As this horrible dreadful terrible year ends, some things do not change: ruminations about this past year, and looking ahead to possible future trends, although no one has a crystal ball. If someone does have that crystal ball, please let us know when it will be safe to resume some semblance of prepandemic life.
The legal profession is no different. At the end of the year, reports come out about what has been and what hopes to be. What am I reading? The Legal Trends 2020 by Clio; a report I wrote about last week called Building a Better Bar Exam, and this one by Acritas, The State of Corporate Law Departments: Effectiveness, Efficiency, and Expanding the Guardian Role (you can download the report here).
The role of a corporate law department has not changed. Yes, there have been changes in the name of innovation and other tools, all good things, but the sine qua non remains the same.
The clients bring the business in the front door (of course all business is from “good customers,” until they’re not). One of my jobs was to keep that business from going out the back door by paying out hard-earned dollars to resolve a claim or litigation. Regardless of how it came in, we didn’t want to see those earnings disappear.
When a claim or lawsuit had to be resolved, one issue was always which department, which branch, which cost center, who would take the hit to earnings. I always thought that it was unfair that a current unit be tagged with mistakes and screwups of a previous employee, manager, or administration. I thought that was disheartening and a morale problem, as employees worked hard for salary increases and bonuses only to find out that a prior screwup affected their compensation. But that was how it was played, and the decision to handle it that way was way “above my paygrade,” so to speak.
At a predecessor bank, the HR director had a separate cost center for paying out claims that arose out of employee relations issues. That separate cost center was where all employee settlements were charged along with concomitant legal expenses. It served two purposes: one, any employee relations-related matter was not charged to the unit because the bad actor or actors had “left the building” by then and personnel had turned over, and two, employee privacy, as it cut off gossip about how much was paid and to whom. Just like in any other businesses, employee privacy can be a synonym for “sieve.”
The mantra of corporate law today is still to reduce legal risk and legal expense. There is nothing surprising or unusual about those duties; that is why corporate legal departments are created and why they continue to exist, even if there’s pressure to outsource some or even all the legal department’s functions. And please don’t insult my intelligence (whatever is left of it after all these years) that outsourcing reduces costs. It doesn’t.
What nonlawyer in a company knows enough about what a project should cost or does cost, what the defense costs in litigation will amount to, what seemingly picayune wording in an agreement is critical to the deal? Who takes responsibility for legal fee overruns? Nonlawyers don’t know how to assess billing rates and times spent on projects, and they can be hornswoggled into approving fees and expenses that they do not understand, so they defer to outside counsel. How many nonlawyers are good at spotting legal issues and their consequences?
Often, companies regret outsourcing the legal function and decide to rebuild in-house, realizing that the cost benefit analysis of having inside talent is worth it, particularly in the ability to act preventively, to cut off claims and potential litigation at the pass, in being able to evaluate risk. One less lawsuit is one less hit to the bottom line, and given how expensive litigation is, the cost of that one settlement can often pay for salary and benefits of one in-houser. A strong, effective, and efficient in-house department that is willing and able to push back successfully against risky and even illegal business behavior is worth the price. I don’t think anyone who has ever been in-house will disagree.
Benjamin Moore says that the dismantling of its legal department was done for “financial reasons.” I have no idea what the “financial reasons” are, but I can’t believe that money is going to be saved over the long run. I joined one legal department where outside counsel were running amok with no controls on expenses, on whether a particular legal strategy made sense in a particular case, whether it made sense to take a turkey to trial or get rid of it. No one questioned outside counsel’s advice.
One outside lawyer whined (yes, he did) about losing the work, but he was spending way too much of my client’s money in the process. When asked what he thought the odds were that my client could win, he said 50-50 at best. It sounded like a case to be settled, but he didn’t see it that way when we pulled it away from him and resolved it on favorable terms soon thereafter. Meanwhile, one outside firm was staffing more than three attorneys on a matter so that the effective hourly billing rate for this firm was over $1,000 an hour, and this was some years back. Ka-ching!
Outside law firms make their money by billing. Period. And unless hourly rates go the way of the dodo bird, they will always be here.
However, I think the “guardian role” can’t exist unless there’s an in-house legal department. It’s not a matter of saying “no,” but protecting the client from all sorts of risks, including reputational.
Without an effective and efficient in-house legal department, one with not only “boots” but “ears” on the ground, the fox will be guarding the hen house, and I wonder if any CEO would be happy with that.
Jill Switzer has been an active member of the State Bar of California for over 40 years. She remembers practicing law in a kinder, gentler time. She’s had a diverse legal career, including stints as a deputy district attorney, a solo practice, and several senior in-house gigs. She now mediates full-time, which gives her the opportunity to see dinosaurs, millennials, and those in-between interact — it’s not always civil. You can reach her by email at oldladylawyer@gmail.com.
Kathryn Rubino is a Senior Editor at Above the Law, and host of The Jabot podcast. AtL tipsters are the best, so please connect with her. Feel free to email her with any tips, questions, or comments and follow her on Twitter (@Kathryn1).
