innovation

Preventive Law Step #3: Due Diligence

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“Step three! It’s just you and me.”
 
- Jordan Knight, NKOTB

Let’s say your company is growing to the point where you are considering acquiring a competitor or expanding operations to a new region. First and foremost, I’d like to congratulate you on this huge success! And to ensure it remains a success, please be proactive and conduct adequate due diligence prior to closing these transactions.

So what exactly is due diligence? Simply put, it’s an in-depth review, analysis and evaluation of the target business or real estate deal to make sure there are no red flags that could come back to bite you. In other words, it’s like looking under the hood of the car to make sure you’re not buying a lemon (or worse, something that could blow up on the road).

Make a List, Check it Twice

When starting the due diligence process, it is wise to start with a checklist of items to request from the other side. For example, in the event you are merging with or acquiring another business, your initial list should generally include some form of the following subjects:

  • Company/organizational information

  • Financial/tax records

  • Contracts/agreements

  • Licenses/permits

  • Assets

  • Liabilities

  • Employment information

  • Claims/litigation

There will be many subparts to each of the above subjects, with specific documents and follow-up items requested depending on the type and complexity of the transaction.

As responsive information and documents start rolling in, you can decide whether you have enough information to satisfy concerns related to a particular subject . . . or you can request supplemental information and documents and start chasing rabbits down holes in the event potential red flags emerge.

This Could Happen to You!

The due diligence process should not be taken lightly, as failure to uncover and address landmines within your target can be problematic. Consider the following potential scenarios involving your prospective acquisition target:

  • It has a shareholder who owns a significant percentage of the company, but is conspicuously absent in company minutes, consents and resolutions involving key decisions.

  • It has operations in several states, but has failed to appropriately register to do business in half of them.

  • It has recently received a demand letter from a lawyer with regard to a potential class action involving a product defect.

  • It has received several letters from local and state environmental agencies with regard to overflow of hazardous waste into a nearby river.

  • It has a significant union presence, and the local union has filed several recent unfair labor practice charges against the company.

  • It sells products primarily through direct-to-consumer channels but has not implemented appropriate cybersecurity measures, including procuring cyber insurance.

  • Its land and equipment are largely tied up by third-party lenders, with additional judgment liens filed in the local recorder’s office.

  • It has a long-standing relationship with an overseas factory that is notorious for harsh employee conditions.

These are just a small number of issues that could be uncovered during the due diligence process, but you’ll likely want to learn more about them before deciding whether to proceed with closing. Having a robust checklist up front, and then following up with additional requests based on findings can ensure no stones are left unturned.

Seasoned Preventive Lawyers are skilled in navigating the due diligence process. In the event potential red flags are uncovered, Preventive Lawyers can help you understand and assess the risk of exposure and then discuss legal and business strategies to minimize this exposure, including whether or not to ultimately proceed with closing.

Open Your Eyes, Look Within

Due diligence is not only necessary in business mergers, acquisitions or real estate settings, but it can also provide the framework to maintaining ongoing business health. Consider the preventive medicine analogy, where your business undergoes an annual physical to assess health and treat areas of potential “disease.” The physician will perform a “review of systems,” including assessing cardiovascular, pulmonary, neurological, gastrointestinal and musculoskeletal systems, among many other things (cue latex gloves!).

Conducting regular business self-exams utilizing an abridged diligence methodology—or a “review of business systems”—can identify current business health as well as targeted opportunities for improvement before potential exposures start to multiply. For example, a business physical might include:

  • Review of existing business entities to ensure alignment with tax strategies and opportunities, as well as mitigation of legal and business risks;

  • Review of business formalities conducted during the year to ensure legal compliance as well as accurate and appropriate business story-telling through minutes, consents and resolutions;

  • Review of existing and prospective geographical presence to ensure appropriate state-based registrations;

  • Review of existing and prospective license, permit and regulatory registration requirements to ensure ongoing compliance;

  • Review of contract practices to ensure proactive negotiation and development practices are being followed, and that business counterparts are compliant with quality and safety standards, insurance levels or other contractual requirements;

  • Review of business continuity practices to ensure there is not over-reliance on a key supplier or vendor that could result in a business interruption;

  • Review of legal, regulatory and contractual compliance programs to ensure appropriate training and documentation is taking place;

  • Review of insurance program to ensure risk transfer practices align with existing enterprise-wide exposures, and that vague or ambiguous language is addressed and clarified before claims arise;

  • Review of potential claims against third-parties, as well as claims by third-parties against the company that could be tendered to an insurance carrier; and

  • Review of existing claims and lawsuits to ensure litigation strategies are business-forward.

An experienced Preventive Lawyer can serve as the “internist” to perform this physical, evaluate the overall health of your business, and then take affirmative steps to treat symptoms or refer to a specialist when indicated.

Long story short, due diligence is a necessary component of significant business transactions. Preventive Lawyers are a valuable resource to peek under the hood of target businesses or real estate to make sure you’re not buying lemons . . . and can further be deployed to look under the hood of your own business to make sure it’s consistently operating at optimal health! As always, we’re here to help.

Preventive Law Step #2: Business Governance

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“Step two! There’s so much we can do.”
 
- Donnie Wahlberg, NKOTB

There are reasons why new business owners form corporations, limited liability companies or other legal entity forms. Branding and credibility in the marketplace are of course important, but limiting personal liability is the primary driver. In other words, owners set up these business forms to shield themselves from personal liability in the event something goes wrong with the business . . . can you blame them?

When you set up a business entity, you are required to proactively govern that entity from the initial documentation all the way through growth and global domination (cue Dr. Evil laugh). Failing to do so could mean losing the protections these entity forms offer, in addition to many other issues.

You Gotta Keep ‘Em Separated . . .

Business entities such as corporations and limited liability companies must be kept appropriately separate from the individuals forming them. In order to ensure this separation, certain formalities will need to be followed. Typical formalities include:

  • Maintaining separate business accounts;

  • Holding annual meetings, as well as special meetings for important business decisions;

  • Business record-keeping, including meeting minutes, resolutions and agreements for important transactions;

  • Maintaining accurate financial records; and

  • Regulatory reporting in some securities-related settings.

Depending on the type of entity structure and number of business owners, there may also need to be by-laws or agreements in place which govern the relationships among the owners and the entity.

Now, some entity forms are more flexible than others as far as the formalities are concerned. Size, geography and ownership (e.g., privately-held vs. public) issues, among other considerations, all come into play in deciding one form over another. However, failure to follow minimum required formalities regarding your particular business form can have adverse effects, such as:

  • The ability of third-parties to disregard your business entity form (known as “piercing the veil”) and then go after you individually for something your business may have done wrong;

  • The inability to do business in certain states, including fines and penalties in those states for doing so;

  • Claims by minority shareholders that majority decision-makers were not authorized to undertake certain actions;

  • Events of separation (death, divorce or assignment of interests) resulting in third-parties having more control over the business than what was initially intended or desired; and

  • Possibly even a knock on the door from federal and state enforcement agencies for wrongdoing.

A good Preventive Lawyer, working hand-in-hand with your business accountant, can assist in choosing and then setting up the initial business entity, and can then work with your team to proactively govern the business to ensure business and legal risks are minimized.

. . . But Not Too Separate from the Others

Let’s say your widget-making business has grown to earn substantial revenues, owning a significant percentage of the widget-making industry. In order to spread the wealth (and also minimize your own burden), you set up a few more companies in different states which are owned primarily by your children and a small handful of worthy employees. Of course, you also retain some ownership as well and are ultimately responsible for certain baseline pricing decisions for your products among the family of widget-making businesses.

Depending on how you set up these business entities, this situation could actually be considered collusion among competing companies in violation of federal and state antitrust laws, subjecting you and your businesses to criminal and civil actions. In addition to a potential knock on the door from the Department of Justice involving felony charges and massive fines, other smaller competitors may be all too eager to file lawsuits against your businesses claiming they were somehow damaged as a result of an alleged conspiracy among your “competing” companies.

In order to avoid these competitive exposures, your family of widget-making business entities will need to have an appropriate unity of interest or purpose. In other words, these businesses can’t have the appearance of separate, independent decision-makers as far as the making and selling of widgets is concerned. And depending on the states you’re doing business in, there may be additional ownership and decision-making requirements from a competitive standpoint.

Being proactive in structuring your business entities on this front can be critical from a timing standpoint. If you wait too long, you may find your business has grown to a size where you have to obtain government approval before proceeding with a business restructure, planned merger or other substantial acquisition. In addition to initial business setup and on-going governance, a seasoned Preventive Lawyer can work with your team to develop strategies to minimize exposure to these competitive risks.

Call of Duty

Earlier, we talked about the necessity of following legal formalities with regard to your business form. This compliance can actually have a dual purpose . . . these signed minutes, consent resolutions, and agreements can tell a detailed story about what the company did, and why those running the company did it. Why is this important, you ask?

Decision-makers of the business are considered fiduciaries of the business, meaning they are under an obligation to not usurp business opportunities for their own personal gain. In other words, these decision-makers can’t allow personal interests to prevail over the interests of the business. An action by a business decision-maker is typically presumed to be valid as long as it is consistent with the exercise of honest business judgment or discretion. This is known as the “business judgment rule.”

In order to get the benefits of this deferential business judgment standard, it is imperative that minority owners have notice, full information and an opportunity to consent to the transaction. And given the size of the transaction, consequences to the business or other considerations, an independent special committee may also need to be engaged to evaluate potential fairness issues.

If there is evidence of self-dealing, the deferential business judgment presumption can be rebutted. In that case, the decision-maker will have to prove that the transaction was in fact in the best interests of the company, using a less-deferential “entire fairness” standard. This means the decision-maker will have to affirmatively demonstrate that the transaction was fair in both process and substance, with a court typically being the final say on the matter. A determination that the decision-maker breached a fiduciary duty could mean civil damages all the way up to having the business placed in receivership and liquidated. Not good.

Preventive Lawyers can be a great resource to assist your business with conducting annual and special business meetings and then preparing the minutes, resolutions and agreements to tell the business story correctly and in a detailed manner. Their proactive approach helps minimize fiduciary risks to the business.

Like contract development, business governance is not the sexiest part of running a business. However, it is equally as important in contributing to long-term success. Deploying Preventive Lawyers proactively on the governance front can minimize exposure to registration, competitive and fiduciary risks before they become a reality. As always, we’re here to help.

Preventive Law Step #1: Proactive Contract Development

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“Step one! We can have lots of fun.”
- Danny Wood, NKOTB

Okay, so negotiating and developing contracts may seem tedious for business owners. However, being proactive about your contracting process—the first pillar of Preventive Law—can ensure that you are not assuming unnecessary liabilities in the business relationship, and that prospective business partners are in fact qualified to do business with you.

A Cautionary Tale

We were engaged by a national product manufacturer with numerous vendors and materials suppliers. Over the course of many years, contracting had been delegated to the point where at least twenty managers across several departments were responsible for reviewing and signing contracts. There was no centralized process for vetting potential business partners to make sure there were no red flags. There were also no standard “pro-company” form contracts in place, outside of basic Non-Disclosure Agreements. This meant the company had been simply reacting to one-sided contracts provided by business partners, many of which were in complex transactional settings.

Long story short, these managers were signing contracts with multiple business partners, across multiple business functions, without fully understanding who they were contracting with or the liabilities and obligations being undertaken. They did not understand, and therefore could not negotiate, many of the legalese pitfalls contained in the one-sided agreements. And they definitely did not like being pulled away from production schedules to tend to eye-glazing tasks like this.

Ultimately, this led to the following problems for the company:

  • Assuming onerous obligations such as implementing impossible or impractical compliance programs, aggressive payment and credit-worthiness requirements, unreasonable inspection and acceptance periods, and overbroad and one-sided indemnification language;

  • Vague and one-sided contract termination provisions, giving business partners broad rights to terminate contracts for any reason and at any time without consequence;

  • Overbroad and ambiguous service provisions, resulting in projects continuing for much longer than what was initially anticipated (or desired);

  • Limited recoveries in the event of a breach of contract, including the inability to recover attorney’s fees when litigation became necessary as well as being forced to litigate in unfavorable venues; and

  • Business partners with significant safety histories and lack of appropriate insurance being given access to company premises to perform maintenance and repairs on heavy industrial equipment.

On more than one occasion, key suppliers had availed themselves of their one-sided contract provisions, resulting in substantial business interruption to the company. It was clear the company’s executive management did not understand the benefits of being proactive with its contract negotiation and development practices, and continued to find themselves having to react to problems that could have been avoided up front.

The Fix

We worked with the company to become proactive in their contracting processes, rather than reactive, by applying Preventive Law methodologies. We started by dramatically minimizing the number of managers and departments involved. The procurement department was a natural fit to centralize this function, and its new director was more than happy to have more control over the contracting process.

We then worked with the director to develop proposed pre-qualification standards given different business settings, including vendor and supplier relationships. For example, in a vendor/supplier setting, the prospective business partner would have to provide the following documentation before being considered:

  • Compliance with appropriate safety incident standards, including Experience Modification Rates and OSHA incidence rates;

  • References from previous customers regarding performance and safety;

  • Copies of drug/alcohol, jobsite safety and accountability, accident reporting, emergency response, and project inspection policies in place governing vendor/supplier projects and employees while on-site; and

  • Copies of certificates of insurance on multiple lines of coverage, with appropriate additional insured endorsements in place that adequately protected the company.

We also developed a set of “pro-company” contracts which could be tailored across multiple business functions and deployed proactively, instead of the old practice of simply responding to the one-sided vendor/supplier forms received. Needless to say, our forms were also one-sided . . . but this time in the company’s favor! Of course, the process we developed was flexible enough to accommodate having to react to the other side’s forms when necessary.

We accepted the reality that some business partners would demand their forms be used. That was okay, and we did not want to immediately blow up relationships over initial stubbornness. Instead, if this occurred, the director would simply request a copy of the contract in Word or other editable format. Reasonable business partners should expect that you will want a copy to redline if they demand use of their one-sided form. And if they refuse to do so, this should be seen as a red flag warranting consideration of other business partners (hint, if they are going to be this difficult in these initial negotiation stages, just imagine how problematic they’ll become if there are any issues with regard to contract performance!).

Game Time

After developing the standard process and forms, we worked with the director to obtain buy-in from executive management. Given the contracting problems the company had faced over a number of years, it was an easy sell. As such, we began implementing the process to ensure an enterprise-wide understanding and appreciation of what we were doing, as well as why we were doing it (all part of the Preventive Law protocol!).

Our Preventive Law team continues to be involved, particularly when:

  • The director or other side has questions about whether certain pre-qualification requirements can be limited or waived under a given set of circumstances;

  • We have deployed our own form contract, but the other side responds with its own redlines requiring review and evaluation;

  • The other side demands its own one-sided form be utilized, requiring redlines on our side to balance things out; and

  • Assistance is needed to develop negotiation strategies in order to arrive at acceptable contract language after the parties have dug in their respective feet after several rounds of back-and-forth redlining.

Following implementation, the company noticed immediate results:

  • Managers are not burdened with contract review tasks and are able to focus energy on managing their teams and making good products.

  • There is an enterprise-wide consistency around the contracting process.

  • Contracts with business partners are more balanced between the parties, and often even skewed in favor of the company when the other side signs the pro-company form without negotiating it (hint, our client is not the only one in need of Preventive Law assistance!).

  • Since the contract language has been discussed and negotiated in advance, issues with vague, ambiguous and overbroad provisions are minimized.

  • The company is able to perform effective gate-keeping early on to determine which business partners should be considered long-term fits for sustainable success, and which ones should not.

  • The contracting process finally supports the making and selling of product, instead of hindering it.

Contract negotiation and development may not be the sexiest part of running a business, but it is one of the most important. Deploying Preventive Law strategies can help you anticipate and respond to risks with prospective business partners, leveling the playing field in the process. As always, we’re here to help.


Welcome to the Real World: Stories of Preventive Law Success

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“Treatment without prevention is simply unsustainable.”
- Bill Gates 

We’re often asked for examples of how we’ve used Preventive Law to help companies minimize risks. We’re not sure if it’s because people generally love a good story filled with gory details (giving them reassurance that things could be worse) or if it’s the happy ending they’re after (filling them with hope). Either way, here are a few real-world examples of how we’ve helped product manufacturers avoid disaster and operate happily ever after. 

What the Shell?

We were engaged by a product manufacturer which was looking to quickly become a public company and raise capital through merging with an existing shell company. Unfortunately, this client had conducted very little diligence on the shell and individuals involved. Like most businesses, it had trusted its new business partners, one of whom was a neighbor and friend of the CEO, who had been reassuring the executive team that this merger would help the company accomplish its goals quickly.  

Right away we began the due diligence process to get up to speed on the players involved, determine potential exposure to unnecessary risks in this venture, and ultimately to confirm whether or not the shell was “clean” enough to avoid problems with the Securities Exchange Commission, among others. That’s when we noticed some red flags waving. 

After digging a little deeper, we discovered this shell had all the hallmarks of a sham and that the individuals offering it had a history with these types of shady transactions. It was clear that if the company had continued down its current path, it could have been exposed to significant civil and even criminal liability.

Needless to say, the executive team immediately ended discussions with its “partners” and was grateful to have avoided what could have otherwise been a business-ending catastrophe. I believe the CEO’s exact words were, “Wow, thank you, man . . . that’s why we brought you on board!” We’ve since been strategizing with the executive team on less-risky means of raising capital, as well as commercial contracting, supply chain operations and risk transfer issues. 

Just Rub Some Dirt on It

When a national manufacturer was looking to establish a Pacific Northwest presence, the CEO came to us for assistance in reviewing some real estate agreements. The company was under contract for a large parcel of brownfield property and had trusted the Phase I environmental report finding “no recognized environmental conditions” (or “RECs”). The diligence period was set to expire in just a couple weeks, and the company would then be locked into closing.  

We took a closer look at the Phase I report, and then talked to relevant parties to learn more about the property and transaction. After a few days, it became apparent there were in fact significant environmental red flags surrounding the property, and the company needed to get out of the contract. We challenged the Phase I outfit as to the presence of leaking drums, underground storage tanks, fly ash piles, and an oil/water separator on the property, all of which had been noted but tucked away toward the end of the report and disregarded. We then pushed the outfit to revise the Phase I report to accurately reflect these conditions as RECs. This strategy enabled us to make a strong argument to back out of the agreement and avoid purchasing a property with hazardous environmental conditions. 

Fortunately, we were able to terminate the agreement and then help our client identify a less-risky parcel to set up operations. We worked with the company to develop and negotiate the necessary contracts and agreements to facilitate a successful closing. 

Going Off the Rails on a Crazy Train

Another one of our product clients, with factories in multiple states, had significant union involvement. Relations had become strained over the prior couple years with the union filing numerous unfair labor practice charges, largely to prove a point.

Prior to our involvement, the company had engaged a large law firm to defend the charges, racking up hundreds of thousands in legal fees in the process. This firm had even increased rates and made questionable staffing choices without first discussing with the company. The senior partner had further recommended taking the matter through trial and then appeals, despite the low probability of success, which would have resulted in the company spending several hundred thousand more in fees to this firm. The kicker was that trial was set in less than 30 days.

We were engaged by the company and immediately interviewed the firm to better understand the ongoing litigation strategy. Unfortunately, these issues were just the tip of the iceberg. Among other things, we learned there had been previous opportunities to settle at a fraction of what had been spent in fees, as well as the possible existence of insurance coverage to offset some of the losses, which had been missed. It did not appear the company’s best interests were being protected.

We quickly replaced this firm with a more business-forward firm, working closely with the new attorneys to pivot away from trial strategy and toward settlement discussions. In the meantime, we notified the insurance carrier of a provision in the policy that allowed coverage for a portion of the fees and settlement given the nature of the claims being made. Long story short, we successfully settled all of the pending charges for a fraction of what would have been spent litigating to ultimate conclusion, with over half of those sums reimbursed by insurance proceeds.

We then helped the company work productively with the union to rebuild trust and get the relationship back on solid footing. This involved collaborating with the company to develop internal policies to minimize the likelihood of this circus happening again. After a few months, the relationship had improved to a point where disputes were being handled amicably and without need for involvement by the National Labor Relations Board.

These are just a few real-world examples of how Preventive Law was a “pound of cure” for businesses. By looking around corners and taking the appropriate precautionary measures, companies can avoid significant exposure. Contact us to learn more about how being proactive can better protect your business.

How Preventive Lawyers are Innovating the Legal Supply Chain

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A guy walks into a lawyer’s office and asks, “Can you tell me how much you charge?”
“Of course,” the lawyer replies, “I charge $500 to answer three questions.”
“Don’t you think that’s an awful lot of money to answer three questions?”
“Yes it is,” answers the lawyer, “What’s your third question?”

Though lawyer fees have been fodder for jokes for as long as we can remember, they’re really no laughing matter. Companies routinely pay much more than $500 per hour to answer far fewer than three questions. How did it get to this point? The answer is bloat. Let me give you a peek behind the curtain.

As firms take on more business and begin to grow, they add more attorneys and staff to handle these increasing workloads. With continued growth comes potential for expansion into other states to take advantage of business opportunities there. Growth means expensive nameplates on big buildings and brass, mahogany and marble office spaces to draw larger corporate clients. This also means hiring more attorneys at high salaries, as well as partnership opportunities for those attorneys who are able to bill significant hours and generate business to enrich the firm.

Business development naturally leads to the need for even more attorneys and office space, and in turn more costs and overhead, much of which are passed along to the client in the form of exorbitant hourly rates. In most larger cities, these rates will exceed $500 per hour, which can have a chilling effect on the businesses these attorneys are meant to serve. Voila! You now have a bloated law firm. And guess who gets to pay to keep it afloat? That’s right. You.

DIY Could Mean RIP

What options exist for companies that want top-tier legal advice without the bloat? I can’t speak to all legal specializations, but in the area of Preventive Law, we often see businesses deciding to “go it alone” rather than pay these high law firm rates. While these companies may enjoy not having to pay legal fees, what few realize is that they place themselves at exponentially higher risk. Ironically, such DIY practices can cause even bigger problems:

  • Insurance policies are legalese monstrosities, containing complex language and articles that can later be exploited by insurers. A company that buries its head in the sand, hoping those policies will react in the event of loss, not only ensures the language will be exploited, but further increases the likelihood of gaping coverage holes. 

  • Failing to proactively manage your insured claims and lawsuits can lead to strategies which are not in your best interests, resulting in skyrocketing premiums or even loss of coverage.

  • Relying on non-lawyers such as insurance brokers to help you understand the legalese contracts and claims strategies could limit your recourse (hint, an insurance policy is a contract with your insurer, not your broker or anyone else).

  • Signing vendor and supplier (and other) agreements without fully understanding and negotiating the terms in advance means you may have unwittingly assumed obligations that can blindside your business later.

  • Failing to develop and implement internal policies and procedures can result in significant exposure to business interruption, cyber events, HR risks and regulatory actions.

These are not meant to be scare tactics, but rather highlight issues we see on a regular basis. Understandably, high law firm rates often result in second-guessing whether to enlist attorney assistance to address these concerns.

Escaping from the Rock and Hard Place

The emerging practice of Preventive Law presents a viable option for companies who want peace of mind without paying absurd hourly and retainer fees. Preventive Law develops and implements proactive strategies involving insurance, litigation, human resources, R&D, procurement, real estate, marketing and regulatory compliance. The rewards for companies that implement these strategies include:

  • More informed decision-making;

  • Improved efficiency and reaction time;

  • Lower contract, claim, litigation and regulatory exposure; and

  • Better opportunities to recover significant insurance proceeds when necessary.

These benefits are primary reasons why larger companies hire lawyers to serve as in-house corporate counsel. On-boarding attorneys also improves predictability of corporate legal spend. No longer does the business have to worry about a department head picking up the phone to call an expensive attorney to discuss a business or legal strategy when you have a lawyer on staff.

Of course, adding in-house corporate lawyers means rising costs, and your business may not have the need for full time legal services, let alone resources to afford them. Again, this is where Preventive Law practices can provide value and flexibility, and in a cost-effective manner. Let’s peel back the curtain even further.

Mindless Habitual Behavior is the Enemy of Innovation

How is Preventive Law able to offer top-tier legal support without astronomical fees? Successful Preventive Law practices eliminate billable hours altogether and offer instead a retainer-based, client-facing, value-driven model. Okay, that’s a lot of hyphens, so what does it all mean?

In short, a Preventive Law firm thrives when the client thrives. The preventive legal practitioner’s fee is not calculated using inward-facing attorney billing rates, but rather using on-boarding costs, adjusted to reflect that client’s relative need for preventive legal services on a monthly basis (hint, review glassdoor.com and salary.com for average corporate counsel salaries/benefits in a particular city, and then adjust for the size of the company, type of industry, and potential legal and business risks facing that company). Next, the preventive lawyer determines an appropriate term for engagement, which will again depend on each client’s particular needs. A minimum of four- to six-month engagement is considered optimal to develop institutional knowledge and exposure to different departments and personnel which can provide efficiencies for the client down the road.

Once engaged, the preventive lawyer keeps detailed daily time entries for work performed. “But I thought you said not to bill clients!” you astutely point out because you’ve been paying attention. Here’s where Preventive Law departs from its traditional legal counterpart.

Preventive Law serves the client rather than padding the law firm. This is why time isn’t kept for purposes of billing, but rather to track the effective hourly rate on both a monthly and aggregate basis. These updated time-sheets are made available with each monthly invoice to assist the client in determining the value of services rendered, both subjectively (through perceived quality) and objectively (through the effective hourly rate). If it’s discovered at the end of the term that the effective rate was higher than anticipated, the lawyer offers to reduce the monthly fee for the next term. After all, the mindset is not “winning” in this business relationship, but rather demonstrating a trusted partnership and adding true value.

When done properly, Preventive Law practices offer accessible, cost-effective access to attorneys on the front end, which in turn can enhance business decision-making while minimizing exposure to catastrophic risks. We know this is a new option for some and would enjoy helping you better understand its benefits. We've found that companies are better off paying for quality legal counsel instead of mahogany, brass and marble. If you have any questions about Preventive Law, please reach out. As always, we’re here to help.

YEAR ONE: What We Do

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What's the one question that always gets asked?

Are you traveling for the holidays?

If so, chances are you're spending some time on airplanes and will end up chatting with the person seated next to you. Inevitably, there’s one question that always gets asked. That’s right: “What do you do?”

Candidly, that’s a great question. While this may be an easy question for some to answer, we must confess that we've found it difficult. To say we’re a boutique legal practice that specializes in insurance law and risk strategy doesn’t typically excite most people, nor does it capture the essence of what we “do”. The truth is, KEEFER is much more than that.

It wasn't that long ago that we turned on the lights in our downtown Portland office. With our desks facing each other, we filled our time with brainstorming sessions, endless research and back-to-back coffee meetings as we set out to invest in this community that we now call home.

Preventive Law?

“So, what you are doing is like preventive medicine," said a colleague during one of our many coffee meetings. And that was it. We had it.

KEEFER is a Preventive Law practice.

According to the American College of Preventive Medicine, the goal of preventive medicine is to “protect, promote and maintain health and well-being of the patient and to prevent disease, disability and death.” It’s much more rewarding to stay ahead of our health than it is to do damage control. We can find dozens of excuses to not exercise or to indulge (especially at this time of year), but have to remind ourselves of how much better we feel and how clear our thoughts are when we put in the work up front.

Like preventive medicine, we are proactive in our approach. With business-forward strategies and pricing structure to match, we work with companies on the front end to minimize exposure in the future. This includes overseeing insurance relations, managing claims and litigation, contract negotiation and development and day-to-day legal and business strategies.

The KEEFER Client

We’re building momentum and continue to serve clients we feel fortunate to work with. We’ve been deliberate in defining the type of businesses we best serve which include proactive decision makers who have a genuine desire to learn. These leaders have integrity and transparency which have allowed for a mutual trust between us.

Here are some highlights from 2018:

  • We worked with a client to recover several million dollars in insurance proceeds it would have otherwise missed.

  • We guided a medical device manufacturer with regard to federal and European compliance issues.

  • We helped a national product manufacturer manage and resolve a series of litigation matters, which had spiraled out of control over several years, resulting in significantly lower legal spend and exposure. 

  • We collaborated with a regional shipping company on strategic planning for an intermodal development project. 

  • Most recently, a client came to us for contract management and found it was not properly protected in its agreements. We helped to restructure contracts and put a strategy into place that should protect this company for years to come!  

As we reflect on how we've helped our clients over the past year, we can see why our friend compared what we do to preventive medicine. It’s exciting to be on the front end of things, working with like-minded businesses to anticipate and respond to risks before they materialize. And when we travel south for the New Year holiday, we'll be able to confidently answer the question, "What do you do?"

We’ve enjoyed another Christmas with Santa and our young boys and are looking forward to quality time in the sunshine with family. We’re hopeful for what 2019 will bring and until then, we wish you a holiday season filled with peace and joy. Taking the time to revel in the moment, which I’m certain falls in line with “promoting well-being”, truly fills our cups.

We sincerely thank you for your trust and are grateful for your continued support. May your cups be full as we wrap up a wonderful 2018.

Cheers!  

Garetta & Chris

Preventive Law: An Origin Story

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“Prevention is better than cure.”
- Desiderius Erasmus

We’ve received some attention following the Portland Business Journal’s feature, as well as inquiries about the origin of our Preventive Law practice and how it works.

It all began a few years back while serving as in-house counsel for a global product manufacturer. We retained a large law firm to represent the company in a lawsuit involving a recalled product. The lawyers weren’t cheap, with the partner charging over $500 per hour and the associate charging nearly $400 per hour.

Less than a year into the lawsuit, in which we had already spent over $75,000 in lawyer fees, my assistant forwarded the partner a brief list of questions from our insurance broker about the case to assist with upcoming renewals. A week later, we received a multi-page formal report on firm letterhead followed by a $3,000 invoice for this work. 

Frustrated by what I deemed to be an unnecessary report and excessive invoice, I called the partner and requested these entries be removed. I viewed them as a value-added service, reminding him of the amounts already paid. I also questioned the business sense in spending several hours on a formal report given its limited purpose. The partner wouldn’t bend, arguing the value of his firm’s time and how it needed to be compensated per the terms of the retainer agreement.

Where was the concern for our value?

Sometimes You Need to Distance Yourself to See Things Clearly

Prior to joining this company, I had been an associate with a private law firm for several years, so I was well-versed in billing hours for my work. My firm, like many other firms, had a strict rule that associates were required to bill at least 2,000 hours per year. Year-end bonuses and opportunities for advancement were largely tied to hitting this figure. Performance was largely inward-focused.

After managing a corporate practice, I finally noticed and began to appreciate the other side of the coin. It felt as though outside firms had been preying on our need for their services, as opposed to focusing outward toward our business success. 

After this epiphany, I began reaching out to other in-house colleagues and managers to determine whether they were facing the same struggles with outside law firms. I wasn’t surprised with what I uncovered:

  • Growing distrust with outside law firms, at times wondering whether services provided were always in the best interests of the company;

  • Frustration with having to pay increasing hourly rates due to firm bloat and rising overhead, especially when attempting to manage legal spend;

  • Perception of law firms as not cost-effective on day-to-day inquiries given fears of receiving a large invoice for even minor requests; and

  • Confusion as to why law firms were only interested in reacting to client problems, as opposed to being proactive with preventive strategies to stay ahead of exposure. 

It was clear the traditional law firm model of reactive services and billing hours was not client-facing, and it certainly was not business-forward in its approach.

The Ounce of Prevention

Having practiced on both sides of the fence, this was truly a problem in need of a solution. Fortunately, more nimble legal practices (not anchored by bloat and overhead) were already beginning to disrupt the legal industry by offering specialized services and flexible fee arrangements. This disruption extended to practices dedicated to helping businesses minimize their exposure to risks.

These Preventive Law practices specialize in anticipating and reacting to risks before they materialize, providing cost-effective guidance with long-term benefits. When done properly, these practices can assist businesses with:

  • Improved understanding of risk exposure along primary and support activities;

  • Developing and implementing proactive strategies to prevent exposure;

  • Better informed decision-making;

  • Improved efficiency and reaction time, as well as consistency in application;

  • Lower contract, claim, litigation and regulatory exposure; and

  • Better opportunities to recover significant insurance proceeds when necessary.

Like preventive medicine, Preventive Law practices help companies stay healthy up front in order to minimize likelihood of “disease” later.

It Works, It Really Works!

Shortly after starting our practice, we were approached by a product manufacturer that had no in-house counsel and a significant annual legal spend. They were in the middle of several lawsuits and couldn’t see a light at the end of the tunnel. They wanted a plan to get out from under the litigation and what seemed like endless invoicing by lawyers and legal strategies they did not fully understand or trust. Because of the competitive market, profit margins were already razor-thin and cash flow was closely monitored.

We sat down with the executive team to explain how a Preventive Law practice could be of benefit. For a fixed monthly fee, we would manage all company claims and litigation as well as relations with insurers, help review and prepare enterprise-wide contracts, and further assist with developing and implementing strategies from supply chain operations to human resources to labor relations to procurement. We took the position that no project would be outside the scope of work, and that employees should feel free to call us with any matter. Our primary goal was to be an accessible, business-forward resource.

Ultimately, the manufacturer signed with us. The increasing number of calls and expanded projects since then demonstrate that we’ve become a trusted resource. Cases are being closely managed, keeping litigation budgets within reason. We’ve also helped the company recover millions of dollars in insurance proceeds that may have otherwise been missed due to lack of awareness and strategy.

We include updated time-sheets with our monthly invoices to provide a comparison against the old hourly rates paid, as well on-boarding costs (since we’re really competing with that possibility as well). So far, so good. We’re nearing a year together and it’s safe to say both parties are looking forward to renewal.

Preventive Law won’t work for everyone. Many established law firms are too hesitant to adopt more outward-facing models. At KEEFER, we’re fully embracing this new world order. As always, we’re here to help.