In This Issue

Did You Know?

Dow Jones reported on February 17:

Two days after authorities in Brazil raided Whirlpool Corp.'s (WHR) offices there, the U.S. Department of Justice confirmed Thursday that it is investigating possible antitrust violations in the multibillion-dollar refrigeration compressor industry, in conjunction with international authorities.

The story also disclosed that Whirlpool and a competitor, Tecumseh Products, received grand jury subpoenas and that Tecumseh "said authorities appear to be focusing on pricing issues."

In a press release, Whirlpool announced:

On February 17, 2009, Whirlpool Corporation (NYSE: WHR) received a grand jury subpoena from the U.S. Department of Justice requesting documents relating to an antitrust investigation of the global compressor industry. Whirlpool Corporation subsidiaries in Brazil and Italy were visited on the same day by competition authorities seeking similar information.

Whirlpool Corporation has a strong corporate code of conduct, which requires full compliance with all applicable antitrust and competition laws. It will cooperate fully with the investigations. To the Company's knowledge, there have been no charges filed against the company or any of its employees. As the European Commission has noted, "The fact that the Commission carries out such inspections does not mean that the companies are guilty of anti-competitive behaviour; nor does it prejudge the outcome of the investigation itself."

Tecumseh Products said:

Tecumseh Products Company , a leading global manufacturer of compressors and related products, today announced that the Company is in receipt of a subpoena from the United States Department of Justice Antitrust Division and a formal request for information from the Secretariat of Economic Law of the Ministry of Justice of Brazil related to investigations by these authorities into the compressor industry. In addition, the Company has learned that the European Commission has also begun an investigation of the industry. These requests appear related to a pricing issue, and the Company intends to comply with them.

The Company said it does not expect the investigations to impact in any material respect its ongoing operations or ability to compete in the markets it serves.

My newest favorite Australian trade publication, Hydraulics & Pneumatics, reports that Danish company Danfoss also "has had surprise visits by authorities at its offices in Nordborg, Denmark and Flensburg, Germany as well as at several facilities in US."

Contingent Fees in a Down Economy

A recent article in The New York Times   leads with this:

Lawyers are having trouble defending the most basic yardstick of the legal business -- the billable hour.

Clients have complained for years that the practice of billing for each hour worked can encourage law firms to prolong a client?s problem rather than solve it. But the rough economic climate is making clients more demanding, leading many law firms to rethink their business model.

Oddly, to Your Editor's way of thinking, the item says nothing about an obvious alternative -- the contingent fee.

Let's see.  Unlike the hourly fee -- which must die -- a contingent fee arrangement:

• aligns the interests of client and lawyer -- in maximizing and expediting recovery,
• encourages efficiency -- in hours and expenses, and
• minimizes the client's cash outlays -- making more money available to fund profit-seeking business operations.

The NYT piece does hint at why so few firms offer the contingent fee option:

[T]he biggest stumbling block to alternative fee structures may be the managing partners at law firms, who will have to overhaul compensation structures to reward partners and associates for something other than taking a long time to do something.

Ouch.

I would add that firms lacking experience with contingent fee work seldom do it well.  Reasons include:

• Habits that formed in an hourly regime tend to carry over to a one-off contingent fee case.  That generates overinvestment (too many useless memos, unnecessary motions, and marginally helpful discovery), tension with the client (once the firm realizes its mistake and pulls back from working the case), and subpar economic outcomes for firm and client.
• The crucial skill of evaluating a case results from years of learning what works and what doesn't, not sudden elightenment.
• Taking on the peril of losing a case and shouldering the uncertainty of cash flow clash with firms' risk-averse cultures.

The director of litigation at a large oil and gas company told me recently that his experiments with contingent fee arrangements had largely produced unsatisfactory results.  His take on why?  The firms "didn't know what they were getting into."

Just so.

Hot Lunch

The online version of Fortune has an article about an unusual continuing legal education class -- "Madoff 101:  Total Immersion for Lawyers". 

Senior Editor Roger Parloff includes this bit:

Those who sustained particularly heavy losses and who can afford to bring their own individual cases usually prefer to do so, rather than joining class actions. In an individual suit the plaintiff exercises more control over his suit and can pay his attorney only hourly fees rather than a contingent fee amounting to a healthy percentage - usually 25% or more - of the entire recovery.

Your Editor concurs in part and dissents in part.

People who lost a bundle to Madoff, Stanford, and their ilk often do opt to hire their own counsel to prosecute claims against culpable participants, aiders, and abetters outside of a class action.

But a Great Many don't go for shelling out "only hourly fees", which could cost hundreds of thousands, instead of a contingent fee, which comes out of a recovery by judgment or settlement.  Some may like a hybrid arrangement -- lower hourly rates plus a lower contingent fee percentage -- best.

Besides, the hourly fee must die.

How Federal Courts Got Their Inefficiency

 
Lionel Hutz invokes "bad court thingy" procedure.

In a previous issue, Your Editor hypothesized that "how quickly judges choose to dispatch their dockets depends on whether they look at cases as moving towards trial too fast, too slow, or at just the right speed."  I promised to "attempt an approximation of which view predominates in 2008 -- and, more important perhaps, why."

Bold talk, I know.

Luckily I have good help.  Long-time trial judge W. Royal Furgeson, Jr. and former Chair of the ABA's Litigation Section Gregory P. Joseph have independently ruminated on the causes of the drop in trials, especially jury trials, over the last few decades.  They reached similar conclusions.  I've found their tough judgments persuasive, not least because they resonate with my experience.

The chief mechanism by which the courts and our profession have choked off civil trials has a name that warms our lawyerly hearts -- procedure.  We adore procedure and process, especially due process.  Rules, rules, rules!

But procedure has a dark side.  A law professor boasted early in a course that he could win cases at least half of the time if he could dictate the rules of procedure.  That seemed silly to me.  It still felt like an exaggeration for several years after.  Not any more.

Consider a few examples of procedural shifts in the 28 years since that One L course:

• In 1986, the Supreme Court handed down the summary judgment "trilogy" -- Anderson v. Liberty Lobby, 477 U.S. 242 (1986); Celotex Corp. v. Catrett, 477 U.S. 317 (1986); and Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574 (1986) -- which promoted summary judgment practice.  Today, hardly any federal case terminates without someone moving for summary judgment.
• Seven years later, the Court overhauled the use of expert evidence in Daubert v. Merrell Dow Pharms., 509 U.S. 579 (1993).  Since Daubert, motions to strike experts have mushroomed.  (Perhaps their numbers have even skyrocketed.)
• The piece de resistance came last -- Bell Atlantic Corp. v. Twombly, 127 S. Ct. 1955 (2007), which set a new "plausibility" standard for judging whether a complaint states a viable claim.

Judge Furgeson sums up the piling on of procedural pitfalls as littering the path to trial with paper, turning it into a "paper war".  Mr. Joseph concludes that these and other changes (including the 1991 recognition of "inherent power" to impose sanctions and new rules on electronic discovery in 2000) "have made federal civil litigation procedurally more complex, risky to prosecute, and very expensive.  It is a Bentley, not a Ford.  Plaintiffs who can avoid federal court do so, while defendants strain to achieve a federal forum.  Forum-shopping incentives have been institutionalized."

Amen.

But why did it happen?  What thought process led to a system that converts potentially every case into a paper war and forces parties to buy a Bentley when they need only basic transportation?

Fear.

Read any opinion that raised the barriers to trial, and you will find an expression of fear.  In Celotex, the Court lamented the "unwarranted consumption of public and private resources" that it said would result from treating summary judgment as "a disfavored procedural shortcut".  In a progeny of Daubert, concurring justices demanded exacting analysis of expert evidence to ferret out "expertise that is fausse and science that is junky".  The Twombly majority expressed a horror that "the threat of discovery expense will push cost-conscious defendants to settle even anemic cases before reaching" the summary judgment stage.  And the Court's latest antitrust ruling (see below) again highlights the theme of preventing jurors from drawing "mistaken inferences" and (per the dissenting Justice Stevens) elevates "the interest in protecting antitrust defendants -- who in this case are some of the wealthiest corporations in our economy -- from the burdens of pretrial discovery."

I've commented before about the rise of judicial worry that certifying class actions creates "hydraulic" pressure to settle.  I still haven't seen proof that substantiates the concern.  (Nor have I witnessed a defendant who cited the danger of hydraulic pressure as a reason to deny certification succumb to it.)  But the lack of evidence hasn't prevented courts from in effect judicially noticing the non-fact and imposing extraordinary new barriers to class certification.  See here and here.

Any judge who views trial as a fearful event instead of a triumph of our civil justice system will always see trial as coming too soon.  She will tolerate delays.  He will postpone rulings.  She or he will hold aloof from the rough-and-tumble of getting a case ready for trial, indulging in the consoling fiction that nobody really wants a trial anyway.

Trials are scary, you know.

[I don't excuse the lawyers, of course.  We have plenty of incentives to draw out the pre-trial -- hourly fees and lodestar fee awards among them.  But we must leave attorneys' complicity in judicial failings to another day.]

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Squeeze This!

The U.S. Supreme Court extended its streak of handing victories to antitrust defendants into the 2008 Term as it dealt a death blow to "price squeeze" claims.  Pacific Bell Telephone Co. v. linkLINE Communications, Inc., No. 07-512 (U.S. Feb. 25, 2009).

The plaintiffs provided digital subscriber line (DSL) service at retail,  But, because they didn't have their own network, they bought access to the equipment necessary to furnish the service from an outfit that did, Pacific Bell, which did business as AT&T.  These networkless DSL suppliers accused AT&T of violating Sherman Act section 2, which deems unlawful any single-firm conduct that unreasonably restrains trade by monopolizing or trying to monopolize a market.  They said, among other things, that AT&T "squeezed" them into penury by charging them a too-high wholesale price for network access while billing a too-low retail price to AT&T DSL customers.  The poor fellows couldn't make a profit!

The 5-4 majority held that the district court and Ninth Circuit both erred in concluding that the price-squeezees stated a viable antitrust claim.  "In Verizon Communications Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398, 410 (2004)," Chief Justice Roberts noted for the Court, "we held that a firm with no antitrust duty to deal with its rivals at all is under no obligation to provide those rivals with a 'sufficient' level of service."  linkLINE, slip op. at 3.  As AT&T likewise lacked an "antitrust duty" to deal with plaintiffs, it could deal with them however it pleased antitrust-wise, including by charging them confiscatory prices for network access.

On the retail end of the price squeeze, the Court observed, precedents foreclosed antitrust scrutiny of low prices unless they fell beneath an appropriate measure of cost.  Thus the Court said it said in Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 222-24 (1993).  linkLINE, slip op. at 4.  The competing DSL merchants hadn't alleged below-cost pricing to retail customers and thus couldn't complain about that pincer of the squeezing unit either.

The majority dispatched the price squeeze theory in a few pages and might've stopped there.  But it went on to share its ruminations on some "[i]nstitutional concerns" about courts' capacity to regulate markets and the absence of a "safe harbor" for pricing behavior of aspiring monopolists.  linkLINE, slip op. at 12 & 13.

Justices Breyer, Ginsburg, Souter, and Stevens concurred in the judgment only.  They noted that the plaintiffs conceded error on the price squeeze claim and asked only for a remand to consider a new "predatory pricing" claim.  And they criticized the majority for needlessly answering "hypothetical questions".

Your Editor suspects that the tag line for linkLINE will come on a neat three-word package:  "no antitrust duty", a phrase that doesn't appear in Trinko or any other Court decision we've found.  No duty to do this, no duty to do that.  And I imagine that The Current Majority will not decide a single case in which they conclude that a section 2 defendant violated any "antitrust duty" whatever.

Your Editor scanned a Fourth Circuit decision not long ago.  It looked dull. 

Something to do with a bankruptcy trustee's power to undo pre-bankruptcy transfers from a debtor.  Yowza!

But on second viewing, a wondrous thing twinkled from the electronic page -- yet another way Congress aided and abetted the financially poison credit default swaps industry.

[Recall here that CDSs may have caused the financial meltdown that started in earnest last September.]

Federal bankruptcy law cuts a big swath of the U.S. Code.  It even claims its own title -- lucky 11.  And does it go on for miles.  Section 101 alone hews more than 55 separate definitions into our legal firmament.

Which may explain why you didn't realize four years ago that Congress vastly expanded protections for a "swap agreement", which appears to include CDSs.  See 11 U.S.C. 101(53B).  The amendatory statute, you'll recall, bears the fetching -- and inaccurate -- name of Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.

The legislative expansion broadened the definition of "swap agreement" to just about any type of derivative instrument.  The new scope in turn exempted lots more swap agreements from the bankruptcy "automatic stay", which generally stops creditors from enforcing obligations of the bankrupt entity, and prohibited actions under the Bankruptcy Code to set aside preferences and constructively fraudulent transfers involving a much wider variety of swap transactions.

The Fourth Circuit case arose from supply contracts that National Gas Distributors signed with several gas purchasers, including chemical giant E.I. du Pont, during the year before NDG filed for bankruptcy protection.  Apparently the contracts locked in the prices NGD could charge for future deliveries of gas -- which price commitment proved a bad bet when spot gas prices rose.  The bankruptcy court concluded that the contracts didn't fit within the new "swap agreement" definition and that therefore NGD's trustee could pursue claims to avoid them. 

The Fourth Circuit praised the bankruptcy judge's paper (he made a "staunch effort") but gave him a failing grade anyway.  Congress didn't mean to pinch the scope of "swap agreement" to cover only instruments that trade on active markets and that don't result in physical delivery of a commodity.  No.  It purposed to "protect[] financial markets from the instability that bankruptcy might cause" if swap agreements didn't get special favors.  Hutson v. E.I. du Pont de Nemours & Co., Inc. (In re Nat'l Gas Distributors LLC), No. 07-2105 (4th Cir. Feb. 11, 2009).

I don't rightly know how granting even more preferences to complex financial instruments like CDSs could avoid "instability" in financial markets.  As best I can tell, the deregulation of CDS transactions in 2000 contributed mightily to the deep turmoil the markets now find themselves in.

Perhaps the law of getting consequences you don't intend applies?

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 Speaking of Money Management

Used with permission.

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