E=MC2 For In-House Counsel

Many disciplines often have a formula that describes a profound relationship in the discipline. These formulas are often very simple, but that does not detract from the fact that they describe a relationship that is so profound it finds many applications in the discipline that might otherwise be missed or incapable of explanation. In quantum mechanics it is Einstein’s statement of relativity that energy is equal to mass times the speed of light squared. In DC electricity it is I= E/R, current in amperes is equal to electro motive force in volts divided by resistance in ohms.

You may be surprised to learn that there is an equally profound formula available to in-house counsel that expresses such a simple, fundamental principle that once explained it seems trite. However, looks are deceiving. The value of the principle can not, in my opinion, be under estimated. The formula’s value is not in that expresses a relationship that many did not perceive as in Einstein’s statement of relativity, but it forces one to think about relationships and thus take a more critical structured look at one’s decision making than might otherwise have been the case.

The uses of the formula, and the underlying logic, or perhaps illogic it reveals in one’s decision making or policy implementation can be quite dramatic, and at times embarrassing. I must warn those who have no taste for discovering flaws in your analysis or hidden motives in one’s decision process-- STOP READING NOW. Knowledge of the formula can create discomfort for many—and for those who viewed the in-house career as more comfortable and less demanding than practice as out side counsel, this formula has the potential of changing that perception.

I do not know who first devised this formula—it was not me. My acquisition of knowledge of it is in my dim past, and I associate it with Professor Marc Galanter, whose creative, economic analysis of the profession is something I will address in future blogs. I think I may have added to the formula ever so slightly, by adding the subscript “v” to the TC value.

Ok, you have been patient; here it is SV=DO + TCv

What does it mean—SV is the settlement value of a case. DO is the value of the outcome of litigation discounted to present value for risk and TCv are variable transaction cost—that is a euphemism for legal fees. Variable means their variation can be substantially manipulated by the behavior of the opposing party.

Now, start thinking about how you can use this formula and share some of your ideas.

- Larry Salibra
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What About the Lose – Lose Part?

Steve is correct we are old friends, and spent most of our time prior to this exchange talking about sailing. Steve is also someone who can make the best counterpoint case, so the exchange should be quite interesting to you readers.

Steve’s position has two major flaws. The first is he offers no explanation why all the problems identified in the ACC piece can not be adequately addressed simply by being an effective provider of legal services. Do you need to be in a partnership to have the firm provide a competent litigator? I never was in a partnership with outside counsel and I never had a law firm provide a litigator that did not meet my expectations. They couldn’t. I had more litigation experience than most of their litigators; I would know in the first few minutes of conversation whether there was a problem. Relying on a faulty recommendation is an example of not making an independent assessment of the competence of the person you are hiring—not a result of not being in a partnership. Steve has not demonstrated why any of the problems identified by the ACC participants could not be adequately addressed by insuring that person making the purchasing decision has the skill and judgment to ascertain the quality and cost effectiveness of the service provider. If the service provider does a good job at a low cost they get hired again—what does a partnership add.

Second, the classic notion of a partnership requires not only sharing the profits, but also sharing the losses, and that is where the partnership model totally breaks down. Most in-house counsel would not embrace the notion that when the outside counsel goes they go as well. In fact none of the ACC participants who described this notion of a partnership even hinted at such a close connection. House counsel’s reward system and objectives are inherently inconsistent with the outside legal service provider. Their compensation should go up when the outside firm’s goes down either because they are providing more cost effective services in-house or they have become more effective in eliminating the need for costly outside services. When we eliminated what was becoming an epidemic of claims under the “scaffolding law” provision of the New York labor law by trying cases to verdict, and winning a sufficient number to make contingency litigation uneconomic, my compensation was not threatened, in fact my compensation went up and would continue higher to extent that our plant operations were less costly. If an outside, firm had done the same thing they would have to replace that stream of lucrative income with the same or larger source, and such replacement is not a realistic expectation. Trying to construct a win-win in this case is simply not possible.

So why do house counsel keep insisting on having their relationship with outside counsel described as a partnership?(It is ironic that the notion of a partnership with one’s outside law firm is in favor, when the idea that the traditional relationship in a partnership among members of law firms seems to be coming into question. Sidley and Austin was sued on behalf of partners at the firm, who claimed they were employees and their partnership was a de facto corporation. See: Equal Employment Opportunity Commission vs. Sidley Austin Brown & Wood, 2002 US App. LEXIS 22152, 90 Fair Employment Practice Cases 145 (BNA) October 24, 2002) That is a topic of another blog.

-Larry Salibra
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A Response to Establishing Partnerships . . .

I want to take serious issue with Larry Salibra’s premise that corporate law departments cannot establish effective partnerships with law firms. Larry’s (we are old friends and on a first name basis) views were expressed in response to an ACC Docket article, “Memo to Law Firms” in the April 2008 issue (p. 99) Is such a relationship easy to establish?? No. Can it be productive and mutually beneficial when done correctly? Yes.

It is trite but true that any partnership with an outside firm must be a “win-win” for both the corporate law department and the law firm. There must be a good working relationship which includes mutual respect between the principals in both organizations. The law firm “wins” by being guaranteed a level of work over an extended period that it would not otherwise have. The corporation benefits by paying lower fees, having someone at the firm who knows and understands the particular problems the company faces, and often having a firm that is more responsive than it would otherwise be. Often more important in an on-going relationship is that the firm lawyer knows and becomes well known to, and respected by, the corporate executives.

A firm that is a true partner of a corporation will also display a level of sensitivity to the corporation’s economic ups and downs. I knew partners at private law firms with whom I had relationships that stretched for more than a decade. In a pinch, I could call them and tell them I needed a help with a problem, and had no budget to pay them. And more often than not, they would provide the assistance I needed. I was, of course, sensitive to the fact that there needed to be a payback. When I was choosing between two firms for a paying project, the past assistance would be in the back of my mind.

Larry has promised to expand his views on partnering with private law firms. I will be looking over his shoulder.

-Steve Bokat
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Establishing a Partnership with Your Outside Law Firms- Do You Really Want Your Employer to Hear You Say That?

Recently, members of ACC and Fred Krebs attended the 15th Annual Marketing Partner Forum held by Hildebrandt. I have actually had some contact with that organization having published two articles in their journal, Strategies. These are the folks whose job it is to get you to spend your client’s money on their clients. The articles I wrote for them suggested ways that they might actually provide you with meaningful data so you could make informed choices based on factors that I believe that your clients expected, or at should be expecting—establishing a partnership with the service provider was not one of them.

The article “Memo to Law Firms: Make It A True Partnership”, ACC Docket (April 2008) has questionable validity in the relationship between inside and outside counsel. In future blogs I will examine a number of parameters around this issue which has dominated much of ACC activities since it’s founding—in fact was a large if not pivotal contributor to its founding.

Consider the following: Your Company is in the process of constructing a number of pivotal new manufacturing facilities. The CEO determines that the new facilities are so critical to the company’s success that someone must be hired on staff to oversee the construction. Two candidates immerge as potential choices, both are competent, admirable people and will fit into the corporate culture, but each brings a clear difference in their skills and management technique The first has direct experience in the construction process having had to make real decisions concerning the scheduling of subcontractors and insuring the quality of materials. He proposes to the CEO that he will manage the project by maintaining direct and comprehensive oversight of the contractors, exercising his independent judgment over each critical element of the construction and cost and he expects that the CEO will hold him solely and directly accountable for the success or failure of the projects.

The second candidate does not have the either practical experience or background in construction, but has a degree in business management from a prestigious business school and “construction management experience”. The candidate explains that the management technique he will use will result from his development of a partnership with the contractors, open channels of communication and formal budgeting.
When the CEO questions this candidate concerning how he views his position of accountability in this relationship he answers….

The role between inside and outside counsel has a long and tortured history. In future blogs I will review historical publications (which I have been using to develop an objective model to evaluate in-house counsel’s effectiveness in controlling legal expenses) and my numerous participations in forums sponsored by ACC and other organizations, to explore the complex agendas in the relationship between inside and outside counsel.

-Larry Salibra

Thinking Out Loud

In this first blog, I should introduce myself. I joined ACCA when it was a desk, a phone and Nancy Nord (the first executive director). She called me to tell me that the phone had now been installed, and Bob Banks had told her once it was working to call me and “start doing stuff.”

I have had an unusual career up to my retirement a couple of years ago, since I not only did all the things in-house counsel typically do; I also had a remarkably robust litigation career having tried jury cases across the country, argued before many appellate tribunals, including the United States Supreme Court, and well as a number of international tribunals. A number of my cases had garnered substantial media attention. Alcan’s challenge to the use of Worldwide Combined Apportionment had international attention. PIRG v MEI was used by a number of groups to impugn Sam Alito’s environmental credentials to be a Justice of the Supreme. Those who want to learn a little more see: “If you want things done right… Alcan Senior Counsel Keeps Litigation In House,” Inside Litigation , February 1999 , Vol. 13, no 2, pp 9-11 or “He’ll litigate you to death ”, National Law Journal, Monday , October 22, 2001

Over my career I developed a number of opinions and perspectives about the profession, and no doubt that is why Fred Krebs asked me to undertake the task of blogging. He will tell you to take what I have to say with a “grain of salt” and he is correct. What is important is that you think about what I have to say. What I hope to do is share with you what ACCA (Sorry, I am not against internationalizing the organization, in fact, I just has my Italian citizenship recognized; I just find ACC does not sound right), did for me. When we started on our efforts of advocacy on behalf of in-house counsel and in some cases on behalf of the profession generally, it forced me to step back and think about what I did everyday. This resulted in my beginning to challenge things that appeared to be unequivocally true by many.

In our profession things become accepted and fashionable. I am convinced that lawyers treat as fact anything that has been repeated three times. That is how it became fashionable to claim that alternative dispute resolution lowered legal costs, or that the Civil Justice Reform Act was going to solve all major litigation management issues or that value billing (I am not sure that really means) was going to solve the problem of escalating legal fees.

I have as you will come to realize a different take on a lot of these issues. I don’t think outside legal expenses are out of control if one wants to buy just cost effective legal services. The problem is that many in-house counsels are buying something else. The present legal system in the United States is in state of substantial disarray, insensitive to its primary role of serving the public, in many respects unaccountable, and far too controlled by special interests, the judiciary being one of them.

Our profession has a serious detrimental effect on its members; practitioners are ill-equipped by out-dated legal educational system unable to effectively train lawyers capable of efficiently delivering meaningful services to client and has compensated by substituting form for substance.

I will be addressing many of these views in the forthcoming posts—the first will be this notion of partnering with outside firms—is it real.

-Larry Salibra

The New Era of Blogging

ACC is excited to bring two new bloggers into the mix. Stay tuned for their thoughts and opinions about all things in-house.