Tuesday, November 18, 2008

Beetles, Frogs, and Lawyers

Posted by Jeff Lipshaw

Several weeks ago, I was provoked (in a good way) by Usha Rodrigues' reference to Ronald Gilson's 1984 article on how transactional lawyers create value as the "reigning academic account."   I wrote a quick little essay and let it sit until this weekend when Gordon Smith reported on a clever quip from Professor Gilson about lawyers who become professors, and in the classic line:  "I resemble that remark."  I decided to update the little essay a bit and it is now on SSRN as Beetles, Frogs, and Lawyers:  The Scientific Demarcation Problem in the Gilson Theory of Value Creation.  Here's the abstract:

Recently, Ronald Gilson described a transactional lawyer turned law professor as someone who was a beetle, but became an entomologist. This is not the first non-mammalian metaphor used by an economically inclined legal academic to demarcate those who study and those who are studied. As Richard Posner so colorfully explained rational actors as they appear to economists studying them objectively: "it would not be a solecism to speak of a rational frog." In this short essay, I suggest that both say something about the prevailing view of theorizing that is entitled to privileged epistemic status in the legal academy. I assess Professor Gilson's classic 1984 article on value creation by lawyers in terms of its implicit claims to (social) scientific truth.

November 18, 2008 in Abstracts Highlights - Academic Articles on the Legal Profession, Economics, Law & Society, Lipshaw, The Practice | Permalink | Comments (0) | TrackBack (0)

Friday, November 7, 2008

Suing Law Students

A former Rutgers law student was sued for alleged failure to pay off student loans. He in turn filed a pro se third-party complaint against the law firm that had initiated the action for alleged violation of the Federal Fair Debt Collection Practices Act. He contended that the proper venue for the original case was where he resided and that the claim had been brought in the wrong jurisdiction. Summary judgment for the firm was reversed by the New Jersey Appellate Court, which found that the initial suit had been brought in the wrong venue. The matter was remanded with instructions to vacate the grant of summary judgment on behalf of the law firm. (Mike Frisch)

November 7, 2008 in Economics | Permalink | Comments (1) | TrackBack (0)

Wednesday, October 22, 2008

Why Early Voting Is Not A Luxury, But An Ethical Duty for Citizens

Posted by Alan Childress

Voting "the day of" is a scarce resource in many precincts, especially those with long lines and for voters whose jobs or responsibilities make it hard or impossible to wait more than a half hour.  So I regard using early voting as a near necessity in states that offer it, and voting the day of potentially as a wasteful exercise or at least a luxury item.  I will go further and make the claim that those who can vote early have a citizen's ethical responsibility to do so, at least in areas at serious risk of having long waits or administrative disruptions that prevent others in good faith from voting.

I don't think that is a Versus issue (democrat: republican, conservative: liberal).  It is a citizen's thing, in a democracy that holds its elections on workdays and cannot equally ensure short lines.  Give Louisiana (yes, Louisiana!) some credit on this front: we have Saturday elections for the local races except when coupled to a mandatory federal date.  That is another one of Huey Long's gifts that keep on giving.  Since states are unable (or unwilling) to give everyone the same feasible wait times, and even in the best of circumstances Muurphy's Lwa may kick in or machines can malfunction -- witness Homer Simpson's efforts to vote this year for a President -- every precinct is at risk of essentially turning away intended voters.  Some predictably more than others, which is where I think the ethical duty lies to vote early if possible.

I came to this conclusion in response to U Miami's Professor Michael Froomkin's interesting musings on his blog as to whether to vote early in Miami.  To me, especially for him in Florida, it is a no-brainer.  I get his point:  he waxes nostalgic about the collective emotional feel of participation that he has long felt the day of elections, walking to his polling place (and makes a nice aside about the fact that it is a Catholic church) and waiting his turn.  He writes, "I’ve never voted early — there’s something about the democratic ritual of the polls, plus the convenience of the local site, only a few blocks from home, that makes it very appealing."  I hope he will develop a new fond memory with the early voting process. 

I actually share that sense of "day of" excitement and do not belittle it.  I totally get that and can easily remember my first time too.  I think many of us feel that way.  But nowadays such participation is a luxury that runs the risk of hording a finite resource at the expense of others.  Think of it this way. It feels luxurious because it is a luxury. If you vote the day of, you will be one extra person in a line. Someone less committed to this election than you (or just someone who has a job that allows a short window of voting time) will see that line and walk away.  (I am not talking about minor inconvenience where you just fail to accommodate the tepid voter who has zero patience.) The more all of us can do to make the lines shorter that day, the more that others can vote. Especially in places like Florida, that matters. Until voting officials make it easy for everyone to vote on election day without lines, the opportunity to vote that day is a scarce resource that should not be horded or enjoyed for the luxury that it is (for anyone who can vote early).

If you can vote early and manage the inconvenience of that, why not help out the voter who cannot, and runs this risk of facing a long line the day of while thinking of their kid sitting on the front stoop at school.

October 22, 2008 in Economics | Permalink | Comments (4) | TrackBack (0)

Thursday, October 16, 2008

Understanding the Financial Crisis

[By Bill Henderson, cross-posted on ELS Blog]

Like everyone else, I am struggling to get my head around exactly what happened to produce our current financial crisis.  That is a precondition of anticipating the longer term consequences.  In a single paragraph, this is what (I surmise) happened. 

Sometime during the 1990s, momentum began to build on Wall Street for securitizing home mortgages in new and exotic ways.  Residential real estate seemed like an attractive business because the yields were decent, the historical default rates were low, risk of loss was mitigated by pooling thousands of mortgages (which were, themselves, divided into parts), and the underlying assets (homes) generally went up in value, sometimes by a lot in major metropolitan areas. Institutional investors had an insatiable appetite for these debt instruments, which were graded as safe by all the major rating agencies.  Further, respected companies like AIG wrote insurance on these instruments on the theory that they would never have to pay.  All the risk was supposedly hedged by "credits swaps," which are fancy and unregulated contracts between private parties.  So money gushed in. Because virtually any loan could be sold the next day to Wall Street (who, in turn, could repackage them for a large profits within a short time), banks and other mortgage originators could make money with no risk (zero risk!).   This cycle continued even though the pool of mortgage applicants became weaker and weaker--eventually people with (a) bad credit, (b) no assets, and (c) no job.  This had the predictable effect of driving up the price of real estate to a frothy bubble. 

If we want to get back to good old-fashion, sane capitalism where risk is actually assessed before a lender gives a borrower money (and I do), we need to know what the underlying asset (a home) is really worth. 

Here, the news is not good.  According to this story in the New York Times, the price of real estate could tumble throughout 2009.  Frankly, this is where analogies to the 1930s seem like they have some traction.  When an average person's largest asset turns out to be a terrible investment, they have lost a lot of money in the stock market (any opinions on privatizing Social Security now?), and banks are failing left and right, it has a devastating effect on society's ability to pool risk--all the money ends up in the mattress, so to speak.   No surprise, people like my grandparents who lived through the Great Depression tended to be very cautious and risk averse with money.

Frankly, the issue now is not how to regulate Wall Street--the investment banks are gone.  It is how to unwind this mess.  The larger tragedy here is not the loss of money; it is the loss of trust by ordinary people in basic financial and commercial institutions.  They worked hard and played by the rules. Yet many of their homes will be worth less than what they paid for them, and retirement seems beyond reach.   Unregulated capitalism failed.  Like it or not, government is the only entity that can fill the breach. 

These two stories from This American Life, both 1-hour long audios, are the two best resources I have found on these topics:

October 16, 2008 in Economics | Permalink | Comments (4) | TrackBack (0)

Thursday, October 9, 2008

The Drift Toward Pure Numbers Admissions

[by Bill Henderson, cross-posted to ELS Blog]

Law schools are part of a production function for entry level lawyers.  Therefore, if law schools alter their admissions practices, the character and complexion of the law school applicant pool can shift in significant ways.  On the input side, the data are crystal clear: over the last 15 years, the rankings arms race has pushed U.S. law schools toward a pure numbers approach to admissions.   The more interesting question, however, is whether prestige-conscious law firms are now, inadvertently, experiencing any fallout.   First the data.

Law schools operate in an environment of supply and demand and are famously counter-cyclical.  When Silicon Valley was booming in the late 90s, law school applicants plummeted.  When the economy faltered in the early 90s or after 9/11, applicants spiked.  Therefore, to examine how admissions practices have changed over time, it is important to pay attention to the underlying applicant pool.  Below are trend lines for median LSAT scores by USNWR rank for 1994 and 2007, which reflect classes that entered in the fall of 1993 and 2006 respectively.  During those two admissions cycles, the number of applicants was virtually identical:  89,600 (class entering fall 1993) and 88,700 (class entering fall 2006).


Obviously the blue line (2007) is higher than the orange line (1994).  In fact, despite slightly fewer law school applicants, the average median LSAT increased by 2.18 points (std. dev. of 1.99). For the record, only three schools fell out of Tier 1 between 1994 and 2007.  And it cannot be explained by the ABA policy shift that instructs law schools to no longer average LSAT scores when reporting 25th, 50th, and 75th percentile figures, thus slightly pumping up the volume of high LSAT scores.  That change was not enacted until the summer of 2006

Here is the same analysis for UGPA (1994 data came from the Princeton Review, 2007 from the ABA):


Although we might chock some of the higher UPGAs (avg. of +.17, std. dev. of +.12) on grade inflation between 1994 and 2007, it is likely that schools were also trying to maximize this number. More after the jump ... .

Continue reading

October 9, 2008 in Economics, Law Firms | Permalink | Comments (0) | TrackBack (0)

Wednesday, July 23, 2008

Some Thoughts on the Bi-Modal Distribution from a Former Partner and Retainer of Partners

Posted by Jeff Lipshaw

Coming up for air after working on some other stuff, I finally had a chance to digest Bill Henderson's post on bi-modal distribution of starting associate pay.  I have some visceral reactions to the data, as well as some "the sky is not falling" thoughts about how things will play out.  This is all casual empiricism and seat of the pants theorizing, so take it for what it's worth.

1.  Bill's post doesn't talk much about industry consolidation, but there's no doubt that has substantially impacted the law business since I started at a big Detroit firm in 1979.  At that time, there was a big premium to working in a New York law firm - as I recall, as much as $10,000 a year.  This will sound quaint and somehow Great Depression-ish, but my offer letter in the fall of 1978 from Dykema promised a starting salary of $22,000, and I am pretty sure an offer from Cravath at the time would have been in Dykemalogo the low $30,000s.  The gold standard of pay at the time was not as a lawyer, but as a consultant at The Bain Company, which was mainly a place for the JD-MBAs.  (I remember this because the starting pay was $44,000, exactly double my offer, but the word was you worked three times as hard.)  What Detroit (Dykema), Milwaukee (Foley & Lardner), Pittsburgh (Reed Smith), St. Louis (Bryan Cave), as exemplars, offered, even then, was a trade-off of life style for dollars:  billable hour goals in the 1700-1900 range, versus 2200-2800, lower cost of living, accessible suburbs, greater assurance of partnership (ratios then were 1:1 in the smaller cities, with the 4:1 or 5:1 leverage even then in New York.)

What seems clear to me is that the midwestern model indeed did not work, and the continued admission of partners created what one of my late partners used to rail about at partner admission meetings:  the creation of negative leverage by admitting so many people as equity partners.  The solution was growth, but organic growth opportunities are cyclical with the business cycles, and consolidation growth is the alternative.  And that's what we've seen.  DLA Piper may be the best example, as a decent firm out of Baltimore turned itself into a global powerhouse over the course of a few years (my late friend Jeff Liss being a major player in that strategy).  Dykema just swallowed up a medium-sized firm in Chicago.

My theory is there's less to distinguish the Am Law 200 now, and hence, less to distinguish in terms of non-monetary compensation, hence the trend to bi-modal distribution.

2.  I want to suggest the banking consolidation model as a prediction of the way the law industry will go.  Banks, like law firms, are natural consolidators.  It's largely a service business, the services are fairly homogeneous, and consolidation offers huge cost synergy opportunities.  But what happened with all the banks turning into Citis or Chases or Keys or National Citys is that market opportunities sprang up for local service oriented banks.  The "private bank" phenomenon is a response to that.  I used to listen to radio ads for a locally-owned bank in the Detroit area, Franklin Bank, that made this the focal point of its value proposition.  (I'm hearing something similar this summer here in northern Michigan from local pharmacies, particularly those that do compounding, as a reaction to the CVS-Walgreen's-Rite Aid-Walmart consolidation.)

As smart and ambitious lawyers get tired of the bureaucracy of the mega-firms (and more importantly, like David Boies, having fruitful and remunerative new business killed by a conflict!), my prediction is we will see a cycle of boutique firms that return to something like the market distinction of the late 1970s.  I can reveal here a not-very-hidden secret:  GCs of big companies know that much of what they purchase in legal services is fungible, and they can get quality work in Albuquerque or Nashville or Birmingham, Alabama or Jackson, Mississippi.

My faith in the corrective power of markets is not quite as ardent as my friend and about-to-be co-author Larry Ribstein (Ribstein & Lipshaw, Unincorporated Business Associations, 4th ed., to be available for the 2009-10 school year, get it while it's hot!), but I think that's where we are going (see Larry's observations on this business acting more like other capitalist businesses).  Like Larry, however, it's the debt that bothers me, and I second his historical observations on that score.

July 23, 2008 in Economics, Hiring, Hot Topics, Law Firms, Lipshaw | Permalink | Comments (0) | TrackBack (1)

Tuesday, July 15, 2008

The Mortgage Mess and Conflict of Interest

[Posted by Bill Henderson]

Looking for a primer on the Fannie Mae / Freddie Mac mortgage mess?  Over at Econbrower, UCSD economist James Hamilton has an excellent detailed post that lays out the problem.  In a nutshell, it comes down to market believing that Freddie and Fannie mortgage-backed securities were riskless because the government would never let them fail.  All that extra cash, available at artificially low rate for consumers, subsequently ran up the price of housing to unsustainable levels. Here is Hamilton's bottomline:

The overriding concern in dealing with the current mess is that the process of rapid and radical deleveraging would so impede the flow of new credit that the housing price declines, foreclosures, and bankruptcies significantly overshoot the values that we'd expect in a properly functioning credit market. In addition, I would worry about possible serious repercussions of a flight of foreign capital if there is a sudden perception that agency debt entails heavy risks.

The principle of "make those who caused the problem pay" has a lot of visceral appeal. But the principle of "don't impose severe and gratuitous extra costs on those who had no role in causing the problem"-- in other words, don't make the housing depression much more severe just to teach somebody a lesson-- has to be the basis for our policy decisions.

(HT: Tom Smith at the Right Coast.) The poor organizational incentives at Fannie Mae and Freddie Mac remind me a lot of Enron's go-go culture. Unfortunately, this debacle has potentially staggering macroeconomic consequences. 

To my mind, the legal analogue to the economist's "moral hazard" problem is conflict of interest; lawyers should be able to spot these issues. The peculiar aspect of the mortgage meltdown is that many Wall Street lawyers had clients that, at least in the short run, were benefiting from the conflict of interest.  From this unchecked growth, Fannie and Freddie executives got power, income, and patronage $$ to spend around to their politico friends, and investors got seemingly riskless securities.  But there was no vigilant regulator at the table assessing the risk implicitly being assumed by the government and taxpayers.   We operate in an adversarial system.  If the government lawyer never shows up, that is not the problem of the private sector lawyer. 

I would be interested to know, however, how many Wall Street lawyers perceived the mortgage-backed securities market as an eventual Ponzi scheme. Is it a pipe dream to teach lawyers to spot these types of issues?  And if they do spot the issue, what should they do with the information?

July 15, 2008 in Economics, Ethics | Permalink | Comments (1) | TrackBack (1)

Wednesday, July 2, 2008

Fee Contract Provisions Enforceable Against Sophisticated Client

A contract between lawyer and client that contains a liquidated damages provision in a fixed-fee, fixed term agreement is enforceable under the jurisprudence and ethics rules of Oklahoma, according to a decision issued yesterday by the Oklahoma Supreme Court. The decision resolved a question had been certified by the United States District Court for the Northern District of Oklahoma. The court noted some "unique facts" that influenced its decision: the client is a "large corporation sophisticated both in  the commercial and legal environment and was represented by its Vice President of Legal Affairs and General Counsel in contract negotiations." The terms were unambiguous and "contains [the client's] express acknowledgment that the firm changed its position by undertaking costs and expenses to meet the demands of the contractual relationship."

The court concludes:

Courts should be reluctant to disturb fee arrangements freely entered into by knowledgeable and competent parties. However, a contract between a lawyer and a client is not an ordinary contract because of the existence of a fiduciary relationship. Nevertheless, we recognize that fixed-fee structures may often be beneficial to large corporations. They may allow the corporation to quantify and control its litigation expenses on an ongoing basis. Clients who regularly retain lawyers bargain for innovative fee arrangements that limit the right of discharge in exchange for lower fees. It would be counterproductive, in an era of increasing concerns over the cost of legal services, to preclude a client from bargaining for a reduction in fees in exchange for a reasonable limitation on the right of discharge.

(Mike Frisch)

July 2, 2008 in Economics | Permalink | Comments (0) | TrackBack (0)

Friday, April 18, 2008

IP Litigation, Cease and Desist Letters, and One Good Reply Letter to Monster Cable

Posted by Alan Childress

Jeff recently opined that IP law and lawsuits is one area of practice, he observed, where there are marketing, sales and PR incentives, beyond the lawsuit at hand and its objectives, to pursue expensive and complicated court remedies.  "It's because the fact of the litigation casts a cloud on the allegedly infringing product. ... Indeed, dollar for dollar, it may be one of those instances in which legal fees really do bring some bang for the buck in terms of the top line.  So it's nice to see that a well-respected judge has used the only effective tool there is to regulate this -- a finding under Rule 11." 

Another possible tool, before judges get involved, is the well-turned response to the draconian cease and desist letter.  Consider one that Monster Cable recently received from pesky 930451_cable_3competitor Blue Jeans Cable, whose president Kurt Denke is a lawyer and not afraid of a lawsuit, after Monster had sent it a lengthy and illustrated cease and desist letter. Audioholics Online A/V Magazine printed the reply in full, in this post, and Miami's Michael Froomkin found it "fun to read" here.  It is full of detail and patent/tech substance, but in any event starts nicely with:

RE: Your letter, received April Fools' Day

Dear Monster Lawyers,

            Let me begin by stating, without equivocation, that I have no interest whatsoever in infringing upon any intellectual property belonging to Monster Cable.  Indeed, the less my customers think my products resemble Monster's, in form or in function, the better.

Then Denke was interviewed yesterday at this site about this whole matter.

In his own post, Jeff added that "I used to swear that in some of our patent cases the lawyers for both sides had a 'nasty discovery dispute letter' quota that they had to fill...."  Maybe some of this can be Index_bl headed off at the pass with detailed, challenging and inquiring reply letters earlier in the skirmish.  The only thing I might have added is some language to the effect that the writer would of course regard a failure to provide the requested information, and substantiation to the outrageous and sweeping assertions in the cease and desist letter, to constitute a waiver of such claims and certainly of the fact of a valid cease and desist letter itself.

April 18, 2008 in Economics | Permalink | Comments (1) | TrackBack (0)

Friday, April 11, 2008

No Payment Of Non-Indigent Legal Fees

The Iowa Supreme Court held that a district court had exceeded its authority in ordering the state public defender to pay the fees of a lawyer appointed to provide legal services to a non-indigent litigant who had been deployed to Afghanistan. (Mike Frisch)

April 11, 2008 in Economics | Permalink | Comments (0) | TrackBack (0)

Wednesday, April 9, 2008

"Needless and Standardless Litigation"

In a lawsuit between three firms involved in the settlement of a medical malpractice action for $6.7 million, the New York Appellate Division for the First Judicial Department held that a lawyer who had "actually contributed to the legal work" and never refused a request to render more substantial legal services did not violate New York Code of Professional Responsibility DR 2-107(A) and was entitled to a one-third share of the amount recovered "under the statutory sliding scale applicable in malpractice cases" but not a share of the enhanced award over the normal sliding scale. The court's majority opines:

"Sinel made no contribution to the extraordinary services provided by Samuel and Pegalis that resulted in the trial court granting their application for an enhanced award of legal fees over the normal sliding scale. Under the circumstances, allowing Sinel to share in any portion of the enhanced award would result in a fee grossly disproportionate to the services rendered. It would result in defendants, the referring attorneys, being awarded a fee larger than plaintiffs, the attorneys who did the bulk of the work. Clearly, this could not have been the intent of the attorneys when they entered into their agreement nor can it be consistent with this Court's obligation to oversee the reasonableness of legal fees (citations omitted)."

A dissent would enforce the contractual provisions between the lawyers and warns that the majority approach "establishes a precedent that will encourage-and enmesh the judiciary in-needless and standardless litigation."

Further, the dissent notes:

" 'It has long been understood that in disputes among attorneys over the enforcement of fee-sharing agreements the courts will not inquire into the precise worth of the services performed by the parties as long as each party actually contributed to the legal work and there is no claim that either refused to contribute more substantially' (citations omitted). Moreover, it ill becomes defendants, who are also bound by the Code of Professional Responsibility, to seek to avoid on ethical grounds the obligations of an agreement to which they freely assented and from which they reaped the benefits (ABA Comm on Professional Ethics, Informal Opn No. 870).

This Court has repeatedly followed that 'well[-]settled' rule..." (Mike Frisch)

April 9, 2008 in Economics | Permalink | Comments (0) | TrackBack (0)

Wednesday, February 27, 2008

When the Real Cost of Litigation is Part of the Marketing Budget. . . .

Posted by Jeff Lipshaw

The WSJ Law Blog has a story up on the remarkable decision by Judge Richard Matsch (previously best known for his no-nonsense - cf. Judge Ito - conduct of the Timothy McVeigh trial) to overturn a $51 million IP verdict in favor of Medtronic with an attendant award of attorneys' fees to other side, upheld on appeal by the 10th Circuit, as a result of "overzealous" conduct by Medtronic's lawyers, McDermott, Will & Emery.

A faculty colleague who I respect and admire immensely asked me several weeks ago if, in my long practice experience, there were really were serious cases that companies pursued for reasons that did not involve the merits of the lawsuit itself.  After chuckling for a minute, I said "absolutely, and the best example is patent litigation."  It's because the fact of the litigation casts a cloud on the allegedly infringing product.  And while the IP lawyers tell me that it is abuse of patent to let the sales people tell customers that the other product infringes, (a) you can't monitor that in any effective way, (b) the pleading have a qualified privilege, and (c) the fact of the litigation and the possibility of an injunction is often enough to sway a customer away from the alleged infringer.

Indeed, dollar for dollar, it may be one of those instances in which legal fees really do bring some bang for the buck in terms of the top line. 

So it's nice to see that a well-respected judge has used the only effective tool there is to regulate this - a finding under Rule 11.

I'd also agree with a number of the comments to the WSJ Law Blog that patent litigation seems to be particularly fraught with over-the-top zealousness.  I used to swear that in some of our patent cases the lawyers for both sides had a "nasty discovery dispute letter" quota that they had to fill by way of useless but colorful letters sent by e-mail, overnight courier, and regular mail accusing the other side, variously, of document withholding, destruction, delay, sodomy, bad breath, and unsightly wax build-up.

February 27, 2008 in Economics, Ethics, Law & Business, The Practice | Permalink | Comments (0) | TrackBack (0)

Wednesday, February 6, 2008

Reform Group "HALT" Rates D.C. Bar as Best in Resolving Fee Disputes

H.A.L.T.'s Breaking News section headlines this:  D.C. Leads Nation on Solving Lawyer-Client Fee Disputes.  The full story reports on all 50 states and D.C., including an informative U.S. map with color-coding for grades on bar arbitration.  The organization says all jurisdictions can and should improve the procedures and rules for resolving attorney-client fee disputes, and none receives higher than a grade 837748_thumbs_down of BHere is the D.C. bar report card.  Vermont gets an F, as do West Virginia and New Hampshire.  [Alan Childress]

February 6, 2008 in Economics | Permalink | Comments (0) | TrackBack (0)

Thursday, December 27, 2007

Caught Between the Infinite Regress of Rational Choice and Psychological Determinism

Posted by Jeff Lipshaw (cross-posted at Concurring Opinions)

I neglected to mention, in my original commentary on the Cerberus opinion over at Concurring Opinions, that I am indebted to Frank Pasquale (the real one!) for directing me to Paradoxes and Inconsistencies in the Law, edited by Oren Perez and Gunther Teubner.  I'm now doubly indebted to Frank because he pointed out another blog post that makes for an interesting counterpoint about practical reason - how we decide (particularly as lawyers) what to do.

In his introductory essay to Paradoxes, Oren Perez (Bar-Ilan) makes a point about rational calculation, in the context of the Learned Hand formula for negligence, that had never occurred to me, and which seems to make sense.  (I invite anyone to explain why it is wrong!)  This has broad application because it gets at the heart of the core relationship between the ex post outcome of cases (like Cerberus' "lessons" on eliminating ambiguities in drafting) and the ex ante calculation in respect of that outcome that lawyers (those most rational of actors) are supposed to make.

Perez's argument goes like this.  The potential tortfeasor, informed by the case holdings, knows that she will be liable for the injury she causes if the cost of precaution is less than the probability of an accident times the magnitude of the accident.  For the model to work, it has to assume that potential tortfeasors and judges are perfect welfare maximizers with perfect information.  But information and deliberation are not costless.  So maximizing actors need to make a decision about whether to invest costs in obtaining the necessary information and spending the time deliberating about the choice.  That decision is itself not costless; one needs to gather information about whether gathering information and deliberating is a fruitful way to spend one's maximizing time.  And so on to the infinite regress. This appeals to my intuition in the same way as, and seems to be related to, at least analogically, the idea that rules cannot determine their own correct application.  (If there were a rule for the application of a rule, then what would the rule be for the application of the rule for the application of a rule, and so on to the infinite regress.) 

Perez's conclusion is that this is why we have rules of thumb for deciding what to do - they sit somewhere between unsatisfying calculation and pure intuition.

But wait.  Maybe we don't calculate or intuit.  Maybe we just frame, conform, and comply.  That's a thesis proposed by Sung Hui Kim (Southwestern) over at The Situationist, a law and psychology blog affiliated with the Project on Law and Mind Sciences at Harvard Law School. In Part II of a series speculating on why lawyers acquiesce in the frauds of their clients, Professor Kim says:

Inside counsel, as employees of the firm, are inclined to take orders and accept the “definition of the situation” (a phrase coined by Milgram) from their superiors.  These superiors happen to be a cohort of non-lawyer senior managers vested with the authority to speak on behalf of the organization and entrusted to give direction to inside counsel.  They create the reality for inside counsel: they define objectives, identify specific responsibilities for inside lawyers and, ultimately, determine whether an inside lawyer’s performance is acceptable. And accepting management’s “definition of the situation” means accepting management’s framing of the inside lawyer’s role and responsibilities.

This framing provides that compliance responsibilities be segmented.  Although inside counsel’s duties include a prominent role in corporate compliance, it is business management that jealously guards the right to decide whether to comply with the law, which is seen as the ultimate risk management decision.  For inside counsel to challenge management’s decisions or management’s authority to make decisions would then amount to clear insubordination. Obedience in the corporate context will be substantial, so we should not be surprised by the banal tendency to listen to superiors.

Full disclosure.  I spent eleven years of my career as an in-house lawyer, so it's entirely possible that I resemble that remark.  (Professor Kim can also call on real-world experience as outside and inside lawyer, and in fairness, her very thoughtful and interesting Fordham Law Review article on the subject, which I recommend heartily, is more nuanced than the blog post.)  But I'd be a lot more comfortable accepting this sweeping conclusion were it made on broad empirical evidence of actual in-house lawyer conduct rather than on what appears to be a combination of inference from the Milgram conformity lab tests and well-known examples of lawyers behaving badly.  I knew a lot of in-house lawyers, and while I can't say how they would have performed in the electric shock tests, and can't deny the impact of framing on decision-making, I sure saw a lot of thoughtful and courageous pushback to management on lots of legal and moral issues.  Indeed, my casual observations were that individual moral choice and leadership in context, while certainly more elusive in its measurement, showed up more than just from time to time.  I can't determine whether that was the exception or the rule.  Indeed, I applaud the coda to Professor Kim's bio: "I tell my students that there are two questions that every lawyer should ask when counseling a client about a proposed course of action. The first is: 'Is it legal?' The second is: 'Is it right?'" But how do you make that call? 

I struggle with the line between psychological "truths" and moral free agency.  I am willing to accept the conclusion that we are hardwired to seek and justify physical and material well-being, and hence, a natural inclination for people, not just lawyers, is to comply and avoid conflict.  I don't like, however, blanket statements about in-house lawyers doing this and that, and having this and that tendency.  If I may engage in another exercise of shameless self-promotion, the point of my piece, Law as Rationalization:  Getting Beyond Reason to Business Ethics, was to explore the difference between lawyers using reason to justify a desired material world outcome, and lawyers using reason as autonomous moral agents trying to discern ethical obligation.

The implication is that I don't think you can change things by incentives (more cheese for the rats).  My answer is there has to be personal engagement in a continuing struggle to ask questions with the hope of getting answers along the way.  To borrow from Robert Louis Stephenson, sometimes it is better to travel hopefully than to arrive.

December 27, 2007 in Economics, Ethics, In-House, Lipshaw | Permalink | Comments (0) | TrackBack (0)

Sunday, October 14, 2007

Tevye's Question, the Myth of the Horizontal Organization (Again), Interdisciplinary Work, and Rob Kar's Great Idea

Posted by Jeff Lipshaw

Having just returned from the Midwestern Law and Economics Association conference, and having this morning read Rob Kar's great first post on PrawfsBlawg (what is he going to do for a follow up to that?), I was reminded again of the fundamental question Tevye the Dairyman, the protagonist of The Fiddler on the Roof, raised about interdisciplinary studies.  Tevye, in advising his daughter about the problems of inter-marriage, says "a fish could marry a bird, but where would they live?"

The myth of horizontal organization is that you can keep a business organization dynamic and growing merely by agglomerating value-creating specialties. But if that's the case, it's like fish and birds, and who sees the places where neither of them live? Either everybody is responsible for the gaps between specialties (which means nobody is responsible) or nobody is responsible.

My talk at MLEA dealt in the broadest sense of trying to use algorithmic economic models to map linguistic or moral models.  That is, can you draw legal policy conclusions by trying to cast what the parties mean in a contract into the equations of welfare economics so as to resolve disputes about contract interpretation in an economically efficient way?  While I'd say about 40% of my time on this over the last couple weeks has been devoted to refining the point I was trying to make, the other 60% was devoted to what is essentially translation.  My first attempts, thoughtfully critiqued by colleagues Eric Blumenson and Andy Perlman, were largely cast in terms of the jargon of philosophy of language and cognitive science, and I thought we made great strides in bringing the ideas to a common denominator of relatively plain English (albeit plain English with words I made up).  Nevertheless, I have reason to believe I was not entirely successful (nor unsuccessful) in communicating with the audience. 

On the flip side, there were portions of the conference - mostly those with complex equations - as to which I might as well as been have been listening to a talk in French.  I would have understood enough of the syntax and the occasional words or English cognates to be able to say, with about this level of specificity:  "they are talking, I think, about wine, and either about its price or the tannin levels."

Which brings me back to the subject of Rob Kar's post, about which I have great passion.  He's responding to the response by Brian Leiter and Michael Weisberg to the recent convergence of law and evolutionary biology, which they criticized.  Now, again, we have a translation issue, but I read the Leiter/Weisman critique as saying evolutionary biology has yet to show it is capable of shedding light on the "non-plasticity" of behaviors, such that they might be the subject of legal policy.  I interpret non-plasticity as the behavior being fixed, or rigid, or hard-wired, or universal in a particular circumstance, as shown biologically, such that we might have confidence that the generalization in a legal rule is neither under-inclusive or over-inclusive.  I think Rob agrees with that (as do I), but his broader point goes back to how fish and birds, or sub-specialties, might learn to talk to each other, much less live together.

The point is the myth of the horizontal organization.  A new discipline that fits in between the cracks of the old ones needs to adopt its own rigorous standards, but they won't be the standards of any of the contributing disciplines.  I particularly took to heart Rob's inclusion of the philosophy of science and an analogy to meta-ethical thinking in the mix of disciplines that might inform this venture.   Particularly as to the latter, without a good dose of thinking about thinking, the project will never be more than the sum of its parts.

October 14, 2007 in Comparative Professions, Conferences & Symposia, Economics, Lipshaw | Permalink | Comments (0) | TrackBack (0)

Wednesday, August 29, 2007

Kritzer on 'Not Lawyering Up' Due to Income and Kind of Case: Some Counterintuitive Empirical Results In the US and Five Other Legal Cultures

Posted by Alan Childress

Herbert Kritzer (Wm. Mitchell) has posted to SSRN's LAW & SOC.: LEGAL PROF. journal his paper, "To Lawyer, or Not to Lawyer, Is That the Question?" (August 2007).  Here is Bert's abstract:

A central aspect of much of the debate over access to justice is the cost of legal services. The Kritzerherbert presumption of most participants in the debate is that individuals of limited or modest means do not obtain legal assistance because they cannot afford the cost of that assistance. The question I consider in this paper is whether income is a major factor in the decision to obtain the assistance of a qualified legal professional. Drawing upon data from five different countries (the United States, England and Wales, Canada, Australia, and Japan), I examine the relationship between income and using a legal professional. The results are remarkably consistent across the five countries: income has relatively little relationship with the decision to use a legal professional to deal with a dispute or other legal need. The decision to use a lawyer appears to be much more a function of the nature of the dispute. Even those who could afford to retain a lawyer frequently make the decision to forego that assistance. The analysis suggests that those considering access to justice issues need to grapple with the more general issues of how those with legal needs, regardless of the resources they have available, evaluate the costs and benefits of hiring a lawyer.

August 29, 2007 in Abstracts Highlights - Academic Articles on the Legal Profession, Comparative Professions, Economics, Law & Society | Permalink | Comments (0) | TrackBack (0)

Wednesday, July 11, 2007

Darian Ibrahim's Paper on Angel Investor Contracts

The Conglomerate Junior Scholars Workshop continues, with a neat paper from Darian Ibrahim on angel investors and a series of responses from luminaries like Larry Ribstein, Barbara Black, George Dent, and David Hoffman.

For the uninitiated, angel investors are those brave souls who put the first significant money into a start-up enterprise.  They overlap on the more developed end with venture capitalists, and on the less developed end with the holy triad known as "FFF:"  friends, family, and fools.

Being the hedgehog I am (wandering, I think, in the instant classic Solum sense - how does he do it?) about the lawyers' impulse toward a certain kind of rationality, and underlying (and autopoietic - look that one up!) presumption that the impulse is correct, I supplied a lengthy comment to Christine Hurt's intro to the discussion.

[Jeff Lipshaw]

July 11, 2007 in Abstracts Highlights - Academic Articles on the Legal Profession, Conferences & Symposia, Economics, Law & Business | Permalink | Comments (0) | TrackBack (0)

Friday, June 8, 2007

The Rationale for "Sweetened" Severance Packages at Dow Jones

Posted by Jeff Lipshaw

If you read both the New York Times and the Wall Street Journal on a regular basis, you know it's like Michigan-Ohio State, Yankees-Red Sox, or Coke-Pepsi.  It's particularly interesting when the two Sugar papers are reporting on each other's businesses.

Dow Jones, which owns the WSJ, obviously is in the midst of a "bear hug" from Rupert Murdoch's News Corporation.  The NYT reported this morning that Dow Jones had increased the number of managers covered by special severance contracts from 25 to 160 (and reported that in an SEC filing).  I have the WSJ here and took a quick look at the "Index to Businesses" and don't see a reference to Dow Jones.

Whether or not it is justified empirically, there is a benign rationale for a board's decision to "sweeten the pot" in the face of a potential take-over, particularly here where the sweetening appears to be breadth of coverage rather than a pure money grab.  You need to have been in a large business going through acquisition discussions to appreciate the level of distraction from the business itself.  The board's perception will be that without some kind of incentive to stay through (and beyond) the consummation of a deal, managers are inclined to look for security, and are ripe for the plucking by competitors.  The perception may or may not be justified, but it seems to me to be supportable under the business judgment rule.  If there were to be an exodus, it hurts the value of a business, either in the long run if the deal does not go through, or in the short run to the purchaser.

Case in point.  When I was with Great Lakes, we were recruiting an executive then with Honeywell.  At the time, Honeywell was still to be acquired by General Electric (recall that the deal fell through as a result of merger enforcement in the EU).  The executive's long term compensation, triggered either by longevity at Honeywell or by a deal with GE, made it impractical for him to consider leaving, and we didn't get him. 

I know, in the present political climate, it is easy to be cynical about executive compensation "'intended to enhance the company's ability to retain and attract management-level employees' and to help them focus on their jobs," but sometimes a cigar is just a cigar.

June 8, 2007 in Economics, Hot Topics, Law & Business | Permalink | Comments (0) | TrackBack (0)

Tuesday, June 5, 2007

More on the Process of Legal Reasoning & Gold on the Business Judgment Rule

In a post a few days ago, still hung over from grading, I made an off-hand and slightly, I think, inscrutable reference to more to come on analogical reasoning.  It's in part what I am spending time reading this summer (going back and forth with very preliminary class prep for Securities Regulation) when I am not packing boxes, trying to do the Cesar Millan thing with our dog (Prozac is not a complete solution), or running unused household chemicals to the Indianapolis Tox Drop.

GoldMy reading and writing is iterative.  If I think I will lose a thought, I will write a page or a paragraph, even though it may not link well or at all to the general thrust, and many times I figure out later that there was a connection.  So it happened that I saw an article by Andrew Gold (DePaul, left) that attempts a deep dive into the process of reasoning from law to decision in a corner of the real world with which I have a more than passing familiarity, and I've decided to excerpt (edited and rearranged for the blog format) my little squibbet of writing about it.

* * *

One of my recurrent themes is that all forms of judgmental or decision-making reasoning, other than the purely deductive, have a moment in which there is an indeterminate or intuitive or mysterious leap.  To the extent we see ourselves as scientists, it is difficult to let go of the hope of explaining that leap in scientific (read: predictive) terms, yet we soldier on, looking for, analogically, a way to square the circle.

An interesting and readable example of the “soldiering on” is A Decision Theory Approach to the Business Judgment Rule: Reflections on Disney, Good Faith, and Judicial Uncertainty by Professor Andrew Gold, the thesis of which is that the rational basis test is still the best standard of review under the corporate business judgment rule.*  As he observes, boards make decisions in the context of “intractable empirical uncertainty."  He thus turns to Professor Adrian Vermeule’s discussion of institutional choice and decision theory as a means, it seems to me, not of supplying a scientifically predictive means of decision-making, but of choosing which institution’s intuition will be given presumptive deference.  I read the analysis to suggest that, given enough time, the decision-making could be scientifically predictive, but in the ex ante time frames decisions must be made, the issue is “trans-scientific.” (I am not sure how that differs from being “trans-cendental.”)  In the decision theory model proposed here, uncertainty means that decision-makers know the payoffs of decisions but do not know the probability of those payoffs; ignorance means that they do not even know what the payoff will be.  The purported value of decision theory is that it “permits decisions to be made without resorting to random guesses or raw intuition.”

If we cut through the jargon, the upshot is that there are analytical and reasoning tools – deductive, inductive, abductive, analogical – to approach or isolate the factors in a decision, or to weigh or quantify or anticipate or calculate, but ultimately the decision is a leap from what we know to what we do not, and in the moment of that leap all forms of reason (short of formal deduction) lead back to something that we seem only to account for empirically as something like “intuition.” In a 1996 Harvard Law Review article, Professor Scott Brewer said the following about analogical reasoning: “The mystics [referring to a particular group of scholars] are correct that there is inevitably an uncodifiable imaginative moment in exemplary, analogical reasoning.”  We know the same to be true for rule-following.  Has decision theory, a creation of economic models of behavior, really shed any light on the process?  I'm not sure the theoretical solution is any more satisfying.  And I would love to see, in follow-up perhaps, how Professor Gold's interesting dive into theory would work as a board of directors actually pondered a merger, or a sale, or the firing of a CEO.

* Professor Gold's abstract follows the fold.

Continue reading

June 5, 2007 in Economics, Law & Business, Law & Society | Permalink | Comments (1) | TrackBack (0)

Tuesday, May 22, 2007

Blackstone IPO and Simpson Thatcher

Posted by Jeff Lipshaw

Steven Davidoff at our sister blog M&A Prof Blog has a post on the Blackstone Group IPO, which includes a disclosure in the S-1 that Simpson, Thatcher partners will buying up units that account for less than 1% of the offering.  Simpson, Thatcher is counsel to the company; Skadden is representing the underwriters.

I'm not sure this bothers me particularly.  Underwriters' counsel will be looking out for disclosure issues as well, and the question will be whether Simpson's judgment in advising Blackstone would be affected by some of the lawyers having a stake in the offering going forward.  Certainly there would be few clients more sophisticated than Blackstone, and hence capable of a knowing consent to Simpson's continued representation of the company even in the face of a potential conflict.  Moreover, I don't see that Simpson is taking the units in lieu of fee compensation; simply some of the lawyers are buying in. 

Far more problematic, I think, is the question whether lawyers take stock in start-up companies in exchange for fees.  We spent a day on that question in the venture capital seminar I taught at IU-Indianapolis.  On one hand, entrepreneurs are unlikely to have the cash to pay standard fees and the arrangement facilitates getting a better grade of lawyer; on the other, there's a far greater self-interest issue.  (HT to Peter Henning.)

May 22, 2007 in Clients, Economics, Ethics, Law & Business, Professional Responsibility | Permalink | Comments (0) | TrackBack (0)