Practical knowledge, innovative solutions and best practices for the in-house bar.
Each year hundreds of general counsel and other in-house lawyers from around the country gather in Chicago for the InsideCounsel SuperConference. At SuperConference attendees share strategies and best practices, get insight into how their peers are handling emerging legal, regulatory and management challenges, and network. The 7th annual SuperConference, which took place May 15 and 16, featured 30 breakout sessions on topics from privilege to FCPA compliance, a plenary panel about how companies should respond to global warming and a keynote address from former Sen. Paul Sarbanes. What follows are some highlights from the two-day event.
Plaintiffs’ lawyers targeted the company as an easy mark.
The company–whose identity is secret–endured a stream of mass-tort lawsuits, yet hadn’t prioritized its defense strategy. Instead it encouraged outside counsel to settle cases quickly and relied on insurance payouts to cover the costs.
But as insurance coverage neared its limits, the company realized it had to regain control of litigation costs.
At the session “Benchmarking Explained,” Bill Sowinski, director of decision support services for CT TyMetrix, explained how identifying metrics and setting benchmarks for performance helped this client get control of its litigation costs.
“The process involved making lists,” Sowinski said. “We identified the cost factors we’d be most able to influence and then benchmarked the company’s results against those of other defendants.”
The company set benchmarks for a variety of factors, including the number of trial-ready counsel at its outside law firms, the average monthly costs per case and the average settlement amount per plaintiff. When external data was not available for comparison, benchmarks were based on the company’s own performance.
This process of identifying cost factors and setting benchmarks allowed the client to weed out underperforming outside counsel and develop litigation strategies that reduced cost burdens.
For example, co-defendants in lawsuits involving the CT TyMetrix client mentioned above had similar liabilities, but were paying significantly less per settlement. “We were able to identify the defendants that weren’t bearing their fair share,” Sowinski said. “We then asked how the company got into that situation and how we could get into the same boat with co-defendants.”
Knowledge about where the client stood with relation to its co-defendants gave it a stronger position in settlement negotiations, and over time, the client’s payouts decreased to roughly equal those of its co-defendants.
“The most important step is understanding your own process,” said David Cambria, director of operations at Aon Corp.’s in-house law department, who also participated on the panel. “When you find out how you are doing today, it turns into an ‘A-ha!’ moment.”
GCs Under Fire
Panelists on the session “GCs Under Fire” offered the following tips to keep regulators and prosecutors at bay–and some examples of how failing to follow these guidelines can lead to trouble.
Be the gatekeeper
“Breathe life into your code of conduct,” said panelist Marti Little, general counsel of Legion Insurance Co.
Check your greed
Panelists pointed to Rite Aid’s former CLO Franklin Brown as an example of what can go wrong when GCs fail to leave their personal interests at the door. Brown’s compensation was tied to Rite Aid’s stock performance when he engaged in a scheme to inflate the company’s earnings. He was convicted of criminal fraud and settled civil fraud charges in 2003.
Don’t always be the ‘yes’ person
“Warn your clients about unpopular advice from the start and provide a range of alternatives,” Little recommended.
Know the law
Dan Gregus, assistant regional director for the SEC, noted that David Drummond, general counsel of Google, got in trouble with the commission when he advised the company that options granted to employees didn’t need to be registered. “Generally, the SEC will not sue an attorney for advice he or she gives a client–even if it’s negligent,” Gregus said. “But here, the commission looked at the improper motivation behind the advice–trying to keep competitively sensitive information private.”
Panelists said the SEC’s case against John Isselmann, former GC of Electro Scientific Industries Inc., was a troubling example of how a GC’s failure to provide enough information to executives creates liability. In 2005 Isselmann settled charges related to his failure to inform execs that the company could not eliminate certain employee benefits.
Executive Compensation Overview
One of the first things Christopher Cox did when he became SEC chairman was to declare war on complexity in financial
statements. Cox targeted executive-compensation disclosures as a key battleground, directing filers to explain their executive compensation programs clearly and succinctly–without mind-bending legalese.
So far, however, these new rules don’t seem to have simplified the language of disclosures. “Alarm bells are ringing,” Cox said in a March 2007 speech. “Already we are seeing examples of over-lawyering that are leading to 30- and 40-page long executive compensation sections in proxy statements. Most of it’s as tough to read as a Ph.D. dissertation.”
At the SuperConference session “Executive Compensation Overview,” panelists discussed the difficulty of meeting the SEC’s expectations. “Chairman Cox wants language as simple as Dr. Seuss,” said Luis Machado, assistant general counsel at Wm. Wrigley Jr. Co. “I find that challenging. Specific disclosures have to be made to ensure you are not creating an opening for a plaintiff.”
Furthermore, as compensation arrangements have become more multifaceted, they’ve become more difficult to describe. “Compensation for senior executives today is very complex. We are not trying to hide anything; it’s just not easy to comply with the regulations,” said Steven Shapiro, GC at eLoyalty Corp. “For example, you have to show the cost of equity, not the market value. That’s not always intuitive, and you wind up with paragraph-long provisos.”
In short, complexity is a tough adversary.
But in the fight against it, companies are gaining a better understanding of their compensation policies. For example, they are learning more about the perks their executives get and, in the process, are getting non-standard perks under control.
“We didn’t even know we had golf memberships until we did tally sheets for perks,” said Donald Liebentritt, president of Equity Group Investments. “That process revealed things. Disclosures should get you thinking and re-evaluating.”
Inroads to India
India is set to become the third-largest economic powerhouse in the world, after the U.S. and China, according to Kenneth Cutshaw, general counsel of Cajun Operating Co., which owns Church’s Chicken. He should know. As honorary consul to the Republic of India, Cutshaw has spent a lot of time in the densely populated subcontinent.
“India is on everyone’s mind; it’s very much part of the future,” Cutshaw told attendees at the session “Inroads to India.”
Richard Mosher, chief legal officer of Loctronix, and David Lindsey, partner at Clifford Chance, joined Cutshaw on the panel.
According to panelists, one reason for India’s incredible growth rate is a large workforce that is well educated but willing to
work for low pay. In many cases, an Indian worker can do the same work as an American employee for a quarter of the cost. This also applies to legal work.
“My company has three lawyers and four paralegals, and one of those paralegals used to spend all his time doing trademark work,” Cutshaw said. “After outsourcing some of the work to India, that paralegal only spends a third of his time on trademarks.”
The panelists, however, warned attendees that although India offers many economic advantages, there are many disadvantages to doing business there. One such disadvantage is its judicial system. “The lower courts in India can sometimes take 10 years to try a case,” Lindsey said. “What takes a week here can take six months there.”
Another disadvantage is India’s poor infrastructure. “India has terrible roads, which are extraordinarily congested,” Mosher said. “This makes building facilities and transporting goods difficult. If there’s one thing that could stop India from becoming a global economic leader, it’s the infrastructure.”
Sarbanes Stands Up for SOX
Former Sen. Paul Sarbanes became chairman of the Senate Banking Committee in June 2001, shortly before the Enron scandal erupted. In its wake, he convened 10 hearings in early 2002 to explore corporate governance issues. Concluding that sweeping new regulations were needed to protect investors, he co-authored the Sarbanes-Oxley Act. Sarbanes, 74, retired from the Senate in January 2007.
What follows is an excerpt from his keynote speech at the SuperConference.
The complaint about Sarbanes-Oxley that we hear the most is the assertion that the cost of establishing the internal controls of Section 404 are too great, particularly for smaller companies. There is a reason that the upfront costs are this much. For too long, too many companies have lacked adequate internal controls.
Nevertheless any reasonable concern about cost needs to be carefully considered. Obviously, you don’t want to impose an unnecessary burden, so there’s been an effort to examine the situation very carefully.
The new auditing standard for 404, together with the SEC’s new guidance to management, should make the internal
control review and audit more efficient, by focusing the effort on what truly matters to the integrity of the financial statements.
One other criticism of Sarbanes-Oxley is that we are losing our international competitive position in capital markets. That’s a very complicated issue. We no longer dominate the way we once did, but there are a lot of developments that have led to that. There’s a lot of liquidity elsewhere in the world, other markets that copy the American model, so other capital markets are being developed–Singapore, Hong Kong, Europe and so forth. Many of the companies going public are located there.
So we’re facing that kindof competition.
That raises the question of on what basis are we going to compete and at what standard do we hope to come out foremost in that competition? We’ve always had departures when people break the rules, but the American markets have been known for setting a high standard. If you can gain listing in the American market, you will, according to a study that was just completed, get evaluation premium at about 30 percent. Investors perceive that you’re meeting high standards, that things are being done according to the book and they’re willing to pay for that. The question then becomes, are we going to try to compete by lowering the standard and moving downward? The fact of the matter is that around the world, exchanges are beginning to move in the U.S. direction. The SEC has just done a very comprehensive study showing the extent to which aspects of Sarbanes-Oxley are being adopted across the world. So I think it’s very important that we hold to this high standard.
We must continue down the path of restoring honest, transparent, ethical business practices and the indispensable safety mechanisms designed to keep them in place.
Very frankly, we can do no less because the integrity of our capital markets and the confidence of our investors, and therefore the underlying strength of our economy, are at stake.
On the Offensive
Paul Dacier, executive vice president and general counsel of EMC Corp., seems to have little respect for plaintiffs’ attorneys. He believes most of them sue EMC simply because it has deep pockets. As a result, he rarely assumes a defensive posture when sued.
“We will fight most cases tooth and nail,” he said.
Dacier, who was a panelist on the “On the Offensive” session at the SuperConference, offered attendees some advice on responding to lawsuits. One of the first things he does after assessing the claim is determine whether his company has any leverage with the plaintiff. For instance, if the plaintiff is a customer he will advise his client to no longer do business with that entity. In addition, he said he often will file a counterclaim as soon as he receives a copy of the plaintiffs’ complaint and will attempt to move the case to a rocket docket. Most plaintiffs’ attorneys, he said, are unprepared to go to trial. He warned attendees, though, that they shouldn’t go to trial with the hope that the case settles.
“Your trial lawyers should never be distracted by a settlement strategy,” Dacier says. “They should be prepared to go all the way. That is the message you need to send to the other side.”
Ross Bricker, a partner with Jenner & Block and a panelist on the session, agreed with Dacier on this point. “If you decide to move forward you should budget accordingly,” he said. “If it doesn’t make sense financially, then don’t do it.”
Dacier admitted that going on the offensive is risky and that management needs to understand that they may lose a few cases along the way. According to Dacier, though, the long-term benefits of being aggressive outweigh the risks.
“Eventually plaintiffs will get the message that your client is not an easy target and will stop filing baseless suits,” he said.
Intellectual Asset Management
Panelists on the session “Intellectual Asset Management” offered the following suggestions for fostering innovation:
Sweeten the Pot
Cash encourages creative employees to advance patentable ideas. “Money is the motivator,” said William Shull, chief patent counsel at Halliburton Energy Services Inc. and a panelist on the session. Halliburton pays employees up to $3,000 for each commercialized patent and also rewards employees who author “defensive publications” serving as prior art.
Go Beyond Pocket Protectors
Award programs should look beyond the scientists and engineers. “All kinds of employees can invent business methods,” Shull said. Likewise, sales and marketing staff can identify consumer trends that create opportunities for innovation.
Educating employees about the basics of IP law can improve productivity. Employees should understand such concepts as novelty, obviousness and prior art. “The right to practice an idea versus patentability is not intuitive,” said Paul Rodriguez, chief patent counsel at RR Donnelley and a panelist on the session.
Efficient, simple programs attract participation. Cross-functional committees can develop technical guidelines, while intellectual asset managers act as liaisons, evaluate inventions’ merit and track progress.
Get the Word Out
Promoting award programs and publicizing inventors’ achievements increases awareness and participation.