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By Helen W. Gunnarsson
March 6 — Law firms must explain, negotiate, argue, push back and ultimately be prepared to walk away from business dangled by corporate clients that insist on unreasonable “guidelines” for outside counsel, panelist Simon Chester said Feb. 26 during a program on outside counsel guidelines at the 14th Annual Legal Malpractice & Risk Management Conference.
The conference took place Feb. 25-27 in Chicago, sponsored primarily by Hinshaw & Culbertson LLP. Bloomberg BNA is a co-sponsor.
Chester delivered a solo performance that included a “bestiary of awful examples” from outside counsel guidelines that he said he saw in his former firm.
Chester, formerly a law firm general counsel, is now a consultant on risk management and professional malpractice based in Toronto.
A show of hands from the audience in response to Chester's questions supported his thesis that corporate clients are increasingly presenting guidelines for representation to their outside counsel, that those guidelines are getting tougher and that few law firm members feel confident they are aware of guidelines to which their partners have agreed.
Chester said that while general counsel at his former firm, he assigned his summer associates to search the firm's document management system for outside counsel guideline packages. “There were hundreds of them,” he stated.
He said he and the firm's management team “had no idea” of the extent to which his partners had agreed to those “bombs waiting in our files” that “were setting the terms and conditions for our interactions with our clients.”
Chester identified a number of categories of intrusion of outside counsel guidelines into law firm management:
Many clients identify items such as research and travel as nonreimbursable or reimbursable only up to certain limits. Chester said at his former firm “we would tell associates not to use the term ‘research’” on their billing records. Instead, they were instructed to substitute terms such as “reviewing options” or “conducting analysis.” He said a client once summoned him from Toronto to an hour-long meeting in New York City “and I was only permitted to bill one hour.”
Clients also subject expenses to “micromanagement,” he said. On the same trip, the client allowed a maximum reimbursement of $90 for his hotel room and set a daily limit of $30 for meals.
Chester said many clients permit only one firm employee to be present at any meeting, including court appearances. It's also common, he said, to see provisions limiting fees for paralegals to, say, $50 per hour “or we will provide you with paralegals from our preferred outside vendors.”
Chester also said clients frequently require prior approval of law firm staffing on their matters, which can pose payment issues when the unanticipated happens. “Then we get a motion Friday afternoon for a Monday morning response and we have people out sick” and the firm gets “stiffed” because the client didn't okay firm staff pulled in to take care of its emergency. “Trying to get prior approval [from a client] on a Friday afternoon is hard,” he noted.
Clients increasingly require law firms to sign off on agreements to subject themselves to the same privacy laws that govern the clients, which may include HIPAA, financial privacy laws “or something completely different” with which the law firm may lack familiarity, Chester said. Additionally, he remarked, clients frequently insert provisions that all of their data must be encrypted and none may be stored on any portable electronic device. “How confident are you that [your] lawyers do that?” he asked.
Clients also may include provisions requiring their law firms to comply with all of the client's network and data security requirements: “Your software or hardware is not good enough. You have to meet our standards.” Chester said law firms should be asking themselves “What if there are different or inconsistent standards from different clients?”
Even more intrusive, Chester said, citing a report from the Wall Street Journal, is that some clients' guidelines insist that their law firms comply with all of the client's network and data security standards and then verify compliance through third-party audits.
Chester said clients frequently state expectations that their law firms will comply with their business codes with respect to such matters as confidentiality, conflicts, intellectual property, political activity, accepting gifts, and even ethical standards for vendors as if both lawyers and the law firm were the client's employees. “I was asked if we were in compliance with a whole slew of international labor conventions,” Chester said.
More often than not, Chester said, outside counsel guidelines stipulate that the firm owes a duty of loyalty not only to the client but to “the entire conglomerate” and prohibit any legal services, even tax work, for competitors.
Chester said he would often be told in response to his request for a list of a client's subsidiaries and affiliates “we file that every quarter with the SEC, please look it up.” He said he once asked the chief ethics officer of a Fortune 500 company how many affiliates the company had. “He said ‘That's an interesting question. I ask myself that frequently’” and estimated there were around 64,000.
“Large corporations are amoebas,” Chester said, because they are constantly changing and re-forming. He warned “If you are dealing with a Japanese corporation you'd better find out who their preferred trading partners are, because they consider them ‘family’ for conflicts purposes.”
Chester advised the audience to refuse to accept clients' attempts to require law firms to disclose information about competitors they represent. He offered a “clinching argument” to use in negotiating that issue: “Of course you understand that I'm going to tell your competitors all about the work I'm doing for you.”
When a corporate client insists on changes, “the partner in charge of that client should be zapping those outside counsel guidelines to you as general counsel as fast as they can.”Simon Chester Risk Management Consultant
Client prohibitions of general, prospective or unlimited conflicts waivers are increasingly common, Chester said, with clients also announcing “and whatever [waiver] you think you have in your files, we renounce it.”
Chester said these expansive client demands with respect to conflicts and waivers “are extending the definition [of a conflict] far beyond the Model Rules and what the courts would insist on.”
He opined that conflicts rules designed for litigation may not be appropriate for transactional work and would “Balkanize” law firms into representing only one client in any given industry, resulting in the fragmentation of legal expertise to the ultimate detriment of clients.
Clients are demanding that their law firms indemnify them for a laundry list of potential losses, Chester said, which may void a law firm's own insurance.
He told the attendees he has had clients insist on knowing how much insurance the firm carries and then demand more—up to half a billion dollars in one matter in which the law firm was engaged to provide a third-party opinion on a syndicated loan in which the client was the junior member of the syndicate—for which the law firm's total fee was $50,000.
Chester said he pointed out to the client that the purpose of his firm's insurance was to compensate the client in the event of negligence, not to guarantee the transaction.
Chester said clients are including provisions giving them the right to audit the law firm's work, to enter the firm's premises with 24 hours' notice and to access the firm's servers. He suggested that such provisions might be appropriate for third-party technology providers handling the client's personal information, but said they are “completely unacceptable” if they cover access to the confidential information of other clients.
Chester said guidelines are including provisions that they trump any other agreements with the firm, including engagement letters, and may state flat out that the client “will not adhere to any guidelines or standard terms imposed by outside counsel.”
As if that weren't enough, he added, guidelines also may state that the client reserves the right to change the guidelines at any time “in our complete and unfettered discretion.”
Chester cautioned the audience that even longtime clients may suddenly attempt to impose new and “completely unacceptable” outside counsel guidelines on their law firm, as he himself experienced. “When that happens,” he said, “the partner in charge of that client should be zapping those outside counsel guidelines to you as general counsel as fast as they can.”
He said it's not unusual for firm lawyers working with the clients not even to read the guidelines. “They're prepared to sign off on anything that's going to keep the gravy coming,” he stated.
Increasingly, Chester said, clients are demanding a role in how their law firms conduct litigation and discovery, and are even refusing to pay for court filing fees, “as if that disbursement was somehow unrelated to the service,” and insisting on coordinating the discovery.
Terms for outside counsel may include managing litigation in accordance with company policies, such as behaving in a way that “enhances and preserves the dignity of the system of justice” and exercising “good faith in discovery.” Well and good, Chester said, but “Can we define that with any sort of exactness?”
Chester said clients are expecting reports on their law firms' staff ethnic composition. He noted that Canadian and U.S. interpretations of diversity may differ: in his Canadian firm, “we had all sorts of people whom we would regard as minorities” but who would not be so regarded in the United States.
Chester said clients are insisting on being the ones to select a “contact partner” whose services will not be billed but who will be responsible for compliance with the client's expectations, diversity requirements, making sure the client's budget is satisfactory to the client and being available 24/7 to respond to whatever the client defines as “urgent.”
While clients may demand their law firms comply with “all applicable laws related to bribery and corruption, including the laws of England, U.S. and local laws,” Chester asked “Can you really tell whether you're in compliance with the U.K. Bribery Act?”
He also said he was “pretty sure” his former firm complied with the frequently seen provision “The firm must hold itself to the highest legal and ethical standards and comply with all applicable laws and regulations,” but, with respect to global law firms, asked “am I really sure there isn't some office somewhere else in the world that has a problem?”
Certifying compliance with all applicable laws is probably not a meaningful risk, he said, “but I really have no idea.”
Clients want their outside counsel and other vendors to certify their compliance with statutes and regulations, he said, for a purpose: so that the client can make its own certifications to regulators. “But all these certifications are sitting in [the law firm] files like little bombs waiting to go off,” he warned.
“The market for legal services has changed,” Chester said. “We have clients increasingly in the driver's seat, stipulating how they want to be treated.” Chester acknowledged that clients have legitimate concerns but said the examples he cited “go way too far.”
Chester warned the audience that individual partners—“particularly partners looking for origination credits”—cannot be relied upon to protect the firm's interests when clients present them with unreasonable outside counsel guidelines.
He recommended that firm general counsel who receive these packages “pick up the phone and have a discussion with the client's general counsel on why it's not in their interests or the interests of anyone in their sector to impose these conditions.” And, he said, “you always have to be prepared to walk away.”
Law firm general counsel, Chester told the audience, must work at “reestablishing a balance” of power between clients and law firm. He recommended starting by taking an inventory of outside counsel guidelines in existing files and “see what it is that [firm lawyers] have actually agreed to.” He warned “until you know what's out there, you're going to have really severe problems.”
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