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Caesars Entertainment: Render Unto Caesars
Christine Sommella, associate chief counsel for real estate and development at Caesars Entertainment Corporation, spent a recent lunch talking about a $550 million development deal in downtown Las Vegas. Heady stuff for a relatively young (she's 37) in-house counsel. "Yeah, it is," she agrees, "but now I'm going to the sewer department." She excuses herself, explaining that she has to negotiate where to put some new sewer lines.
That's a typical in-house day at the fast-paced Caesars, where the extraordinary is the routine. The lawyers under general counsel Timothy Donovan handle everything from complex, multimillion-dollar mergers and acquisitions to lawsuits brought by disgruntled casino losers. One morning the legal department might be negotiating a hefty performance contract involving singer Céline Dion or a restaurant lease for celebrity chef Gordon Ramsay, and that afternoon find itself working on one of the 75 collective bargaining agreements covering 25,000 unionized employees at its properties across the country.
Caesars was chosen one of our 2013 Best Legal Departments because of the magnitude of work done by its relatively small 21-lawyer department as well as for the quality and diversity of its efforts. The attorneys take on myriad projects in the gaming industry, one of the most tightly regulated businesses in the United States. Caesars regularly answers to regulators in 14 states, Canada, and one tribal jurisdiction, plus the Securities and Exchange Commission. It owns or operates 52 casinos in seven countries, including notable names like Caesars Palace, Harrah's, Paris Las Vegas, Flamingo Las Vegas, and Bally's Las Vegas. And the company is juggling $20 billion of debt while it grows exponentially with a popular online gaming business, new casinos around the world, and an outdoor dining and retail development called the Linq that is changing the face of the Las Vegas Strip.
All of this makes for a hectic agenda requiring a nimble general counsel. Chief executive Gary Loveman hired Donovan in 2009 for both his legal expertise and business background. The GC had held several business positions, including executive vice president and managing director of the Asia Pacific region for the manufacturing company Tenneco Inc. Donovan later became general counsel for Allied Waste Management Inc., and its predecessor Republic Services Inc. Loveman says that given Caesars's complex financial dealings and major lawsuits, he needed a lawyer "with both a legal and business mind to protect us legally, but at the same time to make sure we do what we need to commercially."
Donovan filled the bill. Saddled with a dwindling budget in a down economy, the GC quickly centralized the scattered department, cut a bloated payroll while still hiring bright and dynamic lawyers, and attacked spending with a combination of across-the-board metrics, streamlined operations, and modern technology. "You cannot manage what you do not measure," he preaches. He also brought a new mind-set, sharply focused on the client. Donovan boasts, "They no longer think of themselves as a group of lawyers who happen to work for a business, but as a highly functioning business unit who happen to be lawyers."
His philosophy is working. The legal team has orchestrated creative transactions resulting in more than $5 billion in debt reduction and cash infusions to fund growth. In 2012 alone, Caesars undertook three first-lien bond offerings by its main operating subsidiary totaling $2.75 billion, a first-lien bond offering for a Philadelphia property, an amendment to its credit facility, financing to renovate a casino, and an IPO.
The group has also resolved over half the major lawsuits against Caesarsmany were old cases inherited through acquisitionswhile reducing legal expenses over the past two years with a leaner staff. It also implemented a convergence project that reduced the number of legal vendors and cut outside counsel costs.
For all his hard work, Donovan was rewarded with more work. He was made a member of the management committee, promoted from senior to executive vice president, and given the additional title of chief regulatory and compliance officer in 2011. He quickly promoted Susan Carletta from compliance manager to his deputy to navigate the tricky regulatory waters. "Almost anything the company is looking at doing, from new developments to new employees, has some sort of regulatory or compliance review to it," Carletta says.
To keep tabs on Caesars's rapid changes, Donovan centralized the compliance department under Carletta. She supervises a small group in Las Vegas in which she is the only lawyer, plus she oversees 83 compliance employees around the country who report through regional heads. Carletta's group in Las Vegas includes two units: One handles due diligence and internal investigations, while the second coordinates all corporate initiatives and major developments. Every new key employee, for example, has to be licensed. Every restructuring of a department has to be cleared by regulators. "We have to monitor the company continually," Carletta says, "because if something changeseven something as small as changing an executive's titlewe have to go back to the state regulators."
And then there are the feds. Carletta explains that her duties include interacting with the SEC, the Internal Revenue Service, the Federal Election Commission (over Caesars's political action committee and lobbying), and other agencies. She also monitors compliance with the Foreign Corrupt Practices Act, which prohibits bribery of foreign officials. The law applies not only to Caesars's foreign properties in Asia, Canada, Egypt, South Africa, the United Kingdom, and Uruguay, but also to foreign visitors to U.S. casinos. "We have to be careful how we treat people coming here, such as who we give comps to, if they are government officials," Carletta explains.
Donovan also revised Caesars's litigation strategy. While many companies let their in-house lawyers handle the routine cases and outsource the complicated ones to law firms with special expertise, Caesars does the opposite. At the start of 2012, Caesars centralized the litigation and operations group under newly named chief counsel Duane Holloway. He oversees operations lawyers at each property, coordinates the handling of similar problems at different properties, identifies global issues, and helps set policies to fix them. The strategy, Holloway says, "has cut the number of our major cases in half from 2011 to 2012."
Holloway is amazed at the range of cases he sees, from serious class actions to frivolous suits. He cited one family who sued because the premium channel TV in their room showed movies inappropriate for their children. The family settled the case for the right to have free access to the pool for two years, Holloway says. More serious are several class actions seeking millions and accusing the casinos of encouraging excessive gambling by those with addictions. Caesars recently won an important precedent in one such suit.
In two of his other favorite cases, the company made a profit. Holloway explains that the claimants sued for millions of dollars over service contracts in two separate matters. Caesars formulated counterclaims based on suspected fraud. During discovery, Caesars's lawyers uncovered proof of the fraud. While the settlements are confidential, Holloway says both plaintiffs asked to dismiss their suits and the counterclaims. Holloway convinced his bosses to stand firm, and the plaintiffs ended up paying Caesars millions to settle. It was a perfect marriage between Caesars's business and legal aspirations. "We not only defended the matter, but took the offensive at the same time, and we do that a lot," Holloway notes.
Before Holloway's promotion, he headed Caesars's labor and employment group. (The company hired Richard Appel, a veteran labor attorney from Akin Gump Strauss Hauer & Feld, to take over the post beginning July 1subject to the necessary regulatory approvals.) Holloway says handling the labor and employment issues is one of the most difficult jobs in the legal department. To deal with the burden, Donovan and his group began developing a multidisciplinary labor team to implement a cohesive strategy across all properties two years ago. Under the developing plan, in 2012 the law department and human resources handled the major issues, while each HR department used an outside counsel to consult on day-to-day matters. And Caesars trained more HR employees on how to avoid litigation in the first place. The new strategy has been especially effective in labor negotiations.
The strategy also helps with Caesars's growth. That's because labor issues pervade much of what Caesars tries to do with new properties, Holloway says. Now the labor team has set guidelines on establishing labor peace in new developments. All the planning has reduced Caesars's load of major labor and employment cases from 85 in 2011 to 60 in 2012, according to Holloway. The key, he says, is that "we don't make labor decisions in a vacuum anymore."
The strategy also has helped with cost control. Holloway says that in 2009 the company spent twice as much on outside counsel fees as in 2012, with 90 percent of the fees going to labor negotiations and employment litigation. "Back then we had 15 or 20 law firms, with rates all over the board," he recalls. But a convergence plan reduced the number to six outside law firms, with an array of savings from alternative fees, fixed fees, and phased billing.
Such innovation permeates Caesars's legal department. One stellar business idea implemented by the lawyers has saved time and money across the department. The legal group created a transactional paralegal team to generate contracts. Deputy general counsel Michael Cohen, who heads the corporate services group, explains that the paralegals may work in Atlantic City or anywhere else, but they report to the team in Las Vegas.
Their job is to churn out quality transactions, and they do it at a dizzying pace. Using templates they have developed over the past two years, the paralegals are averaging about 3,400 transactions per year, ranging from promotional rules to marketing deals to lounge act contracts. The team also handles some licensing applications and third-party subpoena requests. At any one time, a paralegal is juggling up to 50 matters, with any transaction over $100,000 requiring the approval of an attorney. The result, Cohen says, is to free up attorneys "to be more proactive" as well as to offer more consistency in how contracts are handled across the country.
One of the legal department's most creative projects is rising across the street from Caesars Palace. The team of Scott Wiegand, chief counsel for enterprise development, is overseeing the building of The Linq, the open-air retail, dining, and entertainment district. It will literally link Caesars Palace to other smaller properties that Caesars has acquired, renovated, and in some cases rebranded. They include the Flamingo, Imperial Palace, Bill's Gambling Hall, and O'Sheas. Filled with renovated casinos, new indoor and outdoor restaurants, and retail shops, The Linq will be anchored by a 55-story observation wheel, the High Roller, billed as the world's highest.
It will open in phases, beginning later this year. The legal team handles every detail of the project's management, Wiegand says, which explains why Sommella was dispatched to the sewer department after lunch. "It's not about control," he adds, "but about coordination. The client looks to us for judgments on commercial terms and overall strategies."
His team is also actively pursuing Donovan's larger agenda for this year and beyond. For example, Donovan and Wiegand are working with a lawyer in Hong Kong to expand Caesars's Asian operations, where Donovan sees the greatest opportunity for "wealth generation." Caesars now has an office in Singapore and a golf course in Macau. To expand into the hotel and/or casino business will require difficult-to-obtain approval from Chinese officials.
And the GC has a list of other business goals. He wants to continue supporting the company's balance sheets by accessing more equity markets and doing more financing and debt repurchasing. His legal team is also busy supporting the opening of new casinos in Cincinnati, Boston, and Baltimore this year.
What's more, Donovan sees the online gaming business growing fast in the next year or two, with Caesars and others pushing for legalized online gambling. The company's social gaming venues could easily be expanded into full-blown gambling sites with national appeal, if other states would allow it. In February, Nevada passed the nation's first law allowing online poker and other gambling gamesbut only for players in Nevada. "We'd prefer a federal solution," Donovan says, "but we're happy with what's going on at the state level so far."
And the GC's eyes start dancing when he talks about another Caesars property: the World Series of Poker. If the tournament could expand to allow online gamblers across the nation to join in, "it will be good for business," Donovan notes, with the practiced understatement of a card shark.