Ford's lawyers get kudos for their central role in litigation, their IP chops, and their agility in working closely with the business side.
By David Hechler|May 01, 2006 at 12:00 AM
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Put yourself in the driver’s seat of Ford Motor Company’s legal department. There’s a problem with one of the automaker’s most important products: the Crown Victoria. Annual sales exceed $1 billion. Cops, especially, love the big sedans; Ford has 85 percent of the police cruiser market. But highway patrol officers are dying. They pull over drivers, and while they write them up, their own cars are rear-ended � often by speeding drunk drivers. And then those Crown Vics burst into flames. From 1993 to 2003, ten officers died this way. Ford was hit with personal injury suits and class actions filed around the country. The National Highway Traffic Safety Administration (NHTSA) opened an investigation; two state legislatures scheduled hearings; and the attorney general of Arizona � where three officers died � told anyone willing to listen that she was up in arms. If this wasn’t enough, CNN aired an hour-long special on the Crown Vic problem. It included dramatic aerial footage of one of the burning cars that looked like it was straight from an action thriller. What do you do? Ford’s lawyers talked to the company’s engineers, who explained that the car was designed to provide the acceleration and large backseat that police officers need. The fuel tank in the rear is safe under most circumstances, they said. But it’s not designed to withstand an 80-miles-per-hour impact, which can puncture the tank by pushing it into the rear axle. The lawyers worked with Ford’s safety experts to map out a strategy. Teams of attorneys and executives met with NHTSA investigators in 2001, and the following year they flew to Arizona to meet with then � attorney general (now governor) Janet Napolitano. The Arizona summit resulted in the creation of a blue � ribbon panel composed of Ford engineers and managers, and law enforcement officials. But unlike some of these committees, this one was ordered to come up with solutions quickly � in 90 days � and it did. Ford agreed to install free shields to protect the fuel tanks in all police Crown Vics on the road (about 350,000). It test-crashed cars at 75 mph to confirm their effectiveness. And the company established a Web site to suggest how officers should position their vehicles during traffic stops. A short time later NHTSA closed its ten-month investigation, satisfied that the car was safe. In 2003 the New York State Senate held hearings, then closed its investigation shortly afterward. Within weeks California’s state senate dropped its own inquiry without even holding a hearing. The first class action claiming the car was defective went to trial in 2004, and a jury in St. Clair County, Illinois � which tort reformers label a “judicial hellhole” � found for Ford in 75 minutes. That case was followed last year by the first personal injury trial. A Missouri jury found that the company was not liable for the officer’s death (a finding of even 1 percent liability could have put the company on the hook for full damages). Few of the lawsuits remain; the company settled most of the personal injury cases, and the majority of the class actions were withdrawn or dismissed following the Illinois verdict. The way Ford’s lawyers tackled this hydra-headed problem exemplifies why we’re bestowing Corporate Counsel‘s first Best Legal Department award on them. At the automaker, it’s all about teamwork. Not just among Ford’s nearly 300 lawyers worldwide, but the teams that attorneys form when they work together with company engineers, business managers, media advisers, and outside counsel. It took all of those players � working together � to defuse the Crown Vic controversy. It’s not just a posture the company assumes during a crisis, either. The team approach runs through everything the law department does, whether it’s preparing a crash test demo for use in court, or bringing an in-house lawyer in China up to speed. More than 20 other Fortune 500 legal departments filled out our lengthy, wide-ranging Best Legal Department questionnaire that asked about their work in 2004 and 2005. Editors and writers at this magazine reviewed and argued over the submissions; many impressed us. Some departments sported remarkable diversity, others boasted wonderful pro bono programs, or displayed deft management of outside counsel. We decided to honor three departments as runners-up. But the six judges were unanimous about the winner: None of the other entries impressed us as deeply or in so many ways as Ford. Of course, Ford’s achievements weren’t limited to Crown Vics. The law department takes a hands-on approach to its big cases and the thousands of smaller ones. We noted that Ford has an in-house group of lawyers who direct its appellate docket � and who get involved with litigation from the get-go by sitting in on case assessments. Their aim is not just to preserve issues for appeal, but to shape the law. The intellectual property group is at once a part of the law department and a wholly owned, revenue-generating subsidiary. Wearing its legal hat, it brings suit against companies that infringe Ford’s trademarks and patents. As a business, it develops and markets products based on those company patents. The law department also played a very active role in the company’s recent sale of The Hertz Corporation, a complex transaction that turned out to be the second-largest leveraged buyout in history. It’s not all smooth riding. The department could make better use of technology officewide, and it has a ways to go on diversity (we evaluated both criteria as part of our judging process). Still, in an industry that’s always been a bastion of testosterone, it’s notable that 40 percent of Ford’s lawyers are women. What makes the company’s achievements all the more remarkable is that the lawyers never lost their focus in the face of a deep slump in the domestic auto industry. Last year Ford lost $1 billion in its automotive business, and it recently announced plans to close 14 U.S. plants and to lay off 30,000 of its 300,000 employees over the next few years. (The law department will not be included in the downsizing, according to Joe Laymon, head of human resources.) David Leitch, who’s been general counsel for little over a year, says he’s still settling into the job. He hasn’t made many changes � he streamlined administration a bit, but kept his people in place � and he doesn’t think he needs to. Asked to assess his crew, Leitch sounds like a man who broke open a fortune cookie and pulled out a $100 bill. “I’m really quite surprised,” he says, “and would not have predicted how good this legal department is.” Lawyers haven’t always been held in high esteem at Ford. A history of the company, Wheels for the World by Douglas Brinkley (Viking, 2003), quotes from a speech Henry Ford delivered to young people eager to learn his formula for success. “Above all else, keep away from lawyers,” he warned America’s youth. “They are bound to get you in trouble.” Perhaps he was thinking of the lengthy cross-examination he endured when he sued the Chicago Tribune for libel. At any rate, the current crop of executives believes their lawyers keep them out of trouble. “We work hand in glove with our attorneys,” says Don LeClair, Ford’s chief financial officer. LeClair’s office is right next to general counsel Leitch’s; Peter Sherry, the corporate secretary and associate general counsel, is just down the stairs. “And I wear a path on those steps to the corporate secretary’s office,” LeClair adds. “I think that’s the way it should be.” Lots of legal departments told us they work closely with the business side, but at this 103-year-old company, the practice is deeply ingrained. Perhaps it’s because Ford invented the assembly line, and “family” is more than a metaphor at the company. The Ford family still controls about 40 percent of the voting shares � and Henry’s great-grandson, William Ford, Jr., is chairman and CEO. But the family influence extends beyond control; it’s rooted in the culture. Katherine Kjolhede is living proof. Kjolhede, who heads the general litigation and human resources practice group, is a third-generation Ford employee (one of several lawyers there with deep family ties). Both her grandfathers worked for the company, and so did her uncle. Everyone in her family called it “Ford’s,” she says � denoting the family business. “I grew up hearing that, and so I had to make a conscious effort to say ‘Ford.’ “ Ford hires lawyers from a variety of backgrounds � law firms, government, other automakers � and gives them latitude to move around. The discovery team, which handles most of the work in-house, is a frequent training ground for the company’s litigators. Other alums from the team have jumped to corporate work. Some Ford lawyers have sampled the business side; several have shipped out for lengthy stints in the law department’s overseas offices. Though the attorneys talk about litigation in business terms, there’s a sense that, to some, defending Ford feels like defending their family. In its Best Legal Department application, we were struck by how deeply the department is involved in all phases of litigation. It starts with not being afraid to try � or lose � cases. “A lot of companies will talk tough about going to trial, but will increase their settlement offers until the plaintiffs say yes,” says John Mellen, who heads the company’s litigation and regulatory group. “We don’t do that.” Ford tries 60 � 70 cases annually � though it’s been as many as 100 � and typically wins three-quarters of them, Mellen says. While outside lawyers � mostly drawn from about 40 litigation boutiques � try the cases, Ford’s own litigation counsel are actively involved. “It’s clear that the in-house guys call the shots,” says plaintiffs lawyer Mikal Watts, of the Watts Law Firm in Corpus Christi, who tried six cases against Ford in Texas last year. The reason he tried so many, Watts says, is that Ford adopted a harder line the last couple of years � settling far less often than its competitors. The in-house lawyer assigned to his region, Kevin Kimball, directed trial strategy and settlement negotiations, Watts says. They were mostly rollover cases, and Watts won three � each among the 100 largest jury verdicts of 2005 (as reported by The National Law Journal, a sibling publication of Corporate Counsel). Watts also lost one and settled two during trial. Mellen says the business decision to litigate means that settlements are usually 20 � 50 percent lower than they would be if they paid plaintiffs’ lowest demands. And, of course, many verdicts are slashed by trial judges and appellate courts, or settled for even less. It’s cheaper to lose 20 percent of the cases than it is to settle them all, Mellen says. James Feeney, the outside attorney who won the two Crown Vic trials, says that Ford lawyers aren’t like those at other companies who view themselves as administrators: Ford’s lawyers “get their hands dirty.” Part of their effectiveness involves teaming with the business side. When plaintiffs’ witnesses criticize a car’s design, says Feeney, a partner at Dykema Gossett in Bloomfield Hills, Michigan, in-house lawyers consult with the engineers, who help them craft an effective response. For example, the company’s engineering experts helped them devise a rollover test that’s proven to be an effective courtroom exhibit. Engineers mount a car on the back of a specially outfitted semi � tractor trailer that allows them to spin and drop it to replicate the dynamics of the accident. They repeat the test with a second car that has a reinforced roof that can’t be deformed. The effect of the crashes on dummies (that are wired with sensors) demonstrates, the lawyers say, that roof crush doesn’t cause plaintiffs’ injuries. As much as we liked its work in the trenches, we were also impressed by the law department’s finesse behind the scenes. Modern law departments can do more than react to lawsuits � they can work to change the law. That’s what John Thomas, who heads Ford’s appeals group, tells the company’s lawyers. “Your job is not just to get a favorable resolution of this case,” he says. “Your job is to use this case to make the law fairer or more sensible.” Thomas’s appeals group is another feature that distinguishes Ford from other companies. And again, this in-house think tank functions as a team within a team. Appeals lawyers often attend the case assessment and courtroom proceedings to ensure that trial attorneys raise issues “both to help win the case, but also to preserve issues for appeal,” says Thomas. The arguments his group introduces in the company’s appeals often come straight from law review articles they write laying out the doctrinal foundation, Thomas explains. The team (which includes two in-house lawyers and a small cadre of outside counsel) is particularly focused on jury instructions. Often these negotiations involve Ford’s attempt to limit punitive damages, but the appeals group has added a new wrinkle to its arguments. Companies should not be subject to punitives, they opine, when reasonable people can disagree about whether a product was defective. When judges omit it from jury instructions, and Ford objects, the issue is preserved for appeal. The pace of the appellate process means it may be years before they see results. But a recent U.S. Court of Appeals for the Sixth Circuit opinion suggests they’ve made some progress, says Thomas. In a department where lawyers find themselves playing on multiple teams, none tops the intellectual property division, which functions both as a law group and a business. With all the talk about value added, what law department wouldn’t want to have a division that generated $186 million in revenue last year? The group secured more than 1,000 patents in each of the last two years, according to William Coughlin, a patent attorney and the unit’s president and CEO. One of the products it codeveloped is a Web-based program called Anaqua that allows companies to manage their IP holdings while making it easy for engineers, designers, and lawyers to enter information that speeds the filing of patent applications. Among the companies that have signed up for the service, Coughlin says, are health products manufacturer Kimberly-Clark Corporation and software giant Microsoft Corporation. Coughlin’s group also functions as the IP enforcement team. In December it filed a complaint with the U.S. International Trade Commission claiming that seven auto parts companies, including industry leader Keystone Automotive Industries, Inc., sold products that infringe Ford patents. The case could be worth more than $100 million, Coughlin says. As Ford seeks to divest itself of everything but core businesses that boost the bottom line, it must be just as glad to have a top-notch transactions group. Though Simpson Thacher & Bartlett and Hogan & Hartson worked on the Hertz sale (which brought in a welcome $5.6 billion in cash), Ford’s own lawyers led the way. “We were the principal negotiators, not them,” says Peter Sherry, who heads the corporate and commercial group (and was featured in Corporate Counsel’s April 2005 “shortlist” of in-house lawyers most likely to become GCs by 2010). The deal was particularly complicated, explains Jeffrey Ruprich, an in-house lawyer who worked on it, because it was floated on two tracks. The company prepared an initial public offering as well as a private sale to secure the best deal (which turned out to be a private sale). It required expertise in M&A, tax, antitrust, and securities law. There were international issues, and the IPO had to be cleared with the Securities and Exchange Commission. Outside counsel provided research and advice, but Ford’s own law department dug in from day one. And the depth of Ford’s bench proved its value. Not only does the company have a tax office in the law department to draw on, but many of the lawyers have years of experience in complex transactions. Ruprich, for example, was once a senior accountant at Coopers & Lybrand International (now PricewaterhouseCoopers). Through the parent company’s bleak year, there was one ray of light; Ford’s international automotive operations made money. As the automaker pursues growing opportunities in countries like China, the law department is ramping up as well. When Kathleen Kozlowski first joined Ford as an attorney in international trade and transactions in 1992, there wasn’t a China office. She and a colleague covered whatever was needed, traveling to China when they had to. Now Ford’s managing counsel of Asia-Pacific and Africa, based in Dearborn, Michigan, Kozlowski supervises eight in-house lawyers in China � seven born and educated there, and one Chinese American. Historically, Ford did not seek to integrate its overseas operations into the mother ship. But that’s changing. There are now about the same number of lawyers abroad � 150 � as there are in the United States. In March, Leitch took his first trip as Ford GC to China. It’s important “to make the rounds,” he says. And Kozlowski and Bradley Gayton, who supervises Canada, Mexico, and South America from his office in Dearborn, are working to incorporate their growing foreign offices into the Ford family by bringing lawyers to Dearborn each summer to learn the business and soak up the culture. This summer one will fly in from China and another from South Africa. There will probably be five overseas lawyers spending the summer in Michigan in all, Kozlowski says. Leitch has also extended the office footprint. He was hired straight from the White House last spring, where he was deputy counsel and deputy assistant to the president. (Earlier he was a partner at Hogan & Hartson and then chief counsel for the Federal Aviation Administration.) Leitch’s political and legal relationships in Washington, D.C., and state legislatures were part of his appeal to the heavily regulated company. One of his early moves was to hire an in-house lawyer, based in D.C., who coordinates with the company’s separate corporate affairs division. Human resources chief Laymon says that the new GC will likely get additional resources that will let him put his stamp on the department. The department’s spending in recent years has held the line. In 2005 it represented 0.19 percent of Ford’s revenue; that percentage has decreased each year since 2001, the company reports. Over the same period, spending on outside counsel increased � largely due to an uptick of asbestos litigation and to the Firestone tire recall, which doubled the company’s volume of product litigation. The department was able to keep costs down through favorable fee arrangements. On asbestos, for instance, the company has a network of flat fee retainer agreements which actually reduced overall costs even as the case count swelled. As for the car cases, the outside boutiques work under fixed-fee agreements. Most of the firms have worked for Ford for years. Leitch generally gets involved in negotiations with outside firms only when he meets with group heads to review fee structures. The final area that caught our eye was pro bono. Ford’s long tradition in this realm dates to 1984 and is an outgrowth of a companywide program encouraging volunteerism. Much of the department’s pro bono legal work is for low-income residents of Detroit, and includes help with wills, probate, and tax returns. About a quarter of the company’s lawyers participate in the program each year, and in 2005 they contributed an estimated 1,500 hours. This year a new program will also offer assistance to nonprofits in Dearborn. This is not to say, of course, that there isn’t room for improvement in the legal department. Only 15 percent of Ford’s lawyers are from minority groups, and the number hasn’t budged in five years. Many of the other law departments in our contest are more diverse. Also, the same legal department that congratulates itself for its IP division has been slow on other high-tech fronts. For example, Ford only uses e-billing on a piecemeal basis and has yet to establish firm plans for an officewide program. The practice is commonplace at many other companies. But the department’s frame and chassis are solid. And its teamwork � with the business side � is second to none. One young lawyer who joined the company right out of law school saw that early on. Marcy Burnstein, now in litigation, began as a counsel in marketing and sales. “You’re really viewed [by the business side] as part of the team,” she says. “I attended business meetings; I attended staff meetings.” The regular contact “helps keep the channel of communications open.” And there’s nothing like positive reinforcement, she adds: “Once you solve a problem for someone one time, you are in their good graces.” They remember, she says. And they come back. Company: Ford Motor Company
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