Nobel Prize in Economics/2008

Not every day do we get a new Nobel Prize winner in Economics, not to mention one whose name, Paul Krugman, might actually be familiar to more Americans than the few of us who are poor closet economists. Krugman is of course not only a Princeton professor (we pause to take pride here in the home team), but a regular op-ed columnist in The New York Times where he is known for wielding a hatchet against all things touching or concerning the Bush Administration.

As for his Times op-ed columns, we are, as you know, resolutely apolitical here at "Adam Smith, Esq." Perhaps the best that can be said of those is that we come not to praise but to bury them in the context of his winning the Prize. Or, as was said more pungently in Australia's National Post, "You don't get the Nobel Prize in Economics for writing newspaper columns (as I've been trying to explain to my mother the last couple of days). So the prize awarded Monday to Paul Krugman should not be read as an endorsement of Krugman's uber-Democratic newspapering."

Actually, I'll give the last word on his Times op-eds to his fellow columnist Maureen Dowd:

"I'm not sending Paul Krugman Champagne.

He won the Nobel prize in economics this week, and while I'm sure that's delightful for him, it has raised the bar to an impossible height for his fellow columnists at The Times. We used to strive for Pulitzers, or simply regional awards, or even just try to top each other on the paper's most e-mailed list.

Now we're supposed to compete for Nobels?"

We're here to take a brief interlude, a detour, if you will, into economic theory and into what Krugman's Nobel is all about.

Classic models of trade between countries, stemming from David Ricardo's shockingly brilliant concept of "comparative advantage," predicted, in theory, that trade flows would depend on such things as ratios of capital to labor, with capital-rich countries exporting capital-intensive goods and importing labor-intensive goods from labor-rich countries.

But that's not what the data showed. In reality, most international trade takes place between countries with very similar capital:labor ratios.

Krugman sought to, and succeeded in, explaining this. His explanation was based on economies of scale and on transaction costs across distances. What does this mean?

Economies of scale mean that producer incentives are to concentrate production in a limited number of locations. Too abstract? Let's make it concrete: There's a reason Silicon Valley is a self-reinforcing hub of high technology and innovation in general. An engineering and entrepreneurial culture combined with venture capitalists combined with a world-class research university (Stanford) combined with a very start-up friendly business ecosystem has made it a hotbed for new companies.

Similarly, New York and London are likely to remain global financial centers as far as the eye can see. They both have the infrastructure that sophisticated financial professionals depend on. Permit me to state the obvious ones:

• English
• Entrepreneurial cultures
• The Anglo-Saxon common law tradition, and the rule of law
• An indigenous infrastructure of banks, law firms, marketing professionals, and all the multifarious support professions.

And the less obvious:

• Workable, if not Asian-clean-slate, physical infrastructures
• Terrific international air connections
• Fabulous stores, restaurants, museums, parks, and schools
• Great, and highly diverse, residential and commercial real estate

But back to Krugman.

He described his basic findings in the 1992 "Geography & Trade:"

"Because of economies of scale, producers have an incentive to concentrate production of each good or service in a limited number of locations. Because of the cost of transacting across distance, the preferred locations for each individual producer are those where demand is large or supply of inputs is particularly convenient -- which in general are the locations chosen by other producers. Thus [geographical] concentrations of industry, once established, tend to be self-sustaining."

An example he used was that the auto industry in capital-intensive Sweden exports cars to capital-intensive America while also importing cars from America.  The logic is that both Volvo and GM can reduce costs by producing a relatively large output (sufficient to satisfy worldwide demand) in particular geographic niches where the requisite inputs are concentrated. 

Krugman, of course, was building on the theory of comparative advantage, which he explained perhaps most famously in "Ricardo's Difficult Idea." Comparative advantage is a theory at once powerful and notoriously elusive, which--although beloved by economists, including yours truly--seems to inspire incomprehension even by those who loudly retort that while they subscribe to it, they only happen to see certain exceptions applying, which are only visible to those with a particularly subtle intellect.

At that point you know you're in the company of someone whose fellow intellectual travelers include those who proclaim their belief in evolution while demanding equal time in the schools for "intelligent design." They say they believe, but they don't believe.

Here's where Krugman's brilliant "Ricardo's Difficult Idea" comes into play. Permit me to quote at some length (my own Cliff's Notes version is here at the bottom):

My objective in this essay is to try to explain why intellectuals who are interested in economic issues so consistently balk at the concept of comparative advantage. Why do journalists who have a reputation as deep thinkers about world affairs begin squirming in their seats if you try to explain how trade can lead to mutually beneficial specialization? Why is it virtually impossible to get a discussion of comparative advantage, not only onto newspaper op-ed pages, but even into magazines that cheerfully publish long discussions of the work of Jacques Derrida? Why do policy wonks who will happily watch hundreds of hours of talking heads droning on about the global economy refuse to sit still for the ten minutes or so it takes to explain Ricardo?

[...]

At a deeper level, comparative advantage is a harder concept than it seems, because like any scientific concept it is actually part of a dense web of linked ideas. A trained economist looks at the simple Ricardian model and sees a story that can be told in a few minutes; but in fact to tell that story so quickly one must presume that one's audience understands a number of other stories involving how competitive markets work, what determines wages, how the balance of payments adds up, and so on.

[...]

I believe that much of the ineffectiveness of economists in public debate comes from their false supposition that intelligent people who read and even write about world trade must grasp the idea of comparative advantage. With very few exceptions, they don't -- and they don't even want to hear about it. Why?

[...}

[I]f one tries to explain the basic model to a non-economist, it soon becomes clear that it really isn't that simple after all.

There are, I believe, at least three implicit assumptions that underlie the most basic Ricardian model, assumptions that are justified by the whole fabric of economic understanding but are not at all obvious to non-economists. Here they are:

- Wages are determined in a national labor market: The basic Ricardian model envisages a single factor, labor, which can move freely between industries. When one tries to talk about trade with laymen, however, one at least sometimes realizes that they do not think about things that way at all. They think about steelworkers, textile workers, and so on; there is no such thing as a national labor market. It does not occur to them that the wages earned in one industry are largely determined by the wages similar workers are earning in other industries. This has several consequences. First, unless it is carefully explained, the standard demonstration of the gains from trade in a Ricardian model -- workers can earn more by moving into the industries in which you have a comparative advantage -- simply fails to register with lay intellectuals. Their picture is of aircraft workers gaining and textile workers losing, and the idea that it is useful even for the sake of argument to imagine that workers can move from one industry to the other is foreign to them.

Not is it obvious to non-economists that wages are endogenous. Someone looks at Vietnam and asks, "what would happen if people who work for such low wages manage to achieve Western productivity?" The economist's answer is, "if they achieve Western productivity, they will be paid Western wages" -- as has in fact happened in Japan. But to the non-economist this conclusion is neither natural nor plausible.

- Constant employment is a reasonable approximation: The standard textbook version of the Ricardian model assumes full employment in both countries. But in reality unemployment is constantly a concern of economic policy -- so why is this the usual assumption? There are two answers. One -- the answer that Ricardo would have given -- is that international trade is a long-run issue, and that in the long run the economy has a natural self-correcting tendency to return to full employment. The other, more modern answer is that countries have central banks, which try to stabilize employment around the NAIRU ["Non-Accelerating Inflation Rate of Unemployment"--Bruce]; so that it makes sense to think of the Federal Reserve and its counterparts acting in the background to hold employment constant. This is not at all the way that non-economists think about the issue.

- The balance of payments is not a problem: The standard textbook presentation of the Ricardian model assumes balanced trade -- indeed, it is usually a one-period model in which trade must be balanced. Yet the news is full of stories about the balance of payments, of complaints about trade surpluses and deficits. Why are these absent from the story?

Again, economists have good reasons for thinking that it is a good approximation to separate balance of payments from real international trade issues. In Ricardo's case, the essential ingredient was the argument by David Hume that trade imbalances are self-correcting: a surplus country will acquire specie, leading to rising prices that price its goods out of world markets, while a deficit country will correspondingly find its goods increasingly competitively priced. In the modern world, again, the channels involve less Invisible Hand and more government intervention: when monetary policies target the unemployment rate, exchange rates do the adjusting. Economists are also aware that even persistent trade imbalances are not necessarily a problem, and certainly that surpluses are not a sure sign of health or deficits one of weakness.

Permit me to try to summarize the virtues of comparative advantage.

The benefits of trade do not depend on countries' having absolute advantages over other countries, but only on having comparative advantages. This means that a country that is absolutely disadvantaged in producing all relevant goods and services can still benefit from trade. The secret is opportunity costs, not absolute costs.

Consider two hypothetical countries, North and South, which produce only two goods, food and clothes. If each country devoted its entire economy to producing food, North would produce 100 tons and South 200 tons. Similarly, if each devoted everything to clothes production, each would produce 100 tons of clothes. South appears absolutely advantaged, so where's the benefit from trade?

First, let's pretend that each country is equally predisposed to consumption of food and of clothes, so that each devotes 50% of their productive capacity to each. This produces:

	Food	Clothes
North	50	50
South	100	50
Total	150	100

Now let's assume trade barriers are lifted and each concentrates entirely on its preferred output in anticipation of being able to trade. This yields:

	Food	Clothes
North	0	100
South	200	0
Total	200	100

Of course, this "production" leaves North starving and South naked.

So if we introduce actual trade and imagine some arbitrary preference "price" of one ton of Food for 2/3 ton of Clothes, we get:

	Food	Clothes
North	75	50
South	125	50
Total	200	100

Everyone is better off.

---

Now, if you still don't believe me, consider the famous "attorney/typist" example.

Suppose you're the best lawyer in town and also the fastest typist in town; you have an absolute advantage in both.

Q1: Are you going to go to work as a secretary? Obviously not. You put your absolute advantage as a lawyer to its highest use.

Q2: Are you going to type your own documents? Obviously not. You put your comparative advantage as a lawyer to its highest use.

You are now a subscriber to the doctrine of free trade.

The Data-Centric, Empirical "Law Firms Working Group"

My friend Professor William Henderson at Indiana University School of Law—Bloomington just sent word of a new initiative the law school is launching in conjunction with the American Bar Foundation. 

Called the "Law Firms Working Group," the project includes no fewer than 14 research teams comprising 38 scholars in all, who will have access under a special license to the archival data of American Lawyer Media, which "includes cross–sectional and longitudinal information on law firm structure, financial performance, lawyer demographics, branch office size and location, lawyer mobility, associate satisfaction, relative law firm prestige derived from lawyer surveys, practice group prominence, and other facets of modern law firm practice."

What precisely are they researching, and what makes this initiative different from yet another set of academic papers on our complicated profession?

First, what promises to make it different is that the "LFWG" researchers will actually be working with data.  In other words, their work will be far more empirical than the usual armchair-observing and abstract-pontificating (and no, I'm not naming any names, thank you).

Second, their proposed projects include several that promise to be of genuine interest to those of us who are long since out of the academy and into the actual nitty-gritty of management and leadership.  Here are a few that struck me as particularly "real world" in focus:

• Lawyer Mobility:  "The investigators will study the volume of lawyer lateral mobility, and the and factors influencing it. They will explore the importance of a strong firm culture in the quality of client service, firm profits, firm stability, employee satisfaction, and associate attrition. After this analysis has been completed, Marc Galanter and William Henderson will utilize this dataset to study the relation of mandatory retirement policies to lawyer mobility."
• Interaction Between Law Firm Structure, Hiring, and Partner Promotion:  "John Gordanier will study the empirical relationship between the structure of law firms and the characteristics of associates and partners. His focus will be on whether a multi-tiered partnership structure [with equity and non-equity partners] changes the composition of a firm's associates and whether it affects the quality of the partners."
• Globalization Strategies of U.S. Law Firms:  "Carole Silver and Nicole DeBruin will combine Law Firms Working Group data with their own prior research into non-U.S. offices of U.S. law firms to analyze the consequences of different approaches to global expansion. They will examine a variety of factors, including the ways that offshore offices reflect or differ from their domestic counterparts, and the relationship between offshore office growth and financial success."
• The Professionalization of Large Firm Management:  "Elizabeth Chambliss will track the emergence of full-time ("professional") managers in law firms, focusing on the managing partner and law firm general counsel positions. Her research will examine the relationship between professional management and the economic success of the firm, and the sources of managerial authority for full-time versus part-time/practicing managers."

Other projects will look at the relationship between firm performance and a commitment to pro bono, the changing geographic footprint of global law firms, career trajectories of young lawyers, and race and gender in large law firms.

For some time now, Bill Henderson has been one of the rare law professors with a dominant "quant" gene and I for one will be fascinated to see the fruits of these various research projects.

And of course, you know that "Adam Smith, Esq." will be one place where you can read about those results as they materialize.

Who's Innovating?

The College of Law Practice Management was formed over a decade ago to "honor and recognize distinguished law practice management professionals, to set standards of achievement for others in the profession, and to fund and assist projects that enhance the highest quality of law practice management."  To date, over 200 practitioners have been inducted, from the US, Canada, and eight other countries.  The College is governed by a Board of 15 Trustees, and annually it sponsors the "InnovAction Awards," designed to identify innovation by lawyers and law firms.  The criteria for selecting among entrants are:

• Absence of precedent (never been done or done quite this way before)
• Evidence of action (the innovative idea was transformed into action and not merely reflective of best intentions)
• Effectiveness of innovation (there is some measurable outcome that would indicate that the innovation is accomplishing what it was intended to do)
• Action must have taken place within no more than three years prior to this entry.

Information about the InnovAction Awards is here, and I invite you to check out the inaugural issue of the online publication celebrating last year's awards.

So:  Have you or any of your good friends done something wonderfully innovative recently?  Nominations are open; what are you waiting for?

"Wealth" and "Conscience"

At "Adam Smith, Esq.," we don't talk about Adam Smith himself very much, but at year-end it seems appropriate to pay a moment's homage to this site's intellectual godfather and, I hope, provide those of you who may not have studied him closely a slightly more nuanced perspective of his views.

To start, there could be no better introduction than this discussion of the interplay between his most famous work, obviously, The Wealth of Nations, and its predecessor by 17 years, the relatively unsung Theory of Moral Sentiments.   The piece takes off from Adam's Fallacy: A Guide to Economic Theology, written by Duncan Foley of New School University in New York, which is described as "a beautiful little book. It contains some of the most lucid exposition of the core ideas of economics that I have ever read."  (The reviewer is David Warsh, author of Knowledge and the Wealth of Nations, which I will soon be reviewing here; Warsh is a former Boston Globe columnist.)

The "fallacy" of "Adam [Smith]" is this:

"So what exactly is Adam's fallacy? According to Foley, it's "the idea that it is possible to separate an economic sphere of life, in which the pursuit of self-interest is guided by objective laws to a socially beneficent outcome, from the rest of social life, in which the pursuit of self interest is morally problematic and has to be weighed against other ends." This abstraction of an economic sphere from the messy complexity of real life is indeed the kernel of present-day economics.

But this entirely overlooks Moral Sentiments (for the 18th-Century phrase "moral sentiments," substitute today's more apt "conscience," and your understanding will increase), which opens thus:

"How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it.... The greatest ruffian, the most hardened violator of the laws of society, is not altogether without it."

And Adam Smith is astutely attuned to the inability to cabin human beings into the rigor of the model of homo economicus, without attending to

the social and psychological realities of free will, choice, and impulse:

And here he describes "the man of system," who "seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces on a chess-board; he does not consider that the pieces on a chess-board have no principle of motion besides that which the hand impresses on them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own altogether different from that which the legislature might choose to impress upon it."

Indeed, these extra-homo economicus considerations are not just competitive with rational, gimlet-eyed, calculating analytics, at times they overwhelm "reason" altogether:

"What is it that prompts the generous, on all occasions, and the mean, upon many, to sacrifice their own interests to the greater interests of others? Is it not the soft power of humanity, is it not that feeble spark of benevolence which Nature has lighted up in the human heart, that is capable of counteracting the strongest impulses of self-love?"

Now, for some reason, the received wisdom handed down over 200 years later about Adam Smith is that he abandoned these views with publication of The Wealth of Nations.  Well, I'll spare you the academic arguments, but suffice to say there's not a scintilla of evidence that was the case.  Indeed, the better reasoned side of the debate, able to marshal far more evidence in support of its view, is that Smith intended a third and possibly even a fourth volume (cut short by his death, and his mandated destruction of all his unpublished manuscripts) reconciling and extending Moral Sentiments and Wealth of Nations by adding to the mix a treatise on the theory and impact of law and another on science and the arts.

So where are we left here in the 21st Century? 

Economics, a somewhat feckless discipline for the last few decades (there you have, in a nutshell, why I never entertained the notion of pursuing a Ph.D. in economics), has opted to "model what it can at the expense of ignoring what it cannot," and "moral sentiments" are famously unsusceptible to modeling.

One of my fonder, if milder, hopes is that my beloved discipline of economics will come to grasp more strongly the world as it really is with all its human complexity and contradiction, and return from its exile in the arid, mathematically intricate "blackboard economics" domain of homo rationalis economicus.

Happy New Year.

Web 2.0 in the Legal Blogosphere

As the legal blogosphere goes from childhood to adolescence to (eventually) full-throated adulthood, I've enjoyed not just contributing my own small efforts to that process, but also being able to be an armchair observer of other developments having nothing whatsoever to do with me. 

Partly this stems from my endless fascination with the proliferation of business models the online world has spawned, and with luck will continue to spawn.   Partly it stems from my wanting to vindicate—or invalidate—a theory of mine to the effect that any new media channel begins life by imitating the closest analogous old-media channel, and that it takes an explosion of experimentation before the new media understands "what it wants to be when it grows up."  Thus radio began by staging plays and running vaudeville acts years before discovering its real home in news, talk, and music.  Likewise, TV began by imitating radio before it found its strength in late-breaking news, sports, and series. 

And yes, thus the web began imitating print and has evolved roughly as follows:

• Web 1.0
  • revolution = hyperlinks
  • static content ("brochure-ware")
  • activity = surfing
• Web 1.5
  • revolution = self-contained portals
  • dynamic content (Salon, Nerve, Slashdot)
  • activity = search
• Web 2.0
  • revolution = collaboration
  • user-generated content
  • activity = share

Today I'm here to report on an emerging category of legal sites targeting micro-communities with micro-focused content. 

The best example I've seen, which I just learned of this week, is Drug and Device Law, which is—yep!—about pharmaceutical and medical device product liability.  Its founders and co-hosts are Jim Beck, with Dechert in Philadelphia, and Mark Herrmann, with Jones Day in Cleveland.  (Careful readers will recognize mark as the author of The Curmudgeon's Guide to Practicing Law.)  Their goal for the site?  As Mark put it to me, "Jim and I would be quite happy with a "fit audience, though few": inside counsel at drug and device companies and sophisticated lawyers who act as outside counsel for those companies."

Why is this different than, say, a three-ring binder treatise on the same subject?

Look back up at my bullets under "Web 2.0:"  The potential is for "Drug and Device Law" to become essentially home-base for a community of practice, exchanging ideas, analyses, and even briefs (well, OK, we could start with string cites).  Now imagine trying to replicate the robust functionality of that same potential community in the off-line world.

I rest my case. 

So Happy Zero Birthday to Drug and Device Law.

A Professional Courtesy Announcement

Those of you who know or have worked with me are aware that I'm pleased to have a "best friends" relationship with the principals of Edge International, founded over twenty years ago, and a group of wonderfully talented people who are also fun and deeply edifying to be around.  (I also am proud of my strong relationships with individuals at Hildebrandt, at Altman-Weil, and elsewhere in the industry, but those are not topics for today.)

The announcement:  As of December 1, an outstanding group of people from Edge have combined with Alan  Hodgart, based in London, and with Tim Leishman, based in Toronto, to form Kerma Partners. 

I wish the best of luck to both the new venture and to Edge, both populated by good friends of long standing. 

Aren't You Glad You Majored in Economics?

From the Journal of Economic Education (hat tip to "Truth on the Market") comes the first study I'm familiar with examining whether the choice of undergraduate major has any effect on a lawyer's career earnings.  And guess what?  If you major in economics, it helps; majoring in anything else makes no difference.

Here's the abstract, in full (emphasis supplied):

"Using nationally representative data, the authors examine the effects of preprofessional education on the earnings of lawyers. They specify and estimate a statistical earnings function on the basis of well-established theory and principles. Along with standard control variables, categorical variables are included to represent graduate degrees in addition to the law degree and an assortment of undergraduate major fields. Holding a Ph.D. or M.B.A. degree, with the law degree, is associated with significantly higher earnings in some sectors. Lawyers with undergraduate training in economics earn more than other lawyers, ceteris paribus, and economics is the only undergraduate field associated with earnings that differ significantly. The available evidence supports the hypothesis that economics training increases a lawyer’s human capital compared with other undergraduate majors."

That still doesn't mean Adam Smith would become a lawyer were he alive today; but I know in my heart that he would have an active and energetic blog.

The Dismal Science at Age 230

"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

Copyright Law, "Fair Use," and Why You Can Still Read My Analyses of The AmLaw 100 Statistics

As loyal readers know, I had a nasty brush with copyright law and the ALM Media inhouse law department this past Monday. 

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."

After observing that "the key to resolving the tension lies in understanding why facts are not copyrightable,"

she discussed the constitutional requirement of "originality" as a predicate to copyrightability. "Originality" means that an act of independent creation took place. By contrast:

"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. "

Finally, the Feist court takes pains to dispose of the "sweat of the brow" doctrine, whereby lower courts had (consistently, the High Court implies) granted unjustified protection to factual compilations merely because they were laborious to assemble:

"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”)."

Getting then to the heart of the dispute, the Court restates the question presented as follows:

"[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."

Here endeth our discussion of Harper & Row v. Nation.

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.

Maister On Why "Leadership" Won't Work

David Maister, who knows his way across the management/leadership landscape so much better than almost anyone else that he seems to have been GPS-enabled while the rest of us were relying on 15thC. parchment maps, has taken off from my post of a few days ago about leadership.   Here he is getting warmed up:

"I keep getting asked about this topic, so here goes my ten cents worth. I think more rubbish has been written about ‘leadership’ than almost any other business topic. A lot of it is patently false, and even more of it is dangerous."

And I bet you didn't know that "manager" derives from medieval French or Italian meaning, roughly, "holder of the horses," while "leader" is of Chaucerian-era origins and means one who chose the expedition's route, a model "that won't work," David states flatly.

Enough; just go read the whole thing right now.

"The Magic Middle"

Every once in awhile, it pays to stand back and reflect for a moment on the "Adam Smith, Esq." community—yes, dear reader, that means you.

The more involved I've become with "Adam Smith, Esq.," and the more readers I've heard from and even met in the real world, the more I've come to think of it not as a "blog" but as a publication, with all of the responsibility for accuracy, even-handedness, and citation of original source material, that that entails.  As the managing partner of an AmLaw 25 firm said to me, "The difference between you and The American Lawyer is that you publish a couple of dozen times a month."  [And there's a nontrivial difference in the cost of a subscription, but I chose to be kind and avoid pointing that out.]

Have I, then (horrors!), become "Mainstream Media"?!

Wrong question, at least if you believe David Sifry, founder and CEO of Technorati, the first and in many ways still the best search engine dedicated to blogs.  In a thoughtful and, blessedly, data-rich post, Sifry points out that some famous blogs, including the ubiquitous Boing Boing, have professional journalists on staff.  Other sites which he classifies as "MSM," including Slashdot, let readers spontaneously create and populate their content. 

The point is that the line between the MSM and the blogosphere is blurring, particularly as we gain more experience with what I think of as "Blogs 2.0:"  Sites, like "Adam Smith, Esq.," that are professionally produced, directed at a focused target audience, and (so people tell me) offer content equivalent in quality and analytic rigor to anything to be found offline in more conventional media addressing the same topics.

That said, blogs are never going to supplant The New York Times or CNN, as this handy little graphic makes clear:

It's also overly simplistic to conclude, as the hypothesis of "The Long Tail" would have it, that you're either on the A-List, read by millions, or you're nowhere.   Going just a very short distance further down the popularity distribution curve shows blogs gaining a lot of real estate on the MSM:

Sifry calls sites that are neither on the A-list nor irrelevant The Magic Middle of the attention curve:

"This realm of publishing highlights some of the most interesting and influential bloggers and publishers that are often writing about topics that are topical or niche, like Chocolate and Zucchini on food, Wi-fi Net News on Wireless networking, TechCrunch on Internet Companies, Blogging Baby on parenting, Yarn Harlot on knitting, or Stereogum on music - these are blogs that are interesting, topical, and influential, and in some cases are radically changing the economics of trade publishing. [...] 

"And what is so interesting to me is how interesting, exciting, informative, and witty these blogs often are. "

So it's official:  You are a subscriber in good standing to "The Magic Middle."  And "Adam Smith, Esq." is a publication in every sense intended by that moniker.

Does Italy Recognize a Right of Privacy?

File this under "Truly Useful."

Charles Glasser, Jr., Media Counsel at Bloomberg News, has just published the "International Libel & Privacy Handbook," subtitled "A Global Reference for Journalists, Publishers, Webmasters, and Lawyers."  As the reach of print, broadcast, and of course online media becomes worldwide, ignorance about the libel and privacy laws of seemingly far-away jurisdictions is no longer a viable option.

Glasser has put together certainly the most up-to-date and comprehensive, if not the first and only, nation-by-nation summary of these laws, written by legal experts in Europe, Asia, and the Americas, and concluding with a section on "Issues of Global Interest," including a cross-reference chart, discussion of special issues for book publishers, enforcing foreign judgments, and fair use (guess what?—it "stops at the border").

As Floyd Abrams says (and if you don't know who he is, you don't need to worry about media law),

"At long last, we can now compare on a nation-by-nation basis how countries in the Americas, Asia, and Europe deal with libel and privacy issues and how that treatment differs from that of the United States.  This book offers a sophisticated and reader-friendly response to the core questions that any practitioner frequently must consider."

Not available on Amazon, you can buy it through Bloomberg Books.

 

Your Money or Your Reputation: Adam Smith, the First Behavioral Economist?

Seventeen years before The Wealth of Nations (1776), Adam Smith published his Theory of Moral Sentiments (1759), nowadays a relatively neglected work which, to my mind, is nearly as astute, deserves far greater current recognition, and which not-incidentally puts pad once and for all to any charge that Adam Smith was unsympathetic to human nature or cavalier about the consequences of his theories for individuals.  Merely contemplate the book's very first sentence if you doubt me:

"How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it, except the pleasure of seeing it."

One reviewer nicely summarized its relationship to Wealth of Nations as follows:

"To truly understand Adam Smith's economic masterpiece "The Wealth of Nations", one must understand its moral foundation. Without Smith's essential prequel, "The Theory of Moral Sentiments", the more famous "Wealth of Nations" can easily be misunderstood, twisted, or dismissed."

So, to today:  Harvard Business School's Working Knowledge has a piece positing that the Theory of Moral Sentiments was the original intellectual precursor to what we all know today as Behavioral Economics.  [The HBS WK article refers enticingly to the primary source, "Adam Smith, Behavioral Economist," published in the summer 2005 edition of The Journal of Economic Perspectives, but the troglodyte JEP keeps its online archives under severe lockdown—trust me, I tried.]

The premise of the HBS piece, "Adam Smith, Behavioral Economist" is that Moral Sentiments and Wealth of Nations, which Smith never sufficiently inter-connected during his own life, nevertheless together constitute the intellectual foundation of how human psychology (including incentives, preferences, risk-aversion, and the endless struggle between immediate and delayed gratification) affect how people behave in markets:  In other words, Behavioral Economics.

"Smith's two main works—The Wealth of Nations (WN) and The Theory of Moral Sentiments (TMS)—show him to be a brilliant economist and arguably a brilliant psychologist, but he was never fully able to bring the economics and psychology together."

One of the primary arguments of TMS is that human behavior is driven by passions—fear, desire, and greed among them—but that these passions are moderated by an "impartial spectator" looking out for the individual's long-term interests.  And there's apparently something to the theory:  Using it, the Harvard professors designed a "commitment savings product" for banks in the Phillipines that required customers to sign a contract prohibiting them from withdrawing funds until a certain amount of time had elapsed or a level of principal value had been achieved.   According to them, this "had a large and significant effect on clients' total savings," resulting in increased home purchases, educational investments, and small business-building.

But it's when we come to Smith's bedrock belief,  intimated in the opening sentence above, in the importance of trust, concern for fairness, and reciprocity, that the linkage of human psychology to market functioning becomes most clear.  Smith believed that those values become more, not less, important as markets evolve.  For example, with many of the professions, most assuredly including our own, clients cannot monitor "quality" in real time—and the same goes for doctors, auditors, and financial advisors.  So trust and reputation stand in where cold economic calculus fails.

Likewise with corporations:  Shareholders must at a fundamental level trust management to operate in the shareholders' interest since the range of variables over which management has control or influence is far too vast to specify contractually (and such a hypothetical specification would also be obsolete the moment it was completed).

Finally, Smith recognized, and placed great value upon, "the aerial coin of praise," and social and professional status, as critical motivational ingredients.  Reputation ("the aerial coin") is the flip-side of trust; one trusts those who have earned their blue-chip reputations.  And Smith would have insisted on the most scrupulous care and feeding of reputation, if for no other reason than the dire consequences attendant upon its destruction.

More currently, consider this (emphasis supplied, hat tip to Larry Ribstein): 

"The market is capable of levying harsh penalities [for financial malfeasance] on its own. Recent evidence comes from Karpoff, Lee and Martin, The Cost to Firms of Cooking the Books (July 25, 2005). Here’s the abstract:

"We examine the penalties imposed on all 585 firms that were targeted by SEC enforcement actions for financial misrepresentation from 1978-2002. Consistent with the view that penalties are small, monetary fines were imposed on only 7% of the firms. A larger fraction, 36%, faced class action lawsuits from investors. Overall, however, the penalties imposed on firms through the legal system appear to be small, as the unconditional mean total of all legal penalties is only $14.3 million per firm.

"The penalties imposed by the market, in contrast, are huge. Our point estimate of the reputational penalty - which we define as the expected loss in the present value of future cash flows due to higher contracting and financing costs - is over twelve times the sum of all penalties imposed through the legal and regulatory system.

"For each dollar that a firm misleadingly inflates its market value, on average, it loses this dollar when its misconduct is revealed, plus an additional $2.47. Of this additional loss, $0.18 is due to expected legal penalties and $2.29 is due to lost reputation. This evidence belies a widespread view that financial misrepresentation is disciplined lightly. To the contrary, reputational losses impose substantial penalties for cooking the books."

So next time you're cynically thinking that money is the only motivator, try putting a price on your reputation; Smith would have.

Blawg Review #39

"Adam Smith, Esq." is honored and delighted to host Blawg Review #39; I consider myself in excellent company given the distinguished and talented people who have hosted Blawg Review in the past.  

This week we celebrate:

Epiphany:  n.   1.  From the Greek epiphania "manifestation," often referring to the appearance of a divine being. Christ's appearance to Paul on the Damascus road was an epiphany. The word is used to describe the first appearance of Christ to the Gentiles in the visit of the Magi to the baby Jesus (Matthew 2:1-12), an event celebrated January 6.
2. Epiphany in fiction, when a character suddenly experiences a deep realization about himself or herself; a truth which is grasped in an ordinary rather than a melodramatic moment.

The most famous representation of "The Epiphany" in art history is doubtless Giotto's (more formally, Giotto di Bondone:  Italian, Florentine, 1266/76–1337) from New York's own Metropolitan Museum of Art:

My wife, who majored in art history at Vassar, has indelibly memorized this educational little ditty placing Giotto in art-historical context:

"Giotto, Giotto, Giotto-Giotto:  Renaissance
He paints in the morning and he paints at night;
If it's a Giotto it'll turn out right.
Giotto, Giotto, Giotto- Giotto:  Renaissance."   

Of course, here in New York City we celebrate the end of the 12 days of Christmas with our own tradition:  The annual rite of The Ceremony of the Mulching of the Christmas Trees, jointly supervised by the NYC Sanitation and Parks Departments:

Before we begin our cyberspatial tour, like all accomplished explorers, we need to be well-equipped.  To that end I commend to you Google Pack, a handy-dandy Swiss Army-knife compilation of everything the Prepared Scout of virtual-space needs, from Adobe Acrobat and Firefox to anti-virus and anti-spyware armor.

Let the tour begin!

Alito Fireworks

"Adam Smith, Esq." is resolutely non-partisan and apolitical.  That said, without question the best-quality daytime drama scheduled for this coming week will be the nomination hearings for Judge Samuel Alito to SCOTUS—they promise an extremely high entertainment-value quotient, and I for one intend to Tivo them in their entirety.  But for commentary and observation, I'll turn to those who plow these fields for a living, starting with the newest addition to the Law.Com "Inside Opinions:  Legal Blog Network," the consummately qualified Howard Bashman of How Appealing.

The "Epiphanic Moment" ("EM") from this post is Howard's intimate knowledge of the witnesses who will be testifying in favor of Alito this week: "I know about all of these judges as a result of having handled numerous appeals in front of the Third Circuit over nearly the past sixteen years and having clerked for a judge serving on the Third Circuit for two years before that. Here are my quick insights..."

Our friends at Law.Com have their comprehensive "A Field Guide to the Alito Confirmation Hearings."  You were expecting, perhaps, a red hawk pair nesting above Fifth Avenue?

Meanwhile, over at the Electronic Privacy Information Center, they've a remarkably comprehensive complete copy of a conference report from the Seeley G. Mudd Manuscript Library at Princeton University—the conference in question taking up "The Boundaries of Privacy in American Society," chaired by none other than then-Princeton-student Samuel Alito, who was responsible for putting the conference together, doing the research behind it, and preparring the "remarkable summary that accompanies the final report."   This should have the C-SPAN junkies going back to their Red Bull's for stamina.

NSA Surveillance Fireworks

Also on the late-breaking political newsfront, we have the story that our very own NSA ("No Such Agency") has developed an expertise in data-mining that Wal-Mart would envy, but rather than applying it to how our household purchases index on Crest and Pampers, they've applied it to determine how many degrees of separation lie between you and Osama.

Jay Leno has his own take on this revelation:

According to a new poll, President Bush's approval ratings are on the rise. A lot of these polls are phone polls and people were worried Bush is listening in.

Kierkegaard Lives, a new blog to me, provides a "wire-tapping link repository" aiming to constitute one-stop-shopping for digerati running down primary sources on this. 

For the attention-span challenged, yesterday TalkLeft uncovered a Congressional Research Service report questioning the NSA/White House's authority.  EM from the summary:

"The 44-page report said that Bush probably cannot claim the broad presidential powers he has relied upon as authority to order the secret monitoring of calls made by U.S. citizens since the fall of 2001."

For the record, I do not subscribe to the cynical view of this imbroglio that it's merely a matter of whose ox is being gored—that if you're an upstanding American citizen you have nothing to fear from the snoops, so what's your problem, buddy? Rather, I view the debate as the latest incarnation of the timeless, "no permanent solution" tension between human liberty and free and open societies, and the reality that "the Constitution is not a suicide pact."

Lawyers Behaving Badly

This topic can only be introduced by:  "Where oh where to begin?!"

f/k/a reports on a lawyer who:

"... gets three months in jail for being one of the two major actors in a complicated scheme to steal millions of dollars [$25.6-million, in fact] from people he himself describes as "decent, hardworking people looking for an honest way to resolve their debt issues.""

How is this possible?  Maybe the judge was swayed by character witnesses, or the lawyer's own questionable character:

"Attorney Lisa B. Shelkrot came up with the usual defense gobbly- gook, including: "What stands out [in letters from prominent members of the community] is his selflessness and commitment to service." "It was a fear of destitution, not a high flying lifestyle ... that lead him to this.  Sinnott had a "deeply and tragically" flawed personality."

My EM question to Ms. Shelkrot:  Are you yourself buying that for a second?

And since when does being "flawed" exempt you from responsibility for the consequences of your premeditated actions over a period of years?

We don't apply this standard in dealing with children or dogs, and it's not time to start with grown, bar-passing adults.

More seriously, Jack Balkin asks whether it now "seemed as if there was no legal proposition, no matter how outlandish, that you couldn't get some prominent lawyer these days to defend."  Answering his own question, he writes:

"Lawyers have always, to my knowledge, been willing to come up with clever and ingenious arguments for the interests they represent."

But he's only warming up:

"Put another way, we have all known for many years that lawyers are rhetorical whores; their job is to confuse, obfuscate, and make unjust and illegal things seem perfectly just and legal, or, if they cannot quite manage that feat, to muddy up our convictions sufficiently that we conclude that it's a close case. There is nothing new about this."

"Nothing new?" Meaning it's essentialy an ineradicable and hopeless condition? Well, not quite. EM moment in bold (my emphasis:

"Lest I be misunderstood, I do not mean to say that law and legal doctrine counts for nothing, and that lawyers have no independent role to play other than as political cheerleaders for one side or the other. Rather I mean to say that the law always needs help from other sources in political culture if it is to do its job appropriately. The rule of law, I would insist, is not a purely legal or professional ideal-- it is a political ideal."

TalkLeft decodes what motivates outstanding federal prosecutors to go to the defense side—and questions whether they ever really make the transition.  "The real problem is most of these former high-level prosecutors can't make the mental shift. They don't have it in them."   Or, as former Deputy Attorney General James Comey puts it in a quote so rich you couldn't make it up (EM in bold):

“You go from being paid to do the right thing every day, from having the freedom never to make an argument you don’t believe in, to being a defense attorney, where you are duty-bound to make the best argument you can,” he told the New York Law Journal. “I have a tremendous respect for people who do defense work, and it’s not lying, but in a private moment, sometimes, you say, ‘Geez, this is a bunch of baloney.’”

And you really  anticipate even a soupcon of "zealous representation" on behalf of a criminal defendant from Mr. Comey?   TalkLeft certainly doesn't:  "Pathetic...irksome beyond description."

For a moment's worth of comic relief, the always-reliable Walter Olson at Overlawyered chronicles a Dallas restaurateur who sued the Dallas Morning News over a review of his restaurant, "Il Mulino"—specifically, so it would appear, over the newspaper critic's take on Il Mulino's bolognese and vodka sauce.  I am pleased to be able to report that the matter has been settled without admission of much of anything, it seems, but with a promise of a second review from the newspaper.  "And you're ugly," perhaps?

The serious message here is simply, Who comes off looking worse?  The benighted restaurateur who exponentially increased circulation of the critical review by his action, or the lawyer who took good money from him to help?

Craig Williams, another Scottish lawyer with a penchant for economics, regales us at May It Please the Court with Major League Baseball's claim that it "owns" all baseball statistics.  The party offending MLB's expansive notion of the territorial reach of its intellectual property is one CBC Distribution & Marketing, a fantasy baseball game operator—dependent for the reality of its fantasy upon real-world baseball statistics.  EM of the post:  "Next thing you know, they'll be charging the fans to quote statistics to one another."

Mauled Again kicks off 2006 with a confident prediction:

"The culture of corruption, of bribery, of putting one's own selfish interests above those of the public one is required to serve will also trigger yet another easy-to-predict Top Ten tax story of 2006. At least one politician, one celebrity, and one lawyer will run afoul of the tax law by failing to file a tax return or by failing to pay income taxes."

What's to be done?   You might try starting young:

"It is a challenge getting across to law students the point that when they enter the profession, and even as law students, they are subject to a higher set of integrity standards than those that apply generally to citizens of the nation."

Put that on your refrigerator.

On a less consequential, but equally depressing, note, Matt Homann of "the [non]billable hour" reports seeing a serious-minded piece of advice that clients should not talk to their lawyers until the deal they're doing is completely worked out.   What on earth would prompt such advice?  "Our predominant business model"—the billable hour.

In contradistinction to the billable hour, Greatest American Lawyer advocates serious, candid discussions with clients about budgets.  The goal?  Try, "Truth."   

Over at Houston's Clear Thinkers, Tom Kirkendall writes about "The High Price of Asserting Innocence," and sees a vicious double standard infecting the Enron prosecution, wherein the right to defend oneself has essentially been emasculated by trigger-happy prosecutors and the federal sentencing guidelines' emphasis on co-operation as a get-out-of-jail-free card: 

"Last week, former Enron chief accountant Richard Causey pled guilty to a single count of securities fraud and agreed to a seven-year prison term after vigorously defending himself from multiple charges of business crimes for over two years. Had he elected to defend himself at trial against the charges and lost, he would have faced an effective life sentence."

Yet another triumph of the Law of Unintended Consequences; but lawyers created this injustice. Can't lawyers be expected to fix it?

Part of the problem may be that lawyers can't be expected to fix injustices if they simply can't be trusted in the first place.  To that point, Dennis Kennedy recounts the "baffling" decision of the Florida Bar's Board of Governors to prohibit lawyers from looking at metadata—presumably on the principle that gentlemen don't read other gentlemen's mail.  To my mind, the only conceivable rationale for such (a feckless) rule of "Enforced Ignorance" is that the children can't be trusted near the liquor cabinet.

Is there hope?  Point of Law writes about "Merit-Based Judging" and urges all of us (is the MSM listening, here?) to get the notion out of our heads that judicial decision-making is a clone of the legislative process, where all that matters are results.  Ted Frank comes out decisively in favor of hoping Alito will truly judge matters strictly on the merits, and even though Frank is confessedly pro-business, he argues correctly that "business is better off in the long run with a judge and judiciary that decides cases on the merits"  rather than "a hack judge who makes his or her decisions based on the identity of the parties in the caption." 

Wouldn't it be nice if a greater proportion of the American public (and again, the American media) understood that "decisions based on the identity of the parties" enjoys a one-for-one identity with being "a hack."

Finally, we can all breathe a sigh of relief—inbetween chuckles, anyway—at the extremely welcome news that The Bitch is Back. 

Practice, Practice, Practice

Lest you begin to form the impression that lawyers never get any real work done, we have an eclectic roundup of practitioners opining on their specialties.  I'm not sure any one of this exactly qualifies for an "EM," being, as they are, proudly technical and rational self-contained essays, you hey, you might learn something; I surely did.

• Ever wonder about the extraterritorial application of US Antitrust Laws?  You understand, of course, that ever since Alcoa (1945), it's been settled that they do have some such reach.  Law & Society sets us straight (and I'm personally a sucker for their banner image).
• Patent Baristas educates us on the USPTO's proposal to limit continuations, which have "become the current whipping boy."  (Who knew?!)  PB opines that "this has not been thought through very well," and as part of their argument to that effect notes (and trust me, I quote):

  "Note that proposed Rule § 1.78(f)(2) provides that for applications that fall under set proposed § 1.78(f)(1) above, there will be a rebuttable presumption that the nonprovisional application contains at least one claim that is not patentably distinct from at least one of the claims in the one or more other pending or patented nonprovisional applications. In that case, [etc.]"

  I'm willing to take them at their word.
• Staying in IP-land for a moment, The Invent Blog notes that David Allen's "Getting Things Done" (a collection of techniques I heartily endorse), which relies upon tabbed folders for organization, wouldn't be possible without the handiwork of one James Newton Gunn, who in 1897 obtained a patent for tabbed folders and index cards.  Respect your ancestors, I always say!
• My e-friend Ingo Forstenlechner has just completed his Ph.D. thesis titled "Impact of Knowledge Management on Law Firm Performance - An Investigation of Causality across Cultures" and wants to let you know that you can get a copy directly from him.  I'm sure Joy London already has hers.  Here's an excerpt from Ingo's abstract of the thesis: 

  "The set of cause and effect relationships at the heart of the [balanced] scorecard - referred to as the success map – is at the core of this research, which aims to investigate if the link between managing knowledge and financial performance really exists and – if it does – how it can be influenced." [And his conclusion?] [...]  "This thesis provides the empirical evidence for a link between KM and organisational performance."

• Carolyn Elefant at My Shingle offers very practical advice (##'d 1 through 5, in fact) for people seeking contract work from local attorneys or solos.
• And last, both Carolyn and I contributed to the launch of Law.com's "Career Center" earlier last week.

And The Final Word Goes to The Economics of Law Firms

I hope you all saw that coming.

Patrick Lamb, at  In Search of Perfect Client Service, essays upon "The Essence of Leadership."  The first thing he does, with a hat tip to Tom Peters, is distinguish leadership from management:  "Management has a lot to do with answers.  Leadership is a function of questions. And the first question for a leader always is "what do we intend to be?""

Those of you who were comparative lit majors may be interested to know that I took off from the same Harvard Business School paper Patrick is launching from, in a post of my own, here.

The anonymous Wired GC kicks off the New Year by turning his thoughts to New Ventures, and to the pilot fish that invariably accompany them in schools, your friends the Venture Capitalists, and The Top 10 Lies of VC's as recounted by Guy Kawasaki, who's in a position to know.  My personal favorite is #9 (EM included) :

"Do you know why we all know about Google's amazing return on investment? The same reason we all know about Michael Jordan: Googles and Michael Jordans hardly ever happen. If they were common, no one would write about them. If you scratch beneath the surface, venture capitalists want to invest in proven teams (eg., the founders of Cisco) with proven technology (eg., the basis of a Nobel Prize) in a proven market (eg., ecommerce). We are remarkably risk averse considering it's not even our money."

Gerry Riskin at Amazing Firms, Amazing Practices (who I know well, whom I hope to have breakfast with in New York this coming week, and who deprived the world of stand-up comedy of a potential ace when he stuck to law-land) turns the kleig lights on "old-fashioned bad management" at Dorsey & Whitney's London office, leading the en masse departure of 8 associates. What, Gerry asks rhetorically, does it cost to recruit 8 associates? And what firm would "dare subtract that number from the billing revenue of some maniac in order to determine compensation?" Another rhetorical question.   But the EM is this:  Thanks at least in fair measure to the blogosphere, dysfunctional people cannot remain anonymous.

Finally, the question you've all had in the backs of your minds, especially those of you contemplating hosting another Blawg Review of your own some day: Am I glad I did it?

Yes, I thoroughly enjoyed it!  I had the chance to delve deeper into some old friends, to meet some new ones (as it were), and finally, to point you all towards two of my own post-children of the past week:

• Five Questions (Or Is It Only One?) For Your Firm in 2006, and
• Build on Your Strengths or Tackle Your Weaknesses?

It's good to be King For A Day.  Still, I hope I've done justice to Blawg Review #38's 10 Resolutions for Better Blogging.

And to all a good night, and a most merry and enjoyable 12 Days of Christmas next year.

Blawg Review has information about next week's host, and instructions how to get your blawg posts reviewed in upcoming issues.   Final Note: I'm also interviewed there.

 

"The Wall Street Journal Online, Esq."

As of this morning, there's a noteworthy new kid on the legal blogosphere block: "The Wall Street Journal Online, Esq."

Well, not quite—actually, they're calling it simply their "Law Page," but a "centerpiece" of their new coverage is their new Law Blog.  Grab the feed.

Who's behind this?:

"We've beefed up our legal team with two great journalists: Ashby Jones, our legal editor, was a reporter at The Deal and American Lawyer Media. A former litigator and clerk to a federal judge, Ashby is a graduate of Haverford College and the University of Michigan Law School. He'll be writing The FLaw column.

"Peter Lattman will be writing our law blog. Peter joined the Online Journal from Forbes Magazine. Before becoming a journalist, he was a litigator at a law firm and worked on Wall Street. He is a graduate of Harvard University and Fordham University Law School. The blog will also include contributions from reporters at The Wall Street Journal and Dow Jones Newswires."

A heartfelt "Welcome" to the blawgosphere is in order!   And you thought blogging was going to turn out to be a fad....

So You've Made Your New Year's Resolutions....

What are your New Year's resolutions?  And, of greater interest, what makes you think you might really observe them?

Let's take a step back:  Isn't there something fundamentally irrational about New Year's resolutions to begin with?  After all, if you want to start running five miles a day, getting to work earlier, or cutting out the cheesecake, you shouldn't wait until January 1st to start.

Prof. Thomas Schelling, this year's Nobel prize-winner in economics for his work on conflict, has something to tell us about this:  He's written at some length about the archetypal situation in which a "resolution" may come in handy to change your actual behavior.  He posits a divided self:  One part of us wants to stop smoking, the other part wants to reach for the cigarette after dinner.  One part of us wants to get up earlier, the other part wants to hit the snooze button.  So far, so familiar.

The insight he adds is that these two parts of ourselves exist at different times.  The Angel Part is in control before the decision is actually made; the Devil Part takes over at the moment of truth.  So the question becomes:  Are there tools/techniques/strategies we can employ to strengthen the Angel's ability to constrain the Devil when push comes to shove?  There are some.

• The very fact that you have made A Formal (Written, I hope) Resolution raises the price of non-compliance; if you've also made the commitment public with a spouse or loved one, posted it on the refrigerator and above your desk, so much the better.  Shame doesn't always trump temptation, but you can give it a fighting chance.
• Make bright-line rules, not vague incantations of improvement.  So:  Rather than "eat less," specify "zero carbs."  Rather than "only one cigarette after a meal" (what exactly is a "meal" in today's grazing/snacking society?), "one cigarette only at 1pm and 7pm."
• Physically remove temptation:  If you have to go out to buy dessert, the Angel may have time to reassert control, but had it been ready to hand in the freezer, the Devil starts out on top.
• Bargain with yourself and promise a reward for the pain inflicted by compliance with the Resolution:  If you lose 10 pounds, you can buy a new dress.  Just make sure the incentive is something you really want; make it meaningful, so that its loss would be painful.

So what are my New Year's Resolutions? 

• To connect with more readers of "Adam Smith, Esq." in the real, off-line world—one of the greatest rewards of this site, to me.
• To try to make "Adam Smith, Esq." ever more insightful, carefully reasoned, and just plain intrinsically interesting.  And
• To celebrate everyone's entitlement to one vice of their choosing.

Comparative Strategic Advantages: The NYC Subway Strike

It's official:

 

The  power of the Transit Workers to wreak economic havoc is unsurpassed—yet just this side of unthinkable.  For the police or fire departments to strike is unthinkable; but the MTA union has the unmatched tactical advantage of being able to bring the City to its knees, literally within minutes of commencing their strike, without inflicting permanent damage. 

(When I went running this morning at 5:30, cars and trucks were already backed up as far as the eye could see from the police checkpoints at 96th Street, stopping all vehicles with fewer than four passengers from proceeding further downtown—and the strike was 2-1/2 hours old.)

I view the negotiations surrounding the strike as a fascinating example of strategic considerations, because the City's legal cudgel is the flat statutory prohibition on the transit workers' striking, with fines of double their daily pay for each day they're out.   Raising the stakes for both sides is the nature of the key issue which has become the sticking point:  The City is insisting that newly hired transit workers not be eligible for retirement until age 62 (current employees are eligible at 55).  Under the slogan, "protecting the unborn," the Union is refusing to agree.

What makes this particularly problematic?  That it's not a readily "divisible" issue:  It's all or nothing.  If this strike were only about 4% vs. 6% raises, it would never have happened.  You and I both know the answer to that one is 5%.

But both sides in the end have to play to public opinion:  The union taking the stance of hard-working, under-appreciated public servants at the end of their rope, the City as guardian and savior of the working class masses from the outer boroughs.  Or, as a store owner adjacent to the busiest Brooklyn subway station (Fulton Street), put it, showing an estimable level of economic sophistication:  "I pay good money to have my store here.  Is my rent bill gonna go on strike?"

Those who must be physically at their jobs (or whose customers, patients, or students must be) are hardest hit by this.  As for people like me?  If we don't already live within walking distance of our Manhattan offices, we can telecommute.

Limits to Capitalism: The New York City Subways and When Public Benefits Private

Aside from law firms and the business thereof—my genuine professional passion—I must occasionally share a personal passion, but only if it touches upon economics.  One personal passion is the almost unimaginable centrality of the subway system to New York City as it exists today.

Today's threatened subway strike in New York (which was averted by "stopping the clock" for four more days, at which point we'll be on the brink again barring a settlement), is such an occasion for breaking the rules about what you come to "Adam Smith, Esq." expecting.

What on earth do the subways have to do with economics and business?  Plenty.

If you look at a map of downtown New York in 1900, before the subways were built, there were no skyscrapers.  Look at the same map 10 years later (the first, primary, branch of the IRT opened in 1903, from City Hall to Harlem), and you will see a virtual curtain wall of skyscrapers down Wall Street and Broadway.  Did engineering technology change?  No—what changed was the ability of the subways—the physical infrastructure of the city—to deliver the throngs of office workers from Brooklyn, Queens, and the Bronx needed to make those skyscrapers economically viable.  

The same is no less true today. 

New York could not live without it.

Courtesy of the WSJ:

FAST MTA FACTS

• Carry 7,711,945 passengers on the average weekday
 
• Have 343 routes, 8,259 train and subway cars, 4,895 buses, 2,058 miles of track, 2,967 miles of bus routes, 734 train stations, and 63,884 employees
 
• Give New Yorkers about 2.4 billion rides each year
 
• Carry roughly one in every three users of mass transit nationwide and two-thirds of rail riders.
 
• Serve 14.6 million people in New York City, Long Island, southeastern New York and Connecticut.
 
• Are used by four of every five rush-hour commuters in New York City.
 
• Had a 2004 operating budget of $8.0 billion
 
• Last went on strike in 1980, when they were out for 11 days
 

Announcing "BlawgWorld 2006: Capital of Ideas"

With pride I would like to announce the release this morning of "BlawgWorld 2006," the first in what is promised to be an annual series of "e-books" comprising the best of the blawgosphere, brought to you by our friends at TechnoLawyer.  In their own words:

"According to various studies, approximately 80,000 new blogs launch every day, including dozens of legal blogs (blawgs). No one knows how many blawgs exist, but whatever the number, monitoring them would amount to a full-time job.

"For this reason, we've published BlawgWorld 2006: Capital of Big Ideas, a TechnoLawyer eBook designed to take you on a journey through 51 of the most influential blawgs.

"You cannot buy a copy of BlawgWorld 2006. It's free, but available exclusively to TechnoLawyer members. To receive your free copy, please use the form on this page."

The inaugural issue contains "best of" posts from 51 separate blawgs, and I am honored that the "sampler" from "Adam Smith, Esq." was chosen as the illustrative post featured on the BlawgWorld 2006 home page.

I encourage you all to take a look; clearly a lot of hard work has gone into this endeavor.  And in the true original spirit of the 'Net, it is, I repeat, completely free.

Unfortunately, I cannot offer all of you the free drinks I and other contributors will be enjoying tonight courtesy of TechnoLawyer to celebrate the launch of BlawgWorld 2006.  But if you're ever looking for a snappy bar in Tribeca, check out "Brandy Library," where we'll be congregating tonight.

Michael Lewis Explains It All

And now a moment to reflect—with sincere earnestness—on  what makes it all worthwhile.  

The text for this post comes, coincidentally, from an interview with Michael Lewis (an author so talented that, as they say, his shopping list makes gripping reading), who Bill Henderson and I just discussed last week. 

Lewis's first book, "Liar's Poker" (see the interview for dust-jacket images and Amazon links) covered Salomon Brothers at its apogee as bond-trading leviathan (the era, in the caustically incorrect phrase, of "big swinging d***'s");  his second, "The New New Thing," Jim Clark and Netscape at its apogee; and his third of course was "Moneyball" profiling Billy Beane, the nonconformist general manager of the Oakland Athletics who discarded the received wisdom of baseball scouting tradition and instead embraced a statistical, quantitatively-driven analysis of players that produced championship teams with rock-bottom payrolls. 

The natural question that occurs is, of course, why Lewis chose these three so disparate topics; what on earth do they have in common that tantalized him?  Here's Lewis' explanation (emphasis supplied):

ML: The only necessary ingredient for a book to work is for me to feel passionate about the material. I have to feel so enthusiastic about it that I can persuade others to feel the same. As a magazine writer, I get paid to dip my toe into new waters. So, for every book I write, I seriously consider as many as nine other options. The books are the subjects that truly hold my interest.

[Interviewer]: So you've written about bond trading, the internet, sports. Across those, what common trait makes people successful? More importantly, what makes them happy?

ML: These industries all employ high price people. They are talent with a "capital T". Every manager will tell you their most important assets walk out the door every night.

While there's no definitive answer, there's one trait that goes under-mentioned...a capacity for wonder and interest. You look at Jim Merriweather at Solomon, Jim Clark in Silicon Valley, or Billy Beane in baseball. Their great successes began with curiosity and openness. You may know everything, but it's what you learn after you know everything that's most important.

As for happiness, it comes from thinking your job has a purpose. The scarcest resource in the world is purpose. People who have purpose, other than money or social position, tend to be much happier.

Lewis has said it all, hasn't he?  About why we get up in the morning with energy and passion, why we've chosen the paths we have, why we inhabit the professional and personal ecosystems we do. 

Or, as Buddha allegedly said:  “Your work is to discover your work and then with all your heart put yourself to it.”

For those of you who may not have "discovered" your work yet, all I can say from across the perspective-chasm of one who has is, "Keep seeking."  There is no higher reward than finding it; and your heart will then need not be "put to it," but will race to pursue it.

Peter Drucker, 1909-2005

Peter Drucker, the management uber-guru who hated the term "guru," died at home in Claremont, California yesterday "of natural causes," a phrase all too rarely heard in our Big Medical Science era.  I'll leave the recitation of the facts of his life to the capable hands of The New York Times and the FT, but his passing deserves a word because of his vast and continued insight and perspective.  In these days of embarrassingly vapid "management" books (I won't name too many names, but Jack Welch, Lee Iacocca, and Donald Trump will give you my drift), Drucker was a sage for the ages.  Over 66 years, he wrote 35 books which were translated into 30 languages.

"Peter could look around corners," philanthropist Eli Broad, who knew Drucker for 30 years, said Friday. "He would say things that seemed rather simple but in fact were very profound. He saw the future."

Drucker's views stemmed from his focus not on corporations in the abstract, or buildings and machines, processes and systems, not in creating elaborate economic or managerial theories:  Drucker's focus was on people. Management's job was to chart a course and get out of the way. People were not an expense but a resource.

Interestingly, another business legend of the 20th Century, Warren Buffett, operates on the same principle (from a profile of him in today's WSJ):

Mr. Buffett believes that managers of these companies ought to be left to run their businesses without interference from him, and without having to hew to any unifying corporate strategies or goals. "We delegate to the point of abdication," Mr. Buffett says in Berkshire's Owner's Manual, a six-page manifesto posted on the company's Web site.

Famously, Drucker was also skeptical of grand predictions.  He was anchored in the concrete:

"There is only one valid definition of business purpose: to create a customer," he said 45 years ago. Central to his philosophy was the belief that highly skilled people are an organization's most valuable resource and that a manager's job is to prepare and free people to perform. Good management can bring economic progress and social harmony, he said, adding that "although I believe in the free market, I have serious reservations about capitalism." (from The Washington Post)

And here are some words of wisdom particularly germane to lawyers, information junkies that we are. The message is to be exceedingly selective about what you're doing as a firm leader (from a 1996 Forbes interview):

"Leaders communicate in the sense that people around them know what they are trying to do. They are purpose driven--yes, mission driven. They know how to establish a mission. And another thing, they know how to say no. The pressure on leaders to do 984 different things is unbearable, so the effective ones learn how to say no and stick with it. They don't suffocate themselves as a result. Too many leaders try to do a little bit of 25 things and get nothing done. They are very popular because they always say yes. But they get nothing done."

In 1999, the WSJ published the following on the occasion of his 90th birthday. It can scarce be bettered:

"Drucker is famous for a series of questions: What is our business? Who is the customer? What does the customer value? The answers to those questions, asked by generations of managers around the globe, became known as "the theory of the business."
The most distinctive hallmark of the managerial mindset is that it operates from that theory. Major decisions and initiatives all become tests of the theory. Profits are important in part because they tell you whether your theory is working. If you fail to achieve the results you expected, you re-examine your model. It is the managerial equivalent of the scientific method, starting with hypotheses which are then tested in action, and revised when necessary."

Pay a bit of heed this weekend; we will be exceedingly fortunate to see someone of half his stature again.

And for the record:

• The Los Angeles Times
• The Washington Post
• ABC News
• Forbes (including a wonderful republished interview)
• Bloomberg

 

---

Update (14 Nov 2005, 11:52 am):  Here's one of the last things Drucker wrote for publication.  Print it out and tape it up somewhere conspicuous (or put it under your pillow).

"Good Lawyers Write Well, Quickly, and Clearly..."

Obligatory, I suppose:

• While lawyers are less than 1% of the population, we evidently make up 5—6% of blog writers and readers, putting us behind computer professionals and students.
• "It's all words, that's all the law is."—Scott Turow.  And, my favorite:
• "Blogs break down the barriers."—Denise.

Once something is in The New York Times, with its own patented reality distortion field, that something is True.

"One from Column A,...."

Here are three rankings of top firms, all published this month.  Any ideas on which is what?

Ranking A	Firm	Ranking B	Firm	Ranking C	Firm
1	Wachtell	1	Cravath	1	Wachtel
2	Cahill Gordon	2	Wachtel	2	Cravath
3	Sullivan & Cromwell	3	Sullivan & Cromwell	3	Sullivan & Cromwell
4	Simpson Thacher	4	Davis Polk	4	Skadden
5	Cravath	5	Skadden	5	Davis Polk
6	Paul, Weiss	6	Simpson Thacher	6	Simpson Thacher
7	Cadwalader	7	Williams & Connolly	7	Cleary Gottlieb
8	Davis Polk	8	Cleary Gottlieb	8	Latham & Watkins
9	Kirkland & Ellis	9	Latham & Watkins	9	Weil Gotshal
10	Milbank, Tweed	10	Weil Gotshal	10	Covington & Burling
		11	Shearman & Sterling	11	Kirkland & Ellis
		12	Paul, Weiss	12	Shearman & Sterling
		13	Covington & Burling	13	Paul, Weiss
		14	Wilmer Cutler	14	Debevoise
		15	Kirkland & Ellis	15	Sidley Austin

I'll be merciful:  "A" is profits per partner, courtesy of the AmLaw 100; "B" is Vault's annual "prestige" rundown, as ranked by partners; and "C" is Vault's prestige tally as ranked by associates.   Now, the sizable overlap/identity between "B" and "C" is no surprise; if associates don't entirely get their opinions about things like this from partners, that is surely their primary source.

The newsworthy item to me is how PPP correlates with perceived prestige:  7 of the 10 firms with the highest PPP also figure in the top 15 most prestigious in the view of both partners and associates.  The three exceptions?  Well, I would argue they're truly exceptions:

• Cahill Gordon has always followed its own muse, and thumbed its nose at convention with the certainty and finality that their internal performance is all they need to care about.  (Their website, almost shockingly simple and quaint, caveats in a fashion both prissy and inarguable, that it "is primarily intended for use by law school students considering a career at our firm.")
• Milbank and Cadwalader, on the other hand, while Household Names in anyone's book, are strongly on the comeback from some years in the wilderness, and perception may not yet have caught up to reality.

Overall, a triumph of the marketplace.

Where Are The Non-AmLaw 100 Firms?

It takes little discernment to conclude that "Adam Smith, Esq." could be more appropriately subtitled "...an inquiry into the economics of [Big] law firms."*  Not only would this conclusion be correct, but since I know for a fact that you, dear readers, are an exceptionally discerning lot, I am telling you nothing you don't know.

Still, the question arises as to how much of the total landscape of law-firm-land I am consciously overlooking.  Today we have an answer.

According to the US Census, in 2003 (most recent statistics available), the total revenue for "taxable" (i.e., not non-profit) law firms was $178.95-billion.   Meanwhile, over at the Bureau of Labor Statistics (the government is not known for its embrace of one-stop-shopping), we learn that about 521,000 lawyers were employed in for-profit law firms (i.e., not government or in-house corporate).**  

And thanks to The American Lawyer, we know that the total revenue of the AmLaw 100 for 2004 was $46.04-billion and that those firms employed a total of 68,186 lawyers.   Now you can see this coming, right?

AmLaw 100 vs. All Law Firms

	AmLaw 100	Non-AmLaw 100 Law Firms
% of lawyers (headcount)	13.1%	86.9%
% of total (private) legal industry revenue	25.7%	74.3%
Average revenue/lawyer/year	$675,200	$293,400

You can thank Craig Williams for setting me loose on this trail.

What do I conclude?  First, that the focus of this blog is not about to change.  Second, that it would be interesting to see an historic time-series of this data.  My educated hunch?  The AmLaw 100's share of total legal-industry revenue is growing, as is their share of lawyer headcount:  But revenue is growing at a faster rate.

---

*The phrase "an inquiry into" is lifted from the full title of Adam Smith's 1776 masterpiece, which is An Inquiry Into the Nature and Causes of The Wealth of Nations.

**The 521,000 figure does not appear directly on the page I cite, but I derived it from their total full-time lawyer headcount (695,000) combined with their observation that "3 out of 4" lawyers are work in law firms of all sizes (including solo practitioners).

Economic Literacy for All

According to The Wall Street Journal, the popularity of economics as an undergrad major is rising:  Up 40% in the US in the past 5 years, and the #1 major at Harvard, Columbia, and NYU.  Even in Russia and Poland—or, when you think about it, especially in Russia and Poland—its popularity is surging.   It comes at the expense of history (not a good thing), political science (a very good thing), and sociology (a spectacularly good thing).

With plausible, if not slam-dunk, justification, the reporter attributes the shift to a perception by undergrads that economics will be perceived as a smart choice for the job market after graduation.

Be that as it may—and I cede pride of place to no one in my belief in the intrinsic value of a classic, well-rounded "liberal arts" education—the good news here is that anything under the sun we can do to increase the economic literacy of the American populace is a per se good.  Until the majority of people, and politicians, understand such rock-bottom principles as opportunity cost, unintended consequences, dynamic vs. static analysis, and even good old supply and demand, we will continue to make bone-headed public policy decisions such as requiring the last 0.01% of asbestos removal, at a price per life saved of about half a billion dollars, instead of installing more highway guardrails, at a price per life saved of about $25,000.

Why New York, London, & Hong Kong Will Endure

Janet & I had the delightful experience of being able to meet Ernie Svenson, creator of the early-adopter blog "Ernie the Attorney," for drinks last night in New York—he was here for the weekend to see, among other things, the new MOMA (highly recommended).

Meeting fellow members of the blogosphere is, in my experience to date, 100% a home-run event.  For those of you who have blogs, reach out to people you've connected with; these are opportunities in the making.  For those of you who don't, reach out to people you know "off-line."   Fabulous as technology is, there is no substitute for face-to-face.  This gives me great confidence that cities like New York, London, and Hong Kong will endure, grow, and prosper.

Did I mention that I'm a city person?

100 Million "Missing" Asian Women

So this from Slate has nothing to do with law firms, but it's too delicious an economic commentary to pass up.   Asking, "What is economics, anyway?," the piece proceeds to analyze (and largely debunk) a sinister theory first put forth 15 years ago by Amartya Sen that there were 100-million "missing women" in Asia compared to what one would expect if boys and girls were born in equal numbers.  And  Sen darkly insinuated that this was attributable to the forces of misogyny in general, including female infanticide and even forced export of prostitutes. For want of a more convincing explanation, this has remained accepted, if still lore.

Comes now another economist to put forth a different, and innocent explanation.

One's human reaction is primarily relief that an alleged pattern of atrocities is evidently no such thing; the reaction of homo economicus is to be reminded of the uses, and abuses, of statistics.

Editorial to U.S. News & World Report Re Your Law School Rankings: Cut it Out!

Last Friday I participated in a day-long conference at Fordham Law School on "Professional Challenges in Large Firm Practices" and was invited by Professor Bruce Green, creator of the conference, to be a speaker on one of four panels, on "The Billable Hour." 

The quality of erudition across the panels and throughout the audience was impressive, and I once again am grateful that I live in the city I do for the overwhelming wealth of resources and events it provides and makes available..  But, chauvinism aside (because many of the panelists came from out of town), a fascinating discussion arose—not one remotely on the formal agenda—about the nefarious impact of US News & World Report's law school ranking survey.

Coincidentally, now we have The National Law Journal reporting on the lengths law schools will go to in order to juice their rankings.  Law schools have (reportedly) gone so far as to create computer models mimic-ing the US News ranking protocol in order to see how they could best improve their rankings, and the consequences of the name-brand competition, whether intended by US News or unintended, border on the vicious.  For example, because of nearly-exclusive emphasis of LSAT scores and undergraduate GPA's:

"There goes the Peace Corps, there goes a Ph.D., there goes work experience,"

says Jeffrey Stake, a law professor at Indiana University School of Law-Bloomington.

To me, the real question boils down to whether the US News scorecard doesn't drive law schools away from their fundamental mission of educating professionally impeccable and ethically rigorous future members of a noble profession.  The problem is that schools are distracted into gaming the system (can you say, "the AmLaw 100 and profits per partner?"):

"There are a lot of schools that spend huge amounts of time on this. We don't have any interest in gaming the system, but we certainly want to put ourselves in the best light that we can," said [Susanah Mead, the interim dean at Indiana University School of Law-Indianapolis].

And the defense for US News?  "U.S. News & World Report is aware that "some of the schools have a numbers game," said Robert Morse, director of data research for the publication."

I'm sorry, but that's not good enough.  The sad, but utterly predictable, unintended consequence of the US News ranking is law schools' toeing the line on metrics they did not invent, should not subscribe to, and which debase and trivialize the educational experience of law students nationwide.

US News knows better than to pretend it could not have foreseen this, and the sensationalism it enjoys from it (knowing it's the only game in town) magnifies rather than excuses their ethical lapse.  They should suspend the rankings forthwith.

"There's No Crying in Baseball"

Cut me a break on this one, folks. 

Opening Day is scant weeks away, but all the baseball headlines are about lately are steroids, Congressional inquiries, allegations and denials, asterisk'ed records, and taking-the-Fifth's.

But sometimes, from a situation that can only be characterized as depressing and painful and confusing to think about, comes a minor work of genius that, for a graceful moment, is like a surprising bolt of sunshine through the clouds and overcast.  That light, and enlightenment, is on today's New York Times op-ed page, courtesy of the deeply talented Michael Chabon.  Just an excerpt:

"I don't know what is to be done about this latest debacle, and neither do you. No, what I want to know about Jose Canseco is, how come I still like the guy so much?

"No, I'll go even further: I admire him. Not in the way I admire Clemente - not even remotely, which says something about what an ambiguous thing admiration can be. Like all showboats, Canseco courts the simpler kind of admiration, starting in the mirror each morning. He is slick, he drives too fast, he is nine feet tall and four feet wide and walks with a roosterish swagger. But there has always been something about him, about his style of play, his sense of self-mocking humor, his way of looking at you looking at him, that goes beyond vanity and self-aggrandizement, or being a world-class jerk.

"Canseco has been described as a charmer, and a clown, but in fact he is a rogue, a genuine one, and genuine rogues are rare, inside baseball and out."

Read the whole thing.

"Never Write a Letter and Never Destroy One"

Cardinal Richelieu's words came to mind when Alan Abelson, the wry and engaging author of Barron's weekly "Up and Down Wall Street" column, considered the fate of Boeing's CEO, Harry Stonecipher, who as we all know tendered his resignation to the Board last week after it was discovered the (married) Mr. Stonecipher had engaged in a brief affair with a (divorced) female Boeing executive—despite the fact that this ungodly stupid frolic violated no express policy of Boeing.  More jaw-droppingly stupid than even that, Stonecipher recorded his transgression unto time immemorial in an internal email to his mistress.

What, you're wondering, has this to do with the economics of law firms?

We often pay lip service to the notion that reputation and integrity are everything, but if this tale doesn't hammer home the point, nothing will.  More germane for our purposes is that Stonecipher himself, when he came out of retirement to re-assume the reins at Boeing two years ago, did so with a mandate to be the Ethics Czar and to instill a culture of zero tolerance of gray or borderline practices at Boeing, which was just recovering from influence-buying and theft-of-trade-secrets scandals.

As much as any CEO of an F1000 firm, each and every partner in an AmLaw 200 firm puts not just their professional, but their personal, repute in play every morning.  The career you save could be your own.  Don't f*#@ it up. 

Professional Behavior Under Incentives

So this has nothing to do with the economics of law firms, but it has a lot to do with professional behavior under incentive regimes.  Two economists at the University of Chicago have published a paper analyzing whether realtors (representing the seller of a home) work as hard on their client's behalf and extract as much value for a home as they do when they're working for themselves, selling their own home.

Have you already guessed or shall I tell you?  As competently summarized by The New York Times, in a study of nearly 100,000 home sales over ten years (1992—2002) outside Chicago, realtors selling their own homes typically kept it on the market 9.5 days longer and secured a median price 3.7% higher than a comparable home for sale by you or me.  Unprofessional?  A breach of duty to the client? 

Not so fast:  Because of the commission structure, there is truly little in it for the realtor to hold out very long for a better offer that may, of course, never come.  Although the standard 6% commission is, in my opinion, scandalously high and prima facie evidence that the National Association of Realtors constitutes a cartel, the seller's individual realtor only gets one-quarter of that 6%, or 1.5% (their half of the half that goes to their firm). 

So for a $500,000 home, the agent would get $7,500—say, for 10 days' work.  Now suppose they could add 3.7% to the price by working for another 10 (OK, 9.5) days.  The house would now sell for $518,500, and their net gain in income for doubling their efforts would be $277.50.  $7,500 or 10 days work or $7,777.50 for 20 days?  But when selling their own home they of course get to keep at least 95.5% of the incremental price (assuming 1.5% still goes to their own firm and 3.0% to the buyer's realty firm).

Now comes the important part:  Recall that this particular 10-year period spans from pre- to post-internet.  Pre-internet (1992—1995), the difference in favor of the realtor's own home was 14 more days on the market and a 4.9% higher price.  Post-internet (2000—2002), the numbers shrank to a 2.9% higher price and 2.5 more days on the market.  Thank you, realtor.com!

Something similar (see below) is happening to the mainstream media courtesy of the blogosphere:  The cartel's power is under siege from newly-widely distributed data. 

Don't you hate it when your information advantage starts to be eroded?

The Blawgosphere as Distributed Intelligence

A fellow new to me, one Bruce Marcus (a self-described former Upper West Sider, I hasten to add, as well as someone with an enviable first name), alerted me to a post of his about the impact of legal blogs:

"Aside from political blogs, few areas have produced more interesting, valuable and sophisticated material than the legal profession. You have only to look at the growing number of blogs for and by lawyers to realize that the massive power of law bloggers can ultimately influence the law itself, and certainly its practice.  Law firm blogs report on techniques of practice management, practice news, practice gossip and practice techniques. Led by a long list of pioneers, such as Monica Bay (The Common Scold), The Volokh Conspiracy, Andy Havens, Dennis Kennedy, Bruce MacEwen, Larry Bodine, Jerry Lawson, Sabrina I. Pacifici, Robert Ambrogi, and many others, the network of law bloggers has blossomed."

Excuse me while I finish blushing.

To my mind, and I'm confident Marcus would agree, the impact of blogs—particularly in knowledge-intensive domains such as the law itself, management of law firms, and practice group management—stems from their spontaneous creation of a distributed network of wisdom and knowledge. 

And, unlike in the world of "MSM" (mainstream media), a Darwinian competition enforces a discipline upon content, meaning that cant, obfuscation, and insincerity will be rejected and ignored, and that thoughtfulness, a felicitous tone of voice, and critical insight will rise to the top. Put more simply, if The New York Times has a bad day, I'll still read it tomorrow; but if a blog disappoints, there are plenty more where it came from.

Proof that this "distributed intelligence" is a genuine phenomenon was "Rathergate," where a powerful array of arcane specialties (the fontography of 1970's-era IBM Selectrics, for example) spontaneously assembled to deal a blow to the august CBS News division.  I wonder when or if there may be such a seminal event in law-land.

Christo's "The Gates"

The big event in New York today is the unveiling (actually, "unfurling" is more like it) of Christo's project, "The Gates," in Central Park.  Janet and I were in the Park with the dog by 7:00 am to watch the process begin. 

All I can say is that if any of you are in a position to get to New York before February 27th (when they come down), do it.  Magical.  The cumulative impact is hard to exaggerate.

One-Stop Data Dump

One-stop data shopping about the size and composition of the legal services industry?  It's here on one handy page put together by "Envision Agency," a new name to me, which describes itself as a "full service marketing agency specializing in the legal vertical."

Hot dots from the data:

• In the US, there are about 900 firms with at least 50 lawyers;
• Total revenue of the industry is $118-billion;
• There are approximately 250,000 (they say 249,969, an exercise in dubious precision) firms;
• Employing 1,464,737 people (see above).

Other information is not data, but opinion.  For example:

• Mergers and consolidations are here to stay, or, as one might put it, to accelerate;
• The increasing professionalization of management on the business side is likewise;
• As is global expansion.

Great insights?  No.  Handy "bookmarkable" reference?  Sure.

Blogging = Changing the System?

Ernie Svenson, one of the "Savvy Blawgers" and  host of Ernie the Attorney, was just interviewed on JD Bliss about how he came to be a blogger, and among other points was this exchange:

JDB:  Has blogging been important to you as a means to address some of the frustration you feel with the legal system?

Svenson:  There is a lot of hype now about blogs.  My view is that blogs matter because they represent a new way of communicating that is in its infancy, but one that is clearly growing at a rapid pace.  When I first got involved in blogging it was completely refreshing to me.  It got me in touch with a lot of lawyers who felt as I did, and was like going to a specialized bar association meeting of like-minded colleagues.  I have to admit that, after almost three years, there are times when keeping my blog fresh – which takes several hours each week – seems like more work than it should be.  Overall it is completely rewarding and that’s why I continue doing it. 

But the real strength of blogs is that they still aren’t mainstream, so the opinion of recognized bloggers carries real weight.  For example I was recently among a group of “savvy blawgers” who were asked by Bruce MacEwen’s “Adam Smith, Esq.” blog to give opinions on how the most sophisticated law firms will be managed five or ten years in the future.  That kind of opportunity really can help change the legal system to better serve clients, and it shows why blogging is very much worthwhile for me.

Thanks, Ernie!  I just thought I was asking a thought-provoking question, but now I realize I was really helping change the legal system.  Where do I sign up for my royalties?

Debating Affirmative Action: Ideology or Data?

The current issue of the Stanford Law Review has an empirical analysis of the impact of affirmative action in law school admissions on black students, written by UCLA Law Professor Richard Sander, which concludes that the "costs of preferential admissions appear to substantially outweigh the benefits."  Sander's thrust is that black law students would perform better, achieve higher class ranking, and pass the bar at greater rates, were they to attend less prestigious schools.

Can you say "incendiary?"  That's why the debate hosted by Legal Affairs between Sander and my good friend and colleague Associate Professor William Henderson of Indiana University Law School/Bloomington is such an important one, and why Bill's opening point (in what is a remarkably civilized discussion) is essential to approaching the issue:

I don't think the legal academy will reach any constructive conclusions on your study until we are capable of having exchanges that are driven primarily by data rather than ideology.

Wouldn't a "data-driven" debate of this issue of consummate public importance be fascinating? I personally don't have much optimism it can be pulled off, but all of you who care about this issue deserve to take a look and understand the contours of the evidence.

I'll Drink to That. On Second Thought,...

Which profession is most likely to suffer from stress, depression, and alcohol or substance abuse?  That's right—here's lookin' at you, kid.  According to the FT, alcohol-related deaths in the UK among lawyers are double the rate of the general population, and in the US the ABA puts alcohol abuse among lawyers at 18% vs. 10% nationwide.

Assuming these statistics are roughly accurate (and one of my motto's is "never debate the facts"), the two obvious questions are:  Why?, and, What's to be done about it?

Concerning why, the FT lines up the usual suspects:  Law is an inherently stressful profession where the expectation is of invariant perfection, requiring long hours, a scrupulous eye for detail, and possibly a tendency towards pessimism, or at least a congenital absence of spontaneity and exuberance.   I would add that the business- and marketing-driven nature of large firm practice may be at odds with the academically or intellectually inclined "do-gooder" self-image that many law students start out with, causing cognitive dissonance at the least and utter professional flameout at worst.  Finally, virtually all associates and a substantial proportion of partners are convinced that their lives are not their own, and study upon study has confirmed that the perception of lacking control over one's situation—or even basic information about one's firm, as exemplified by the headhunter who remarks that "we now have partners asking us what is going on at their own firms"—magnify stress.

But similar observations could be made about other high-profile and high-stakes professions, not least among them medicine.  What makes lawyers different? 

I will venture two hypotheses, neither, I hasten to add, supported by a scintilla of data:  They are merely my suppositions based upon a career in the profession:

• First, lawyers are typically agents rather than principals.  By this I mean that they are seeking the attainment of goals largely dictated by others, and commonly with a set of facts and circumstances largely if not completely pre-determined.  This is archetypal of litigation, but also largely of corporate and transactional work.  Most high-achievement Type A professionals that I know, including myself, instinctively prefer the role of client to broker, talent to agent, and executive to employee.
• Second, the lawyer's role as classically conceived is to be risk-averse, cautionary, even negative.   Theirs is to foresee the future debacles and, by astute draftsmanship or trusted counsel, avert ruin or risk.   This is a far less inherently jolly approach to life than that of the innovator or deal-maker.

Which brings us to:  What to do about it?

If you are among the legion contributing to these statistics, I have serious and heartfelt advice:  Quit.  Do something else.  Start now.

Both positive and negative reasons compel me to say this.  The negative reasons are to escape whatever pressures are driving self-destructive behavior, and one's doctor, priest, and spouse would presumably second that notion entirely on its own and independent of any other motivation.

But the positive reason is, to me, far more compelling:  You aren't going to be as good as your unconflicted colleagues.  If you love what you're doing 110%, you will excel without ever looking at the clock.  But if you're only 85% committed, there's someone down the hall who is 110%.  They win, you lose.

I Hope You're Reading This in English

OK, so this has nothing to do with law firms per se; it's still fascinating (and we're allowed to have recess even while school is in session).  The FT has an analytic/speculative piece comparing the economic performance in the post-WWII period of (a) the US, the UK, Canada, and Australia [a/k/a the "English-speaking" world] with that of (b) Germany, France, Italy, and Japan [non-English speaking, duh]. 

The story in a nutshell?  Starting in 1950 with average GDP per capita at about 35% of the US level, the non-English speaking group grew to about 80% of the US level by 1990, but has since fallen back to 70%; and the UK/Canada/Australia combo has been comfortably ensconced in a narrow band of 70-80% of the US level for the entire time.  (The article's charts are truly well done; be sure to take a look, as they virtually tell the entire story without text.)  So those are the facts.  The interesting question is, "What's going on here?"

Starting with the obvious, at the end of WWII Germany, Italy, Japan, and even France were economic basket cases; they had nowhere to go but up.  The late Mancur Olson contributed the best formulation of an additional consideration:  As economies become more prosperous (and as people become more complacent), "distributional coalitions" seeking their own advantage arise and gain strength, calcifying the economy.  WWII busted the Axis' pre-war coalitions asunder, and it took them 40 years to re-establish themselves. 

Meanwhile, the converse was going on in the US, UK, Canada, and Australia.  When the conspicuous pain of stagnant productivity, high inflation, a crummy manufacturing sector and a crummier stock market all combined to assault those economies in the 1970's, everyone from policy-makers to business executives decided to actually do something:  And the result was an unprecedented wave of deregulation from the public side and massive financial re-engineering (spinoffs, LBO's, hostile takeovers, recapitalizations, de-conglomaterizations, etc.) from the private  side.  Over time, these trends had the predictable beneficent impact.

It gets better.  (At least it gets better if you're reading this in the original English and not as translated into German, French, Italian, or Japanese).   The late 20th-Century and (so far) early 21st-Century acceleration of globalization has had a disparate impact on the manufacturing sector vs. the service sector.  Manufacturing is the quintessential activity capable of being relocated abroad. 

But services are tougher.  (A haircut, a dinner, or even an opera performance, might be cheaper in Mexico, but there are, shall we say, other considerations.)   With relatively greater labor market mobility in the English-speaking countries, and with relatively less reliance on a robust manufacturing sector to begin with, service sector growth and innovation has found fertile soil here. 

If you're a lawyer, this is very good news (see, you knew I'd connect it somehow).

As to whether it will continue, the FT ventures no opinion.  But then, the global economy is not and never has been a zero-sum game.  The happy circumstances we English speakers find ourselves in are not remotely tied to the misfortune of sclerotic economies elsehwere.  We might, however, be well advised to take a lesson and not drive into that same snake-pit of indulging distributional coalitions.

"Worldly" Philosophers? Yes.

The world has just learned that Robert Heilbroner, author of the justly famous and best-selling The Worldly Philosophers: The Lives, Times, and Ideas of the Great Economic Thinkers, first published in 1953 and still in print, died here in Manhattan last week at age 85.  "Worldly Philosophers," which I read as a teenager and which cemented my fascination with economics, profiles, among others, Adam Smith, Karl Marx, David Ricardo, and Joseph Schumpeter, but the operative word here is "worldly"—what Heilbroner cares about is the impact these men's thoughts have on our everyday lives.  Those he profiles thought large thoughts on a large stage, whereas, to me, far too many of today's economists think crabbed and impoverished thoughts on an intensely mathematically-driven stage:

"The worldly philosophers," Dr. Heilbroner said in a 1999 interview, "thought their task was to model all the complexities of an economic system - the political, the sociological, the psychological, the moral, the historical. And modern economists, au contraire, do not want so complex a vision."

If you haven't read it, a word of advice: Do.

Tales of the Takeover Decades from Inside Wachtell

I just finished reading Tombstone:  A Lawyer's Tales from the Takeover Decades (Farrar, Straus & Giroux:  1992) by Lawrence Lederman, former chairman of the corporate practice at Milbank-Tweed (and still a partner there), who started his career as an associate at Cravath in 1967 and joined Wachtell as lawyer #24 six years later, soon to become a partner. 

The book recalls his "present at the creation" moments of being in on, and watching unfold, the astonishing financial-engineering explosion that was the late '70's and early '80's:  Bob Bass, Ivan Boesky, Carl Icahn, KKR, Michael Milken, Boone Pickens, et al.  All the "barbarians" are present and accounted for, but so are the remarkably dedicated, sagacious, and creative lawyers who facilitated the "ordinary" deals, primarily by educating sometimes-naive clients over what the marketplace would inexorably cause to happen once a company was "in play," but who, more importantly, changed the rules in many deals by inventing such devices as the leveraged buyout, the recapitalization, and the poison pill.

Aside from the sheer rollicking pleasure of reading about high jinks by these masters of brinksmanship—and learning just how much of it was truly made up as they went along—Lederman provides a window into two topics near and dear, or so I hope, to the hearts of readers of this blog:  The first is simply a high-level series of examples of how real-world economic calculations are made by some truly gifted strategists; and the second is insight into the high-end practice of law.

An instance of economic calculation concerns "golden parachutes," the late-1970's invention seen largely by the media and the public as exercises in naked greed and self-dealing:  What, one can still hear the critics decrying, could possibly justify throwing millions of dollars at executives who, by hypothesis, will perform no further service?   That analysis falls into the popular fallacy of looking at matters statically rather than dynamically. 

In other words, it assumes the enhanced and accelerated payments to departing executives exist in a vacuum without connection to the surrounding context of the takeover.  As Lederman correctly observes (p. 128), "in fact they facilitated the takeover.  It was the board's way of easing management out."  And, consider the human context as well: 

"For many [in senior management] the jobs had taken years of effort to achieve....  The knowledge acquired by many of these executives was largely limited to the industry in which their company was involved.  There would be few opprtunities for them elsewhere.  A senior manager's job also carried with it a position in the community and often defined social standing.  Much of that would be lost."

Or consider Marty Lipton's shrewd decision to focus Wachtel exclusively on the "defense" side of takeovers (p. 211, emphasis supplied):

"Opposing [Michael] Milken positioned Wachtell Lipton as primarily a defense firm.   The choice was not a necessary one.   Skadden Arps flourished representing both sides.  But limiting representation to target companies was a choice that Goldman Sachs had made years earlier, and it had proved very profitable for them... The early decision of Lipton to say that the firm would not join with Skadden Arps in raids [also] proved very successful.  [...]   When the poison pill defense was developed by Lipton and validated by the courts at the end of 1985, Wachtell Lipton's place as the premier defense firm was assured."

This constitutes one of the boldest, most decisive, and most successful market positionings by a law firm in the late 20th Century.

As the last example of consummate strategic thinking, consider this tactic by one Jack Seabrook, chairman of IU International, a $2.5-billion conglomerate as of 1979.  One of IU's subsidiaries was a 58%-owned Canadian utility, which the Canadian government strongly preferred to see majority-owned by Canadians.  Seabrook had no particular love for the utility business, so watch his thinking (p. 139, emphasis supplied): 

"IU, Jack told us, planned to start an exchange offer in Canda, exchanging the stock of its subsidiary Canadian Utility with IU's Candian shareholders for IU common stock.  The exchange would only be made in Canada.  In the proposed swap of stock, IU's ownership of Canadian Utility would be reduced from 58 to 48 percent.  [...]  For Jack, however, the proposed swap was the official scenario, not the way he would like the matter to come out.
       "What he thought might happen, Jack told us, was that once he announced an exchange offer and indicated that IU was prepared to reduce its ownership below a majority, there might be bids from a number of Canadian companies for IU's whole majority interest in Canadian Utility.  That would give him an opprtunity to negotiate for the sale of control, affording IU a chance to get a large premium price..."

And so, indeed, does it proceed.

Finally, consider his essential distillation of the differences between investment banking and law firms, including his deeply insightful, almost off-handed, observation about an "unintended consequence" of the billable hour (p. 118, emphasis supplied):

"[Investment] banking firms were oriented to doing transactions that brought in fee income and were sensitive to changes in the market.  [...]  Most partners were well off financially and retired in their early fifties.  Important responsibilities were necessarily given to young people, all ready to embrace change.  In the law firms, however, changes in the marketplace had to filter through to the top-tier lawyers, who were tradition-bound, much older than their bankign counterparts, and remote from the market.  Also, lawyers billed on an hourly basis, making one kind of work not much more profitable than another.  As a consequence, law firms rarely developed new specialties.  And lawyers didn't move around from firm to firm as much as business people.  Accordingly, there was limited ability to move or to grow into new areas of the law."

Wachtell, of course, up-ended the billable hour as the default billing methodology, and, with that, proved its ability to "move into new areas of the law" in spades.

Alas, Tombstones is out of print.  I found my copy at Powells, but you might also try Amazon, Alibris, or other book search sites [ISBN# = 0374278458].  You will be deeply rewarded.

25 Years of Legal Technology

The estimable Ron Friedman, who's been covering legal technology since 1989, has done a nice recap of the past 25 years of legal technology for The American Lawyer.  Two messages here:

• No matter how much you may bitch and moan at technology today, it's useful to be reminded how far we've come. I personally recall when Davis-Polk used vi for word-processing.  (Count yourself fortunate if you've never heard of "vi"; it's a UNIX text editing program [with apologies to the Slashdot crowd].)
• Predictions of where technology will go are utterly useless; the only meaningful rule is to be ever-vigilant, flexible, and to adapt.

Sometimes in reading articles like Ron's I am momentarily seized by the desire to be 10 years old again, just so I could live to see another generation of technological innovation.  But then I remember the purgatory that was adolescence and come to my senses.

Will the Real Adam Smith Please Stand Up?

Adam Smith's thought (the real Adam Smith, that is) has been famously characterized by the economist George Stigler as a "stupendous palace erected upon the granite of self-interest."  I have long labeled this a "mischaracterization," and I am now pleased to report that I am in good company. 

To be sure, "self-interest" is a real phenomenon, albeit a rather humdrum one. Of far greater significance to Smith's thought, and his intellectual legacy, was his bedrock—and spectacularly uncommon at the time—belief that individuals, even the impoverished and unschooled, knew and understood their own best interests far more keenly than the wise and virtuous classes that were then readily perceived as their betters. 

This core faith in the judgment of every individual is the foundation upon which Smith rests his aversion to heavy-handed governmental intervention in the economy:  It is not (just) a "positive" argument Smith is making against excessive government involvement (i.e., the argument that the government tends to get it wrong, and that its interventions have pernicious unintended consequences); rather, it is primarily a "normative" argument (namely that the intelligence and autonomy of each individual should be minimally interfered with, and then only for the most compelling reasons and where there are no meaningful "less intrusive" alternatives).

In his crystal-clear but inimitable prose:

"It is the highest impertinence and presumption... in kings and ministers, to pretend to watch over the oeconomy of private people, and to restrain their expence either by sumptuary laws, or by prohibiting the importation of foreign luxuries. They are themselves always, and without any exception, the greatest spendthrifts in the society. Let them look well after their own expence, and they may safely trust private people with theirs."

Need I add that these observations are of wide applicability today?   (Can anyone say, "school vouchers," where the wise and virtuous classes would deny poor parents the educational choice they themselves enjoy for their privileged children?)

But enough editorializing for this quarter; in case you hadn't picked up on it, I am a profound and enthusiastic admirer of the original AS.

And yes, I do believe he'd have his own blog today.

Lawyers, Economists, and the Law of Unintended Consequences

Stories that provide real-world confirmation of our core beliefs are all but irresistible—even if fundamentally intellectually unchallenging.  Two of my core beliefs about analyzing policies at the intersection of law and economics are:

• a "static" analysis that assumes people and market forces will not react to the new policy loses to a "dynamic" analysis that assumes they will, every time; and
• beware the long arm of the law of  unintended consequences.

So this piece by the admirable Virginia Postrel (a fellow Princetonian, but don't hold that against her) is a must-read.  It discusses the "catastrophic failure" of Texas' school finance reform initiative nicknamed the "Robin Hood" project, which was designed to shift property tax receipts from wealthy districts to poorer ones by "confiscating" all property taxes above a certain "threshold" value level.  For example, when the threshold was initially set at $340,000, 50% of the property tax collected on a $680,000 house (double the threshold value) would be redirected by the state elsewhere and would not be available to fund local services in the $680,000 house's district. 

Now, how long do you think it will be before buyers decide that (relatively) service-deprived $680,000 house isn't such a great deal?  But you have to read the article to the end to learn who the geniuses behind this well-intentioned scheme were.

You Can't Make This Up

Bar exam hypothetical:  A two-lawyer, one-secretary firm is handling a malpractice case against a bankrupt hospital.  In September a key deadline in the matter—when claims must be filed to be recognized as pre-bankruptcy and therefore entitled to preferential treatment—is set for December 31. 

Also in September, Partner #1 receives word that his long-standing petition to adopt a child in China has been granted and he must fly over immediately.  He doesn't return until late November.  Meanwhile, Partner #2 is called up for active duty and departs for Iraq.  The secretary, alone in the office, goes into premature labor and is out on maternity leave from December through February.

The firm misses the deadline.  "Excusable neglect?"

No.

Gossip Time-Out

For the first time, the inimitable Vault site solicited partners', not just associates', opinions for its annual "Most Prestigious Firms" ranking.  Here we go:

1. Cravath
2. Wachtel
3. Sullivan & Cromwell
4. Davis-Polk
5. Skadden

...etc.  Once again, in a victory for the home team, eight of the top 10 are NYC-based (#7 Williams & Connolly and #9 Latham being the exceptions), as are 16 of the top 25.

Meanwhile, Legal Week posed a different question to its UK base:  How do you see the global legal marketplace ten years hence?

Despite a very rocky past couple of years, Clifford-Chance was judged most likely to be the premier UK-based international player (41%), beating out Freshfields (29%) and Allen & Overy (12%).  Will the leading global firm be?:  UK-based (7%);  US-based (44%); "half and half" [in the Azores, perhaps?] (49%).

My votes?  I have very little quibble with the "most prestigious" rankings (kind of like debating whether Jeter or A-Rod adds more to the Yankees), and I think the 7%-UK/44%-US split of the Legal Week poll means the handwriting is on the wall.

Back to work....

What if "None of the Above" Had Teeth?

After all the Sturm und Drang surrounding implementation of Sarbanes-Oxley, how "reformed" are corporate boards?  According to Ira Millstein, not very.

How could this be?  Chalk up another one to human nature:  "My impression is that management does not like reform and so complies and complains and resists....[Moreover,] management never much liked boards."  Nor is it fun any longer to be a visible public-company director.  Once board membership was limited to "cronies," "harmless academics," and the occasional obligatory "woman or minority," but now CEO's cannot be so confident their board will be a lap dog.

Still, management has a virtual hammerlock over the nomination of directors, and since a nominee can be elected with a single vote (say, the CEO's) even if all other shares vote "withhold," there is no incentive for management to change its ways.  Millstein proposes an ingenious reform:  That nominees must win a majority of all votes cast, so that "withhold" essentially becomes "against."  At first glance, I like this enormously:  It has the lawyer's (and the economist's!) virtue of drastically changing the behavioral incentives by "merely" changing a procedural rule.

Imagine if "none of the above," as a ballot-box option, could defeat actual candidates for the Congress and Presidency of the United States.  Now there's a thought experiment for you.

Punitive Damages and the Law of Unintended Consequences

This has nothing whatsoever to do with the AmLaw 100 and their kin, but it's such a juicy example of the Law of Unintended Consequences that I have to call your attention to it.

Most readers of this blog have probably heard that California Governor Arnold Schwarzenegger's budget proposal calls for the state to take 75% of punitive damage awards, on the stated ground (putting the state's desperate need for revenue to one side) that since the purpose of "exemplary" damages is to make a punitive statement about the defendant's egregious misconduct, the goal is achieved even if the individual plaintiff does not collect in full.  Surprisingly, according to Columbia Law School Associate Professor Catherine Sharkey, eight states already have "split-recovery" statutes.  But consider their possible second-order effects:

• After a punitive damages award, but before appeal, the parties will have an almost overwhelming incentive to settle for $X where: X > [(Compensatory Award) + 25%(Punitive Award)] discounted by (odds of overturning the award on appeal).  By settling at a level that essentially guarantees the plaintiff what they would net after the state's take, and by characterizing the settlement as fully compensatory in nature, Pareto-optimality is achieved as between the parties.  (Glossary detour:  A "Pareto-optimal" outcome is one where every party is at least equally well off as before, and at least one party is better off—here, the plaintiff is equally well off and the defendant is far better off because they only shell out 25% of the punitives instead of 100%.)
• As well, since judges and juries will know about the state's take going in, might not this cause punitive awards to grow rather than diminish?
• Or consider the altered landscape for contingency-fee agreements:  Will the plaintiffs' firms be willing to stick with one-third of one-quarter of what they used to get?  Will the firms interpret (or re-word) their agreements to call for complete confiscation of the punitive amount since the client wouldn't be seeing anything until 33 cents had been received, and now the payment maxes out at 25 cents?

You get the idea.  Odds of this being enacted?  Beats me.  Odds of its having the intended effect?  Vanishingly small.

SOX & Knee-Capping Our Comparative Advantage

I rarely if ever will use this blog for editorial purposes, but as a securities lawyer who chose that practice specialty primarily out of my (economist's) immense respect for the United States' capital markets—an area where we have a comparative advantage in spades—I must draw your attention to and resoundingly endorse an Op-Ed in today's Wall Street Journal by John Thain, CEO of the NYSE:  "Sarbanes-Oxley:  Is the Price Too High?"

First there was the Foley & Lardner study showing public companies' compliance costs typically had doubled, then we had evidence that VC's were chilled by the suddenly-higher price of life-after-the-IPO, and now we have evidence that European and Asian firms are staying away from tapping our capital markets.  This is not good news.

But then, my approach to securities law is much like my approach would be to campaign-finance reform:  Anything and everything is legal, so long as it is instantly, fully, and accurately, disclosed.

Google's IPO and The Law of Unintended Consequences

OK, so this really doesn't have anything to do with the economics or management of law firms.

Still, Barron's has a wonderfully contrarian editorial about the pending Google IPO, pointing out among other things that under the Corrupt Bad Old Frank Quattrone System of IPO allocations, shares tended to end up in the hands of the most wildly exuberant speculative bulls.  Whereas, under the Transparent Hygienic New Dutch Auction System of Google's IPO, shares will tend to end up in the hands of the most wildly exuberant speculative bulls.

Could this be the end of Silicon Valley as we know it?  Or only the end of mutually parasitic (ooops—we meant to say "symbiotic") dance between the VC's and the investment banks?  Or are those the same thing?

"Common Sense" & Copyright Law?

Professor Lawrence Lessig, the Stanford Law professor, has published a new book, Free Culture, reviewed by John Swartz of The New York Times. Although I haven't read it yet (but I will), Lessig argues that it's time for a "clean sheet" re-thinking of copyright law.  Specifically:

"Upon reflection, it should be obvious that in the world with the Internet, copies should not be the trigger for copyright law. More precisely, they should not always be the trigger for copyright law."

Unfortunately, the "Orwellian" Digital Millennium Copyright Law essentially erases the entire jurisprudence behind "fair use" and imposes strict liability for even attempting to understand the technology behind a digital rights management scheme.  Don't believe me?  Ask Prof. Edward  Feltenof Princeton.