Keith Paul Bishop compares Delaware and California law on the attorney-corporate client privlege.
There's been a fair bit of blawgosphere chatter about Wal-Mart Stores, Inc. v. Indiana Electrical Workers Pension Trust Fund IBEW, Del. Supr., No. 614, 2013 (July 23, 2014).
This Delaware Supreme Court en banc opinion requires Wal-Mart to produce documents about an alleged bribery scandal involving their Mexican subsidiary. The most noteworthy aspect of this decision, about which we will write more later, is that for the first time the Delaware Supreme Court directly addressed and recognized an exception to the rule that documents protected by the attorney/client privilege do not need to be produced. It is referred to as the Garner exception after a case of that name from the Fifth Circuit.
This FCPA Blog post sought to explain “why the issues before the Delaware Supreme Court are important to all compliance officers and corporate stakeholders, and how the outcome could influence compliance programs globally for decades to come.” Why was the Wal-Mart dispute, according to the FCPA Blog commentator, so important?
“Because at the heart of the appeal is the question of what misconduct by directors so taints them that shareholders are allowed to proceed with a civil complaint. When can directors be absolved from directing an internal FCPA investigation? And when can they ignore red flags of overseas misconduct and conduct business as usual?”
As highlighted below, none of these issues were on appeal to the Delaware Supreme Court.
Further, this FCPA Blog post stated that Wal-Mart’s appeal “could be the right forum for landmark changes to guide executives, directors, and compliance professionals for decades” and the commentator was hoping for the Delaware Supreme Court to “seize the opportunity to paint on the largest canvas possible, to illuminate new roles for those we’ve put in charge of compliance.”
As highlighted below, this did not happen either.
Oral arguments on the appeal were heard on July 10th before the Delaware Supreme Court. The Court will decide, among other issues, if Wal-Mart should release the files of the senior executives who briefed the directors, the Board’s Audit committee, and Maritza Munich, Walmart’s in-house counsel who resigned after the investigation was closed.
Personally, it just doesn't seem that big a deal. Somebody want to explain to me why I should care more?
Jeff's got a great post on the role practice experience ought to play in faculty hiring, of which I will (perhaps all too predictably) just excerpt the snippet about yours truly:
I do think there is something to requiring an aspiring full-time tenure track academic in a university or quasi-university setting to signal (to Brian Galle's point) what I would call a tolerance for, if not a commitment to, in the absence of a better term, "the life of the mind." (Put aside my belief that there are whole areas of practice now the exclusive domain of lawyers and law schools that could be taught and practiced without a three year traditional law degree, and the university model need not apply there any more than it does for barbers or chefs.) The person who comes to mind is my friend Steve Bainbridge, who quite publicly proclaims (often and loudly in a metaphoric way) his impatience with both "law and ..." and empirical legal studies and his preference to focus on the law. Nevertheless, I don't think you ever pick up from Steve a disdain for intellectual pursuit or think of him as anything other than a university professor. (You can pick up a lot of other clever disdain from Steve - that's why we who disagree with him so much still love him - but not disdain for thinking!)
Here's my take: A good law professor needs some practice experience, if only just to get acculturated to the profession into which s/he will be directing students for the rest of his/her professional life. More is probably better, although I think my shortish stint in practice has not been an obstacle to staying current or to being engaged with practitioners and the bench. It's mostly a matter of attitude, I think.
A good law professor also needs a commitment to the life of the mind. A commitment to doing serious but engaged scholarship of the sort that the bench and bar can't do but will find useful. A commitment to writing often and well. A commitment to keeping up to date with developments in your field OF LAW (not your law and fill in the blank field). A commitment to going where the evidence takes you. A commitment to not whoring yourself out as an expert witness or lobbyist. Mostly, a commitment to revel in the intellectual freedom this job allows. The law is an endlessly fascinating subject. A good law professor will commit to mastering some part of it at a level no judge or practitioner would ever have time to do.
In a recent Delaware Law Weekly interview with recently retired Delaware Supreme Court Justice (and former Vice Chancellor of the Delaware Chancery Court) Jack Jacobs, the eminent jurist was asked:
Q: What do you view as your most significant opinion on either court?
A: That's a difficult question because I've authored a lot of opinions in many different areas of law over the last 29 years. Although I wish I could give you a straight direct answer, but I think, in all candor, that question is one better answered by other people.
At the risk of being accused of engaging in empirical scholarship, I decided to undertake an answer to that question. I searched Delaware cases on WestlawNext to find all published opinions written by Jacobs. I then had WestlawNext rank them by frequency of citation. With this result:
If data is the plural of anecdote, we need just one more example to go along with this classic story of plaintiff bar abuse from the pen of Keith Paul Bishop to declare that the evidence favors fee-shifting bylaws.
Usha Rodrigues thanks me for making her look like a moderate:
Steve Bainbridge is not afraid to stake a claim. Yesterday he took aim at both empirical legal scholarship and the law & PhD. folks. How not to win friends and influence people at a law professor conference, indeed. ...
I've done some empirical work, and I see real value in its insistence on seeing what's actually out there--how things work in the real world. ...
Still, we are law professors. Law must come first. I remember in my earliest days in the academy listening with disbelief to a fellow newbie law prof: "I just want to do empirical work, and law pays better than economics. I don't care about the law at all." He laughed. I didn't.
In the comments to his post Steve laments that "the legal academy is not producing scholarship that is relevant to the bench and bar or that our graduates (especially at the T14 schools) are coming out of school better versed in theory than professional skills." This is a problem. ...
To put it bluntly, Harvard/Yale/Chicago/Columbia/Stanford can hire whoever they want, because they're in the business of pedigreeing elite students. They can hire professors who haven't practiced law and who write about theoretical topics. It doesn't effect their students' job prospects. All the other law schools have lemming-like followed their lead, accepting without question that the way up the USN&WR rankings is to look as much like possible as the T5. That worked fine during boom times, but in this legal market, it seems a lot like walking off a cliff.
Henry Manne sent along this email:
I saw (before I lost it in cyberspace) your Facebook remark about Empirical Law and Economics. I could not agree more. In fact some weeks ago I wrote a letter to Bob Scott and Doug Baird complaining about the agenda of the ALEA meeting. I'll attach it for your perusal (and agreement). But I think that this discussion hides a deeper problem that I have written about before. I don't know whether you saw this paper, now published in the International Review of Law and Economics, but I'll attach a copy for your consideration and comment if you feel so inclined. My story only goes through the use of law school accreditation by the bar to help cartelize their industry. One could be sure that at that period of development the bar was only interested in vocationally well-trained young lawyers, certainly not economists or sociologists. Hence the old—style curriculum. But it is also clear that the bar did not succeed as had the medical profession in this use of the accreditation device and, I am sure, not long after that was recognized, the bar substantially lost any aggregate interest in what the law schools were doing. What we have now, as I described in the paper, is the result of the inmates (the faculty) taking charge of the asylum. Please note, I do not spare L&E, but I see nothing wrong with having a few schools that might specialize in highly intellectual fare, for the few lawyers who might like it.
In the letter to which Henry refers, he wrote that:
Now bean counting seems more important than improving legal standards. Not only does this do great harm intellectually in terms of opportunities lost, it also threatens to make law schools into third-rate economics departments - or worse. (My emphasis.)
And an email from Daniel Sokol:
The law and econ/law and finance formal modeling revolution may have created a gap in partnership, LLC and corporate law. However, in antitrust law and econ have moved hand in hand at least since the 1970s. Econ articles get cited by the Supreme Court and law profs write (occasionally) in peer review econ journals, mostly with economists. One of most important contributions, in the American Economic Review no less, was an entirely UCLA product - John Wiley (law), Mark Ramseyer (law), and Eric Rassmusen (econ) wrote "Naked Exclusion" in 1991. It still gets cited by US courts, briefs, DOJ Antitrust, the FTC and foreign governments in documents around the world. Two years ago I participated in antitrust judicial training with John in Beijing. All of the agency people in China were familiar with his article some twenty years later and not merely because of the racy title. More recent econ work by law profs (I am thinking of work by Abe Wickelgren and Einer Elhauge) covers similar ground to Naked Exclusion and has placed in econ journals. The Antitrust Law Journal, our top field law journal, is peer reviewed and has a mix of papers by antitrust law and econ profs (and practitioners). Articles from the ALJ are more heavily cited in US Courts than the Harvard, Chicago, Columbia or Yale law reviews.
In November I was asked to testify before Congress on cartel enforcement based on a forthcoming empirical/non doctrinal piece in the Journal of Law and Econ. I couldn't because I would have missed class. I can give you lots of similar examples based on people's empirical work.
Our version of you in antitrust (the person who has used economic analysis most to shape case law - I mean this with great respect to you both) is Herb Hovenkamp. Herb has moved antitrust doctrine in the direction of economic sense more than even Bork or Posner. Breyer has stated that a citation to Herb's treatise is akin to a Circuit Court decision. Herb has even been recognized by DOJ Antitrust for his lifetime of scholarship to the field - see http://www.justice.gov/atr/public/press_releases/2008/235516.htm.
One final thought on the relative importance of antitrust profs to practice. Many antitrust profs have taken on formal consulting roles in law firms as Of Counsel or affiliated experts in economic consulting firms at one point in their careers (Compass Lexecon, CRA, NERA, etc.) and many are currently active in this area. The market thinks that we have value. Consulting also reinforces our teaching and scholarship as we have a better sense of what is happening in practice.
I concede that the original post was a sweeping over-generalization, in the sense that there are clearly some fields where bean counting is essential. Antitrust is probably one. So are disparate impact civil rights litigation, dumping, and so on. My complaint, however, is that (1) too many people are treating bean counting as the only legitimate methodology, (2) too many people are ignoring problems that can't be answered by bean counting, (3) too many people are doing bean counting for the sake of bean counting. And my biggest complaint is that these trends are exacerbating the divide between the academy one the one hand and the bench and bar on the other. In today's market, that divide is simply unsustainable (at least for those of us who aren't Harvard and Yale).
Finally, a note from a very junior faculty member who wished to remain anonymous:
Dear Professor Bainbridge, I ... wanted to thank you for your anti Law &___ comment. ... I am in this profession because I don't want to talk to economists and run regressions. Law professors are selling themselves short if they just want economists to take them seriously, which they will not do because they are too silo-ed and insular. There's no need for us to have an inferiority complex--especially as against economists whose discipline I think still needs to be justified. I have had so many people tell me that I need to do empirical work if I ever want to get hired at a top school but I refuse to. I'm proud of my work and I've been able to speak to large non-academic audiences and plenty of policymakers without running a single regression. So thanks for saying that. I'm not saying that no one should be doing it ..., but for those of us who aren't interested, it's nice to have some validation that we aren't completely irrelevant.
One of the joys of my present state of life is that I've got no interest in moving to a different law school (other than the occasional podium visit in some lovely garden spot) and the protection of tenure at UCLA, which gives me a freedom to say things junior faculty who are still trying to climb the greasy pole would never dare utter.
So I'm going to keep fighting for law to come first, second, and third.
I wish I found this statistic shocking:
Only 2 percent of lawsuits filed in response to M&A deals that settled in 2013 produced monetary returns for shareholders.
Meanwhile, I guess we're all supposed to be dancing in the streets because Delaware courts are not quite as liberal as they used to be in approving legal fees for plaintiffs lawyers:
The report also finds that plaintiff attorney fees awarded in disclosure-only settlements of M&A cases continued to drop in 2013. In addition, over the last four years, the Delaware Court of Chancery approved 80 percent of the fee amounts requested in such cases, compared with 90 percent in other courts.'
BFD. If plaintiff lawyers get fees in 80% of cases and plaintiffs get a monetary recovery in only 2%, well you do that math. The point is that the Delaware courts are still basically rubber stamping a system that amounts to a massive wealth transfer from investors to lawyers.
Some will ask: If derivative litigation cannot be justified on compensatory grounds, can it still be justified as a useful deterrent against managerial shirking and self-dealing? In short, no. There is no compelling evidence that derivative litigation deters a substantial amount of managerial shirking and self-dealing. Certainly there is no evidence that litigation does a better job of deterring such misconduct than do markets. There is evidence that derivative suits do not have significant effects on the stock price of the subject corporations, however, which suggests that investors do not believe derivative suits deter misconduct. There is also substantial evidence that adoption of a charter amendment limiting director liability has no significant effect on the price of the adopting corporation’s stock, which suggests that investors do not believe that duty of care liability has beneficial deterrent effects.
 See, e.g., Michael Bradley & Cindy A. Schipani, The Relevance of the Duty of Care Standard in Corporate Governance, 75 Iowa L. Rev. 1 (1989); Roberta Romano, Corporate Governance in the Aftermath of the Insurance Crisis, 39 Emory L.J. 1155 (1990).
 See Daniel R. Fischel & Michael Bradley, The Role of Liability Rules and the Derivative Suit in Corporate Law: A Theoretical and Empirical Analysis, 71 Cornell L. Rev. 261 (1986).
Is summarized here:
We have the best defense lawyer on our side, who “does not speak much but loves” and who “in this very moment” is praying for each of us, showing “his wounds to the Father” to remind him of “the price he paid to save us”.
From CLS Blue Sky blog:
The Court’s ATP Tour decision created concern in some quarters that if the holding applied equally to Delaware stock corporations, it would deter potentially meritorious stockholder claims and also erode Delaware’s role as the leading arbiter of corporate jurisprudence in the United States. However, in the rush to address the concerns of the Delaware bar, it appears that the proposed legislative fix failed to even consider situations where fee-shifting provisions may be appropriate. Instead of invalidating all fee-shifting provisions included in stock corporations’ charters and bylaws, there might have been an attempt to evaluate the potential merit of a limited response to the ATP Tour decision, such as tailoring the amendments to include situations where, upon a balancing of the interests involved, fee-shifting provisions should be permitted. For example, should all intra-corporate suits be treated similarly (for example, claims involving a merger or acquisition compared to claims involving a private company internal conflict)?
Ultimately, it appears that an opportunity was lost to craft a solution to a well-established issue, the growing tide of intra-corporate stockholder litigation, that adequately balances the interests among: the corporations and the insurers that bear the cost of litigation and settlements for the suits settled on a “disclosure only” basis that result in little or no benefit to the stockholders whose interests are ostensibly being championed; the stockholders who truly have a legitimate grievance that would be effectively precluded from access to redress if fee-shifting bylaw and charter provisions were permitted; the State of Delaware to preserve its position as the dominant arbiter of corporate disputes; and other stakeholders, including the lawyers that derive their living from stockholder suits.
As Kevin LaCroix notes, the Delaware Supreme Court recently ruled in favor of fee shifting bylaws:
In a May 9, 2014 opinion (here), the Court held in ATP Tour, Inc. v. Deutscher Tennis Bund that a by-law provision shifting attorneys’ fees and costs to unsuccessful plaintiffs in intra-corporate litigation can be valid and enforceable under Delaware law. A May 9, 2014 memorandum from the Paul Weiss law firm said the decision may “dramatically change the landscape of stockholder litigation.” ...
The Court first observed that there is no prohibition in Delaware’s statutes forbidding the enactment of a fee-shifting bylaw. The Court also noted that while Delaware generally follows the American Rule, pursuant to which each party to a lawsuit bears its own costs, Delaware also allow contracting parties to agree to modify the American Rule to obligate a losing party to pay a prevailing party’s fees. Because corporate by-laws are considered contracts among a corporation’s shareholders, a fee-shifting provision would fall within the contractual exception to the American Rule .Therefore, “a fee-shifting provision would not be prohibited under Delaware common law.”
Whether or not ATP’s fee-shifting by-law is enforceable, however, depends on the manner in which it was adopted and the circumstances under which it was invoked. Bylaws that are otherwise facially valid will not be enforced if adopted or used for inequitable purposes. ...
LaCroix goes on to explain in detail why the court concluded that the bylaw was not adopted for an inequitable purpose, even if that purpose was putting plaintiff lawyers out of business deterring frivolous litigation.
Naturally this seriously pissed off the sharks trial bar (both plaintiff and defendant trial lawyers, both of whose business would be adversely affected), so the bar ran to the Delaware legislature seeking to have the decision overturned by statute. Their flunkies faithful representatives in the Delaware Senate responded with SB 236, which would do so. Yesterday, the U.S. Chamber Institute for Legal Reform sent an open letter to the members of the Delaware legislature, urging them to oppose SB 236:
Abusive intra-corporate litigation has become an extremely serious problem that imposes very substantial and wholly unjustified costs upon shareholders in Delaware companies. For example, in the merger and acquisition context:
Just about every merger or acquisition involving a significant public company becomes a litigation target soon after the deal’s announcement – 94% of all deals valued at over $100 million were targets of lawsuits; compared to 44% in 2007.1 No one can seriously believe that every one of these transactions was legally flawed.
Multiple lawsuits filed by different law firms challenge each deal, an average of five in 2013.2 Lawsuits typically are filed in different States – 62% of the time in 2013. This multiplies the defense costs and increases the leverage to force settlements regardless of the merits.
The overwhelming majority of cases (more than 80%) settle, typically with a fig leaf of some additional, practically meaningless disclosure for shareholders accompanied by large fee awards for plaintiffs’ counsel.
Indeed, members of the Court of Chancery have commented on the abusive nature of some of these lawsuits.
A company’s shareholders suffer when one or both parties to a merger transaction are forced to expend millions of dollars defending suits in multiple courts and paying multiple attorneys’ fee awards in connection with settlements necessary to eliminate legal uncertainty and allow the transaction. Those expenditures reduce the funds available to integrate the two companies effectively, expand the business, or create new products, imposing a “merger tax” that benefits lawyers and hurts shareholders.
The Delaware Supreme Court’s ATP decision gives corporations a way to protect their shareholders against these costs of abusive litigation. The possibility of fee shifting will deter the filing of abusive, duplicative lawsuits.
I agree. Indeed, I recently argued that rational shareholders would support these sort of fee-shifting bylaws.
Why would the Legislature so quickly deprive shareholders of the opportunity to obtain that protection – overturning the decision of a Court that is widely respected as the leader in corporate law? Furthermore, why would it do so without providing an alternative deterrent to the abusive litigation that is a well-recognized problem?
Why indeed? The only plausible answer is so as to pay off lawyers. Which calls to mind Jonathan Macey and Geoffrey Miller's classic paper, Toward An Interest Group Theory of Delaware Corporate Law, which argues that "the rules that Delaware supplies often can be viewed as attempts to maximize revenues to the bar, and more particularly to an elite cadre of Wilmington lawyers who practice corporate law in the state."
Fortunately, most of the time, the Delaware bar's interests are consistent with efficient outcomes, which is why Delaware's dominance and the bar's influence is usually a good thing. But SB 236 is one of those exceptions that proves the rule.
So the Delaware legislature for once should bite the hands that feed it and nix SB 236. Let's let the market decide. After all, if the perspicacious Steven Davidoff is right, few public corporations will adopt these bylaws.
When it comes to corporate law and class-action cases, attorneys fees can total hundreds of millions of dollars, eye-popping totals that shock even the most jaded court observers. Last week, attorneys for merchants suing Visa and Mastercard over credit card swipe fees were awarded $544 million by U.S. District Judge John Gleeson in the Eastern District of New York after winning the long-simmering case.
... Judge Leo M. Strine, who was just nominated by the state’s governor as the next chief justice of the Delaware Supreme Court, made plenty of headlines when he awarded the winning lawyers a fee that ended up totaling $316 million for 8,600 hours of work. It is reportedly the largest amount ever approved in a shareholder derivative action. The case involved minority shareholders in Southern Peru Copper Corporation, who successful claimed that they were forced by Grupo Mexico to buy an interest in a Mexican mining company named Minera.
The fee also raised the eyebrows of UCLA law professor Stephen Bainbridge, who questioned whether the decision may have been linked to a concern that some big cases were skipping Delaware for other states. Thus, by rewarding plaintiffs' lawyers a giant fee, other attorneys would be more inclined in the future to choose Delaware courts to hear their cases.
Andrew Tuch has an interesting new paper (albeit one I'm not sure whose policy recommendations I agree with) on so-called Chinese Walls:
The organizational structure of financial conglomerates gives rise to fundamental regulatory challenges. Legally, the structure subjects firms to multiple, incompatible client duties. Practically, the structure provides firms with a huge reservoir of non-public information that they may use to further their self-interests, potentially harming clients and third parties. The primary regulatory response to these challenges and a core feature of the financial regulatory architecture is the Chinese wall or information barrier. Rather than examine measures to strengthen Chinese walls, to date legal scholars have focused on the circumstances in which to deny them legal effect, while economists have focused on demonstrating Chinese walls' practical ineffectiveness in a range of important contexts.
This paper discusses the phenomenon of failing Chinese walls, explains why it occurs, and proposes a regulatory solution. The paper argues that limits on market discipline and evidential difficulties in detecting and proving the use of non-public information account for the failures of Chinese walls. It shows how the Volcker Rule, a core plank of the Dodd-Frank Act, will likely reduce harms flowing from failing Chinese walls, despite the rule’s intended focus on financial stability. To address the ongoing regulatory challenges, the article proposes the use of statistical inference to both detect and prove trading by financial conglomerates using non-public information and thus the failure of Chinese walls. Employed in so-called forensic finance to detect wrongdoing, the analyses can be used to rule out benign rationales – including superior trading skill and mere coincidence – for financial conglomerates’ abnormal trading returns. The article designs a regulatory strategy based on the use of statistical analyses. Although recognizing limits with the strategy, the article argues that it nevertheless holds promise in addressing the regulatory challenges of financial conglomeration.
I may comment on his policy recommendations later. For the moment, however, I simply want to suggest that it is past time to retire the phrase "Chinese wall." I'm not the most politically correct guy in legal academics, but I nevertheless find the phrase inapt and potentially offensive.
As a California appellate judge aptly noted:
“Chinese Wall” is [a] piece of legal flotsam that should be emphatically abandoned. The term has an ethnic focus that many would consider a subtle form of linguistic discrimination. Certainly, the continued use of the term would be insensitive to the ethnic identity of the many persons of Chinese descent. . . .
Aside from this discriminatory flavor, the term “Chinese Wall” is being used to describe a barrier of silence and secrecy. . . . [But] “Chinese Wall” is not even an architecturally accurate metaphor for the barrier to communication created to preserve confidentiality. Such a barrier functions as a hermetic seal to prevent two-way communication between two groups. The Great Wall of China, on the other hand, was only a one-way barrier. It was built to keep outsiders out--not to keep insiders in.
Peat, Marwick, Mitchell & Co. v. Superior Court, 245 Cal. Rptr. (App. 1988) (Low, P.J., concurring).
In law firms, terms such as “ethical wall” or “ethical screen” are emerging as alternatives. See, e.g.,Ronald R. St. John, When an Ethical Screen Can Be Used to Avoid Vicarious Disqualification of a Law Firm Remains Unsettled, L.A. Lawyer, Feb. 2005, at 29 (“This technique has been referred to in the past as a Chinese wall and is now commonly called an ethical screen.”).
Outside the law firm setting, however, the term “insulation wall” seems superior. Cf. Bernard Shapiro & Neil D. Wyland, Ethical Quandaries of Professionals in Bankruptcy Cases, C836 ALI-ABA 15 (1993) (noting “the recently politically correct expression ‘insulation wall’”). First, it does not connote the professional responsibility aspects associated with the ethical wall terminology. Second, it provides a more exact “architecturally accurate metaphor” than does ethical wall, because it connotes the need to isolate the actors from pressure and to prevent them from providing information to outsiders.
Perrenial corporate raider Carl Icahn reportedly is trying to bully Wachtell Lipton for representing his targets:
Wachtell thinks it knows exactly why Icahn is engaged in what it regards as naked chicanery: to bully his anti-takeover nemeses at the law firm. “The Icahn-sponsored CVR litigation amounts to a scare tactic to intimidate those lawyers willing and able to help clients faced with Icahn’s opportunistic attacks,” Wachtell said in its New York case, which seeks a declaratory judgment that Wachtell committed no malpractice and that Icahn and CVR breached confidentiality orders protecting discovery from the banks’ fee litigation. “In a number of high-profile situations, Wachtell Lipton has helped clients fend off Icahn, including assisting Clorox in defeating an Icahn takeover assault in 2012 and assisting Dell when Icahn unsuccessfully sought to break up a premium transaction in order to buy the company for himself in 2013,” the firm asserted. “Icahn resents any resistance and thus has for years attacked Wachtell Lipton in the press for its fierce commitment to its clients. With his new litigation campaign, Icahn takes his bullying campaign to a new level, seeking to intimidate lawyers who help clients resist his demands by making wild allegations and threatening liability.”