Legal Profession Blog

ABA Ethics Opinion On Communicating With Inside Counsel to a Represented Corporation (It's OK), + More on Restrictive Covenants in Retirement Pacts

Posted by Alan Childress

This morning's ABA email newsletter YourABA, amid a flurry of articles [here in PDF] about the ABA's mid-year meeting in Miami, also links to summaries of two recent Ethics Opinions it has issued.  [The PDF above also includes this Eye on Ethics section.]  One opinion deals with the Model Rule 4.2 dilemma of prohibited communications with the opposing client where the lawyer wishes to communicate with in-house counsel to a corporation or organization that is otherwise represented by outside counsel.  The opinion, with related cautions about care in communicating with the client in this position and honoring a request not to communicate that way, finds that the contact is permissible.  It reasons that the policies of protecting clients from pressure and harmful admissions do not apply to the in-house counsel in that situation.  The formal opinion is linked here.

The other opinion deals with restrictive covenants in lawyer retirement agreements, related to a topic [when New Jersey ruled on a similar matter of non-competes] on which Jeff previously posted and analyzed here.  It appears that the ABA position is more generally approving of such agreements than had been New Jersey [see previous Law.com story on Jersey here], at least in the context of in-house counsel working for a competitor after leaving the company.  On a quick reading this morning, I'd say that the ABA opinion solves some of the "puzzlement" that Jeff expressed with the New Jersey ruling -- and shows a more realistic place for lawyers in the grand scheme of things as subject to employment contracts to some extent as real people are.  But there are obvious differences between the ABA focus on retirement agreements and qualifications that the retirement be real, as opposed to non-competes where the in-house lawyer contemplates further employment after leaving the company.

More on lawyers & CEOs

Posted by Nancy Rapoport.

Jeff Lipshaw hits the nail on the head (sorry about the Home Depot pun) in his post, More on Lawyers as Leaders.  In the Wall Street Journal article on lawyers & CEOs, I was happy about one particular omission.  I'm glad that Alan Murray, who wrote the column, didn't trot out the hoary old saw about how law schools teach law students to "think like lawyers," as if other professions didn't also teach ways to understand and dissect arguments, think logically, and argue convincingly.  I've written on this particular brand of arrogance before.  More below....

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More on Lawyers as Leaders

Posted by Jeff Lipshaw

Several days ago, Alan invited me to comment on Ben Heineman's lecture on lawyers as leaders.  I think it's particularly appropriate to do so in view of Alan Murray's column in the Wall Street Journal this morning "When Firms Turn to Lawyers."

The subject is the recent succession of two lawyers, both of whom happen to have been Ben Heineman proteges from GE, who have ascended to the top job in major corporations in recent weeks:  Frank Blake (right) replacing Bob Nardelli at The Home Depot, and Jeff Kindler replacing Hank McKinnell at Pfizer.  I think something has gotten buried or conflated by the circumstance that both of these lawyers have replaced CEOs whose severance packages have inflamed shareholder activists and business journalists.

Murray's thesis is that these companies have turned to lawyers because they are in trouble:  "Lawyers are trained to foresee risk, making them well-suited for times of trouble.  Perhaps more important, they understand what it means to be a fiduciary, acting in trust on someone else's behalf.  Messrs. Nardelli and McKinnell clearly failed to grasp that basic tenet of leadership."

I think the comment is, in some ways, a cheap shot, but not at Nardelli and McKinnell. (I am less outraged than many by the severance packages, but that is another subject for another time.)

It's something of an insult to Blake and Kindler to suggest they would take the reins of two huge corporations with their primary skills being their ability to bail water out of the sinking corporate canoe.  Indeed, the boards of the respective companies must have thought so much of their abilities that it would counteract the natural presumption, embodied in Murray's piece, that something is sorely amiss for a LAWYER to attain a position of leadership.  A personal note:  back in 1994 or so, when we were looking to institute major six sigma productivity changes within AlliedSignal Automotive, a senior executive was to be the "champion" (that's corporate lingo for a person who doesn't really do the work, but who acts as visionary, spokesperson, cheerleader and barrier-remover).  I volunteered, and was told by our division president, who had previously been the corporation's chief financial officer, that the business would think it odd and troubling that a non-operational type like him had appointed not only a non-operational type like me, but a LAWYER no less, to this critical position.  But he did appreciate my cojones.

More below the fold.

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New DaimlerChrysler GC

DaimlerChrysler has announced that its long time general counsel, Bill O'Brien, is retiring, and his successor will be Gerd Becht, who is described over at Law.com as follows:

Becht, who is German, spent much of his career with multinational companies, including 13 years at General Motors Europe AG, three years at Banque Paribas and eight years at AEG Aktiengesellschaft. Going to DaimlerChrysler made sense: "If you look at my résumé, there's a strong emphasis on international legal education and business alignment."

Alan Childress is our resident scholar on comparative legal professions, and my observations are anecdotal, but I would have been shocked to have seen this fifteen years ago when I was heavily involved in negotiating deals with German companies.  My impression then was that continental lawyers were more academically inclined than business-oriented, removed from the business people themselves, and viewed by their clients essentially as scriveners, not counselors.  While there were exceptions (the general counsel of Robert Bosch GmbH, Dieter Berg, was a dynamite lawyer under anybody's standards), Becht's view of cross-cultural and cross-functional linkage was certainly not the norm in European legal circles.

In the meantime, oh Lord, won't you buy me a Mercedes-Benz?

[Jeff Lipshaw]

Cancer Causes Smoking: The Post Hoc Error and Real People's Reputations

Posted by Alan Childress

Jeff did not ask for elaboration on today's post on Amtrak billing, but here is my $ two one-hundredths (where's the cents sign on this thing?).  I enjoy a good correlation error. I always thought the CEOs of tobacco companies should be arguing that cancer causes smoking.  At least surely there is some expert on retainer who would prove that even if smoking correlates with cancer, that's not proof of causation--maybe the same gene that causes cancer carries a desire to smoke!  My favorite pop culture example of Post Hoc, Ergo Propter Hoc error (in a West Wing season-one episode of the same name, quoted below the fold):  Jeb Bartlet did not lose Texas just because he made a joke about big hats.

I think Jeff's caution or insight is especially important because we are dealing with real humans here who have public reputations:  the fired in-house lawyers who are now being treated as if they are part of a clean-up from an "ethics scandal" when, to me, no one has yet shown any specific ethical breach like overbilling.   

It is quite possible they were let go as part of a routine management change.  I think it more likely this is connected to the swirling ethics concerns and rumors, but I don't assume it is because they did anything wrong.  I assume, so far and until some proof otherwise, appearing to clean house is the politically (and public relationsally) expedient thing to do right now.  The GCs may be sacrificial lambs, scapegoats, or other animal offerings to a nationally enquiring press and Congress.

In the original reports, such as those we linked here, the basic accusations seemed like many things were being presented as scandalous when they may not be--and many look exactly like how lawyers work in the non-choochoo world.  One instance of that may be Jeff's detailed example of "block billing," which may be at its worst a breach of some billing arrangement in the retainer, and possibly federal regulations of billing specificity--if Amtrak is subject to the government-client ones, but they were negotiating about that all along.  But it does not by itself mean overcharging. Indeed, if I were going to overbill this particular client, I would be fastidious about following their procedural requirements and just specify a lot of made-up work--I would not fall into the lapse of writing my time the way I do all the other clients.  [My if-I-were-overbilling conceit with apologies to O.J.]

That's Jeff's example, and it is a good one I think, because my own experience in billing clients with two big [reputable] law firms is in line with his:  we usually did block billing and everyone was fine with it as long as the time was real.  I'd add that we had occasional banking or insurance clients who wanted more specificity and line-itemization (maybe more often than Jeff's 99% suggests), and we tried to comply.  But the inevitable lapses were never seen as unethical or sneaky; they led to calls for reminders to be clearer and of course to client renegotiations--perhaps even excuses but hey we asked for it--about write-offs.  The only scandal would be a possible write-off of actually-earned time and some client-relations hiccups.

My own example of the possibly-false scandal in the original reports is their suggestion of something awry from the fact that some of the in-house counsel came from the very law firms that were now doing Amtrak work.  Imagine that!  How cozy!!  I am shocked, shocked to find that--you get it.  Not only is that uber-typical in the trackless world (yet here it was presented as if it is by itself a conflict of interest and unethical). But indeed the changing-roles relationship has its own built-in checks:  Jeff has previously argued, in different words and citing an empirical article that supports the point, that there is no more virulent anti-smoker than a reformed smoker. 

Without more, these Amtrak lawyers don't deserve to be treated as if there is something inherently wrong with the fact that they left a law firm to go in-house to the firm's corporate client--and then eventually accepted and paid some time sheets that did not separately itemize each legal task but instead grouped them with the same level of billing detail as if they had been on separate lines.

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Amtrak Changes: Post Hoc Ergo Propter Hoc?

I commented on the so-called "block billing" matter a couple weeks ago:  the congressional investigation of the possibility that Amtrak was paying legal bills that looked a lot like 99.9998% of the legal bills sent to major corporations.  Law.com is now reporting that the new CEO at Amtrak has replaced the general counsel along with most of the rest of the senior management team.  "New Amtrak President Alex Kummant engineered a major management restructuring Monday, firing five top officials and naming Eleanor Acheson [right], assistant attorney general for policy development under President Bill Clinton, as the passenger rail's general counsel."

Of course, the news stories have linked the two.  Note the Law.com headline: 

Amtrak Fires Five in Midst of Congressional Probe

That points out the need, particularly in our information age, not to believe everything you read.  I can't help but think the linkage to block billing is a case of the post hoc ergo propter hoc fallacy.  And the response from Amtrak seems plausible to me:

Amtrak spokesman Cliff Black says the changes were not a response to the inspector general's report on its legal department. "I can't associate it directly with the report. Corporate reorganizations are common under new CEOs. This is no different than that of any other large corporation under new leadership."

What is more interesting are the career bona fides of this new general counsel for a major business corporation.  According to Law.com, Acheson headed the Justice Department office responsible for reviewing federal judgeship nominees under Clinton, and since then has been a government affairs lawyer for a prominent public interest group.  Worthy pursuits all, and I'm sure Acheson is a crackerjack lawyer, but this hire suggests the critical legal job at Amtrak is about lobbying, not business.

[Jeff Lipshaw]

How To Stump A Corporate Lawyer

The cartoon of "how to stump a corporate lawyer" by Wiley Miller (Non Sequitur), reprinted on the GoComics site here, is funny enough, but actually does not make a lot of sense to me.  Maybe it would be a good PR essay question, with just "Discuss."  It was linked on the QuizLaw blog.  [Alan Childress]

The Availability Heuristic Strikes Again: Generalissimo Francisco Franco is Still Dead,* But May Have Backdated Some Options

This is the "availability heuristic."  You are in a rush to get some place.  It seems like you hit every red light.  You get to the destination, and say "my god, I hit every freaking light on the way over here."  In fact, you didn't hit lights any more frequently than you normally do, but because you were focusing on it, it seemed like you did.  I have already ranted as to the way in which scholars are apparently no less immune than others to the availability heuristic, at least when it comes to corporate governance.

The option backdating issue is a perfect example.  I'm not condoning backdating for a minute.  I don't know whether it's right that a general counsel takes the fall for option backdating, but I'm on record as saying that it was either wrong or colossally bad judgment for a GC to listen to somebody propose backdating an option grant and say "well, yes, there's an argument in favor of that...." (Or in Nixonian terms, we could raise $1,000,000 in hush money, but it would be wrong, wink wink.)

And, of course, it's not news to say "952,788 citizens here in Metropolis were not the victims of crime today," or "Paul Newman and Joanne Woodward remain happily married."  So news itself plays to the availability heuristic.  But we owe it to our constituencies as scholars rather than shills (for any position) at least to struggle with whether it's our theory or the facts that are the dog and the tail and which is doing the wagging.

Joann S. Lublin, who I think is a good reporter over at the Wall Street Journal on career matters, has a story today on several companies that have announced they will only issue options at a set time every time.  What a shock!  As I have pointed out, there are over 9,000 public companies in the U.S., and as Ms. Lublin observes, "There's no precise count of how many companies unaffected by the scandal are altering option-grant policies.  But several executive-pay specialists estimate that more than two dozen [ed. note:  two dozen equals 24 which is something like one quarter of one percent of all public companies] have acted so far.  Option-backdating has sparked regulatory investigations at more than 130 concerns [ed. note, let's see, that's 1.5% or so] . . . ."

Two additional points.  Apparently the Council of Institutional Investors is doing some empirical work to find how pervasive this problem by writing to the 1,500 biggest firms by market capitalization, and asking (it seems to me the academic paper posted on the CII website is fraught with correlation versus causation issues, and hence suspect, but at least you can point out its flaws!).  In the kind of anecdotal evidence that passes for learning in this area, the letter from CII provoked Becton Dickinson, a large cap pharmaceutical company, to write down what had always been a perfectly legal and common sense, but informal, practice of issuing option grants on an annual basis.

[Jeff Lipshaw]

*I realize I may be dating myself with this particular reference to the Saturday Night Live Weekend Update.

GCs, Not Just CEOs, All Over Backdating Options Fallout

This morning's Law.com's "In-House Counsel" reports, "Stock Option Scandals Take Down a Record Number of GCs."  Says the story, "These legal chiefs constitute about a quarter of the 40-plus executives who have lost their jobs in the steadily expanding options controversy. Indeed, backdating has forced out as many GCs as CEOs."  While "the casualty list will only grow," the story adds that "in some cases, the GC appears to have been little more than a fall guy."  More bad news for GCs:  "At least seven ... have been named as defendants in shareholder derivative actions." 

And the Wall Street Journal today, here, adds Home Depot to the list of companies reporting, via internal investigation, "routine" backdating, from 1981-2000.  [Alan Childress]

Unlicensed General Counsel Should Not Lose the Client Its Privilege

That's the perfectly reasonable position taken by this op-ed piece from the National Law Journal (and Law.com), echoing as well Jeff's earlier call to take MR 5.5(d) seriously on its common-sense flexibility regarding corporate counsel in good standing with some state's bar but not licensed in the corporation's home state.  The writers note that 5.5(d) "would largely cure these problems but it has not yet been uniformly implemented."  [Alan Childress]

First Circuit Ruling on Indemnifying Exec's Defense Costs May Skew Incentives

Posted by Alan Childress

A recent First Circuit ruling allows a corporation to recoup the massive legal fees it had paid (over an indemnity agreement under Delaware law) to finance an executive to defend himself against insider trading, fraud, or similar charges--if ultimately he is found to have acted in bad faith.  See the Law.com story here.  Ultimately the exec (a director) owes his old company a million dollars for an offense in which he was civilly fined $70k.

At first blush, no one defends an exec 'rewarded' for acting in bad faith by paying his or her fat cat lawyers.  It does not seems fair that he or she gets the company defense.  But run-of-the-mill insurance contracts with a duty to defend built-in are really just indemnification agreements too.  Is anyone suggesting that each of us pay Allstate back after we lose the auto accident case for which it paid our defense?  Well, you say, this one acted in bad faith, but we don't when we run into a light pole.  Yes, but all sorts of insurance policies which cover bad faith--where allowed to--provide for defense costs.  I have not heard of paying back the insurer after losing such cases, if the policy is valid and covers the loss and defense.  It does not appear that the First Circuit is ruling that it is invalid as a public policy matter to contract for such defense.  The case then ultimately turns on this particular indemnity clause and the "out" it gave the corporation when the exec lost his civil case.  (in that sense it may just be fairly narrow and consistent with rulings in Delaware courts over Disney on which Jeff has posted.) But I fear it will not be read in that limited way.

This kind of ruling, while focusing on an unsympathetic party, ultimately creates rules for the rest of us.  It is one more notch in the expanding belt of disincentives to get smart people (who can do basic risk analysis) to be directors.  It also skews the risk analysis an innocent accused must do when presented with charges, a settlement offer, and the prospect of a bonus fine of one million dollars (past the smaller substantive exposure) if one rolls the dice and loses.  Wouldn't the smart innocent person just settle every time and swallow the pretense of guilt but no finding of bad faith rather than risk ruination with a formal guilty finding?  Or if the settlement or plea is proof of bad faith, so that settling equals a massive debt to the employer, wouldn't everyone innocent or not have to roll the dice, precluding rational settlement?  The implications are not just about sympathy for the bad corporate apple.

SOX Compliance May Be Growth Niche for Mid-Size and Smaller Law Firms

That's the astute observation of Tom Kane on his Legal Marketing Blog, following on a study that shows compliance with Sarbanes-Oxley is the corporate world's new #1 expressed headache and need.  Fully 86% of companies surveyed rated SOX as their main concern.  That leaves room for one or two attorneys in even smaller firms to master the field and create niche marketing in an area of growth, Kane reasons. 
        Previously and elsewhere (here, here, and here), it has been noted that publicized SEC measures promising to ease compliance costs are likely to be half steps, at most.  So Kane's prediction and advice does not seem undermined even by recent publicity suggesting--perhaps mostly as wishful thinking--that there's a more flexible SOX in the future.   [Alan Childress]

Antinomies and the Life of a Corporate Lawyer

Posted by Jeff Lipshaw

I will work with the Wikipedia definition of an antinomy as developed in Kant's work:  "the equally rational but contradictory results of applying to the universe of pure thought the categories or criteria of reason proper to the universe of sensible perception."  So, for example, starting from the same empirical data, pure reason is capable of deducing the thesis that the universe has a beginning point, and the antithesis, that it does not.  Or reason is capable of deducing the thesis that causality means everything is determined, and the antithesis, that we have free will.

And so we find the corporate lawyer and the corporate executive faced with such antimonies, as pointed out in an eminently sensible way by Joe Nocera in the New York Times (November 11, Business Today) under the headline "The Paradoxes of Business as Do-Gooders."  The occasion is the annual Business for Social Responsibility conference in New York this weekend, at which companies like Starbucks, Time Warner, Chevron, Pfizer, and others are explaining why being good corporate citizens makes business sense.

Nocera observes, sensibly, that it is much easier to be a good citizen in a profitable company.  Indeed, that's consistent with the observation that environmentalism is a luxury of the developed countries; you don't worry too much about externalities when you are struggling just to house and feed people.  But the paradoxes and antinomies of the real world, faced by corporate lawyers and executives every day, are hardly the stuff of a solid, non-contradictory theory of human behavior.  So from an empirical base, one side, represented in Nocera's article by Isaac Post (right) of the Competitive Enterprise Institute, says that corporate social responsibility "is a misguided attempt by a subcategory of business managers to deal with the crisis of corporate legitimacy."  Russell Roberts, an economist at George Mason University, adds "Doesn't it make sense to have companies do what they do best, make good products at fair prices, and then let consumers use the savings for the charity of their choice?"

But the nature of antinomy is that you can't win.  According to Nocera, "[f]rom the left, the essential criticism of corporate social responsibility is that it is little more than window dressing, intended to give companies a good name without having to back it up with real deeds."  Ah, would that the world were simple enough to explain by resort to the fruits of pure reason, notwithstanding that the same set of circumstances allows us to reason to wholly antithetical conclusions.

Last night, I had the pleasure of speaking for an hour, mainly answering questions about the life of a corporate lawyer, to the mergers and acquisition class taught by Professor Antony Page (left) at the Indiana University School of Law - Indianapolis.   The central question was - what does a general counsel do during an acquisition?  My response was that the general counsel has to understand the business deal and its importance to the company well enough to overrule high-powered Wall Street lawyers who are recommending that such-and-such a provision really should go into the agreement "to cover you just in case this-and-that happens," but also at the same time to understand when the language of a particular provision is important enough to stop the deal in its tracks.  That is the antimony of deal lawyering, because from the center of any such problem, you can always argue your way to either antithetical conclusion.  And so the students asked:  "how do you know which way to go?"  My only response is that of the Geoffrey Rush character in Shakespeare in Love who explained why everything in the hectic production of a play always works out, despite that "the natural condition [of the theater business] is one of insurmountable obstacles on the road to imminent disaster."

"I don't know; it's a mystery."

Zealous Advocacy Meets Fantasia: A Response to Professor Donohue

Posted by Jeff Lipshaw

John J. Donohue III (Yale) has a column in The Economist's Voice (Berkeley Electronic Press) entitled The Discretion of Judges and Corporate Executives:  An Insider's View of the Disney Case.  To be accurate, Professor Donohue's "insider" status derives from the fact that he was an expert witness for the plaintiff shareholders in the shareholder derivative litigation claiming that Disney officers and directors breached their fiduciary duties and wasted corporate assets.  So it turns out Professor Donohue wasn't a fly on the wall when Michael Eisner and his general counsel, Sanford Litvack, were trying to decide what to do about the very highly paid executive Disney had recently hired, and who was turning out to be one of the great hiring errors in recent corporate history.  Like the rest of us, Professor Donohue was an after-the-fact commentator on the cold record of documents and depositions, taking (hey, that's what we're paid to do) a pot shot, albeit learned, at their decision.

It's pretty clear Professor Donohue does not hold himself out as an expert on Delaware corporate law; he has a distinguished background as a legal academic and economist, and according to his biography on the Yale Law School website "has used large-scale statistical studies to estimate the impact of law and public policy in a wide range of areas from civil rights and employment discrimination law to school funding and crime control. Before joining Yale Law School, he was a chaired professor at both Northwestern Law School and Stanford Law School. He recently published Employment Discrimination: Law and Theory." 

A real insider might have been somebody like Senator George Mitchell (right) who was on the board of Disney at the time, and who took over as the interim chairman of Disney when the board relieved Michael Eisner of that title.

Extended reaction below the fold.

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"There's No Gamekeeper Like an Ex-Poacher:" Schwarcz on In-House Counsel

Posted by Jeff Lipshaw

Steven Schwarcz (Duke) continues his marvelous series of empirical studies on lawyering with To Make or To Buy:  In-House Lawyering and Value Creation, just posted on SSRN.  Here is the abstract:

In recent years, companies have been shifting much of their transactional legal work from outside law firms to in-house lawyers, and some large companies now staff transactions almost exclusively in-house. Although this transformation redefines the very nature of the business lawyer, scholars have largely ignored it. This article seeks to remedy that omission, using empirical evidence as well as economic theory to help explain why in-house lawyers are taking over, and whether they are likely to continue to take over, these functions and roles of outside lawyers. The findings are surprising, suggesting that in-house lawyers may now be performing as high quality work as outside lawyers and that the reputational value of outside lawyers may be significantly diminishing.

The quote in the headline of this post does not appear in Professor Schwarcz's paper.  That is a line I used (and I lifted it from somebody else) in an interview several years ago with a reporter from Crain's Detroit Business, when I was the GC of a large division of a large company, recently recruited from partnership in a big law firm.  It was precisely what you don't say if you don't want to be quoted.  As you might imagine, it endeared me no end to my former partners at Prestigious But Regional Large Law Firm, who nevertheless stifled their bile for as long as we kept sending business their way.

Oh, by the way, the statement was true, and Professor Schwarcz's survey results bear that out.

I Coulda Been a Professa....*

Posted by Jeff Lipshaw

Imagine you are the chair of a Faculty Appointments Committee some time back in the mid-1970s, and this is the C.V. that comes across your desk:  Harvard College, magna cum laude, Harvard Law School (winner of the Fay Diploma for graduating first in the class and Articles Editor of the Law Review), clerkships with Irving R. Kaufman on the Second Circuit and Supreme Court Justice William O. Douglas, then two years as Counsel to the Watergate Special Prosecutor, Archibald Cox.  I suppose nowadays you'd want to see an article or two published as well.

This, of course, was the early resume of Peter Kreindler, the current Senior Vice President & General Counsel of Honeywell International, who hired me (a long time ago when Honeywell was AlliedSignal) and was my boss for five years.  From the Watergate Special Prosecutor's Office, Peter went on to partnerships at Hughes Hubbard & Reed and Arnold & Porter before being hired at AlliedSignal by one of the great and charismatic business leaders of the last thirty years, Larry Bossidy. 

I thought of Peter when I saw Brian Leiter's note (and Avery Katz's update) on one of every twelve Yale Law School alumni being a law professor.  It made me wonder about all of the alums of the law-professor-producing schools who, like Peter, it seems to me, were probably minimally qualified to be law professors (note the sarcasm, please) but chose other careers.  How many are there?  Of the law review editors/Order of the Coif types at Harvard, Stanford, Chicago, Yale, etc., what percentage go on to be law professors?  Of those who do not, are there particular kinds of practice to whom they tend to gravitate?  Do they ever have second thoughts about the road not taken?  Do they stay in touch with issues on the academic side of the profession?  How do they see the subject of curricular reform of the kind discussed over at Money Law?

By the way, were it not for the fact that Peter is a great human being, having him as my direct supervisor for five years would have been (well, actually it was anyway) the most intimidating experience of my life.  I have never met anybody in private practice, corporate life, or the academy, whose CPU ran faster than Peter's.  The sheer speed at which he could deconstruct and reconstruct a problem was staggering.  Peter's law department was also a school of sorts for general counsels:  his former deputies moved on to be the top lawyers at Perkin-Elmer, FMC, American Standard, Medtronic, Visteon, Raytheon and others.

*HT to Marlon Brando and Elia Kazan

Pine Tar, Zealous Advocacy and the Disney Case - More on the Ethics of Exercising One's Rights

Posted by Jeff Lipshaw

A few days ago, I commented on the Kenny Rogers-Tony LaRussa pine tar (or clump of dirt) incident in Game 2 of the World Series.  Steve Lubet (Northwestern and Legal Ethics Forum) commented: 

Let's assume that Larussa did make a spontaneous decision to defer to his own sense of justice as opposed to the positive law. The problem is that he wasn't exactly playing poker with his own money. He was acting as the employee of an organization, managing a team of professional athletes. Everyone involved has a serious stake in the outcome of the series, financial and reputational. what would give Larussa -- a lawyer, after all -- the right to privilege his own sense of justice over the positive law, in a situation where others (whom he did not consult) may suffer the consequences?

Andrew Perlman (left, Suffolk) also over at Legal Ethics Forum has advanced the discussion with an analogy to the professional requirements of zealous advocacy.   I was a litigator for ten years before I moved into the corporate and M&A world, but one of my aphorisms of practice was "every time I thought I was either sublimely clever in pressing a rule-based advantage, it turned around to kick me in the ass."  But that's me, and it could well be I just wasn't very clever.

Yesterday, in BE class, we launched into teaching the Delaware Supreme Court opinion in Brehm v. Eisner, better known as the Disney shareholder lawsuit, concerning the compensation paid to Michael Ovitz upon termination after his fourteen month stint as Disney's president.  (I confess:  at one point, I couldn't help it and this came out:  "certain as the sun, rising in the east, tale as old as time, Beauty and the Beast,"* at which point I teared up, sighed deeply, and moved on.) 

One of the heretofore little-discussed professional issues was Sanford Litvack's conclusion that trying to assert that Ovitz could be terminated for cause was a "no-brainer:"  there was simply no basis for bringing Ovitz's conduct, even if obnoxious or insubordinate, within the clause.  And mind you, this was no small decision:  fighting the "non-fault termination" aspect of the contract could well have saved Disney a portion of that $140 million in severance cost.  Indeed, one of the plaintiffs' theories was that Litvack and Eisner breached the fiduciary duty of care by not asserting the claim.

Under the Lubet view, or under Andrew's zealous advocacy view, if Litvack concluded that Disney could pass Rule 11 muster (or the straight face test), did he have an obligation, moral or otherwise, to all the uninformed stakeholders (i.e. the shareholders) to pursue the claim, even if as nothing more than bludgeon to knock ten or twenty or thirty million dollars off the pay-out?  The similarity between the LaRussa judgment and the Litvack judgment, it seems to me, is the extent to which you are willing to employ EVERY means at your disposal to win (no pun intended - but playing hardball).

That was always the toughest kind of call for me as a general counsel.  Like Litvack, I would conclude that contesting a particular issue was a "no brainer" because in my judgment we had no case.  But I always wondered in those instances:  was I too nice?  or too ethical?  Somebody could cobble together enough of a position to cause some grief for the other side (because it seemed like people were always taking marginally ethical positions against us, and finding lawyers who would sign the pleadings!)  And a distinction as between LaRussa and Litvack, perhaps, that the latter disclosed his view to his principals but the former didn't, doesn't hold - because if I reached a legal conclusion and expressed it to the board, it was the rare case that anybody would question it.  In essence, my sense of ethics or my moral judgment, as the GC, became the moral judgment of the corporation.  I am sure it was the same for Litvack (well, maybe not - the case says Eisner checked with everybody!)

*Trivia bonus:  the voice of Lumiere, the singing candlestick ("Be Our Guest"), was Jerry Orbach, better known as Lenny Briscoe, the long-time detective on Law & Order.

"Them": Availability Heuristics and the Scholarship of Corporate Demons

Yesterday in my Business Enterprises I class, we moved into the fiduciary duties of corporate directors, a subject close to my heart, having counseled a public company board from 1999 to 2005, a period that spanned the burst of the Internet bubble, the Enron fiasco and its ilk, the passage of Sarbanes-Oxley, and the New York Stock Exchange's adoption of the governance standards in it revised listing requirements.  During that period, we did an partial IPO of an wholly-owned subsidiary, resulting in a controlled public company listed on NASDAQ, and later acted on behalf of all of the shareholders of the subsidiary to sell it in a cash-out merger.  We also pondered significant strategic redirection, saw the resignation of a CEO, and then merged the company out of existence.

So, as I observed to my class, I have perhaps a harder time seeing corporate directors as "them," and prefer to think not of directors as demons, or even as Richard Posner's faceless and automatonic "rational frogs," but as real human beings faced with difficult choices, and without the benefit of the hindsight that either litigators or law professors bring to the table.  Perhaps that is why I was taken with the even-handed approach of Professors Rasmussen and Baird in the article I highlighted several days ago.  I also suggested to the class, whether someday they are in the position of counseling, defending, or suing directors, they would be well served to appreciate the complexity of the ex ante decisions (whether or not it is a calculation) facing corporate directors.  Indeed, my pedagogical point is that this is at least some basis for the deference that courts give to directors, absent breach of the duties of care and loyalty, for actions taken in good faith under the business judgment rule.

Should we look at corporate directors with the glass half full or half empty?  I confess, having watched a white male conservative Republican director (one of our curmudgeons) argue that our non-discrimination policy should include a ban on discrimination on account of sexual orientation, and similar displays of independent-mindedness against type on a fairly regular occasion, I incline toward the former.  But I cannot deny the reality of what seems to me good judgment gone awry in what viscerally seems to be a non de minimis number of backdating cases.  (I have already expressed my view on that issue:  I would have criticized a general counsel who did not go beyond the strictly legal in pointing out the issues of truth-telling - or its opposite - in undertaking the practice.)

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Teaching Future Board Counselors - World View?

Check back over the next few days as I will be blogging - in the Straddling series - on teaching corporate law to future counselors to corporate boards.  I am just now getting to Van Gorkom, Disney, Caremark, etc. in my syllabus, and I've been thinking about the world view implicit in The Prime Directive, by Rasmussen & Baird, on which I have commented previously, and that in The Unimportance of Being Earnest:  Reflections on Director Liability and Good Faith, recently posted on SSRN by Elizabeth Nowicki (I listened to Professor Nowicki give an overview of this paper at the Law & Society Annual Meeting in July as well).

To come:  reflections from my present academic perch on the good old days when I was counseling a corporate board. [Jeff Lipshaw]