The Law Business and Business and the Law
Wriston, Walter B.
It is a common practice in business management to formulate a strategic plan. Like most things, some are of very little utility being merely linear extensions of today's business, while others make a real effort to start with a look at the changes in our society and how these may affect our businesses. All of you who deal with juries know how hard it is accurately to predict the outcome of their deliberations. In a larger sense, our jury is the world and the people in it will buy your product or service, or they won't. Products can be priced out of the market and they can become obsolete in a changing value system. This economic principle extends even to the legal profession, even though lawyers have more control over society than any other profession, since men and women of your profession tend to comprise the majority in the Congress and state legislatures in our country, and just as importantly make up the legislative staffs that produce the more than 20,000 bills dumped into the Congressional hopper and the hundreds of thousands introduced in state legislatures. After the laws are passed, you then write the myriad pages of regulations controlling the size of fish that may be caught in the Hudson River to details on inspecting atomic plants.
While descriptions of what lawyers do range from the laudatory to the obscene, what changes the world and the law with it was described by Walter Lippmann many years ago as: "The multitude of little decisions made daily by millions of men." Those millions of decisions if plotted on a graph might look like a scatter chart, but sometimes the dots are clustered around trend lines that may give us a clue to the direction our society is taking.
Recently Michael H. Annison of the Westrend Group ticked off some changes in our society which he characterized as in the process of totally restructuring "all the social, economic and political systems of the country." While this is a rather broad statement, he predicted: In the next five years, 10 to 50 percent of the hospitals in the U.S. will be merged, go bankrupt or be bought out. Thus somewhere between 700 and 3,500 multimillion dollar businesses won't survive, "because they can't respond to the marketplace." While one might argue about the numbers, no one could deny that the delivery of health care is changing in an almost revolutionary manner. It now costs almost as much to stay a day in a great hospital as it does to spend a day with a partner of a law firm.
In looking at how we educate our children, Mr. Annison observed that today only 28 percent of us (American parents?) have children in public schools, 72 percent of us don't, and there are 55 million people in alternative learning systems. Since we grew up believing that the public school system was an important pillar of our society, these numbers give us pause.
While there are still 38,000 local governments, there are now 55,000 "private governments" -- people who pulled out of municipal systems to organize and pay for their own sanitation, police, and fire services.
While we may think of American business as being composed of great corporations, since 1976, two-thirds of the new jobs have been created by businesses employing fewer than 20 people. The return of the entrepreneur is a dominant phenomenon of our time.
In our society, in general, 80 percent of everything we do can be done equally well by somebody in a different industry. The value added is the 20 percent of the service which represents the competitive edge.
Finally we see power returning to the states, cities and to the people from Washington. Indeed much of the innovation in public policy now again originates at the local level.
You don't have to be a futurist to know that one of the things that is happening in your business is that the cost plus billing practice of lawyers is pricing you out of the market and causing the explosive growth of in-house law firms. The only-man made laws not written by lawyers are the laws of economics, and they are forcing more and more companies to reduce their reliance on outside law firms if the shareholders want their dividends. Law firms are not unique in this regard. Development of in-house legal capability is just another form of vertical integration that extends from corporate medical departments to in-house software production and pension management. All three activities call for highly skilled professionals, all are often done more economically within the corporation, and yet all three want to call on outside experts from time to time. Some large corporations also have built up their in-house consulting firms which offer management advice to various divisions of a corporation. All of these developments are driven not by the laws of the United States but by the laws of economics. The cost of our legal system is so immense that it will have to change and adapt to our shifting value system like all parts of our society.
Dr. Howard of the University of Virginia estimates the cost at 2 percent of our G.N.P. or about $66 billion -- a sum that would get attention even in the Federal budget. All estimates of this kind can be attacked, but even after many caveats, if we accept Dr. Howard's order of magnitude, it is a very substantial sum our society is paying for our system. Perhaps it is justified as the price we pay for a government of laws and not of men. On the other hand a cost benefit analysis might reveal a different answer. The American people will make that judgment. At the end of the day, a major factor in the public judgment of the law will rest on the public perception of fairness and how the pie is divided. While relatively little comprehensive research is available, we do have good data on one series of cases. The Rand Institute of Civil Justice has done a study of asbestos claims and reported that about $1 billion in compensation and litigation expenses had been spent by the end of 1982 on more than 20,000 open and closed liability claims. While the total is impressive, what strikes one as unfair and wrong is that only 37 percent of the payments of tried claims go to the injured party, the rest of the money goes to the lawyers. In other words, for every dollar received by the claimant, the lawyers collect $1.63. An ordinary person looking at these facts has to conclude that there is something wrong with the system. If enough people conclude this, the system will get changed, or bypassed, or ignored.
The way a market works, each law firm will react to the changing scene depending on how it reads the trends and how much effort it puts on planning its own future. The corporate graveyard is full of companies which failed to make the effort and it could happen to others.
It is not enough to say people have always picked on lawyers and cite everyone from William Shakespeare to Chief Justice Burger. This is true of all professions and corporations, but once again the survivors will be those who listen to the market and respond in an intelligent and positive way. In the case of the law, there are more than a few things going on that you can ignore at your peril.
Ordinary people caught up in some legal case often wonder about the economics and ethics of discovery procedures. These legal hunting licenses that produced over 30 million documents in the IBM case with a demand for many more, raise serious questions about the entire justice system. While new rules on discovery are now in effect, the ancient rules of economics will drive big corporate users of legal service to find other avenues of dispute resolution. It is human nature for lawyers not to want to shoot a cash cow like abusive discovery procedures, but it is equally true that good corporate managements will find ways to cut or even eliminate these costs over time. No profession has a monopoly on innovative ideas to solve a problem. Perhaps we should heed Justice Robert Jackson who said: "Discovery was hardly intended to enable a learned profession to perform its functions either without wits or on wits borrowed from the adversary."
When market forces make your product unattractive, most companies try to design new products and services at prices the public will buy and that produce a profit for the shareholders. Sometimes business tries other avenues to hold back tomorrow and artificially preserve the life of a business, product or service. Sometimes business lobbies for new laws to protect markets, give us a special tax advantage, preserve a local monopoly, or otherwise get an edge on our competitors. All this is played out in the legislative hall of the country or before the various commissions and regulatory bodies.
The legal profession, however, has invented a new method not subject to the democratic process.
The American Law Institute's attempt to rewrite the law on corporate governance without benefit of the legislative process is a cross between a new business guide for your rainmaker partners and a complete lack of understanding about how a business enterprise works and adds value to a society. The massive amounts of time and talent absorbed by these and other pursuits were described by Derek Bok, in his President's Report devoted to the law school, as "a massive diversion of exceptional talent into pursuits that often add little to the growth of the economy, the pursuit of culture, or the enhancement of the human spirit." The A.L.I.'s draft adds nothing to any of these three areas. The idea of lawyers who are judges rewriting or rejecting laws which were passed by the untidy legislative process, but which displease them in some way, is an old one, but one explicitly rejected by the Constitutional Convention. In the so-called Virginia plan put forward at the Convention, a scheme for a "Council of Revision" was an integral part of the proposal, this council, which was to be composed of judges and representatives of the Executive, planned to review each law passed by the Congress and approve or reject it, prior to its taking effect. This was a kind of a wise men's check on the product of the congressional democratic process. After much debate, this idea was rejected, but this has not prevented judges and lawyers from doing their best to make laws fit their own personal views. Justice Douglas stated that "when the Court used substantive due process to determine the wisdom or reasonableness of legislation, it was indeed transforming itself into the Council of Revision which was rejected by the Constitutional Convention."
The A.L.I. program goes even further in a process rejected by those who formed our basic Constitution under the guise of it rewrites laws no legislature has ever seen. Myner McDougal wrote some time ago: "Government by a self-designated elite -- like that of benevolent despotism or Plato's philosopher kings -- may be a good form of government for some, but it is not the American way." When the A.L.I. substitutes the personal judgments of its reporters for the law as we know it, we come close to the situation described by McDougal. This is true because the work of the A.L.I. tends to be cited by judges and thus works its way into case law without, in this instance, the benefit of case by case accumulation of opinions.
An early draft of A.L.I.'s opus gave the game away when it spoke of "the necessarily entrepreneurial role of the plaintiff's attorney." Although the term lawyer entrepreneur disappeared from later drafts, the entire work is shot through with advice on how to collect legal fees. One could conclude that the whole draft is designed to make it easier for the lawyer entrepreneur to get some monetary recovery and legal fees -- indeed some 26 and a half pages were devoted to proposed institute guidance on such fees. There is a section addressed to "the issue of plaintiff's attorney's fees because a viable litigation remedy depends upon a satisfactory system for the funding of the private attorney general." In the Council's draft No. 3, they return to the same theme of enhanced judicial authority to penalize nuisance actions "and a revised incentive structure for plaintiff's attorneys." The whole draft is based on the idea that somehow business's corporate governance is not operating effectively. Looking at the record of American business in a world economy, it is hard to make this case. Neither is there any evidence that a group of reporters writing down what they wish the law should be would improve the efficiency of business in creating wealth. In the very first part of the draft it says, "This chapter's primary thrust is to increase judicial oversight and to seek to provide appropriate incentives for meritorious actions, but also to redirect those incentives in order not to encourage improper or inadequate settlements." Many examples could be shown from the text but the basic problem was stated in Tentative Draft No. 1, "The objective of the project will be...to describe and ..." While this is a nice new business project for law firms, no evidence has been submitted suggesting that the current corporate governance structure does not serve the American economy well. Much less has any evidence been presented showing that tying the world up in derivative law suits would add to the wealth of the nation.
There may be a Corporate General Counsel who suggests rewriting the law without benefit of legislation, but I have not met one. It would seem to one observer that with the courts clogged to the point that they run the risk of the public losing confidence in the legal system, the bar might be well advised to turn its immense talent inward to reform its own system, which is clearly in need of repair, and not expend so much effort on trying to wring more fees out of attacking a system of corporate governance that clearly works better than the system of legal governance.
The way the world works all business judgments are made on incomplete information and thus mistakes will be made. The Edsel was perhaps the most thoroughly researched car ever brought to market, but it failed.
Since all investments are made by coming to a judgment about the future -- the kind of a car your spouse will want three years from now, for example -- mistakes will be made. That's the way business works -- a paper trail that would warm the reporters' hearts will not prevent a disaster, while a young person working in a company with no review process may write the software that becomes a great success. Care and deliberation have an important place in business, but do not insure success. More reviews and more lawyers to monitor the documentation on business decisions would reduce American competitiveness. Indeed, all American management thrusts are now toward less corporate bureaucracy, less paper, flatter organizations, and small business units with great autonomy.
Bill Kennedy once reacted to the system proposed in Council Draft No. 1 as follows: "An irreverent reaction is that the U.S. economy would be better off if only we could license such a system (royalty-free!) to our Japanese competitors, induce them to adopt it, and refrain from implementing it in this country. No one has said it better.
 At Peat, Marwick, Mitchell & Co. Forum on 9/24/84 at Arlington, Virginia
 Howard, Richard, The Wilson Quarterly
 Variation in Asbestos Litigation Compensation and Expenses, Rand - The Institute for Civil Justice, PG XVIII Published June 1984
 Jackson, Robert H., Hickman v. Taylor, 329 vs. 495, 516 (1947)
 Bok, Derek C., 3/1983 President's Report, pg. 6
 Flast v Cohen
 Quoted in Government by Judiciary, pg 314 - Bergen
 Council Draft No. I, page 250
 Tentative Draft No. I at 7.18
 Council Draft No. 3 at 221
 Tentative Draft No. I at 232
 Tentative Draft No. I at XXV
 Letter of January 28, 1982 to Messrs. Kaplan, Eisenberg, Guldschmid, and Coffee