Trouble in River City Episode 5: Confidence Restored

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When I walked into my GC’s office, she saw the signs of concern inscribed across my expression. “Superstar ?”, she asked without hesitation. “Yes”, I said. “He wants me to economically model our litigation,” the words came spilling out without any apparent exercise of volition on my part. “I have never heard of economically modeling litigation; I went to one of the best law schools in the country and I have never heard of it. I have a lot of CLE, I have simply never heard of it. I heard of ADR, mediation, arbitration, third party neutrals, and I got A’s in civil procedure and federal jurisdiction—I have simply never heard of economically modeling cases”.

“Don’t worry,” she said, “I haven’t either”. “But I have heard that since Superstar has come back from the MBA program at this local University, he has appeared to have acquired a number of new notions about the law and lawyers—it is a passing fad. These unusual ideas have not made their way into any of the well known, established schools. Moreover, I am sure that there is a simple explanation that we can get from Professor Prestige, at my law school. He wrote the authoritative case book on civil procedure. I have remained in touch and we can call him and get an explanation; I will help you prepare your response to Superstar.”

Professor Prestige had a national reputation. He was often a talking face on TV and sought out by the media to opine on noteworthy litigation. His case book, The Essentials of Civil Procedure, had become the standard text around the country and was in its fourth addition.

My CG placed a conference call. “Nonsense,” said Professor Prestige, “Economically modeling cases—never heard of such a thing.” The imperial tone of his response gave one a sense of confidence. As the conversation was ending, Professor Prestige, was complementing my GC on her career: “Well Ms. Ruddock (he was known for addressing everyone in this formal manner; it distanced him from his students) you have had quite a successful career. If you are near the Law School be sure to stop by; we would love to have you talk to the students.”

As the conversation was ending, I said automatically, “Professor how many cases have you actually tried?” The question was like sending an electric shock. ‘Tried!” said the Professor with the most imperial tone of the entire conversation. “I study the law and I am up to date with every reported appellate case on civil procedure,” he said in manner the suggested that further conversation on this topic was not welcome.

-Larry Salibra
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A different type of gift

I attended a graduation tonight. I was not a graduate, but I received a gift.

The graduates were five adults who were graduating from "Read To Succeed", the adult literacy program run by the YMCA in which I am a volunteer tutor. This is not an English as a second language course. This is for English speakers (with some dual language speakers) who have never learned to read. Some made it through public schools. Some dropped out. What they have in common is a desire and commitment to better themselves. Some want better jobs. Some just want to read to their children or grandchildren.

Most of them work full time and go to school four nights a week for two hours per night. Some have two jobs. One woman works nights and comes straight from work to class. Many yawn through their lessons, but most make it through the two-year program.

Each gave a graduation speech that they wrote. The common thread was how the inability to read had completely eroded their self-confidence.

I was most touched by Lisa, a mother of about forty- five. Lisa said that she had grown up as one of nine children in a French-Canadian home. Her parents spoke neither French nor English well and only one of her siblings graduated from high school. She said she was ridiculed in school for her poor vocabulary and hid her inability to read by avoiding people. At parent-teacher conferences, she told the teachers that she would not be able to help her kids with homework because she had a learning disability. She was constantly ashamed. She now reads two newspapers a day and may start her GED. Luis, Seth, Iman and Iris each had a similar story to tell.

The gift that I got was helping each of these people take a big step up in life. Each day that I helped someone learn that "an e at the end of a word is silent and the vowel before it is long", I was one rule closer to helping that person become literate; to take the fireman's exam or to read "Cloudy With a Chance of Meatballs" to their kids.

I know that this sounds like a United Way public service announcement. Well maybe it is. My point is that this volunteer work, teaching one-on-one and seeing adults go from reading the alphabet to reading one syllable words to reading three and four syllable words is one of the most rewarding things I've done. It helps them and it makes me feel good.

As a group, adult illiterates are invisible. I'm sure that there is some group in your city that's like "Read To Succeed". Find a little bit of time to teach one evening a week. Best thing you've ever done.

-Mike Schnipper
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Today's IP Committee Legal Quick Hit Continued

In Quanta Computer, Inc. v. LG Electronics, Inc., the Supreme Court recently addressed the 150 year old doctrine of patent exhaustion. The doctrine limits “the patent rights that survive the initial authorized sale of a patented item[,]” arguably forcing patent holders to collect royalties from one level of distribution, rather than from every subsequent level of buyer and sellers. The case has implications for downstream licensing, as a defense to patent infringement, perhaps altering the focus of claim drafting, and emphasizing contractual remedies in patent licensing.

The Supreme Court reversed the Federal Circuit’s ruling, holding that LGE’s authorized sale of microprocessors and chipsets to Intel exhausted both their system and method patent rights. The Court considered the arguments in three stages.

First, the Court addressed the notion that method patents could not be exhausted, holding that “[n]othing in [the] Court’s approach to patent exhaustion supports LGE’s argument that method patents cannot be exhausted.”

Second, the Court “consider[ed] the extent to which a product must embody a patent in order to trigger exhaustion.” Relying on Univis, the Court found that all of LGE’s patents were exhausted. In Univis, the lens blanks had no utility until they were made into lenses. Similarly, the microprocessors at issue only functioned when incorporated into buses and memory to form a computer system. The Court concluded that both the lens blanks and microprocessors “constitute a material part of the patented invention and all but completely practice the patent.” The key determination for the Court here was that Quanta was not required to make any creative or inventive decision when adding the Intel parts to its computer system, holding that “Quanta had no alternative but to follow Intel’s specifications in incorporating the Intel Products into its computers . . . .”

Finally, the Court addressed whether the sale of the patents to Quanta exhausted LGE’s patent rights. Noting that only an authorized sale will trigger exhaustion, the Court held that “[n]othing in the License Agreement restricts Intel’s right to sell its microprocessors and chipsets to purchasers who intend to combine them with non-Intel parts.” LGE gave Intel the authority to sell regardless of whether Quanta promised to abide by the restrictions put on third parties in a side agreement. The Court did leave open the possibility that LGE could recover other damages, stating that it expresses “no opinion on whether contract damages might be available even though exhaustion operates to eliminate patent damages.”

-Ken Godlewski
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***DISCLAIMER*** Treasury Department Circular 230 Disclosure: To ensure compliance with requirements imposed by the Treasury Department, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein...

Political Confusion

I am at sea about the upcoming election.

John Kennedy was my only childhood hero (aside from perhaps The Cisco Kid or Hopalong Cassidy).

I am a liberal democrat who came of age in the sixties. At Columbia, many of the SDS members were classmates and, even though I did not occupy a building in 1968, my sympathies were more with than against those who did.

My first two jobs after law school were representing the labor movement.

If someone said that we could provide health care to all Americans if I paid $1,000 more in taxes, I would gladly do so.

I was raised by parents who lived through the Depression and who did not have credit cards. Following their example, I saved, paid off my credit cards every month, made reasonable investments, never bought a house that I could not afford to carry and generally acted as a financially responsible citizen.

Here's the dilemma.

I cannot vote for John McCain for lots of reasons that I'm not going to detail.

With some trepidation (similar to that with which I supported Jimmy Carter) I want to vote for Obama. However, I have reached that stage of life at which my retirement funds have to last for perhaps thirty or more years (my parents are 94 and 95 and pretty darned healthy). Obama's position on raising the capital gains tax seems to be that it would be "fair" to do so, his example being "the top 50 hedge fund managers made $29 billion last year--$29 billion for 50 individuals". I'm no hedge fund manager, and doubling the tax puts a substantial crimp in my plans.

I have always voted for the person who, I felt, was best for the country.

When, if ever, is it appropriate (if that's the right word) to vote my self-interest? Do I abstain when I go into the booth this year?

I guess I have five months to figure it out.

-Michael Schnipper
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Trouble in River City: Episode 4

I felt relatively confident that I could handle any question Superstar could put to me and my recommendation for a response to our escalating litigation claims was clear. We needed a comprehensive compliance program. It seemed clear from Super Lawyer’s presentation that our focus on ADR had dramatically reduced our costs.

When I walked into Superstar’s office, he had been working feverishly with some papers. He looked up as I walked in and motioned to me to sit on the sofa in the far left corner of the office. I did so and spread the charts and graphs on the coffee table.

He walked over and quietly surveyed the collection of papers I had spread out. “I see you have been working on the problem—bottom line first,” he said. “What do you recommend?” The quick question caught me off guard—I had fully prepared to take him through the same analysis that Superstar had done and demonstrate how effective we had been in keeping our costs under control through our use of ADR to set the stage for the conclusion.

“A compliance program,” I uttered, involuntarily. “Compliance on what,” he asked. “Well product liability for sure,” I said. “What about the other cases?” I had not really thought about them? “How do you know it will work?” That question really caught me off guard. “Well,” I said “ we are already keeping our litigation costs under control through ADR, more aggressive litigation would simply increase those costs, compliance is the only other alternative and we can do it for a lot less than trying cases.”

He looked up at me, stared me straight in the eye and said “You did not sort these cases by economic modeling so you really do not know what factors you can control.” I was shocked, not because I had not done it, but because I have never heard of it. Superstar did not let me answer—he said: “I suggest you allocate these cases among a set of economic models that permits us to evaluate what we can control—then let’s talk.”

I left the room and headed straight to my GC’s office.

-Larry Salibra
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Trouble in River City Episode 3: Super Lawyer’s Opinion

I called Super Lawyer to explain my problem. He said he would get together with the head of his litigation department and review the cases they had for that division. We had to center all the litigation at Super Lawyer’s firm because we believed that we could save money since the firms lawyers would not have to relearn the nature of our business, the technology of our product line and there would be economies of scale with similar litigation.

When I arrived a few days later at the ACE firm, Super Lawyer and his colleagues had collected and charted out litigation. It fell into three categories, product liability claims in our widget product line, a couple of employment claims and a substantial tax claim disputing the constitutionality of a certain tax that was hurting our ability to import raw materials in order to be competitive with non-domestic supplier.

The firm had graphed the claims over a 5 year period. Only the product liability claims of which there was a great number showed a study increase. They also graphed the division’s quarterly expense of the litigation and it became immediately clear why Superstar had focused on this area. Costs had been going up steadily and when taken as a whole over time, it was clear why it was something he was interested in.

I asked Super Lawyer whether he thought could control this escalation of claims? He suggested that we undertake a comprehensive program to review both our quality control procedures and our product labeling. He also suggested
a series of presentations by his firm to operations personal that would increase their sensitivity to product liability exposure.

What about more aggressive litigation posture? We considered that he said as he produced another graph. We have taken the position that ADR and cost reduction was a key policy objective. We have graphed amount we would have spent if we had litigated to a resolution and the amount we settled for. In almost every case we paid less in settlement than it would have cost to litigate. This does not seem to be an economic option.

I left the meeting with the recommendations in hand to present to Superstar.

-Larry Salibra
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Opinions of In-house Counsel

In our discussion regarding opinions of in-house counsel, we noted that the inside counsel who signs a closing opinion has personal responsibility for satisfying the duty of care owed to the recipient. The manner in which this risk is managed by corporate counsel will depend upon the right of the corporate counsel/opinion giver to be indemnified and the availability of insurance. Each company’s situation will be different. In addition to directors and officers liability insurance, some companies procure malpractice insurance for their corporate lawyers. It would be interesting to know whether it is common practice for companies to obtain Employed Lawyers Professional Liability Policies and, if so, whether adequate attention is being paid to the integration of the policy with the directors and officers liability insurance. Any comments regarding your experience with Employed Lawyers Professional Liability Policies would be of benefit to the group.

Check out the agenda and minutes from the ACC Small Law Department Committee Calls

-John R. Miller
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As Father's Day Approaches

Excuse me for taking a short break from writing the last episodes of “THERE MAY BE TROUBLE IN RIVER CITY”, but I was watching CNBC this morning, a channel to which I had become somewhat addicted after my retirement. This morning the commentators were in a tizzy about Lehman Brothers 2.8 Billion loss and their need to raise 6.0 billion in capital. How could the Chief Financial Officer not know said one commentator? Lehman had said all was fine not too long ago.

Before I begin, let me make my bias clear. I was against the Bear Stearns bailout notwithstanding the claims by the sophisticated that it was necessary to prevent financial collapse. I have a similar position on attempts by the government, of all forms, to deal with the housing crisis. We got there without government help; we will just have to get out of it without government help.

So how did we get here and what does my father and grandfather (on my mother’s side, my Dad’s father died before I was born) have to do with this? Neither was well educated. My father completed high school and my grandfather who emigrated from Italy did not make it that far. They certainly would not been able to carry on a conversation with graduates of Harvard or Wharton Business Schools. But to paraphrase the wizard in the Wizard of OZ, what did they have that the graduates of these schools did not have-“common sense.”

What they were not able to do, or perhaps unwilling to do was to engage in semantic calisthenics to disguise the obvious. Let me share with you how I think they would have redefined the standard terms used to describe the present and continuing financial crisis.

“EXOTIC FINANCIAL INSTRUMENT": My father and grandfather would describe this as lending money at an unusually high interest rate to a borrower who had no hope of servicing the debt or repaying the principle.

“COMPLEX AND NOVEL FINANCIAL INSTRUMENT": My father and grandfather would describe this as a lot of people lending a lot of money at an usually high interest rate to a lot of borrowers who had no hope of servicing the debt or repaying the principle.

“CREATIVE ACCOUNTING": My father and grandfather would describe this as ignoring the fact that you had lent a lot of money at an usually high interest rate to a lot of borrowers who had no hope servicing the debt or paying back the principle.

“WALL STREET BONUS": My father and grandfather would understand this to mean getting paid an amount of money they could not imagine any human being needing or productively using in their lifetime for selling a lot of “Complex and Novel Financial Instruments” to people who because of the education you would expect to know better.

The sad thing about this is that there were no doubt many in our profession who participated in this activity and should have known better as well.

-Larry Salibra
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There May Be Trouble in River City- episode 2

EPISODE: 2 SUPERSTAR’S FIRST ASSIGNMENT

As my GC warned the day came when Superstar called and asked that I come to see him in his office. Since my meeting with my GC the official announcement of Superstar’s appointment of division president took place, and for the next couple of weeks a flurry of additional announcements took place describing new assignments in the Superstar’s division as he replaced or rearranged the management structure to his liking. This was not unusual; of course, management changes typically took place when new leadership was installed in a division. However, there was a different tone to these changes.

In the past one could somewhat predict the changes in personnel—it was sort of musical chairs, people changed chairs but the people were the same. This was different. Positions were filled by people no one had heard of before. Serious change was in the air.

When I arrived at Superstar’s office, he invited me in and was very cordial, but it was clear I was under review. He explained that it was his intention to re-examine every aspect of the division’s operation, including the way its legal issues were managed. His review of the legal area suggested that major expenses were being incurred in the litigation area. He said it was his intention to understand why that was occurring and then determine the appropriate response. He wanted me to undertake that effort.

As I walked out, two obvious options occurred to me, a more strident defense posture as a deterrent or a compliance program to improve the employees understanding of their legal obligations. But I was not sure, so I decided to consult Super Lawyer at our outside law firm, the ACE firm in downtown River City. We had long ago established a partnership (see partnership debate in prior blogs) in the manner in which we related—they could help I thought.

There May Be Trouble in River City

Your GC has just called you into her office to tell you that there may be difficult times ahead for the law department. Superstar has just been appointed to run your division and he is the head on favorite to become President and CEO. Superstar was an engineer by training and his aggressive management style that resulted in the complete turn around of a plant that had been scheduled to be shut down had caught the attention of senior management and the Board.

They are grooming him for the top spot and had sent him off to get his MBA at some college that was in the fly-over-zone (that is the vast area between the coasts where perhaps only one or two academic institutions are taken seriously). Typically, this would not be considered a problem; however, this particular graduate school had apparently developed a new approach to teaching law in their curriculum—they not only taught doctrine, they apparently give their students an analytical paradigm that provided them with the ability to effectively manage legal issues and their lawyers. They could understand the economic implications of different choices in designing and implementing contracts and they expected their lawyers to integrate business alternatives in their contractual design (yes, they called it design not drafting).

The GC said she also understood that they also were challenging the validity of traditional case analysis as an effective way to predict legal outcomes, and appeared to understand the economic implications of legal procedure. The GC conceded that although she was a graduate of Super U Law School, she did not recall being exposed to much of this. She said that she had heard that Superstar was concerned about the extent of litigation in his division and one of his priorities was to contact you to address this problem. She wanted you to know and said she would do all she could to help you, but simply did not know what to expect.

You walked out of her office waiting for the call from Superstar.

-Larry Salibra
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A Good Point About The Relationship Between Litigation Experience and Transactional Law

If you have not read David Mowry’s piece in the June “Change is Good” I commend it to you. David describes his change from outside litigation lawyer to inside transactional lawyer. He makes a good point about how much his litigation experience has contributed to his new role as a transactional lawyer because he approaches it with a “seer’s perspective.”

Don’t get me wrong transactional lawyers are nice people, I even did acquisitions and divestures, but I try not to publicize it too much. The problem is that transactional lawyers sometimes tend to become mesmerized by their language skills. They describe a concept, or sometimes just string together a rather impressive collection of words with out any real sense as to how those words will be implemented in a litigation context.

I have had the opportunity to try contract cases involving large commercial agreements that were drafted by law firms of substantial reputation. They were even bound. Notwithstanding the imposing appearance of these documents one is amazed at the level of ambiguity that can exist that I am sure was not apparent to its drafters, but might be to someone like David who is accustomed to looking at these agreements in their least flattering light.

David’s perspective might well distinguish between three alternative ways of addressing an issue because his knowledge on civil procedure can reveal one to have the most cost effective manner of developing facts and getting them into evidence to support a claim than the other two alternatives.

Great point David—good luck in your new career. By the way I was close friends with former Xerox, General Counsel and ACC founder, Bob Banks, who had lawyers who worked for him that argued Xerox cases before the US Supreme Court—there is history there at Xerox that may get you back in court for your employer some day!