Legal Profession Blog

More on Goldman as Bookie: What About "Bespeaks Caution?"

Posted by Jeff Lipshaw

It's certainly not my goal to defend Goldman Sachs any more than it is to defend bookies.  And I acknowledge that as to materiality, it's entirely possible that you get to the trier of fact on the question whether the actual selector of the Reference Portfolio was something for which there is a substantial likelihood that a reasonable investor would find that the information significantly altered the total mix.  (That's the legal standard.)  But, as we teach our students, the mere materiality of undisclosed information doesn't create liability for its omission; as opposed to a misrepresentation, the culpability of an omission depends first on a duty to disclose. 

So here's a quote from the Goldman Sachs flip book under "Risk Factors."  And remember this thing wasn't going to Mom and Pop up in Lowell; it was going to IKB Deutsche IndustrieBank and ABN Amro:

• Goldman Sachs may, by virtue of its status as an underwriter, advisor or otherwise, possess or have access to non-publicly available information relating to the Reference Obligations, the Reference Entities and/or other obligations of the Reference Entities and has not undertaken, and does not intend, to disclose, such status or non-public information in connection with the Transaction. Accordingly, this presentation may not contain all information that would be material to the evaluation of the merits and risks of purchasing the Notes.

• Goldman Sachs does not make any representation, recommendation or warranty, express or implied, regarding the accuracy, adequacy, reasonableness or completeness of the information contained herein or in any further information, notice or other document which may at any time be supplied in connection with the Transaction and accepts no responsibility or liability therefore. Goldman Sachs is currently and may be from time to time in the future an active participant on both sides of the market and have long or short positions in, or buy and sell, securities, commodities, futures, options or other derivatives identical or related to those mentioned herein. Goldman Sachs may have potential conflicts of interest due to present or future relationships between Goldman Sachs and any Collateral, the issuer thereof, any Reference Entity or any obligation of any Reference Entity.

Isn't there a real question whether Goldman owed a legal duty that would make the omission actionable?  Didn't Goldman tell the Investors in the flip book that it might well have non-public information relating to the Reference Portfolio?  Didn't it say that it might have "short positions in . . . other derivatives identical or related to those mentioned here"?  This is the "bespeaks caution" doctrine:  optimistic forecasts or projections in a prospectus aren't actionable if they are accompanied by meaningful disclaimers or warnings of the risk involved.

I'd like to be a fly on the wall when the sophisticated investor representatives get deposed on this issue.

Q:  "Did you read the flip book?"

A:  "Well, parts of it."

Q:  "Which parts?"

A:  "The parts that talked about the Reference Portfolio."

Q:  "Did you read the disclaimer about 'non-public information' that Goldman might have?"

A:  "I don't recall at this time."

Q:  "You don't disagree that the disclaimer is there, do you?"

A:  "No."

Q:  "Did you ask Goldman to reveal to you the undisclosed information?"

A:  "I don't recall at this time."

Q:  "Did you read the risk factor that said Goldman might be shorting the identical reference portfolio?"

A:  "I don't recall at this time."

Q:  "Did you actually ask Goldman if it was shorting the identical reference portfolio?"

A:  "I don't recall at this time."

Q:  "Remind me again how long you've been in this business."

I find myself in a funny position, intellectually speaking.  The lawyer in me, applying a legal model to what I've seen so far, is saying this case is a real stretch.  The business ethicist in me is saying, "ugh, what a squirrelly business to be in.  You must have to take a scalding shower when you get home every night to play it that close to the vest."  The sociologist-psychologist-philosopher-Tina Turner in me is saying:  "Well, of course, Jeff, what's law got to do with it?"  The cognitive scientist in me is saying, "It all depends on the metaphor.  If you think of Goldman as the bookie, and ABN Amro as a high roller, you reach one result.  If you think of Goldman as your doctor or lawyer, you reach another one."

Goldman as Bookie: Inspector Renault Assesses Synthetic CDOs

Posted by Jeff Lipshaw

I really think this should have been the epigram on the SEC's complaint against Goldman Sachs:  "I'm shocked, shocked to find gambling is going on in here!"  I've spent a little time in the last couple days digging past the allegations to the structure of the deal, and conclude that blaming Goldman Sachs for this is about as sensible as blaming the Race & Sports Book at Caesars Palace for taking bets on both sides of the game.

Seriously.  Bookies don't gamble.  They facilitate gambling.  They set odds to equalize the betting on both sides.  When the game or the race is over, they gather up what the losing side lost, pay what the winning side won, and skim a little bit for themselves.  You know when you place a bet with a bookie that it's the nature of the system that the bookie HAS to have a counter-bet to offset your own.  Now imagine that you'd like to bet against the Pakistani badminton team in its upcoming match against Indonesia because you think there are a lot of crazed Pakistani badminton fans who will bet the farm on their team.  There aren't any bookies who take badminton action.  So here is what you do.  You find a reputable bookie and ask him to set odds on the match for no other reason than you see those Pakistanis as suckers just waiting to be taken. You'll even pay the overhead to set up the line.  Caesars posts a line on the match; you bet Indonesia; the Pakistanis bet Pakistan; Indonesia creams Pakistan; Caesars collects the Pakistani bets, pays you off, and makes a little money in the process.

Then, horror of horrors!  The bettors on the Pakistani team sue Caesars because it didn't disclose that it set the badminton line and took the action because somebody wanted to bet on Indonesia!  Ludicrous, you'd say.

But as far as I can tell that's exactly what Goldman did here.  What made the deal work for Goldman was that it was the purchaser from ABACUS of credit default swap bets on the reference portfolio and the seller of matching credit swap bets to Paulson on the same portfolio.  I'm afraid that what's going on is that the deal is indeed so complex in its structure and terminology that even the sophisticated public is flummoxed.  SYNTHETIC CDOS WERE NOTHING BUT GAMBLES ON THE DIRECTION OF THE HOUSING AND SUBPRIME MARKET.  Like all derivatives, they might well have served as a conservative strategy if one had an underlying business that was exposed, and wanted to hedge away losses at the cost of additional speculative gains, either going long or short on the market.  If ABN Amro and IDK Deutsche Bank wanted to bet on the subprime market, they had to have a bookie with counter action to create an opportunity for the bet!

At first I thought this case was odd for its secondary actor liability issues.  Now I think it's just as interesting on issues of materiality, reliance, and causation.

Hold The Phone

The New York Appellate Division for the First Judicial Department reversed an order directing that a deposition of a representative of Verizon be conducted in California:

Respondent, a publicly traded corporation, with over 600 employees, has failed to meet its burden of demonstrating that appearing in New York City for deposition would cause it substantial hardship...Respondent merely asserts, without more, that its chief executive officer, who respondent acknowledges travels throughout the world almost six months out of the year, will be unable to be deposed in New York. Nor has respondent proffered any reason why none of its other 600 plus employees are appropriate witnesses. (citations omitted)

(Mike Frisch) 

The Difference Between Being a GC and a CEO

Posted by Jeff Lipshaw

Unfortunately, I can't provide a link because the online version of today's New York Times doesn't seem to include it, but the second page of Sunday Business is the "Corner Office" interview with Debra L. Lee, the chairwoman and CEO of BET (and successor to Bob Johnson, who founded the network before it got sold to Viacom).  Buried in the interview are a couple observations I found interesting, given that Ms. Lee was BET's general counsel before being appointed as the chief operating officer. 

Q. Looking back, it sounds as if it was a big leap to go from general counsel to C.O.O.

A. As a general counsel, you're taught research, research, find out every case, find out every opinion, think about it.  It's almost like you are a judge.

So when I went from being general counsel to C.O.O., that's the way I first approached it.  Well, it doesn't work.  I had to learn to make decisions quicker and follow my gut.  You're not going to be able to run the numbers and come up with perfect answers.

I certainly agree with her observation about being a COO or a CEO, but I think that most COOs and CEOs would get very, very frustrated with a general counsel who couldn't either translate all of the legal stuff into something that could factor into an executive's gut-based decision, or couldn't make quick and gut-based business decisions herself that placed the legal concerns alongside the non-legal ones. 

The example I give in The Venn Diagram of Business Lawyering Judgments (forthcoming, 46 Seton Hall L. Rev., Issue 1 (2011)) is the decision whether to proceed with an acquisition in which there is significant competitive overlap.  The synergies arising from that overlap may well be part of the purely business decision whether the acquisition is attractive, and the analysis whether a Hart-Scott-Rodino pre-merger filing is necessary, and whether there are substantive Section 7 concerns is almost purely legal, but the decision whether the acquisition is attractive enough to merit the risk and cost of the antitrust review is one of mixed law and judgment that I believe only a "well-attuned to the business" GC is in a position to make.

Fee Sharing Agreement Does Not Create Joint Venture

The Maryland Court of Appeals addressed the implications of a fee sharing agreement between two attorneys pursuing a medical malpractice case. Attorney One referred the matter to Attorney Two early in the prosecution of the case. They entered into an arrangement by which the division of fees was based on the "anticipated division of services to be rendered." Attorney Two had primary responsibility and Attorney One was to assist as requested by Attorney Two.

While the claim was in negotiations, Attorney Two advised the clients that they might have a legal malpractice case against Attorney One.  The underlying medical malpractice case then settled for $225,000. Attorney Two paid Attorney One one-half of the fee.

Attorney One then sued Attorney Two on a variety of contract and tort theories alleging breach of good faith, fair dealing and disclosure duties. The circuit court granted summary judgment to Attorney Two. The Court of Special Appeals affirmed. Here, the Court of Appeals agreed, concluding that Attorney Two fulfilled her covenant of good faith and fair dealing by delivering to Attorney One his proportionate share of the fee.

The court held that the fee sharing agreement did not establish a joint venture with the resulting fiduciary obligations that would apply to such ventures. The court agreed that the tort claims failed because, among other things, Attorney Two "could not tortiously interfere with an economic relationship to which she was a party." (Mike Frisch)

Not Giants But Not Prohibited

The United States Court of Appeals for the Second Circuit has, in the main,affirmed the Disrtict Court's determination that certain aspects of the New York regime for regulating attorney advertising do not pass constitutional muster. The court rejected attempts to regulate "nicknames, mottos and trade names" and advertising gimmicks:

...the sort of gimmicks that this rule appears designed to reach--such as [a firm's] wisps of smoke, blue electrical currents, and special effects- do not actually seem to mislead. It is true that [the lawyer] and his partners are not giants towering above local buildings; they cannot run to a client's house so quickly that they appear as blurs; and they do not actually provide legal assistance to space aliens.

However, such attention-getting devices do not mislead the public.

The court also agreed with the District Court that the 30 day New York ban on solicitation of accident victims and their families was permissible under Florida Bar v. Went For It. The court discusses the concepts of the porcelain heart, Wemmick's Castle (it's from Dickens) and lawyers' reputations in reaching its conclusion in that regard. 

Hat tip to the ABA Journal. (Mike Frisch)

Claims Against Referring Firm Reinstated

A law firm that had represented a client sued the client for unpaid fees. The plaintiff firm also sued the law firm that had referred the client, claiming that the defendant law firm had represented that their clients (the Nassers) guaranteed payment of their fees. Plaintiff appealed the dismissal of claims against the referring law firm.

The New York Appellate Division for the First Judicial Department held that the claims were viable:

The complaint alleges that defendants-respondents represented to plaintiff law firm that they had authority from the Nassers to promise payment of $75,000 of the legal fees incurred by plaintiff's client when, in fact, they lacked the authority to bind the Nassers. Thus, the complaint alleges a viable claim for breach of the implied warranty of authority. The complaint also alleges that defendants-respondents falsely represented to plaintiff law firm that they specifically discussed the subject matter of their authority and representations with the Nassers. Thus, the complaint alleges a viable clam for tortious misrepresentation of authority and assurances of payment.

To the extent the motion court relied on the principle of apparent authority, lack of consideration and the statute of frauds to dismiss these causes of action, such was error. The doctrine of apparent authority is irrelevant because the fourth and fifth causes of action are not seeking to hold the principals (the Nassers) liable on the ground that defendants-respondents had apparent authority from the Nassers to make promises of payment. Rather, these causes of action are seeking to hold the agents, defendants-respondents, liable for contracts or representations they purported to make on behalf of the principal (the Nassers) while acting without authority from the principal. Therefore, the fact that the Nassers never manifested to plaintiff law firm that defendants-respondents were authorized to act on the Nassers' behalf has no bearing on the viability of the fourth and fifth causes of action. Moreover, regardless of whether or not there was consideration running to the Nassers, defendants-respondents can still be held liable for their own tortious conduct in making deliberate misrepresentations of fact that they had authority to make the promises that the Nassers would pay $75,000 of the legal fees incurred by plaintiff's client (see Restatement (Third) of Agency §§ 6.10, 7.01 [2006]). In addition, the statute of frauds does not come into play since the fourth and fifth causes of action are not seeking to enforce the unwritten agreement by the Nassers to pay plaintiff's client's legal fees against the Nassers. These causes of action state a claim against the defendants-respondents regardless of whether there is an enforceable contract with the Nassers.

The sixth cause of action against defendants-respondents for tortious interference with defendant Jacques Nasser's contract with plaintiff law firm to pay $37,500 of the legal fees incurred by plaintiff's client was also improperly dismissed by the motion court. In order for there to be a viable claim there must be a valid contract between Jacques Nasser and plaintiff law firm. Pursuant to General Obligations Law § 5-701(a)(2), every agreement, promise or undertaking which is a special promise to answer for the debt of another is void unless it is in writing. Under a long-standing exception to the statute of frauds, however, the promise need not be in writing if it is supported by new consideration moving to the promisor and beneficial to him, and the promisor has become in the intention of the parties a principal debtor primarily [*3]liable (see Martin Roofing v Goldstein, 60 NY2d 262, 264 [1983], cert denied 466 US 905 [1984]; Carey & Assoc. v Ernst, 27 AD3d 261 [2006]). At the very least, the allegations in the complaint raise an issue of fact concerning whether Jacques Nasser agreed to act as a guarantor in the event plaintiff's client did not pay her legal fees, in which case there was no enforceable contract, or whether in seeking to secure the benefit of the cooperation of plaintiff's client in connection with the lawsuit against him by her employer, Jacques Nasser offered to lift the burden of the obligation to pay legal fees from plaintiff's client and pay the law firm directly, in which case the contract would not be barred by the statute of frauds (see Rowan v Brady, 98 AD2d 638, 639 [1983]). Therefore, the sixth cause of action for tortious interference with contract is reinstated.

Finally, the motion court erroneously dismissed the seventh cause of action against defendants-respondents which alleges tortious interference by defendants-respondents with the attorney-client relationship between plaintiff law firm and its client, defendant Srour. Insofar as the complaint alleges that defendants-respondents, knowing that Srour was represented by plaintiff law firm, met with Srour alone, without informing plaintiff law firm of the meeting, and approximately three days later, Srour discharged plaintiff law firm, it is sufficient at this stage of the proceedings, to state a viable claim, and therefore the seventh cause of action is reinstated.

(Mike Frisch)

Termination, Not Hints, Triggers Wrongful Discharge Claim

The District of Columbia Court of Appeals affirmed the dismissal of a former law firm associate's claim of failure to accommodate a disability on grounds that the claim was time-barred. However, the court reversed the dismissal of a related claim of wrongful discharge and remanded that claim for trial on the merits.

The associate was hired by the law firm in 2000. While attending a firm trial training program in April 2001, her dominant hand was burned. She suffered extreme pain and medical limits on her activities and took a month leave of absence for treatment. She requested a number of accommodations on her return and alleges that she was told by her supervisor "that if she was still injured, she was 'of no use to anyone.' " After a second leave of several months, she claimed that she was told not to seek substantive billable work until she could work without restrictions. There were further requests for accommodations and performance reviews. The associate attorney received notice of discharge from the firm in late October 2002.

The court here concludes that the statute of limitations for wrongful discharge began to run with the formal termination. Earlier threats or hints of poor performance do not trigger the statute. (Mike Frisch)

Stanford Lawyer (Class of 1979) Heads Up Hollywood Negotiations

Posted by Jeff Lipshaw

I was flipping through the New York Times Sunday Business section this morning, and saw this article about the upcoming labor negotiations between the motion picture and television industry and the various unions and guilds (writers, directors, actors), complete with picture of my law school classmate, Carol Lombardini (left), the new president of the Alliance of Motion Picture and Television Producers.

Just another member of the moderately amazing Stanford Law School class of 1979, whose members have included, in addition to all the top flight lawyers, among other things, law professors, the dean of the University of Chicago law school (who hired Barack Obama), a deputy cabinet secretary, the publisher of a major newspaper, the State Department legal officer in Berlin responsible for liaison with Rudolf Hess in Spandau Prison, the CEO of one of the largest construction companies in the world, the winners of the 1979 Stanford Trivia Bowl, the Notre Dame athletic director, and the parents of two different University of Michigan undergrads named Matt.

A Rose By Any Other Name...

From the web page of the Ohio Supreme Court:

The Supreme Court of Ohio’s Board of Commissioners on Grievances & Discipline has issued an advisory opinion concerning the inclusion of an area of practice or specialization in a law firm name.

Opinion 2010-1 addresses the following question: “Is it proper for a lawyer to name a law firm the lawyer’s surname followed by the words Intellectual Property or the initials IP as an abbreviation for intellectual property?”

The opinion finds that naming a law firm in this way is improper. Professional Conduct and Supreme Court rules “do not authorize the inclusion of an area of practice or specialization in a law firm name and Prof. Cond. Rule 7.5 specifically does not allow a trade name,” the opinion states.

The opinion also noted that Supreme Court rules require that the name of a law firm formed under a corporate structure must include the “proper descriptive designation required by law such as LLC or LLP.”

This link should take you to the opinion. The most pertinent U.S.Supreme Court precedent on the state bar's regulatory authority over letterhead designations is ARDC v. Peel, linked here. (Mike Frisch)

Lipshaw on Judgment (and Metaphor)

Posted, written, directed, produced by, and starring, Jeff Lipshaw

I hope you have the point.  I have decided that the article I've been working on (February is the hardest month, isn't it?) has, sometime in the last several days, passed not only the point of minimal coherence, but is indeed ready to leave the womb, sink or swim, fend for itself.  I am hoping it takes care of me in my old age.  Seriously, folks (ta ta boom), The Venn Diagram of Business Lawyering Judgments: Toward a Theory of Practical Metadisciplinarity is up on SSRN (in the spirit of "tomorrow's research today, not completely complete, but getting there, subject to post-production), now that I've decided what to leave on the cutting room floor.  It is the basis of the last part of my book-to-be (in utero), Lawyering and the Mystery of Judgment. 

If you get the idea that metaphors have something to do with the point, you win the kewpie doll.  What I've tried to do is exploit what is my niche - bridging the real world and the academy - and it is recursive in exactly the way I tend to think of the world:  how do we make judgments that bridge or fall between disciplines?  Those are interdisciplinary judgments, but is there a skill that focuses on those kinds of judgments, meaning that we are dealing with an even higher order concept, namely metadisciplinarity?  Which academic department grants a Ph.D. in that? (The fact that TypePad has just put a dotted red line under metadisciplinarity makes me hopeful I've coined a term!)  What I have tried to do is spice the theory with many real world examples, admittedly anecdotal, but also, I think, typical.  I will look forward to comments, because I have tried to be provocative, especially with regard to the pitfalls of "thinking like a lawyer", and the education that takes us there.

The abstract follows the fold.

Here's the abstract:

The relationship of pure and mixed business and legal judgment can be modeled in a Venn diagram. The question is who is capable of making judgments in the overlap. Businesspeople are not competent to assess the legal implications, and not inclined merely to trust the decision to lawyers. Lawyers, on the other hand, are usually successors to a particular method of organizing the world, and members of a closed discipline. By nature of the very concept of a judgment, it must occur privately in a single conscious mind, no matter how the judgment is ultimately communicated, shared, or adopted by others. The implication for lawyering and legal education is that some of the old canards about leaving business judgment to the business people must fall away.

There are three sub-themes. First, there is no "collective judgment." Practical judgment does not occur in some communitarian ether, but in a mind. The closest we have come to a science of judgment is the exploration of consciousness and cognition, both of which remain tough nuts. There is still no scientific explanation of consciousness; it is subject to what Thomas Nagel referred to as the "explanatory gap." It is fair to say that if there is anything to the idea that consciousness is irreducible, judgment is next in line. Could we pour all the relevant facts and authorities into a legal computer, and have it provide us with advice such that we could not determine, in a blind test, that it came from a computer and not a human being? Indeed, an inquiry into prospective judgment overlaps traditional questions whether anything actually constrains a judge's decision. It seems intuitively correct when we take the issue of judgment out of adjudication and consider it prospectively that our judgments are neither pre-ordained by some kind of formula nor wholly random. We need to assess rule following in the non-adjudication context, and for that I turn to work in cognitive science and the law.

Second, the judgment in the overlap is interdisciplinary. Business judgment depends far more on the argument from merit, versus legal judgment, which depends far more on the argument from authority, and a particular kind of authority at that. What, then, does it means to be an expert in the overlap of the diagram? We need to define a new professional discipline: the field of metadisciplinarity. Being a metadisciplinarian takes one to a higher order skill than mere interdisciplinarity: it means being an expert in the making of interdisciplinary judgments, which in turn invokes the role of metaphor and analogy in our cognitive abilities.

Metadisciplinarity recruits such basic cognitive abilities that the task of learning it is never going to be easy. It requires that its practitioners understand that human beings are "meaning-making machines," employing what the cognitive scientists call "cognitive integration" or "blending" (of which metaphor is a prime component). Metadisciplinary lawyers will not merely understand the fact of cognitive blending, but also approach it empathetically.

Need Not Arbitrate

The New York Appellate Division for the First Judicial Department modified an order dismissing a suit for allegedly unpaid legal fees in a matrimonial action. The attorney and client had executed three retainer agreements that provided notice of rights to arbitration of fee disputes. The attorney thereafter sued for over $155,000 in fees. The supreme court concluded that the case should be dismissed for non-compliance with rules governing arbitration of fee disputes in matrimonial cases. The court stated the issue:

Characterizing the issue before it as "one of pure contract interpretation," the Supreme Court dismissed the complaint, finding that plaintiff breached the unambiguous retainer agreements by failing to give defendant 30 days' notice of her right to fee arbitration prior to commencing suit. We now consider whether in performing its analysis, the Supreme Court erred when it held that the retainer agreements may be construed without reference to the matrimonial rules governing retainers, fee disputes and arbitration in domestic relation matters that were in effect at the time the retainer agreements were executed.

The court concluded that the arbitration rules did not apply where the amount at issue exceeded $100,000 and reinstated the claim:

Here, in accordance with the matrimonial rules, plaintiff presented executed written retainer agreements which contain a fee arbitration provision and attached a copy of the statement of client's rights and responsibilities. In his complaint, plaintiff alleged "[t]hat neither Part 136, nor Part 137 of the Uniform Rules is applicable because of the amount in controversy, and, as to the latter Part, also because representation of Poster commenced in 1997." Given that it is undisputed that the amount in dispute exceeds $100,000, the parties' fee dispute is not subject to arbitration under the matrimonial rules, and plaintiff's complaint states a valid cause of action that should not have been dismissed on the basis of his failure to give defendant notice of her right to arbitrate.

The court affirmed the denial of the plaintiff attorney's motion for summary judgment. (Mike Frisch)

Outside Traditional Boundaries

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

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

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

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

Solicitation Regulation Upheld

The District of Columbia Court of Appeals affirmed the grant of summary judgment against an attorney-plaintiff who had challenged an act adopted by the City Council that made it unlawful for professionals (including lawyers) to solicit business within 21 days of a motor vehicle accident "with the intent to seek benefits under a contract of insurance or to assert a claim against an insured, a governmental entity, or an insurer on behalf of any person arising out of the accident." The court rejected the attorney's First Amendment challenge to the provision, applying the analysis of the U.S. Supreme Court's precedents. The court in particular relied on Florida Bar v. Went For It.

The court noted that the act contains several exemptions from the 21 day ban, including immediate solicitation of legal business through the mail. The court also noted that there was evidence that victims are inundated with solitications in the wake of an accident. The court also rejected the contention that the act interfered with its authority to regulate the practice of law. (Mike Frisch)

New Montana Rules Proposed

The Montana Supreme Court has issued an order setting a 90-day period for comments on a petition filed by the State Bar Board of Trustees and the Ethics Committee to revise and amend three rules that deal with attorney advertising and solicitation. The proposed amendments would, according to the petition, clarify disciplinary jurisdiction over attorney advertising, specifically identify types of misleading communications and recognize that the state has no procedure to "qualify" a lawyer referral service. (Mike Frisch)

Lawyer Witness Disqualified

The New York Appellate Division for the First Judicial Department affirmed a trial court decision to disqualify defense counsel in civil litigation under the "lawyer witness" rule:

Rule 3.7 of the Rules of Professional Conduct (22 NYCRR 1200.29) provides that "[a] lawyer may not act as an advocate before a tribunal in a matter if: (1) another lawyer in the lawyer's firm is likely to be called as a witness on a significant issue other than on behalf of the client, and it is
apparent that the testimony may be prejudicial to the client" (22 NYCRR 1200.29[b][1]). Here, plaintiff sufficiently established that a member of the subject firm would be a witness and provide testimony that "may be prejudicial to the client," inasmuch as defendants claim that the note in question is invalid and a forgery, and the member is the person who prepared the note in question, who would most likely have knowledge regarding its execution, and who is claimed to have delivered it to plaintiff. The member also represented defendant Nightlife in the transaction that resulted in the promissory note, as well as in negotiating a subsequent agreement regarding the note with the person whom defendants claim was its rightful owner. Furthermore, any delay in bringing this motion was minimal, given that discovery is ongoing, and defendants have claimed no prejudice. (citations omitted)

(Mike Frisch)

Conference Announcement on Law Firm Evolution; Timely WSJ Article Begging the Question: "Do Lawyers Evolve Sufficiently to Use the Technology Placed at Their Fingertips?"

Posted by Jeff Lipshaw

Carole Silver (Georgetown) passed along an announcement for  “Law Firm Evolution:  Brave New World or Business As Usual.”  The conference will take place at Georgetown Law Center in Washington, beginning with an evening reception on March 21st and running through lunch on March 23rd.  Speakers will include Richard Susskind (author of “The End of Lawyers?” and “The Future of Law”), but more importantly, friends like our own Bill Henderson, David McGowan, Michele Beardslee, co-author Larry Ribstein, and Paul Lippe of Legal OnRamp.  Other notables:  Jeff Lehman, former dean of the Michigan Law School, Cornell president, and current dean of the Peking University School of Transnational Law, David Wilkins, and Aric Press of the American Lawyer.

All of which segues nicely into an article entitled "Using Web Tools to Control Legal Bills; Big Law Firms Turn to Technology to Provide Clients With Real-Time Expenses, Automate Tasks" from the Wall Street Journal this morning which trumpets "new technology" about which I was harping during the law firm beauty contests our staff held for purposes of choosing "preferred providers" back at the beginning of this decade (which began on 1/1/2001 and doesn't end for another year).  Pardon my occasional slip into facetiousness, but what follows ain't a technology issue, except as it relates to the technology extant in the six inches between a lawyer's ears. 

Let me provide some background here.  In 1998, my old law firm, Dykema Gossett PLLC (now Dykema "A Firm Unlike Any Other") installed billing software that allowed any human being (I include lawyers) to open a program in the morning, keep it open, and, without resorting to paper time sheets, memory, Post-It notes, or scrawls on one's body (like that guy in Memento), to record one's billables in, as we have come to say, REAL TIME.  The upshot of this was the potential of fine grapes in/fine wine out:  somebody could actually tell a client in REAL TIME how much a matter was costing. 

Fast forward a couple years to about 2002.  I'm now the general counsel of a public company.  Put aside whether it's a good thing for society - public companies report their earnings every three months, and whether they give "guidance" or not, securities analysts make models in which they predict what those earnings will be.  On the inside, the company knows what those estimates are and, all other things being equal, tries not to rub too many analysts' noses in the dirt by surprising them on the downside.  In short, you can't rule out contingency and surprise, but the whole point of having information available to management about sales, costs, trends, weather, the macro-economy, etc. is to plan for it.

Now consider a law firm managing some major matters for that client.  During the beauty contest, the GC will say:  "Look, I need you to understand how important financial management is, wholly apart from the quality of your work.  X dollars in absolute terms equals Y cents per share, and if you surprise me with bills or accruals in the last month of a quarter or a year that can be X or more, you've actually affected our relationship with our shareholders."  This is because the GC knows how law firm billing cycles work.  Associate Miguel does twelve hours of work on November 3.  This work doesn't get rolled up into a "pre-bill" for review by the relationship partner until some time after the end of the month, say December 8.  The final bill comes out a couple weeks later, say, December 23.  Which means that there's almost a sixty day lag between when the firm does the work creating an accrual, since the company owes the firm for the work, and when the firm finally tells the company how much it owes.  If the company finds out on December 23 that, indeed, the firm ran up multiples of X dollars in the preceding sixty days, the GC finds herself in an extremely uncomfortable conversation with the CEO and CFO, not because the work didn't need to be done, but because the management of the information relating to the work was so badly butchered.

So we manage this, understanding as we do it's partly science and very much art.  Every quarter we hold a reforecast meeting on each legal matter.  In November, we tell the law firm we want an estimate of an accrual through December 31, meaning all the work that has been completed and is waiting to be billed ("WIP") and everything the firm thinks it needs to do through December 31.  The firm says "oh, no problem, we have a system just like the one you used at Dykema A Firm Unlike Any Other."  And the GC says, that's great, do you have a culture in which the lawyers actually put their time in every day so that we get fine grapes in and fine wine out?  And the answer is almost always, despite the slickness of the Power Point, "well, it's hard to get the lawyers to do that."  Garbage in, garbage out.  So the GC pounds his fist on the table and says, "I want to be able to call you at 1:00 p.m. on Friday, and know exactly how much time we've invested in each of our matters through the close of business on Thursday, and I want you to be able to get the report back to me within an hour."  (By the way, this should be music to the managing partners' ears because it means that time gets billed, bills get sent, bills get paid, and partners make money.)

Well, read the WSJ story.  Foley & Lardner can do that now.  Indeed, I shouldn't be facetious.  The firm can look at a matter by activity, suggest it's being handled inefficiently, and recommend alternatives, such as bringing it back in-house.  No doubt the technology is better.  But garbage in/garbage out (or as we used to say, the human interface) is still going to be an issue, and only leadership and culture change that.

P.S.  As long as I'm ranting (albeit with ten fingers on a keyboard that I will post in REAL TIME), I can still remember an old partner, who was OLD circa 1980 or 1981, who produced documents as follows:  he would write them out long hand, then call in his secretary and dictate to her from what he had written.  Then she would go to her IBM Selectric typewriter and type out what he had dictated in OCR (optical scan) format, which was then fed into a mainframe computer, which then turned out a draft, which she reviewed, then sent back for a final, which she then gave to him, which he marked up with a pen, gave it back to her, and so on.  I have to believe the cycle time for the production of a moderate length brief was three weeks.

Remand In Litigation over Fees

The District of Columbia Court of Appeals has issued its decision in the litigation between Douglas Rosenthal and his former firm Sonnenschein Nath & Rosenthal. The case involves a dispute primarily over fees for representation against Libya arising out of the destruction of Pam Am 103 over Lockerbie. The trial court had awarded Rosenthal $3.7 million in compensatory damages. The firm won an award against Rosenthal and his new firm for tortious interference.

At issue were claims for compensatory damages for two periods of time. The court held that the jury was presented with sufficient evidence that the firm had been "unevenhanded and thus unreasonable" in setting compensation for the second period. Rosenthal's retirement did not preclude him from suing the firm. The evidence was insufficient to award punitive damages against the firm. 

The court remanded for a new trial on compensatory damages for the second time period. and reversed the award to the firm on the  tortious interference claim. Rosenthal was given the option of a new trial on compensatory damages or accepting an award as reduced by the court's opinion.

The decision can be accessed through the court's web page (Rosenthal v SNR) and was decided today. (Mike Frisch)

Teaching Contracts

Posted by Jeff Lipshaw

I've been asked to teach our six credit contracts course here next year, and have been puzzling (far ahead of time) about book adoption and teaching philosophy.  Contracts is the often the bane of the first year experience, and I am thinking about hitting the reasons head on.

I spent 26 years in practice, as a law firm litigator and then transactional partner, and then as the general counsel of two different companies.  I have written fairly extensively on contract theory (perhaps teaching the course will be impetus to combining my various pontifications into a book), but I am generally disdainful of contract doctrine as a means of explaining what is actually going on in the business world.  (See my article Models & Games, for example.)  Although there are some admirable contracts casebooks out there that attempt to do so, if I don't use one, it will be a result of my concern that pushing traditional contract doctrine into a real business setting is a square peg in a round hole (the metaphor is apt for all sorts of reasons).   You don't really teach the business world, and you don't really teach traditional doctrine.

No, were it not for the bar exam and inertia (i.e., Langdell was a contracts teacher), we probably wouldn't bother with most of contract law as we presently teach it.  Or, as I have often said, practice is 5% doctrine and 95% interpretation; the course is usually 95% doctrine and 5% interpretation.

I've concluded instead that the way to approach the subject (and relieve some student angst at the same time) is to reject at the outset the idea that what they are learning maps on the real world.  It is more helpful to think of contract law as most casebooks begin - with the idea of the objective law of contracts, or, as we say more explicitly in areas like partnership, the default rules upon which the legal consequences of a binding promise will be imposed on parties after the fact when indeed there is no subjective evidence of an intent to be bound at all, or legally, or on what specific terms.  (As I have made clear in the past, I'm a skeptic on subjective intent altogether when even the interpretation of the contract is the subject of colorable litigation positions.)  Hence, teaching the subject, by my way of thinking, requires a jurisprudential approach, one that says "what you are about to learn is a particular way of modeling human interaction."  Said with more jargon, contract law may or may not map well onto the reality of private ordering, and the mistake most students make is to try to make the map work.  No - an integrated law of contracts, if one exists, is a figment of the Langdellian or Willistonian or even the Corbinian or Llewellynian imagination, a way of trying to make unified sense of the whole of private ordering, whether that sense-making is by way of formalism or contextualism (or efficiency or the promise principle, to bring the debate forward in time).

Put otherwise, if the reality of private ordering is metropolitan Boston, contract doctrine is a map, based on the mapmaker's view of what is important.  But you could have a road map of major highways, a topographic map, a detailed street map, a map of population densities, etc.  This is merely one map, or several competing maps.  (Think about the classical view of offer and acceptance, for example, versus the UCC's view.  Does either one really map onto a singular underlying reality of the making of an agreement?  Even "the meeting of the minds" is a metaphor (and, in my view, an unfortunate one)). (I think the Macaulay/Macneil relational contract school falters on this point, by the way.  It gives up on the map altogether and tries to go straight to the reality of the relationship.  That may explain the relationship, but it may not make for the best way to explain the law.  I have a similar reaction to Omri Ben-Shahar's longstanding proposals (now with Lucian Bebchuk) on liability arising out of preliminary negotiations - we're trying to fine tune the map (or model) beyond its usefulness as a model.)

Finally, the difficulty with putting aside whatever sense of reality we might have, and reconstructing the rules of the model (or game?) on their own is a little like trying to master the rules of cricket without making analogies to baseball, or the rules of rugby without making analogies to American or international football.  Let's say you are playing cricket, and you do something that cause the other team to cry "foul!"  You have to make your argument why what you did was legal in cricket terms, not baseball terms.  That doesn't mean there couldn't have been other ways to play cricket, or that the world would be better off if we interpreted the rules of cricket differently, but to win the argument we have to fashion it in a way that appears to be consistent with cricket.  Contract law is the set of rules making up the objective contract litigation game, and some arguments based on those rules are cricket, and some are not.

Anyway, that's my current thinking.  Responsible opposing (or helpful) views are always welcome.

A Case of Metaphor Infringement? An Open Letter to David Wessel of the Wall Street Journal

Posted by Jeff Lipshaw

I was sitting this morning at breakfast, leafing through the Wall Street Journal (note to Rupert Murdoch:  I like to have a place to read conservative viewpoints, but why in God's name do you give space to a hack like Karl Rove?), when a column on the global financial situation caused me to break into a James Stewart-like, "wull, wull, wull, hold on there just a darned minute!"  In a column entitled "A Prozac Economy Has Its Costs," the economic editor, David Wessel (left), says this:  "If we could find the economic equivalent of Prozac -- a cocktail of "financial stability" overseers, tighter restraints on banks, wise government rule to prevent market excesses -- would it bring a calmer prosperity or a less prosperous calm?"

Now I realize that only a masochist would read an article with the word "epistemology" in the title, but I, me, myself, did say this well before the metaphor of Prozac was a gleam in Mr. Wessel's eye, and it was in the abstract, so you didn't even have to download the damned thing:  "I propose an analogy between medicine and law in the sense of 'regulatory technology.'  If bubbles are the disease, then the analogy is to bipolar syndrome - exuberance, or even a little hypomania is okay on the upswing, but true mania is bad, as is the resulting swing to depression.  Good regulation, then, would be something like lithium, which keeps us on an even keel."

In a fit of pique (or is it a fitue of piq?), I dashed off an e-mail note to Mr. Wessel this morning as follows (in relevant part):

Dear Mr. Wessel:

I read your Prozac metaphor this morning with some amusement and even some mock anger. I have written an academic article (to be published in the Southern California Indisciplinary Law Journal) on the complexity of the financial crisis (epistemologically speaking), and I used the much better lithium metaphor.

I won't demand royalties for metaphor infringement, but at least give me credit!

I feel so much better now.