When it comes to attorneys, even the smartest business owners screw up. It doesn't have to be that way -- if you follow Inc.'s plan for managing your lawyer.
When it comes to attorneys, even the smartest business owners screw up. It doesn't have to be that way -- if you follow Inc.'s plan for managing your lawyer.
Manny Balani doesn't hate lawyers. He just wishes they knew their place. The attorneys he's encountered tend to think that their $500-an-hour expertise is essential at all times. But Balani, the 29-year-old founder and CEO of Governors Distributors, a cigar distributorship in Miami, prefers to think of lawyers as the heavy-duty jigsaw you keep in the back of your garage -- "The tool," he says, "that cost you an arm and a leg but you use only once a year." When Balani reaches for that expensive piece of machinery, he wants it to work.
Unfortunately, people tend to be less reliable than machines -- and lawyers less so than most people. When Balani needed to trademark some tobacco and rolling-paper brands that he was launching, for example, he struck a deal with a lawyer for a discounted, flat-rate legal fee. Then the bill arrived. Not only was the total $1,000 more than promised, but the lawyer who'd agreed to the original fee had left the firm. What's more, the work had not been completed. After much wrangling, the firm agreed to a lower fee, with the understanding that it would resume work on the trademarks. Instead, once it had cashed the check, the firm quit.
Maybe, Balani has thought, he'd have better luck with a larger, more established firm. And he's been courted by some of Miami's better-known downtown corporate firms. But Balani usually finds himself put off by their swank offices and pretentious attitudes. "'Look at my marble floors. Look at my plasma TVs," he says, mockingly. "'Would you like coffee? Espresso?" No, says Balani. What he'd like is an attorney who can make his legal problems go away so he can run his business. Is that too much to ask?
It sure seems to be. If negotiating the legal system is almost always a hassle, entrepreneurs tend to occupy their own special place in lawyer hell -- too poor to afford the best, yet too sophisticated and demanding to do it on the cheap. On the menu of horrors: unreturned phone calls; a condescending "I'm-a-lawyer-and-you're-not" attitude; the overworking and overbilling of routine matters; missed deadlines and deal-killing dropped balls.
The fact is, too many businesspeople don't know how to manage lawyers. Entrepreneurs who would never be taken advantage of in their dealings with customers, suppliers, partners, or employees, make dumb mistakes with their lawyers. They hire poorly and manage passively. And as a result, they fall prey to nasty surprises. It's the same kind of blind spot that afflicts many patients when doctors start throwing around medical terms, says management consultant and author Patrick McKenna: "They can get paralyzed."
It's easy to see why. The legal world is a mysterious fraternity, with its own language and customs. Who isn't mystified, even intimidated, when confronted with a stack of legal documents or the prospect of an impending lawsuit? And many lawyers are perfectly happy to exploit your relative lack of knowledge. It doesn't have to be this way. A lawyer can become a true business partner -- if you know how to structure and handle the relationship. Inc. canvassed some two dozen business owners and some of the nation's leading business lawyers and asked them to reveal the secrets of the legal temple. The result is a five-point program for getting the attorney-client relationship right. Follow it and you'll become a smarter consumer of legal services, have a healthier, more productive relationship with your attorney -- and begin your climb out of lawyer hell.
Don't hand your legal fate to a stranger. Savvy legal consumers ask questions -- lots of them.
Before you can learn to love your lawyer, you have to find one. And that's where many people make their first mistake. Too often, entrepreneurs find their lawyers through personal connections -- old college chums, brothers-in-law, board members' golfing partners. That guy who cornered you at a cocktail party last month? He was a lawyer. Why not give him a call? That's not far from how Balani did it. How many potential lawyers did he bother to interview before settling on his feckless trademark attorney? "I shouldn't admit this," Balani says, "but I pretty much went with my first guy." And that wasn't the only time he's made the same mistake. "You're just caught up in getting it done," he says. "It's hard enough to take two hours out of my day to put out a legal fire" -- much less give the matter the same attention he would to something that's actually going to generate some cash for the company.
The next mistake? When meeting with a prospective attorney, the client's brain freezes. Experienced lawyers see it all the time. Clients meekly ask a few softball questions about a lawyer's bona fides, inquire about rates, and that's it -- they hand over their legal fate to a complete stranger. Competing bids? References? These and other routine due-diligence steps apparently fall victim to the desire to dispatch this legal hassle so that they can get back to real work.
Savvy legal consumers ask questions -- lots of them. If you're interviewing a litigator, ask how many jury verdicts he has won (himself, not a colleague or the firm in general) in the same area of law, and in the same courthouse. If the answer comes back "plenty," ask for a list of those cases with the names and telephone numbers of references. There's no better way to smoke out litigators whose actual experience consists of carrying the bags for a more senior partner at a two-hour witness deposition four years ago. The same goes for business lawyers. When a mergers-and-acquisitions partner confidently ticks off the half-dozen deals she and her firm have done in your industry, call a time-out. In which deals did this lawyer (not someone else in her firm) serve as lead counsel, not just as a bit player? "Nobody asks these questions," says Fred Bartlit, a Chicago litigator who often works with entrepreneurs.
Should you go with a big firm or a small one? Obviously there's no right answer. The largest firms tend to handle the most intricate deals and the most hair-raising lawsuits, but there are any number of sophisticated smaller firms -- often spun off from the big firms -- that do work of the same quality. Sure, they might lack an army of attorneys to throw at a project, but it's unlikely that you'll ever need that. (And pray that you don't.) If you do select a big, name-brand firm, make sure that the lawyer you choose is accustomed to dealing with small companies -- and that he's not juggling your work with, say, a big project for ExxonMobil. If he is, guess whose emergency will get first priority? And remember: There is often a cultural disconnect when big law firms meet small businesses. "Some of the larger firms have a difficult time being entrepreneurial," says Timothy Hodge, chief in-house lawyer at 180s, a Baltimore manufacturer of ear warmers and sunglasses. At many big firms, the first impulse is to throw a team of lawyers at a new project. "They're treating you like they're treating IBM," Hodge says. Not good -- unless, of course, you have as much cash in the bank as Big Blue.
While brand-name firms carry some cachet, it's seldom worth the added cost. Seth Seidell, chief operating officer of Human Capital, a human resources outsourcing agency in Southfield, Mich., has two favorite outside firms -- one with 25 lawyers and the other a sole proprietorship. Sure, he'll go to a large firm if it has a partner with exactly what he needs. But Seidell's seen the regard for large firms taken to absurd extremes. Occasionally, a client will show up for routine contract negotiations with big-firm lawyers at the ready -- and then run up fees that exceed the value of the contract itself. "That," Seidell observes, "is just stupid." Indeed it is. Not all legal matters require the best and the brightest. You don't need a jigsaw to cut a sheet of paper.
Letting your lawyer set the terms unilaterally is almost certain to end with hard feelings.
Let's say you've found an experienced lawyer with loads of small-client sensitivity. Now it's time to lay down the rules. It's not as simple as it sounds. Most attorneys will simply hand you a boilerplate retention agreement to sign. Don't. Letting your lawyer set the terms of the relationship unilaterally is almost certain to end badly, with hard feelings and lots of zeroes on the check you write at the end of the case.
Once again, you have to ask questions. First, attack all ambiguity about costs. Remove the legalese, and here's what the typical boilerplate lawyer-retention agreement says: "We, the law firm, will assign whichever attorneys are needed; we will do the work that's required (whatever that turns out to be); our rates range from $200 to $500 per hour; we can't predict the ultimate cost, but we'll consult with you along the way (whatever that means); and we'll charge you for our out-of-pocket costs at our firm's standard rates." It's standard legal fare, agreed to by clients every day of the week. But in fact, each one of these provisions is a ticking bomb. Even if your lawyer isn't out to scam you -- and, to be fair, most aren't -- such vague, one-sided provisions can only work against you.
Instead, take control of your retention agreement. (See "Think Your Lawyer Is Ripping You Off?" page 96.) Establishing control over the lawyers you hire means encountering fewer nasty surprises and resolving common problems before they start.
Maintaining such control is especially difficult -- and nasty surprises are most likely to occur -- when you're in litigation. If you're the one being sued, you're not in control of the situation to begin with. Your opponent is. The standard lawyer response, when asked what the ultimate downside might be, is to shrug and claim that there's no way to know. Your reply: Let's try anyway. "It's all about money," says William Flannery, an Austin-based consultant who helps lawyers land clients and manage customer service issues. Demand a budget, Flannery advises, with probabilities attached to each step of each scenario. How many briefs and motions will the case demand, and how long will it take to prepare and argue each one? How many witness depositions will be needed? What are the odds and costs of winning or losing or settling at each potential mile marker? Tally up those guesses (and yes, they are only guesses -- but they should be educated ones) and you'll at least have a sense of what you're facing financially.
Yet business lawyers seldom encounter such a calm and competent client. Michael Boone, co-founder of Haynes and Boone, a large full-service firm in Dallas, says too many of the would-be clients he encounters are much more likely to lose their cool. Unaccustomed to dealing with lawyers and caught up in the throes of litigation, often for the first time, all they can think of is crushing the opponent. "They get caught up in emotion," he says. "They don't know what things cost." Boone makes sure they learn fast, by asking for a retainer of as much as $100,000 and promising monthly bills of some $15,000. "Sometimes you need to shock them," he says. After all, if the costs are too much to bear, better to learn that before someone gets hurt. It's a bitter pill to swallow. But it's better to have a candid lawyer like Boone than a passive-aggressive one who will, without warning, drop a 10-ton weight on your bottom line.
The challenge is to align your attorney's interests with your own, making sure he understands exactly what you expect.
You need to know that your lawyer is on your side and will fight hard for your interests. A no-brainer, right? Not quite. The lawyer-client relationship is complex -- made all the more tricky by the often competing economic interests of the parties. Old-fashioned loyalty is often a rather quaint notion. (See "Which Side Is Your Lawyer On?" page 93.)
Essentially, there are two kinds of lawyers -- the guard dog and the fixer. A guard dog will protect you from potential risks and treat the other side in a dispute or negotiation with an arm's length skepticism bordering on hostility. A fixer, on the other hand, turns dreams into reality, knocking down barriers to get you to your goal. Too much of either trait is a problem. An out-of-control fixer is a yes man, unable to stop you from making mistakes. But an excess of guard-dog genes means your lawyer will nitpick deals to death and treat theoretical risks like insurmountable barriers.
Terry Collins, CEO of Argon ST, a defense contractor in Fairfax, Va., has seen too much guard dog in some of his attorneys. "I don't think you succeed in business without having trust in other people," Collins says. The guard dog, however, is not a particularly trusting breed. Collins has been sitting around a conference table, inches away from inking a deal with a potential partner, only to see his lawyers behave, he says, as though "the other guy must be a criminal." Whose side are these guys on, wonders Collins, who then must spend his own time smoothing over ruffled feathers so that the deal can get done.
One reason for the disconnect: Many lawyers simply don't think like businesspeople. When confronted with a risk, an entrepreneur weighs the costs and benefits, decides which route makes sense, and takes action. "It's risk management," says Susan Hackett, of the Association of Corporate Counsel. "It's what companies do all day long." Law firms, on the other hand, "are in the 'elimination-of-risk' business," she says. Hence their knack for transforming speculative outcomes into deal-killing barriers.
The challenge is to align your attorney's interests with your own -- to make sure your lawyer understands your priorities and what, exactly, you expect. But be warned: Economics is working against you here. The image of the noble warrior-lawyer, loyal to the death, is an anachronism in an era of shopaholic clients, pressing for the best fee deal by constantly moving their business from firm to firm. Lawyers, of course, are no better, hopping from one firm to the next in search of an ever-bigger payday. What's more, the compensation schemes in place at many law firms encourage lawyers to hoard clients rather than match the client with the most appropriate partner. In such a world, there is little room for trust, says Michael Shakman, a Chicago attorney who represents law firms accused of malpractice.
It's tough to change the laws of economics and human nature. But you can keep your lawyers on your side by making yourself indispensable. By concentrating all of your legal work in one firm rather than spreading the different types of work you generate among several firms, you might go from a blip on those several firms' financials to a sizable client at one. And it's not just about financial clout. If your company is prominent in a certain industry or a leader on a particular issue, it might be attractive to the right law firm. If you're in the business of helping companies outsource computing services, for example, then find a law firm that's trying to make its name in outsourcing contracts. Become that firm's marquee client. The bragging rights for that firm should at least be enough to make sure your calls get returned.
"If I have a short conversation with clients, I'm not going to bill them. Not every lawyer can do that."
Jack Danahy loves his lawyer. As with most romances, Danahy owes some of his good fortune to a happenstance meeting. But his experience is instructive for the cues it offers business owners who want to recognize a lawyer worth keeping when they see one.
Danahy, founder of Ounce Labs, a software security firm in Waltham, Mass., met his lawyer last year, when he was negotiating a financing deal with the venture capital firm Greylock Partners. Greylock planned to be represented in the deal by Hale and Dorr, a major Boston-based law firm. But Danahy knew the firm's reputation, and wanted Hale and Dorr for himself. Fortunately, Greylock agreed to hire a different firm for itself in the deal.
Danahy had reason to want the best. At his previous start-up, Qiave Technologies, he had learned that cheaping out on legal help when money is tight can cost dearly later on. While negotiating Qiave's sale in 2000, Danahy discovered that his rather ordinary lawyers had made a rather extraordinary mess of his company's corporate documentation -- a mess that needed to be cleaned up before the deal could proceed. "It is enormously important to get it right the first time," Danahy says. "It really makes growing a heck of a lot easier."
With Hale and Dorr, Danahy got more than he bargained for. He was steered to John Chory, a corporate partner who works exclusively with emerging companies and who was willing to gamble that a promising but cash-poor early-stage outfit would mature into a more substantial client. Danahy has used Hale and Dorr for practically every legal need since -- from finance and corporate affairs to intellectual property, contracts, and employment matters. That's because an emerging-company specialist like Chory is not as likely to fall into the usual lawyerly habit of overworking everything or dumping the fledgling client whenever a larger client snaps its fingers. He's also willing to brainstorm on strategic matters and offer legal advice on the fly -- often at no charge. "If I have a short conversation with clients, I'm not going to bill them," Chory says. "Not every partner at Hale and Dorr can do that."
Danahy has benefited from persuading his lawyers to view him less as a client than as an investment. It happens more often than you might imagine. A law firm's investment in a client can take any number of forms. At the benign end of the spectrum, the firm simply writes off a portion of its fees -- absolving the client of worry that every question, phone call, meeting, or collaboration will be billed in six-minute increments. It's an expression of hope that the company will throw more work to the lawyers as the business grows. Sometimes the investment is literal -- an equity stake in the company, purchased by the law firm's partners or bartered in lieu of fees. Even more aggressive law firms have been known to demand equity simply for agreeing to take a company as a client. The equity-stake tactics reached their high-water mark during the Internet bubble. They're now largely out of favor, for reasons both economic (because of postboom stock prices) and ethical (mainstream corporate-law experts caution against taking supposedly independent legal advice from lawyers who have one eye on the stock ticker).
Equity deals don't happen so often these days. But discounted fees and cash investments by lawyers do happen, especially with law firms that are serious about working with start-ups. Relationships with such lawyers are very different from those with most attorneys. For example, say a start-up encounters an ambiguous contract provision that could cause trouble down the line. A typically cautious lawyer will want to crawl all over the issue, locking it down into an indisputably safe form before signing off. A lawyer attuned to start-ups will often go along with the entrepreneur who's hurriedly trying to close the deal and is willing to assume some risk.
What if you're not fortunate enough to be based in an entrepreneurial hotbed like Silicon Valley or Boston's high-tech suburbs? Or if you can't promise a quick IPO or acquisition? Can you still get this kind of attention? It's possible -- just be sure to look for a law firm that specializes in smaller companies. Finding one is more art than science, but it's not impossible. Look for lawyers who flock to entrepreneurs' social or professional events; ask around at law firms and among other companies; and zero in on corporate law boutiques, which often segment their practices according to company size or level or maturity. Finally, stay attuned to that all-important element of any romance: good chemistry.
Never sit on a bill and stew. All the law firm knows is that it hasn't been paid. It's better to air concerns early and often.
Legal malpractice claims arising from business disputes are far less prevalent than claims from personal injury, divorce, or real estate cases, according to a recent survey by the American Bar Association. But malpractice claims do happen, and one thing is certain: Suing law firms is not for the faint of heart.
Exhibit A: Michael Viner, founder of the Los Angeles-based audio-book publisher, Dove Audio. In 1998, Viner sued his law firm, Williams & Connolly, a prominent firm based in Washington, D.C., alleging that one of the firm's attorneys had botched his exit agreement from Dove, hurting his ability to capitalize on new ventures. A jury agreed, awarding Viner and his wife $13.3 million for their troubles. Then, inevitably, came the appeals. First, the award was cut to $8 million, and then last April it was cut again, to about $515,000. Mark Helm, the Los Angeles lawyer who represented Williams & Connolly, draws one lesson from the case: "If you're a businessperson, rely on lawyers to help you in the areas where they can, but take responsibility for the business decisions that you make." Viner draws another: Don't litigate against professional litigators.
Fortunately, most problems that arise between business owners and their lawyers almost never prove so catastrophic. Outright fraud by attorneys "happens a lot less than people think," says John Marquess, founder of Legal Cost Control in Haddonfield, N.J., which audits legal bills for clients who suspect they've been ripped off by their law firms. If you believe you are suffering from poor service, high costs, and divided loyalties, "never sit on the bill and stew," says Marquess. All the law firm knows is that it hasn't been paid. Now you're both mad. It's better to air your concerns early and often.
If that fails to yield results, think very, very hard before taking your attorneys to court. It's instructive that large corporations tend to file malpractice suits only as a last resort. Instead, they use their financial leverage to pressure lawyers for better service. You can do the same. When fees are out of control and calls aren't returned, move to a different firm. Will the legal world get the message and clean up its act? Customer service has improved in recent years. But the pace of change has been frustratingly slow, says Jonathan Bellis, who consults with attorneys from the Somerset, N.J., office of the professional services firm Hildebrandt Inc. "It has absolutely not been a revolution," says Bellis. "This industry moves like a battleship." But rather than despair, just remember: Even battleships have commanders. The trick is knowing how to issue orders, enforce crew discipline, and avoid the torpedoes.
Back in 1995, Spence Jackson's Austin start-up, SigmaTel, was pursuing venture financing and needed some legal help. Jackson's main concern: protecting his company from patent claims on the computer audio chips it was developing to compete with Crystal Semiconductor, which had a head start on the technology. SigmaTel's VC firm suggested Brobeck, Phleger & Harrison, a high-flying West Coast firm. Jackson hired the firm and was impressed with its work. But their relationship was short-lived; the firm and SigmaTel parted ways several months after Brobeck's VC ally pulled out of the deal.
SigmaTel found financing elsewhere and Jackson never gave the matter much thought -- until four years later, when he was hit by a bombshell: Cirrus Logic, Crystal's parent company, was suing SigmaTel, alleging that the start-up had infringed on its patent on the very same audio chip. The law firm representing Cirrus Logic? None other than Brobeck, Phleger & Harrison.
For SigmaTel, the timing was disastrous. The company was racing to go public, and that would never happen with a patent fight looming. Even worse, the lawyers who should have been helping the company mount a defense were on the opposing team. After months of costly skirmishing, SigmaTel got Brobeck booted from the case. But by then, the tech bubble had burst and the IPO window had slammed shut. SigmaTel, which was forced to lay off employees to cut costs, filed a malpractice suit against Brobeck. The law firm denied doing anything wrong but agreed to a $3 million settlement.
Ultimately, SigmaTel overcame its financial woes. (Jackson left the company in March 2001.) When the company's IPO finally did happen in 2003, its market cap approached $1 billion. By then, however, Brobeck was no more. The firm had collapsed in early 2003 after overdosing on dot-com work.
Jackson now has a new start-up, Metanoia Technologies, and relies on a small patent firm. "They're ideal for where we're at now," he says. Money-focused large firms, Jackson says, sometimes "don't have strong ethics." One other bit of advice: Develop a personal, direct relationship with your lawyers. When VCs call the shots, things may not turn out as planned.
John Marquess, founder of Legal Cost Control, in Haddonfield, N.J., is one of the nation's leading auditors of legal bills. Marquess has seen it all, and the trouble, he says, almost always starts with a vague or one-sided contract between client and lawyer. Here's his advice to clients seeking an ironclad retention agreement.
Get it in writing. Always, for every piece of legal work -- even when dealing with longtime outside counsel.
Be explicit about staffing and billing rates. Know exactly who will work on your case and what each lawyer's and paralegal's billing rate is. Refuse to pay for two or three people to do the work of one at routine meetings or hearings. Stipulate that no new attorneys can be added to your case without your written approval.
Ban markups and specify allowable expenses. Get approval rights over all expenses -- travel, meals, online research, outside experts' fees, photocopying, etc. In other words, just say no to the 25-cent-per-page fax and car service for secretaries who work late.
Insist on clear bills. Block billing -- in which a number of tasks, performed by any number of lawyers, are lumped together and totaled into a single sum -- is what you don't want. Demand a detailed statement that breaks out discrete tasks and their costs. And get a monthly statement -- the more time that goes by, the less likely billers can remember the details.
Plan for the worst. Even lawyers (strike that: especially lawyers) need a prenup. Insist that disputes go to mediation or arbitration. And don't allow what's called a retaining lien, where you fire your lawyers but they hold on to your file until they're paid what they say they're owed.
Mark Obbie, former executive editor at The American Lawyer, is a visiting professor at Syracuse University's S.I. Newhouse School of Public Communications, where he teaches reporting, writing, and media law.