There’s a nice debate going on right now on this subject within the Legal Innovation Group on Linked In, you can check it out here.  Here’s my most recent comments on the issue, challenging the idea that it is not easy to change the current model (it is, but there is little incentive to do so) and the supposition that managing partners often have firm wide policing to prevent padding (they usually do not):

Gary, I would have to respectfully disagree as to this point “It is not easy or obvious how to accomplish this”. Law firms, being loose federations of individual businesses, each business consisting of an equity partner with a book of business and the willingness to walk away from the firm, would need to do the following:
1. Secure a commitment from each partner with a book of business to make the clients those of the firm.
2. Impose optimized processes using Lean/Six Sigma for doing all of their work and make sure that they are followed.
3. Use knowledge management and software automation to speed up document preparation.

Frankly, Patrick is right, without fixed fees there is little incentive to take these steps, and, in fact, a disincentive to do so. But it would be a straightforward process that is already widely performed in other fields, such as software development.

And:

Chris, I would recommend caution in referring to firms where certain behavior is allowed or isn’t, as I find that firms don’t do much of a job of policing behavior internally, and often times one partner will pad a bill while another partner at the very same firm would find that ethically abhorrent. Also, speaking from the in-house perspective, it really is one’s responsibility to question bills on a regular basis from larger law firms because of this lack of policing. At small firms I find this is less necessary, as you have much more of a chance of establishing a regular relationship and better billing expectations once you’ve removed leverage from the equation.

I do think the ethics committees make a few good points, though, namely:

1. Websites and publishers shouldn’t hold themselves out as being the equivalent of a legal service from an attorney.  Good legal service is at a much higher level than a template or form, and to contend that they are equivalent is simply wrong.
2. Websites and publishers should not mislead customers into thinking that just because attorneys prepared general forms and templates, that means that they will work for the customer given his or her unique circumstances.  That’s why you hire an attorney, to provide customized advice for your unique situation.
3. Websites and publishers should provide a conspicuous disclaimer that they are not providing legal advice.

However, the ethics committees simply go too far, attempting to ban dissemination of any legal information.  This is clearly an attempt to restrict free speech and is unconstitutional.  I think that the private practice attorneys who generally make up these committees are probably motivated by two main concerns.  First, to some degree, they are probably engaging in economic protectionism; worried that clients will be less willing to seek them out, they choose to simply shut down the competition.  Second (probably to a much greater degree), they genuinely feel that everyone with contract needs should get the high quality service of an experienced transactional attorney.

However, this understandably admirable motivation is often dispensed with when it comes to making sure that attorneys are good at what they do (many are not, and continuing legal education requirements are minimal and do not push our service to a higher level).  Additionally, we charge too much for many people to afford us, so the end result is that the ethics committees are shutting people completely out of access to any kind of legal information.  I haven’t seen any good responses to this damning critique.  I also think that the increasing inefficiency in legal services does not speak well to being cognizant of the omnipresent client need for less expensive billing.

I think the current sad state of affairs is due to the misconception that Internet resources should mostly be used without attorney input.  This misconception is furthered on both sides of the debate, by website marketing campaigns, and attorneys trying to use the unauthorized practice of law restriction to shut websites down.  I believe that websites should instead be encouraging users to engage attorneys, and attorneys should instead be taking advantage of these resources to enhance their productivity and pass those savings on to clients.

TotalAttorneys Being Sued for Violation of Legal Referral Rules

Connecticut Bar Attacks Non-Law Firm Legal Websites

Unauthorized Practice

Who Polices The Practice Police?

A Matter of Law: Texas vs. Nolo Press

Innovation and Rules of Professional Responsibility

Zip Code Referrals Ok’d in CT

Conn. Dismisses Total Attorneys Ethics Case

LegalZoom and Unauthorized Practice of Law

Believe it or not, right after our discussion on payment terms, a story on this topic hit the press.  Apparently Anheuser Busch InBev is now paying its bills 120 days after receiving an invoice.  Reportedly, Belgian governmental authorities are investigating the practice to determine its legality.

Since Emerson (Anheuser Busch InBev’s main supplier for brewing appliances), has little bargaining power to resist this change, it has publicly issued an edict that it will no longer serve its huge customer’s beers at any Emerson event.

“We suggest you use Coors, Miller, Modelo (Corona, etc.) or Heineken products,” the memo apparently goes on to say.

What Anheuser Busch InBev is doing, essentially, is turning each of its purchases into a 4 month financing contract.

I wonder how they would feel if their beer distributors tried to do the same?

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We’ve seen dozens of apps that are approved the first time, but later rejected for a seemingly small update. And we’ve seen others that are rejected, make almost no change, yet get in the next time they’re submitted. It would seem the the life or death of an app is entirely in the hands of the App Store inspector who checks it out.

Apple’s App approval process reminds me of a similar application system: applying for a trademark registration from the US Patent and Trademark Office.  When I used to represent clients in prosecuting their applications, I really had little idea what would happen, as trademarks that should have sailed through according to the law were rejected, and others that were “on the fence” might go right through.  For WhichDraft.com, our recent application had been approved, but was then pulled and sat on a supervisor’s desk for 6 months.  They couldn’t give me a reasonable explanation why.

Echoing TechCrunch, it would seem that the life or death of a trademark application is entirely in the hands of the U.S. trademark examining attorney who checks it out.

It’s not a good sign when a for-profit corporation’s performance mimics the quality level of the federal government.

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So color me surprised when I noticed one of my large clients insisting that it would only pay a bill within 45 days.  They also pushed back on the seller’s right to terminate the contract for late payments, requiring the seller to give up to 90 days advance notice before it could do so.  Floating your money for this extended time period gives you some great advantages when you’re the customer.  A customer can use its levitating dollars during the extra time to garner interest or invest the money, money which, in the past, the seller would have had.  Presto!  Like magic, the extra time means extra dollars for the customer.

What happens to the seller?  Think about it: 90 + 45 = 135 days to pay a bill.  Most salespeople will tell you that waiting over 4 months for payment will clobber their cash flow and make it very hard for them to pay their own bills.  The solution?  The seller starts doing the same thing to its vendors.  Now, when people negotiate the payment terms in a contract, they’re left in the rather disingenuous position of begging customers to pay within 30 days, then turning around and asking for much more time to pay when it comes to their own creditors.

Besides being a blatant violation of the golden rule (which we all want to follow, right?), the lack of reciprocity makes for an uncomfortable negotiating relationship and hits you with credibility and loyalty costs when it comes to your business partners.

A great example is playing out right now.  Apple appears to be taking longer and longer to pay developers who create iPhone applications.  Here we have a situation where Apple has tremendous power because it’s the gateway to the iPhone platform.  Apple takes all the money users pay for developer’s apps and then relays the developer’s cut to them (minus Apple’s share), per the Apple contract agreed to by every developer.  According to the copy of the Apple contract here, Section 3.5 requires Apple to pay the developer within 45 days after the end of the month that Apple received the developer’s payment from a user.

So if you buy my WhichDraft App (doesn’t exist yet, but I can dream, can’t I?) on March 1, Apple doesn’t have to relay your payment to me, the developer, until mid-May!  While waiting over 70 days for my money is bad enough, according to this report Apple might be taking even longer.  And since Apple controls access to the platform, the developer is left with a difficult choice: keep waiting while her own bills pile up, or threaten to sue Apple, which could provoke Apple into rejecting her apps entirely, effectively shutting the developer out of the entire platform’s market.

The situation makes me imagine Steve Jobs as the Soup Nazi: “No more millions of iPhone users for you!”  Sure, there are laws against this kind of behavior, but if you’re a small developer, do you really have the time and money to litigate this kind of dispute?  For most people, I think not.

That’s the power of a network access agreement.  However, at some point, the pain could be so great that developers just move to a different platform.

Palm Pre, anyone?

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Frankly, I was surprised by the question.  Given the routine practice of emailing unencrypted contract drafts, I told my questioner that confidential client information is routinely exposed to many third parties who handle email traffic, seemingly without a problem.  I added that if he’s still worried, he can use Web 2.0 sites to create contracts and download them to his hard drive before he enters any client identifying information.

But I thought I could provide a better answer, so this blog post is my first crack at investigating the topic of attorney client privilege and web sites.  Surprisingly,  I could not find a single case or ethics opinion directly addressing whether or not use of a web site in this manner violates privilege.  However, there are a number of closely related rulings that I think, collectively, demonstrate that the privilege is safe.

The key case is City of Reno v. Reno Police Protective Ass’n, 59 P.3d 1212 (Nev. 2002), modified, 2003 Nev. LEXIS 25 (Nev. May 14, 2003), which states that privileged information sent via unencrypted email does not destroy the privilege.  In this vein, I would think that a web site storing privileged information, subject to a nondisclosure privacy policy, is even more secure and should be fine from a privilege standpoint.  Additionally, under ABA Formal Op. 398, when a lawyer has client files stored by a third party warehouse, the lawyer needs to obtain reasonable assurances that the warehouse will protect confidentiality.  Similarly, a web site, with a privacy policy protecting the attorney’s contracts from prying eyes, would also seem to clear this “reasonable assurances” hurdle.

Also, check out these additional documents and links to discover more information on this topic.  Collectively, I think they demonstrate that with reasonable protection, the attorney client privilege on the Internet is safe and sound.

Additional Resources
-Nevada Supreme Court holds attorney-client privilege not waived by transmission via e-mail http://www.legalethics.com/?p=56
-Delaware addresses e-mail confidentiality issues http://www.legalethics.com/?p=70
-Ethical Issues and Technology Rob Aronson 1-6-04  Summary of Ethical Issues (www.elawyering.org) http://tinyurl.com/aqyfma
-See Model Rule of Professional Conduct (MRPC) 1.6. (lawyers may not reveal “information relating to the representation” of a client.)
-North Dakota St. B. Ass’n Eth. Comm. Op 99-03 (June 21, 1999) (security measures must be in place for backup storage)
-ABA Formal Op. 398 (reasonable assurances that paper file storage company will protect confidentiality)
-Law Practice Management Section: eLawyering Task Force http://www.abanet.org/dch/committee.cfm?com=EP024500
-A Quagmire of Internet Ethics Law and the ABA Guidelines for Legal Website Providers http://www.allbusiness.com/legal/882375-1.html

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When it comes to law firms selling stock, Law Practice Magazine points out:

“The first reaction from many people is to question why anyone would invest in, or buy stock in, a law firm . . .  The most frequently raised objection is that it could influence lawyers to put financial considerations ahead of the needs of the clients. Some opponents also believe that it will raise even more ethics issues.”

The Georgetown Law Center for the Study of the Legal Profession has published a thoughtful series of letters on this subject.  The letters note the widely held U.S. fear that law firm partners, to please their outside shareholders, would make decisions that would hurt their clients but provide better short term results, referred to as “practicing to share price.”

Additionally, some fear that lack of outside investment means a talent drain for law firms.  In the Georgetown letters, Bruce MacEwen (the blogging force behind Adam Smith, Esq.) notes:

“This state of affairs leaves law firms at a competitive disadvantage when it comes to recruiting and retaining talent.  Lawyers can be lured by private equity, hedge funds, investment banks, management consulting, and even plain old corporate clients offering stock options.   Also, “C-suite” executives in law firms cannot be compensated at levels equivalent to their peers at similarly-sized corporations.  Last and most obvious, ordinary income receives the most onerous tax treatment of all forms of potential compensation.”

To me, I think this risk of losing lawyers to companies should not be the reason to open up law firms to outside investment.  After all, in-house lawyers in corporate America actually make less, even with stock compensation, than most lawyers at top law firms.  And the enormous compensation of top executives is often due to incestuous relationships with consulting firms that tell boards of directors to pay officers handsomely so that the officers will in turn give the consulting firms more business.  Runaway compensation levels caused by conflicts of interest need to be redressed, not equaled.  Moreover, because law firms are so poorly run, it is hard to imagine a non-law firm wanting to poach a top equity partner and pay her better than her current compensation.

Believe it or not, I’m not against outside investment in law firms (and neither is MacEwen).  And I agree that there is a serious ethical concern here.  But that concern is not that lawyers will compromise their clients needs.  Instead, outside investment would force firms to do a better job of serving their clients. Law firms defy economic rationality: in what other industry do the best companies pay everyone exactly the same, embrace massive annual attrition, and often do nothing to hold on to their best performers?  Knowledge management is used ineffectively (if at all), and there’s hardly anyone using Six Sigma, Lean and other proven methods to provide superior service at cheaper rates. With savvy investors behind the scenes, we would start seeing more firms come under pressure to respond to widespread client complaints, associate complaints, and general unhappiness with the legal profession. An effective response would give a firm a huge competitive advantage in the marketplace. Despite most lawyers thinking the opposite, I think outside equity will be the ultimate intersection of the profit motive and ethics.

And the fear of lawyers “practicing to share price?”  It already goes on.  Most major law firms report their “Profits Per Partner” publicly.  Firms do everything they can to keep that number from dropping, for fear that equity partners will quit in the face of falling profits and take their clients to a firm where profits are higher.  So whenever there’s a down period, key practice support departments like knowledge management are cut (a point we’ve made before here).  You’ll also see some of the best and brightest associates, of counsel, and non-equity partners shown the door.  The quality of legal work suffers, and the client is left holding the bag.  When the economy bounces back and work picks up again, the attorneys that are still around are usually overwhelmed.  The firm quickly hires attorneys who are “good enough,” and the client receives work rife with shortcuts from non-top notch talent.

Buying stock in a law firm might seem bizarre and objectionable. But it might also make us much better lawyers.

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