Billable Hour Fees Under Attack – Again!

Today’s edition of The Wall Street Journal includes yet another great article (most of it subscription protected) about companies continuing their efforts to push big law firms to abandon the billable hour fee structure in lieu of flat or fixed fees based upon the value added of the law firm.  TGC has been using flat fees since we started our part-time general counsel services over four years ago and our clients have found this fee structure to be very cost effective and productive for them.  The transition to flat fees for legal services is well underway and very soon will be a tide that the big law firms will be unable to stop.

Can I prohibit my employees from discussing any and all information regarding the company, its business plans, its partners, its policies, new business efforts etc?

By Karen Ward. The surprising answer is no.   A Federal District Court ruled that employees could reasonably interpret the rules unqualified prohibition of the release of “any information” regarding “its partners” to unlawfully restrict employees’ discussion of wages and other terms and conditions of employment with fellow employees.  A permissible limitation is that employees may limit discussion of working conditions, including pay issues, in areas where there might be customers but an employer cannot limit such discussion completely without violating the National Labor Relations Act.

Any policy whether in writing or not, can violate the NLRA, if it prohibits employees from discussing their working conditions.  Please note that these laws apply to you even if you do not have any unionized employees.

More on Legal Fees and Billable Hours, by Jerry Bloch

A recently published article explains why the billable hour business model used by law firms is so dysfunctional and why firms are so addicted to it. The article is not available on-line but I will send a copy on request, email jbloch@thegeneralcounsel.net.

It underscores a central theme of The General Counsel, LLC’s mission to provide high-quality, reasonably priced legal services to clients, which is that companies must seek out alternatives so that they can survive a very difficult economic environment.

In my white paper posted on CFO.com , I offer a number of suggestions on how companies can reduce their outside legal expenses. We believe that our clients can pay less without having to sacrifice quality.

Does Your Company Have An Updated Social Media Policy?

The use of social media is growing at a very rapid pace as companies look to use these digital media sites to grow their brand and increase sales. Many company communication policies predate the fast growth in social media that has occurred during the past two to three years and do not include any mention of employee use of blogs, Facebook or Twitter. Companies need to consider two important questions:
1) Do your policies take into account the potential uses of social media?
2) Should you re-train employees regarding outbound digital media communications?

Use of Interim Executives

Cerius Interim Executive Solutions has a great white paper called ” Top 8 Reasons Why Leadership On-Demand Makes Economic Sense Today” which makes outstanding points (eight of them) of the economic benefits of using interim executives.   Let me know what you think!

Good Governance in Troubled Times

Every industry has its own unique array of risks and no advice can cover all situations; however, given general economic conditions, and particularly the problems in the financial and credit markets, directors and senior officers should begin by regularly and carefully monitoring risks that might impact the ability of the company to maintain liquidity and access to capital needed for the business to survive and hopefully expand in the future.  Directors and senior officers should anticipate that is highly likely, even for the best companies, that cash flow will be slowing down and that for the foreseeable future debt and equity capital will be unavailable or available only on terms that are prohibitively expensive.  As such, it is recommended that directors and officers should review and update the company’s operating and business plans, establish performance monitoring procedures, analyze the availability of short- and long-term capital, evaluate the condition and prospects of key business partners, analyze and upgrade disclosure and communications practices and procedures and evaluate and improve corporate governance practices.  The experienced attorneys working with The General Counsel have the legal skills and management savvy to provide strong support for each of these activities.  To learn a little more about Corporate Governance Practices in Troubled Times, please click on this link  to view a more detailed article.

Pay Reduction Programs May Pose Problems for Employers, by Jerry Bloch

Many employers are looking for ways to cut expenses. Some employers are considering reducing pay with a corresponding reduction in the work schedule.

 

This can be problematical, as an article in the Los Angeles Daily Journal on April 10, 2009 by Lonny Zilberman and Lisa A. Hill points out.

 

Exempt employees must be paid a salary of at least $33,280, which is two times the minimum wage for a 40 hour week. If an exempt employee’s salary is reduced below that amount, that employee will become non-exempt, entitled to all of the protections afforded such employees (overtime, meals and rest breaks, etc.).

The same result may follow a reduction in the salaries of exempt employees even if the reduced salary is above the $33,280 minimum salary. The risk of a change in status to non-exempt is heightened if the reduction in pay is directly related to a reduction in time or number of days worked.

This is based on a federal regulation (29 CFR §541.118(a)(1)), which states that an employee will not be considered to be on a salary basis [and thus exempt] … if deductions from his predetermined compensation are made for absences occasioned by the employer or by the operating requirements of the business. Accordingly, if the employee is ready, willing and able to work, deductions may not be made for time when work is not available.”

If, for instance, an employer were to cut pay by 20% and simultaneously provide the employees with one day off per week, there would be a heightened risk that the employees would be considered non-exempt.

The less risky approach would be to cut pay for exempt employees without any corresponding formal reduction in the work schedule. The employees should be left to decide for themselves the schedule they need to work to get their jobs done, which may be less than a full time. Any abuses can be dealt with on a case by case basis.

The risk is also heightened if employees are told that the reduction is temporary. Employees should not be told that the reduction will be in effect for a limited period of time.

These issues may make it more difficult to gain the employees’ acceptance to reduction-in-pay programs but there could be problems down the road if they are not properly addressed.

WHAT A GENERAL COUNSEL CAN DO FOR A CEO

In today’s economic times, CEO’s of emerging and mid-sized companies can ill-afford to incur unanticipated risks or see a badly structured transaction or contract erode hard-earned company profits.  That is one of the many reasons that a CEO’s team should include an experienced General Counsel.  The mission of the General Counsel is to facilitate the achievement of the company’s business goals and profitability by being a proactive, valued member of the management team. 

A General Counsel tends to be far more knowledgeable about your industry, business operations, strategy and new product opportunities than outside law firm attorneys who are not accustomed to being onsite or serve as hands on members of the business unit.  As a result, a General Counsel is keenly attuned to the full range of legal and business issues embedded in the company’s business, understands the business priorities, and can add critical value by proactively translating legal risk into business reality.  As an inside legal expert, a General Counsel has the ability to devise action plans, engage in timely and decisive risk prevention strategies as well as to cost-effectively and creatively find solutions to legal problems.

 

A General Counsel will emphasize the importance of developing a working environment where he/she is integrated with the client and is a member of the management team.  When business people perceive that in-house lawyers can provide creative legal solutions with a business perspective, those lawyers are drawn more deeply into business teams as high value-added contributors as well as trusted advisors.  A savvy CEO is one who recognizes the business advantages and risk reduction that a General Counsel can bring, and ensures that his or her executive management team always includes this valuable team member. 

Renegotiating Contracts When Markets Turn Sour

Recently our partners at Thomson Reuters arranged for me to publish an article in the ACC Arizona Chapter Newsletter on renegotiating and managing contracts when markets turn sour.  Well, things haven’t gotten much better since then and I thought it would be useful to share some of the advice with you.

Unfortunately it is now commonplace for companies to find themselves in a bind with regard to performing their obligations under a contract with a vendor, customer or other business partner. For example, a company may have agreed to sell raw materials to a customer over a two-year period at a fixed price only to find that the deal suddenly became unprofitable because of an unforeseen rise in the company’s costs of procuring the raw materials that it was obligated to sell.  At that point the company can continue to try and perform under the contract, and risk significant financial damage to its business, or can simply cease deliveries and hope for the best when the customer begins threatening litigation. A strategy of stopping deliveries is often accompanied by any attempt to find fault on the customer side that would allow the company to claim that the customer has breached its duties under the contract thus relieving the company from its obligations. Unfortunately, arguing over the words of the contract at that point will only benefit the lawyers involved and the better course for the senior management of the company is to attempt to sit down with the customer and try and work out a restructuring of the contract that makes sense for all parties. When attempting to restructure a problematic contract an attempt should be made to align the interests of both sides and offer the other party, the customer in this case, an incentive to cooperate other than the prospect of costly litigation. In the illustration above the company might offer to substitute a new pricing formula for the fixed price arrangement which offers the customer reasonable pricing under all market conditions plus assurances that the company will not seek and obtain unfair profits from the restructured relationship. For example, assume the fixed price was $1.00 per unit and at the time the contract was first entered into the company’s cost was $0.85 per unit. At that time the company’s profit was $0.15 per unit. If the market price went down to $0.50 per unit the company’s profit would increase to $0.50; however, the contract became unprofitable for the company—and advantageous for the customer—when market prices rose to $1.50 and looked like they were going to stay there for the balance of the contract term. In that situation the company might suggest that contract price be set at the market price plus 10% which means that the customer would enjoy a price that is in line with the market and the company is entitled to a modest profit at all times during the contract term. The customer waives the right to the attractive pricing in relation to the market that it would have received under the initial contract but is spared the costs of litigating the breach and finding a new vendor. The company gets to keep the customer, and stay in business, but the days of 50% profit margins are gone. The company may throw in other incentives, such as more robust customer service plans, to sweeten the deal.

Obviously there are risks in attempting to informally renegotiate a contract. The major concern is that if discussions are not successful the non-defaulting party, the customer in this case, has been given a substantial amount of information that can be used in subsequent litigation and information provided in good faith as a basis for striking a new deal can be turned into a harmful weapon in the hands of the party’s attorneys. In many cases, however, the rewards exceed the risks and companies can resolve problems by providing the other side with sufficient information to allow them to make an informed decision and understand the benefits of a proposed compromise.

Several safeguards should be used when entering into negotiations to restructure a troubled contract. First of all, any documents provided to the non-defaulting party that contain sensitive information should be marked “confidential” and only disclosed after the other party has agreed to sign and return a confidentiality and non-disclosure agreement. Second, while it is usually obvious that the reasons for the discussion are that the terms of the initial contract have become significantly unfavorable an effort should be made to avoid using language that the other party might reasonably interpret as being an admission of impending non-performance such that the other party might claim anticipatory breach. Third, try to continue complying with the terms of the contract as they stand during a limited negotiation period even if this means incurring modest losses on the contract during that time. If possible, start talking about restructuring a contract as soon as it appears that problems are on the horizon but before they reach a crisis level. Fourth, try and determine if the other party has specific problems of its own that might be solved or managed in some way during the negotiation process. For example, the other party might have an immediate need for cash that might open the door to discussing a buyout of the contract with an immediate lump sum payment that represents a substantial discount from the costs of performing for the entire term. Finally, if litigation is a real possibility and there are legitimate concerns about misuse of information disclosed in good faith consider holding the discussions through a mediator. A mediator is not only trained to get both parties to find common grown, and ignore emotions and anxieties, but it is also possible to have discussions with a mediator protected as confidential and privileged so that they do not later come back to cause harm in the event of litigation. Consideration should also be given to other contract-related issues and problems that may arise when markets turn crazy. Things that you might consider include the following:

1. Review representations, warranties and covenants in major agreements to ensure that the company remains in compliance at the current time and that anticipated changes in business and financial condition of the company will not trigger a default in the foreseeable future. If a potential issue is identified pro-active steps should be taken to contact the other party to the agreement before a crisis emerges in order to arrange for a modification to the terms or a waiver. Remember, however, that the other party may be seeking a way to exit the contract due to changes in its own situation and any communications should include a potential solution to the issue and acceptance of the fact that it may just be the first step in restructuring the entire arrangement. Dispute resolution provisions in the contract should be reviewed and preliminary litigation plans should be prepared in the event that less formal discussions are not successful. By the way, representations, warranties and covenants provided by other parties should also be reviewed to determine whether they might be heading toward a default of their own.

2. If the company’s performance under a major agreement turns on the ability of another business partner, such as a supplier, to fulfill its promises it is important to take a hard look at the contract with that business partner and conduct some basic business and financial due diligence to ensure that market problems will not cause the partner to declare a default. Hopefully the contract with the business partner calls for delivery of regular financial information. If it does and reports are delayed this may be a “red flag” of potential problems.

3. Some of the company’s customers may seek to get out from under payment obligations by making warranty claims based on purported defects in the company’s products. If elements of the company’s products are provided by third party vendors the contracts with those vendors should be checked to ensure that indemnification provisions are adequate and that the vendors are obligated to provide necessary support so that customers are not able to back away from their obligation to pay for the products.

4. Many contracts include obligations on the company to obtain and maintain various types of commercial liability insurance. Given the issues that have arisen with many major insurance carriers attention should be paid to the company’s insurance portfolio and communications should be made to the company’s insurance broker to verify that all coverage remains in effect and that the chosen carriers are financially able to meet their obligations. If required insurance is coming up for renewal it may make sense to begin shopping around well in advance of the policy expiration date. If a change is made make sure that the contract partner is given appropriate notice.

5. Review the entire roster of parties to major contracts with the company to identify any business partners that are known to be experiencing financial difficulties and make sure that any potential contract claims against them are documented and asserted as quickly as possible. One of the goals is certainly to perfect any legal rights against the partner in the event that it goes into bankruptcy; however, every effort should be made to have the complaint accompanied by ideas to resolve the problem without forcing the partner into bankruptcy where the company may find that its rights are diluted or completed overwhelmed by the claims of other parties. Even if the company cannot assert any contract claims it may be a good time to use a bit of leverage to force the other party to negotiate pricing and other terms in a way that is more favorable to the company.

6. If the company itself is having business or financial difficulties make sure that there is an effective communications policy for sharing information with contract partners to minimize the risk that customer, suppliers and other strategic alliance partners do not begin looking for ways to void their contractual obligations to the company. Major contracts should be carefully scrutinized to identify all important ongoing obligations to make sure the company does not inadvertently let something slip that can be used as an excuse to trigger a relationship crisis around the contract.

How to Cost Effectively Manage Legal Issues

Last month, there was an excellent article in the New York Times about the imminent death of the billable hour at law firms.  It identified the common complaint of law firm clients that the practice of billable hours can encourage law firms to prolong a client’s problem rather than solve it in a timely and cost-effective manner.  This is certainly not a new complaint as the debate and discussion about billable hours has been going on for many years between in-house counsel but the debate gets more scrutiny during tough economic times even as hourly rates increase into the $500 to $800 range.

Companies of all sizes continue to seek more cost-effective ways to solving and dealing with their day-to-day legal issues.  The movement away from billable hours includes the payment of flat fees for handling transactions, success fees for positive results as well as other alternative billing arrangements.

As an example, our company charges a flat monthly fee for the services of our part-time general counsel services based upon the number days the attorney is on-site working in your offices and our clients have found this practice to be an extremely cost-effective way to manage their legal services by making their monthly legal expenses more predictable and controllable.  In the event you have the need to retain a law firm, you should negotiate with that firm for an alternative arrangement that fits your needs as well as the pending legal matter.