JUST WHEN YOU THOUGHT YOU WERE SAFE…

April 4th, 2011

Hiring can be a grueling business, especially when you are looking for higher level or more skilled employees.  You review resumes.  You call references.  You Google applicants.  You conduct endless interviews.

Finally, you find just the right person.  Time to relax.  In the interests of space, throw away the resumes of those you didn’t hire. Get rid of your interview notes.  What do you need them for?

Wrong answer.

Just when you thought plaintiff’s lawyers could not come up with any more creative ways to lighten your wallet, along comes a particularly imaginative one who claims that you discriminated against one of the applicants you did not hire and he wants money.  Have to make a buck somehow. If the job doesn’t work out, sue the company that didn’t hire you.  Nice work if you can get it.

This actually happened to MV Transportation.  It was looking for a staff lawyer to handle labor matters and a 56 year old, very experienced labor lawyer applied for the job.  He was not even interviewed.  The job went to a 40 year old lawyer whose labor law experience was a bit thin but whose experience in employment litigation was impressive and she came with a very high recommendation from a friend of the general counsel, who made the decision.  The older lawyer sued, claiming he had been the victim of age discrimination.

The case went to judgment in the trial court and up through the court of appeal.  In order to prevail, the applicant had to show that he was part of a protected class (he was); that he was qualified for the position and that he did not get the job because of discrimination.  Had he been able to do so, the burden would have shifted to the company to prove it had no discriminatory motive.

In the end, things came out for the best for MV.  But it was not easy and it cannot have been cheap.

The court of appeal held that in order to show a discriminatory motive, the applicant had to show not just that his credentials were better, but that they were “vastly superior” to those of the person who got the job.  His were better, but not “vastly superior”.

The applicant also argued that the company gave him varying and inconsistent explanations for why he did not get the job, but the court of appeal decided that those were merely failures of recollection.

The applicant’s strongest argument, though, was that the company had suspiciously destroyed the applications, resumes and notes surrounding the employee search. That not only raised the presumption that it was hiding something, but it was a violation of a California law that requires that employers retain all such materials for two years.  The court of appeal found that the destruction of records was done with a “culpable state of mind”; that the records might have revealed information relevant to the applicant’s case and that the company had an obligation to keep the records in accordance with California law.  The court of appeal severely criticized the company for having destroyed the records and suggested that in closer cases, the decision could hinge on this factor.

Fortunately for MV Transportation, the court found that all of that was insufficient to upset the trial court’s decision.

MV dodged a bullet, but it was a close call and there is lesson value in this case for employers.

Keep the employment applications and resumes.  Not only is it the law, it will help to show that the hiring decision was not tainted by discriminatory motive.  In addition, it will assist witnesses in recalling what they were thinking when the decisions were being made.  Years later, when such claims come to trial, the decision makers will not remember the dozens of resumes they reviewed, the interviews they conducted or their reasons for preferring the one hired over the ones who were not.  But the records will help refresh their recollection so they can testify credibly and effectively. In addition, of course, by the time of trial, the decision maker might, well, himself have moved on.  Without the records, defending then becomes nearly impossible.

It is equally important to keep notes of interviews and impressions of application or resume review.  The company can establish through those notes that a fair process was undertaken that had, as its intent, to get the best possible hire and not to discriminate against those who were not.  You will need that ammunition if a claim is made.

Finally, if you feel you must talk to unsuccessful applicants, you will be able to look at your records and see why the decision was made and will not give inconsistent answers for not hiring him.  On the other hand, you have no obligation to explain yourself and you would be better off simply telling a disgruntled applicant that explaining the decision to hire would violate the hiree’s right to privacy and that you must decline, for that reason, to do so.  Saying nothing is a better policy.

With all of the hungry plaintiff’s lawyers out there, companies have to operate defensively and that means documenting hiring decisions thoroughly and keeping the documentation.  Advance planning will minimize exposure to claims.  It is hard enough to generate revenues these days without having to expend thousands on defending lawsuits from those you don’t hire.

INDEPENDENT CONTRACTORS

April 4th, 2011

One of the inquiries we often receive is whether a company can regard someone providing services to it as an “independent contractor”.  There are advantages and disadvantages to the designation, but most often it is a means by which companies can avoid the expense, time and paperwork of employment, as well as the exposure to claims by workers.  For the worker’s part, it is a method of minimizing taxes and withholding so the check he receives is bigger than the one he would have received were he an employee.

It is really something the advisability of which has to be determined on a case by case basis.  The problem with the mischaracterization of a service provider as an “independent contractor” rather than as an “employee”, is that a company can be exposed to severe penalties if the characterization is not correct.  For example, if an “independent contractor” is found to actually be an employee, the company may be required to make up for the withholding it failed to do when paying the service provider, as well as pay penalties and interest.  If other employees have benefits the “independent contractor” was not extended, he may have to be reimbursed for the value of those benefits.  It can be a very expensive proposition.  That is why it is important to be very careful when attempting to forge an independent contractor relationship with someone in a close case.

Courts have articulated a variety of factors in determining whether a person is an independent contractor rather than an employee.  No one factor is determinative and judges tend to weigh them in making a decision.  However, the more of these factors that are present, the more likely the person will be found to be an employee rather than an independent contractor.

The first factor is the place at which the work is to be done.  If it is in the company’s facility, the service provider is more likely an employee.

The second factor is control of the service provider’s work.  If the work is to be done under the supervision and at the direction of the company in the details and manner in which it is to be performed, the provider would generally be found to be an employee.           If the company sets the time at which the work is to be done, for example, if the provider is to be present at a certain time and on certain days to do his work, the providers is more likely to be considered an employee.

These are referred to as the “time, place and manner” factors and if all of these are present, it is likely the provider will be found to be an employee.

But there are other factors, as well.

An important factor is the tools of the trade.  If the company provides the tools through which the service provider accomplishes his work, such as computers, tools, equipment, supplies, paper, copiers, and so forth, it is more likely the provider will be considered an employee.

If the worker can be terminated without cause, that generally means the work is “at will” and that is the mark of an employee rather than an independent contractor.

On the other hand, if the provider must have a certain level of skill, for example, if the provider has a professional license or high skill credential, that argues for independent contractor designation.

If the provider has other customers to whom he provides the same type of service, that lends itself to a finding that the provider is an independent contractor.

If the provider is paid by the job, as opposed to by an element of time such as by the hour, day, week or month, that argues for independent contractor status.

If the work provided by the service provider is not the main work of company, the provider is more likely to be an independent contractor.  For example, if an automobile manufacturer were to hire on someone to install fenders on cars, it would be hard to characterize that person as an independent contractor because the installation of fenders is an integral part of auto manufacturing.  But if the manufacturer were to bring on someone to provide accounting services, that person could be an independent contractor since accounting, while important to auto manufacturing, is not a part of its core business.

If the service provider collects any money or fees for the work he is doing and simply remits back some of that to the company, that is the mark of an independent contractor.

The most important thing to remember is that if you provide the means, location and tools to do the work hired and direct how it is done, pay by a parcel of time and determine when the worker should do his work, that worker is probably an employee.

The best way to avoid the problem is to have a carefully drafted contract that specifically sets out in writing the factors that will show that the service provider is an independent contractor and carefully define the basis on which he is to be paid and that he has control over all aspects of his work, except the result.

It can be a delicate balance and it is one that is receiving greater scrutiny at all levels of government.  The California Department of Industrial Relations, for example, went after theatres some years back on the basis that the actors they hired for limited run plays were actually employees.  The theatre paid a dear price when it was determined that because the actors were told where to appear, when to appear and  how to act and were given the props and costumes through which they did their performances, they were employees. They had to pay huge amounts to those who regarded themselves as independent contractors, as well as penalties for having failed to properly characterize them.  This delicate balance is also one that has generated expensive class action lawsuits that have cost companies millions when they have guessed wrong.  We can help you navigate through the rocks and shoals if you are considering bringing on independent contractors to assist in your business.  But you must not try to do it alone.

THE BEST DEFENSE

April 4th, 2011

A company’s best defense against employee claims is a statement of firm and clearly articulated standards and rules.  Most businesspeople know that a good part of customer relations is the management of expectations.  The same is true of employee relations.  That is why it is critical that companies prepare, distribute and regularly update employee handbooks.  They are your best defense against employee claims.

California is an “at will” employment state which means that companies can terminate an employee’s employment for no reason.  Why, then, do we read of wrongful terminations lawsuits that end up in large judgments?  They arise, generally, because the company has not managed the employee’s expectations and has not taken the time emphasize the employee’s at will status. Such lawsuits can be maintained if the company has, by word and deed, led the employee to believe his employment is permanent and that he could rely on having a continuing, and long, career with the company.  (They can also arise when the employee is the beneficiary of an employment contract, but such contracts are typically extended only to top executives, so we need not address them here.)

Employee handbooks have been found by courts to be contracts between employer and employee and, as such, should spell out all of the terms of employment, such as vacation schedules and accruals, employee duties and rights, employee use of company equipment, hours, benefits and a host of rules that set forth the expectations on both sides.  It should specifically state that it is a contract and emphasize that employment is “at will”. The existence of a handbook will be very important if your company is ever the target of a claim by an employee.

A handbook is important for several reasons.  The first is that it is not unknown for disgruntled terminated employees to claim to have been told that they could expect long careers and continued employment with the company and that, as a result, the presumption of “at will” employment has been overcome.  They will claim that the expectation of continued employment is an “implied in fact” contract and proceed against the company.  It is often just enough to keep a case in court and to get it before a jury of employees who will often side with “the little guy” in an employment dispute. So, it is important to have a handbook that clearly indicates that employment is “at will” and that nothing anyone says will modify that relationship.  This will minimize the possibility that a claim will be made for wrongful termination and will make those that are made easier to defeat.

The second reason it is important is that it clarifies the relationship so that the probability of misunderstandings is drastically diminished.  Making “at will” employment a matter of contract between your company and the employee, will protect you against claims for wrongful termination.

The employee handbook also provides both employer and employee with a clear articulation of the rules that bind employee conduct.  This is very important for two reasons.  The first, of course, is that it lets the employee know what is expected of him or her.  The second is that it provides the means of minimizing claims against the employer upon termination and provides a good negotiating chip to get a release of liability from the employee when termination occurs.

If the company maintains a comprehensive set of rules, it can point to violations of those rules as a reason for termination and can provide the employer with the means of sustaining a claim that termination was “for cause”.  The clearer the rules and the care with which they are enforced will give the company the tools it needs to manage employees and protect itself from meritless claims.  It will help make the case that the reason for termination is a proper one grounded in the agreement between employee and employer.

The maintenance of a handbook and the enforcement of its rules will help the company establish reasons for termination.  Many companies have found themselves the victims of claims of discrimination, because they failed, first, to articulate the rules they expect employees to follow and, second, to adequately write up violations of those rules to document poor performance on the part of the employee.  Without that evidence, it is much harder to defend against a charge of discrimination, especially if the employee has a characteristic that is not widely present among other employees.

The strength of employee handbooks was recently illustrated in a case decided by the California Court of Appeal.  An employee in a dispute with her employer used company computers and its e-mail system to communicate with her attorney with respect to her case against the company.  The employee handbook specifically said that the employer had the right to monitor e-mails; that employees were not to use company equipment for personal purposes, that nothing on an employee’s computer was subject to a right to privacy and that the employer had the an unfettered right of access to it.

At trial, the company produced e-mails to and from the employee’s attorney that undermined her case and the Court of Appeal held that because the employer’s rights and the employee’s lack of an expectation of privacy were clearly set forth in the employee handbook, the e-mails were admissible, as a matter of contract.

This is significant because the confidentiality right between attorney and client is very strong in California so if the Court of Appeal is willing to overlook that strong public policy on the strength of an employee handbook, it clearly believes in the power of such handbooks carry with them.

Employee handbooks are wonderful tools for organizing employee relations and they systematize the conduct of those relations and define expectations. They are also your first line of defense against claims.  Every company should have one, regardless of size.

JW HOWARD ANNOUNCES A NEW LEGAL NETWORK!

July 26th, 2010

JW Howard/Attorneys announces the formation of a legal network comprised of small firms specializing in the areas most important to business. Specialties covered by the network are corporate, business formations and securities, business and corporate litigation, employment law, copyright, trademark, patent and intellectual property, insurance coverage and real estate transactions from simple landlord/tenant disputes to the negotiation, drafting and documentation of complex real estate purchase, sale and development.

“We perceived a need in the business community for lawyers with particular skills without the overhead and bureaucracy of large firm practice.” said John Howard in announcing the legal network. “Our members are all either former partners in large law firms or in house counsel in major corporations.” he added. “Their knowledge and experience are without equal and the sensitivities they bring to the modern business environment give them the unique ability to service companies from start up through public offering.”

Each firm is separate but client representation is coordinated by one lawyer who ensures that the skills that must be brought to bear for each client are made available. The advantage is that every client is represented directly by partner level lawyers without the sublevels of associate training that often increase cost and impact quality at larger firms. “This, truly, is direct representation by some of the most experienced lawyers in the business without filtering through stages of attorney experience.” Howard said. “Every member of the network has a personal stake in efficient and cost effective representation. We believe this combination of small firm efficiency with big firm skill is a new step in legal service that recognizes current market realities and service needs. Our clients get the best of both worlds.”

Freedom is Alway Right

June 13th, 2010

Are we destined to rehash the same debates over and over? On winning the senate primary, Rand Paul walked off the stage and directly into his mouth, igniting a firestorm when he suggested that the Civil Rights Act of 1964 is unconstitutional and that he would not have supported it. Let’s put aside the fact that his reaction was the result of a cheap setup on the part of a radical leftist masquerading as a journalist. Let’s also put aside the boneheadedness of Paul’s staff’s having sent him right out of the box into the lion’s den. That, I take it, was simply the hubris of those who know they are a lot smarter than everyone else. Underestimating Rachel Maddow is a sure way to get shredded. And Paul was. We can even put aside the tone deafness of Paul’s reaction but what he did show is why you should never take legal advice from a doctor.

But what of his position on this issue? The Civil Rights Act of 1964 followed the Civil Rights Acts of 1957 and 1960, each more expansive than the last. With the exception of southern Democrats, conservatives, in general, supported all three of the acts, Barry Goldwater’s having voted for both the 1957 and 1960 versions. He supported most of the Act of 1964, as well. His opposition was to Sections II and VII, those having to do with public accommodations and employment.

His opposition was principled. It was not a reflection of racism. It was based on his view that the Constitution did not allow for federal micromanagement of interpersonal relations and private businesses. His was a strongly federalist view based on a firm understanding of and commitment to the Tenth Amendment, which reserves to the states all powers not specifically granted to the federal government by the Constitution. It was a correct view of the original constitutional paradigm that gave substantial autonomy to the states and recognized that state government is the primary seat of sovereignty in our constitutional federal system. It was also a correct view of constitutional limitations on federal power and the exclusive power of states to regulate internal state businesses. It is certainly an arguable position based on the state of Commerce Clause jurisprudence and one currently advanced with credibility by conservative lawyers and legal scholars.

Perhaps a little background is in order. The Constitution provides that the federal government has certain, delimited delegated powers. The so-called “Commerce Clause gives the federal government the right to regulate interstate commerce. The original intention of that clause was to prevent states from charging one another tariffs for the shipping of goods across state lines or preventing their shipment from one state to another. In 1937, however, the Supreme Court, in an anxious search for a means of upholding New Deal initiatives, settled on a misconstruction of the Commerce Clause that it has expanded ever since. It decided that the federal government has the power to regulate anything that touches or affects interstate commerce. Out of that expansive interpretation of the Clause has grown virtually all federal regulation. So vast is the interpretation that the Court has held the purely intrastate growing of food for personal use “impacts interstate commerce” and can be regulated by the federal government. It has held that the federal government can regulate the treatment of migratory birds – animals that have no impact on commerce – because they cross state lines and “could” impact interstate commerce.

Until 1937, no one believed the federal government had the power to regulate activities having a purely intrastate impact, such as the serving of food or hiring of employees for businesses having only an intrastate presence. The regulation of that sort of activity was considered a uniquely state activity, much like the issuance of driver’s licenses and health rules governing restaurants.

That was why Goldwater voted against the Civil Rights Act of 1964. He believed that the Tenth Amendment prohibited federal impingement on state prerogatives with respect to education and the regulation of intrastate business and that the Constitution provides no basis for federal regulation of purely intrastate commercial activity. It was his view that the regulation of education, employment and public accommodations was not within the constitutional power of the federal government. It was also his opinion that the Act represented a huge expansion of federal power and authority, something he opposed as a threat to liberty. He was right about that, too.

Goldwater was wrong to vote against the Act, though, but for all the right reasons. There continue to be constitutional litigators who hope to move the Supreme Court back in the direction of a proper, restrictive reading of the Commerce Clause and the Court took a step in that direction in the mid-‘90’s in United States v. Lopez. There are also good and credible scholars who continue to attempt to revitalize the Tenth Amendment. It was legitimate constitutional concerns that motivated Barry Goldwater to vote against the Civil Rights Act of 1964 nearly fifty years ago.

There are times, though, that rigid constitutionalism must yield to greater notions of liberty. I have, in these pages, explored the foundations of American conservatism. Like the founding, it begins with individual freedom. A commitment to its protection must inform every public policy judgment.

The movement for civil rights was the great moral imperative of the second half of the Twentieth Century. We had, as a society, systematically oppressed an entire race of people even since their emancipation a hundred years earlier. We denied them jobs. We denied them education. We denied them admission to colleges. We refused to serve them in restaurants. We interfered with their right to vote.

And we wondered why they were mad.

We allowed, indeed, promoted, a moral evil and it needed to be addressed. A nation cannot long survive half slave and half free and the fact that we tolerated this sort of treatment of any of our citizens, much less ten percent of them, was not acceptable.

Sometimes a nation must stand up for its most sacred principles even when other considerations might seem to conflict with them. Freedom is too dear; liberty too important to be sacrificed on the alter of form. We needed to redress a grievous wrong and the solution called upon the best in us and demanded flexibility.

Barry Goldwater was truly the great man of conservatism. He was its first major champion and defined its ideas, purposes and goals. He is a man who deserves veneration for his insight and his tremendous integrity. There was no guile in this man; not one atom of dishonesty. But we are all imperfect. And so was he.

Conservatives were AWOL when human freedom was at stake. We were tangled up in minutia and technical details and refused to see the greater purpose. We, who stand for individual rights; we for whom liberty is a sacrament; we who have based our lives and philosophy on the sanctity of the individual should have been at the vanguard of this great crusade. Instead, we ceded it to those least devoted to its fundamental premise: freedom. We let those who stand for statism; those who define oppression; those who have been responsible for the greatest diminution of human freedom and dignity in human history, wrap themselves in the trappings and suits of liberty and take credit for its advancement. Just imagine the bizarre and revolting vision of Stalinist pamphleteer Pete Seeger singing of freedom!

Conservatives have much for which to answer.

I am not yet old, but I attended segregated schools. I went to restaurants that would not serve black people. We drove through a ghetto to get to our all-white country club in Northern Virginia. Blacks could not live in our neighborhood. It was not that long ago. It was a wound that had to be mended and human freedom is more important than technical interpretations of constitutional theory.

So, Rand Paul is wrong to pick at that scab and ignore the moral imperative that demanded action. Goldwater himself recognized it in subsequent years and while he stuck true to the constitutional principle involved, acknowledged that the greater good demanded a less rigid view.
Rigidity, though, is the problem with Libertarianism and that is how theory can lead to injustice. Indeed, it quite often does. That, too, is why Libertarianism, in so many ways, has more in common with leftism in its manner and premises than it does with conservatism. It grows out the same theoretical paradigm and leaves no place for experience.

It is time to put this discussion to rest once and for all. Until it changes by further Supreme Court action, the state of constitutional jurisprudence is that the federal government, through its commerce power, has the power to regulate virtually any economic activity. It can, through the Equal Protection and Due Process Clauses of the Fourteenth Amendment which makes them applicable to the states, prohibit discrimination on the basis of race, regardless of the Tenth Amendment.

But most important, it was right. It was right to prohibit commercial discrimination on the basis of race. It was right to prohibit discrimination in employment on the basis of race. It was simple justice. It was about human freedom. It was about human dignity. And it was the right thing to do.

Recent Developments in the Law

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)

MEDIATION

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.

DO YOU NEED IN HOUSE COUNSEL?

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.

IN FULL HOWL

February 17th, 2010

IN FULL HOWL

Last week, the Supreme Court eloquently reaffirmed the continuing vitality of the First Amendment. In doing so, it confirmed again our commitment to freedom of speech and the free exchange of ideas as the critical engine of American liberty.
In its opinion, the Court wrote:

“The First Amendment underwrites the freedom to experiment and to create in the realm of thought and speech.”

“The civic discourse belongs to the people, and the Government may not prescribe the means used to conduct it.”

“The First Amendment confirms the freedom to think for ourselves.”

“If the First Amendment has any force, it prohibits Congress from fining or jailing citizens, or associations of citizens for simply engaging in political speech.”

One might have thought such ideas quite uncontroversial.
But the Left is in full howl over this decision. The objectivity of the law is among its most cherished strategic myths. It has repeatedly hijacked the courts for the implementation of social objectives and for the accomplishment of purely political goals. When many protest the undemocratic judicial imposition of political change, leftists pompously suggest that the law’s impartiality requires the result. It is merely a ploy to shut down debate, of course, but the Left has always squinted toward authoritarianism. When the Court has the cheek to conclude, though, that the Constitution prohibits their autocratic political projects, it suddenly becomes a “political body” and the objectivity of the law somehow disappears from leftist rhetoric. It is, apparently, their contention that the Supreme Court is an objective arbiter of an absolutely determinable law only when its decisions agree with their political aims.
This latest avalanche of vituperation finally strips the mask from the Left’s pretension as freedom’s guardian. The truth is that leftists believe the First Amendment exists only to protect expression with which they agree. It is their private sanctuary; it exists to protect the expression of their ideas, but not yours. In their warped world view, the First Amendment only protects pornographers, sacrilegious artists, profane protesters and unhinged leftist ideologues, like the editorial board of the New York Times.
What was the controversial holding in Citizens United v. Federal Election Commission? Just this: corporations, like individuals, enjoy the right to freedom of speech; that Congress may not enact laws that prevent anyone – including corporations – from expressing political opinions.
The New York Times calls the holding “a blow to democracy”. Exquisitely and willfully unmindful of the hypocrisy that enables them to be serial litigants in favor of protecting the First Amendment rights of the corporation for which they work and, at the same time, to hysterically decry a decision that safeguards the same right for all other corporations, its editorialists asset that corporations do not enjoy the right to freedom of speech. Of course, the statute they so ostentatiously defend exempts their corporation from its prohibitions, so they cannot be expected to trouble themselves with mere intellectual integrity. Not that it has ever been in abundant supply at that particular institution, but, at some point, one would expect that embarrassment, if not shame, would begin to set in for its naked ideological partisanship.
If the New York Times and leftist ideologues from the President on down are right, though, there is, as the Court pointed out, no principled reason for arguing that the New York Times enjoys freedom of the press. The Times is, after all, a corporation and, until recently, a profit making one at that. Journalists seem to think the word “press” that appears in the First Amendment refers to some discrete, inchoate entity rather than as shorthand for “the printed word”. It does no such thing. It was never intended to describe an institution or class named “the press”, regardless of its form, since there was no such thing at the time. It was used, rather, to indicate that the right to freedom of expression extends to the written as well as the spoken word. Press corporations, then, have no greater right to freedom of expression than any other corporations.
But the New York Times corporation does not care. After all, it was exempted from the law the Court overturned so no one but it and other media corporations enjoyed the power to express political opinions. The intellectual greed this represents is as breathtaking as the Court’s retreat to liberty is refreshing.
The Left’s unprincipled attack on the Court’s decision is also oddly disconnected to the structure of First Amendment. As Justice Scalia put it in his concurrence, “This section of the dissent purports to show that today’s decision is not supported by the original understanding of the First Amendment. The dissent attempts this demonstration, however, in splendid isolation from the text of the First Amendment.”
The First Amendment does not, as many believe, say that the citizens have the right to freedom of speech and the press. It says “Congress shall make no law … abridging the freedom of speech…”. That means that the citizens’ “right” is protected through the Constitutional prohibition of government’s making laws that inhibit speech. The amendment says that Congress has no right to make any law that prevents anyone from freely expressing ideas. It does not make exceptions for legal constructs like corporations or any distinctions between what sort of person or entity might engage in that expression. It simply says that Congress cannot limit anyone from freely speaking. And “freedom of speech” is not capitalized so it is not a defined term carrying with it any assumption such as that it is a particular right belonging to a limited number of entities, human or otherwise. That stands to reason inasmuch as much expression then, as now, was carried out by profit making enterprises.
The Founders were not directing their lawmaking to those enjoying the right. To understand this, one must understand what prompted the enactment of the Bill of Rights to begin with. The debates over the adoption of the Constitution revolved around concerns on the part of such as Patrick Henry and Samuel Adams that the Constitution provided no limits on the new government.
It was universally accepted that the federal government should be small and strong enough only to overcome the fractiousness institutionalized by the Articles of Confederation that gave supreme power to the individual states. These “anti-federalists” argued that without specific prohibitions, the new government would arrogate to itself power that might have the effect of impairing the hard fought liberties everyone believed were the God-given rights of man. It was their view that rights were given by God and inherent in man, not granted by the government.
The Bill of Rights, then, was directed not toward the people but as a means of limiting the government. That is why rather than spelling out the rights themselves, by saying, for example, “The citizens have the right to freedom of speech.”, it prohibited the government from enacting laws that encroached on human effort that was considered protected. That is also why the amendments did not limit the prohibitions to the acts of individuals recognizing, as they did, that political action is concerted action by collections of people and seldom the action of an individual alone.
It is absurd, then, to suggest that the Founders intended to limit the right to free expression to each individual engaging in it. No one seriously contends that the Founders intended the right to freedom of religion, another right protected from infringement by the First Amendment, to be enforceable only by individual parishioners. Does anyone doubt that, say, the Baptist Church, as a body – a collection of people into a unit of worship – has the right, as an entity, to sue to protect the freedom to practice its faith? Of course not.
But all of this is lost on the Left and the constitutional geniuses on the New York Times editorial board who argue that this decision “undermines democracy”. How, pray, does an expansion in the expression of ideas, philosophies and perspectives undermine democracy? Undermines democracy? What, with more ideas to choose from? With an expansion of the marketplace of ideas so celebrated in First Amendment jurisprudence?
The Left has never been noted for intellectual honesty but this, surely, represents a new low.
Nonetheless, the Citizens United decision is victory for liberty and it points the way for conservative officeholders. If the critics have any legitimate point it is that in this decision, the Court has engaged in judicial activism at odds with the thought of Edmund Burke, so celebrated by conservative thinkers as their intellectual godfather. It illustrates why Burke, as a rhetoritician without fixed philosophy, is so unsuitable an ideological role model. Burke believed in incremental change without immutable guiding principles. He argued for the preservation of what is. If conservatism is Burkean, the Court’s decision was a bad one because it was a dramatic departure from what is. If, as I argue, conservatism is a fixed philosophy of freedom that is a collection of determined principles, then it is decidedly inconsistent with Burke’s intellectual conceit.
To the extent that it is, as I urge, a determinable and defined philosophy, then, it is justified in articulating and fighting for its ideas and that means taking the time to roll back leftist programs when it has a chance to. It means being willing to dismantle what is to move state and society toward a conservative ideal.
This decision is decidedly un-Burkean and shows the way to political conservatives in their effort to achieve an ideal state and an ideal society based on conservative principles – on the principles of the founding. The fact that the Court was willing to undo what was wrongly done by the Left based on anti-freedom leftist thought, is not only remarkable but should point the way to conservative politicians who need to run on the basis of a conservative ideology that includes a commitment to dismantle the leftist state when elected.
The Supreme Court has pointed the way. They need only follow.
See www.familysecuritymatters.com

DON’T ARBITRATE!

January 13th, 2010

You are the CEO of an important, successful company.  Your chief financial officer comes to see you backed up by your outside accounting firm and they suggest that you hire a vice president who will be solely responsible for all spending.  They tell you that that person needs to have complete autonomy unfettered by any business concern of yours and, in fact, that he should be independent not only of you but also of the board.  And, in fact, they say that he should be immune from firing.

You are a successful CEO and you didn’t get there by surrendering power and discretion.  Your first instinct is that they must be kidding. But then, as it sinks in that they are serious, you come to the conclusion they should be fired for such an idiotic idea.  Of course, no CFO would consider making the suggestion nor would any competent outside accountant.  But your lawyer does it all the time.

You know how ridiculous it would be to hand over company spending to someone who is completely unaccountable.  So, why do you hand over your company’s legal affairs to someone who is completely unaccountable?

There is a myth abroad in the land.  For more than seventy years, lawyers, inside and out, have sold executives a bill of goods.  They have told you that your disputes are better handled through arbitration than through litigation.  It isn’t true.

What are the benefits of arbitration?  Well, they tell you that it is faster than litigation and that was true at one time.  But most states have now enacted “fast track” systems so that in California, for example, 95% of cases are disposed of in less than a year.  Arbitration of difficult business disputes will certainly take that long.

Your lawyer will tell you that arbitration is less expensive.  But that is seldom true, at this point.  Far and away the most expensive part of litigation is discovery and if you allow your lawyer to engage in arbitration without full discovery, you are taking your life in your hands.  And, frankly, virtually all large law firms insist on discovery not only because they fear going to hearing without all facts at their disposal (lest they commit malpractice) but because they want the billable hours.  So, you aren’t going to save any money on discovery.

Maybe you will save money on motions.  But most arbitrators like to have a series of meetings to discuss the conduct of arbitration and courts never do.  So, depending on how aggressively your lawyer litigates the case, it is probably a wash.  And, of course, you can always tell your lawyer that you just want to get on with it and forget about motions unless you approve them in advance.

So, what is the downside of arbitration?  Just this: under the law of most states, arbitrators do not have to follow the law and there is nothing you can do about it.  If the arbitrator gets up on the wrong side of the bed that day and decides he just doesn’t like your attitude, he can issue an award that is completely contrary to the law and the facts and because you have no appeal, that is it.  You are stuck.  Because arbitration is favored in the law, few courts will give you any relief.  And, worse, that award can be made into a judgment quickly and with little trouble.  So, not only can you get a bad decision from the arbitrator, it can become an enforceable court judgment in no time.

“But”, your lawyer tells you, “you have finality.” Well, that’s terrific.  You have finality because you have no appeal.  Finality of a bad decision is not such a great idea, is it?

The truth is that agreeing to arbitrate is the worst thing you can do to your company.  When you sign a contract with an arbitration clause, you have no alternative but to arbitrate.  But when you sign a contract without one, there is no reason why you cannot opt to arbitrate in the event of a dispute with the opposing party.  The difference is that neither it nor you can force the other to arbitration against your will.  And that is worth something.  If arbitration is a such a good idea, presumably both parties can be induced to agree and the matter will be arbitrated.  But a contractual arbitration clause takes from you your flexibility and you got where you are by insisting on maximum flexibility.  The fact is that an arbitration clause is nothing more than a waiver of your due process rights under the law.

And studies do not bear out your fear of the court process.  On average, judges find for plaintiffs more than 60% of the time.  Juries find for plaintiffs only slightly more than 50% of the time.  So, the myth that a legally trained individual will give corporations a better shake than unsophisticated jurors is simply that: a myth not borne out by facts.  Where did that fear of jurors come from?  Well, while juries find for plaintiffs significantly less often than judges, the awards they issue are generally higher, on average, than those of judges.

I don’t know.  I think I would rather take the chance of a higher judgment against the probability that the jury will find for my corporate client.  And I certainly am not going to recommend to you that you surrender your due process rights and the power to appeal.  You are a CEO.  You know how it works.  If your employees do not have the possibility of being fired, they will, like civil servants, soon lack accountability.  What is their incentive to do it the way you want it done?  That’s how it is for arbitrators.  Their decisions are final.  There is no appeal.  There is no risk to them for making a bad decision.  Is that really who you want hearing your case?  I didn’t think so.

And, by the way.  Fire that lawyer who tells you you are better off arbitrating.  He’s either lying or incompetent.  Either way, you don’t need him.