Art for Justice: Harvey Finkle

Art genuinely does have the power to advance justice. A body of work that does just that is on display right now at Painted Bride Art Center in Philadelphia, which is exhibiting the work of Harvey Finkle, ” a documentary still photographer who has produced a substantialbody of work concerned with social, political, and cultural issues.” As explained on Finkle’s web site:

His recent work includes a documentation of the Kensington Welfare Rights Union (KWRU), a poor people’s movement emanating from the poorest neighborhood in Pennsylvania; and “The Jews of South Philadelphia,” interviews and photographs of the remnants of what once was among the largest Jewish communities in the nation.

His ongoing work includes documenting the activities of many progressive organizations including a death penalty abolitionist group, ACT-UP, ADAPT (disabled activists), KWRU, and other groups concerned with housing and homelessness. Also, his work includes an extensive inventory of images depicting all aspects of life in Deaf culture, plus a substantial collection of photos dealing with education.

Works in progress are about the new wave of immigrant and refugee families who have settled in urban areas and the evolving Transgender community.

(hat tip to the art blog)

Our courts and legislatures are bought and paid for — the laws they’ve made with respect to oil spills prove it.

In March, I emphasized — not for the first time — the insanity of considering corporate and other business entities as rational actors of the sort many economists consider people to be. The problem is that corporate decisions are made by individuals and are therefore driven to benefit those individuals, not the corporations (and their shareholders).”

One reason corporations focus on short-term profits is that the individuals making the decisions for a company will often take the cash made in the short term out of the company (by paying special dividends, for example) and then sell there stock, evading the long-term loss. Even if they hold onto their stock, they may have taken so much cash out of the company before the stock crashes in value that they’ve profited mightily from their holdings regardless of the company’s failures.

But still another reason is the idiocy of the regulation that is in place, regulation that instead of imposing responsibility on the companies for problems they cause limits that responsibility.

10 days ago David Leonhardt wrote about the  perversity of the federal limitations on corporate liability for oil spills and how they made BP’s oil spill, in retrospect, no great surprise:

In a little-noticed provision in a 1990 law passed after the Exxon Valdez spill, Congress capped a spiller’s liability over and above cleanup costs at $75 million for a rig spill. Even if the economic damages — to tourism, fishing and the like — stretch into the billions, the responsible party is on the hook for only $75 million. (In this instance, BP has agreed to waive the cap for claims it deems legitimate.) Michael Greenstone, an M.I.T. economist who runs the Hamilton Project in Washington, says the law fundamentally distorts a company’s decision making. Without the cap, executives would have to weigh the possible revenue from a well against the cost of drilling there and the risk of damage. With the cap, they can largely ignore the potential damage beyond cleanup costs. So they end up drilling wells even in places where the damage can be horrific, like close to a shoreline. To put it another way, human frailty helped BP’s executives underestimate the chance of a low-probability, high-cost event. Federal law helped them underestimate the costs.

We shouldn’t be surprised, then, at BP’s pathetic safety record and the retrospective inevitability of the Gulf spill:

Years before the Deepwater Horizon rig blew, BP was developing a reputation as an oil company that took safety risks to save money. An explosion at a Texas refinery killed 15 workers in 2005, and federal regulators and a panel led by James A. Baker III, the former secretary of state, said that cost cutting was partly to blame. The next year, a corroded pipeline in Alaska poured oil into Prudhoe Bay. None other than Joe Barton, a Republican congressman from Texas and a global-warming skeptic, upbraided BP managers for their “seeming indifference to safety and environmental issues.”

BP was only acting rationally!

Unsurprisingly, the Supreme Court has teamed with Congress in being an accessory to the corporate rape of the country. Even if compensatory damages are capped, conceivably courts can impose punitive damages in civil lawsuits to deter particularly egregious conduct. And, indeed, courts reacted precisely that way to the Exxon Valdez oil spill — that is, until the Supreme Court stepped in. In 1994, a jury imposed $5 billion in punitive damages on ExxonMobil for the Exxon Valdez  oil spill. 12 years later an appellate court reduced that amount to $2.5 billion, half the original amount.

2 years later, in a 5-3 vote (Sam Alito recused himself from the case because he owned Exxon stock), the Supreme Court reduced the amount to $507.5 million, about 10% of the jury’s award. The Court ruled that punitive damages (intended to punish bad behavior, not to compensate a plaintiff for his losses caused by that behavior) cannot be greater than compensatory damages (which compensate victims for their economic losses). As reported at the time, the reduced amount represented “about 12 hours of revenue for [Exxon], which reported record profits of $40.6 billion in February.” Justice Souter, writing for the Court, explained that “a penalty should be reasonably predictable in its severity, so that even Justice Holmes’s ‘bad man’ can look ahead with some ability to know what the stakes are in choosing one course of action or another. See The Path of the Law, 10 Harv. L. Rev. 457, 459 (1897). Exxon Shipping Co. v. Baker (U.S. 2008)(hyperlink added).

Of course, one might argue pretty cogently that neither the Exxon Valdez spill nor the BP Gulf spill were conceivable in the minds of the people who made the decisions that resulted in disasters and that it is precisely that failure to conceive of, much less consider, those consequences that is what the courts should retain the power to punish.

Steven Colbert on Citizens United and Corporations as People

Corporations = individuals? Confusions in economic theory and First Amendment jurisprudence

Metaphors are tricky things. Corporations are “persons” under the law in many respects, just as you and I are. And we treat corporations as rational individuals in the market. These figurative equations of legal fictions with human beings certainly have their utility, but they easily can be pushed too far. Individuals at AIG were making individual fortunes based on the income they were bringing into AIG for selling credit default swaps. Those individuals were making and would retain those fortunes even if, as turned out to be the case, AIG might not have sufficient funds to pay off the obligations those credit default swaps imposed on AIG. In other words, if one treated AIG as a rational person, one would suppose AIG would never expose itself to a real risk of obligating itself to pay more than it had in reserve. But AIG is merely a corporation, and the individuals actually making the decisions on behalf of AIG had every incentive to get what they could, subject AIG to irrational risk, and be able to walk away with their tens of millions of dollars.

And now the Supreme Court has overturned over 100 years of precedent permitting limits on corporate contributions to political campaigns because such limits constrained free speech and, according to the truism announced by Justice Kennedy’s majority opinion, ”Speech is an essential mechanism of democracy, for it is the means to hold officials accountable to the people.” But corporations don’t make decisions about how to spend money on campaign contributions — the individuals who control the corporations do. So what the Supreme Court has done is to remove any limits we might put on corporate CEOs to spend corporate money to advance the interests that indubitably are intended to redound to the benefit of those individual CEOs. I wouldn’t limit the ability of CEOs and shareholders to make individual contributions to political campaigns, but why are we treating purely legal entities like they are made of flesh and blood?

As Buzzflash pointed out recently, Thom Hartmann in his book Unequal Protection explains:

Prior to 1886, corporations were referred to in U.S. law as “artificial persons.” but in 1886, after a series of cases brought by lawyers representing the expanding railroad interests, the Supreme Court ruled that corporations were “persons” and entitled to the same rights granted to people under the Bill of Rights. Since this ruling, America has lost the legal structures that allowed for people to control corporate behavior.

Who needs public services in case of disaster? Not the rich . . .

The market strikes again: worried about help in the event of disaster? Well, with a lot of money, you’ve got nothing to worry about – as Naomi Klein writes, if you’re worried about wild fires burning down your home, you can buy private fire fighters who will stand by and watch your neighbors’ home go up in flames, or you can even buy larger scale disaster relief:

[Pellston, Michigan] is about to become the headquarters for the first fully privatized national disaster response center. The plan is the brainchild of Sovereign Deed, a little-known start-up with links to the mercenary firm Triple Canopy. Like HelpJet ["guarantees its well-heeled members a seat on a chartered jet out of the hurricane zone"], Sovereign Deed works on a “country-club type membership fee,” according to the company’s vice president, retired Brig. Gen. Richard Mills. In exchange for a one-time fee of $50,000 followed by annual dues of $15,000, members receive “comprehensive catastrophe response services” should their city be hit by a manmade disaster that can “cause severe threats to public health and/or well-being” (read: a terrorist attack), a disease outbreak or a natural disaster. Basic membership includes access to medicine, water and food, while those who pay for “premium tiered services” will be eligible for VIP rescue missions.(Hyperlinks added.)

Why are you working harder for less? Scientific Management, management consulting, and leveraged buyouts – a century of being conned.

I described leveraged buyouts the other day — in connection with the demise of the maker of the Simmons Beauty Rest Mattress — as a symptom of why we don’t trust Wall Street. You might wonder why, if I’m right, we allow people again and again to “buy” companies by borrowing enormous sums of money — in essence, we allow the buyers to suck money out of successful companies for their own benefit in the same way we allowed home owners in a rising housing market to suck money out of their homes by means of home equity loans.

It’s perfectly clear why we allowed homeowners to do that — all involved figured the market would continue to rise at least until they could make their money and get out. But why do we let this keep happening on a much larger scale on Wall Street?

I hadn’t considered the question specifically at the moment I wrote that post about Simmons. It was enough for me that throughout the 25 years of my career both practicing (in connection with, among many things, leveraged buyouts) and teaching I’ve seen the phenomenon again and again. But this week I came across Jill Lepore‘s article “Not So Fast” in the New Yorker, an article which asks the question, “Scientific management started as a way to work. How did it become a way of life?” Lepore’s article is about the rise in the early 20th Century of “Scientific Management,” the foundation of modern “Management Consulting.” Scientific Management was created by Fredrick Winslow Taylor, who, as Lepore writes, sold himself as someone able to make businesses more efficient:

Speedy Taylor, as he was called, had invented a new way to make money. He would get himself hired by some business; spend a while watching people work, stopwatch and slide rule in hand; write a report telling them how to do their work faster; and then submit an astronomical bill for his services. He is the “Father of Scientific Management” (it says so on his tombstone), and, by any rational calculation, the grandfather of management consulting.

The problem, as Lepore notes, is that Taylor was a fraud, and Taylorism’s grandchild, management consulting, is as well.

What does all this have to do with leveraged buyouts? Plenty. The entire rationale of the leveraged buyout is that the buyers can take a company with a lot of unrealized value and realize it. How? By making the company more “efficient.” The debt taken on to buy the company (and to reward the “buyers” with profits along the way) will, the argument goes, easily be paid off given the as yet unrealized efficiencies. Thus, we’ve had decades of “downsizing” (massive layoffs), “consolidations” (elimination of competing businesses), and arguments that advances in productivity brought about by our new technologies would redound to the benefit of all (when the only benefit would redound to whoever could pull the money out quickest).

We’ve been had.

At least we have one consolation — none of us have been alone in being conned. The focus of Lepore’s work is Louis Brandeis, someone I’ve always thought was a very bright guy and who against all evidence remained convinced his entire life that Scientific Management would benefit the working person:

Neither unions nor businesses have lived up to Brandeis’s optimism. “If the fruits of Scientific Management are directed into the proper channels,” he wrote, “the workingman will get not only a fair share, but a very large share, of the industrial profits arising from improved industry.” Lately, that share has been going to shareholders and C.E.O.s. Home and work, separated since the first stirrings of the Industrial Revolution, have been growing back together again: BlackBerry on the nightstand, toaster in the photocopy room. Efficiency was meant to lead to a shorter workday, but, in the final two decades of the twentieth century, the average American added a hundred and sixty-four hours of work in the course of a year; that’s a whole extra month’s time, but not, typically, a month’s worth of either happiness minutes or civic participation. Eating dinner standing up while nursing a baby, making a phone call to the office, and supervising a third grader’s homework is not, I don’t think, the hope of democracy.

You’ll also find worthwhile on this topic the New York Times video series entitled “Flipped: How Private Equity Dealmakers Can Win While Their Companies Lose“

Tort law serves a lot of purposes tort reformers don’t recognize, though Robert Bork might have changed his mind.

The law tends to be rational, though the rationale behind it is not always apparent. But when you see people screaming about irrational laws, they’re often failing to see, if not ignoring, what the laws do accomplish.

You’ll hear again and again in connection with proposals to reform our system of health insurance that the real way to cut medical costs is to reform our tort system so that doctors don’t practice excessively expensive “defensive medicine.” Don’t believe it. I’m not saying that our malpractice system is perfect, but merely cutting back on malpractice cases and recoveries because of their impact on the practice of medicine ignores two important consequences of the malpractice system that we better be sure are provided in other ways before we significantly cut it back.

First, the malpractice system maintains the high quality of health care we do have. My dentist, who is German, told me she hates practicing dental surgery in Germany because the standard of care is so low. She’s always afraid the anaesthesiologists will kill the patients. In contrast, she explains that the standard of care is so good here precisely because of the fear of malpractice liability.

Second, judges and juries in some jurisdictions likely do err in favor of patients in finding doctors at fault. Why? Because our health insurance system is so inadequate and, regardless of the doctor’s wrongdoing, a patient who suffers a bad outcome from a medical procedure is going to need money to take care of the bad outcome. If it isn’t going to come from health insurance, why not from the doctor’s malpractice carrier?

The second problem would be better taken care of by instituting a no-fault compensation scheme for people who suffer bad outcomes from medical procedures. But doctors have always, for reasons I do not fathom, resisted such a system, while at the same time they cry, understandably, about the blame game played in malpractice cases.

There have to be better ways than the malpractice system to maintain our nation’s high standard of medical care. But until we’ve devised such a system, we ought to be cautious about dismantling the system that currently maintains that high standard.

The funny thing is that no one likes a personal injury lawyer until they need one. Robert Bork, of course, is a notorious conservative critic of our legal system who is often portrayed as a victim as a result of the rejection of his nomination by Ronald Reagan to the Supreme Court. Bork’s critique of the legal system has included an attack on the tort system, calling it, as Bloomberg News reported last month, an irrational and unpredictable process that subjects businesses to the kind of predation practiced by pirates:

In a 1995 opinion piece published in the Washington Times, Bork and Theodore Olson, who later became a top Justice Department official, criticized what they called the “expensive, capricious and unpredictable” civil justice system in the U.S.

“Today’s merchant enters the marketplace with trepidation — anticipating from the civil justice system the treatment that his ancestors experienced with the Barbary pirates,” they wrote.

But Bork recently sued the Yale Club of New York City, “claiming he tripped and fell because of the club’s negligence as he ascended a dais to give a speech.” His amended complaint alleges that “[w]hen it was his turn to deliver” a speech at the Yale Club, he “approached the dais. Because of the unreasonable height of the dais, without stairs or a handrail, Mr. Bork fell backwards as he attempted to mount the dais, striking his left leg on the side of the dais and striking his head on a heat register.” Among other defensess asserted by the Yale Club in its answer are that the risks of mounting the dais were “open and obvious” and that Bork has already been compensated (no doubt through his health insurance, which I bet is as good as it comes) for some or all of his economic loss.

Bork isn’t the first “hypocrite of tort reform,” nor will he be the last. But next time you know someone who’s been badly injured, you might want to keep in mind the ways he or she might get compensated for the costs arising from the injury and the ways the law discourages the conditions that caused the injury.

War is Peace, or They can sue, but you can’t.

There is wisdom and responsible citizenship, and then there is mindless use of law to advance whatever selfish interests one has when one has them.  May my students know the difference, and may they not serve clients who want the latter at the cost of the former.

In November 2006,  the Committee on Capital Markets Regulation issued a report arguing for cutting back on regulation of financial markets, for limitations on private lawsuits and on lawsuits by state attorneys general, and for increased restrictions on the ability of the Securities and Exchange Commission to issue new rules. The Committee on Capital Markets Regulation was a private group, but it had prominence.   Its co-chairs were R. Glenn Hubbard, the dean of the Columbia University Graduate School of Business, and John L. Thornton, the chairman of the Brookings Institution, its formation was endorsed by then-Treasury Secretary Henry M. Paulson Jr., and a significant part of its funding came from the Starr Foundation, started by Maurice R. Greenberg, who had in 2006 recently been deposed as Chairman of AIG.

Greenberg and AIG were notoroius for their hostility to lawsuits.  It figures — AIG is (was?) an insurance company, and liabilities are what insurance companies are supposed to pay for.  As the founder of one law firm I worked for, Gene Anderson, always says, “Insurance companies are in the business of collecting premiums and denying claims.”

Now, though, Greenberg no longer heads AIG and AIG showed itself incapable of paying for the liabilities it had collected premiums to insure.  So their minds seem to have changed.  Greenberg has become a lawsuit enthusiast, most recently suing AIG for for securities fraud based on alleged “‘material misrepresentations and omissions’” that  caused him to acquire New York-based AIG shares in his deferred compensation profit-participation plan at an ‘artificially inflated price.’”

And I just read that AIG commenced a lawsuit last month against the federal government seeking a return of $306 million in taxes it claims it should not have paid.  The claims include taxes paid in connection with AIG’s financial products unit (“the once high-flying division that has been singled out for its role in A.I.G.’s financial crisis last fall”), and “AIG offshore entities whose function centers on executive compensation and include C. V. Starr & Company, a closely held concern controlled by Maurice R. Greenberg and the Starr International Company.”

As the New York Times puts it:

A.I.G. is effectively suing its majority owner, the government, which has an 80 percent stake and has poured nearly $200 billion into the insurer in a bid to avert its collapse and avoid troubling the global financial markets. The company is in effect asking for even more money, in the form of tax refunds. The suit also suggests that A.I.G. is spending taxpayer money to pursue its case, something it is legally entitled to do. Its initial claim was denied by the Internal Revenue Service last year.

And if you think corporations should be liable to individuals for damages their products cause, that taxes should be raised on the people who earn more than 95% of our citizens, and that we should tax the inheritances of heirs who have done nothing to earn that money, you’re accused of engaging in “class warfare”?  I’ve got news for you: they struck first.

Courts are supposed to do justice even if doing so costs individuals a lot of money.

Joe Nocera writes in the New York Times that to even suggest “that maybe, just maybe, deals that stop making sense ought to be called off, or at least rejiggered, especially in the middle of a once-in-a-lifetime financial crisis – invites withering scorn, especially if you say it to someone on Wall Street or in the legal profession.”

I’ve worked in the legal profession on Wall Street, and I like to think that when what the law seems to compel makes no sense the law has the capacity to adjust, to do justice instead of nonsense.  My thinking isn’t purely the product of naivete and idealism.  There really  is a legal (or,  rather, for the lawyers among my readers, an equitable) argument to stop the particular deal Nocera is writing about.  Moreover, that argument is precisely that the deal makes no sense to an interest — the public — much more important than the individuals who would profit mightily from the deal.

Here’s the deal:  “Last summer, the Dow Chemical Company won a heated auction for a well-run, highly valued specialty chemical company called Rohm & Haas. . . . The price it agreed to pay was high: $78 a share in cash, a 74 percent premium, for a total of about $15.3 billion.”  The problem is that in light of the global financial crisis and a collapse of the chemical business, if the deal goes through the resulting Dow/Rohm & Haas entity “could be badly damaged, saddled with high-priced debt in a horrible business environment, and a junk bond credit rating.”

What does that mean? It means that if the deal goes through Dow would need to strip itself to the bare bones to survive or would collapse altogether.  This while “Dow Chemical employs around 45,000 people; Rohm & Haas employs more than 15,000.”  This while “the American chemical industry – which was suffering even before the financial crisis because of the rise of commodity chemical companies in China and elsewhere – is going to be in a bad place for the foreseeable future.”   This “[a]t a time when every job matters, and when the economy is holding on for dear life . . .”

In return, the shareholders of Rohm & Haas will get $15.3 billion.  According to Answers.com, ‘the Haas family, descendants of one of the company’s two founders, continue to control a substantial ownership interest of nearly 30 percent” of those shares. So the the Haas family and the other Rohm & Haas shareholders are suing for “specific performance” of the contract with Dow; that is, they are asking a Delaware court to order Dow to go through with the deal to buy Rohm & Haas for $15.3 billion.

I’m not sure why there’s “withering scorn” for the suggestion that a court might refuse to enforce a deal that threatens 60,000 jobs and, as Nocera writes,  would probably destroy “billions of dollars of value.”  It’s no stretch to suggest that at a time of global economic collapse and at a time when President Obama is fighting to inject billions of dollars into the economy, the deal is not in the public interest.

Why am I willing to defy the withering scorn of the Wall Street experts?  Because specific performance, the remedy Rohm & Haas is asking the court to grant, is an what is known as an “equitable” remedy.  In order to show it is entitled to equitable relief, Rohm & Haas must show that the outcome makes sense even after the court balances “all the equities” involved.  In other words, the court must determine whether, considering all of the interests at stake in the lawsuit, ordering the deal to go through would be more fair than unfair.  The public interest plainly is one of those interests the court must consider. Because the deal poses such a great threat to the public interest, the equities do not favor the deal; the equities, in fact, weigh heavily against enforcing the contract between Dow and Rohm & Haas.

In legalese, Corporate and Commercial Practice in Delaware confirms that this is the law in Delaware:

[I]f specific performance of a contract would cause significant public harm, then the Court has discretion to deny such relief, even where a breach of contract and substantial harm to plaintiff have been established . . .

1-12 Corp & Commercial Practice in DE Court of Chancery § 12.03 (Matthew Bender 2008), citing Alro Assoc., L.P. v. Hayward, CA 19544 (Del. Ch. Oct. 31, 2003), mem. op. at 22-26 (holding that where plaintiff had established breach of contract by Delaware Department of Transportation and where Court had assumed irreparable harm to plaintiff, specific performance was not appropriate  due to a balance of equities weighing strongly in favor of public interest).

Courts really are supposed to do justice notwithstanding the fact Wall Street expresses withering scorn at the thought.

Again, let’s give more attention to individual justice and less devotion to abstract rules

The hope for the Obama administration I expressed in my post last Thursday was that it would promote a legal culture in which courts would begin to pay more attention to the justice required in individual cases rather than, as has been increasingly true over the last thirty years, feel increasingly bound to abstract interpretations of language that lead to plainly unjust results. My focus in that post was on statutory interpretation, but the same sentiment applies to the interpretation of contract language, as Ralph James Mooney made clear in The New Conceptualism in Contract Law, 74 Or. L.Rev. 1131, 1170-1171 (1995). Mooney also noted, as I implied in last Thursday’s post, that the new focus on abstract rules and language at the expense of just results in individual cases invariably favors moneyed corporate interests:

Just as they have in contract formation disputes, American courts recently have embraced far more conceptualist approaches to contract interpretation issues. They [exalt] the written word over the parties’ actual . . . agreement. They exercise their pre-modern faith in the objectivity of language, and overturn jury verdicts, by applying classical interpretive rules like ”plain meaning,” ”four corners,” and interpretation as a ”matter of law.” In general, American courts the past dozen years have moved noticeably away from the most fundamental theorem of contract interpretation, that the law should enforce the parties’ intention, toward a more abstract, disembodied inquiry, resembling, what should the parties have meant when they signed this form contract? In addition, this intellectual regression once again has had important political consequences. . . . Notice that, as in formation cases, it is almost invariably a seller, a bank, an employer, or . . . an insurer that benefits from the New Conceptualism in contract interpretation. This judicial tilt away from underdogs, back toward the privileged beneficiaries of classical contract law, is, of course, the New Conceptualism’s most troubling feature of all.

Economic pressures motivate law firms to try innovative billing practices

There is nothing new in lawyers trying to find ways to price their services in ways other than the standard practice of charging a price for each “billable hour” of work performed for a client.  Each lawyer, of course, is billed to a client by her firm at a different rate, the precise rate per lawyer depending primarily on her experience.  When I began practice in 1984, my firm billed my work to it clients at about $100 per hour.  By the time I left practice to teach, the hourly rate my firm billed my time out to clients was $315 dollars per hour.  I can only imagine that had I continued in practice, by now, twelve years later, my hourly rate would be in the ballpark of $500 an hour.    According to the New York Times, Cravath, Swaine & Moore in New York is “one of a number of large firms whose most senior lawyers bill more than $800 an hour.”

Lawyers have always also used pricing schemes other than billing per hour.  Certain types of transactions are generic enough that lawyers can charge a flat rates for representing a clients in such a transactions.  And, of course, firms that represent clients with modest to poor economic means suing wealthy clients have regularly charged contingent fees, collecting a percentage (typically 25-40%) of any recovery achieved as a result of the lawsuit.  Those firms finance their losing cases with the windfalls they earn in winning cases.  And their clients benefit because without the contingent fee arrangement they could not possibly afford to pay for the lawsuit.  The most typical types of cases employing these billing methods are personal injury and malpractice lawsuits.

But in most other situations the billable hour has been the standard way to price legal services.  There always have been severe criticisms of the practice. Its potential defects are plain.  Some firms break the hour into 15 minute segments; others into 6 minute segments.  If you perform one minute of work by, say, making a brief telephone call on behalf of a client, you might well  record an entire billable segment (6 or 15 minutes) for the call.  Everywhere I worked I had the discretion to choose not to record time for such brief tasks.  So I wouldn’t.  I couldn’t justify the cost the minimal effort would cost the client. If, for example, an attorney makes a one minute telephone call, the attorney records that call as fifteen minutes of billable time, and his  firm bills his work out at an hourly rate of $300 dollars, that one minute phone call would cost the client $75.

But the fact I wouldn’t bill a quarter of an hour for a one minute phone call could hurt me in a very real way.  It reduced the amount of time I recorded as billable hours.

And the number of hours a lawyer bills over the course of a year plays a significant part in the firm’s evaluation of his performance.   The lawyers conducting the evaluation may understand that the sheer number of billable hours bears little relationship to the quality of a lawyer’s work, but any overburdened organization engaged in evaluation tends to put a lot of weight on hard numbers that bear little relationship to the qualities being evaluated.  So my failure to bill a quarter hour for one minute of work could work against me in my efforts to advance within my firm.

The system also biased the evaluations against better lawyers.  I always prided myself on my research and writing skills.  I felt I could identify, analyze, and research a disputed issue faster and more effectively than any of my colleagues.  I also felt I wrote better and more quickly than my colleagues.  Yet colleagues who were slower at the same work I did billed more hours for that same work, and that higher number of hours accrued to their benefit, at least in part, when our performances were evaluated.

I was exceedingly fortunate in not suffering from these potential defects in the billable hour system.  I worked regularly with a close-knit group, so we knew each other’s work well.  Our work, therefore, could be evaluated direrctly on the basis of its quality.  But the larger the firm and the more a lawyer is shuttled from colleague to colleague as he works on new matters, the less the firm will evaluate his work based on its intrinsic quality and the more the firm will rely  on the number of his billable hours.  And some firms, naturally enough, don’t care why a lawyer might bill more hours than a better performing colleague.  The higher number of hours mean more money for the firm.

I certainly felt the constant pressure to bill as many hours as possible.  Over my 12 years of practice I billed between 1900 and 2400 hours a year.  1900 billable hours seemed a livable amount of work (and seemed to be the minimum an associate could get away with), but it hardly amounted to what most people would consider a reasonable work schedule.  For one thing your billable hours are not the hours you work.  They are only the hours you work on matters that can be billed to clients.  The hours spent on administrative work on behalf of the firm, on pro bono work, on training younger attorneys, and on the necessary interludes from the demanding work are not billable hours.  In my last years of practice, as a partner, when I was still a relatively young but experienced commercial litigator, I generally was in the office from 8:30 a.m. until sometime between 7 and 8 p.m.  I also worked regularly on weekends for 3 to 8 hours.  During my busiest times, which occurred with regularity, I could easily bill something on the order of 110 hours a week.  I don’t know how I did it.  There are only 168 hours in a week.

The system provides an incentive to the firm itself, and not merely its lawyers, to maximize the number of hours billed to a client.  The more time a firm spends on a matter, the more money the firm will make.  That makes for a perverse incentive — clients want matters resolved as quickly and cheaply as possible.  But it is in lawyers’ short term financial interests to resolve matters in the most complex and drawn out ways possible.  As the New York Times points out,  “In litigation, firms that charge by the hour can suffer if they are too successful and end a lawsuit – and the stream of payments from continuing work – too quickly. One law firm that recently collapsed, Heller Ehrman, was hurt in part because a number of cases had settled.”

The defects inherent in billing by the hour began to become an issue to clients  in the late Eighties as a consequence of the economic difficulties set off by the 1987 stock market crash and the Savings and Loan debacle.  Money was tight, so clients would scrutinize more carefully the prices they were being charged and the ways those prices had been arrived at.   It doesn’t surprise me, therefore, that the New York Times suggests that today’s “rough economic climate is making clients more demanding, leading many law firms to rethink their business model.

One change demanded by a client I worked for back in the late Eighties and early Nineties was to produce a detailed budget in advance of his decision to have our firm represent his company in a  lawsuit.  The budget would provide an estimated cost of the representation, with the ultimate cost limited no more than a fixed amount above  the estimated total cost.  The budget would lay out in detail the work that would have to be done — work that would include, among a myriad of other things, drafting pleadings, drafting and arguing any and all pre-trial motions, conducting discovery (including the oral examination of witnesses under oath in depositions, the review of documents, and our own independent investigation into relevant matters), any and all legal research that might become necessary in the course of the case, the retention and preparation of any experts that might be required, and the preparation of our own witnesses for both deposition and trial testimony.

The time and effort necessary to conduct these tasks is to a great degree unknowable in advance of a lawsuit.  Moreover, unforeseeable complexities are almost inevitable.  It is virtually impossible to calculate  the number of new claims that might be asserted in a lawsuit, the number of new parties who might be drawn into it, the number of  new legal issues that will inevitably arise in the course of the case, and the amount of work each of these and other unforeseen complications will require.  Preparing these budgets was one of the most difficult things I ever did as a lawyer because so much of their content seemed largely the result of guesswork.

It was not, however, a senseless product I was producing.  Essentially, the budget set forth our best estimate of a fixed fee  for all the work required to conduct the lawsuit through trial.  In the event the case settled before trial , our fee would be limited to the amount the budget had allocated for the work we had actually done.

With the recovery of the economy in the Nineties and the enormous sums earned by corporate America, the motive to impose such novel billing methods waned, and the billable hour managed to maintain its role as the foundation of large firm billing practices.

But, as Friday’s New York Times stated:

The evidence of a shift away from billable hours is, for now, anecdotal, as few surveys exist. But partners at a half-dozen other big bellwether firms and lawyers at corporations, who sometimes engage outside counsel, say they are more often seeing different pay arrangements.

One such novel scheme was followed by Morrison & Foerster, and in fact resulted in the firm earning a much higher fee than if it had charged by the hour:

In one case, he said, Morrison & Foerster negotiated a fixed fee for defending a company in court, covering work up to the point of a motion for summary judgment.

On top of the fee, if the case settled for less than what the company feared having to pay if it lost in court, the law firm got a percentage of the amount saved. The arrangement made sense when the goal was to resolve the dispute quickly, Mr. Leonard said.

Lawyers on the case negotiated a settlement for much less than the client’s worst-case number, Mr. Leonard said. “The effective hourly rate was something like 150 percent of our hourly rates,” he added. “We made money, the client was happy.”

What other types of pricing will clients and lawyers develop?  It remains to be seen.   But since the financial crisis seems more dire than any we’ve experienced in the last seventy years, law firms might have to engage in the first comprehensive overhaul of their pricing systems since at least the Sixties.

Finally, let me emphasize that there are good lawyers and bad lawyers, just as there are good and bad people in every profession.  The people I worked closely with were kind, generous, hardworking, and dedicated to serving our clients as efficiently and effectively as possible.  We would not bill a quarter of an hour for a one minute phone call. The founder of one firm  I was a member of for many years,  Gene Anderson, made sure the firm’s lawyers put our clients first in everything we did.  Any business air travel, for example, had to be made in coach class.  Every lawyer I knew at comparable firms would fly First or Business Class.  Doing the least expensive and most efficient work for the client was, in short, the ethic of almost every lawyer I  personally worked with.

But I have encountered many a lawyer whose “ethic” is to extract from his every cent he can.  The principal way to maximize one’s fees is to fight as long and hard as possible on any and every issue that can be made into a fight. The truly sad part of this phenomenon is the belief among many, many people that the most effective lawyer is the nastiest lawyer.  Those people get their nasty lawyers.  They also make the cost of their representation as high as possible.

Nastiness is bad lawyering.

Oppositional figures?

Art and law are ways of exploring, defining, and even creating the world. They are also often romanticized as methods of expressing opposition — opposition to the ruling order, opposition to the status quo, opposition to conventional wisdom. Princeton will soon be hosting a symposium on The Art of Opposition. The promotional materials state:

Throughout history artists have created works as a form of opposition, whether to a dominant political order or to familiar social mores and conventions. This polemical mode of conceiving and interpreting art continues: artists frequently present their own work as a challenge to the status quo, while scholars and critics of contemporary art reinforce the notion that for art to be relevant it must at some level present a critique of prevailing habits and attitudes. For art historians, the concept of art as a form of protest or a challenge to established convention remains a frequent point of departure for research, particularly in relation to certain artists or in the study of specific historical junctures.

Art too, of course, has a long history of reinforcing the status quo, of glorifying the powers-that-be. Virgil’s Aeneid is at least in significant part pro-Augustan propaganda. And you don’t exactly find the world’s greatest art (or most art) in the more pedestrian places. Patronage has its price.

Law as well has its long history of opposition. Our entire system of litigation is founded an adversarial process. More to the point, however, lawyers have often been at the forefront of progressive social movements. As in the case of artists, however, it is not skill and creativity that frees one from the mass of humanity, or even from the forces that crush the most noble parts of humanity. It is the use to which one puts that skill and creativity.

Don’t be fooled again.

One way we’ve been bamboozled by the myth that regulating financial markets is bad is by allowing ourselves to be convinced that “hedge funds” and the like are just too sophisticated for simple folks like us to understand. So we don’t even try to understand them. What happens? They steal us blind.

In 2005, law professor David Skeel, in “Behind the Hedge,” simply explained what hedge funds are, why and how they are unregulated, and their pernicious effects on our economy. I wish I could say now, three years later, that his conclusions showed him to be hysteric:

[T]here is a cost greater than lost dollars for all these practices . . . . It is the danger that investors will lose confidence in the markets because the markets are rigged. “People will not entrust their resources to a marketplace they don’t believe is fair,” an American Bar Association task force said 20 years ago in a study of insider trading, “any more than a card player will put his chips on the table in a poker game that may be fixed.” The same holds true today. If investors’ faith in the integrity of the markets is shaken, some will pull their money out, meaning less money will be available for American corporations to invest in ways essential to the nation’s prosperity. Investors will also be unwilling to pay as much for stocks or bonds in initial or subsequent public offerings, making it more difficult for companies to raise money for expansion or the creation of new technologies and products. The effect on the markets, and on the American economy, would be devastating.

ACORN ACORN ACORN ACORN ACORN ACORN ACORN

Registration Fraud? ACORN as the second coming of the Bolsheviks? Think again.

I’ve written already a couple of times about the hysteria being fomented over purported registration fraud purportedly being perpetrated by ACORN.

Here’s more:

The KLF knew bankers were pushers

Lawyers can be creative, and artists can have profound insights into matters legal and financial. An earlier project of mine on copyright and fair use grew out of a work by the KLF, a couple of musicians and artists from the U.K. who are worthy of even greater recognition than that they have received in their native land. Among other things, they wrote The Manual (How to have a Number One the Easy Way), a how-to guide on creating a number one pop hit. While The Manual is a work of brilliance at many levels, I was taken aback again today by the timeliness of one more aspect of the wisdom they impart therein:

Banks are in the business of making money by lending it. The more they lend the more they make. They want us, the punter, to become addicted for life to the false sense of security it gives us. Banks will go to extremes thinking up new and ingenious ways of getting us to borrow money from them. First and foremost they want us to get into property: “Buy a house,” because with your property as security they can always lend you more and more money. If things were to go badly wrong and you weren’t able to keep up the interest payments they can always force you out of house and home and get their money back that way.

Of course, it would be bad for the banks if they were seen to be throwing too many families onto the street or forcing businesses to the wall in order to redeem their loans. They would always prefer to lend more money so as to help pay off the interest on the earlier loans. Banks have spent millions over the past few years trying to destroy the public’s old impression of the bank manager in bowler, brolly and pinstripe, to the approachable and amiable sort of chap who will attempt at all times to say “Yes!”. They have only done this, not because they like being nicer, but to seduce you into coming in and borrowing more money. Remember, when you are going in to see a bank manager you’re going to see a pusher; a pusher dealing in one of the purest, most addictive drugs – money.