In-house ACCess : In-house ACCess: Association of Corporate Counsel : ACC : The In-house Counsel Bar Association

Relying at multiple points on an amicus brief filed by the Association of Corporate Counsel and others, the Pennsylvania Supreme Court has returned to the fold and will now apply the attorney-client privilege to confidential communications, in particular, legal advice, from the attorney to the client.  The decision is available here.

   
Prior Pennsylvania court decisions had suggested that only confidential communications from the client to the attorney were protected.  Therefore, an opposing litigant could discover an attorney's legal advice delivered to the client, so long as no confidential information the client provided to the attorney was revealed.  This distinction, which offends common sense as well as the majority rule in the states that both types of communications should be safeguarded, is hard to apply in practice.  As our brief noted:

“The [lower court's] constricted view of the attorney-client privilege requires lawyers, clients, and courts to make surgical separations of communications based on client confidences from communications based on other sources. In practice, drawing such distinctions would be imprecise at best. Determining what documents are privileged will have the practical effect of unnecessarily complicating the court's in camera review of claimed privilege documents and result in affidavits and depositions of attorneys to determine where they obtained the information used as a basis for their legal advice.”

Gillard v. AIG Insurance Co., et al, No. J-58-2010, slip op. at 11 (Pa. S.Ct. Feb. 23, 2011) (citations and internal quotation marks omitted).   And, as our brief in Nationwide Insurance Co. v. Fleming, which was the last time the Court addressed this issue, made clear:

“The [lower court's] holding reduce[s] Pennsylvania's attorneys to guessing when their own legal advice may be privileged, leaves clients uncertain as to when their lawyers' communications are confidential, and, consequently, will significantly disrupt the free and candid exchange of information between attorneys and clients.”

Id. at 9 n.5.

Exactly.  The Court refused to introduce those complications to the discovery process and to the ordinary practice of law.  In-house counsel representing their clients in the Keystone State will now have a more certain privilege on which to rely when they provide candid legal advice. And, a more certain privilege will redound to the company’s benefit by facilitating more informed decision making by the non-lawyers about the constraints and opportunities imposed by legal rules and regulations.  For that, the in-house bar and the client companies those lawyers represent, are quite grateful.

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Post 13

Compensation, Conversation and Collaboration

Week 13. Each week via the In-House ACCess blog, follow the promise and pitfalls of forming a new value-based client-firm relationship. ACC Value Challenge steering committee member Ken Grady, General Counsel and Secretary of Wolverine World Wide, offered to profile his selection and start-up process of launching a trademark portfolio management engagement with law firm Seyfarth Shaw. Ken's co-blogger is Lisa Damon, a member of Seyfarth's Executive Committee and leader of the firm's efforts to incorporate Lean Six Sigma into its business. The voice, views and stories expressed by the authors below are their own and not ACC’s. To catch up on the story so far, click here.

The client side

From Ken:

We structured the value fee for 2011 by borrowing from a common executive compensation arrangement. First, we established the base fee for 2011 (think base salary). Seyfarth used raw data that Wolverine supplied (hours, number and type of matters) to calculate estimates assuming the work was done by (1) a traditional large firm (higher rates), (2) the current firm, and (3) Seyfarth. I also calculated an estimate. My calculation and Seyfarth’s calculation of the Seyfarth fee agreed within about 7%, and we decided to use my number (I had the edge given my insider knowledge).

Next, we set up a bonus structure. The bonus recognizes savings based on systemic changes. This is a key point. We want repeatable changes that reduce the time to do portfolio work. That means we need process improvements, not one time cost avoidance. Reducing the time it takes to process a trademark application is a process improvement, whereas deciding to file a trademark application in fewer countries is a one-time savings. Process improvements give Wolverine savings each time we do an application.

The bonus builds on two opportunities: (1) reducing Seyfarth’s work, and (2) reducing foreign agent work. Between Wolverine and Seyfarth, Seyfarth has almost total control over the foreign agent work. So, for each $1 of systemic foreign agent savings, Seyfarth will be paid a $1 bonus. Seyfarth’s work is more closely tied to Wolverine. Since we must work together to reduce Seyfarth’s costs, we split each $1 of systemic Seyfarth savings $.75 to Seyfarth and $.25 to Wolverine. Put differently, for each $1 systemic savings on Seyfarth’s work, Wolverine will pay Seyfarth a $.75 bonus.

To measure Seyfarth’s systemic improvements, we will use two metrics: time to process an application, and time to receive a useable specimen (we have to file specimens in certain countries to show we are still using the mark). We need one score across both metrics to determine Seyfarth’s bonus, so we will combine the results on the two metrics by weighting them 80% on trademark applications and 20% of specimen gathering. We calculate the trademark application improvement metric, multiply it by .8, calculate the process improvement on specimens metric, multiply it by .2, and add the results. For every X% of weighted process improvement, Seyfarth will earn $.75.

Let’s compare this to a common executive compensation bonus system. I earn a base salary (base fee). My long-term bonus depends on the company’s performance on two metrics, earnings per share (think trademark applications) and value added (think specimen gathering). EPS counts for 65% of the final score, and value added counts for 35%. We get the final score by taking the weighted score (.65 times EPS score plus .35 times value added score), and apply that weighted score to the sliding bonus scale. For each X% improvement in the EPS/Value Added score I get a bonus of $Y.

I’m going to emphasize one point – this structure depends on process improvements not one-time savings. That means we need a system (we are using, of course, SeyfarthLean) to document existing processes, improve those processes (reduce work), and ensure that they are repeatable. Since many have successfully used lean process improvement for services where you could claim there is great variability (for example, medical treatment in hospitals), using it for legal services does not present any unique challenges.

Next: Explaining the power of this approach in driving shareholder value for Wolverine, and margin improvement for Seyfarth.

The firm view

From Lisa:

As the provider, we were delighted by Ken’s approach. We believe that it is fair, aligns us with Wolverine and properly reflects our joint expectations for the further development of the trademark service platform. 

More than that, it provides a compelling strategy for recognizing both the “industrial” and “artisanal” components of our work that Ken has described in the past. We receive a fair base fee and the opportunity to do better if we can help to build out the service platform.  We are absolutely committed to working with Ken’s team to identify process efficiencies and other systemic changes, believe we can do it by harnessing the capabilities of SeyfarthLean and agree with Ken that his approach fairly reflects that commitment.

So, what did we need to do from our end to get comfortable with the approach from a business perspective? We clearly wanted an approach that worked off a different calculus than seeking to compare the projected results of Ken’s pricing strategy against a traditional hours times rates model. That approach might have been ok but was clearly inconsistent with the core theme of the Wolverine trademark relationship 

Like Ken, we worked first to develop a scoping model that projected fees under several different scenarios. Working with Ken, we determined that his numbers and our numbers on scope were close and elected to work with Ken’s numbers (that company knowledge thing). From there, we looked at our costs to deliver the scope, ran through a scenario analysis that Ken developed and looked at margins. With that analysis, we concluded that Ken’s strategy should bring us together with Wolverine in a joint mission to handle the daily core services and further develop the trademark platform.

This exercise was similar to our more traditional pricing analysis only in the goal of seeking to understand the financial results of various scenarios. The economic incentives associated with rewarding strategic value (as the client understands it), however, was very different from the more traditional approach to pricing trademark portfolio services and very cool from our perspective.

Next: Working as partners; next steps.

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In a case involving an investigation by the NYAG and the SEC of Bank of America’s merger with Merrill Lynch and compensation and bonuses paid to Merrill Lynch executives (see New York Law Journal story), the NYAG's approach turns privilege law on its head and could profoundly undermine the provision of legal and preventive law counseling in public companies. 

The U.S. Department of Justice has officially agreed that coercing privilege waivers is not appropriate, without precedent, and extremely bad public policy.  It appears that the NYAG strategy is to "try" Bank of America in the media where they have suggested that Bank of America is not cooperating with the investigation because they haven't released privileged communications and work product. Such arguments do not hold water and would not withstand the scrutiny of introduction in the courtroom, under legal precedent on privilege, current federal charging policy, or SEC enforcement guideline.

It is ludicrous for the government to argue that a company invokes an "advice of counsel defense," because an employee “admits” under questioning that s/he spoke with a lawyer. That "admission" by the employee is the result of a good faith answer to a direct question posed by a prosecutor (and is thus compelled). It is not a disclosure of any aspect of the underlying advice, nor does it somehow create an argument that the company is asserting an advice of counsel defense.  We all know that such an assertion needs to be made by the company in a formal adjudication process as a stated defense.  Bank of America is quite clearly arguing in this case that its actions were legitimate and compliant with all disclosure laws, not that they were somehow illegitimate or suspect, and only made on “advice of counsel.”   (see Lewis Liman’s 9/8/09 letter to the NYAG). 

 
The NYAG's unprincipled shot across the bow [to create out of thin air an assertion that the company has raised an advice of counsel defense and therefore needs to divulge privileged files], if allowed to stand, will reverberate through every corporate boardroom and C-suite.  It will have a chilling effect on clients’ willingness to engage in crucial conversations with lawyers on the most sensitive and complex matters they face.  Yet those are precisely the circumstances in which the public interest most favors candid consultations with counsel.  I would have hoped that prosecutors and enforcement officials in such cases would be interested in encouraging such good practices, rather than undermining them.  

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