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1. Critical Agenda
It’s the story that drove nearly all others in InsideCounsel‘s roundup of the Top 20 biggest legal stories of 2009:
On Jan. 20, Barack Obama became the 44th President of the United States.
It’s hard to imagine a more unenviable agenda: a nation embroiled in two wars; a global economy in tatters; and a deeply divided population and Congress.
Obama acted quickly to make his promise of change more than just a hollow campaign pledge. Just two days into his presidency, he announced plans to close the controversial detention facility at Guantanamo Bay. In the following months, Obama enacted a massive economic recovery plan, signed a game-changing employment discrimination bill, endorsed sweeping climate change legislation and launched a campaign for a complete overhaul of the nation’s health care system. But nearly one year into his presidency–and with the prospects for economic recovery still shaky, and major legislative initiatives still pending in a deeply partisan Congress–Obama faced harsh criticism. Some campaign supporters thought he had caved too much to established interests, while Republicans thought he was in the sway of traditional Democratic special interest groups, including labor unions.
From the start, business groups were skeptical of Obama’s intentions. By the fall, the steadily expanding rift between the White House and the U.S. Chamber of Commerce came to a head. Obama openly criticized the Chamber during Oct. 9 remarks defending the proposed Consumer Financial Protection Agency, which would oversee consumer products such as mortgages and credit cards. “[P]redictably, a lot of the banks and big financial firms don’t like the idea of a consumer agency very much,” he said. “In fact, the U.S. Chamber of Commerce is spending millions on an ad campaign to kill it.”
The Chamber responded to the criticism with a statement reiterating its disapproval of the proposal. It argued the new agency would do little more than further clutter an already overcrowded sea of regulators with a series of poorly defined rules.
“We should strengthen enforcement against illegal and predatory practices by expanding the ability of the seven current federal regulators taxed with consumer protection to do the job right–not by creating a separate giant new bureaucracy,” said David Hirschmann, president and CEO of the Chamber’s Center for Capital Markets Competitiveness, in the statement.
In another move that raised alarm bells in the business community, Obama’s pay czar, Kenneth Feinberg, demanded in October that seven companies receiving “exceptional” amounts of taxpayer bailout money cut the annual salaries of their 25 top executives by an average of around 90 percent, and total compensation by about 50 percent. At the same time, the Federal Reserve Board said it will review compensation programs of thousands of U.S. banks to discourage reckless behavior by making sure they reward long-term performance instead of short-term goals. The moves represented highly unusual government intervention into private business practices.
But that’s not to say Obama hasn’t made headway toward building a bridge between corporate America and his administration. On several occasions, he hosted executives for discussions at the White House, including a March meeting with more than 60 CEOs who are members of the Business Roundtable. He tried to quell “big government” fears by explaining that although government intervention was crucial to economic recovery, it wouldn’t become a hallmark of his presidency.
And prominent companies such as Nike and Apple have taken a very clear side in the battle between the Chamber and the White House by withdrawing from the Chamber over its opposition to the Obama-endorsed Waxman-Markey climate change bill.
“It is fair to say that the business community sees the need to have a better relationship with the White House,” says Venable Managing Partner Karl Racine, who served as associate White House counsel during the Clinton administration. “That’s apparent from much of the discussion concerning the Chamber of Commerce, as well as those companies that have opted out of the Chamber’s approach to climate change.”
2. Bumpy Recovery
As the New Year began, the economic outlook was as bleak as the winter weather. Many fourth quarter earnings statements recorded massive losses and uncertain prospects for recovery. With the 2008 government bailout obviously inadequate, new Treasury Secretary Timothy Geithner outlined on Feb. 10 a different approach and expansion of the rescue effort. The plan included a public-private rescue fund for toxic assets and an expanded program for financing consumer loans.
The plan was widely criticized for leaving too many questions unanswered. Rumors that the Obama administration intended to nationalize the banking system (which proved unfounded) fueled more declines on Wall Street, with the Dow Jones eventually hitting its lowest point in
12 years. The national gloom was compounded when both Chrysler and GM filed for bankruptcy. Though both companies emerged quickly, it was clear that millions of high-paid manufacturing jobs would never return.
But with spring, the stock market revitalized as investors started thinking the worst was over. A first-time homebuyer’s tax credit spurred the hard-hit housing market, and a wildly popular “cash for clunkers” auto rebate plan helped car dealers pare bloated inventories. When 19 major financial companies fared better than expected on government “stress tests” designed to demonstrate if they could survive further economic declines, investors showed renewed confidence in the financial sector.
One year after the credit crisis erupted, the stock markets continued to pick up steam. In September, Federal Reserve Chairman Ben Bernanke said that the recession was “very likely over,” though he predicted a bumpy recovery. With unemployment hitting a 26-year high of 9.8 percent in September, fears emerged of a “jobless recovery” that would be ultimately unsustainable in a consumer-driven economy. And billions of dollars of public money was still supporting the financial system, even as some banks started repaying the bailout money in an effort to avoid government control over such matters as executive pay.
As the economy showed new signs of life, President Obama’s proposal for systemic reforms in the financial system lingered in Congress. On Wall Street, financial firms were creating new investment instruments–this time buying up and repackaging life insurance policies. Investors cheered as the Dow Jones average once again surpassed 10,000 in mid-October, up more than 50 percent from its March low, based on strong third quarter earnings from some bellwether companies. But skeptics worried that the seeds of the next crash had already been sown, and others pointed out that the earnings gains came from massive job losses, making recovery for average Americans an uncertain prospect.
3. Tables Turned
For a time, it seemed like the headlines about “bad GCs” just wouldn’t stop. From 2003 to 2008, nearly three dozen U.S. general counsel were convicted of, pleaded guilty to, or settled civil or criminal charges brought by the Securities and Exchange Commission (SEC) or the Justice Department.
Some saw the prosecutors as unfairly targeting in-house counsel under the theory that, as gatekeepers, they should have prevented corporate wrongdoing. Others feared they were convenient scapegoats on which to pin the blame for top executives’ misdeeds.
So there was more than a little satisfaction when one of the most visible of the prosecuted GCs, former McAfee General Counsel Kent Roberts, was completely vindicated of charges related to the company’s stock option backdating scandal. On March 19, the SEC dropped all charges in its case following Roberts’ acquittal on related mail fraud charges the previous October.
A 2006 internal investigation at McAfee implicated Roberts as the sole culprit in the backdating scheme and served as the basis for his termination and the government prosecution.
Roberts filed suit against his former employer in September, alleging defamation, malicious prosecution and invasion of privacy. Roberts accused the company of making him the scapegoat to protect former CEO George Samenuk and the company’s board. He alleged that Samenuk and the board “instituted a campaign of diversion, misrepresentation and falsehood aimed at shifting the attention of federal authorities away from [their] misdeeds,” in the process destroying Roberts’ professional reputation and opportunities for employment.
Roberts’ attorney, William Freeman, a partner at Cooley Godward Kronish, told InsideCounsel in May that the unjustified charges against Roberts send a message to other companies. “It’s important to be sure an internal investigation is thorough and completely factual, because the government does make charging decisions based on what internal investigations say,” Freeman said.
4. Up Against a Wall
As the product liability lovechild of old-guard asbestos and new-wave Chinese imports, the Chinese drywall scandal was a plaintiffs lawyer’s dream and a homeowner’s nightmare.
The majority of the drywall in question was imported during a shortage caused by the housing boom of the early 2000s and exacerbated in the Gulf States region by severe 2004 and 2005 hurricane seasons. Complaints began surfacing in late 2008 from homeowners suspecting that imported drywall in their homes was responsible for harms ranging from a sulfurous odor and corroding metals to respiratory problems and nosebleeds. As of September 2009, the Consumer Product Safety Commission (CPSC) had received 1,192 incident reports related to drywall.
Researchers have found that the drywall emits “volatile sulfur compounds,” but the CPSC, EPA and CDC continue to study the drywall and its as-yet unproven health and environmental effects.
That hasn’t stopped the lawsuits. In August, New Orleans trial lawyer Daniel Becnel told InsideCounsel, “I’m going after everyone in the food chain.” Becnel represents about 200 “toxic drywall” homeowners.
Becnel’s not the only one. Numerous individual and class action suits (from homeowners and other parties along the chain) have begun targeting the Chinese manufacturers of the drywall (and their German parent company), homebuilders, contractors, subcontractors, distributors and insurers.
Becnel says it’s difficult to bring an action against a Chinese company, and indeed in September a federal district judge in Louisiana overseeing a drywall-related multidistrict litigation held China-based Taishan Gypsum Co. in default for failing to respond to a class action lawsuit related to the imported drywall, of which it was a major manufacturer.
Of course, the real ordeal–legal and otherwise–is that of the homeowners. They face uncertain science, far-off defendants and homes they allege are poisoning them. Insurance companies are claiming pollution exclusions to deny their claims, and most recently homeowners were reporting their homeowners’ insurance providers refused to renew their policies after denying their Chinese drywall claims.
The science is on the horizon, though–and that should provide some clarity. “Only once we get some scientific foundation for the allegations or the defense are we going to be able to see if this is a big deal,” Womble Carlyle Sandridge & Rice partner John Sweeney told InsideCounsel in August.
5. Under Fire
Scrutiny and criticism defined 2009 for the Securities and Exchange Commission (SEC). Rep. Gary Ackerman, D-N.Y., kicked things off Jan. 5 with a crude but direct assessment of the agency’s efforts to protect investors: “They suck at it.”
Accusations came from every direction. The Government Accountability Office released a report in March detailing holes in the SEC’s resources that played a role in its failure to root out frauds–some building for decades–that contributed to the financial meltdown.
In August, H. David Kotz, the SEC’s inspector general, released a scathing report analyzing the SEC’s oversight of credit rating agencies such as Moody’s and Standard & Poor’s. The report questioned the agencies’ eagerness to favorably rate subprime mortgages that proved worthless when the real estate market began its decline in 2006.
With a new chairman, Mary Schapiro, at its helm, the SEC fought to regain some goodwill with proposed rules aimed at increasing corporate transparency and oversight.
The credit rating agencies got their due in September with an SEC vote to increase oversight by requiring annual compliance reports and seeking greater disclosure of an agency’s rating history.
“Reliance [on credit rating agencies] did not serve [investors] well over the last several years, and it is incumbent upon us to do all that we can to improve the reliability and integrity of the ratings process and give investors the appropriate context for evaluating whether ratings deserve their trust,” Schapiro said at the meeting.
Motivated by the collapse of AIG, which crumbled in 2008 after the failure of a single, risk-burdened unit, the agency proposed a new rule in July to illuminate how a company’s compensation practices relate to its risk profile. The rule would require public companies to disclose these relationships in their annual proxy statements to shareholders. At press time, the rule awaited final approval.
“[The SEC] is reacting to the fact that a lot of top officers got really rich and walked away, leaving the public with depleted 401(k)s and retirement and college savings because they got stuck with all the risk,” Ropes & Gray partner Julie Jones told InsideCounsel in September.
6. Disparate Decisions
The Supreme Court’s 2008-2009 term saw the justices siding with employers in cases involving age discrimination and the ability to impose mandatory arbitration on union members’ discrimination claims. But on the key labor and employment decision of the term, it left employers between a rock and a hard place on the issue of reverse discrimination.
In the closely watched Ricci v. DeStefano, the court ruled on June 29 that the City of New Haven subjected white firefighters to race discrimination when it threw out the results of a promotional examination on which they had done well and black firefighters did poorly. New Haven argued that it had acted in good faith, fearing a disparate impact suit from minority firefighters had it relied on the test results in its promotion decisions.
In a 5-4 decision, the court rejected that argument and found that the city had engaged in disparate treatment of the white firefighters. Writing for the majority, Justice Anthony Kennedy said that Title VII prohibits both disparate treatment and disparate impact discrimination. Declining to certify the results because they showed disparate impact against black and Hispanic firefighters constituted an unlawful disparate treatment of the white firefighters, he said.
“Without some other justification, this express, race-based decision-making violates Title VII’s command that employers cannot take disparate employment actions because of an individual’s race,” Kennedy wrote.
But in the minority opinion, Justice Ruth Bader Ginsburg said the majority’s decision “makes voluntary compliance [with Title VII] a hazardous adventure.”
While the decision will have the most immediate impact on public employers that commonly use tests for hiring and promotion, it applies to private employers as well.
In other notable labor and employment decisions, the Supreme Court:
- Decided 5-4 in Gross v. FBL Financial Services Inc. that in age discrimination cases, the burden is on the plaintiff to show that his or her age was the sole, or “but-for,” reason for the employer’s decision. In doing so, the court rejected so-called “mixed motive” claims that assert age discrimination was one of the reasons for an adverse action.
- Ruled that an employer and a union can agree that unionized employees must take their statutory discrimination claims to arbitration, rather than filing lawsuits. Writing for the five-member majority in 14 Penn Plaza LLC v. Pyett, Justice Clarence Thomas specified that arbitration provisions are enforceable only if the definitions of exactly what claims are subject to arbitration are clear and specific.
7. Bad Bug
It started in April, south of the border, but rapidly became a global pandemic. By early November, the Centers for Disease Control and Prevention (CDC) reported widespread swine flu in 48 states, and smaller outbreaks in the others. The World Health Organization had counted 175,000 cases and 4,200 deaths in the Americas. That number included only those cases confirmed by laboratory testing, meaning most relatively mild cases were not included. Still, the disruption of normal business activity was negligible, but health authorities warned that the flu season had only just begun.
While most of the country anxiously awaited the arrival of the H1N1 vaccine, a group of New York medical professionals filed suit in October in the Federal District Court for the District of Columbia to block distribution of the vaccine nationwide. They alleged that it was approved too quickly, without appropriate testing for safety and effectiveness. After New York health care workers won a temporary restraining order blocking implementation of a state order requiring them to get the H1N1 vaccine or risk losing their jobs, the state suspended the order, saying the vaccine should go to high-risk groups first.
Meanwhile, businesses scurried to devise contingency plans to deal with potentially massive absenteeism. The EEOC issued guidance interpreting Americans With Disabilities Act (ADA) provisions in light of the pandemic: An employer can send employees home if they display influenza-like symptoms. They can ask an employee if he has the flu, or symptoms of the flu. But they cannot identify employees who have swine flu. And they can’t ask employees if they are at high risk for complications because that could involve probing into an ADA-protected disability. The EEOC also warned against requiring an employee to take a medical exam or even have his temperature taken (though the agency left the door open to allowing temperature taking should the outbreak become more severe).
While it may seem like a tricky road for employers to walk, Darren Mungerson, a shareholder at Littler Mendelson, points out that the swine flu has not changed any of the rules under the Family Medical Leave Act or the ADA.
“There may be business reasons to change things such as sick leave policies, but the sky is not falling in terms of legal implications,” Mungerson says. “Follow what you’ve done before and treat everyone on an equal basis.”
8. Climate of Change
For the first time, meaningful climate change legislation gained traction in Congress in 2009 in the form of the American Clean Energy and Security Act.
Passed by the House of Representatives June 26, the climate change bill mandates a cap-and-trade policy for greenhouse gas emissions that would forever alter the U.S. economy, says Seth Jaffe, coordinator of the environmental practice group at Foley Hoag.
And the impact wouldn’t just strike traditional polluters such as manufacturers. “It’s going to make energy a central focus of what every company that occupies any significant space has to think about,” Jaffe says.
Sens. Barbara Boxer, D-Calif., and John Kerry, D-Mass., introduced a companion bill in the Senate Sept. 30, with one key difference: a tougher 20 percent limit on greenhouse gas emissions than the House bill’s 17 percent cap.
Greenhouse gas emissions also took the spotlight in two pivotal federal appeals court decisions allowing plaintiffs to file public nuisance lawsuits against power companies. In a landmark decision Sept. 23, the 2nd Circuit ruled in Connecticut v. American Electric Power that global warming-related injury claims against six power companies could proceed. While the U.S. District Court for the Northern District of California bucked the 2nd Circuit’s reasoning Sept. 30 by dismissing nuisance claims in Village of Kivalina v. ExxonMobil Corp., just two weeks later the 5th Circuit swung the momentum back to plaintiffs’ cases. A three-judge panel unanimously reversed the lower court’s decision in Comer v. Murphy Oil USA that dismissed nuisance claims related to Hurricane Katrina damage.
The circuit decisions, combined with stricter enforcement of existing Clean Air Act standards, send a clear message to the in-house bar, Jaffe says.
“All of those actions tell corporations that their option isn’t congressional legislation or nothing,” he says. “It’s congressional legislation or dealing with EPA regulation and private lawsuits.” Jaffe advises in-house counsel to take an active role in shaping that legislation since it’s not a matter of if it will pass but rather when.
“Corporations should negotiate the best deal they can because even the worst bill is going to be better than dealing with EPA regulation under existing authority and a host of public nuisance cases,” he says.
9. The Competition Commission
If there’s one thing the European Commission (EC) has no patience for, it’s antitrust violations. The EC has perhaps most clearly demonstrated its zero-tolerance stance on anticompetitive practices in its years-long battle with Microsoft–beginning in 1993, with its concern over the software giant’s dominance in the market, to most recently targeting its software bundling practices.
Last year, the commission hit Microsoft with a $1.3 billion fine, a record at the time, for failing to comply with a 2004 judgment that the company had abused its market dominance. “Microsoft was the first company in 50 years of EU competition policy that the commission has had to fine for failure to comply with an antitrust decision,” European Competition Commissioner Neelie Kroes said in a February 2008 statement.
Then in January 2009, the EC objected to Microsoft’s bundling of Internet Explorer with the Windows 7 operating system. “Microsoft’s tying of Internet Explorer to the Windows operating system harms competition between Web browsers, undermines product innovation and ultimately reduces consumer choice,” Kroes said in a January statement.
Later this year, however, the EC and Microsoft seemed to have put an end to the ongoing battle. Microsoft proposed offering EU users of Windows 7 a choice of several browsers, including Chrome, Mozilla Firefox and Explorer. On Oct. 7, Kroes announced that the EC would begin market-testing the proposal.
“I’m absolutely of the opinion that this is a trustful deal that we’re making. I trust Microsoft,” Kroes told reporters in a statement the same day. “I had contact with Steve Ballmer. The [EU investigation] team is in close contact so there can’t be a misunderstanding here.”
While the EC may be playing nice with Microsoft, it doesn’t seem to have the same attitude toward Intel. In May, the EC fined the Silicon Valley-based semiconductor company $1.45 billion for abusing its dominance in the European computer chip market.
“Intel used illegal anticompetitive practices to exclude its only competitor and reduce consumers’ choice–and the whole story is about consumers,” Kroes said in a May statement.
The fine surpassed the Microsoft figure to become the largest fine ever levied for breach of competition law in the European Union. In a May statement, Intel maintained the Commission’s conclusions were “wrong–both factually and legally.” Intel has appealed the decision.
10. Labor Letdown
For awhile, it looked like 2009 might go down in American history as the year of labor victories. It started in January, when President Obama signed three pro-union executive orders affecting companies with government contracts. The new Democratic-controlled Congress wasted no time passing the Lilly Ledbetter Fair Pay Act, in effect overturning a pro-employer Supreme Court decision and making it easier for workers claiming pay discrimination to win suits against their employers.
Hilda Solis, to whom the AFL-CIO gave a nearly perfect pro-union voting score during her tenure in Congress, took over the Labor Department in March. In her first speech, she vowed to go after employers who “for far too long, abused workers, put them in harm’s way [and] denied them fair pay.”
With labor supporters in power in both the legislative and executive branches, many predicted that the No. 1 goal of unions–passage of the Employee Free Choice Act (EFCA)–would be a slam dunk. It didn’t turn out that way.
Opponents including the U.S. Chamber of Commerce succeeded in stirring up enough controversy over EFCA to effectively stall the bill in Congress. The arguments centered on a provision eliminating secret ballot elections to determine if a bargaining unit will be formed, replacing them with a so-called card-check process. Business interests argued the move would allow unions to put undue pressure on employees to sign the cards and deny employers their right to present their case.
At press time, the bill was still languishing amid media reports that negotiations were underway to replace the card-check provision with an expedited election process, which management-side labor attorneys said still would unfairly advantage unions.
“While expedited elections are more favorable than card check, the fallacy of the entire premise of EFCA suggests it is neither necessary, wise or warranted,” says Allen Gross, a partner at Mitchell, Silberberg and Knupp. Gross cites statistics showing that unions won 56.8 percent of the elections held in 2005, and that only five percent generated objections from either the union or management. That shows the current system works for both sides, he says.
EFCA isn’t likely to pass this year, Gross adds, “but I think there will be new legislation, and ultimately it will pass in some form.”
11. Health Care Hullabaloo
Not too many things sound scarier than a “death panel.” Slap that term onto an element of health care legislation, and you’ve got a conspiracy theory tailor-made to provoke widespread anxiety. It didn’t help that Republicans such as Charles Grassley, of Iowa, and former vice presidential candidate Sarah Palin perpetuated the rumors.
The degree of fear-mongering epitomized the intense controversy surrounding the health care debate. President Obama launched his reform push in February during an address to Congress, touting overhaul as a key element of economic recovery, and was met with instant opposition from Republicans.
All told, Congress shopped around five different health care bills throughout the summer and fall. A public option was in the most prominent bills, then it was out, and then, surprising many, it reappeared as a discretionary amendment to the bill Senate Majority Leader Harry Reid, D-Nev., promised in October to deliver to the full Senate–states could opt out of the public option while still adopting the rest of the overhaul.
Sen. Max Baucus, D-Mont., introduced his bill, the cheapest of the bunch, in September. While it doesn’t require employers to insure employees, companies with 50 or more workers must reimburse the government for any subsidies supplied to employees who get their own insurance. It allows people satisfied with their current insurance to keep it while ensuring coverage even for individuals with pre-existing health conditions.
The Congressional Budget Office (CBO) released a preliminary analysis of the Baucus bill’s cost on Sept. 16. Even with an estimated 10-year net cost of $500 billion, CBO projected the proposal would result in a net reduction of the federal deficit by $49 billion dollars during the same time period. More than $200 billion in revenues from an excise tax on high-premium insurance plans, as well as other spending changes, would actually lead to an increase in federal revenues.
Health care fraud-fighting provisions in the bill strengthen requirements for health care organizations to return overpayments quickly, which Joan Polacheck, a partner at McDermott Will & Emery, says would also play a key role in funding the plan. “There will be enhanced scrutiny of the relationship between health care providers and insurance companies,” she says, which will come in the form of increased pressure to identify and refund overpayments.
On Oct. 13, the Baucus bill squeaked through the Senate Finance Committee with just one Republican vote–from Sen. Olympia Snowe, of Maine, who tempered her yea-vote by saying she wouldn’t necessarily approve future versions. Quickly making good on her promise, Snowe withdrew her support when Reid announced his pledge to include a public option.
12. Hitting Home
With the increase in litigation, the focus on intellectual property and the employment issues surrounding layoffs that arise during difficult economic times, legal departments are no doubt keeping themselves busy these days. But despite the increased workload, many are being asked to slash not only their annual budgets, but also their headcounts.
Earlier this year, Microsoft’s legal department had to cut its budget by 15 percent and its staff by 5 percent. Sony Electronics had to trim more than 20 legal department employees, in addition to budget cuts. And Macy’s department stores reduced its staff by 7,000 employees–which included 14 people who either retired or were laid off from its legal department. Home Depot and Ford Motor Co. also can be added to the list. These are just a few of the many legal departments being forced to do more with less.
“While the degree may be different, what’s really made this recession unique is that it’s affected [legal departments in] industries across the board,” Vanessa Vidal, president of ESQ Recruiting, told InsideCounsel in August.
Out-of-work in-house counsel are turning to networking events and informational interviews to keep their names out there, but Vidal said it’s important to simply be patient. It often takes six months to a year for in-house counsel to find another job in this market.
But it’s not all so bleak. Hiring in the health care and energy industries remains strong, according to Bob Graff, global practice manager for the in-house practice group at recruiting firm Major, Lindsey & Africa.
“We’re down, but we’re not down nearly as much as the law firm hiring,” he told InsideCounsel in August. “The outlook is still very bright for corporate legal departments.”
13. Billing Business
Some of the country’s top law firms have caught the brunt of the economy’s downward spiral. Last year, some long-standing firms–including Heller Ehrman and Thelen, both based in San Francisco–closed their doors after decades in business. In 2009, Wolf Block closed its doors after 106 years of doing business from its Philadelphia base.
And the rest of the year brought no relief for those still standing. In 2009, scores of firms–too many to list–suffered round after round of mass layoffs, which included not only support staff but also associates and partners alike.
But there may be a silver lining. These struggles have been the impetus law firms needed to find new ways of doing business to keep afloat. And reassessing their billing practices may just be the answer.
“The billable hour is a defective model, and the defects become more apparent in tough times,” said David Boies, founder and chairman of Boies, Schiller & Flexner, in his keynote speech at the 2009 InsideCounsel SuperConference.
While law firms are closing their doors and laying off employees, their clients are also in dire straits. With companies like Pfizer, which historically spent $500 million a year on legal services, slashing those big budgets by upwards of 20 percent, firms are looking to alternative fee arrangements–such as flat-fees, contingencies and reduced rates–to save their businesses and keep clients happy.
San Francisco-based Orrick, Herrington & Sutcliffe is one example of a firm that’s making this work. By incorporating efficiencies–such as software integration, biweekly work analysis on lawyers and a more diverse mix of associates and partners–Orrick has maintained profitability.
“Alternative fee arrangements encourage us to partner with our clients,” says David Fries, chief client services officer at Orrick. “It offers them cost certainty, alignment of interests and lower costs, and it pushes outside counsel on spending more time on loss avoidance.”
As more companies find themselves in a situation similar to Pfizer’s, more law firms will be forced to accommodate. Boies said alternative fee arrangements lead to the happiest clients and provide the most value and predictability. And he believes alternative fee arrangements are here to stay.
14. Social Responsibility
Social media aren’t exactly new, but they took a front-and-center role in our personal and professional lives this year. According to research firm Forrester, in 2009, about four in five American adults who went online used social media at least once a month, and half participated in social networks such as Facebook and Twitter.
As demonstrated in the past, courts are often slow to keep up with the advancement of technology–and social media have been no exception. For in-house counsel, the increase in popularity of social media may spell headaches on several fronts.
Privacy: Many employers are jumping online to check up on potential employees. Experts warn if you’re not careful, you may violate that person’s privacy rights.
“You should redact information that you shouldn’t be considering in hiring decisions, such as date of birth, or the fact that they are pregnant or have a disability,” Brian Flock, a member of the employment privacy group at Perkins Coie, told InsideCounsel in November.
Additionally, some employers are looking at what their current employees are posting on their Facebook pages, Twitter feeds and blogs. As long as the information is openly available, it’s fair game, experts say. But bypassing passwords on protected sites to see what an employee has posted isn’t.
Intellectual Property: Social media are a breeding ground for trademark worries among businesses. For example, when two companies have the same name, such as Delta Airlines and Delta Faucets, the question is raised about who gets the URL on the Facebook page or Twitter account.
While there are laws that protect trademark owners in the cyberspace realm, they haven’t caught up to social media. The Uniform Domain Dispute Resolution Policy only protects second-level domain names, which social media sites don’t provide. The Lanham Act, which trademark owners use to sue for trademark infringement or unfair competition, only applies if the mark is being used “in commerce.” And since most social media users are selling products or services from within their account, these laws wouldn’t apply.
Until trademark laws catch up, trademark owners will be hard at work registering their trademarks as usernames on social media sites before someone else does.
In the Courtroom: Usually, the last thing a GC overseeing a costly litigation wants is a mistrial. But with smart phones and BlackBerrys, social media are at a juror’s fingertips–and the threat of the juror reading or divulging information he shouldn’t is real. One case in February underscored the problem.
After an Arkansas jury reached a $12.6 million verdict against Stoam Holdings in Deihl and Nystrom v. Wright and Stoam Holdings, it was discovered that a juror had posted several disparaging entries about Stoam on his Twitter page during the trial. After catching wind of the post, Stoam appealed the verdict. Although the judge ruled that the juror’s conduct was in poor taste, he said it didn’t warrant a new trial. Despite the close call, the message was loud and clear.
“Inside counsel have to make sure their outside counsel (and the judge) are aware of the problem,” Richard Ormond, a shareholder at Buchalter Nemer, told InsideCounsel in June.
15. Historic Choice
President Obama got his first opportunity to alter the Supreme Court when Justice David Souter announced his retirement April 30. Obama’s choice to replace him, 2nd Circuit Judge Sonia Sotomayor, personified the American dream–like the president himself. Sotomayor rose from a childhood in a Bronx housing project to become a successful Latina attorney and jurist.
While Sotomayor drew fire from the gun lobby, business groups generally supported her nomination. “Through several years of experience as a law firm partner representing business interests, Judge Sotomayor has spent time considering the litigation environment from our point of view,” U.S. Chamber of Commerce President Thomas Donohue said in a statement. “With her unique experience as both a trial and appellate judge, Judge Sotomayor has seen firsthand the tremendous burdens that our legal system places on businesses.”
Conservative commentators tried to inflame opposition by pointing to a remark Sotomayor once made that “a wise Latina woman with the richness of her experiences would more often than not make a better conclusion than a white male.” Regardless, Sotomayor’s confirmation process was relatively smooth and she was confirmed in August on a 68-31 vote, becoming the third woman and the first Hispanic to sit on the
16. Doctrine’s Orders
Pre-emption flourished under the Bush administration, with various federal agencies and their divisions adopting language in their regulations or regulatory preambles allowing for federal laws to pre-empt state tort laws, and taking a pro-pre-emption stance in court briefs. Many expected that to change under President Obama, and he made his move with a May 20 memo that stated executive departments and agencies should only pre-empt state law “with a sufficient legal basis.” He also ordered a review of any regulations issued within the past 10 years containing statements intended to pre-empt state law.
As an issue at the intersection of state tort claims and federal regulations, such language had been adopted most visibly by safety agencies such as the National Highway Traffic Safety Administration (NHTSA). Under Bush in 2008, the agency proposed automaker standards for roof crush resistance–an echo of the wave of class actions concerning rollover crashes–which included statements that “all differing state statutes and regulations would be pre-empted” under the new regulations.
When the Department of Transportation announced the final NHTSA rule in April 2009, the pre-emption language was gone, with the explanation that it had been “reconsidered”–a sign of the changing political climate.
Perhaps the most interest in pre-emption can be found in the pharmaceutical industry, which is subject to heavy federal regulation and multibillion-dollar product liability litigation. In early 2009, the pharmaceutical industry awaited the Supreme Court’s decision in Wyeth v. Levine, the case of Diana Levine, the musician who lost an arm due to what she claimed was inadequate warning labeling of Wyeth’s phenergan drug. The case asked whether state failure to warn claims are pre-empted by FDA approval of drug labeling. In a March opinion, by a 6 to 3 margin, the Supreme Court said no.
But the opinion was no treatise against pre-emption–the majority gave a careful statutory reading of the FDA regulations for drug labeling in coming to its conclusion.
“In the executive branch, it becomes apparent that Obama disagrees with some of what the Bush administration had done in the pre-emption area,” says Mark Herrmann, a Jones Day partner and co-proprietor of the Drug and Device Law Blog. “But you’ll still see legal decisions on pre-emption going both ways in court.”
17. Deal Duties
Delaware, a pacesetter for U.S. corporate law, took on two cases in 2009 that dealt with the duties of boards of directors, an increasingly important issue for shareholders in recent years. Specifically, two cases, one still raging, looked at their duties in the mergers and acquisitions context.
After Dutch chemical company Basell acquired Lyondell Chemical Co. through a process that began in 2006, shareholders sued for damages, alleging that Lyondell’s directors had acted in bad faith by failing to properly shop the company and get the best deal for shareholders. For directors to satisfy their fiduciary duties under Delaware law, they must act on an informed basis, in good faith and in the honest belief that their actions are in the best interest of the company. Ryan v. Lyondell looked at what it meant to act in bad faith.
In March the Delaware Supreme Court set a high bar, setting aside liability for independent and disinterested directors in M&A deals unless there has been a “conscious disregard” of duty or if the directors “utterly failed to attempt to obtain the best sales price.” It continues a pattern of deference to boards of directors.
“The decision gives support to directors who have to make these tough calls about how to sell a company … and makes clear that Delaware courts are not going to go back and second-guess the directors’ decisions so long as there were not conflicts of interest at issue,” Hunton & Williams associate Steven Haas told InsideCounsel in June. Williams had closely followed the story as a guest contributor to Harvard’s Corporate Governance and Financial Regulation blog.
It remains to be seen how the Delaware courts will view directors involved in the already-infamous Bank of America acquisition of Merrill Lynch & Co., which shareholders approved in December 2008–and which remains the subject of multiple lawsuits and investigations. In a shareholder suit consolidated in Delaware, plaintiffs contend BofA directors knew that Merrill would post a $15.4 billion loss in the last quarter of 2008 but consciously failed to disclose the fact and went ahead with the deal anyway. (BofA has since accepted $45 billion in federal bailout funds, with $20 billion coming just weeks after acquiring Merrill.) BofA counters that it was clear Merrill Lynch had suffered from the subprime mortgage meltdown, and the losses should not have come as a surprise.
Most recently, shareholders in the Delaware case overcame a BofA motion to dismiss on Oct. 12, with the chancery court noting the facts as alleged support the shareholders’ bad faith claims.
18. The Great Pyramids
Ponzi schemes made something of a comeback in 2009, with attention dominated by Bernie Madoff. As Ponzi’s new patron saint, Madoff presided over an investment scheme that’s been estimated at $50 billion, with $18 billion in actual losses to his clients, including many non-profits.
In June Madoff was sentenced to 150 years in prison and ordered to pay $170 billion in restitution. After his arrest, the SEC came under fire for failing to take action despite receiving several “credible and specific” warnings regarding Madoff’s investments.
“The market downturn is really driving a lot of this being uncovered,” financial investigations expert Michael Mayer told InsideCounsel in March. Mayer is vice president of CRA International. “The rocks surface as the tide goes out.”
One revelation was the legal industry’s very own Madoff figure. Marc Dreier ostensibly set out to manage his 240-lawyer firm, Dreier LLP, like a business, doing away with the partnership structure and assuming the role of sole equity partner. He relished in the spoils–his high-flying lifestyle included multiple homes, a 121-foot yacht and a $40 million art collection. There was a clear bureaucracy, and he was on top, which allowed Dreier to hide a Ponzi scheme that included peddling worthless financial instruments to hedge funds and skimming from escrow accounts.
Arrested in December 2008, Dreier pleaded guilty in May to criminal charges connected to the scheme. The indictment outlined how between 2004 and 2007 he sold $700 million in fake promissory notes to investors, resulting in $400 million in losses. He also poached $40 million from client escrow accounts. In July a court sentenced him to 20 years in prison, rejecting the 145-year sentence prosecutors had sought and noting that Dreier’s scandal paled in comparison to Madoff’s.
In a letter Dreier wrote to Federal Judge Jed Rakoff before sentencing, he offered a mea culpa and an explanation.
“I can’t remember or imagine why I didn’t stop myself. … I recall only that I was desperate for some measure of the success that I felt had eluded me,” he wrote. Prosecutors said prior to carrying out the crime, Dreier earned $400,000 a year.
Dreier LLP no longer exists, and creditors have filed more than $450 million in claims against the firm.
19. Breaking the Rules
Change is afoot at the U.S. Patent and Trademark Office (PTO), but as for the expected change that sparked controversy in the IP world for years–well, it kind of just went away.
In October the PTO, under the leadership of newly appointed director David Kappos, announced that it would rescind its proposed claim and continuation rules (see “Out of Balance,” November 2009).
One of the proposed rules, originally published in January 2006, would have made it difficult for patent applicants to include large numbers of claims in an application. The other would have limited applicants to two continuation applications and one request for continued examination for each application.
In April 2008, the U.S. District Court for the Eastern District of Virginia permanently enjoined the rules after they were challenged in court by Triantafyllos Tafas, the founder of robotic microscope company Ikonisys Inc., and GlaxoSmithKline. The district court in Tafas v. Kappos (formerly Tafas v. Doll) found that the PTO exceeded its rulemaking authority in issuing them. On appeal, a three-judge panel of the Federal Circuit found that the rules were within the PTO’s authority, except the one limiting continuation applications. In July 2009, the Federal Circuit agreed to hear the case en banc but said it would give the PTO’s new director some time to reconsider the rules. Now Kappos has effectively put the lengthy court challenge to rest.
“The USPTO should incentivize innovation, develop rules that are responsive to its applicants’ needs and help bring their products and services to market,” he said in an Oct. 8 press release. “These regulations have been highly unpopular from the outset and were not well received by the applicant community.”
The PTO also said it would file a motion to dismiss and vacate the federal court decision in the court challenge to the proposed rules. GlaxoSmithKline joined with the PTO in its most recent motion to dismiss and vacate.
But in court filings, Tafas urged against blindly vacating the district court decision that enjoined the rules: “Tafas commends the PTO for coming to the right decision about the Rules, albeit belatedly, but erasing the district court decision altogether now that the PTO has already withdrawn the Rules is neither necessary nor appropriate.”
20. Hide and Seek
A tax lawyer’s practice had never been the stuff of a juicy John Grisham thriller–until the IRS declared war on offshore accounts, setting off an international scandal. In June 2008, the FBI announced it would travel to Switzerland to investigate UBS AG for helping wealthy Americans hide billions from the IRS. A Senate report revealed the U.S. loses $100 billion yearly through offshore tax evasion and alleged the Swiss banking giant helped thousands avoid paying taxes.
In February, UBS agreed to pay a $780 million fine and enter a deferred prosecution agreement on charges of conspiring to defraud the government. The next day, the government sued the bank seeking the names of 52,000 customers who benefited from tax-avoidance schemes. UBS later settled with the IRS and agreed to name 4,450 clients with offshore accounts.
An IRS amnesty program offered reduced fines and criminal immunity to U.S. taxpayers with offshore accounts if they came forward voluntarily. The program ended Oct. 15, setting off the expected criminal cases against taxpayers (or, perhaps, nonpayers). One of the first was a Boca Raton, Fla., client of UBS who hid $2 million in offshore accounts. His sentence was lighter than expected–probation, a year of home confinement and a $40,000 fine. More prosecutions are expected.
Meanwhile former UBS exec Bradley Birkenfeld, the whistleblower who sparked the investigation in 2007, is headed to prison for 40 months in January despite his cooperation in the case.
“Birkenfeld gave the Justice Department its entire historic case against UBS on a silver platter,” said Jesselyn Radack, homeland security director of the Governmenta ccountability Project, in an October statement. “It thanked him by letting all the Swiss bad actors go free and prosecuting the whistleblower–an American.”