complexity arising in the current financial crisis. One of the questions that kept occurring to me was the context of the complexity issue - what exactly were we trying to fix, if anything?  My analogy was this:  if law is a "science," and something about the financial crisis (whether complexity or something else) reflects a disease, then what is the relationship between what we know about the disease and the regulatory medicine we would want to prescribe?  I liken financial boom-and-bust to bipolar disorder - is there a regulatory equivalent of lithium that we are assured will tamp down the peaks and valleys?  And even if there is, do we want to prescribe it?  Maybe we like the booms enough to bear the busts!  There's a good chance Tchaikovsky and Van Gogh were bipolar - would we have their art if they had been medicated?

Anyway, when I get to thinking, I usually get to writing (particularly when ensconsed in our Michigan house). This seemed like grist for the mill on one piece of a longer work on the difficulties in forward-looking judgment, namely, the difference between looking backward and assessing causation as a matter of attributing blame, and understanding what is going on as a descriptive matter sufficient to make a good forward-looking decision in real time under conditions of significant uncertainty.  The result is The Epistemology of the Financial Crisis:  Complexity, Causation, Law, and Judgment, which I've just posted on SSRN.  (I apologize for the use of the word "epistemology" but I like it.)  Here is the abstract:

The focus on complexity as a problem of the financial meltdown of 2008-09 suggests that crisis is in part epistemological: we now know enough about financial and economic systems to be threatened by their complexity, but not enough to relieve our fears and anxieties about them. What marks the current crisis is anxiety that the financial world has evolved to the point that there are hidden structures, like concentrated "too big to fail" institutions and mechanisms, or like credit default swaps, that have widespread and adverse downsides. I propose an analogy between medicine and law in the sense of "regulatory technology." If bubbles are the disease, then the analogy is to bipolar syndrome - exuberance, or even a little hypomania is okay on the upswing, but true mania is bad, as is the resulting swing to depression. Good regulation, then, would be something like lithium, which keeps us on an even keel. The question is really whether we understand the forces well enough to regulate them. Regulation is a function of prediction; prediction is a function of observed regularity; observed regularities invoke the problem of causation; causation raises the issue whether the process being analyzed is reducible. Complexity in itself relative; what seemed inordinately complex to ordinary people, much less deep thinkers, in 1787 or 1887 might not seem at all complex to us now. What we are dealing with instead is a crisis of confidence in those who purport to be experts in what we cannot fathom merely through common sense. The conundrum, of course, is that if it takes an expert to see the problem caused by complexity, how are we, possessing merely common sense, supposed to do anything but rely on their judgment? The epistemological crisis arises from our own judgments to rely on, believe in, trust, or have faith in, that judgment.

Pension Answer Book Not Firm Asset

The New York Appellate Division for the First Judicial Department affirmed a judgment on behalf of a departing lawyer against his former law firm but remanded for a recalculation of damages. The court held:

The finding that respondents were guilty of oppressive actions against petitioner was substantiated by corporate tax records of respondent law firm reflecting the uncompensated disgorgement of petitioner's 39 percent equity interest in the firm during his last year as a member.

The finding as to the fair value of petitioner's equity share in the firm was substantiated by the evidence offered by petitioner's expert appraiser, which included his report, with supporting documentation, and testimony. The asset values recommended by the expert were based on a cost/asset analysis, and the basis for the final values proposed by the expert can be gleaned from the record. Respondents elected not to submit a counter appraisal.

However, petitioner's expert's inclusion of the Pension Answer Book, that was co-written by Stephen J. Krass, one of the respondent partners, prior to formation of the firm, as an asset of the firm is unsupported by the record. The Referee found that while, during their 1984 discussion about merging their firms and forming a new law firm, petitioner and Mr. Krass discussed the book becoming an asset of the firm, that was never reflected in the firm's financial records. Krass not only owned and controlled the royalties paid on the book, and was taxed individually for the book's earnings but, although the royalties were listed on internal firm documents as a line of fee income, the firm's distributions to him were reduced by the amount of royalties he received. The fact that several of the firm's lawyers contributed legal work (on firm time) to subsequent revisions of the book, which was deemed a marketing tool for the firm, does not render it a firm asset.

Additional cash assets of the firm that allegedly had been earmarked for bonus compensation and other incentive payments to be distributed within a month after the filing of the petition on November 20, 2001 were properly treated as assets of the firm and subject to valuation. These cash assets remained within the firm's control to dispose of as necessary.

(Mike Frisch)

Honor Among Fee-Sharers

The New York Appellate Division for the First Judicial Department has held that an oral fee-sharing agreement between non-affiliated lawyers is enforceable in the courts:

Plaintiff attorney alleges that he assisted defendants in a contingency fee case for which they paid him 20% of the fee they realized on settlement, in breach of an oral agreement calling for a division of the fee as the parties "had done in the past," and that in all previous contingency-fee cases procured by defendants on which plaintiff had worked, they had paid him 50% of the fee. Contrary to the motion court's ruling, the complaint alleges a course of dealing sufficient to establish the terms of the parties' oral contract. Equally unavailing is defendants' argument that the parties' alleged fee-sharing agreement would be void under Code of Professional Responsibility DR 2-107(a)(2) (22 NYCRR 1200.12[a][2]). Defendants are also bound by the Code of Professional Responsibility, and cannot avoid a fee-sharing agreement on ethical grounds if they freely agreed to be bound by and received the benefit of same. (citations omitted)

(Mike Frisch)

The Invisible Hand Meets the Internal Point of View: The Strange Mish-Mash of Law & Economics

Posted by Jeff Lipshaw

Richard Posner published an eminently sensible analysis of the bursting of the credit bubble in the Wall Street Journal the other day (a prelude, I assume, to his new book, The Failure of Capitalism, which he no doubt wrote in a couple nights of intense work).  I'm not sure what's going on in his thinking, but the virtue of having what appears to be very few unpublished thoughts is that we ankle-biters have all sorts of grist for the mill when we find changes in thinking or contradictions.  For some reason, it got me thinking about some of the, well, (how should I say this?) odder results of the combination of economics and law, such as Judge Posner's 1993 comment that "[a]t the heart of economic analysis of law is a mystery that is also an embarrassment: how to explain judicial behavior in economic terms. . . .”  In the spirit of Thomas Kuhn's The Structure of Scientific Revolutions, it seemed to me fair to trace this particular convergence of philosophy, science, and economics.  (I've done it before, but more people will read this post in a couple hours than have combined read the essay!)

The image that comes to mind is that game in which you start with one word, and by changing it one letter at a time into a series of different words, you finally end up at a word that is the opposite of, or an ironic twist on, the original word.  Remember what Adam Smith's invisible hand was?  The wealth of nations comes about from individual self-interest.  "It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest."  That is, each individual doesn't worry about creating a better world, but a better world comes about regardless.  (That's why Judge Posner correctly says that classical microeconomics doesn't try to get inside the head of each actor - it just assumes the actors, as a whole, are rational in seeking their self-interest, like rational frogs.)  But the combination of law and economics has produced (incrementally, I think, like the word game) a "scientific" orthodoxy or paradigm (see Kuhn) in which it's assumed that the butcher, brewer, baker, or frog actually has societal welfare maximization inside his or her head when making decisions.  (Steve Bainbridge expressed this in economic jargon the other day.  Corporate boards don't generally make decisions based on pareto-optimality, i.e., making everybody better off; they make "Kaldor-Hicks" decisions, which means that they are looking to maximize the corporation's share of any consumer surplus without regard to its overall impact on society.  That's what we all do every time we haggle with somebody over the price of the goods or services.)  This transformation (or Kuhnian paradigm) completes itself in models like the justification of contract formalism proffered by Alan Schwartz and Robert Scott (contracting parties really do want to maximize the joint surplus, not their individual share of it), or Ronald Gilson's justification of lawyering, in which he theorizes the only reason lawyers are present is because they have to increase the value of the total deal, not just each party's Kaldor-Hicks share.  I've criticized both of those models in other pieces.

Here's my Kuhnian thesis.  About a hundred years ago, the dominant philosophy of science was logical positivism.  (This was the Vienna Circle.)  The idea was that only the observable had any meaning at all - metaphysics was meaningless, including any attempt to posit a priori concepts like causation in the explanation of the world.  In other words, the only appropriate tools in the scientific tool box were observations of regularities, and the use of deductive logic.  The logical positivists viewed any attempt to explain one event in terms of another by way of "causation," for example, as without meaning.  From this basis, Carl Hempel developed his "covering laws" thesis, Popper rejected the verification principle in favor of falsification, and so on.  The point is that philosophers of science were rejecting Kantian metaphysics in favor of a strict empiricism.  What we want to do is identify the regularities, not try to explain why they are occurring.

I don't think it's a coincidence that the concepts of legal positivism were developing at about the same time.  Hans Kelsen developed his "Pure Theory of Law" to identify positive law, but it turned on neo-Kantian metaphysics expressed in the fundamental Grundnorm, an a priori concept (i.e., one accessible to us merely by reason, and preceding our experience of the world) by which physical events took on legal consequence.  H.L.A. Hart's positivism put aside the metaphysics, but substituted the Rule of Recognition, and the "internal point of view."  That's the key move:  the melding of the objective and observable (i.e., positive) with the subjective and internal.  Note the paradox that is now simply ignored.  We observe people stopping at red lights and going on green lights, but that only tells us there's a norm.  What makes it law, objectively and positively, is the subjective view of the individual from the internal point of view - the placement of the traffic light traces back to a "Rule of Recognition" by which the subjective actor recognizes the light has having the force of law.

So, economics is a science in the logical positivist tradition.  It ought not try to speculate why things are happening, but to explain or predict regularities.  If marginal costs exceed marginal revenues, generally the firm will shut down production.  If interest rates go down, generally demand for houses will go up.  The explanation of law, on the other hand, in the positivist tradition at least, demands that we look at the internal point of view; otherwise we may be studying norms and not law.  Note again that there is a metaphysical paradox that Hartian legal positivism just doesn't contemplate.  The incremental result of combining the two - the external point of view of economics and the internal point of view of law - is the mish-mash in which, against all intuitive good sense, the theory demands (see Schwartz and Scott or Gilson as evidence) individual actors incorporate the external point of view in their internal motivations!

To me, reading these accounts of motivation is as strange as if reading a theorist in quantum mechanics who felt obliged to explain the individual motivations of the electrons versus merely predicting where they'd be.