Legal Profession Blog

"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)

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.

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 of B.  Here is the D.C. bar report card.  Vermont gets an F, as do West Virginia and New Hampshire.  [Alan Childress]

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.

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.

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 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.

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]

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 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.

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.

My 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.

Here is the abstract:

This Article presents an institutional choice perspective on the judicial role in enforcing corporate law, in light of the Delaware Supreme Court's recent formulation of a fiduciary duty of good faith. The Court's Disney decision allows for the possibility that director decisions will be reviewed under a more stringent standard of review than the traditional business judgment rule. This Article argues that shifting the standard of review could dramatically alter the courts' role in policing board misconduct. Furthermore, it suggests that courts do not have access to sufficient empirical data to calculate an ideal balance between board accountability and board authority. It is impossible to reliably weigh the complex variables that are relevant to this balance. Given this uncertainty, this Article then uses decision theory to suggest that the business judgment rule standard – a rational basis test – is the most reasonable means for courts to review unconflicted director conduct.

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.)

Two Views on Analyzing the Lawyer Under the "Agency" Concept and Economic Model

Posted by Alan Childress
        Recently posted to SSRN are two articles examining the traditional "agency" model of the role of lawyers as to clients and the legal profession generally.  One, by Grace Giesel (Louisville--Law [right]), entitled "Client Responsibility for Lawyer Conduct: Examining the Agency Nature of the Lawyer-Client Relationship,"  argues that courts are unjustifiably reluctant to carry through on a strong notion of the lawyer as agent binding the client.  We have posted on this previously (nonetheless its abstract is after the jump below, for ease of comparison). 
        By contrast, another article, written by Lorenzo Sacconi (Univ. of Trento--Econ.), challenges the traditional principal-agent paradigm from a law and economics standpoint.  It is called "Good Law & Economics Needs Suitable Microeconomic Models: The Case Against the Application of Standard Agency Models to the Professions," and its abstract is:

Notwithstanding its widespread acceptance, agency theory could not be the most suitable microeconomic modeling for designing efficient and fair economic transactions. The case against the standard principal-agent modeling is made about liberalizations of professional services that introduced schemes of professionals' remuneration contingent on outcomes - i.e. “contingent fees” for lawyers. If the relationship between the professional and clients is seen according to the principal-agent model, contingency fees can be an efficient incentive for the professional's effort. The case is quite different, however, if the situation is seen as one of bounded rationality and unforeseen and asymmetrically gathered events. In these contexts they can generate pathological incentives.

The professional relationship is an authority relationship based of contractual incompleteness, which requires the reliance on trustworthiness of the authority position's holder. Hence I propose a model for understanding the professional relationship which extends the “formal vs. real authority” model proposed by Aghion and Tirole (1997). This leads to underline the essential role played by behavioral hypothesis on professionals' “endogenous” adherence to ethical standards that induces the professional's identification with her clients' interests.

A game theoretical thought experiment is then carried out. It shows that (i) in the case of a self-interested lawyer contingent fees lead to not respecting the fiduciary obligations with at least one client for only the ex post mostly remunerative cases are litigated. (ii) In the case of the lawyer's willingness to comply with deontology standards, contingent fees lead nevertheless to neutralization of the deontological motivation and to a loss of efficiency. A Pareto optimal, impartial, as well as efficient, arrangement aimed at maximizing the total volume of damage compensation is then considered. Nevertheless under a contingent fees contract, even if these motivations were available, the professional could not carry out them because of the logic of the contract.

Grace Giesel's abstract is:

Many are the court opinions stating that attorneys are agents of their clients. Traditional agency law allows principals to be responsible for actually and apparently authorized acts of an agent. Thus, one would expect courts to hold client principals responsible for authorized acts of agent attorneys. This article illustrates that some courts have exhibited significant reluctance to so hold, however. In the context of liability for torts such as abuse of process committed by attorney agents, some courts do not recognize traditional agency bases of client liability. Also, in the context of settlement, many courts do not apply traditional agency law in a traditional manner. Finally, in the context of waiver of the attorney-client privilege, some courts do not apply traditional agency principles. In each of these situations the courts deviate from traditional law to protect the client principal from liability that might otherwise occur as a result of the agency relationship. Courts appear troubled by viewing the relationship of lawyers and clients as a run-of-the-mill agency relationship. At the very least courts appear reluctant, in a paternalistic or maternalistic way, to hold a client responsible for an attorney's actions. This article concludes that such additional protection for clients is unnecessary in today's world of empowered clients. While there is no doubt that the relationship of attorney and client is a unique agency relationship, this relationship requires no special rules; the client neither deserves nor requires to be treated differently. Such a stance is more appropriate in today's environment in which user's of legal services are, in general, more sophisticated about the services provided by attorneys, and in many situations, intimately involved in the decisions made regarding the legal representation.

The Reality of Creative Destruction

Posted by Jeff Lipshaw

As someone who grew up in the Detroit area, and who worked as a lawyer in the auto industry for some time, it's painful to read stories about the current state of the industry and its impact on my hometown.  Today's New York Times business section has a long feature on the current travails of Chrysler, now a unit of Germany's DaimlerChrysler.  Chrysler's modern history began at the same time as my legal career - in 1979, when Congress bailed it out of likely bankruptcy with a package of federally guaranteed loans.  By the mid-1990s, when I was the general counsel of a first-tier auto supplier, Chrysler had paid back the loans, become a model of enlightened OEM-supplier relations (largely through the leadership of Thomas Stallkamp), and, because of Bob Lutz's leadership, had the best designs of the American cars (the minivans, the Concorde, the Sebring convertible, etc.)  I remember playing golf in 1995 or so at our local muni course with a young Chrysler design engineer, in which we talked about what a fun place it must be to work.

The Times article talks about Chrysler repeatedly misjudging the market, but I think misses the structural point.  The creation of a new model, at least when I was in the business, was a process of design and tooling involving an investment of over a billion dollars and three years or more.  While gasoline prices or consumer tastes could turn on a dime, manufacturing of cars could not.  And the question was whether the American companies ever really got the idea that Toyota (now the world's leader) invented and mastered - lean design, tooling, and production that shortened and made significantly more flexible the offering of cars to the market.  The reality is that American companies are still hugely invested in antiquated industrial plants (see the travails of Visteon and Delphi, for example) that are relics of almost a hundred years ago. 

Yet no workers' council nor social collective is going to recreate the material engine that was.  It seems to me the hard truth for policy in a mixed economy is that we need to acknowledge the reality of creative destruction - in this case, of the automotive dinosaur - far more than we do, accept that it will always take a human toll, and put our efforts behind ameliorating the human effect, rather than try to turn back the tsunami.

NY's New Ad Rules: Even Biglaw May Be Violating Them

Views and links on MyShingle here, and Sui Generis here, as to possible defiance by big New York firms: they have websites that arguably violate the new NY bar regulations on advertising (e.g., the provisions requiring websites to be labeled as such).  Update on the federal lawsuit challenging the NY rules, and helpful links to the complaint, are here.  The latter has useful clarifications from a bar-run seminar. [Alan Childress]

Looking for Law in All the Wrong Places - My Reaction to a New Theory of Contract and Promise

Posted by Jeff Lipshaw

Professor Seana Shiffrin's just published Harvard Law Review article, The Divergence of Contract and Promise, has received a flurry of attention, including from Larry Solum over at Legal Theory Blog and Ethan Leib over at PrawfsBlawg.  It's hard for me not to be interested, in view of the fact that I published an essay a year or so ago entitled Duty and Consequence:  A Non-Conflating Theory of Promise and Contract (not in the Harvard Law Review, by the way).

There's an interesting matrix that frames the various positions on the philosophy of contract.  On one axis, we have business versus personal contracts.  On the other axis, we have the justification of the law of contract by morality versus justification by efficiency.  In recent years, the seminal "personal-morality" article is Contracts and Collaboration by Daniel Markovits (113 Yale L.J. 1417), and the seminal "business-efficiency" article is Contract Theory and the Limits of Contract Law (113 Yale L.J. 541) by Alan Schwartz and Robert Scott.   By and large, the two camps, it seems to me, are ships passing in the night.  Markovits expressly disclaimed any application of his thesis to business entities, and Schwartz and Scott limit their models not only to business entities, but to sophisticated business entities.  (In addition, I am positive I heard Alan Schwartz at the AALS say words to the effect that issues other than efficiency could not possibly enter into a contract between General Motors and General Electric.)  This is the primary point Ethan Leib makes in his essay on the subject.

Occasionally you see thinkers struggle with the "business-morality" and the "personal-efficiency" quadrants, and that is what is interesting about Professor Shiffrin's piece.  What she rightly observes is that both justifications - economic efficiency and moral imperative - seem to influence why we think the law ought to enforce promises, even if neither on its own is wholly satisfactory.  Certainly I won't do justice to her thesis in a blog post, but hers is another attempt to unify more broadly the reconciliation between law and morality within the microcosm of the relationship of private promising to private law.  And I am wholly sympathetic to her underlying concern, which is that, if we advocate a justification for systems of law leaving no room for moral agency, we will get exactly the kind of amoral (or immoral) law we deserve.

I know the following statement is going to come across harsher than I mean it (particularly given my sympathy for Professor Shiffrin's project), but the efforts to articulate an all-quadrant-encompassing theory of contract always seem to highlight two things: (a) jurisprudential justification that barely peeks out of its hermetically-sealed universe, and (b) the over-simplification of the very complex world out there that seems to be the special province of the law professor.  The particular culprit is the concept of efficient breach, and the idea that the law of contract is, and should not be, more lax than the equivalent moral principles inherent in promising.

How Professor Shiffrin's insight impacts my developing thesis comes below the fold.

Here's the thesis I want to develop (it began in the Duty and Consequence essay, and I continued it in Freedom, Compulsion, Compliance, and Mystery:  Reflections on the Duty Not to Enforce a Promise, 3 Law, Culture, & the Humanities 82 (2007), and Law as Rationalization:  Getting Beyond Reason to Business Ethics, 37 U. Tol. L. Rev. 959(2006), so look for something in the coming months).  By standing on an Archimedean fulcrum of law, or even legal philosophy, we find ourselves looking for law in all the wrong places. Professor Shiffrin is onto something important in her conclusion - by creating a contract, we invite the public into what was heretofore a private relationship.  And at that point our concern becomes focused on the public interest - whether of economic efficiency or morality - in the institution that is enforcing these private relationships.  So, not surprisingly, the focus is on how morality infuses itself into the institutional structure.  (Aside.  The following is a particularly intriguing passage from Divergence:  "In creating a contract, the parties render public their efforts to manage morally their disparate interests, as well as the associated latent or emergent vulnerabilities this disparity may create or feed."  It is delightfully ambiguous on the question when that public rendering occurs. Is it when you make the contract, or when you decide to fight about the contract?  That would seem to make all the difference, particularly when the issue is the central one in the philosophy of contracts - did you have a legally enforceable promise to begin with?)

One of the most interesting avenues, and one I discussed in Law as Rationalization, is the second-person perspective being articulated presently in philosophy by Stephen Darwall at Michigan, and in law by Rob Kar at Loyola-LA.   These approaches explore the nature of second-person morality - the claims YOU make upon ME.  Yet even focus, legally, on what is essentially the adjudication of rights - yours against me, or mine against you.

I want to suggest, if we move off the legal Archimedean fulcrum, and place ourselves in the position of moral agents at the moment of moral choice, the public aspect of the relationship, and the apparently clean dichotomies of contract and promise, fall away.  This is the pure second-person relationship, in which I and You consider our respective obligations to ourselves, each other, and to others, and in which easy moral imperatives like "always fulfill your promises" become harder.  Perhaps we can find an answer in the intuitionism of W.D. Ross; the feeling that we ought to fulfill our promises, or have them fulfilled when made to us, are prima facie duties, but not necessarily our final duties.  As I suggested in Freedom, Compulsion, the law cannot deal with a duty that both exists and does not exist in the same circumstance, but morality can.  Perhaps another way to look at it, and that is Professor Shiffrin's contribution to my thinking, is the difference between what we are capable of compromising when it is just us, and what we are required to decide when the matter becomes public.

Moss on Secret Settlements and Competing Economic Analyses

Posted by Alan Childress

Previously we posted links on the ethics and economics of various proposals to prohibit confidential settlement agreements -- as well as links to good articles by Drahozal & Hines, and Dana & Koniak, on the subject.  Now Scott Moss (Marquette--Law), pictured right, has posted on SSRN his economic study of secret settlements: "Illuminating Secrecy: A New Economic Analysis of Confidential Settlements."  It  will appear this spring in Michigan Law Review, volume 105.  Here is his abstract:

Even the most hotly contested lawsuits typically end in a confidential settlement forbidding the parties from disclosing their allegations, evidence, or settlement amount. Confidentiality draws fierce criticism for harming third parties by concealing serious misdeeds like discrimination, pollution, defective manufacturing, and sexual abuse. Others defend confidentiality as a mutually beneficial pay-for-silence bargain that facilitates settlement, serves judicial economy, and prevents frivolous copycat lawsuits. This debate is based in economic logic, yet most analyses have been surprisingly shallow as to how confidentiality affects incentives to settle. Depicting a more nuanced, complex reality of litigation and settlement, this Article reaches several conclusions quite different from the economic conventional wisdom - and absent from the existing literature.

First, contrary to the conventional wisdom that banning confidentiality would inhibit settlement, a ban may promote early settlements. No ban could effectively cover settlements reached before litigation, so any ban would incentivize parties to settle confidentially pre-filing - and such early settlements save more litigation costs. Second, a ban would affect high- and low-value cases differently, depending on whether publicity-conscious defendants worry more about one big settlement or several small ones. Third, more settlement data could help parties settle and also, by decreasing litigation uncertainty, deter frivolous litigation. Fourth, more settlement data could reveal which companies engage in unlawful practices, yielding more efficient decisions by consumers, workers, and investors who otherwise engage in over-avoidance when unable to distinguish hazardous from safe goods.

In sum, a confidentiality ban would decrease settlements of cases already in litigation but it would have many countervailing positive effects: increasing pre-filing settlements; deterring frivolous lawsuits, and improving product and job market decisions. We cannot predict the net effect of all these competing effects, however, contrary to the traditional economic story. Economics thus does not counsel against a confidentiality ban; jurisdictions adopting a ban would be undertaking a worthy experiment with a promising but uncertain policy.

This analysis typifies the schism between traditional economic analyses, which reach definite conclusions by simplifying complex realities, and many contemporary economic analyses, which are realistically nuanced but do not yield categorical conclusions. Ultimately, the latter brand of economics is sounder and still can clarify important matters such as parties' incentives, rules' costs and benefits, and the tradeoffs and competing effects of a policy like a confidentiality ban.

Do Law Blogs Fit Under NY's New Ad Rules?

Posted by Alan Childress
That is certainly a question that will take more than one post or one blog to answer -- and the answer may have to come from the courts -- but here are some thoughts from NY lawyer-blogger Nicole Black (at Sui Generis) on why, despite all the blogger angst about the new rules, she thinks most law blogs do not come under the rules.  And a good comment after, as to why she may be wrong (or at least found to be, by future courts).  Black also offers a helpful round-up of various sources on the new NY ad rules which go into effect 2/1.

Lawyer Advertising in Virginia Yellow Pages

Over at Concurring Opinions, William & Mary's Nathan Oman offers this funny observation on the smiling family photo a Virginia attorney uses in the Yellow Pages to advertise his law practice in divorce and custody disputes.  Nate's post is on The Mysterious Logic of Lawyer Advertising, and it even has a reference and link to "Anthony Kronman's pseudo-mystical paean to the legal profession gone by."  [Alan Childress]

Sunstein on Prediction Markets

Posted by Jeff Lipshaw

Cass Sunstein (Chicago, right) hardly needs me to plug or critique one of his articles (another 100 or so articles posted and another 36,000 or so SSRN downloads and I will have him beat), but he has recently posted Deliberating Groups versus Prediction Markets (or Hayek's Challenge to Habermas), which is to be published in Episteme.  Here is the abstract, followed by some comments:

For multiple reasons, deliberating groups often converge on falsehood rather than truth. Individual errors may be amplified rather than cured. Group members may fall victim to a bad cascade, either informational or reputational. Deliberators may emphasize shared information at the expense of uniquely held information. Finally, group polarization may lead even rational people to unjustified extremism. By contrast, prediction markets often produce accurate results, because they create strong incentives for revelation of privately held knowledge and succeed in aggregating widely dispersed information. The success of prediction markets offers a set of lessons for increasing the likelihood that groups can obtain the information that their members have.

Much of the description of the problem, like much of behavioral economics, made sense to me.  The prescription - to replicate the price mechanism for what would normally be the result of deliberation - is more problematic.  Professor Sunstein cites the predictive accuracy of the Iowa Electronic Markets, which allow people to place bets on presidential elections, or the Hollywood Stock Exchange, in which traders use virtual, not real, money to bet on Oscar winners.  Orange juice futures predict the weather better than the National Weather Service.

Granted, Professor Sunstein acknowledges the limits of prediction markets:  you cannot use a prediction market to determine if a jury reached the wrong conclusion, and "[m]ore generally, it is not easy to see how prediction markets could be used on normative questions."  But he claims, nevertheless, that even if prediction markets are not feasible, understanding them can help us understand what goes wrong in, and to improve, deliberation:

It should be possible for deliberating groups to learn from the successes of markets, above all by encouraging their members to disclose their privately held information.  When such groups do poorly, it is often because they fail to elicit the information that their members have.  Good norms, and good incentives, can go a long way toward reducing this problem.

Thus, as to small groups like corporate boards, the way a prediction market is instructive is by showing group members the consequential value of "dissent and epistemic diversity."

There is a logical leap here that loses me.  I have little doubt deliberating groups suffer from a collective action problem for the reasons stated:  cognitive errors, withheld information, and cascades.  But prediction markets don't "overcome" the collective action problem, they avoid it.  Markets create a collective result from individual actions in which there is no gap between actual preference and stated preference - when we place our anonymous bets, we do so in the equivalent privacy of the voting booth.  When we step back and look at the result, we are as awed as Hayek that somehow this price mechanism, without deliberation, has created a result that aggregates all of the factors.

When we ask a corporate board member (or a lawyer advising the board) to "disrupt[] the conventional wisdom" or to overcome "fear of social sanctions," we are not asking her to act atomistically, but autonomously.  Prediction markets can tell Costco how many shoppers will buy the twenty pound tub of cashews, but they cannot help me in the decision whether or not to overcome my gluttonous instincts.  When all is said and done, the corporate board member will have to invoke some sense of duty to reveal his private information and thereby rock the boat.  Learning that from a prediction market is something like pumping up one's courage from the knowledge that electrons will spurn their orbitals and make quantum jumps.  If it helps, great, but it's a thin analogy.

On Ethics, Economics, Advocacy, and Charlevoix Ice Cream

Posted by Jeff Lipshaw

There's an interesting set of comments to a blog post over at Conglomerate (full disclosure:  I was responsible for one moderately inane contribution).  Gordon Smith posted a snippet from an article by Benedict Sheehy, (University of Newcastle - Australia), entitled "Corporations and Social Costs:   The Wal-Mart Case Study."  Professor Sheehy argues Wal-Mart is responsible for social waste by causing its suppliers to put too much in the packages, thereby underpricing the goods,and causing lots of stuff (in this case, pickles) to be thrown away. 

I have to admit I was scratching my head over this one even before neo-classical economists and empirical scholars far more qualified than I jumped in to point out the holes in the thesis (most of which are testable, like:  does Wal-Mart really have the market power to control the size and pricing of pickle packages?)  My own experience with oversizing was in our little lake resort town of Charlevoix, Michigan (above and right),* which, during the summer does a thriving trade in fudge (a Northern Michigan specialty) and ice cream cones.  I realized at some point that the store owners had figured out that you could double your business by increasing the size of a cone and charging more for it.  So, effectively, single scoop cones went by the wayside, and you had to spend four bucks on this huge glob of ice cream.  Now the locals (and the quasi-locals like me) know how to deal with this (and we leave the Bridge Street shops to the "fudgies" and "coneheads," as summer tourists are known).  You troop a half-mile down the main drag to the Dairy Queen, or stop in Oleson's market and buy a half-gallon of Edy's and take it home.

What stopped me in my [Edy's fudge] tracks was this from Professor Sheehy:

While Wal-Mart is not the creator of consumerism, its dominance creates a large responsibility to inform consumers about the real costs. By under-pricing, Wal-Mart is misinforming the consumer encouraging over-consumption, and to do so in the planet's current state is nothing less than perverse. Because of its market dominance, a strong argument can be made for its bearing considerable corporate responsibility to inform consumers about costs by pricing correctly.

Perhaps this is the nature of the legal academic beast, but David Hume's observation about the conflation of the "is" and "ought" seemed apropos (or, as Professor Childress would say, aproposner): "[T]he author proceeds for some time in the ordinary ways of reasoning, and establishes the being of a God, or makes observations concerning human affairs; when of a sudden I am surpriz'd to find, that instead of the usual copulations of propositions, is, and is not, I meet with no proposition that is not connected with an ought, or an ought not."  I have often suggested that the economic approach to law and policy (and everything else) fails to make clear its implicit consequentialist morality, but despite my occasional jibing of law-and-economics on this point, there is also a fundamental epistemology of freedom that goes with market economics, and on that point I too take a neo-classical position.

Wal-Mart puts it on the shelf and compels NOBODY to buy it.  Murdick's Ice Cream scoops it and compels NOBODY to buy it.  As the commenters over at Conglomerate point out, the argument that Wal-Mart has market power in the grocery business is attenuated; if so, I suppose Murdick's and Kilwin's (below), the two ice cream shops on Bridge Street, have the power to force chocoholics to fork over four bucks for the oversized ice cream cones.  (Wal-Mart is big and Murdick's is small, but mere size has no relationship to market power - ask KMart or Sears.)  It seems to me that consumers have some responsibility to decide what makes sense and what does not.  But I acknowledge that is my "ought" and I don't conflate it with an "is."

One final note on advocacy tactics (or the dangers of the discovered half-truth - see my article somewhat related to this subject).  Mr. Sheehy appeared in one of the later comments to defend his work by noting that it was "sufficiently rigorous to be published by Northwestern."  Most would, I think, decry publication in any student-edited journal as an indication of scholarly rigor, but as Gordon noted in a later comment, "the Northwestern Journal of International Law & Business is quite a different thing from the Northwestern University Law Review, which is what your reference would imply to an American legal academic."  Ouch.

* In the spirit of unbridled capitalism, I should note this lovely house is available for weekly rentals.

Nakazato, Ramseyer & Rasmusen on Japan's Legal Profession: Stratification and Incomes

Posted by Alan Childress

Minoru Nakazato (U. of Tokyo, Law), Mark Ramseyer (Harvard Law [pictured right]), and Eric Rasmusen (Ind.-Bloomington, Dept. of Bus., Econ. & Pub. Pol'y [below]) have posted on SSRN their comparative and empirical study of the Japanese legal profession: "The Industrial Organization of the Japanese Bar: Levels and Determinants of Attorney Incomes."  [And my earlier post is here on significant changes in bar admission, and counting lawyers, in Japan over the past two years.]  In 1999, Ramseyer and Nakazato published the book, Japanese Law:  An Economic Approach [pictured left, since I cannot find Nakazato's photo anywhere].

An easier-to-access version of the new article, in very legible PDF form, is also found here from Harvard's Olin Center website.  Here is their SSRN abstract:

Using micro-level data (from tax records) on attorney incomes in 2004, we reconstruct the industrial organization of the Japanese legal services industry. These data suggest a bifurcated bar. The most talented would-be lawyers (those with the highest opportunity costs) pass the bar-exam equivalent on one of their first tries or abandon the effort. If they pass, they then opt for careers in Tokyo that involve complex litigation and business transactions. The work places a premium on their talent, and from it they earn appropriately high incomes.

The less talented face lower opportunity costs, and willingly spend many years studying for the exam.  If they eventually pass, they tend to forego the many amenities available to professional families in Tokyo and disproportionately opt for careers in the under-lawyered provinces. There, they earn monopoly rents not available in the far more competitive Tokyo market.

Earlier this month, the three posted elsewhere on SSRN an empirical paper on executive compensation in Japan (considering total income, executives earn far less than their U.S. analogs).  Its abstract is below the fold and the paper is linked here in a handier PDF version.

The abstract to "Executive Compensation in Japan: Estimating Levels and Determinants from Tax Records" is:

Most studies of executive compensation have data on pay, but not on total income. Studies of executives in Japan do not even have good data on pay. Although we too lack direct data on Japanese salaries, from income tax filings we compile data on total executive incomes, and from financial records obtain some indication of which executives have substantial investment income. We find that Japanese executives earn far less than U.S. executives -- holding firm size constant, about one-third the pay of their U.S. peers. Using tobit regression analysis, we further confirm that executive pay in Japan depends on firm size, with an elasticity of .24, but not on accounting profitability or stock returns. Corporate governance variables such as board composition have little or no effect on executive compensation, except that firms with large lead shareholders do appear to pay less.