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Sluggish Economy Heightens Role Of In-House Counsel

The ever-present need for in-house counsel to deliver value to their companies has become magnified of late as concerns over corporate liability become more and more acute in the sluggish economy.

Without the promise of more and new business around the corner as a cushion, the primary duties of in-house counsel — such as reviewing contracts, monitoring personnel problems, handling corporate disclosure issues, and apportioning risk in business relationships — take on greater importance as the company’s ability to manage risks is jeopardized.

Experts tell New England In-House that four of the biggest issues on the minds of in-house counsel these days are:

  • controlling litigation costs;

  • satisfying new corporate governance rules, including Sarbanes-Oxley;
  • diminished insurance coverage and rising premiums; and
  • potential liabilities arising from workforce terminations.

But if in-house counsel focus on the basics — communication and compliance — they can ride out the storm of the down economy while keeping in check the liabilities created by it, experts say.

Holding The Line On Litigation Costs

The biggest concern for in-house counsel presently is managing outside litigation costs and outside counsel fees, according to Richard K. Allen of Gadsby Hannah in Boston.

“Overall, [in-house counsel] are concerned about the economy … and the bottom line,” Allen says. “Outside counsel budget isn’t something that adds anything to the bottom line. In good times, attorneys have a little more leeway in handling matters. But now the only way to go is to integrate as much as you can, and make sure in-house counsel is not just supervising the bill, but is a part of the team.”

It all boils down to communication, Allen says: “We’re making extraordinary efforts to integrate with the [in-house counsel’s] office so nothing is a surprise.”

Rather than creating tension between in-house and outside counsel or resentment over micromanagement, this increased involvement is a welcome change, according to Terence P. McCourt of Boston’s Hanify & King.

“It’s more in the nature of a partnership,” McCourt says. “We welcome that kind of approach. It makes for better decisionmaking and ensures we’re always on the right path.”

Allen suggests in-house and outside counsel continuously reevaluate their relationship so both sides are clear on what expertise each brings to the table, what responsibilities each has, and whether the company’s budget is sufficient to meet the needs of particular cases.

Meeting monthly or quarterly can accomplish this goal.

For example, Allen’s firm, Gadsby Hannah, holds monthly breakfast meetings with clients, which gives in-house counsel the perfect venue to review their budget with outside counsel and elect to take on areas of litigation — such as research and parts of discovery — that can be performed in-house for less money.

Technology can also enhance this relationship. “We set up extranets so in-house counsel can have access to our documents and case documents as easily as we can,” Allen says. Lawyers in his practice group also ensure internal e-mails are copied to relevant in-house staff members, who can apply the brakes if the budget won’t support a planned course of action.

McCourt’s firm, Hanify & King, takes the same approach, both with technology and in working with corporate clients at the outset to carefully analyze a case’s merits and establish a budget for taking it forward.

“We come up with a decision-tree-type analysis so the client knows there are a range of issues that have to be resolved to reach the desired end result,” he says. “We partner with the corporation early on so we both understand the financial parameters.”

This approach has instilled more discipline in the litigation process so it doesn’t drag on endlessly and unnecessarily, McCourt says. “We’re very aware in-house counsel are under a lot of pressure with regard to outside legal fees. Litigation becomes very expensive very quickly. We try and invest as much time up front with the client in the early stages to ensure we are all going into this with eyes wide open.”

In-house attorneys are looking for ways to control outside counsel costs through alternative fee arrangements.

In some matters, Hanify & King offers clients a “blended” rate, which equals the average hourly rate charged by the lawyers in the office. “No matter who is working on the case, the client gets billed at [the blended rate] so they know they only pay that one rate,” McCourt notes. “That’s one approach some clients like.”

Hanify & King also charges some clients a flat fee to file an answer in a lawsuit and to get through discovery. A summary judgment motion would be an additional flat charge, and so on.

“The client knows up front — even though litigation to get to the summary judgment phase may take two years — this is a certain number they can plug into their budgets,” McCourt says. “We appreciate that they have budgets they need to respect.”

Another way to control outside counsel costs is to use executive assistants, rather than more expensive paralegals, for basic discovery tasks such as gathering documents.

“In a down economy, take a look, are people underutilized right now?” offers Martin G. Schaefer, corporate counsel at Ionics, Inc. in Watertown, Mass.

In-house counsel can also cut costs by being the attorney of record in litigation. “We work with an in-house counsel who appears as counsel in court, and has all the documents filed in his name,” Allen says.

Taking Compliance To A New Level

It’s rare that corporate governance gets the kind of attention it truly deserves, according to Boston University assistant professor David Walker. But companies should be using corporate governance to reduce their liability, he said.

Frederick J. Krebs, president of the American Corporate Counsel Association, explains: “You want to have processes and procedures in place that make certain that you are complying [with applicable laws] and that the organization is doing the right things.”

But ensuring compliance should not interfere with risk taking as a business, Krebs said.

“The challenge is balance,” he observes. An organization should not “become so restrictive, or become so much red tape or bureaucracy, or so much focused on risk and risk avoidance, to the point where you’re not entrepreneurial or taking risks in your business activities.”

The hottest compliance topic currently is the Sarbanes-Oxley Act of 2002, which outlines new requirements for public companies.

Walker says in-house counsel should be involved in helping their companies meet the requirements of Sarbanes-Oxley, which has fairly well-laid-out regulations, especially with regard to board structure and composition.

“In Sarbanes-Oxley, there is a lot of attention on financial statements, which is very important, but it seems like to me that’s pretty mechanical,” he explains.

The more challenging issues for in-house counsel are the rules for the makeup of boards and the audit committee, he says.

“Sarbanes-Oxley is specific about what needs to be done and if you fail to comply, you will expose yourself to liability there,” Walker says. “For instance, there’s a new requirement for audit committee independence. Basically, there can be no affiliation at all of audit committee members [with the company]. They can’t be a consultant to the company, they can’t be a tax lawyer for the company, and there can’t be payments to audit committee members other than their payments for serving on the board or committee.”

The act also states that all members of the committee must meet this independence requirement. In the past some members were exempt from independence rules, Walker said.

Companies are also required to disclose whether the audit committee includes a financial expert. “It’s a little fuzzy,” Walker says. “The SEC is working on this. It doesn’t actually require an expert, but it requires disclosure.” And it considers an expert as someone with true financial expertise and experience auditing companies, he notes.

Under Sarbanes-Oxley, the audit committee is responsible for appointing, compensating and overseeing the outside auditor, Walker continues.

“If you hire an outside auditor, it has to come through the audit committee. And if the outside auditor is going to provide non-audit services, that has to be approved by the audit committee,” Walker says. “The audit committee also has to develop procedures for dealing with whistleblowers.”

Walker notes that New York Stock Exchange and NASDAQ definitions of “board independence” are tightening as well.

Certain payments to board members for other board services are prohibited, and the new rules prohibit consultants and tax attorneys from serving. They also disqualify family members of company executives from serving. The NASDAQ has proposed a three-year cooling off period before a partner or outside auditor can serve on the board as an independent director.

“This is certainly something in-house counsel or whoever is putting these boards together” should focus on, Walker says. “This has a pretty immediate effect. It’s fairly dramatic. Not many people meet these requirements. Companies are going to be scrambling to load up on these people, particularly the people who meet the financial expertise requirement.”

Dwindling Insurance?

The down economy is making insurance carriers more reluctant to offer additional coverage, experts tell Lawyers Weekly. Many companies are finding that when they need added coverage the most, insurers aren’t offering it, and that businesses must pay higher rates on what they are able to secure.

“There’s certainly a great deal of concern about exposure and liability, particularly for officers and directors,” Krebs observes. “I’ve heard that insurance is going to be difficult to find and that premiums jumped phenomenally.”

McCourt’s clients have reported that insurance companies are becoming “much more aggressive in terms of raising multiple defenses to coverage.”

In response, McCourt encourages his corporate clients to perform an internal audit of their insurance coverage so they’re familiar with what their policies do and don’t cover. “It’s important to understand your coverage, and be prepared to respond to those defenses so that you don’t simply take ‘no’ for an answer,” he says. “Rather, you really understand whether the defenses being asserted are supportable.”

Schaefer advises in-house colleagues to be up-front about liability compensation with the other companies on business deals, and write liability compensation into contracts with them.

Ionics, according to Schaefer, its in-house counsel, is “making sure we have appropriate language [within project contracts] to cover that exposure” and has been adding the extra cost of liability coverage to the total cost of contracted projects.

“Insurance premiums you can’t do a lot about,” Schaefer says. “Projects often dictate the level of coverage you must have. It’s a cost of doing business.”

Employment Pitfalls

A down economy often results in staff layoffs, which can expose a company to liability if the process is not handled properly, McCourt cautions.

“Reductions in force create a potential land mine of claims by employees who are let go,” he says. In-house staff can work with outside counsel early on to lay out an appropriate plan to handle staff cutbacks — whether it’s a hiring freeze, reduction of employee hours, transfer of employees, or an out-and-out reduction in the labor force.

If a reduction in the labor force is the only option, a solid communication strategy is necessary to explain the restructuring to everyone involved. “That means the employees that are going to remain, former employees, customers, and to the extent that it’s a public company, making sure shareholders understand the motivation,” McCourt advises.

The alternative — the one to be avoided — is that managers are not on the same page and give employees contradictory reasons for their terminations.

“That’s where companies get in trouble,” McCourt says. “They don’t have that clear communication. One person is saying it’s performance, and another saying it’s a layoff situation, and the employee begins to wonder what the real reason is. They suspect it’s something illegal.”

Talking points for managers at all levels are important “so that the communication process that takes place among all the managers floats down to the HR people in the field, and everyone understands why the company has to undertake these steps,” he adds.

Companies must also comply with the provisions of the federal Worker Adjustment and Retraining Notification (WARN) Act and applicable state laws when reducing their labor forces.

The WARN Act is triggered in the event of a either a plant closing where at least 50 employees are laid off, or a mass layoff company-wide, where one-third or more of the workforce is terminated, McCourt explains. It requires employers to give employees at least 60 days notice of the termination. If an employer is unable to give 60 days notice, the law allows them to make up through financial compensation the difference between the required 60 days and the number of days notice actually given, he says.

Under the act, employers must also notify local and state authorities, normally the Department of Labor or an elected official, so any help those authorities can provide may be offered, McCourt notes. In the event of the termination of unionized workers, the union must also be notified, he says.

“Employers have to be careful to give proper notice. If not, they can be hit with liability,” McCourt warns.

Companies also must decide whether there are the resources and the will to offer severance packages. If so, enforceable, airtight releases must be drafted for terminated employees to sign.

“In an ideal world, you have a well-planned, well-communicated plan of reducing your work force and then you offer the employees some additional payments in exchange for getting a release from liability,” McCourt says.

But, what often happens is that the company either doesn’t have the resources or doesn’t want to pay out severance. “Then we work together to assess what the potential exposure is to make sure that the criteria for selecting who is being terminated is being applied in an objective and businesslike manner,” he says. “We have a record for why one person is being selected over another person,” an important piece of evidence to present in an employment suit.

“If it’s done properly, the expectation is you might get some claims, but that ultimately, all are defensible” because employees signed contracts agreeing to indemnify the company from liability, McCourt adds.

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