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July Edition

Corporate Counsel Facing Budget Cuts and Need to Address Outside Law Firm Costs
The Trouble With Discovery of ESI Abroad

Corporate Counsel Facing Budget Cuts and Need to Address Outside Law Firm Costs

General Counsel Pressuring Firms Amid Recession
By: Brett Tarr, eMag Solutions

Times are tough for everyone. The economy continues to falter, and both corporate legal departments and outside counsel are facing unprecedented pressures. Law firms are downsizing, and corporate legal department budgets are being slashed. In the midst of this economic crunch, general counsel have increased pressure on their outside law firms, demanding slashed fees, predictable bills and improved service. At the same time, general counsel are wondering what law firm cost cutting measures will mean to corporate clients in terms of quality of service and how much in the way of cost-savings will be passed on to them.

Of the numerous budget issues facing general counsel, the spiraling cost of outside counsel fees and their lack of predictability are the two biggest worries. According to a survey that Altman Weil conducted in November 2008 amongst 115 general counsel, almost three-quarters of those polled reported that they are implementing 2009 budget cuts ranging anywhere from 6 percent up to 35 percent. How then, do law departments manage growing legal and E-Discovery issues with a shrinking budget and uncertain outside legal costs?

Corporate law departments can make superficial in-house staff cuts, but in truth, these departments will not come close to 35% budget cuts without digging deeper, and this will necessarily mean digging into outside counsel. In fact, the Altman Weil study reported that the No. 1 target for general counsel spending cuts is outside counsel. More than half intend to decrease the use of outside lawyers in 2009.

The cutting is already here. One general counsel of a large company recently achieved huge savings nearly overnight by firing its large national law firms and switching to smaller regional firms, she said. "The change provided the company with top-rate lawyers at a lower cost structure. The company replaced $700-an-hour lawyers with $325- to $450-per-hour counsel, she said.

Some law firms are responding by trying to keep pace with smaller firms. One large law firm pledged to a corporate client that it would match any discounted hourly fees that a competing firm might propose. Companies are demanding ever more discounted hourly rates.

Firms that want to continue representing large companies are expected to make concessions. These corporations expect more value, better representation, and better performance in terms of success."

Recession Offers Law Firms a Chance to Refocus on Client Needs

There has been plenty of cost cutting at law firms of late, and, not surprisingly, in-house lawyers are asking where the savings will go. General Counsel are hoping that firms are scaling back in intelligent ways that will allow these firms to be more competitive. In-house lawyers are certainly expecting that some of the cost savings will filter down to corporate clients and not just into the pockets of firm partners.

Many corporate players believe that the legal services market is overdue for a shake-up, and the current recession should hopefully provide the impetus for law firms to re-dedicate themselves to addressing the needs of clients.

It only makes sense that law firm priorities will need to re-focus on client satisfaction, as the legal market has become increasingly competitive in the past decade. It is no longer an accepted fact that legal fees are in direct proportion to value for the money.

Law firms are finding themselves stuck in a strange, new competitive world. Law firms face hard times not only because of slashed fee demands but also because new competition is depressing prices. Overseas firms are trying to pick off corporate clients, offering hourly rates 30 percent to 40 percent cheaper than what large U.S. firms charge. Additionally, corporations are sophisticated about procurement, but not in the area of legal services. That is changing, and the law firms that can go with that change will succeed.

Law firms that think they are accommodating the market's changes merely by discounting hourly rates may be missing the point, though. Ultimately, the issue is not one of price, but rather one of offering value.

Similarly, some general counsel think that asking for a discount is all they need to do to manage their legal expenses. But, in truth, a lawyer's hourly rate is an artificial number that serves as a jumping off point to negotiate service levels and timelines. In reality, offering an hourly discount does not control hours or expenditures. Ultimately, there is no control to prevent the final bill from coming out the same or even larger, even after rate reductions.

Law firm downsizing represents a critical decision point, and may lead to increasing automation or even outsourcing of processes to control costs and maximize efficiencies. Law firms have traditionally been run by lawyers, and in the current economy, it becomes increasingly clear that the competitive business of law needs to be run with a business-centric focus.

Traditionally, as demand for US law firms' services increased, so did their average profitability. Those days are gone. Economic crisis is forcing law firms, few of which are built on a true business model, to become market-driven.

Corporate clients are expecting increased communication from outside law firms, and many organizations are starting to develop sophisticated matrices that measure service along a range of values, including communication, after-hours availability, frequency of reporting, and other less traditional measures of legal value. In a world where law firm life often starts at 10am, it is becoming increasingly common for corporate clients to expect daily 9am conference calls with members of the team providing detailed updates.

In many cases, firms are used to the same-old way of doing business, and most do not even realize how expensive they are in relation to their competitors. By giving these firms an insight into that, and suddenly it becomes easier to have difficult conversations down the line.

The Trouble With Discovery of ESI Abroad

By: Brett Tarr, eMag Solutions

Globalization and the growing mountain of electronically stored information inevitably will lead to an increase in discovery requests for ESI located abroad. Companies are meeting the challenge of globalization by creating networks of electronic data that allow employees around the world to connect to the same set of data no matter where it is located.

But no consistent methodology exists for U.S. courts to evaluate whether discovery of ESI abroad is appropriate, and if so, the consequences for not complying with a discovery order.

Although international discovery is not a new problem, global companies, the growth of international data infrastructures and the explosion of ESI will bring the issues of e-discovery to the forefront of international litigation. Courts will be faced with comity considerations and issues related to the burden and cost of e-discovery, as well as complex international data protection laws.

In much of the world, countries have adopted legislation that protects the privacy of electronic information. These laws may prohibit the electronic transmission of information across borders, without the express consent of the subject of the communication. In many jurisdictions (notably, many countries in the European Union, which has adopted the EU Privacy Directive), it may be impossible to obtain the consent of employees; such consent often is considered to be inherently coerced due to the subordinate nature of the employee relationship.

The increase in globalization and ESI have led to legislation in some countries to protect the disclosure of certain information. Some of this legislation specifically has targeted the protection against production of data for litigation. A party seeking protection against compelled discovery, relying on the basis that foreign law bars the production, has the burden of proving that the foreign law actually prohibits production of the data at issue.

This conflict between U.S. and European law is not merely legal; it reflects nothing less than a clash of cultures. In the litigation context, restrictions on the international transmission of data can present an enormous barrier to the discovery of electronic information kept overseas. Thus far, there appears to be no reported case law construing the conflict between discovery obligations that are broader than discovery in virtually every other jurisdiction in the world, and the restrictions on the transmission of electronic data imposed by the EU Privacy Directive. Discovery in the U.S. is built on the well-founded premise that all information that "appears reasonably calculated to lead to the discovery of admissible evidence" is discoverable.

Ultimately, courts in the U.S. will need to develop and apply a consistent standard to decisions involving the discovery of international ESI.

The view on privacy varies internationally and is strictly regulated in many countries. For instance, the European Union Data Protection Directive establishes a regulatory framework around the movement and treatment of personal data in the European Union. In addition to the personal data protection laws, the European Court of Human Rights has found that the right to private communications in the workplace is a fundamental freedom covered under the Convention for the Protection of Human Rights and Fundamental Freedoms.

The Data Protection Directive allows the transfer of personal data between countries only if the country receiving the data ensures an adequate level of protection. In response to the restrictive Data Protection Directive, the United States Commerce Department negotiated a safe harbor with the EU, which provides requirements that U.S. companies may choose to adhere to in order to participate in the free exchange of personal data with companies in the EU. Personal data has been broadly construed under the Data Protection Directive to include e-mail and other commonly requested ESI.

U.S. courts have found that privacy laws promulgated under the Data Protection Directive reflect a legitimate foreign interest that needs to be considered when deciding discovery issues.

In addition to privacy laws created under the Data Protection Directive, many countries view privacy in the workplace differently to the U.S. There is generally no expectation of privacy in workplaces in the U.S., and so requesting and receiving e-mail in discovery is commonplace. In the EU, however, there is an expectation of privacy in the workplace, and so e-mail sent and received via work accounts may not be discoverable.

In a recent holding, the European Court of Human Rights found that under the European Convention for the Protection of Human Rights and Fundamental Rights, which provides that "everyone has the right to respect for his private and family life, his home and his correspondence", telephone calls and e-mails made by an employee from work fall within the Human Rights Convention's notion of "private life" because they may contain "personal information". In that case, the court found that the employer's monitoring of phone calls and e-mails without notice violated the employee's human rights under the Convention.

French courts also have evaluated these protocols in numerous cases, with the results typically following the same trend as the European Court of Human Rights in limiting an employer's ability to inspect an employee's e-mails, files or computers, even when the employer has reason to suspect wrongdoing on the part of the employee (Philippe K. v. Cathnet-Science, Cour de Cassation, Chambre Sociale). These holdings, combined with the Data Protection Directive's finding that personal data includes e-mail, raise some serious concerns about whether international law will prohibit discovery of foreign e-mail in U.S. litigation in the future.

Historically, foreign blocking statutes have been one of the most common impediments to U.S. discovery of information located abroad. The scope of the statutes varies, but they generally prohibit production of documents and disclosure of information related to a particular topic or industry. Many blocking statutes were enacted specifically to thwart U.S. discovery. Courts recognize that blocking statutes, like the French Blocking Statute, have been constructed purposefully to provide foreign nationals with tactical weapons and bargaining chips in U.S. courts.

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