The Madoff Investigation Should Focus on the SEC.

Ever since the Bernie Madoff scandal broke, I’ve wondered: was the SEC paid off? It’s hard to believe the SEC could have investigated Madoff as it did, see what anyone who looked closely could see, and not dig sufficiently to uncover the fraud. And a story today from the Washington Post only adds gasoline to the fire of that suspicion. An SEC lawyer told her superiors in 2004 that “information provided by Madoff during her review didn’t add up and suggest[ed] a set of questions to ask his firm.” She was instructed in response to focus on other matters. And her immediate supervisor’s boss later married Madoff’s niece!

The suspicious SEC lawyer, Genevievette Walker-Lightfoot, “had previously worked at the American Stock Exchange, where she developed an expertise in specialized trading strategies.” After she was diverted to other matters, she never was asked about the Madoff investigation again, even during an agency investigation into Madoff in 2005 which only “found three violations of minor rules.” In 2006, Walker-Lightfoot left the SEC after filing a complaint with the agency alleging that she’d been subjected to a hostile workplace. A person familiar with the complaint said it was settled in Walker-Lightfoot’s favor.”

Madoff, incidentally, once “boasted at a business roundtable discussion about his close relationship with SEC regulators, saying “my niece just married one.”

Did Apple Mislead Investors Regarding Steve Jobs’ Health? Almost certainly, yes. Then why did it not disclose the medical facts? (Part I)

Steve Jobs had a liver transplant last week, and, the L.A. times and others report, the “doctor who led the transplant team said this week that Jobs was ‘the sickest patient on the waiting list’ at the time a donor liver became available.” All Apple had earlier disclosed to the public regarding Jobs’ health was set forth in 2 statements written by Jobs and posted on Apple’s website posted last January. The first, in connection with his widely reported drastic weight loss in 2008, stated that “my doctors think they have found the cause—a hormone imbalance that has been ‘robbing’ me of the proteins my body needs to be healthy. Sophisticated blood tests have confirmed this diagnosis. The remedy for this nutritional problem is relatively simple and straightforward, and I’ve already begun treatment. But, just like I didn’t lose this much weight and body mass in a week or a month, my doctors expect it will take me until late this Spring to regain it. I will continue as Apple’s CEO during my recovery.” (emphasis added) The second letter, posted one week later, stated that “during the past week I have learned that my health-related issues are more complex than I originally thought. In order to . . . focus on my health, and to allow everyone at Apple to focus on delivering extraordinary products, I have decided to take a medical leave of absence until the end of June.” (emphasis added) In April, “[a]ccording to unnamed sources . . . Jobs continue[d] to work on the “most important strategies and products from home,” though Apple’s only official statement was that “Steve continues to look forward to returning to Apple at the end of June.”

Inevitably, people are asking a question lawyers representing a company whose stock is traded on public exchanges always have to ask themsevles about any facts that might affect the company’s’ value: is the information “material”? On the one hand, the L.A. Times story states: “Companies are not required to divulge medical details about executives, lawyers said.” But the story also quotes a lawyer stating that “If [Apple] tried to lessen the disclosure and make it misleading by omission, that’s just as bad as telling something that flat isn’t true . . . . ” And Warren Buffet is quoted stating: “Certainly Steve Jobs is important to Apple. . . Whether he is facing serious surgery or not is a material fact.” (emphasis added).

What’s going on? What information is “material” and therefore has to be disclosed to the public by a publicly traded company? Well, Neil Lipschutz is right that “something is material if ‘there is a substantial likelihood that a reasonable shareholder would consider it important” in making an investment decision. Also, if there was a substantial likelihood a reasonable investor would think the information ‘significantly altered the total mix of information available’ about a company.’”

Do we have anything better to guide us than (1) what seems a terribly subjective test, (2) the gut reactions of lawyers and of Warren Buffett, and (3) the almost certain fact that Apple, after close consideration of the facts and the law by its lawyers, made the business decision that the risks and probabilities of disclosure last January (or at any time between when Jobs first got sick and now) were outweighed by the risks and probabilities of liability for securities fraud if and when its lack of candor became known?

Well, if what you’re seeking is guidance in the way beginning law students and most non-lawyers want the law to provide guidance — articulation of rule that makes it easy to decide the question — the answer is a resounding NO. These are judgment calls based on the specific evidence of each case. In order to determine if a set of facts would matter to an investor, you need to look at those specific facts. And plainly I have not had available to me all the evidence that might eventually be considered to judge the question in this case. But there is a lot available, and based on only that, I have to agree with Warren Buffet that the fact Steve Jobs was so ill he required a liver transplant certainly is material.

But, again, my certainty is not a product of pointing to a “law” and having you nod your head in agreement. I have to look at the specific evidence regarding Apple, the law, and the facts in the cases in which courts have concluded that events are material and in which courts have concluded the events are not material. By doing that, I hope I can convince you that my certainty is well founded. That’s the best I can do.

Moreover, that’s not the end of the lawyer’s job. Even if the lawyers concluded that the facts regarding Jobs’ health prior became “material” at any time before the next week would not mean Apple necessarily would disclose those facts. Apple’s lawyers would have to consider what potential downside its failure to disclose those facts would present and the likelihood that downside would occur. Then Apple, not the lawyers, would have to decide if those risks and probabilities would outweigh the likelihood and degree of the impact disclosure would have on Apple’s value.

There are a number of rules under which a publicly traded company is obligated to disclose “material” information to the public or face criminal and civil liability, but the definition of “materiality” is the same under all of them. One is a regulation known in the trade as “Rule 10b-5″ [17 CFR 240.10b-5], which makes it a crime and a civil wrong for any a company or an individual purchasing or selling stock “to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, . . ” As the United States Court of Appeals for the 2d Circuit stated in SEC v. Texas Gulf Sulphur Co., 401 F.2d at 833, 848 (2d Cir. 1968), this requirement to disclose material facts is based “on the justifiable expectation of the securities marketplace that all investors trading on impersonal exchanges have relatively equal access to material information . . . .” The requirement originates in the Securities Exchange Act of 1934 (15 U.S.C. § 78j(b)), one of the keystones of the New Deal passed in response to the practices prevalent on Wall Street that had led to the 1929 stock market crash.

As the court further stated in Texas Gulf Sulfur, “[t]he basic test of materiality * * * is whether a reasonable man would attach importance * * * in determining his choice of action in the transaction in question.” Thus, material facts include any facts “which affect the probable future of the company and those which may affect the desire of investors to buy, sell, or hold the company’s securities.”

The defendants in Texas Gulf Sulfur had argued that tests showing one of their company’s mines was likely a rich one were not material because there was nothing certain to report until mining had actually begun and there was more certainty than the tests could provide.  The Second Circuit rejectted their argument, ruling that even possibilities that never occur might be material. One must look at the probability the fact would have an impact on the company’s value and the magnitude of that potential impact: “whether facts are material . . . will depend at any given time upon a balancing of both the indicated probability that the event will occur and the anticipated magnitude of the event in light of the totality of the company activity.” 401 F.2d at 849. Thus, the court reversed the trial court’s decison to dismiss the criminal charges against the defedants because, the Second Circuit decided, they would be guilty if it were true that they had failed to disclose “the possibility, which surely was more than marginal, of the existence of a mine of the vast magnitude” as a result of a “remarkably rich” sample taken  ”close to the surface (suggesting mineability by the less expensive openpit method) within the confines of a large anomaly (suggesting an extensive region of mineralization).” That mere “suggestion . . . would certainly have been an important fact to a reasonable, if speculative,  investor in deciding whether he should buy, sell, or hold” stock in the mining company the defendants controlled. Id. at 849-50 (emphasis added).

The U.S. Supreme Court expressly adopted the Second Circuit’s test in 1988 in Basic, Inc. v. Levinson, 485 U.S. 224 (1988), a case in which the Court determined that corporate insiders might have had the duty to disclose negotiations for a corporate merger before the merger was concluded. Some courts outside the 2d Circuit prior to that time had ruled that a deal didn’t have to be disclosed until it was a binding deal. The Supreme Court rejected the reasoning of those courts and made plain that an event that might not ever happen nevertheless might at some point be likely enough and big enough that it would affect a reasonble investor’s investment decisions.

So the questions Apple’s lawyers had to be asking themselves all the time ever since they learned in 2004 that Jobs had pancreatic cancer, are the following:

(1) Is Jobs so important to Apple that an investor would make a decision to sell, buy, or hold on to Apple stock based on his ability to do his job?

(2) Do the medical facts demonstrate with sufficient probability that Jobs’ condition is threatened enough that those facts would cause an investor to sell, buy, or hold on to Apple stock?

(3) Did Apple’s words or omissions mislead reasonable investors in evaluating whether Jobs could continue to do his job well enough to not affect their investment decisions.

Let’s get the easy stuff out of the way. Jobs’ health and its impact on his ability to do his job  are so plainly material that to argue otherwise wouldn’t pass the “giggle test.”  I would therefore, if I were representing Apple in litigation, advise the company simply to admit this point in the answer to any complaint anyone filed. To admit the point would at least minimize attention to something that, if Apple did dispute it, would only increase attention to a weakness in the company’s case. But just in case you think I don’t understand when it’s smart lawyering to concede a point, remember these things — someone’s own words are taken by a court as “admissions.” In other words, if someone admits something that is harmful to his legal position, the court will assume the facts are at least that bad. In the letter posted online last January, addressed to the “Apple Community,” Jobs ended with this: “So now I’ve said more than I wanted to say, and all that I am going to say, about this.” I’d love to ask him in a deposition why, if he didn’t want to write what he wrote, he did. The probelm, if Apple had decided to dispute the materiality of Jobs to the company’s value, is that he’d have to deny and dance around the obvous: his lawyers told him he had to write the letter because his health and its impact on his capacity to do his job is material to Apple’s shareholders and potential shareholders.

Don’t assume I haven’t considered the arguments I could make on Apple’s behalf on this point — I could point out, for example, as MacNewsWord did yesterday, that since January, when Jobs wrote the letter he didn’t want to write, Apple stock has almost doubled in value. The Apple loving outlet implied that market shows that investors have been confident that Apple was fine without Jobs:  ”This could be due to general belief among investors that Apple has a good management team in place which has kept the company running on an even keel despite the CEO’s absence.”  Or it could mean the market had already accounted for Jobs’ illness.  Or it could be that the market is driven by unreasonable investors.  It could be for any number of reasons. Regardless, I am convinced  that a strategy to fight a securities fraud case on the grounds that Jobs isn’t important enough to be material to Apple is not going to make winning the case more likely. I could go on and on . . . Last October, just to take at random one piece of evidence easy to find via a mere Google search, (according to CSnews) “Some individual had posted a fake report . . . claiming Steve Jobs had suffered from a heart attack and was rushed into the hospital. As a result, Apple’s stock made a 10% nosedive.”

NEXT: (a) was Jobs’ health so dire its specifics would have made a difference to people thinking about buying, selling or holding on to Apple stock, (b) did Apple’s statment’s or silences mislead investors about Jobs’ health, and (c) why would Apple choose not to disclose specifics regarding Jobs’ health even if its lawyers were telling it that those were material facts?

The EFF surely wants Jammie Thomas not to settle at any price, while the RIAA, even though it won $1.92 from a jury, surely wants her to, likely for any price.

Mike Masnick of Techdirt reports that the RIAA is anxious to settle the case in which it won $1.92 million from Jammie Thomas-Rasset for illegally downloading 24 songs. As Masnick writes, the RIAA “seems to recognize that the insanity of the $1.92 million doesn’t do it any favors. Even the musicians whose music was part of the case are embarrassed by the amount. . . . the RIAA would love to settle the lawsuit for some lower amount so it can run around touting the ‘risks’of file sharing without having people laugh outloud when hearing that someone had to pay $1.92 million for potentially sharing 24 songs that could be bought for $1 each.”

Masnick writes too that he’s been expecting Jammie Thomas to settle “but the longer this goes on, the more I wonder if she’s actually planning to fight on. If so, this could certainly represent a case to examine the statutory rates associated with copyright violations.”

Mike is more right than he may know. Any lawyer interested in challenging the constitutionality of the statutory penalties imposed by the Copyright Act would want to represent Jammie Thomas on this appeal. When a lawyer looks to challenge a law, if he’s got any sense he doesn’t challenge it via any case that happens to come up. He chooses a case that presents especially good facts for the challenge. The EFF would love to have Jammie Thomas appeal – no case involving a defendant found liable for illegal downloading would be a better vehicle for bringing the challenge to the statutory penalties.

Tweets on Law Practice

Matthew Homann, at the [non]billable hour, has published  100 Tweets: Thinking About Law Practice in 140 Characters or Less (pdf).  His advice is terrific. Here are some of my favorites:

1. “My lawyer can beat up your lawyer” is not a marketing strategy. “My lawyer will call me back before yours will” is. 

8. The most significant advantage you possess over lawyers who’ve come before you is that you don’t believe what they do. 

16. The confused mind always says no. 

28. You should never have a bigger monitor or more comfortable chair than your secretaries do. 

53. Never confuse your desire to explain something with yourability to do so. 

84. Trying to learn client service in ethics class is like trying to learn to ride a bicycle by watching lots of bike accidents. 

By the way, on Twitter, I’m “@pbfriedman.”

I think we should shoot puppies!

There — that headline should ensure I never can be confirmed for federal office.

Dawn Johnsen, a law professor at the University of Indiana, is President Obama’s nominee to head the Justice Department’s Office of Legal Counsel, which ” provides authoritative legal advice to the President and all the Executive Branch agencies.”  It’s the office that produced the “torture memos,” those shockingly ill-reasoned legal fig-leafs for the Bush administration’s policies regarding the treatment of “detainees in the War on Terror.” Ms. Johnsen was an “unsparing critic” of those memos.  As a result, Senate Republicans are threatening to filibuster her nomination.  But that’s not the reason they are expressing.  What is their pretext?  Twenty years ago in a footnote of a brief she wrote in a lawsuit in which she represented the National Abortion Rights Action League, she wrote that “forcing a woman to bear a child when she had no desire to do so was ‘disturbingly suggestive of involuntary servitude.’” Thus, the Republicans threatening filibuster say, she has “equated abortion with slavery” and is therefore unqualified to fill those posts once occupied by John Yoo and Jay Bybee (currently a tenured law professor and a federal court of appeals judge, respectively), who purported to provide legal justification for the waterboarding and beatings of U.S. prisoners.  (The torture, of course, ensured that we can never bring the terrorists subject to it to justice since no U.S. court would ever consider the evidence obtained by torture reliable enough to convict those terrorists.)

The Republicans are also threatening to do all they can to block the nomination of Harold Koh to be legal counsel to the State Department.  Koh is the dean of Yale Law School.  Why is he unqualified to fill the job he’s nominated for?  Because, purportedly, he thinks “Sharia law could apply to disputes in U.S. courts.” This stuff is actually taken seriously. Even though none of it is true.

I’m flabbergasted.  Effective persuasion and argument require being open to all sorts of ideas, but it also requires constraints — one cannot persuade with unpersuasive arguments.  But whether justifying torture or opposing perfectly reasonable people who happened to oppose the justification of torture, there seems to be a remarkable willingness to rely on the hope that whatever one says, no matter how empty or absurd, will have an impact.  It reminds me of the “Obama pals around with terrorists” line.  Since he had professional connections with Bill Ayers 30 years after Ayers’ days in the Weather Underground, we were supposed to imagine Obama hangs out on his off days with his friends from Al-Qaeda.  I would expect the U.S. Senate could have as much sense as the entire electorate demonstrated last November in rejecting those ridiculous arguments.  So far, it seems, I’m wrong about the Senate.

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.

Shepard Fairey, lightning rod

I’ve pointed out both that I believe strongly that Shepard Fairey’s use of an AP photograph to create his Obama Hope poster does not infringe the pohotograph’s copyright and that Fairey has been the target of frequent criticism in the art community regarding his “originality” and regarding his apparent hypocrisy in asserting infringement claims against artists who had appropriated his images.

It has come to my attention that some criticize the Fair Use Project’s decision to take up Fairey’s cause in the case of the Obama Hope poster and think Fairey should be taken down because of his apparent hypocrisy.

As a lawyer, I strongly disagree with this position.  If, as I zealously believe, the Obama Hope poster is fair use, it would be self-defeating to those of us who support the explicit application of the fair use doctrine to transformative appropriation art and various other methods of “remixing” pre-existing works, regardless of our view of Fairey himself,  if we failed to support Fairey’s position in connection with the Obama Hope poster.

I cannot help but recall last year’s lawsuit brought by Yoko Ono, Sean Ono, and Julian Lennon seeking to require the makers of the documentary “Expelled” from using a 15 second excerpt of John Lennon’s song “Imagine” in their documentary.  As I wrote at the time, I believed the lawsuit was misbegotten and that the film’s use of the excerpt constituted fair use despite my love of John Lennon and my contempt for the film, which purports that “theorists” of “Intelligent Design” have unjustifiably been expelled from the conversation regarding evolution and the development of life.  The court hearing the case agreed with my position and dismissed the case. Not coincidentally, the Fair Use Project represented the producers of “Expelled” in that case.

Fair use is fair use, and if we believe in it we should support it wherever it exists, even if we despise the people asserting fair use.  I supported the right of Nazis to march in Skokie, Illinois, a community full of Holocaust survivors, because I believe that the right to demonstrate in public is protected by the First Amendment regardless of how vile the message being conveyed may be.  The Supreme Court agreed.

That doesn’t mean we can’t criticize Fairey when he seems to want his cake and eat it too.  (Though it may be that Fairey’s thoughts have evolved on these issues — while he sent a cease-and-desist letter to Baxter Orr for Orr’s appropriation of one of Fairey’s images, Fairey never followed that letter up with any other action despite Orr’s continued use of the image.)

You may not like Fairey.  But that does not mean we shouldn’t support his position when he happens to be right.  To fail to do so would be to cut off our noses to spite our faces.

You hang yourself with your own words.

One thing I learned well as a lawyer is that you could almost always hang an adversary with his own words.  When deposing the opposing party or a witness for the opposing party, my strategy was always to get the person to talk as freely and voluably as possible.  I’d ask open ended questions, nod agreeably, follow up with words like “Really?” to prompt even more loggorhea, and, invariably, when the transcript came back I’d find one piece of testimony after another that was damaging to my adversary’s case.  Conversely, when I prepared witnesses to testify in response to the questions of adversarial lawyers, the advice, pounded in with a hammer, was to answer the question and SHUT UP.  If a yes or a no answered the question, just say yes or no and SHUT UP.

Here’s an amusing example (pdf): in a prosecutor’s opposition to a defense attorney’s request for a delay in the defendant’s trial, the prosecutor explains that the defense attorney “is a partner in a large law firm (over 325 attorneys) and presumably has daily access to a horde of eager, smart, hard working associates to assist in this case.”  That’s not all that bad an argument about why there should be no delay in the trial, but it doesn’t have all that much bite.   But her footnote points out that the defense attorney “touts himself as a ‘Super Lawyer’ on his website.”  Ouch.  Surely a Super Lawyer shouldn’t need more time given the other points the prosecutor has made.

The threat one’s own words pose to oneself is one of the things that scares me most about writing so much on the internet.  Shoot me if I ever refer to myself as a super lawyer.  But how can I?  A recent commenter wrote that something in a recent post of mine wasn’t “worthy of a First Year, much less a professor of law.”   And, after all, considering what the prospect for a hanging does to one’s mind, being wary of being hanged by my own words probably not the worst thing to consider when I’m spouting off.

(hat tip to Southwest Virginia Law Blog, via Brian Ledbetter)

Law Firms and Layoffs

Law firms, like most businesses in these dire days, are laying off a lot of people.  In doing so, like any business, they have to consider the threat of lawsuits by individuals who have been laid off.  Catherine Padalino, the worldwide employment practices liability manager for the Chubb Group of Insurance Cos., has some wise advice for businesses of all sorts, including law firms, on how to minimize these threats:

– First (of course, given the source) have insurance against the risk.

– Evaluate the overall anticipated impact of the layoff, including the potential for litigation as well as public scrutiny.

– Use quantitative criteria such as tenure and performance, rather than “soft” criteria such as social situations and financial hardship, to determine which employees to let go. Be consistent in applying the criteria, which should be communicated to all employees.

– Review the demographics of the staff that will be laid off to eliminate any appearance of discrimination. Consider the status of each employee, including whether he or she recently requested a leave under the Family Medical Leave Act or filed a workers’ compensation claim.

– Use outside counsel to evaluate employment practices and severance policies. Law firms should refrain from self-diagnosis.

“Most important,” said Padalino, “remember to treat all employees-those who will be laid off and those who will stay-with dignity. Laying off employees is unpleasant, but firms that try to do the right thing can help mitigate the potential for an even more unpleasant EPL lawsuit.”

The law firm of the future?

The Toronto Globe and Mail reports on Richard Susskind’s predictions regarding the future of lawyers and law firms.  Susskind is no one to be ignored; in 1996, when he predicted that lawyers would soon send legal advice and most legal documents via e-mail, he was derided and even considered dangerous.  I can testify first hand to the resistance law firms had to the internet.  Even earlier, in 1994, I lobbied my firm for an extra telephone line so I could attach my personal laptop’s modem to the dialup connection for my Manhattan-based ISP (the innovative and much-missed “Pipeline“).  My firm hemmed-and-hawed and finally refused my request, worried somehow that the connection threatened their own internal computer network.  Try as I could to explain that the phone line and the network had no connection to one another and that, therefore, the access through the phone line could in no way provide access to even the most sophisticated of post-Soviet criminal hackers, I was unable to get permission.

It’s hard to believe that was only fifteen years ago.

Now, Mr. Susskind predicts for the near future:

Small law firms that dispense customized legal advice will be pushed out of business by technology-savvy and more nimble firms that dispense run-of-the-mill advice and legal documents through websites. Larger law firms will evolve into commercial enterprises with vast stables of legal, accounting and other experts geared to preventing and managing clients’ legal risks. These big firms will outsource basic legal services to cheaper quasi-legal experts and they will build retail kiosks or websites that allow clients to download regulatory expertise and draft legal documents any hour of the day.

And, of course, it is already happening.  Linklaters LLP, a London-based law firm, has long had a “Web-based service called Blue Flag that allowed clients to research regulation and compliance standards around the globe.”  Other firms use “online document drafting services to download within minutes financial term sheets, employment contracts and other standard documents.”  In addition, “a pair of retired U.K. judges recently launched an Internet startup that allows lawyers to quickly generate judicially approved directives and motions for the courts.”  Just last November, Toronto lawyer Michael Carabash launched an online legal service called Dynamic Lawyers that charges lawyers a modest annual fee of $30 to connect with individuals who privately post legal questions on the website.”

On another point, already addressed on this blog, Mr. Susskind predicts a ‘radical shakeup’ of law firm billing practices that charge clients according to hours of service provided. The days of billable hours are numbered, he said, because it ‘rewards inefficiency’ by handing the largest pay for the most time spent on an assignment.

What will the next great innovation be in online legal representation?  Stay tuned.

You don’t have to sue — defamation and exposure

Another key to representing a client well is to ignore things better forgotten.  From CNet: a chiropractor sued an individual who had posted a negative review of the chiropractor online.  The chiropractor’s attorney is quoted as saying that the issue in the case is whether the review stated facts or the reviewer’s opinions:

“[My client] has no problem with people expressing their views and opinions about his service, . . .  [b]ut there is a line where if someone, even on . . . on the Internet, publishes a false statement of fact as opposed to an opinion, then that person can and should be held responsible for their words.”

But a bigger issue may be that the chiropractor’s billing practices are at the center of the defamaion lawsuit, and all the defamation lawsuit has done so far is highlight the fact the chiropractor bills insurance companies more for his services than the prices he quotes to patients.

Litigation is a public event.  Court files are open to the world.  When you sue someone, you often open up to inquiry a lot you never thought might see the light of day.  You and your lawyer need to consider these possibilities seriously before you sue.  No matter how good a lawsuit you have, you don’t need to sue, and it might turn out that even if the lawsuit alone seems to have an upside, the downside it poses to your life makes it not worthwhile.

Representing clients in a changing world

This item, from Techdirt, should give some pause to lawyers who represent copyright holders: the top selling MP3 download on Amazon last year was Nine Inch Nails’ Ghosts I-IV album.  As Techdirt explains, this means, “[i]n other words, you could go on pretty much any file sharing system out there and legally download the music for personal use… and yet it was still the top selling downloadable album (this is on top of all the money earned by Reznor’s other business models associated with this album).”

A lawyer’s job is to represent the best interests of his client.  It may well be that the best interests of copyright holders in an environment where digital information can instantly be duplicated and instantly be disseminated world-wide is to find new business models, not to persist in the 20th Century habit of filing infringement lawsuits.  It seems silly, for example, (as IP Watchdog points out) for Gatehouse Media to be suing “the New York Times alleging copyright infringement by the New York Times because one of the papers owned by the Time, namely the Boston Globe, was linking to original articles owned by Gatehouse Media.”  Gatehouse’s allegations of infringement are based on the fact that the links, though they provide attribution to Gatehouse, are “deep links” — that is, they are links to the articles themselves that, therefore, bypass Gatehouse’s homepage (and, presumably, the advertising on the home page).

The court in Ticketmaster Corp. v. Tickets.Com, Inc., No. 99-07654 (CD Calif. Mar. 27, 2000)(pdf), found that deep linking was permissible. Tickets.com had provided deep links to pages on Ticketmasterrs website to guide readers precisely to the spot the could purchase tickets for specific shows. Ticketmaster wanted readers and customers to come through Ticketmaster’s homepage. The Court stated:

The customer is automatically transferred to the particular genuine webpage of the original author. There is no deception in what is happening. This is analogous to using a library’s card index to get reference to particular items, albeit faster and more efficiently.

The court concluded the deep links provide by Tickets.com did not constitute copyright infringement. Nevertheless, other deep linking cases (discussed by Gayle Campbell and Patty Steib here) make clear that the legality of the practice (like so much in copyright law) has not been finally determined.

But Gatehouse Media’s lawsuit seems intended to stop a practice that can only benefit Gatehouse Media by bringing more traffic to its site.  And what good are links if, for example, I left you wandering through a webiste trying to find the right page rather than sending you straight to it?

For some lawyers, unfortunately, a right is only something to be vindicated, not just one factor among many that need to be taken into account in seeking the client’s best interests.

If it’s too good to be true, it’s too good to be true.

Yesterday i wrote about recognizing lies.  It is also fundamental to anyone who deals with contracts that they recognize that the higher a price one gets, the higher a risk one is taking.  So, if you buy “junk” bonds, you are getting a high interest rate, but along with the high interest rate comes a high risk you’ll get paid nothing at all.  That’s why they are called “junk” bonds — they’re the bonds of high-risk borrowers.  If you want to lend to those borrowers, you might get a lot back, but you might get nothing.  You can assume, therefore, that if you are told you can’t lose — that you’ll always make money, — that the risk you are taking is infinite.

These are the fundamental points Ben Stein made in this last Sunday’s New York Times when he connected the Bernie Madoff fraud, the sub-prime mortgage crisis, and the 80′s rise and fall of Drexel Burnham Lambert, the investment bank that specialized in the junk bond market:

ABOUT two years ago, a little delegation from a major investment bank arrived at my home in Beverly Hills. These nice young people were from the bank’s “wealth management division.” I told them straight away that I didn’t have anywhere near enough wealth to make their trip worth their time, but they smilingly insisted that we could help each other.

They told me that if I invested a certain sum with them, they would make sure that a large chunk of it was managed by a money manager of stupendous acumen. This genius, so they said, never lost money. He did better in up markets than in down markets, but even in down markets he did well. They said he used a strategy of buying stocks and hedging with options.

I protested that a perfect hedge would not allow making any money, because money made on the one side would be lost on the other. They assured me that this genius had found a way to spot market inefficiencies and, indeed, to make money off a perfect hedge.

I thanked them for their time and promptly looked up Bernard Madoff online. Nothing I saw was even a bit convincing that he had made a breakthrough in financial theory. . . .

My point is not that I was so smart. I am not and I was not. Mistakes are a big part of my life. My point is that, as humans, we seem unable to learn from our mistakes very well.

I have never heard of an entity that could make money in all kinds of markets consistently, year in and year out. Yet we continue to believe that there will be one.. . .

The same goes on a much larger scale for the debacle of subprime mortgages. In essence, it is a much larger version of the Drexel Burnham Lambert junk-bond debacle of the 1980s. Back then, investors were charmed by the idea that the lower-ranked the bond, the more money it would make. It seemed like a great idea: there’s this little corner of the market that the big boys turn up their noses at. But in this little corner, huge money is made. It’s almost like the myth that you get great bargains in poor parts of town.

In fact, the Drexel episode should have taught us to be wary, indeed, of poorly rated debt. But it didn’t. The new version of the myth was so alluring that it drew in not just billions of dollars from lenders and mortgage bond buyers, but much more in derivatives linked to the myth.

Piecing together coherence

“Life is made up of a series of judgments on insufficient data, and if we waited to run down all our doubts, it would flow past us.”

– Learned Hand, On Receiving an Honorary Degree 137 (1939).

We all always want to know more. The worst discussions I have in class are those that begin with a suggestion from a student along the lines of, “Well, the plaintiff might have done X,” when there is no more reason to believe X happened than to believe the laptops of every student in the class were being used to take notes. In fact, the plaintiff might have done X, but the mere possibility is not enough on which to base a judgment or decision. If, on the other hand, there are facts or reasoning within the case that support a reasonable inference the plaintiff might have done X then perhaps X is worthy of being taken into account.

Juries never have all the facts. Wouldn’t it be nice if God could provide us his videotape, with all the angles the networks apply to sporting events.

But we make judgments, and we make decisions, and without our capacity to decide reasonably well based on a minimum of knowledge we’d be utterly lost. Life would flow right past us. The other day, writing about the reassignment of the Plain Dealer’s well-respected music critic, I wrote that “[a]s far as I know, such a reassignment breaches no duties, contractual or otherwise.” Do I know that for a fact? Of course not. I am not privy to the thoughts, discussions, or plans of any of the parties to the lawsuit. I don’t have a copy of the relevant contracts.  But what do I know? If there had been a breach of a contract or any other legal duty, Rosenberg’s lawyer would have alleged that breach.

In short, non-facts — things that don’t happen — are often as telling or even more telling than the things that happen. Will Girl Talk be sued for copyright infringement? I have no special insight. Some people are certain Girl Talk will be sued. Others believe Girl talk is protected by the doctrine of fair use.

Me? No one has sued Girl Talk yet. That speaks volumes. What else persuades me?  Girl Talk’s recordings use the samples they weave together to create works that can in no way be substituted for the sampled works. In short, as aural collages go, Girl Talk and Negativeland are as good as they get, and if I were interested in vindicating my right to charge for any sample of a recording I owned the copyright to, I’d stay as far away as I could from a lawsuit against those two acts.

But no doubt there is data out there I am unaware of that sooner or later will make me look like a fool.  That’s simply the nature of human existence.

Roberto Bolaño made a somewhat similar point in explaining the transmutation of life’s chaos into the order of stories:

Let’s say the story and the plot arise by chance, that they belong to the realm of chance, that is, chaos, disorder, or to a realm that’s in constant turmoil (some call it apocalyptic). Form, on the other hand, is a choice made through intelligence, cunning and silence, all the weapons used by Ulysses in his battle against death. Form seeks an artifice; the story seeks a precipice.

Involved in a lawsuit? Be ready to welcome the world into your life.

One of the downsides of engaging in litigation, even on behalf of a righteous cause, is the way in which you must open much you consider private not only to your adversary but often also to the public.  Your motives, your finances, your personal relationships, and, in certain circumstances, your physical and emotional health will be subject to inquiry in the course of a lawsuit.  Often, these questions and answers will be part of the public record.  Court records, after all, are public records.

Fortunately, unless you are considered newsworthy, most of the public will not go rooting through court files.  It is inevitable, though, that the new technologies and media outlets will be used to exploit the exposure of personal matters.

So I am not surprised that, as reported in the ABA Journal, “Outraged by deposition testimony in a fraud suit against a Houston automobile dealership, a client of a Texas attorney arranged, with the lawyer’s help, to post a six-minute excerpt on YouTube.”

In this case, the judge ordered the post taken down (because the deposition was not yet part of the public record in the case), but he refused to sanction the lawyer and client who had initially posted it. “However, the final salvo hasn’t yet been fired in battle to publish the deposition excerpt on YouTube. [The plaintiff's attorney] plans to file a written transcript of the deposition at the courthouse, as part of the record in the case, and then post the full deposition on the site. Under those circumstances, says [the defense lawyer] . . . , his client would be unlikely to protest.”

What, indeed, is fair use?

My students sometimes wonder whether their failures to find clarity in the law are the result of a lack of intelligence.  They aren’t.  Let me give a very timely example.  The New York Press writes that Girl Talk’s music — aural collages of others’ recordings — exists “without fear of lawsuit, thanks to the fair use doctrine in U.S. copyright law.”  The RIAA, on the other hand, states that “generally speaking, the use of any part of a song requires a license.”

The RIAA’s position is not without basis.  Judge Kevin Duffy in Grand Upright Music, Ltd v. Warner Bros. Records, Inc., 780 F. Supp. 182 (S.D.N.Y. 1991)(Duffy, J.), in a decision that did not even consider issues pertaining to fair use, enjoined the distribution of Biz Markie’s third album because one of its songs sampled three words and the accompaniment ostinato of Gilbert O’Sullivan’s schlock hit “Alone Again, Naturally.” Duffy wasn’t satisfied with a mere injunction, however: he referred the defendants to the U.S. Attorney’s office for criminal prosecution and wrote in his opinion, like a preacher from the pulpit,”‘Thou shalt not steal.’ [Exodus, Chapter 20, Verse 15] has been an admonition followed since the dawn of civilization. Unfortunately, in the modern world of business this admonition is not always followed.”

Bridgeport Music, Inc. v. Dimension Films, 410 F.3d 792 (6th Cir. 2004), compounded this folly, holding that the defendant had committed copyright infringement by using in his own musical recording a two-second sample from an earlier copyrighted recording, lowering the pitch, and looping the sample to extend it to 16 beats. Again, the court failed entirely to consider the First Amendment rights that must be balanced against maintaining the composer’s incentive to create, the very core of the fair use doctrine.

The Biz Markie case, Grand Upright Music, is generally considered the reason industry practice (as reflected in the RIAA’s statement quoted above) is to pay for any and all recorded samples. Record companies certainly have no interest in challenging the existing regime. The recordings they own are held inviolate too, so why challenge the right of another recording company to require payment for any sample, no matter how small, no matter transformative its use is, and no matter how little impact it will have on the market for the sampled piece?

Plainly, then, the New York Press is engaging in wishful thinking in assuming Girl Talk can operate “without fear” of lawsuits because of the fair use doctrine.  But MTV.com is being just as innacurate when it writes that Girl Talk’s failure to get permission to use the copyrighted recordings it uses “means that they appear in [Girl Talk's] song[s] illegally.”  And Techdirt is right on the money when it writes:

[W]ith over 300 samples used on the album, there’s almost certainly going to be a few who get upset [by the Girl Talk album]. . . . [T]he woman in charge of the copyright for the band the Guess Who is planning to go after Girl Talk, noting that: “We’ll chase it down. What more can you do?” Well, actually, there’s plenty more that you can do — such as recognizing that no one who hears the music on Girl Talk is going to see that as a replacement to the Guess Who’s album — and, if anything, it might entice new fans to the original.

So does Girl Talk exist without the fear of lawsuits?  Of course not.  But, as I wrote recently, if were advising a client whose recordings Girl Talk had sampled, I would advise that client not to sue Girl Talk: it’s position to argue that it has transformed the copyrighted materials and thus that their use is non-inringing fair use is just too good.  I’d go after someone I am more likely to beat.  Othewise, I’d lose all the leverage I have with the existence, as yet undisputed in case law, of the decisions in Grand Upright Music and Bridgeport Music.

The law may not be clear, but what I advise a client can nonetheless be clear.  Grasping that paradox is central to what it takes to being to really learn to think like a lawyer.

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.

Repeat after me: being a good lawyer means doing good for the client.

Time Ferris, in his post How Not to Use a Lawyer, explains well how lawyers can serve their clients.  Ferri’s observations are a “personal case study” provoked by an obnoxious letter from a laywer representing a business Ferris had actually spoken positively about in his book.  The lawyer had a legitimate request to make to Ferris regarding the specifics of Ferris’s written statement, but the letter was so obnoxious all it did was end up hurting the lawyer’s client.  Ferris’s points:

1. How you say something IS what you say.

2. It’s counterproductive to threaten someone until you determine their incentives to refuse compliance.

3. It’s better to steer the golden goose rather than kill it.

4. Don’t mistake symptoms with root problems, or confuse correlation with causation.

5. If you threaten someone in a digital world, it might become what your prospective customers see first.

This Land is Your Land

Nobody living can ever stop me,
As I go walking that freedom highway;
Nobody living can ever make me turn back
This land was made for you and me.

20 Civil Liberties Laws Every American Should Know

From the Criminal Justice Degrees Guide, 20 Civil Liberties Laws Every American Should Know:

1. Fair Housing Act

2. Racial Profiling Laws

3. Same Sex Marriage Laws

4. Voter I.D. Requirement Laws

5. Americans with Disabilities Act

6. Equal Pay Act of 1963

7. Ledbetter v. Goodyear

8. Oregon Death With Dignity Act

9. Roe v. Wade

10. EC in the ER laws

11. Medical Marijuana Laws

12. Occupational Safety and Health Act

13. Parent-child custody laws

14. Adam Walsh Child Protection and Safety Act

15. Detainee Basic Medical Care Act

16. The National Security Act of 1947

17. U.S. Patriot Act

18. Freedom of Information Act

19. Extraordinary Rendition

20. No laws for the terrorist watch list

You should read the entire post — these are mere links to the subjects Kelly Kilpatrick, the author of the post, comments upon with a considerable degree of intelligence.