THE BEST OF BOTH WORLDS: How to Choose a Chief Legal Officer and Other Helpful Tips for Controlling Legal Costs

One of the best pieces of advice I received in law school was from my trial practice professor, Prof. Bill Reynolds. It was the late 1990s. The dot-com bubble was swelling, lots of people were making lots of money, and I wanted to be a part of all of that. I wanted to join a large firm’s M&A department and spend the rest of my life putting deals together. I had no interest in being in the courtroom. I wanted to be a transactional attorney, specializing in securities law and negotiating multimillion dollar deals.

After the first year of law school, law students choose electives in areas in which they intend to practice or specialize. I chose only transactional law classes. Secured Transactions, Securities Law, Business Formation and Corporate Taxation, International and Comparative Law were just a few of the classes that kept me busy during my second year of law school.

Then, one day during a student/professor mixer, I met Professor Bill Reynolds. Professor Reynolds asked me what areas of the law was I interested in. I rambled off some of my classes. Professor Reynolds looked at me, nodded his head, and said “Very good. Transactional work is good. But learn your way around the courtroom, Mr. Brown. Take my trial practice class because I’ll tell you, when the economy is up, there’s a lot of mergers and acquisition work and firms need good transactional lawyers. But when the economy is down and everyone is suing each other, they need litigators, good trial lawyers who can argue a case.” Who knew that following this advice would make me a better chief legal officer (“CLO”) for my company?

You see, in the U.S., the legal profession tends to pigeonhole practitioners into either being purely transactional attorneys or trial lawyers (litigators). Unfortunately, most U.S. law firms contribute to this pigeonholing by giving their summer interns little to no exposure to other areas of practice. If you were the Editor-in-Chief of the energy law journal and you were fortunate enough to get a summer internship with a large firm with an energy law practice area, then your work load was limited to learning that practice area. You could not walk over to the managing partner of the Securities Law practice or the Litigation department and say, “Hey, can you show me what you do?” You are typically too busy to learn any other practice areas and the partner that fought for your seat in the summer internship program will make sure you stay busy— on energy law matters. Some partners tend to be territorial when it comes to their summer interns, hoarding them away from other partners in other practice areas.

I’ve been practicing law for 17 years. I am licensed in Oklahoma and Texas. Prior to being named Senior Vice President of Legal and General Counsel for Skinny IT Corp., my legal practice entailed about 65% litigation and 35% transactional work. As a transactional attorney, I served as counsel on multimillion dollar finance restructuring projects, compliance counsel on securities matters, and as counsel on a number of M&A deals. As a litigator, I tried complex commercial litigation cases, the run-of-the mill breach contract cases, employment law cases and, even some personal injury in my early days as a baby lawyer. I am what I refer to as “Hybrid Counsel”, having both transactional and litigation experience and a dual practice to match.

Now, as CLO for a thriving information technology (IT) company—management meetings, contract negotiations, acquisitions, regulatory and compliance issues, human resource matters, etc. all help to keep me busy, so much so that it would be virtually impossible for me to continue my litigation practice. As with the time restraints on most CLOs, I am forced to outsource the company’s litigation work. As a “recovering litigator”, I still miss litigation, however.

The CLO of any company is responsible for protecting the interest of the company and defending the company against all enemies, both foreign (external matters…i.e. contracts with other parties, regulatory matters, etc.) and domestic (internal matters…i.e. employment matters, corporate governance, etc.). When looking for a qualified CLO, a CEO would benefit her company greatly by finding Hybrid Counsel.

Separately, transactional attorneys and litigators each have valuable expertise that they can bring to the table as CLO for any company. However, the divergent nature of each type of practice can unwittingly leave the company exposed to unforeseen risks, at different levels. Hiring Hybrid Counsel as your company’s CLO can provide great benefit in minimizing those risks.Let’s examine some of those benefits and risks.

BENEFITS IN HAVING A CLO WITH LITIGATION EXPERIENCE AND THE RISKS IN HAVING A CLO WITH ONLY TRANSACTIONAL EXPERIENCE

Better equipped at red-flagging potential contractual issues. Litigation experience gives Hybrid Counsel the upper hand in flagging potential landmines in contracts. In drafting a complex commercial agreement, she will know what flags to look out for because chances are that some of the flag-raising issues were the basis for a claim in which she litigated in private practice. For example, you’ll be surprised how many contracts I’ve reviewed wherein a party (let’s call it Party “A”) is agreeing to indemnify Party “B” for the actions of a third-party, when Party “A” has no control whatsoever over that third party. Having tried, in her previous life as a litigator, a lawsuit where such a provision was at the center of the claim, this CLO would immediately recognize the problematic nature of such a provision for her company and omit it from the contract altogether or draft creative exceptions to get around it.

However, a CLO with only a transactional background would tend to look past such a provision, reasoning that the chance of something happening that would activate such a provision is remote and not likely to happen. That is, until it does happen. Litigators prefer to avoid any chance of such event occurring and will draft contracts accordingly.

In addition to being knowledgeable on state and/or federal law, good litigators are also adherents to Murphy’s Law. This Murphy’s Law mind-set helps the litigator focus on the details and better prepare for trial. While problems can always surface, leading to a lawsuit no matter how well-drafted the contract may be, CLOs with litigation experience tend to negotiate and draft contracts from this Murphy’s Law perspective, proactively taking precaution to minimize those problems or at least protect the company’s interest in light of them. It is the difference between taking a proactive approach, as opposed to a reactive response, to providing legal counsel. This approach can significantly minimize the probability of litigation in the future.

Less conflict averse. As an attorney in private practice for 16 years, I served as outside litigation counsel for a number of CLOs for pharmaceutical companies, software companies, a uranium enrichment company, you name it. And based on my experience, I’ve found that CLOs with purely transactional backgrounds tend to be conflict averse in comparison to CLOs with litigation experience, many times resulting in lopsided settlement agreements adverse to his company’s interest and in the overpayment of settlement amounts his company has agreed to pay.

Transactional attorneys do not have an appetite for the fight. Why? Because they have never had to. Sure—a transactional attorney might refute this statement and say she fights hard for her client’s interest in heavy contract negotiations. However, this transactional fight is not the same kind of fight involved in litigation. In fact, the transactional fight is not really a fight at all. It is more of a dance.

In a transactional fight, the two parties are building a business relationship to work with each other. Both parties are typically on their best behavior, in a constructive effort to work together for their mutual benefit. Party A enters into a distributorship agreement with Party B, where Party A will be able to expand its market and Party B will gain the exclusive right to sell Party A’s products and services. Party A signs a licensing agreement with Party B in a deal where Party A receives compensation for its intellectual property, while Party B gets to expand its product market. The parties cooperate with one another because they both have something to gain from the deal.

In a litigation fight, however, that business relationship has soured and the parties are at each other’s throats. The spirit of cooperation has fizzled and the fight is on. One or both sides feel betrayed and the plaintiff wants its pound of flesh. In keeping with the Mayweather v. McGregor fight, the parties go to their separate corners, retain their respective litigators, and prepare to duke it out.

Another factor contributing to conflict aversion amongst purely transactional CLOs is the fact that purely transactional attorneys in private practice tend to become frustrated and annoyed with discovery, scheduling orders, motion practice, local rules, civil procedure—all components of litigation. As such, a CLO with only a transactional background may not have a clue of the arsenal of pre-trial tools or strategies available to his company in prosecuting or defending against a lawsuit. This CLO will have no choice but to blindly rely on the advice of his outside counsel, having no personal experience against which to weigh this advice.

For example, at one of my previous firms, a transactional partner approached me about a lawsuit involving one of his biggest clients—a major bank. The partner had never represented a client in Iitigation and had no interest in doing so. The bank had been sued on a completely meritless property claim.

The partner asked me to handle the lawsuit. I reviewed the petition, discussed the merits of plaintiff’s claim with the bank president and the partner, and developed an action plan to get the case dismissed as quickly as possible. In the middle of my discussion, the partner asks me, “Martin, can’t we just send the court a letter, pointing out how stupid this case is, and get it done with?” Unfortunately, we could not. We had to follow certain pre-trial procedures in responding to the suit and to get it dismissed, which I eventually did.

This example illustrates the fact that many purely transactional CLOs are not only conflict averse, but can also be ill-equipped to fight. This is not a criticism. It is a professional reality. When your CLO does not know what the fight should look like, how to bring the fight, or defend against one, it will be difficult for him to understand or gauge how much money in legal cost the company can expect to pay on litigation matters.

Better equipped to control legal costs. CLOs with litigation experience may be better informed and capable of controlling legal costs better than purely transactional CLOs. Why? Because litigation CLOs use to do the billing themselves. They know what to look for. They know bill padding when they see it and how to address it.

The CEO of Skinny IT recruited me from a law firm I worked at for almost 4 years. As an associate at the firm, I recorded my time and billed Skinny IT on a regular basis. Skinny IT still uses the firm on various matters. So now, instead of billing for the firm, I am responsible for reviewing that same firm’s legal bills and approving them for payment, as part of my overall responsibility to control the company’s legal costs.

In looking at the various firms Skinny IT uses on legal matters, the company has been fortunate that we have not encountered some of the usual billing woes, like excessive time spent on a relatively simple matters or incomprehensible entries, that some other CLOs face. In addition to the fact that these firms are just good firms with good billing practices, I attribute at least some of this good fortune to the fact that these firms know my litigation background and give deference to my understanding of proper billing practices.

Tip. While we are on the topic of controlling legal costs, here are some tips I think may be helpful. If your company has a traditional billing arrangement with a law firm, I recommend that you have the firm keep track of its billable hours in a task billing format instead of a block billing format. Task billing provides a more detailed itemization of the time expended on your company’s matters and will help identify if any unscrupulous billing practices are occurring. Without getting too much into the weeds on the different types of billing, simply put, task billing keeps track of the exact time spent on every single task performed by the attorney, paralegal, legal assistant (collectively, “legal professionals”) on your matter. Block billing, on the other hand, designates a total time spent on several tasks performed by each of these legal professionals.

Tip. Strategy-wise, here are two cost-controlling protocols that I require our outside counsel utilize when handling litigation matters for the company:

– If the company is on the plaintiff-side of the lawsuit, we quickly collect every relevant document that we have in our possession that we can use to prove our case. We do this even before we contact our outside counsel. The benefit here is that by knowing ahead of time what we have as far as evidence going into a lawsuit, we may be able to mediate a fair settlement before incurring the significant cost of discovery or, if settlement is not possible, immediately allow the company to begin to ramp up and prepare for trial.

– If we are defending against a lawsuit, then I make sure we forward the initial suit to our outside counsel as soon as the company is served with it, so that we can get an answer or other responsive pleading on file and avoid a default judgment. Then we conduct some quick internal discovery (document review, employee statements, etc.) to see if there is any merit to plaintiff’s claims. I then instruct our outside counsel to conduct some brief preliminary discovery to determine the strength of plaintiff’s claims. If the company has viable defenses to plaintiff’s claims, I then instruct outside counsel to prepare a motion for summary judgment to have the case summarily dismissed, hopefully avoiding a prolonged trial.

– If there is some exposure for the company, I then instruct outside counsel to move forward to quickly mediate the case and hopefully come to a reasonable settlement at mediation.

BENEFITS IN HAVING A CLO WITH TRANSACTIONAL EXPERIENCE AND THE RISKS IN HAVING A CLO WITH ONLY LITIGATION EXPERIENCE

What about the other side of the coin? What are the benefits of having a CLO with transactional expertise and the risks involved with a CLO with only litigation experience?

Industry-specific business knowledge and experience.

While transactional CLOs have often developed an expertise in specific industries (e.g. energy, health, environmental, etc.) during their previous tenure in private practice, purely litigation CLOs tend to have less industry-specific knowledge. Litigation CLOs may struggle to find legal solutions to meet business objectives. This situation tends to be more of a reality with CLOs with less than 5 years of legal experience.

Here’s a common example among inexperienced CLOs. CEO comes to CLO and says “here’s a multimillion deal we’re working on and I need you to review. There was some question about government regulation. We were wondering if we can do ‘X’. There was some concern. We need you to check on that before we can move forward with the deal.”

CLO then reviews the deal, conducts research, and proudly reports back to the CEO, “We cannot do ‘X”. Government regulation “Y” prohibits it.” CEO stares blankly at his CLO.

The problem? The CLO from a purely litigation background did not understand that what his CEO was actually asking him was “What do we need to do to make this deal happen?”. The CEO wanted his CLO to provide him with more than just a ‘yes’ or ‘no’ response to the question. The CEO wanted his CLO to give him legal advice from a business perspective. He wanted his CLO to provide him a legal solution to get the deal done; to recommend other options if option “X” was not an option (or even the best option).

CLOs from purely litigation backgrounds have been trained in private practice to be reactionary in nature, not solutions-oriented, when it comes to business. Litigators are called into action only after a problem has occurred. So, for the most part, these CLOs are used to responding in an environment where it is either ‘win or lose’ or ‘yes or no’. They may not be thinking about broader solutions.

However, CLOs with transactional backgrounds have been trained to be solutions-oriented in nature. Whether it is negotiating the working capital structure of an acquisition or drafting mutually-agreeable indemnification terms in a Master Services Agreement, these transactional CLOs spent their days in private practice, finding ways to close the deal.

More experienced in actually drafting contracts.

Another reason why a CLO with only litigation experience may not be preferable is because she is not as proficient at drafting contracts, terms sheets, or other transactional documents when compared to a CLO with transactional expertise. Unlike a transactional CLO, a litigation CLO probably has no depository of contracts and other agreements developed over her years of practice from which to draw on. She also may have every little, if any, experience in drafting complex commercial contracts. What does this mean for the company? It means that your company will have to outsource more of its transactional work, resulting in increased legal fees to the company.

BALANCE THROUGH HYBRID COUNSEL

Like a pebble dropped in the middle of a pond, the compartmentalizing of the legal practice into transactional law and litigation divisions has ripple effects on American businesses. The tradition of pigeonholing legal practitioners into either transactional or litigation camps has ill-equipped many CLOs to adequately advise their clients on the vast issues facing any company. Of course, hiring more lower level inhouse corporate counsel or outsourcing more legal work to firms to make up for the deficit in a CLO’s experience have been viable solutions to this problem. However, these solutions inevitably cost companies more money and, in the end, affect the bottom line by increasing expenditures and potentially decreasing company value.

While hiring qualified legal counsel and outsourcing legal work will always remain as options for CLOs to close the chasm of experience in transactional work and litigation, having a Hybrid Counsel as your CLO will minimize the expenditures your company spends on these options. With experience in both transactional and litigation matters, she will know what to look for, how to maximize use of the options, and how to minimize the legal costs in doing so, affecting the bottom line in the positive direction. With Hybrid Counsel, your company will be getting a trained fighter, a detailed negotiator with industry-specific knowledge, and someone who is better able to control legal fees. With Hybrid Counsel, your company will get the best of both worlds.