Today we have the results of a Legal Week poll, which they summarize as follows:

"Merit-based pay for partners is sweeping UK law firms, but still struggling to win hearts and minds, according to new research that shows so-called eat-what-you-kill systems of reward are often unpopular with senior lawyers."

Specifically, respondents ranked the desirability of the four alternatives presented in this order:

• "modified lockstep" emphasizing merit:  37%
• pure lockstep:  24%
• "modified lockstep" emphasizing seniority:  20%
• pure EWYK:  19%

More telling, as usual, than the raw statistics are some of the comments.  A Debevoise partner proclaimed himself a "big believer in pure lockstep" since it "gets every partner pulling in the same direction," while an Addleshaw Goddard partner cautioned against a system that is "too merit-based:  You have to make sure the firm still behaves as a partnership and that work is allocated to the right people."

As evidence of the stresses and strains inherent to the territory comes word that Lovells, which just last November rejected proposals for a "bonus pool" above and beyond the lockstep base, is now re-examining that stance following the departure of some high-profile stars including private equity head Marco Compagnoni to Weil-Gotshal in February.   But resistance is keen:

"One partner told Legal Week: "There is not much appetite for it — there is a lot of concern about changing the culture of the firm." Another added: "We have a perfectly fine culture and I hope we can preserve it." "

"Colin Ives, professional practices partner at Smith & Williamson, says that, understandably, choosing a system of remuneration comes down to culture. "If a firm is operating a pure lockstep, is it the right culture for a firm?" he says. "It produces an extremely collegiate team, but can it put the brakes on aggressively expanding into new jurisdictions?""

In other words, if you need to vigorously pound the pavement for new work in a new city, the incentives may be weak for a spear-carrier to lead the charge—knowing that for all his risky efforts he'll receive pretty much what he would have had he kept the home fires burning.   From the same piece, not inconsistently, appears one of the more succinct defenses of lockstep (emphasis supplied):

"Cravath, like Slaughter and May, has a policy of not making lateral hires. This in turn makes it easier for a lockstep to function as all partners enter at the same level, and everyone knows that each partner is in it for the long term.

"In fact, a handful of highly profitable, successful firms have pure locksteps that go against the US ‘eat what you kill’ trend. Cleary Gottlieb Steen & Hamilton, Davis Polk & Wardwell, Wachtell Lipton Rosen & Katz, as well as Cravath, all boast collegiate cultures that they are proud of.

"English firms, however, seem less keen to promote the lockstep as a source of collegiality and equality, and more keen on tinkering with it as a management tool. One of the most recent examples of this is Ashurst, which has moved partners down the lockstep in a bid to raise the performance bar after profits dropped. Like fellow City firm Norton Rose, Ashurst was requested to leave two gateways into the partner-ship; partners who meet performance expectations at various stages can move up through these gateways. Crucially, however, under-performing partners can also move back down through these gateways."

Also back in 2004, Asian Legal Business ran a piece recapping the experience of various US, UK, and home-grown Asian firms in balancing the tensions between lockstep and EWYK.  While not providing any snappy comebacks to the implicit question, "What's best?," they at least pose the right questions: 

"While a single worldwide system offers simplicity, it may also prove to be too rigid. The use of local or salaried partnership status or even a so-called ‘super lockstep’ system may fudge many of these issues, but this can have profound implications for the culture of the firm worldwide.

"While there is much debate over the respective merits of lockstep or a merit-based approach, there is consensus among lawyers over what issues need to be addressed by a firm’s remuneration system. Any system, they say, needs to answer the following: does it motivate your best performers to perform; does it encourage partners to develop existing clients and to locate new ones; does it encourage partners to involve other partners outside their group or office; does it encourage the right behaviour in the firm to partners and all staff; does it enable you to keep partners in areas of significance to the firm which may be inherently less profitable than the rest of the firm; does it facilitate lateral hires; do partners think it fair; and, how much management time does it take to run?"

I would actually condense this (helpful) laundry list to the following:

• Does your compensation system reflect where your firm is in its lifecycle, and what its key strategic challenges are?  And, of surpassing importance:
• Do partners think it fair?

The answer to the second question is one only you and the executive committee can answer.

For the answer to the first, take a look at this, which I am confessedly reprising.  And good luck.

But today we have a lesson from "I, Cringely," a PBS-sponsored weekly columnist who you should be following if you have an iota of interest in the tech industry.  Here's this week's lead:

"After 29 years of working in high-tech companies and writing about them, I have noticed how insular they tend to be, often not seeing either the world or themselves at all clearly. Whether intended or not, this cultural artifact comes to control how the world in turn sees them, which rarely works in their favor. The classic example is Microsoft, where hiring smart people fresh from school and working them 60 hours or more per week -- in an environment where they don't even leave the building to eat -- leads to a state of corporate delusion, where lying and cheating suddenly begin to make sense. But it isn't just Microsoft that does this. It is ANY high tech company that hires young people, isolates them through long hours at work, feeds them at work, and effectively determines their friends, who are their co-workers. This trend even extends to the anti-Microsoft, to Google, where the light of day is sorely needed.

"Google is secretive. ... Google folks don't understand why the rest of us have a problem with this, but then Google folks aren't like you and me.   The result of this secrecy and Google's "almighty algorithm" mentality is that the company makes changes -- and mistakes -- without informing its customers or even doing all that much to correct the problems. It's all just beta code, after all. But the business part is real, as is the money that some people have lost because of Google's poor communication skills combined, frankly, with poor follow-through."

Who recognizes a familiar industry?

My point is not to laud or lambast Google, or Cringely for that matter—and it is certainly anything but to suggest that "lying and cheating" can ever "begin to make sense"—but it is to shine a momentary spotlight—and momentary, I have a high degree of confidence, is all it will be—on the acculturation principles abroad in the land of sophisticated, large law firms.

Specifically what "principle of acculturation" do I have in mind? 

Today, it's the increasingly questionable presumption that associates will work themselves to distraction in exchange for a presumptively fair, even if long, shot at partnership.

First comes this from Legal Week.  In a survey of 2,500 young lawyers, which they summarized as "foot soldiers turn backs on partnership dream," the key finding was:

"The Legal Week Employee Satisfaction Survey, carried out with the Chartered Institute of Personnel and Development, found that work/life balance was ranked ahead of other key factors in choosing a firm, such as culture and treatment by partners.

"The issue was even ranked as more important than ‘concrete’ factors such as salary, billable-hour expectations and partnership prospects in the research, which also includes detailed evaluations by assistants of individual law firms."

Perhaps even more shockingly, while 62% of males claimed they still aspired to partnership, only 40% of females did. 

As Legal Week's editorial summary of the results say:

'Signs are emerging, however, that the appeal of the traditional reward and career structure offered by law firms is diminishing, leading to growing levels of dissatisfaction among assistants and associate solicitors and some serious motivational and staff retention challenges for the profession."

Essentially, the juniors are feeling a disconnect between the relatively high ratings they give "hard" business and professional factors such as quality of work and reputation of their firm, and the quite poor marks they give the more "personal" aspects of work such as collaboration, partners' attitude towards them, and recognition and praise for good work.

This is even more so for those who feel alienated about the partnership carrot itself:  "Those who do not aspire to be partners at their own firms report significantly lower levels of satisfaction in almost all categories."

To me, the handwriting is on the wall:  With women constituting 50% of law school graduates, firms that have a reputation for being unattractive to people who will permit the words "work/life balance" to pass their lips will find themselves drawing from a smaller and smaller talent pool.

Meanwhile, David Maister responds to readers who want to know how to "keep the kids," and his answer is:

• challenges
• growth
• training
• stretching.

"What a young person needs (in addition to a good paycheck) - in fact what he or she MUST have ... the chance to build skills.  Without this, they can not develop themselves and have a career."

Of course, this puts an icy clarity to the question the firm must ask itself:  Are we really willing to trust that associates want to "stretch," will rise to the challenge of learning new skills, and—perhaps the key scary, unspoken thought—if I as the senior partner make sure I delegate some difficult assignments, will I remain valuable and rewarded?

I believe firms may increasingly find themselves in two camps.

• One set of firms will cling to the "safety" of tradition, keeping associates in the dark, as the second-class citizens they are presumed to be,  pointedly oblivious to "work/life" issues, letting the fungible young things sink or swim in the deep end of the pool they're being paid well to inhabit.
• Another set of firms will embark on the adventure of embracing this generation of graduates as true professional peers and colleagues, every bit as ravenous for challenge, stretching, and unfamiliar new assignments as we were—and will also embrace the reality that the highest form of human happiness comes not with work alone, but with work and with love.

The good news is that those of us blessed in work and in love are often the most productive and creative as well.  This is nothing more than centuries-old wisdom, but some of us lost sight of it at the end of the 20th Century.

Today, of course, this (properly) feels like ancient history, but Eli Wald, a law professor at the University of Denver College of Law, has undertaken a study revisiting the history of the divide and how it was eventually surmounted, with an eye to the question of whether there are lessons in that history for today's challenges of diversity in large law firms—both with respect to minorities and to women.

The professor is not hopeful: 

"Indeed, his research into the history of Jewish lawyers and firms in New York from the late 19th century to the present seems to leave him extremely pessimistic about the prospects for minorities and women today."

First, let's recap this history.

For essentially the first half of the 20th Century, the elite corporate New York bar was upper-class white Ivy-League educated Protestant.  (Cahill Gordon was the exception:  A Catholic firm.)  Jewish firms were plenty numerous—Wald calculates that 60% of the city bar's membership in 1960 was Jewish—but even such powerhouses today as Paul Weiss, Fried Frank, Kaye Scholer, Stroock-Stroock, Weil Gotshal, Skadden, and Proskauer were marginalized and focused on (perceived as) distasteful, down-market practices such as real estate, litigation, and bankruptcy.  Protestant lawyers, 18% of the total, handily accounted for more than half of those at large "corporate" firms.

The practices Jewish firms specialized in, theorizes Wald, gave them a "protected" ecosystem in which to develop expertise and, when corporate America came calling for more sophisticated legal services in areas such as litigation, antitrust, and M&A, the Jewish firms were ready to respond while the white-shoe firms were caught temporarily flat-footed.  Wald sees the establishment firms' willingness to hire Jewish lawyers as driven by the competitive realities of the marketplace—which changed in the 1970's.

When Wald asks if this experience holds out hope for women and minorities, he comes up empty-handed.  In a world of globally competitive firms racing to seize even the slightest comparative advantage, long gone is the opportunity for women and minorities to cultivate "protected practice areas."

Worse for women and minorities, the "flip side of bias" that perversely ended up working in favor of Jewish lawyers will do women and minorities no favors.  "Flip side of bias?"  Yes:  If Jewish lawyers were viewed as being overly aggressive and money-grubbing, that could suddenly become a powerful attractor to firms determined to toughly represent their clients and make money doing it.

But stereotypes about women (preoccupied with work/life balance, never going to be as dedicated as men) and blacks (lazy, intellectually inferior) will never redound to their advantage, posits Wald.

So then, pretty bleak, eh what?

Not so fast.

Discrimination based on presumptive stereotypes deprives firms of potential talent.  Need we be reminded that women are still 50% of the population?  You might as well write off everyone whose birthday falls on an even-numbered day.  As one of a couple of dozen Jewish partners Wald spoke to who joined large firms between 1945 and 1962 put it:

"You sort of had no choice, even if at your heart you were racist," one of Wald's interviewees told him. "You had to understand that the economics of the business could no longer support your racism."

And doesn't that indeed say it all?  "Economics does not support racism."

One or more smart firms are going to figure out how to incorporate women and/or minorities into their ranks in ways that will endure, and gain access to an inexcusably neglected talent pool thereby.  And who would suggest that such a competitive advantage will not soon be mimicked by less progressive, but equally profit-obsessed, peer firms?

I'm far more optimistic than Prof. Wald—not because I always trust people to "do the right thing," but because I always trust people to "do the right thing [for their self-interest]."

I'm pleased to report that I'll be attending Interwoven's annual "Legal IT Leadership Summit" this coming Monday through Thursday, May 22—25, at the Ritz Carlton/Bachelor Gulch, as Interwoven's guest, which is extremely gracious on their part.

The panel topics include:

• Redefining the Relationship between the Business and IT;
• Pragmatic Approaches to Knowledge Management;
• Architecting IT Governance and processes for the new business climate; and
• Information Management Strategies in Today’s Environment.

This particular annual IT conference surely ranks among the most valuable of the many offered by various firms and organizations throughout the year.  Here's a summary of what it's all about: 

"It is probably the one time in each year when I get the opportunity to have a real in depth debate with colleagues from either side of the Atlantic. The program, speakers and even timetable are set by the advisory board.” – Janet Day, CIO, Berwin Leighton Paisner

"The Legal IT Leadership Summit is an exclusive event that brings together 40-50 of the IT leaders (CIO's /Technology Partners) at the largest and most influential law-firms across the globe with the goal of discussing the most pressing challenges they face. The summit focuses on 3-4 issues that impact large global law firms in great depth. The format for each session includes keynotes by an expert on the subject followed by a moderated forum or panel discussion that drives questions and deeper discussions, sharing of success and failures and case studies.

"This year’s theme – Navigating New Frontiers, reflects that the business climate for law-firms is changing, and this shift is bringing new expectations of IT to provide simple solutions to increasingly complex challenges."

Unusually, the agenda is set entirely by the completely independent Advisory Board, and not by Interwoven.  The members of this year's Advisory Board are:

I look forward to seeing old friends, and to making new ones.

Anticipate a complete report right here on "Adam Smith, Esq." in a week or so.

I recently had the chance to interview Chris Marston, founder and CEO of Exemplar Law Partners, LLC, based in Boston, which has been open for business for all of about 90 days.  To say that Chris is embarked on an ambitious attempt to rethink the practice of law, down to its very roots, would be an understatement.   Just start with this, from "Our Approach":

"Exemplar is the first corporate law firm in the country to completely abandon the billable hour and exclusively adopt a fixed price business model. This progressive step forward in the legal industry is designed to better align our interest with our customers while enabling businesses to manage their legal budgets, and their expectations."

Certainly abandonment of the billable hour is the most attention-grabbing aspect of Exemplar's business model, but it's far from the entire story, nor is it even the most important part. Still, let's start there: When I asked Chris point-blank why he decided the billable hour had to go, he guffawed and said, "Did you ever Google 'billable hour'!?"   Well, if you haven't done it yourself lately, here are some of the top results:

• "The Tyranny of the Billable Hour"
• "Both reviled and ubiquitous, the billable hour is the cockroach of the legal industry..."
• The ABA Commission on the Billable  Hours Report (deeply critical of it)
• "The Billable Hour:  Putting a Wedge Between Client and Counsel"
• "The Curse of the Billable Hour"

...you get the idea.  In fact I've had some things to say about it myself, which also turn up in the results.

It probably won't surprise you to learn that Chris is a JD/MBA and comes at the challenge of how to re-engineer a corporate law firm from the perspective of an entrepreneur.  And he has some trenchant observations about why the billable hour has endured as long as it has:

• For starters, lawyers are risk-averse, look to precedent, and seek examples of proven success; as Chris puts it, these attitudes "don't really promote innovation and pioneering."  But he also has this to say about the motivations of those in a position to perhaps change things:
  • People who have the power to change it (partners in AmLaw 100 firms) "have a very high opportunity cost" of changing the status quo;
  • People in the middle, with mortgages and kids, don't have the wherewithal or the decisionmaking throw-weight to do it themselves; and lastly
  • Kids coming out of law school with debt north of $100,000 are in the poorest position of all to effect change.

Chris began by listening to all the complaints about the industry: nastiness, competitiveness, work/life [im]balance, lack of teamwork, and he decided you can trace many of those behaviors to the business model of the billable hour.   So out it goes.

He also asked another intriguing question:  Why do all the JD/MBA's who start their careers in law firms tend to leave?  And his answer (music to the ears of this economist):  "There's no economic value to the organization [the law firm] of a JD/MBA—they bill exactly the same hourly rate as a plain old JD.  But you know what:  This is crazy; that's a lot of talent leaving the industry who could contribute a lot."

Result:  Exemplar's lawyers will be expected to have serious business chops—if not JD/MBA's per se.  As they put it:

"Our entire team is comprised of experienced business people with advanced business degrees or significant business experience. We strive to be your strategic business partner, not just your legal counsel."

Many firms talk this talk; we'll see if Exemplar can deliver.

But back to billing, because that's where everyone's skepticism will focus:  How on earth can you set a fixed price for an engagement in advance?

The short answer is, if it's a large engagement, or litigation, you may not be able to fix a price for the entire matter (if you do, one side or the other will end up being burned, which is not a way to foster loyal, repeat clients). 

And Chris readily admits when asked that, "Managing scope of litigation is a real trick; you never know what your adversary or the judge will throw at you."  But, he continues, "the trick to fixed pricing isn’t about knowing everything that could be; it’s about knowing what’s certain. So you don’t price for everything that could conceivably happen; but you can price by the 'unit,' say, the cost for filing or replying to a motion, or taking or defending a deposition."

Further, Chris believes (as do I), that given a large enough "portfolio" of litigation—hypothetically, all of Home Depot's employment discrimination work in the Southeast for three years—that a firm with the wherewithal to  handle it (Exemplar isn't quite there yet...) could well quote a fixed price, perhaps with an escape clause for the litigation equivalent of an Act of God.  After all, the insurance industry has survived and profited for centuries on precisely this model, despite the occasional Katrina.

Does Chris see any room at Exemplar for hourly billing?  Say, for clients who ask for it?  Many of whom have been told by conventional firms, as Chris attests, that going off the hourly rate "is a way for you to get  hurt financially."  To the question of whether a fixed-fee will entail a built-in profit cushion for the law firm, to the client's disadvantage, Exemplar has this to say on their website:

"We are so confident we will deliver unmatched value in the services we provide that we encourage you to determine what the value of the service was worth to you based on your experience. If it was less than the price you paid, call us, articulate the shortcomings, and we will negotiate a fair price with you. What we ask in return is for you to define the unmet expectation, or explain how we could have better served you. In essence, you will be helping us make adjustments and improve our service.

"Providing and improving value to our customers is the primary measure of our success."

But second, pay attention to this:   The billable hour is premised on an inverse relationship between efficiency and profits; and fixed price billing is premised on a direct correlation between efficiency and profits.  Chris fundamentally believes that there’s no way to blend or alternate between the two. 

For starters, the technology infrastructure of billable-hour firms is designed to reduce only nonbillable time, not billable time.  For example, if you can retrieve a "model document" in five minutes through your KM system rather than in two hours through walking around and asking, we all know the five minutes is billable whereas much of the two hours would end up a write-off.

But conventional firms' technology does not, by and large, exist to economize on billable time.   And consider:   In a "blended" environment of fixed-rate work and billable work, where would your incentives lie?  To ask the question is to answer it:  The incentive would be to spend all your time on the billable matters and be done with the fixed price matter ASAP.  

Finally, there's the not-inconsequential issue of compensastion and incentives.  With a mixed bag billable- and fixed-price work, there’s no way to manage profitability because the workforce can’t think and behave in two different ways at once.   And benchmarks that tie rewards to one model cannot be grafted on to the other one.  Given human psychology, this means the firm would all but inevitably self-select into two camps, those pursuing billable work and those pursuing fixed-price work.

And if you don't think that would lead the Mother of All Wars at bonus season,...

You may have already surmised the answer to my next question for Chris:  "So there's no such thing as a partner or an associate?"  No, was the short answer; "everyone's a revenue partner."  But the longer answer was more revealing:  Exemplar is built on a corporate model, with a CEO, COO, CMO, and soon-to-be CLO, CFO, and "HCL" (Human Capital Leader). 

Moreover, the entire partnership superstructure has been ditched:   Because the problem with a partnership model is that it assumes equity, power, and profit share, are joined at the hip.  But the best management learning instructs that it's optimal to disaggregate equity (to the founders), power (to those who’ve earned it), and profits (to those who’ve earned it).

Who, then, can you recruit to buy into the Exemplar Law model?

People who:

• have entrepreneurial spirit;
• have business degrees, and/or business experience;
• believe in what they’re doing;
• have outstanding social skills;
• put character and values first and foremost—not just in the larger perspective of integrity, but in what kind of person you are:  How do you treat the waiter over drinks? Do you do fun things with your life?  Are you an optimist?

Is Exemplar the most unorthodox law firm I've ever encountered?  Are a passel of the ills besieging our profession to be laid directly at the doorstep of the billable hour?  Do a large cohort of clients prefer fixed fees?  Can, in fact, high-end legal services be priced that way?  Has Chris Marston drawn a line in the sand?   Yes, in spades, to all.

After ending my conversation with Chris, I was reminded of one of the more famous epiphanies in business history, when Intel, in the late '70's as a maker of the becoming-commoditized D-RAM chips, was having its lunch eaten by the Japanese, alternately petitioning Washington for trade barriers and frantically trying to chase the vanishing hare of accelerating cost reductions for the sake of survival.  Andy Grove—and this story helps one understand why he's Andy Grove—brought his three key people together in his office, closed the door, and said:

"If we don't fix this, we're all going to be fired by the Board.  And they will bring in new people who will start by questioning why Intel is in the D-RAM business.  So before the Board does it for us, let's walk out of this office and walk back in again as those new people.  Let's see what they would decide." 

The moral is not only that this is why Andy Grove is Andy Grove and you and I are you and I, but it's a story about not being afraid to break a little, or a lot, of china. 

As I said earlier, the Exemplar Law model poses several radical questions the the conventional model, the answers to which I believe are all resolutely in the affirmative.

Will Exemplar Law fly?  That, of course, is the only question on which the jury is well and truly out.

Thanks to an astute reader for pointing me to this more accurate reconstruction of the epiphanic moment at Intel:

Despite Intel's efforts, the Japanese producers kept gaining ground. "Their principal weapon was the availability of high-quality product priced astonishingly low," Grove wrote. By the mid-1980s, Intel's memory chip business continued to head south, with steadily declining sales and rising inventories. Grove felt that he and his colleagues at Intel had lost their bearings and were floundering for direction. In the middle of 1985 came a watershed moment. As Grove explains in a frequently quoted passage from Only the Paranoid Survive, he was sitting in his office with Moore, then Intel's chairman and CEO, discussing their situation. "Our mood was downbeat. I looked out the window at the Ferris wheel of the Great America amusement park revolving in the distance, then I turned back to Gordon and I asked, 'If we got kicked out and the board brought in a new CEO, what do you think he would do?' Gordon answered without hesitation, 'He would get us out of memories.' I stared at him, numb, then said, 'Why shouldn't you and I walk out the door, come back, and do it ourselves?'"

Courtesy of Prentice-Hall Publishing.

A loyal reader who has also become a friend writes that he has just re-read The American Lawyer's lead story on the AmLaw 100 for 2006 and he has some questions (emphasis supplied):

"Maybe I'm missing something, but the analysis seems flawed to me (though their conclusions may nonetheless be right). I know you've thought about this a lot more than I, so let me ask you. It seems to me that the comparsions the article draws between RPL [revenue per lawyer] and headcount growth are not all that helpful and may even be somewhat misleading.

"Classical micro theory would say add another lawyer as long as she contributes to profits. But the article seems to confuse - or at least be unclear about - the difference between diminishing marginal profitability per lawyer, absolute profits, and profit per partner. The profit maximizing partner would, it seems to me, keep adding associates until the last associate added provided no further profit. [...]

"Of course, getting your existing lawyers - fixed costs for purposes of this analysis since there is virtually no marginal cost if they work more hours - to do more work per head is more profitable than hiring additional lawyers.  But that does not mean adding more heads is necessarily bad, especially if heads are not fungible across work or if, in fact, the heads won't work more than 1850 billable hours."

The premise of the TAL piece, in turn, is, properly, in the lead:

"The historical data suggests that The Am Law 100, as a universe, is growing too fast in size to sustain its own long-term revenue expansion. All those additional lawyers are a drag on the growth of revenue per lawyer."

"Average billable hour statistics provide convincing evidence that last year The Am Law 100 had too many lawyers. Even at the 30 most profitable firms included in Citigroup's 2005 survey, partners and associates averaged only 1,850 billable hours."

"Of the 28 firms with head count declines in 2005, 16 achieved increases in RPL that beat the Am Law 100 average of 7.5 percent."

I'll have more of my own thoughts at the end.

But back to my friend's critique:  First, his observation that the piece does something of a mashup among the concepts of marginal profitability, absolute profits, and profits per partner is, essentially, well-taken, although to be fair the piece dwells more on revenue issues than profitability issues: After all, the sub-head of the article is, "Firms keep adding more lawyers, but converting bodies into revenue poses a challenge. It turns out, big isn't always better."

Second, he's absolutely correct as a matter of classical microeconomics that profit maximization occurs when one more unit of a factor of production (in this case, one more associate) provides no marginal profit. 

The nuance, in law-firm-land, is that you cannot build leverage to the sky regardless of what the accounting department tells you about the tradeoff between incremental expense and incremental revenue, because associates are not stupid and they will realize at some firm-specific, to-be-determined leverage ratio (you'll know it when you've hit it), that the brass ring of partnership has vanished so far into the distance that the premise of a tradeoff has become risible.   And they're out of there.

So the calculation has to incorporate not just current year or current quarter cash expenses, but the implicit cost of increased attrition as leverage rises (which is implicit, of course, only until it occurs, when it becomes quite explicit, even if never recognized as a cash item).

Finally, he properly recognizes that "if heads are not fungible across work," adding more heads can help significantly.  With this, no one would quibble, not even the TAL piece cited, which, indeed, pays obeisance to the universally acknowledged wisdom that firms "that are able to attract the highest percentage of rate-tolerant work, whether in the U.S. or internationally, will widen the gap between themselves and the rest of the firms in the AmLaw 100."

But there's far more to the story than that, and I wish to take issue with the piece's fundamental economic and statistical analysis.  One point where we differ is that I wish to take a longer-term perspective than their comparison of 2005 with 2004 and/or 2003.

As they rightly note:

"As a group, the firms of The Am Law 100 have never been very good at predicting how big they should be. Firms have typically grown based on past demand for their services -- which means that over the last 20 years there have been some calamitous mismatches between the supply of Am Law 100 lawyers and client demand for their time."

It's not, however, that simple.  It's not that the AmLaw 100 are particularly obtuse at gauging future demand; it's simply that we're an "elevator asset" business:  You cannot open or close the faucets of supply in a heartbeat.  This will never be a "just-in-time" supply chain.  

Hiring madly in an upswing entails the classic fallacy of buying at the top, and shedding madly in a downturn risks the opposite, of alienating talent and cutting capacity so aggressively that one is ill-positined to profit from a recovery.  (Indeed, I recently sat down with the managing partner of a tech-centric firm who was lamenting precisely the cyclicality of their business and exploring out loud opportunities to diversify in order to smooth the boom and bust swings.)

So I want to proffer not a 2- or 3-year comparison, but a 10-year comparison. 

Let's look at the 2006 AmLaw 100 vs. the 1996 AmLaw 100, and see how The American Lawyer's premises hold up.  1996 is, I believe, a particularly suitable year for a comparison to today.  It was, most importantly, a "normal" year:  It was well past the recession of the early '90's, and well before the tech/dot-com boom of the late '90's.  A time, in other words, much like today, with healthy but not insane growth.

What do the numbers tell us?  (Hint:  A very different story than The American Lawyer's take.)  Here's the raw material:

And here's what it all means:

• Absolute Growth in Revenue, 1996 — 2006:  +215.8%
• Inflation-Adjusted Growth in Revenue:  +146.5%
• Headcount Growth:  +83.9%
• Absolute Growth in Profits per Partner:  +126.9%
• Inflation-Adjusted Growth in PPP:  +99.1%
• Absolute Growth in Revenue per Lawyer:  +171.7%
• Inflation-Adjusted Growth in Revenue per Lawyer:  +134.1%

Now here's how The American Lawyer reads the numbers (to be sure, their comparisons focus on today vs. 1986 and today vs. 2004 and 2003) (emphasis supplied):

"In the U.S.'s 100 highest-grossing firms, in other words, additional lawyers are slowing the rate of revenue growth. Firms have continued to improve profitability by cutting costs, boosting efficiency, and making equity partnership more exclusive, but RPL remains the barometer of The Am Law 100's overall health. And, over the long term, RPL expansion is not keeping pace with head count increases."

• Ratio by which growth in RPL has exceeded growth in headcount (1996 — 2006):  171.7%/83.9% = 2.05.
• And using inflation-adjusted RPL:  134.1%/83.9% = 1.60

"Additional lawyers are slowing the rate of revenue growth?"  How do you read these numbers? 

Better yet, to what metrics are you managing your firm?  I'd bet a healthy cross-section of executives across corporate America would look on these figures green with envy.

Now they've got a sequel, as it were, up their sleeves:  Success Built to Last:  Creating a Life That Matters, which Wharton School Publishing will be bringing out in August.   In this interview with "Knowledge @ Wharton," they describe their motivation for the sequel and their findings.  I use the word "findings" advisedly, because "Success" is the fruit of deep research and interviews with hundreds and hundreds of successful people.

Intriguingly, the idea for "Success" came not from Collins and Porras, but from their readers.  Since virtually no one any more has a career at a single firm, people were trying to apply the lessons of Built to Last to their own careers, and as Collins and Porras began to pursue the metaphor of applying that book's lessons to an individual's career, they realized they were attempting nothing other than defining success.

"Success," then, would be?

"We found that three fundamental principles drive lasting success; these need to interact with one another and also to be integrated and aligned. We describe them in our first chapter in a diagram with three intersecting circles -- meaning, thought and action -- and the bull's eye is where they all come together. We found that individuals across the spectrum of professions were striving to find something that mattered to them in a very fundamental way. This prompted them to drive their thoughts to frame a way of producing those results -- and then acting on those results.

"If you take any one of those principles away -- for example, if you take meaning away from thought and action -- you might be successful in the short term. This is because you have a plan in your head and execute against it. But if your plan is disassociated from meaning, it might not matter. And it wouldn't have the meaning which sustains you through the inevitable challenges and difficulties of trying to create a career. That fundamental step of finding meaning, finding the passion that matters to you and that drives your behavior, is often skipped.

"When we interviewed people for our book, we learned that whether you are Jack Welch or the Dalai Lama, it is dangerous not to do what you love. If you don't have a level of passion that drives your thinking about what you're doing day in and day out, there will be others out there who are passionate who will overtake and outrun you. People who care will take the initiative away from those who are half-hearted. So loving what you do is a competitive imperative, not simply a nice thing to have." (emphasis supplied)

Of course it's not the worst thing to have a couple of mega-best-selling authors agree with you, but I have said this before, phrased slightly differently: Unless you're passionate about what you do, there'll be somebody down the hall who is, and when you're operating at 85% and he's operating at 110%, he will win.

There's more:  Successful people don't strive for "success," and they operate in a mode of continuous learning.

How could people not strive for success?!  Isn't that ultimately the name of the game?  I analogize it to happiness in one's personal life.  Happiness and success are not characteristics or states of being that can be pursued per se.  Rather, the choices one makes, the beliefs and values one holds, the activities one pursues, are what one chooses:  And happiness and/or success do or do not spontaneously emerge on the other side.

Collins and Porras say as much:  If you ask successful people how they think about success, the answer is that they don't:  "they start out to be very good at what matters to them," and then when the stars align success ensues.

Finally, they are "continuous learners," meaning they harvest the lessons of both success and failure, and they never ever blame others for their failings (intriguingly, the authors cite Sen. John McCain as an example of someone who has always refused to be a victim). 

"These people were very consistent about looking to success and failure as feedback. In other words, it's all input. Sometimes, success can make you sloppy, just as a setback can make you [understand] more clearly what works and what doesn't."

So we have:

• finding your passion;
• becoming very good at what you love rather than pursuing "success" in the abstract; and
• truly, honestly, with rigor and clarity, learning from your wins and your losses.

Tall order?  Actually, it sounds like a life well lived to me.

Across the pond, anti-age discrimination regulations are going to go into effect in October, and firms are already bracing for their impact.  This is what they require, in a nutshell:

"The Regulations apply to employment and vocational training. They prohibit unjustified direct and indirect age discrimination, and all harassment and victimisation on grounds of age, of people of any age, young or old."

In other words, not just the old, but also the young, may allege discrimination. And the regulations apply to all private sector activities, regardless of how remote their connection with government or public sources of funding.   Finally, note the somewhat oblique reference to "vocational training," which is elsewhere clarified to make clear that any age-related favoritism in providing professional development must be strictly justified.

So much for blithely assuming that 3rd-year associates need different types of instruction and coaching than do senior partners.

But UK law firms are already taking the matter seriously.  Eversheds pre-emptively dumped its six-tier lockstep in favor of "a scheme based wholly on performance criteria, including fee income generation, profit and strategic value, client service and behaviour."  Said Alan Jenkins, Eversheds' chair, "There's real doubt as to whether lockstep is lawful under that law," since it obviously incorporates age and tenure into remuneration.

Elsewhere, consultants are beavering away advising firms on the implications of the regulations for recruitment, retention, and retirement.  Consider this advice glibly proferred: 

"Do you require a minimum length of service, a minimum age or a minimum number of years post-qualification experience before a [lawyer] can be admitted to partnership? If you do, this is discriminatory to younger [lawyers] under the regulations."

I see.  If you believe this, so much for the Cravath system.

Actually, I find this fellow's claim implausible, although certainly successful at focusing one's attention.  In the event, I have to believe that the literal terms of the regulation would yield to sturdy common sense, and a recognition that in fact a first-year associate is an utterly different animal than a tenth-year.

There's another, even more bizarre, component:  Evidently "those aged 65 and over are completely excluded from complaining about mandatory retirement, or about being discriminated against on grounds of their age."

In other words, the law comes pre-packaged with a default mandatory retirement age of 65. But for those under 65, the regulations promise a free-for-all:  One Ashurst partner logically predicts that "every single application to an employment tribunal will start to have age discrimination as a part of it."  And why not?

Permit us to step back.

First off, far be it from me to wish age discrimination (properly understood) upon any senior:  With luck, we'll all be there some day.  But doesn't this regulation invite the Law of Unintended Consequences right through the front door and into the parlor?   Among other things:

• The Ashurst partner is surely right when she predicts a count of age discrimination will be xeroxed into every employment matter; is this a productive use of professional resources?
• From now until the time the regulation takes effect (in October), it will be a free-fire zone on those marginally productive employees under 65 who are currently unprotected:  Best get rid of them now before they have another arrow in their quiver.
• The "expiration," as it were, of age-discrimination protection at age 65 strikes me as breathtakingly obtuse.  Consider that one of the Truly Serious Problems in the western world in the next 20—50 years is underfunded social security and pension schemes, and the UK is evidently now issuing carte blanche to employers to offload everyone 65 and a day?  Let's just suppose a non-trivial proportion of those seniors wants or needs to keep working to support themselves?   I don't know what your plans are, but I don't intend to retire until I have to be removed bodily.
• As well, we have the delightful stigma that will now attach to youngsters enjoying privileges not granted earlier generations, and to oldsters mildewing in their tenured saddles:  You can hear the muttering already, "If it weren't for that damned law,..."  So much for the presumption of meritocracy.  (If you doubt me, look at the consequences of affirmative action and preferences here; could you create a more toxic imperative for an organization than to put its thumbs, at government insistence, on the scales of talent?)

So is "age discrimination" an entirely imaginary problem that requires nothing more than the magical unfettered hand of the laissez faire market to eradicate it?  Actually, I would very much like to think so.  I would like to think that "recruitment, retention, and retirement" decisions, as our friend the alarmist consultant puts it, are always determined by pure objective merit.  But of course that would be too simple; we are human beings, after all.

Charles Green (co-author with David Maister of "The Trusted Advisor") just sent me his new book, "Trust-Based Selling," and although I've only started it, he makes the psychologically trenchant point that, in making a complex buying decision, people will first "screen" for basic qualifications (a law firm I've heard of, a lawyer who's done this before, reasonably convenient, fees that don't make me gasp, etc.), but after the "screening" comes the critical part:  The selection.

And the selection is almost never (OK, you purchasing executives in the audience excepted) about rational criteria:  It's about trust.

So the moral of this story is that when we make complex hiring, promotion, and alas firing decisions, there are always rational prerequisites involved; but pulling the trigger comes from our gut.  It is therefore impossible to exclude, a priori, the possibility of discrimination.

The good news is that systemic discrimination leads to suboptimal economic performance, and ultimately harsh punishment in the marketplace.   And it does not endure:  Show me a "bulge bracket" New York law firm today whose lawyer ranks are Ivy League-educated WASPs and I will congratulate you on inventing your own way-back machine.  In the meanwhile, let's hope this UK regulation is one Anglo-Saxon legal idea that does not travel well.

I'm not being facetious; well, CIO magazine is not being facetious, anyway, when it features this as its cover story. Add in McKinsey's just-released "Two new tools that CIOs want," and we have a potential "technology architecture transformation beginning to take shape."

If past is prologue, astute and adaptable firms will foresee this wave coming and will gain, if not a permanent, a sure-fire cyclical, competitive advantage. 

McKinsey first, on what "two new tools" you want:

• "server virtualization (which helps companies improve the match between their computing capacity and their application workloads, so that they can do more with fewer machines) and
• "software as a service (which allows IT departments to offload the delivery and maintenance of software applications)."

For the non-techies in the audience, server virtualization solves a seemingly odd problem, which is that in almost any computer network, the servers don't actually work very hard at all.  A common estimate, in fact, is that in a mixed environment of servers running Windows, UNIX, and Linux (a ubiquitous scenario), each machine is typically uses only 5-15% of its capacity. 

"Virtualization," a software application,enables any given hardware server box to run (say) all through operating systems at once, and all the applications that run on top of each, boosting utilization to 40% or more, while retaining the ability to meet peak demand.  A corollary benefit is that applications themselves can be distributed across multiple machines, so a temporarily overtaxed box can "hand off" a processing job to a comrade.

The benefits are financial, and real:

"One CIO with a budget of $600 million told us that his company has virtualized 30 percent of its servers and plans to have 60 percent of them virtualized within two or three years. He expects to reduce capital expenditures during the next server-refresh cycle by 30 percent and to reallocate the savings to different projects."

The other initiative, software as a service delivered over the Internet, means that "rather than purchasing and deploying applications inside the enterprise, many companies are buying access to externally hosted applications."  You only pay for the software as you use it, and it's essentially a form of outsourcing. With the model of outsourcing to a dedicated vendor who does one and only one thing come the classic benefits:

• economies of scale as the vendor can amortize upgrades across a multitude of subscribers;
• highly specific expertise focused on the single application and nothing else;
• with the result that deploying an application as "software as a service" rather than the conventional install-locally, license-and- upgrade, can save 30% or more and cut deployment times from 6 to 24 months to, essentially, however long it takes to finalize the contract.

Those two developments may sound altogether IT-land and techie, but a salient component of my philosophy of law firm management is that the CIO deserves "a seat at the table" at any firm that thinks it operates in the 21st Century, so these are Executive Committee and Managing Partner, not just IT, issues

But the Google story, courtesy of CIO, is sexy enough for any dinner party conversation.

Here's how CIO sets the stage:

"In the Google-future, IT will be more scalable, agile and cost-effective. But it will also be less controllable by CIOs. This will require CIOs to adopt a new mind-set for how they manage the use of IT in their company. Those who succeed will be free to focus on driving innovation; those who fail will be fighting a battle they're destined to lose.

"CIOs need to understand that it is a whole new world."

Google's power, and the threat it poses to incumbents, has little to do with search or with advertising, although those are readily grasped innovations we all can appreciate—just as we say to ourselves, "Why didn't I think of that?"

Google's power is something unseen and largely unknown:  Its hardare infrastructure.  Would it surprise you to learn that Google is the third largest server manufacturer in the world?  And, although "Google treats its infrastructure as a closely guarded secret. It doesn't allow outsiders into its data centers," an educated guess by an independent consultant who focuses on Google estimates the firm now has 150,000 servers spread across 24 data centers.

To some observers, Google's business trajectory so far has seemed like somewhat random, opportunistic growth.  That could be a ruinous under-estimation of them if you're going up against them competitively:

"IBM executives in the early 1980s didn't understand what Microsoft was," says [an analyst].  "Now Microsoft is in the same spot, and they are trying to understand what Google is. And they're having a hard time."

In the traditional corporate/firm IT infrastructure model, the CIO and his advisors choose which applications users will and will not have, and people have no choice but to dine from the set menu. By contrast, at home people are free to choose what applications they'll have on their PC's.   As Google moves more and more applications to the Web, people who like them at home will exercise enormous pressure to have them available at work as well.

But what CIO in their right mind would give up control?  Aren't CIO's all about (among other things) security, audit trails, and locking down options?  It sounds as though no one at Google would disagree:

"At its core, however, Google's enterprise strategy will remain viral. It won't try to convince CIOs to replace the applications they already have with Google versions. Instead, Google will continue to produce products that people like using and will use—at home and at work.

"It will happen without people noticing," says [Dave] Girouard [head of Google's enterprise applications], prophetically. "People look for a eureka moment but things just seep in. That's what's happening here."

In other words, one of these days you could wake up and find that most of the applications your company uses are provided by Google. That's a vision bound to keep most CIOs on edge."

Never happen?  Remember that few saw Microsoft coming either.

And if you believe today's New York Times' lead business story, now Microsoft and Google are "grappling for supremacy."  And in this war, the key determinants of who wins are (a) ability to adapt to change rather than remaining prisoners of their past success; and (b) recruiting and retaining the best and brightest people.

"One area where Microsoft and Google are really competing head-to-head now is in the war for talent," said Richard S. Tedlow, a historian and professor at the Harvard Business School. "Historically, the company that won the war for talent, won the war."

Whoever wins this latest commercial war, it seems clear that our fundamental technology platform is shifting beneath us, from the desktop to the Web.

Law firms that get there first—while still, to be sure, maintaining rigorous standards in non-negotiable areas like document retention—will be able to respond with more alacrity, will be able to invest less in home-grown infrastructure, and will benefit from "best of breed" applications developed at a cost spread over millions of users.

And another thing:  People might actually enjoy having a little choice.

"The dismal science?"  You won't be surprised to hear that that's about the last way I'd describe the art and discipline of economics, and a new book, Knowledge and the Wealth of Nations, reviewed by Paul Krugman in yesterday's Sunday Times Book Review sounds like a wonderfully exciting intellectual exploration of why I believe economics retains its ability to fascinate as it attempts to explain how people, ideas, and things interact to try to produce value.

 The author, David Warsh, a former economics correspondent at the Boston Globe, Forbes, and The Wall Street Journal, writes the online weekly, "Economic Principals."  The book tells the story of how academic understanding of increasing returns to scale, and indeed of growth itself, was revolutionized in the past few decades by introducing the concept of knowledge itself as a factor of production, at long last joining the classical triumvirate of land (a/k/a tangible resources), capital, and labor.

When a book gets advance praise like this, the reason I continue to adore economics should be clear:

“Romer’s understated but earth shattering work deserves our attention and a Nobel prize in economics.”
— John Doerr, partner, Kleiner Perkins Caufield & Byers

In a nutshell, after spending part of the weekend generating four pieces on the 2006 AmLaw 100 (released last Friday)—here, here, here, and here—first thing Monday I returned a phone call from an assistant general counsel at ALM Media who proceeded to tell me that everything I'd written violated their copyright in the AmLaw 100 and that I must take it all down forthwith.

I did not, and I did what any lawyer with himself for a client would advise:  Call in the experts.

The good news is I learned a lot about copyright and fair use thanks to the superb counsel and advice I was able to draw upon, ranging from nearly a dozen readers, many of whom I'd never heard from, who offered their thoughts in personal emails (which were without exception generous and supportive) to a few friends who happen to be IP lawyers, to another friend who's the heaviest hitter of all in this area, as General Counsel of a major publicly-traded media organization.  (You know who you are.)

Consider what follows, then, a small effort to repay the collective efforts of the blogosphere, and an attempt to memorialize what I learned in hopes it might be useful in future to someone finding themselves in a similar situation.

One motivation for doing this is the remark of an IP practitioner and friend who, unsolicited, volunteered the opinion that "There are entire in-house law departments devoted to sending out legally unjustified cease and desist letters." And the truly bad news is not that dismaying commentary on the paucity of ethics, but his additional observation that far more than half the time, threats work.

For starters, my law school alma mater has a much-more-than-decent guide to fair use online.

But to get to "primary sources," the leading cases hereabouts are Feist Publications, Inc. v. Rural Telephone Service Co., 499 U.S. 340 (1991) and Harper & Row v. Nation Enterprises, 471 U.S. 539 (1985).

Feist was a dispute over whether Feist, a directory publishing service, could copy telephone-book white page listings from Rural Telephone's directories and reproduce them in its own directories.  As Justice O'Connor felicitously put it:

"This case concerns the interaction of two well-established propositions. The first is that facts are not copyrightable; the other, that compilations of facts generally are. Each of these propositions possesses an impeccable pedigree."

"facts do not owe their origin to an act of authorship. The distinction is one between creation and discovery: the first person to find and report a particular fact has not created the fact; he or she has merely discovered its existence. [...] Census-takers, for example, do not "create" the population figures that emerge from their efforts; in a sense, they copy these figures from the world around them."

Compilations of facts, on the other hand, may possess originality, but since facts themselves do not become original through association together, "This inevitably means that the copyright in a factual compilation is thin."

The heart of the distinction is explained thus:

"No matter how much original authorship the work displays, the facts and ideas it exposes are free for the taking . . . . The very same facts and ideas may be divorced from the context imposed by the author, and restated or reshuffled by second comers, even if the author was the first to discover the facts or to propose the ideas.

"It may seem unfair that much of the fruit of the compiler's labor may be used by others without compensation. As Justice Brennan has correctly observed, however, this is not "some unforeseen byproduct of a statutory scheme." Harper & Row, 471 U.S., at 589 (dissenting opinion). It is, rather, "the essence of copyright," ibid., and a constitutional requirement. The primary objective of copyright is not to reward the labor of authors, but "to promote the Progress of Science and useful Arts." Art. I, § 8, cl. 8. Accord Twentieth Century Music Corp. v. Aiken, 422 U.S. 151, 156 (1975). To this end, copyright assures authors the right to their original expression, but encourages others to build freely upon the ideas and information conveyed by a work. Harper & Row, supra, at 556-557. This principle, known as the idea-expression or fact-expression dichotomy, applies to all works of authorship. As applied to a factual compilation, assuming the absence of original written expression, only the compiler's selection and arrangement may be protected; the raw facts may be copied at will. This result is neither unfair nor unfortunate. It is the means by which copyright advances the progress of science and art. "

"Making matters worse, these courts developed a new theory to justify the protection of factual compilations. Known alternatively as “sweat of the brow” or “industrious collection,” the underlying notion was that copyright was a reward for the hard work that went into compiling facts. The classic formulation of the doctrine appeared in Jeweler's Circular Publishing Co., 281 F., at 88:

“The right to copyright a book upon which one has expended labor in its preparation does not depend upon whether the materials which he has collected consist or not of matters which are publici juris, or whether such materials show literary skill or originality, either in thought or in language, or anything more than industrious collection. The man who goes through the streets of a town and puts down the names of each of the inhabitants, with their occupations and their street number, acquires material of which he is the author” (emphasis added)."

"The “sweat of the brow” doctrine had numerous flaws, the most glaring being that it extended copyright protection in a compilation beyond selection and arrangement -- the compiler's original contributions -- to the facts themselves. Under the doctrine, the only defense to infringement was independent creation. A subsequent compiler was “not entitled to take one word of information previously published,” but rather had to “independently work out the matter for himself, so as to arrive at the same result from the same common sources of information.” Id., at 88-89 (internal quotations omitted). “Sweat of the brow” courts thereby eschewed the most fundamental axiom of copyright law -- that no one may copyright facts or ideas. See Miller v. Universal City Studios, Inc., 650 F. 2d, at 1372 (criticizing “sweat of the brow” courts because “ensuring that later writers obtain the facts independently . . . is precisely the scope of protection given . . . copyrighted matter, and the law is clear that facts are not entitled to such protection”)."

"[D]id Feist, by taking 1,309 names, towns, and telephone numbers from Rural's white pages, copy anything that was “original” to Rural? Certainly, the raw data does not satisfy the originality requirement. Rural may have been the first to discover and report the names, towns, and telephone numbers of its subscribers, but this data does not “'owe its origin'” to Rural. Burrow-Giles, 111 U.S., at 58. Rather, these bits of information are uncopyrightable facts; they existed before Rural reported them and would have continued to exist if Rural had never published a telephone directory."

So the handwriting of the holding is on the wall, as it were:  Feist did not infringe Rural's copyright:  "copyright rewards originality, not effort."

The other case, Harper & Row v. Nation, has a much sexier set of facts.  But the real reason we're interested in it is that it's the primary authority on the parameters of "fair use."

Shortly after President Gerald Ford left office, he negotiated a book deal for his memoirs with  Harper & Row, which subsequently sold pre-publication rights of an excerpt dealing with Ford's pardon of Pres. Nixon to Time magazine for $25,000.   About ten days before the Time excerpt was to run, The Nation magazine (under the famous Victor Navasky) obtained a purloined draft of the Ford memoir and published a 2,500-word story on it, deliberately scooping Time and lifting 300-400 words verbatim, albeit of course with attribution, from the Ford memoir.  Time magazine promptly cancelled the story and refused to pay the second half of the $25,000, which was still owing.  Harper & Row then sued The Nation for copyright infringement.

The Southern District of New York (557 F. Supp. 1067 (SDNY 1983)) found for Harper & Row and rejected The Nation's defense of "fair use."

The Second Circuit reversed (723 F.2d 195 (2d Cir. 1983)), endorsing the defense of "fair use" and finding under the four tests enumerated in the Copyright Act (17 U.S.C. § 107), as follows:

• the purpose of the article was "news reporting,"
• the original work was essentially factual in nature,
• the 300 words appropriated were insubstantial in relation to the 2,250-word piece, and
• the impact on the market for the original was minimal.

The Supreme Court, in turn, reversed again, rejecting The Nation's "fair use" defense.  Its discussion of the four factors is the heart of the opinion.

• Purpose of the Use:  In general (there are no bright lines here—this is an "all the facts and circumstances" inquiry), nonprofit uses are favored over for-profit ones, news reporting and other "productive" uses are favored, and a "true scholar" is favored over "a chiseler."
  
• Nature of the Copyrighted Work:  The law "recognizes a greater need to disseminate factual works than works of fiction or fantasy," presumably on the theory that facts educate regardless of where they originated whereas fiction or fantasy is at its core the expression of the author.  Also critical in Harper & Row was that the Ford memoirs were unpublished when The Nation purloined them:

  "While even substantial quotations might qualify as fair use in a review of a published work or a news account of a speech that had been delivered to the public or disseminated to the press, see House Report at 65, the author's right to control the first public appearance of his expression weighs against such use of the work before its release. The right of first publication encompasses not only the choice whether to publish at all, but also the choices of when, where, and in what form first to publish a work."

• Amount and Substantiality of the Portion Used:  This is perhaps the single one of the four "tests" that most readily comes to mind when discussing fair use, but it needs to be stressed that the emphasis on the qualitative "substantiality," not the quantitative "amount:"  As the Supreme Court put it, "In absolute terms, the words actually quoted were an insubstantial portion of "A Time to Heal." The District Court, however, found that '[T]he Nation took what was essentially the heart of the book.' [...]  A Time editor described the chapters on the pardon as 'the most interesting and moving parts of the entire manuscript.'"
  
  The fact that the purloined 300-400 words were certainly less than 1% of the memoir manuscript, in other words, cuts no ice.
  
• Effect on the Market:  Finally we get to my favorite test, the economic impact of the alleged infringement, and the Supreme Court evidently is of the same view:  "This last factor is undoubtedly the single most important element of fair use."  Indeed, quoting the estimable Nimmer, they say "Fair use, when properly applied, is limited to copying by others which does not materially impair the marketability of the work which is copied."
  
  Since Time reneged on its agreement to pay the second installment of royalties to Harper & Row, the economic impact here was obvious. But the Court went further:

  "More important, to negate fair use, one need only show that, if the challenged use "should become widespread, it would adversely affect the potential market for the copyrighted work." Sony Corp. of America v. Universal City Studios, Inc., 464 U.S. at 451 (emphasis added)"

  In other words, courts will consider not just the isolated alleged infringement, but how the world would look if they approved a pattern of same.

Held:

"The Court of Appeals erred in concluding that The Nation's use of the copyrighted material was excused by the public's interest in the subject matter. It erred, as well, in overlooking the unpublished nature of the work and the resulting impact on the potential market for first serial rights of permitting unauthorized prepublication excerpts under the rubric of fair use. Finally, in finding the taking "infinitesimal," the Court of Appeals accorded too little weight to the qualitative importance of the quoted passages of original expression. In sum, the traditional doctrine of fair use, as embodied in the Copyright Act, does not sanction the use made by The Nation of these copyrighted materials."

Applied to what I did here on "Adam Smith, Esq." last weekend with the AmLaw 100 statistics, I concluded that my use of their non-copyrightable facts advanced knowledge and was newsworthy in its own small way, that I did not deprive them of any publication rights of their own, and that my analysis of their raw data increased, if anything, the economic value of their initial listing.

Again, I would like to humbly and graciously thank all those who contributed to my education on this topic.   My devout hope is that this piece will help, in some small way, a future target of a claim of copyright infringement to understand the pertinent law and to govern their behavior accordingly.

Click here to open a larger version of the chart in a new pop-up window.

Questions and comments are always welcome.

CFO magazine (along with the usual sources) reports that at Raytheon's annual meeting yesterday the  company announced that it would freeze CEO William Swanson's salary at its 2005 level and reduce his restricted stock eligibility by 20%.  Not that he's suffering:

"In 2005, Swanson’s salary was $1,120,934, up 15 percent from the prior year. His restricted stock awards were worth nearly $3 million, up more than 25 percent from the prior year. Altogether, Swanson earned more than $7 million last year."

You will recall that The New York Times broke the story last month that Swanson's claim to fame in CEO-dom, "Swanson's Unwritten Rules of Management," was plagiarized nearly wholesale from a 1944 book, "The Unwritten Rules of Engineering," by W.J. King, an engineering professor at UCLA. The similarities were discovered by Carl Durrenberger, a chemical engineer and—surprise—blogger, in San Diego.

Before the plagiarism discovery, Raytheon had distributed 250,000—300,000 free copies (reports differ) of Swanson's booklet, and Swanson had gained more than a bit of fame for his folksy aphorisms, such as "Be extremely careful of the accuracy of your statements."

Raytheon has, to state the obvious, stopped distributing the booklet, and here's what they had to say about the wrist-slap given Swanson:

"The two officials also stressed that the board is taking the matter very seriously. Nevertheless, they insisted, the situation shouldn't overshadow Swanson's "extraordinary vision and performance" in leading the company during the past three years."

As for "extraordinary...performance," I beg to differ.  Here's Raytheon's stock price (blue) vs. the S&P 500 (green) for the past three years. To my eye, it pretty much looks like Raytheon is pacing the index:

However you choose to interpret the chart, "extraordinary" performance it is not.

Now, why are we taking this detour from "the economics of law firms?"

Integrity, character, and trust.

Without them, your CEO, or your managing partner, is quite literally nothing and no one.  Forgive me for stating the obvious, but this is something Raytheon's Board of Directors evidently could afford to be reminded of.

The firm claims to subscribe to these values, among others:

• "Integrity
  • Be honest, forthright and trustworthy.
  • Use straight talk; no hidden agendas.
  • Respect ethics, law and regulation."

Now, don the hypothetical hat of any employee, from factory worker to senior manager, at Raytheon, and tell me whether you buy that value statement.

The "message sent" by the  Board was, we "tak[e] the matter very seriously."   The "message received" by the world was, "Swanson's still CEO."  I am deeply distressed at having to say this, but when will people learn? Integrity is simply non-negotiable. Full stop.

It is with pleasure and relief that I can report that I plan to leave all of my analyses of the raw AmLaw 100 statistics (here, here, and here) up on "Adam Smith, Esq." despite ALM Media's request that I take them down as violative of their copyright.

The blogosphere is justly famous for constituting an on-demand network of "collective intelligence," and it has confirmed that reality in spades for me over the past 24 hours.  I've had the benefit of the counsel of nearly a dozen IP and non-IP lawyers, including the general counsel of a major media outlet, and have concluded that my reinterpretation and manipulation of the AmLaw figures is well within my rights to publish.