Legal Profession Blog

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)

No Fee For You

A recruitment firm sent an unsolicited resume of a lawyer who specialized in Korean practice to a New York law firm. The firm had no Korean practice in its New York office but later hired the applicant for its Washington office through a different recruiter. The first firm sued for a fee. The New York Appellate Division for the First Judicial Department affirmed the dismissal of the suit:

As it is undisputed both that the New York partner did not know that the candidate was being interviewed by the Washington office, and that the Washington office did not know prior to interviewing the candidate that his resume had been sent to the New York partner, the required assent necessary to establish an implied contract cannot be inferred. There was no "meeting of the minds" (I.G. Second Generation Partners, L.P. v Duane Reade, 17 AD3d 206, 208 [2005]) sufficient to establish an implied contract pursuant to which defendant agreed to pay plaintiff a fee even if there was no causal connection between plaintiff's submission of the candidate's resume and defendant's decision to interview and hire the candidate.

(Mike Frisch)

No Agreement To Arbitrate

An attorney was hired as "of counsel" of another attorney under a one-year employment contract on November 1, 2005. The contract authorized discharge for cause and had an arbitration clause. The employment relationship had "issues" but extended past the fixed term. Eventually, the employed lawyer was discharged with notice given in August 2007. The parties disagree as to the reasons. The employed lawyer sued the employing lawyer on claims that included wrongful discharge. The employing lawyer moved to dismiss, invoking the arbitration clause.

The Washington State Court of Appeals, Division I held that the there was no basis to conclude that the lawyers agreed to extend the arbitration provision beyond the fixed term:

Where a fixed-term employment contract expires and the employee continues to render the same services provided under the previous agreement, a court will presume that the employee is serving under a new, implied contract having the same terms and conditions as contained in the expired contract. However, where it is clear that the implied contract does not have the same terms and conditions as the earlier agreement, there is no basis
to presume that the contracting parties necessarily renewed any specific term of
the prior agreement. Because the evidence in the record and the pleadings
herein establish that Judith Lonnquist and Reba Weiss did not completely renew
the terms of Weiss's written, fixed-term employment contract after Lonnquist
terminated it, there is no basis to presume that the parties subsequently entered
into an implied agreement to arbitrate Weiss's employment-related claims as was provided for in the terminated contract. Inasmuch as a court cannot compel litigants to arbitrate claims unless they agreed to do so, the trial court correctly denied Lonnquist's motion to compel arbitration. Accordingly, we affirm.

(Mike Frisch)

New Data on BigLaw Contraction: Patterns of Winners and Losers

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

A careful analysis of the recently released National Law Journal 250 reveals some surprising trends.  The NLJ reports that the nation's largest 250 firms (by lawyer headcount) shrank by 4%. Yet, when broken down by geography (see figure below, click on to enlarge), nearly half of the losses (2,096) were concentrated in the 45 firms headquarters in New York City.  And another 20% (883) fell on the 17 NLJ 250 firms headquartered in Chicago.

To put those figures in perspective, for 2008 (the baseline year), NYC- and Chicago-based firms only accounted for  24.7% and 14.7% respectively of the NLJ 250 total lawyer headcount.  In contrast, DC-based firms accounted for 9.7% of the NLJ 250 universe in 2008 but only 3.8% (161) of the total contraction.  The disparate geographic impact suggests that the reductions-in-force are probably due disproportionately (or overwhelmingly) to the decline in the volume of corporate transactions and woes in the banking and insurance sectors.  Among major markets, San Francisco-based firms shrank the least, though this glass-half-full news is probably the result of the dissolutions of Thelen Reid and Heller Ehrman in late 2008, which were both headquartered in the Bay Area. 

On comparative basis, the middle-market firms appear to be thriving.  Collectively, there was a 0.6% increase in the number of lawyers in the 91 NLJ 250 firms based outside the Top 10 markets. In contrast, firms headquartered in Top 10 markets did uniformly worst.  Below is a ranking based on percentage contraction:

1. New York City (45 firms)    -7.0%   
2. Dallas (7 firms) -5.9%
3. Houston (4 firms) -5.4% 
4. Philadelphia (15 firms)                -5.4% 
5. Atlanta (9 firms) -5.3% 
6. Chicago (17 firms)                      -4.7% 
7. Los Angeles (11 firms) -2.7% 
8. Boston (10 firms) -2.1%
9. Washington DC (18 firms)           -1.6%
10. San Francisco (9 firms)               -0.1% 

Firm size appears to be a major explanatory variable, particularly for associates.  Here is the breakdown of changes in lawyer headcounts by size of firm:

 

So what is the bottomline analysis?  I think the slowdown in the economy has made the largest firms the most vulnerable to price pressure from large corporate clients.  The largest firms have the highest cost structure (rents and associate pay), and there is some doubt whether there is a corresponding value-add for their higher fees.  At the high end, the market is pretty crowded.  An international footprint is not necessarily a competitive advantage when 20+ of firms have the same high fixed costs and similar lawyer credentials.  Not surprisingly, a lot of desirable legal work that does not require a multi-office international platform is migrating to firms further down the AmLaw/NLJ 250 food chain.  (These observations, by the way, track Larry Ribstein's The Death of BigLaw analysis.)  Indeed, anecdotal evidence from my informal network suggests that boutiques are booming holding their own [NOTE: after the original post, three additional members of my informal network suggested that boutiques were not booming but, instead, hurt less badly].

Folks, we are in uncharted waters.  The structure of the corporate bar is changing rapidly.  The giants are vulnerable.

Fee Dispute Appeal Oral Argument

The District of Columbia Court of Appeals will hear oral arguments this Friday (November 13th) in a case described in a June 2008 report reprinted below from Law.com:

In March, a D.C. Superior Court judge awarded Douglas Rosenthal, a former Sonnenschein Nath & Rosenthal antitrust partner, only part of the compensation he claimed was owed to him by the firm.  Now, nearly three months later, Judge Melvin Wright has whittled down that award from more than $3 million to $65,639.

Rosenthal (who is not related to the Rosenthal in the firm's name) sued his ex-employer for $8.5 million, claiming he had not been fairly compensated for representing the families of those killed in the 1988 bombing of Pan Am Flight 103 over Lockerbie, Scotland. That contingency work generated nearly $17 million for Sonnenschein. Rosenthal also claimed he was owed origination credit for Sonnenschein's representation of Sun Microsystems against Microsoft Corp. That work produced $20 million in fees for the firm.

After a 2 1/2-week jury trial, Judge Wright entered judgment in favor of Rosenthal on March 28 to the tune of $3.73 million. However, Sonnenschein was also awarded $300,000 in its counterclaim against Rosenthal and his new firm, Constantine Cannon. Sonnenschein filed that claim because it said Rosenthal and Constantine had interfered with clients when Rosenthal left in 2005.

Sonnenschein filed a motion on April 10 arguing that Wright had not properly adjusted the jury's $3.73 million award. Sonnenschein said the court agreed that it would subtract the amounts that Rosenthal actually earned during the years in question from the amounts the jury determined he should have been compensated. According to Sonnenschein's motion, after that calculation, the damages award becomes $365,639. After also subtracting the $300,000 for Sonnenschein's counterclaim, judgment for Rosenthal is reduced to $65,639. Last Thursday, Wright granted the motion to decrease the damages award to that amount.

One of Rosenthal's lawyers, Constantine Cannon partner Gary Malone, says he believes the judge "erred" and plans to appeal the decision within the next month. Rosenthal is also represented by Constantine partner Robert Begleiter. Michele Roberts, a partner at Akin Gump Straus Hauer & Feld, and James Hamilton, a partner at Bingham McCutchen, represent Sonnenschein.

First reported in The BLT: The Blog of Legal Times

The oral argument may be heard in real time by access through following link. Click on the link highlighted in yellow to hear the agrument. (Mike Frisch)

A Fun Read

Jayanth Krishnan at Indiana (Bloomington) is expanding his ouevre of comparative legal profession studies with his latest on SSRN, The Joint Law Venture: A Pilot Study (here).  As with his other work, this one's an interesting (and, yes, fun) read.  Congrats, Jay!

(Posted by Nancy Rapoport)

Sentimental Journey

In an action brought by the personal representative (and later widow) of a deceased law partner, the South Carolina Supreme Court held that the claims relating to the continuing use of the attorney's name were properly dismissed. The court described the basis of the civil complaint:

Julian Gignilliat (Gignilliat) was a founding partner in 1968 of what became the GSB law firm.  The firm did not have a written partnership agreement.  Gignilliat was diagnosed with a serious illness in 2001.  Gignilliat died on June 22, 2002.  It is undisputed that Gignilliat, cognizant of his terminal illness, requested that GSB continue to use his name after his death and that GSB not be sued

The Personal Representative (PR) of the Estate of Julian Gignilliat filed an action against GSB and six partners in the firm at Mrs. Gignilliat’s request.  The PR alleged GSB continued to use and profit from the Gignilliat name without the consent of Gignilliat’s estate and without making compensation for its use. 

A Consent Order was filed wherein the PR of the estate assigned Mrs. Gignilliat the sole right to any of the estate’s claims arising out of the complaint.  Subsequently, Mrs. Gignilliat filed an amended complaint naming herself as the plaintiff in which she sought a declaratory judgment regarding the defendants’ right to continue using the Gignilliat name without consent, and she asserted claims for (1) infringement on the right of publicity, (2) conversion, (3) unjust enrichment, and (4) quantum meruit.  She sought damages and an injunction preventing further use of the Gignilliat name without compensation.

The court concluded that any sentimental value attached to the deceased attorney's name did not form a basis for quantum meruit recovery. (Mike Frisch)

One Claim Survives

The District of Columbia Court of Appeals affirmed "in large part" the grant of summary judgment against a former programmer/analyst for Covington & Burling who sued for failure to reasonably accommodate her medical condition, hostile work environment, and termination in alleged violation of the D.C. Human Rights Act. The court found the hostile work environment claims to be time-barred but concluded that the reasonable accommodation claim remained viable. The former employee suffered from Crohn's disease. (Mike Frisch)

Ohio Outsourcing Opinion

From the web page of the Ohio Supreme Court:

Two recent advisory opinions from the Supreme Court of Ohio’s Board of Commissioners on Grievances & Discipline offer guidance on outsourcing legal or support services and whether a newly appointed domestic relations magistrate can continue to serve as a city council member.

Opinion 2009-6 finds that the Ohio Rules of Professional Conduct do not prohibit an Ohio lawyer or law firm from outsourcing legal or support services domestically or abroad, either directly to lawyers or nonlawyers or indirectly through an independent service provider. The opinion cautions, however, that applicable rules do impose significant ethical requirements.

Some of those ethical requirements include the circumstances and rules that require disclosing, consulting with a client and obtaining informed consent before outsourcing. Other considerations include being responsible for another lawyer’s violation of professional obligations and making reasonable efforts to ensure a nonlawyer’s conduct is compatible with the professional obligations of the lawyer. “The extent of supervision for outsourced services is a matter of professional judgment for an Ohio lawyer, but requires due diligence as to the qualifications and reputation of those to whom services are outsourced.”

The opinion also discusses reasonable fees and expenses in these arrangements and leaves the decision as to whether to bill an outsourced client as part of the legal fee or an expense to the lawyer’s professional judgment.

Opinion 2009-7 finds that it is improper under the Ohio Code of Judicial Conduct for a newly appointed full-time or part-time domestic relations court magistrate to continue serving out a term as an elected member of city council.

The opinion references Rules 1.2, 1.3 and 4.5 as offering guidance in answering the question posed.

The opinion also notes that there may be statutory compatibility issues to consider, but those are beyond the scope of the opinion.

(Mike Frisch)

More from Paul Lippe on the Future of Law Schools

Posted by Jeff Lipshaw

Paul Lippe, who has been an agent provocateur (or thought leader, as they say) on the subject of legal education, has a follow up to his original Am Law Daily commentary to which our Bill Henderson linked a while back.  Follow the link and read it for yourself, but I'm not sure if the comments are available if you aren't a member of Paul's Legal OnRamp, so here's mine if you want to hit the "back" button on the browser after you read his column:

* * *

Like Ray [Campbell, visiting professor at Penn State Law School, who also commented - UPDATE: see his original comments below the fold], I'm a former Big Law partner, and I was the VP & GC of a Fortune 850, NYSE company. I'm less likely than Ray (based on his comments) to try to argue that today's paradigm of legal scholarship has anything more than a passing relevance to the in-the-trenches practice of law. But that's not really the point. Practitioners have to understand that we started down a particular path over a hundred years ago when C.C. Langdell came up with the idea that law could be derived inductively from the reading of cases, akin to the scientific method in other disciplines. (There's a social science term called "path dependency" and it has to do with how hard it is to get off a particular path once you are on it; as an example, if you take a job at the beginning of your career with Weil,Gotshal, you've created different path dependencies for future choices than if you take a job with Sooem & Servem in Elko, Nevada.) Law became a subject for instruction in research universities, not merely for the training of lawyers, and with that developed a community of legal scholars, developing, indeed evolving, their own standards for what constituted advancement in knowledge. For a long time, that had to do mainly with legal doctrine, and academic energy devoted itself to the great treatises, and the great doctrinal advances like the UCC.

The problem with comparing law to medicine (as I did, and to which Paul links) is that while the practice of medicine is both art and science, the science is still hard science, and, moreover, the linkage between cutting edge theoretical research and its practical application is far more intuitive. For example, my son has his name on a paper that deals with work on the very subtle science of diabetic neuropathy in cells - how at a molecular and cellular level does the glucose cause the problems it does? Even if the research isn't directed at a cure, we can understand it in the web of scientific research that leads to useful advances and human flourishing.

That's far harder to do in law, and one only needs to scan the titles of the last 2,000 or so papers uploaded onto SSRN to confirm the hypothesis. Moreover, there's a lot of work produced and in spotty quality because of two structural features of academic law as it has moved down its particular path: (a) the sheer number of law professors compared to other disciplines, because the training of professionals subsidizes the theoretical pursuits; and (b) the plethora of student-edited (and non-peer-reviewed) journals. In short, law as academic discipline is still finding its place in the world. Given a hundred years of path dependence, however, "solving" the problem of legal education isn't going to occur without some acknowledgment of the academic paradigm. For example, we could certainly, as a logical possibility, move to a world in which most lawyers are trained in vocational institutes, and make theoretical "law and..." part of more traditional humanities and social science Ph.D. programs. But I suspect that most lawyers like their ties to the status of research universities that spawned most of them.

In fairness to Ray Campbell, my original version of this post did not treat fairly his original and thoughtful comment on Paul Lippe's column over at Legal OnRamp.   Here it is in full:

* * *

Let me weigh in as someone who has been a big law partner, a start up company CEO, and now a law professor.

First, let me question your central assumption. Is being a lawyer just about serving paying clients? Not to diminish the importance of providing awesome service to clients, but I think a lawyer's duties are a bit more nuanced than that. You can be a great, client oriented lawyer and keep an eye on the bigger game, but you diminish the profession and short sell what law schools need to do if you take too narrow a view of a lawyer's role in society. I was privileged to work with some great lawyers, but a complete lawyer is going to bring to the game some of what Jerrold Solovy does - not just great client service, but a sense of what the law means in society.

I also think you might be surprised if you spent more time really looking at what law schools are like now. I know I was. Law schools are way better now than they were back when I was in law school. The scholarship is more interesting. (Really, it is. The various "Law and" movements have brought some fundamental insights, and add a lot more than novel length doctrinal treatments.) There are more opportunities for practical and clinical learning. Many law schools are looking hard at how they can best participate in the overall society, and have spawned institutes and centers that play vital roles.

In other words, some pretty smart people at law schools are already trying to address some of the issues you have identified, and have made real progress even if they haven't cracked the code entirely. The faculty I know are extremely concerned that students graduate well prepared to practice, even recognizing that their training will continue long after they graduate.

That's not to say law schools can't improve. Any institution has room for improvement, and that's especially true for institutions where a big chunk of the productive staff need respond only to their own views of what they should be doing. But, if we are going to talk about how to improve them, it would really help to start with an accurate assessment of both what law schools do today and what kind of lawyers they need to be creating.

* * *

Law Firm Letterhead Should Not Be Used For Debt Collection Letter

The U.S. Court of Appeals for the Fifth Circuit yesterday issued an opinion that should serve as a warning to lawyers involved in debt collection:  be careful what stationery you use.  Here is a nice summary (with permission) from the always-handy Fifth Circuit Civil News (its daily update by email), produced by Robert E. McKnight, Jr:

      Gonzalez v. Kay, No. 08-20544 (5th Cir. Aug. 3, 2009) (Jolly, Prado and Southwick): Gonzalez sued Kay's law firm and Kay for sending him a debt collection letter that, Gonzalez alleged, deceptively represented the law firm's handling of the debt as a legal matter, rather than simply as a collection matter, in violation of the Fair Debt Collection Practices Act. The FDCPA prohibits "a debt collector sending a collection letter that is seemingly from an attorney." The district court [S.D. Tex.] dismissed on the defendants' FRCP 12(b)(6) motion, concluding that the letter, though on law firm letterhead, sufficiently informed Gonzalez that none of the firm's attorneys had yet become involved in the matter and that the firm was simply acting as a debt collection agency. Holding: Reversed and remanded. "Because the 'least sophisticated consumer' reading this letter might be deceived into thinking that a lawyer was involved in the debt collection ["[a] letter from a lawyer implies that the lawyer has become involved in the debt collection process, and the fear of a lawsuit is likely to intimidate most consumers"], the district court prematurely dismissed Gonzalez's complaint." Judge Jolly dissented.

And Judge Prado wrote the majority opinion, reversing the dismissal.  [Alan Childress]

Referral Fee Not Unethical

An attorney who joined a law firm had an agreement that the firm would pay him additional compensation for fees generated on matters he referred to the firm. He thereafter referred a case to the firm. When he left the firm and returned to his former firm (Wilson Elser), he did not receive compensation for the referral. The matter had come from Wilson Elser and was referred due to an apparent conflict of interest. The departing attorney brought an action against the law firm and prevailed in arbitration. The law firm appealed the arbitration award.

The Connecticut Appellate Court affirmed the award. The court rejected the suggestion that payment to the referring attorney violated the Rules of Professional Conduct because of the conflict of interest of Wilson Elser:

There never was a finding that the plaintiff had ever represented the client in the [referred] matter for his new firm. Compensation was owed to the plaintiff on the basis of the plaintiff's referring the...matter to the defendant, not for representing the client.

The arbitrator had correctly concluded that the ethics rules do not prohibit payment under circumstances where the lawyer receiving the fee later rejoins the firm that sent the case along due to a conflict. (Mike Frisch)

Suing The Dead

An attempt to substitute a law firm for a deceased defendant was rejected by the New York Appellate Division for the First Judicial Department:

In December 2006, just before the statute of limitations expired (CPLR 214[5]), plaintiff commenced this action naming as sole defendant the driver of a car that had allegedly struck plaintiff's car, injuring plaintiff. However, that driver had died in December 2004. After trying to identify an administrator of the driver's estate and starting a second action against the driver's wife, on the mistaken belief that she was the administrator of his estate, plaintiff moved to substitute, as a party defendant, the law firm assigned to this matter by the deceased driver's liability insurer. That motion was granted on default and the court subsequently denied the law firm's motion to vacate the default and dismiss the complaint.

Since one cannot commence an action against a deceased person, this action was a nullity from its inception (see Marte v Graber, 58 AD3d 1, 2-3 [2008]). Consequently, the motion court lacked jurisdiction to hear and determine the initial action and erred in denying defendant's motion to dismiss.

(Mike Frisch)

A Comment on Law School 4.0

Posted by Jeff Lipshaw

An op-ed by Paul Lippe (no relation) at the Am Law Daily on what law schools ought to do to cure THE PROBLEM has gotten a fair amount of buzz in the blogosphere, including from our own Bill Henderson. 

Here's my quick reaction:

1.  The descriptions of Phases I to III (reading law; Langellian case method; "law and ...") seem accurate to me.

2. This statement strikes me as a relatively fair generalization:

Even in 1981, when I went to law school, the faculty generally held law firms in low regard, and clients were presumed unethical without the constant guidance of lawyers (when I spoke to a law school dean the other day, she immediately equated client with "Enron"). It's nuts for law school to be primarily about understanding appellate decision making and not at all about understanding clients.

This is particularly the case when discussing the politically-infused area of corporate governance. I still marvel at individuals in various institutions (academia, Congress, state governors, corporations) who have no compunction about calling the motives of other individuals in other institutions into question (i.e. conflicted, greedy, short-sighted, etc.) without stepping back and looking at their own.  For example, I'm still not convinced that faculty governance has any moral superiority over corporate governance, and clearly Governor Sanford's recent escapade tarnishes the purity of the bully political pulpit. I'm willing to accept a middle ground, which is that none of us embodies an Archimedean moral fulcrum.  Or to quote Robert Burns:  "O wad som' pow'r the giftie gie us, to see oursels as ithers see us."

3.  Mr. Lippe says:

-A much more empirical approach to practice, forcing much deeper inquiry, rather than just trotting out hypotheticals and issue-spotting--e.g., if choosing AAA arbitration is the right dispute resolution clause, do we know that a higher percentage of deals with no arbitration clause ended in a contentious dispute?

This statement strikes me as not fully thought out, but certainly an area in which inquiring minds ought to be engaged (I try to be, as evidenced in this recent piece about legal "cures" to social problems).  First, I'm not sure we've fully probed the empirical foundations of statements of this sort enough to use them as the basis for advice. You have a rare form of cancer. Overall, the cure rate with the best treatment is 20%. We can at least make some fairly reliable predictions as a result of natural science, to get at real cause-and-effect. As a general matter, that's far more challenging when we draw social science conclusions.  Second, the analogy to medicine highlights the issue. Is the information a helpful piece of data in deciding whether to take the treatment?  My son, Matthew, starts med school in six weeks, with a beginning unit that touches on evidence-based medicine.  My guess is that data is helpful, but not ultimately dispositive, in making forward-looking judgments about care.

Claims Dismissed

The New York Appellate Division for the First Judicial Department affirmed an order dismissing a number of claims against lawyers and a law firm:

Plaintiff alleges fraud and fraudulent inducement against all defendants, breach of contract against the Weksler brothers, and legal malpractice, tortious interference and negligent misrepresentation against the firm. Plaintiff was married to Jack Weksler from 2004 until his demise in 2007. She claimed it was the decedent's intention to provide for her by establishing an annuity whereby Joseph and Bruce, his sons from a previous marriage, would pay plaintiff $4,000 per month after his death as long as neither he nor plaintiff had commenced divorce proceedings against the other. The law firm, at the decedent's behest, prepared an agreement memorializing his wishes. Plaintiff and the decedent were allegedly happy with and relied on the agreement, which would guarantee her future financial security. The decedent became seriously ill in January 2007. Four months later, after his discharge from the hospital, he retained the law firm to commence a divorce proceeding. The complaint was filed in New Jersey Superior Court in June 2007, and he died the following month.

Plaintiff alleges that defendants made material misrepresentations upon which she relied, which reasonably led her to believe that the agreement would be binding and valid and pay her $4,000 per month after Jack's death. Accepting the facts alleged in the complaint as true, and according plaintiff the benefit of every possible favorable inference, she fails to allege sufficiently the elements of fraud and fraudulent inducement and plead with the necessary specificity the alleged misrepresentations made by defendants.

Furthermore, plaintiff fails to state a cause of action for breach of contract against the Weksler brothers. Even assuming the agreement was enforceable, it still memorialized the intent of the parties to extinguish any payment to plaintiff upon the filing of divorce papers.

As to the claim for legal malpractice, there was never an attorney-client relationship between plaintiff and the firm. Even assuming plaintiff had been the firm's client, she failed to show how such alleged malpractice caused her injury, as the agreement simply effectuated the intent of the parties, i.e., to provide plaintiff with an annuity during her lifetime subject to the stated terms and conditions.

Plaintiff's remaining causes of action against the firm, for negligent misrepresention and tortious interference, are dismissed as redundant of the legal malpractice claim. (citations omitted)

(Mike Frisch)

First Signs of a New Equilibrium in Entry-Level Salaries

[posted by Bill Henderson, crossposted to ELS Blog]

According to today's Am Law Daily, Philadelphia-based Drinker Biddle announced that instead of deferring its 37 incoming associates for six months to a year, it is going to institute an intensive training programs run by its partners, professional development personnel, and various firm clients.  To pay for this program, it is going to cut entry level salaries to $105,000 (from $145,000 to $160,000 depending upon the market).  Thereafter, the salaries will go to the "prevailing rate" in the spring 2010. [Query: what will that rate be?  Even it is higher than $105K, maybe Drinker is better off getting associates who self-select into its more training-intensive model.]

Frankly, this is the first sign I have witnessed of a sensible medium term strategy by an Am Law 200 law firm.  Further, this approach is very close to the associate pay models hammered out by the four FutureFirm 1.0 teams.  Remarkably, all four teams (each with four partners, three in-house lawyers, and three associates/law students) traded away the $160K pay scale for a entry level job that guaranteed meaningful training, client contact, and other perks, such as greater job security (e.g., a 3-year contract at $80,000 per year) and loan payback programs.

There are several reasons why Drinker Biddle's move could set the stage for a new equilibrium:

• Making "Better Lawyers Faster."  The real problem with the $160K pay structure is that associates become too expensive to train, at least on the client's dime.  $105,000 is more than the $60,000 to $75,000 one-year hiatus offered by several firms.  But think about it.  A firm can bill out the associates at rates below a paralegal and easily recoup the difference.   Further, the associates are learning the clients' businesses and observing partners and senior associates.  In the fall of 2010,  Drinker Biddle associates will be worth a lot more to clients than associates who took the year off.  This training is akin to the original Cravath system, which was designed to make "better lawyers faster."
• Continued Soft Entry Level Market.   With zero voluntary attrition at most Am Law 200 firms and the go-go days of Silicon Valley (97-00) and Wall Street (04-07) gone for the foreseeable future, the entry level supply pipeline is going to back up into the 2010 and 2011.   Thus, there is a decent chance that Drinker Biddle will enjoy a few years of sensible $105,000 salary structure.  In a world where revenues are unlikely to climb anytime soon, reducing costs is the only viable road to profitability.   More significantly, the lower costs and better trained workforce could become a source of long-term competitive advantage.
• Owning your Market Space.  Up until 2009, virtually every law firm in the Am Law 200 was a market follower.  Drinker Biddle lacks to the cachet to be market leader, even in Philadelphia ($605,000 in FY 2008 PPP, which is #92 in the Am Law 100).  Thus, why not be a first mover where many competitors are likely to be too snobbish and bull-headed to follow your lead?  Based on upon my observations from FutureFirm, and my discussions with Indiana 1Ls, I predict that $105K + training will be magnet for many law students.  Keep in mind, more elite firms cannot even offer a firm start date. 
• Reality is Underrated.  To my mind, it is preferable to be a so-called "middle-market" firm with a sensible cost-structure and a contented client base than an so-called top-market firm with a bloated cost-structure and clients who don't want your junior associates to work on their matters.  Am Law 200 firms can and do sometimes implode, especially when the partnership goes into denial.  Drinker Biddle, to it credit, appears to have a plan.
• $105,000 and the Six-Figure Barrier.   It is unclear to me whether $105,000 is the optimal entry level salary for a lawyer who wants the very best training opportunities to launch one's career.  I suspect the optimal figure may be lower (e.g., $80,000 per year moving up to $120,000 to $200,000 within three years).  But I do think that dropping under the $100,000 barrier may have created perceptions problems for Drinker Biddle that may outweigh any short-term financial gains--e.g., Philly rivals mimicking Drinker's strategy, but coming in above the psychologically powerful six-figure barrier.  Yet, now, if some firms dicker around at $115,000, Drinker can move to that number next year with zero lost in market credibility, said figure being the so-called "prevailing rate."

Arguably, Drinker Biddle is the first Am Law 200 firm to not "waste a crisis."  It will be interesting to see how other firms respond.

Henderson on Big Firm Woes

Posted by Jeff Lipshaw

Brian Leiter started a comment thread on the status of big law firm hiring freezes, pay contractions, downsizing, and other indicia of the downturn.  Our Bill Henderson responded to Brian's call as follows:

I have been spending a lot of time talking to lawyers these days, with a wide representations geographically and in terms of traditional "white shoe" prestige.

In a nutshell, there is a fairly general consensus that the bubble has permanently burst on the traditional BigLaw model that produces the $160K salary structure. The high leverage firms in major markets are reeling the most, primarily because there is a lot less money being spend by GC's, and they are imposing brutal cost containment strategies. The problem is two-fold: 1) how does a firm de-leverage without damaging its "brand" (law firm managers are probably too conservative on this issue, but the plentiful layoffs provide plenty of cover right now)? and 2) how will the reduced pie be allocated in such a way that the biggest rainmakers don't leave the firm? Stated enough way, "will there be enough profits to keep these rainmakers at the firm?"

And right now, the extent of the BigLaw revenue drop is still unknown (only the last quarter of 2008 was miserable, but all of 2009 could be bleak). Since Profits = Revenues - Costs, cost containment is viewed as key in a way that has never before been seen by fancy corporate law firms.

Two senior lawyers I know with large Am Law firms, both of whom have management duties, told me "there are no jobs right now -- none. Everyone in over capacity. The deferment to January 2010 will likely to until September 2010." Obviously, this would have a huge impact on the Class of 2010, not to mention 2009.

The fact of the matter is that some firms are going to find that money to shore up profits not by reducing the pay of "service partners" (that is going to happen as well), but by reducing associate pay or, at a minimum, shift the risk of lackluster performance to the associates. In other words, $140K or $160K may be the starting pay, but every extra dollar above that will be "merit-based." Other firms are likely to move to much lower starting salaries to enable billing rates that permit bona fide associate training on the client's dime -- in many respects, a sane win-win solution.

Other conversations I have had recently suggest that regional firms are going to be the real winners. They are responsive and cost-effective, and GCs have zero ability to go over budget in the current environment. There is a general perception among many that national law school credentials are not required for motivated, high quality, cost-effective legal talent. At a minimum, regional firms are going to get the opportunity to do work that formerly went to DC, Chicago, NY, or West Coast powerhouses.

At the end of the day, the market is going to look a lot more heterogeneous, which is a good thing because it will reflect original thinking and innovation, rather than mindless copy-cat versions of the Cravath model. In addition, a brand name law school is not going to command the same market clout. Many, many GCs are less impressed by "brand" than by cost containment and results. Elite Big Law will survive, but the frothy Wall Street bubble that produced the extraordinary entry level market of 2002-2007 is over. Clients refuse -- REFUSE -- to have first year associates billed to their matters when those associates leave after two years. Numerous law firm partners have told me about natural experiments in which associate from regional law school A, who everyone underestimated, outperformed entitled and complacent associates from national law school B. The firms are now systematically studying these observations using the techniques of industrial psychology. It is very interesting stuff.

What I wonder about, having been twice a GC, is what's moving at the margins.  Bill is absolutely correct in perceiving that the major regional law firms provide great value relative to the financial center firms.  The reality is that (a) the top graduates from law schools that tend to fall below Brian Leiter's radar screen turn into crackerjack lawyers on a regular basis (hmm - I wonder whether there is a meaningful way to measure this?), and (b) there are plenty of "elite" school lawyers who make family or lifestyle choices not to go to NYC, Chicago, Washington, etc.  I remember the "Harvard, Michigan, Chicago" trained lawyers at the top firms in Detroit as being wholly the intellectual equal of their peers at Skadden, etc.

Having said that, my casual empiricism was that there was a fairly clear chasm between what one would send to NYC and what one would not.  In short, it tended to fall along "bet the company" or "not bet the company" lines.  Thinking as a former poacher, there's no question that my former partners and I at Dykema in Detroit were intellectually and professionally capable of handling, say, the Fiat/Chysler deal; it was far less likely that we would.  I just don't see that kind of work migrating significantly to the regional firms.  On the other hand, thinking as a former game-keeper, I'd have to wonder about the sense of a GC who sent "routine" work to the Wall Street firms.  To take an example, we used the Butler Snow firm out of all places, Jackson, Mississippi, for our tort litigation because they had some great trial lawyers, and were a bargain.  The real question then, if GCs are moving work from the biggies to the regionals, what is it?

Promises Promises

A complaint by an associate of a law firm that had claimed damages against individual partners based on allegedly false representations regarding his partnership prospects was reinstated by the New York Appellate Division for the First Judicial Department:

Order, Supreme Court, New York County (Bernard J. Fried, J.), entered August 1, 2008, which, to the extent appealed from as limited by the briefs, partially granted defendants' motion for summary judgment dismissing the complaint and denied plaintiff's motions for partial summary judgment and to strike defendant's motion, unanimously modified, on the law, to reinstate so much of the first cause of action as alleges that plaintiff was induced to remain an associate with defendant law firm by the individual defendants' materially false representations about the firm's partnership process, and otherwise affirmed, without costs.

Plaintiff's alleged reliance on the individual defendants' statements concerning the partnership process at the law firm and plaintiff's partnership prospects was not unreasonable as a matter of law. He was an associate with no experience in applying for partnership at the firm, the firm's partnership process was confidential, and defendants, as partners, were privy to information about the past practices of the firm's Executive Committee.

As to damages, if plaintiff proves his claims, he will be entitled to the difference between the immediately payable portion of the other firm's offer, such as the signing bonus, and the sum he received from defendant law firm immediately after agreeing to remain with defendant. His damages may not include any amount based on continued employment with the other firm, since the duration and success of his career with that firm are speculative.

(Mike Frisch)

New Enron Corporate Fiasco Reader Available

Posted by Jeff Lipshaw

The Foundation Press compilation, Enron and Other Corporate Fiascos:  The Corporate Scandal Reader, 2d Edition , edited by Nancy Rapoport (UNLV), Jeffrey Van Niel, and Bala Dharan (Rice) is now in print.  I'm pleased to say that Suffolk is well represented: Andy Perlman (of Legal Ethics Forum fame) and I both have pieces in it.  Andy's contribution is his Hofstra Law Review article, Unethical Obedience by Subordinate Attorneys:  Lessons from Social Psychology.  The editors were kind enough, or confused enough, to include two of my articles, the U. Toledo Law Review piece, Law as Rationalization:  Getting Beyond Reason to Business Ethics, and the Wayne Law Review piece, Sarbanes-Oxley, Jurisprudence, Game Theory, Insurance and Kant:  Toward a Moral Theory of Good Governance.  Brad Wendel (Cornell) also of LEF fame contributed Professionalism as Interpretation, originally in the Northwestern University Law Review.

Other contributors are John Coffee (Columbia), Cynthia Cooper (Cooper Consulting), Lynne Dallas (San Diego), Jose Gabilondo (Florida International), Malcolm Gladwell, Kent Greenfield (BC), Kristen Hays (Houston Chronicle), Katherine Kruse (UNLV), George Kuney (Tennessee), Donald Langevoort (Georgetown), David Luban (Georgetown), Jonathan Macey (Yale), Peter Margulies (Roger Williams), Colin Marks (St. Mary's), Geraldine Szott Moohr (Houston), Marleen O'Connor (Stetson), Frank Partnoy (San Diego), Robert Prentice (Texas), Robert Romano (Yale), Mark Sargent (Villanova), Steven Schwarcz (Duke), David Arthur Skeel (Penn), Christopher Whelan (Oxford, Visiting, Washington & Lee), Duane Windsor (Rice), and Randall Wray (UMKC).

Rumors of the Death of the Billable Hour Continue to Be Exaggerated

Posted by Jeff Lipshaw

I can't let it pass without comment when a front page story in the New York Times claims "Billable Hours Giving Ground at Law Firms."  I don't need to call my friend and empirical guru Bill Henderson to peg this as anecdotal, since the story itself concedes that explicitly.  Indeed, there are a number of truths in the story, not the least of which are (a) David Wilkins' prescient comment to the effect that billable hours show clients' revealed preferences, notwithstanding a lot of yapping to the contrary, and (b) the very open question whether lawyers are good enough business people to operate a business model in which they have to price according to another measure of value, and bear the operating risk of a cost base that exceeds the revenue.  (I acknowledge, by the way, this is generally a "Big Law" issue.)

The real question is whether, overall, the total price approximated by billable hours is an acceptable surrogate for the value to the client.  Bill is free to chime in with hard evidence, but my intuition as a former buyer and seller is that the overall acceptability of the surrogate is indeed revealed by the overwhelming instance of its use in the market.

There's no question that alternative fee arrangements work around the edges.  There's a lot of commodity work out there in which scrivening takes priority over analysis, risk assessment, or judgment, and that can occur even within assignments.  Even in a huge bet the company transaction, I could tell you how much, roughly, it ought to cost to produce the first draft of the merger agreement and supporting documents. 

But let's take an example of a real problem.  Back a few years ago, companies were looking for a way to make their pension plan obligations more determinate, but without going to defined contribution plans.  In a defined benefit plan, the company promises to pay the employee according to a formula that has to do with years of service and rate of pay.  It's the company's responsibility to make sure it has assets available to pay the pension, and it's the gap between the assets available and the obligations that cause the problems (i.e., investments go up and down, but the obligations don't!).  In a defined contribution plan, the company simply makes a contribution to the employee's account, usually in the form of a match to the employee's own contribution, as in a 401(k) plan.  In the cash balance plan, the company says:  "We know employees don't do a great job of managing their own 401(k) plans.  But we are getting killed by the actuarial uncertainty of making promises for benefits years in the future, and then leaving ourselves at risk on the investment side.  So here's our new promise:  we will put a set amount in your pension account every year, and we promise that it will grow at 5% a year.  We'll take the risk that we can't get a five percent return on the pension assets (which is what makes it a defined benefit plan)."

For somebody starting out, it doesn't make too much difference.  But if you are an older worker affected by the conversion, you will lose value, because even though your defined benefit plan gets vested and terminated, the reality is that most of the value in the traditional plan accrues in the last years of service.  The test case was in Illinois, and older employees at IBM got the federal district judge to agree that somehow the fact that older people didn't get as much benefit from the time value of money constituted discrimination among employees, which would violate ERISA.  The Seventh Circuit ultimately reversed it, but there were a lot of employee benefits lawyers giving advice to companies on cash balance plans for a number of years, given the uncertainty.

The first prong of my thesis is that this is precisely the kind of mixed law and business problem on which law firms assist clients all the time, and it's really difficult for either side to price the assignment by any method other than the billable hour.  The firm wants to be sure it has its ducks in a row, and so does the client.  Both tend to agree (implicitly) that the number of hours the lawyers spend doing that is a pretty good surrogate for the value to the client.  To return to the "bet the company" transaction, as I said, I can price certain aspects of the deal (what we used to call "activity-based billing") either as a seller or a buyer.  What is far more difficult to price is the service provided when, as always occurs, the s*** hits the fan, and we have an all-night negotiation, or the need for research into whether the tender offer will violate the best price rule, or some such issue.

The second prong of my thesis is that it's not clients who hate billable hours, but the lawyers themselves.  A Cravath partner said "this is the time to get rid of the billable hour," which might have been the lyrics to my theme song when I moved from a firm to a corporation twice.  I don't think it has anything to do with billable hours per se, but with the fact that being an outside lawyer is a tough and exhausting profession (one that usually happens to pay pretty well) very often entered into by smart people with lots of fungible smarts, but without any particular passion for what they are doing.  (Hence, the fact that well-paid lawyers are among the most prolific whiners in the charted universe!)  The problem isn't the billable hour, but the fact that the lawyer is only slightly more vested in the outcome or the business (other than by fear of failure) than the typical assembly line worker is in the car. 

As I've said before, I was a 1,800 hour biller as a law firm lawyer (to my everlasting shame, I actually hit it on the nose one year, provoking a lot of comment, and my response being if I was looking at it, do you think I'd actually hit it on the mark instead of going home five hours early or coming in for five hours over the weekend?)  My first year in the corporation I'm sure I worked what would have been the equivalent of 2,500 or 2,600 hours, but the fact that the time was means and the business (not just the deal) was the end stood in contrast to the other model, in which the outcomes are means, and the time is the end.  That is certainly the law firm business model! 

That's not to say that there aren't deal lawyers and trial lawyers and tax lawyers and environmental lawyers in big firms who don't love what they do.  There are, and for them, billable hours simply aren't an issue.

A truly radical approach to the practice would recognize that lawyers in big firms might well have more passion around the firm as a business if they had a meaningful stake in it as owners.  I'm not just speaking about associates.  There are a lot of nominal partners who can't say that they have any meaningful ownership commitment.

End of screed.