Big Law United to Save Lucrative White Collar Defense Work

The largest law firms in the country are fiercely competitive, so it’s notable when nearly 40 of them agree to sign on to a legal brief. That’s what happened in an appellate case that could have eroded the attorney-client privilege—and the firms’ lucrative white collar defense practices.

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They breathed a collective sigh of relief earlier this month when the Sixth Circuit overturned a lower court ruling that would have forced FirstEnergy to turn over to its shareholders the results of internal investigations. The company hired Jones Day and Squire Patton Boggs to conduct the probes in response to a bribery scandal and later argued that the work was shielded by attorney-client privilege.

On today’s episode of our podcast, On The Merits, reporter Roy Strom explains what happened in this case and why it represented such a threat to Big Law. He also gets into the reasons lawyers’ hourly rates for white collar defense work can climb so high.

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This transcript was produced by Bloomberg Law Automation.

TRANSCRIPT:

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Host (David Schultz):

Hello, and welcome back to On the Merits, the news podcast from Bloomberg Law. I’m your host, David Schultz.

Larry Householder, the disgraced former Speaker of the Ohio House of Representatives, was arrested on bribery charges more than five years ago. But this scandal still continues to generate interesting case law, even today. We talked on this podcast a few years ago about Householder’s defense against public corruption charges and how it could blur the line between bribery and campaign finance.

Now we have a ruling on a totally different part of the law that is also significant. Earlier this month, the Federal Appeals Court ruled that First Energy, the company whose executives got caught giving bribes to Householder, does not have to turn over to its shareholders the results of an investigation it paid two law firms to conduct after the scandal broke. It’s a win for the troubled energy company, but an even bigger win for their lawyers and for all lawyers who do white-collar defense work. That’s because if a ruling from a lower court was allowed to stand, many firms worried that would weaken the attorney-client privilege and make it harder for them to do this white-collar work, which, as you’ll hear, can be lucrative.

Bloomberg Law Reporter Roy Strom wrote about the implications of this appellate ruling on Big Law, and he joins us today to break down what it all means. First, he gives us a brief summary of the mess First Energy got itself in and how that led us here.

Guest (Roy Strom):

The company paid politicians, including Householder, to help pass a bill in 2019 that would basically bail out some of its costly nuclear and coal plants. Householder received, I believe, a 20-year federal prison sentence for it. First Energy has paid nine figures in fines. So that’s the scandal. It’s basically a big energy company paying off politicians to keep its aging power plants in business. And the company, probably not surprisingly, hired two law firms to conduct internal investigations. Those were Jones Day and Squire Patent Boggs.

Host (David Schultz):

And this is very common. Whenever there’s a scandal at a big company, you bring in outside firms to do an independent investigation.

Guest (Roy Strom):

Yeah, that’s right. This is the job of obtaining documents, interviewing employees, basically trying to get the facts of what happened. Companies do this frequently. We read about investigations all the time. It’s their effort to collect the facts and to ultimately probably share those facts with regulators or prosecutors in an effort to sort of show that they’re willing to get to the bottom of it and that they’ll probably help the prosecution go after the people who are responsible for this.

Host (David Schultz):

But as is common in these situations, the shareholders of the company said, hey, you, the executives, caused the stock price of this company that I own to go down, so I’m suing you because of that. And as a part of that lawsuit, I want to see those investigations. And it sounds like a lower court agreed with the shareholders.

Guest (Roy Strom):

That’s right. I mean, the shareholder litigation was just a piece of the legal fallout, right? There’s regulators, there’s criminal prosecutions, but the attorney-client privilege issue arose in the shareholder litigation. Plaintiffs, of course, would love to get their hands on the company’s internal story of what happened. Be a great way for them to build a case, right? So they asked for those documents and a lower court judge ruled in their favor. And the judge basically said that the company had procured these investigations for what it considered to be business advice, finding that the investigations weren’t done to prepare for legal challenges, which I think was a shock.

Host (David Schultz):

And then the appellate court, of course, overturned that and put a stay on the lower court order. Can you explain the reasoning there and the reason they decided, no, the company does not need to turn over these documents?

Guest (Roy Strom):

Yeah, well, like I said, there was a whole bunch of legal fallout from this scandal. And all of that legal fallout is pretty much what the Sixth Circuit panel really highlights. And they’re sort of confused how the judge originally found that this investigation wasn’t conducted with legal advice in mind. And the ruling even kind of tweaks the district court saying, quote, for reasons that remain unclear, the court decided the investigations weren’t in preparation for legal advice. So that’s to the specific case, but it also goes a little bit further than that and sort of makes a general comment about the importance of attorney-client privilege. They write that what matters for attorney-client privilege is not what a company does with its legal advice, but simply whether a company seeks legal advice. So that you could read as a sort of broad protection for the work that lawyers do for these corporate investigations, a panel saying, as long as you’re paying your lawyers for legal advice, we’re gonna view it as privileged.

Host (David Schultz):

Yeah, and that’s really the main reason why we’re talking about this today. And that’s why there were a lot of law firms that seemed like more than two dozen firms who signed on to an amicus brief in this case objecting to what the lower court ruled. That’s surprising. I mean, these are firms that are competitive with each other, yet they all agreed on this. Was that sort of surprising to you that they all signed on to this brief?

Guest (Roy Strom):

You know, not really because these firms might compete with one another for specific clients, but in terms of the underlying law, they all rely on it, right? They all need attorney-client privilege or would be better off if attorney-client privilege was very strong. And so you’ll see this from time to time where big law firms get together as a group and advocate for legal positions that they find to be common among them or just in the best interest of the way the law should work.

Host (David Schultz):

Yeah, the way you put it in your story, I think, was that they weren’t just making a legal argument, they were also lobbying on behalf of their own industry with this brief.

Guest (Roy Strom):

Yeah, I think you could look at it that way. I think some people might say that might be like a cynical view of it, but the law firms do have the benefit of getting to argue the law, right? And look like, hey, we’re standing up here for the rule of law. At the same time, I think it’s pretty clear that a strong attorney-client privilege in this area helps those practices remain able to do what their clients want from them. So I don’t say that like it’s a bad thing that the law firm’s business is supported by a strong attorney-client privilege, but I just think when you see close to 40 big law firms writing this way, in other contexts, it would be viewed kind of like lobbying for the work they do.

Host (David Schultz):

Well, let’s get into why this is so important for these firms, and you, I think, laid that out really nicely in your story. Tell me a little bit about that and sort of the dynamics at play that allow attorneys to bill such high billable hour rates for this kind of work.

Guest (Roy Strom):

So, I mean, law firms, big law firms, all the time talk about wanting to be doing, quote unquote, bet the company work, stuff that’s super important for companies such that they’re willing to pay a lot of money to get it right. I think you could imagine a bribery scandal fits the bill pretty well. So just in terms of how important clients view these things, they’re willing to pay for the best lawyers with the highest rates. But there’s also perhaps a structural component to these white-collar practices being particularly profitable, and that was laid out in a 2011 paper by a professor at Cal Berkeley, and that paper was basically written in response to a ruling in a case involving the accounting giant KPMG, in which a judge had sort of chastised federal prosecutors for pressuring the company to stop paying the legal fees for a group of its executives, even tossed a bunch of prosecutions against the executives for them not being able to get the attorneys that they want. And that ruling made it easier for companies to pay the legal fees to defend individuals involved in corporate wrongdoing. In this context, the lawyers of their choice is usually really good, really high-paid attorneys at big law firms. So that’s another case that sort of insulated the economics of these practices at big law firms.

Host (David Schultz):

And then, of course, the other factor is insurance. Almost every big company has insurance against litigation, and so when these executives are sued or when they have legal problems, a lot of times the insurers are the ones paying the legal costs.

Guest (Roy Strom):

That’s right. That’s another thing this paper focused on was the profitability of the practice of big law firms. Found a correlation between high profitability and a high ratio of white-collar defense lawyers, and that paper argues that part of the reason it supports such high billing rates is that the insurance companies are paying these bills. Companies have what’s called directors and officers liability insurance. You’ve probably heard about it, DNO insurance. It’s very expensive, but it pays the bills. So the paper sort of concludes that the investigations practices at big law firms just don’t face the same type of cost controls that you see at other practices. And that paper, I thought this was interesting, it even cites some guidance that in order to convince judges or regulators that these investigations were not done, not conducted by the company or not guided by the company, that in fact the lawyers were given a free hand to find whatever evidence they could, the lawyers’ bills should be redacted. So basically, don’t even tell us the work you did. Just tell us what we owe you.

Host (David Schultz):

That’s like going to a restaurant and saying to the waiter, oh, just give me whatever you want, whatever you think is good. And there’s gonna be a huge incentive for the waiter to give you the most expensive thing on the menu, right?

Guest (Roy Strom):

Yeah, market price.

Host (David Schultz):

Market price, yeah, exactly.

Are there certain law firms that tend to rely more heavily on this kind of white collar work for their bottom line, or are there other firms that really don’t do a whole lot of this? I guess I’m wondering which firms are the ones that most stood to lose if the Sixth Circuit ruling went a different way.

Guest (Roy Strom):

Yeah, I mean, you’d be pretty hard-pressed to find a top law firm that doesn’t have some corporate investigations capability these days. Of course, some firms do much more than others. I’d say in general, there’s a group of firms in Washington that are probably best known for corporate investigations. These are firms that have hired former high-ranking prosecutors at DOJ. They have practices, similarly, that are sort of chock full of former regulators. So they’re good at interfacing with all the federal agencies. I think Jones Day is in this first energy case. It’s a good example. It’s a firm that’s done major corporate investigations before. It did the internal investigation for Volkswagen related to its Dieselgate scandal. You know, there’s plenty of them. There’s plenty of them.

Host (David Schultz):

Finally, is this issue now put to bed? We have a ruling from a federal appellate court. It seems like it’s now, at least in the Sixth Circuit, it’s pretty clear that the attorney-client privilege is broad, but I wonder if it’s gonna take a Supreme Court ruling to really sort of put the final bow on this issue, and if we don’t get that, if it’ll keep coming back up in other courts in other parts of the country.

Guest (Roy Strom):

Yeah, you know, the Supreme Court ruling that sort of law professor told me is really seminal in this area. It was settled in 1981. It’s called Upjohn, and it’s still very highly regarded. I don’t think it’s being attacked in any major way. That case basically extended attorney-client privilege to employees throughout an organization, no matter how high in the corporate hierarchy they are. Prior to that, the privilege was sort of only for the company’s controlling officers, and I think most people in the law recognize the benefit of extending that privilege throughout an organization, because the answers to these questions don’t always lie with the people who make the decisions, and I think that the response to this lower court ruling shows that it did really catch people off guard. You saw this big reaction from the law firms. You saw the appeals court taking that really seriously, and I think what they wrote really just reaffirms what the sort of state of play has been for a pretty long time. Like I said, I don’t see some broad effort to undermine attorney-client privilege, so I don’t think that it’ll go much further than this, but I guess you can never know how willing the plaintiffs will be to push it further, whether the district judge will try to reiterate the viewpoint. So no, I don’t think there’s all that much to clear up. I think the attorney-client privilege seems as strong as ever, and probably as a result, these corporate investigations practices should be carrying on pretty much business as usual.

Host (David Schultz):

All right, well, that was Roy Strom talking about, sounds like a bullet dodged for white-collar defense practices at big law firms. Roy, thank you so much.

Guest (Roy Strom):

Yeah, of course. Thank you, David.

Host (David Schultz):

And that’ll do it for today’s episode of On the Merits. For more updates, visit our website at news.bloomberglaw.com. Once again, that’s news.bloomberglaw.com. Today’s podcast was produced by myself, David Schultz, and our editors were Chris Opfer and Alessandra Rafferty. Our executive producer is Josh Block. Thanks, everyone, for listening, and see you next time.