Archive for May, 2010

Recent Developments in the Law

Sunday, May 23rd, 2010

Arbitration Clauses Are Voided.

In a series of recent cases, California and federal courts have weakened the presumption in favor of arbitration. As we noted in an accompanying article, arbitration has, for some years, been favored by courts and agreements to arbitrate strictly enforced. Many companies, following what we consider to be bad legal advice, have insisted on arbitration clauses in their various contracts on the mistaken idea that arbitration is quicker and cheaper than litigation. Companies have also often favored arbitration for the unstated reason that they believe arbitrators will favor companies they believe may send them more business and people with less influence will have less success before them, thus providing corporations a leg up in any dispute.

California and federal courts, recognizing this unstated and less than honorable truth, have, over the last several years, chipped away at the presumption of the enforceability of arbitration agreements, particularly with regard to consumers, employees and companies with little bargaining power in contract.

So, for example, an arbitration clause in a contract for an “extreme vacation” that involved mountain climbing, was found to be unenforceable because it was presented on a “take it or leave it basis” to the traveler and limited the damages to a refund of the money paid for the trip. As a result, his survivors were allowed to proceed in court with their claims. (Lhotka v. Geographic Expeditions, Inc.)

In a case involving an employment dispute, the arbitration clause in an employment agreement was found to be unenforceable for several reasons. The first was that it was presented on a “take it or leave” basis so that if the prospective employee refused to agree, he or she would not get the job. This is referred to as “procedural unconscionability” but, standing alone, it is not sufficient to void an arbitration clause. The clause in this case, though, was found to be unenforceable because it also included limitations on procedural protections (such as the right to discovery) and limitations on damages. This is known as “substantive unconscionability”. (Pokorny v. Quixtar, Inc.) The arbitration clause was voided and the plaintiffs were allowed to proceed in court.

The overarching message is that companies that impose arbitration clauses in their contracts that limit their exposure to liability will find them voided by courts. This is especially true when the other parties to the contracts are employees, customers, subcontractors or smaller companies or individuals with little bargaining power. (Mansour v. Superior Court; Dotson v. Amgen, Inc.; Suh v. Superior Court)

As we have written in these pages, agreements to arbitrate are seldom of any benefit to either party. But if you are a corporation that has been sold the bill of goods that they somehow give you an advantage in disputes, think again. In a trend that began in California and is spreading across the nation, such clauses are more and more often being voided by courts determined to strip away the advantage corporate executives have often been misadvised they receive in insisting on them. The result, ironically, has been increased costly litigation challenging the arbitration clauses themselves. So much for cost savings.

The Supreme Court Defines “Principal Place of Business”.

The United States Supreme Court has now defined a corporation’s “principal place of business” as that place where the company’s officers direct, control and coordinate the company’s activities; its “nerve center”. This resolves disputes between the various federal circuits and standardizes the analysis. Federal courts have jurisdiction only over disputes arising under federal law or between parties who are citizens of different jurisdictions. If one party is in California and the other in Texas, diversity exists and a federal court will have jurisdiction. If one party is in California and the defendants include parties who also reside in California, diversity is lacking and the federal court does not have jurisdiction regardless of the fact that most of the defendants reside elsewhere. The Court’s decision is important for businesses that are sued in courts in states in which they have a minimal presence. It gives them access to federal courts often overcoming the hometown advantage many state courts provide. (Hertz Corp. v. Friend)

Improper Debt Collection Practices.

State and federal law prohibit certain activities in the collection of debts. The penalties can be very severe. An exception to the penalties imposed is made for “bona fide errors” made by a debt collector. The Supreme Court recently held that the “bona fide errors” defense extends only to mistakes of fact. A mistake in the interpretation of the law surrounding what debt collection practices are permitted cannot be a “bona fide error”. This means that the very stiff penalties for improper practices will apply regardless of any error, however reasonable, in interpreting what the law allows. (Jerman v. Carlisle, McNellie, Rinl, Kramer & Ulrich)

ERISA Interpretation.

Recent years have seen dozens of lawsuits challenging interpretations of retirement plans under the federal Employee Retirement Income Security Act (ERISA). Many courts, including the Ninth Circuit Court of Appeals, have allowed courts to substitute their interpretations of the meaning and effect of particular retirement plans for those of plan administrators. The United States Supreme Court has brought this debate and division among Circuits to an end by ruling that a plan administrator’s interpretation should be given wide deference. It held that when a plan gives the trustee “the power to construe disputed or doubtful terms…the trustee’s interpretation will not be disturbed if reasonable”. This ruling should begin to bring to an end the extensive litigation that has been undertaken challenging plan interpretations that has cost companies’ millions of dollars in legal fees over the last twenty years. (Conkright v. Frommert)


Sunday, May 23rd, 2010

Litigation is among the most persistent problems in modern business. It is expensive and soul sapping. It diverts precious time and attention from profit making work to activities that merely drain resources. Sometimes it cannot be avoided. Sometimes companies get sued and have to defend themselves. Sometimes they fall victim to bad or dishonest business practices and must file suit to get whole.

When that happens, you need experienced litigators who have actually tried cases and are comfortable with going to trial. You need skilled strategists who can guide you through the system efficiently and successfully.

Recent years, though, have seen the creation and growth of alternatives to costly litigation. Hundreds of thousands of cases have been successfully resolved through mediation. It is a good system that enables people in dispute to find a negotiated settlement that saves them the cost and risks of litigation through trial. It is a tremendous business tool and it is important that you understand how it works, what it is intended to accomplish, its benefits and its limitations.

Mediation (sometimes called “alternative dispute resolution”) is often confused with arbitration. The two actually have little in common. Arbitration is simply litigation by other means without the protections that are built into the court process. It involves the development and presentation of evidence. It involves hearings, briefs and arguments of law. It requires something akin to a trial and, in the end, an arbitrator makes a decision. One side wins and the other loses.

Mediation, on the other hand, is a structured negotiation process. It generally involves one meeting and no decision is made by the mediator. Instead, he or she will attempt to get the parties to come to an agreement. That means compromise by both sides and it means neither side will get everything it wants. If the mediator is successful, the case will be resolved and the dispute will be over. But the parties have to enter the process with a good faith willingness to compromise.

The process is very simple. Each side typically prepares a short brief that is submitted to the mediator. It can be submitted confidentially or shared with the other side. The best use of the brief, I have found, is in setting the tone for the meeting to come and in letting the mediator know your negotiating position and areas of flexibility. For that reason, it is advisable that you submit your brief confidentially. No negotiation will be successful if the other side already knows your negotiating position and strategy.

Most mediators start by emphasizing the informality of the gathering and attempting to develop a level of trust between him or herself and each party. Mediators generally ask each side’s attorney to make a short presentation the respective parties’ view of the case. Mediators also often have the parties themselves express their positions so that each party feels as if it has had its say.

Once each side has told the other its position, the parties are separated into private rooms and the mediator begins a form of shuttle diplomacy. The mediator tries to find areas about which the parties can agree and areas of flexibility. They explore various ways each side can achieve it goal in the dispute. They push each side to compromise, understanding that neither side will want to do so but also knowing that, in the end, a compromise will ensure that both sides get something.

In an odd way, the merits of the case become somewhat peripheral. They give the mediator the ability to suggest to one side or the other that it should be more flexible based on the strength or weakness of his or her case. The parties do get a relatively objective assessment of their cases; something that can be helpful in assessing their strategies going forward. But, in the end, the decision generally becomes a practical one.

Each side ends up having to balance the cost of litigation against the prospect of success. The truth is that neither side wins in mediation. Both sides will compromise if a deal is to be made and that means getting less than everything one would want. The mark of a successful mediation is that everyone walks away feeling a little cheated.

The benefit of mediation, on the other hand, is that the parties save themselves the time, expense and unpredictability of trial. The parties know that trials can go either way and the risk is complete defeat.

At the same time, the cost of litigation can be daunting and, in most cases, it cannot be recovered. Litigants come to realize that legal fees can diminish any possible good outcome and conclude that half a loaf is better than the risk of none.

Mediation can be a valuable tool but is one that should be entered with one’s eyes wide open and without unrealistic expectations. Mediation is compromise, not justice. If you believe your cause is just and worth pursuing regardless of cost, mediation is not for you. If you go to trial you will either win or lose. If, on the other hand, your goal is to end the dispute and you are willing to compromise to do so, mediation is the best way to do it at the least expense.

It is my experience that mediation is often successful in resolving cases. Over 90% of the cases I have mediated have resulted in a settlement, most of the time one that has satisfied my client. But it has required compromise.

Justice in civil disputes is not normally clear cut, as it is in criminal matters. In a criminal case, the defendant either did it or he didn’t. In a civil case the defendant might have done something wrong that resulted in some damage but the level of culpability can be a matter of some opinion as is the extent of damage. Between the poles of possibility lies the acceptable compromise.

So, while it might seem less than satisfactory to settle for less than that to which one thinks he may be entitled, the truth is that sometimes the mediation process makes clear that the litigant’s assessment of what he should get is unrealistically high.

In the end, mediation can end the dispute with each side getting some but not all of what it wants. But the saving can be enormous in terms of time and resources and thus worth the effort.

A word to the wise, though: If you are going to mediate, do it early in the dispute instead of after all the litigation has been done. The cost of litigation is in the discovery and motion process. By the time that is done, litigation has already cost too much. If you can avoid those processes by early mediation you will likely come out very much ahead.


Monday, May 10th, 2010

The law is mysterious, even to the most sophisticated CEO’s. It is sometimes illogical. It is often frustrating. It is always expensive.

When a company reaches a certain size, sooner or later the CEO is going to consider whether or not hiring an in-house lawyer makes sense. Sometimes it is prompted by concerns over the cost of outside legal service. More often it is triggered by frustration at artificial limitations imposed by law and the unpredictability of the legal system. Companies sometimes fall victim to frivolous lawsuits, suffering the apprehension of the threat they represent. This is compounded by the expense of having to defend when they should not have to. The company’s officers do not understand why it is so difficult to get rid of what is so obviously wrong as the ongoing expense continues to eat into the bottom line.

At some point, frustration at the law intersects with frustration at the cost of lawyers. That is when companies begin to wonder if they can get more personalized legal service at the same cost and start to think it might be a good idea to hire in house counsel.

These are the factors that often drive the decision to hire in-house counsel.

Companies want a lawyer whose loyalty is only to them and who is not going to self-righteously lecture about what the law requires. They want a lawyer who will tell them how to do things not why they can’t be done. They want lawyers who will guide them through the legal labyrinth instead of establishing hurdles to jump over to get to the finish line. Lawyers, for their part, see themselves as having an independent duty to the law that most often leads them away from he entrepreneurial impulse that animates their clients.

Still, the decision to hire in-house counsel must be made because there is a compelling reason to do so rather than out of frustration. In-house lawyers are expensive and general counsel offices are not profit centers. They are a cash drain and a direct and unrecoverable expense. They come right off the bottom line and typically grow, substantially increasing cost, so it is not a decision to be made lightly.

There are good reasons to bring legal services in house. Few law firms take the time to think about the practical impact their decisions have on their clients. Most handle matters “by the book” doing each and every thing that can be done without stopping to consider whether the effect is worth the cost. They do not want to be accused of having failed to do everything necessary to accomplish the goal but sometimes doing everything is not worth the expense. Almost no law firms conduct a cost/benefit analysis in deciding what should be done in any given case. A contract that can be handled in five pages becomes a twenty-five page document covering things that are not even conceivably possible. Litigation activities are undertaken that have no measurable effect other than to increase expense.

In house lawyers know their clients’ businesses intimately so they know what is important and what is not. They spend most of their time with businesspeople so they understand the pressures and concerns that drive expense and profitability. They are available at a moment’s notice to answer questions without additional expense for phone calls. They can advise management before problems arise and implement systems that avoid those problems. They know there is more value in avoiding problems than in solving them. The best resolution to a problem is not its solution. It is in making sure it never has to be addressed.

When I became general counsel of one of San Diego’s largest companies, its claims were out of control and its insurance expenses were dramatically spiraling upward. It was a company dependent upon the strength of its client contracts and leases but those contracts and leases were being prepared by businesspeople unschooled in law based on templates prepared years earlier by huge law firms whose charges were so high that executives did not want to go to the expense of having them reviewed by the firms. Consequently, many of the contracts contained provisions that impaired enforceability and some were completely worthless.

The claims, on the other hand, were huge, cumulatively, but few were individually large enough to justify hiring lawyers to handle them. So they spiraled out of control and many completely unjustifiable claims were simply paid. The company had become known as a patsy.

Not only was I able to substantially increase the level of protection the company enjoyed through legal review and drafting of contracts, I did so while decreasing our legal expenses by over one million dollars per year. We were also able to reduce claims within one year by 90% and the resulting savings in insurance premiums augmented the savings in claims payments.

In house lawyers can anticipate problems and organize management activities to avoid them. They can review and prepare documents at the cost of their salaries rather than the billable hours demanded by law firms.

Staff counsel’s loyalty is only to the company and they can guide management as decisions are made to shape activity in a way that not only makes it more efficient but ensures that legal exposure is minimized. Their object is not to tell management why a deal cannot be done but to provide maximum protection for the deals management wants to do. There is tremendous benefit in that.

There are real benefits to in-house counsel, but they can represent an expense that that outweighs their benefits and companies often find that there is simply not enough legal work to justify the establishment of an office of staff counsel.

There are alternatives. JW Howard/Attorneys is managed by former general counsel so we understand the value of cost/benefit analyses when approaching legal matters. We coordinate our clients’ legal affairs by undertaking the sort of work house counsel would do and managing the work of other outside lawyers to ensure the work is done efficiently and at the least expense. We take the time at our expense to intimately understand our clients’ businesses and cost effectively perform the work most in-house lawyers would perform. We offer fixed price, project based pricing in appropriate instances and block representation for particular activities.

We cover a lot of specialties and perform the sort of routine legal work that is the purpose of in-house lawyers but we know when more specialized representation is required and have a network of highly qualified and credentialed specialists we bring in when necessary. We are a sort of “outside in-house counsel” and we bridge the gap between companies and outside legal service providers. We help companies that have a need for comprehensive legal coverage but are not large enough to justify the expense of a fully staffed general counsel office.

Sometimes the hiring of in-house counsel is wise, prudent and advisable for all the reasons I have listed. Sometimes, though, what you really need is a lawyer who understands the needs of your company from an inside perspective and who has its best interests at heart to coordinate legal services to gain maximum efficiency with the least impact on the bottom line.  JW Howard/Attorneys can answer that need.