Firm Asset, Liability, Risk & Change Management

Is it time for your firm to evaluate the often-indistinct lines between assets, liabilities, risks, and the changes that can limit or delineate those boundaries? Consider the following firm components:

• Partnership or shareholders' agreement;
• Overall management structure;
• Mechanics of the practice;
• Financial management;
• Firm benefits based upon performance;
• Case acceptance principles; and
• Conflicts and ethics considerations.

Does your firm believe that its ASSETS are comprised of:

• Work product;
• Client and contact lists;
• Equipment (leased or owned) and its contents;
• Trade secrets; or
• Marketing/brand recognition including copyrights, trademarks, etc?

Has your firm considered making CHANGES to include replacing issues of “trust” with best business practices? More importantly, careful consideration should be given to who owns these assets. Is it the Partners? Employees? Of Counsel? Vendors? Clients? Formal agreements, like those that firms encourage their clients to institute, are a definite deterrent to intellectual and property ASSET theft or misuse. Is it time to do an inventory of your firm's agreements? Time invested in this activity usually yield a number of breaches, exclusions and expirations.

Does your firm affirm its LIABILITIES to include:

• Malpractice actions;
• Investment and reporting of escrow monies;
• Bar license issues (including CLE); or
• HR practices?

Who represents your firm in disputes with clients, employees and former partners? How is your firm defended against charges of professional or employer negligence? What is the impact of negotiated settlements prior to discovery?

Effects of Malpractice: LLP or Not

Serious claims against your law firm may have a distressing influence, going beyond the settlement dollars involved. Even if a partner or investor's liability is limited to the amount he/she has invested in your firm, the impact includes large amounts of lost, productive time, weakening relationships between partners, and, in many cases, corollary effects influencing your firm's client base.

Like the advice firms often give to their clients about litigation, law firms tend to follow the same tactic whenever they find themselves in court: They settle. However, there are disadvantages to the tendency to settle. According to many lawyers, it has kept courts from clarifying issues of law firm liability and has given plaintiffs' lawyers an incentive to pursue law firms.

Does the possible RISK exist in your firm pertaining to:

• Open access issues (work product, HR records, partnership agreements);
• Client billing (time as inventory) discrepancies (alterations from partners not being consistent or showing favor);
• Ethical wall violations (summer interns, etc); or
• LLP types?

Are the limitations of responsibility brought about by state/federal law, insurance regulations, or negotiated agreements? Is your firm's LLP partnership one in which the partners have unlimited liability for their own malpractice but limited liability for other partners' malpractice or is it a partnership that limits partners' risk of losing their personal assets to only their own acts and omissions and to the acts and omissions of people under their supervision? What management, structural CHANGES does your firm need to institute to avoid these types of RISK?

A Seemingly Simple Scenario #1

Asset: A client brings an action, documents are prepared, filed, shared, and the firm “wins” the case with a sizable, monetary settlement.

Issue: Sometimes closing a case does not. A client can change his or her mind about case outcome due to many, unforeseen influences.

Risk: Are case documents stored on a local PC, local network or in a document management system, and who has access? Are documents shared in an editable form (v. image form, like a scanned PDF)? Who shares access to the documents? Opposing counsel? Clients? Associates? Support Staff? Are the documents e-mailed? Faxed? Were paper only copies issued? What are the documents' retention schedules? Are documents sent to off-site storage once the case is “closed”? Is there an easily accessible tracking database? Does your firm use an untraceable instant messaging system during conference calls?

The process of discovery is not as easy as it once was.

Liability: Is hidden document-tracking information (metadata) unknowingly shared with any of the involved parties? Are shared documents 100% original documents or hastily copied from “like” firm case or client matters? Is access and edits to documents only offered to authorized firm staff? How does your firm prove adherence to ethical wall(s)? If a document is sent via e-mail, is your firm's disclosure or distribution disclaimer attached? Are your firm's staff and professional disclosure agreements enforced by employment contract(s)? Are documents stored in a secured location after archiving (is it paper or electronic)? How difficult is it to gain access to archived documents without valuable time delays? What vehicle does your firm use to assure accurate and timely reporting of monetary settlement trust/accounting/distribution to partners, courts or clients? Client escrow accounts, managed either by your firm or by a bank as agent, are designed to satisfy your fiduciary responsibilities and realize competitive returns.

Change: Your firm can modify its HR policy and firm document security to protect client needs and rights. These modified policies can include employment agreements that emphasize the “reasonable” ethical assumptions that can sometimes be taken for granted. Likewise, modifying your firm's work product processes to accommodate client's needs may include:

• Software management and reporting of potentially conflicting client matters or ethical wall issues;
• Sending a firm broadcast e-mail announcing a conflict is insufficient;
• Case management, reporting and accountability (including client-specified matter budgets);
• Accounting (billing/financial) integrity focused on client satisfaction and client bookkeeping dictates; or
• Documented firm standards in case documentation and distribution practices.

Having a litigation professional review all of your firm's agreements is always a good idea. Firm cultural shifts (mergers, management changes, new technology, relocation) are all reasons for regularly scheduled reviews of these processes. For an interesting, judicial, ethical wall perspective you may choose to read www.rjop.com/plnews8.pdf.

A Not-So-Simple Scenario #2

An associate (or employee) with several years of service decides to leave the firm, and not necessarily to be reemployed in another firm. You think it is amenable. However, undisclosed to you, the associate or employee has other thoughts. Appropriate notice is given, active matters are turned over to other firm attorneys and all seems to be well in hand.

Asset: The work product(s) of the departing attorney/employee, contacts and relationships with clients, witnesses, courts and opposing counsel.

Issues: What are the limits regarding firm assets as they relate to the client's best interests? To what extent is your firm willing to pursue prosecutable lapses?

Risk: Did the attorney take copies of their work product, contact list, or deposition documents even if only for personal, informational purposes? Does this “failure to notice” make the firm liable in future malpractice actions? Is the employee held to ethical walls once they have left your firm? (a rhetorical “No.”) What liability would your firm have if metadata from your firm is discovered in documents generated in the departing attorneys future work product, thus linking your firm to an unrelated, filed action or client agreements? Is there a formal firm policy about removing documents, either electronic or paper, from your firm's possession?

Liability: When clients talk to former firm personnel without professional decorum, malpractice can follow. (see Scenario #1, Liability, above)

Change: Incorporate technology restrictions with HR department processes during, before terminating, and after personnel shifts, removal or voluntary departures. Always consider state and federal employment law in these situations, including:

• As soon as possible, perform an in-depth exit interview. Do not wait until the day of departure!!! HR can make recommendations on how to proceed given the outcome of the interview. You may want to consider immediately terminating those persons not wanting to engage in such conversations;
• Obtain a signed, written affirmation of firm policy regarding all firm assets, even if the policy is in the original hiring contract/agreement. Policies and equipment change and agreements are not often updated. Also, include the surrender of any firm owned laptop, PDA, memory sticks, cameras, etc. Replace laptops with a desktop for short-term work product responsibilities;
• Monitor outgoing e-mail, especially those with file attachments. Restrict any firm remote access capabilities;
• Check computer network logs for copying or large amounts of file deleting. Be prepared with network backups if needed; and
• Review phone logs.

While we may all wish for a kinder, gentler approach to personnel changes, it is better to be safe than sorry. For more in-depth technology advice, go to the ABA's Web site www.lawtechnology.org/lofftech.html.

Dynamics of Change

No matter the industry, firm, size, or anticipated reaction, we must approach change with a positive outlook. Some of the things we can model include:

• People must see the point of a change and agree with it ' at least enough to give it a try. A well thought out and conveyed-in-advance plan can make all the difference. Software changes can be announced by placing a slide show kiosk in an employee lunchroom or library. Policy changes can be sent as log-in reminders or e-mail announcements.
• The surrounding structures, eg, reward and recognition systems, must be in tune with the new behavior. Focus on the positive, client impact rather than punitive lapse consequences.
• People must witness colleagues they admire modeling the change. Committee heads or managing partners need to “walk the walk, talk the talk” at every opportunity and interface.
• People must have the skills to do what is required of them to act accordingly. If the required skills are not inherent, treat training like it's low-carb. Let the staff have as much of it as they want.
• Maintaining flexibility, keeping an open ear to dissenting opinions, all the while limiting your firm's vulnerability is another delicate balancing act. You can agree to listen. However, the future of the firm, the security of all whom it employs, the community it serves and the opportunity for growth all hinge on your firms ability to limit negative influence.

Is it time for your firm to evaluate the often-indistinct lines between assets, liabilities, risks, and the changes that can limit or delineate those boundaries? Consider the following firm components:

• Partnership or shareholders' agreement;
• Overall management structure;
• Mechanics of the practice;
• Financial management;
• Firm benefits based upon performance;
• Case acceptance principles; and
• Conflicts and ethics considerations.

Does your firm believe that its ASSETS are comprised of:

• Work product;
• Client and contact lists;
• Equipment (leased or owned) and its contents;
• Trade secrets; or
• Marketing/brand recognition including copyrights, trademarks, etc?

Has your firm considered making CHANGES to include replacing issues of “trust” with best business practices? More importantly, careful consideration should be given to who owns these assets. Is it the Partners? Employees? Of Counsel? Vendors? Clients? Formal agreements, like those that firms encourage their clients to institute, are a definite deterrent to intellectual and property ASSET theft or misuse. Is it time to do an inventory of your firm's agreements? Time invested in this activity usually yield a number of breaches, exclusions and expirations.

Does your firm affirm its LIABILITIES to include:

• Malpractice actions;
• Investment and reporting of escrow monies;
• Bar license issues (including CLE); or
• HR practices?

Who represents your firm in disputes with clients, employees and former partners? How is your firm defended against charges of professional or employer negligence? What is the impact of negotiated settlements prior to discovery?

Effects of Malpractice: LLP or Not

Serious claims against your law firm may have a distressing influence, going beyond the settlement dollars involved. Even if a partner or investor's liability is limited to the amount he/she has invested in your firm, the impact includes large amounts of lost, productive time, weakening relationships between partners, and, in many cases, corollary effects influencing your firm's client base.

Like the advice firms often give to their clients about litigation, law firms tend to follow the same tactic whenever they find themselves in court: They settle. However, there are disadvantages to the tendency to settle. According to many lawyers, it has kept courts from clarifying issues of law firm liability and has given plaintiffs' lawyers an incentive to pursue law firms.

Does the possible RISK exist in your firm pertaining to:

• Open access issues (work product, HR records, partnership agreements);
• Client billing (time as inventory) discrepancies (alterations from partners not being consistent or showing favor);
• Ethical wall violations (summer interns, etc); or
• LLP types?

Are the limitations of responsibility brought about by state/federal law, insurance regulations, or negotiated agreements? Is your firm's LLP partnership one in which the partners have unlimited liability for their own malpractice but limited liability for other partners' malpractice or is it a partnership that limits partners' risk of losing their personal assets to only their own acts and omissions and to the acts and omissions of people under their supervision? What management, structural CHANGES does your firm need to institute to avoid these types of RISK?

A Seemingly Simple Scenario #1

Asset: A client brings an action, documents are prepared, filed, shared, and the firm “wins” the case with a sizable, monetary settlement.

Issue: Sometimes closing a case does not. A client can change his or her mind about case outcome due to many, unforeseen influences.

Risk: Are case documents stored on a local PC, local network or in a document management system, and who has access? Are documents shared in an editable form (v. image form, like a scanned PDF)? Who shares access to the documents? Opposing counsel? Clients? Associates? Support Staff? Are the documents e-mailed? Faxed? Were paper only copies issued? What are the documents' retention schedules? Are documents sent to off-site storage once the case is “closed”? Is there an easily accessible tracking database? Does your firm use an untraceable instant messaging system during conference calls?

The process of discovery is not as easy as it once was.

Liability: Is hidden document-tracking information (metadata) unknowingly shared with any of the involved parties? Are shared documents 100% original documents or hastily copied from “like” firm case or client matters? Is access and edits to documents only offered to authorized firm staff? How does your firm prove adherence to ethical wall(s)? If a document is sent via e-mail, is your firm's disclosure or distribution disclaimer attached? Are your firm's staff and professional disclosure agreements enforced by employment contract(s)? Are documents stored in a secured location after archiving (is it paper or electronic)? How difficult is it to gain access to archived documents without valuable time delays? What vehicle does your firm use to assure accurate and timely reporting of monetary settlement trust/accounting/distribution to partners, courts or clients? Client escrow accounts, managed either by your firm or by a bank as agent, are designed to satisfy your fiduciary responsibilities and realize competitive returns.

Change: Your firm can modify its HR policy and firm document security to protect client needs and rights. These modified policies can include employment agreements that emphasize the “reasonable” ethical assumptions that can sometimes be taken for granted. Likewise, modifying your firm's work product processes to accommodate client's needs may include:

• Software management and reporting of potentially conflicting client matters or ethical wall issues;
• Sending a firm broadcast e-mail announcing a conflict is insufficient;
• Case management, reporting and accountability (including client-specified matter budgets);
• Accounting (billing/financial) integrity focused on client satisfaction and client bookkeeping dictates; or
• Documented firm standards in case documentation and distribution practices.

Having a litigation professional review all of your firm's agreements is always a good idea. Firm cultural shifts (mergers, management changes, new technology, relocation) are all reasons for regularly scheduled reviews of these processes. For an interesting, judicial, ethical wall perspective you may choose to read www.rjop.com/plnews8.pdf.

A Not-So-Simple Scenario #2

An associate (or employee) with several years of service decides to leave the firm, and not necessarily to be reemployed in another firm. You think it is amenable. However, undisclosed to you, the associate or employee has other thoughts. Appropriate notice is given, active matters are turned over to other firm attorneys and all seems to be well in hand.

Asset: The work product(s) of the departing attorney/employee, contacts and relationships with clients, witnesses, courts and opposing counsel.

Issues: What are the limits regarding firm assets as they relate to the client's best interests? To what extent is your firm willing to pursue prosecutable lapses?

Risk: Did the attorney take copies of their work product, contact list, or deposition documents even if only for personal, informational purposes? Does this “failure to notice” make the firm liable in future malpractice actions? Is the employee held to ethical walls once they have left your firm? (a rhetorical “No.”) What liability would your firm have if metadata from your firm is discovered in documents generated in the departing attorneys future work product, thus linking your firm to an unrelated, filed action or client agreements? Is there a formal firm policy about removing documents, either electronic or paper, from your firm's possession?

Liability: When clients talk to former firm personnel without professional decorum, malpractice can follow. (see Scenario #1, Liability, above)

Change: Incorporate technology restrictions with HR department processes during, before terminating, and after personnel shifts, removal or voluntary departures. Always consider state and federal employment law in these situations, including:

• As soon as possible, perform an in-depth exit interview. Do not wait until the day of departure!!! HR can make recommendations on how to proceed given the outcome of the interview. You may want to consider immediately terminating those persons not wanting to engage in such conversations;
• Obtain a signed, written affirmation of firm policy regarding all firm assets, even if the policy is in the original hiring contract/agreement. Policies and equipment change and agreements are not often updated. Also, include the surrender of any firm owned laptop, PDA, memory sticks, cameras, etc. Replace laptops with a desktop for short-term work product responsibilities;
• Monitor outgoing e-mail, especially those with file attachments. Restrict any firm remote access capabilities;
• Check computer network logs for copying or large amounts of file deleting. Be prepared with network backups if needed; and
• Review phone logs.

While we may all wish for a kinder, gentler approach to personnel changes, it is better to be safe than sorry. For more in-depth technology advice, go to the ABA's Web site www.lawtechnology.org/lofftech.html.

Dynamics of Change

No matter the industry, firm, size, or anticipated reaction, we must approach change with a positive outlook. Some of the things we can model include:

• People must see the point of a change and agree with it ' at least enough to give it a try. A well thought out and conveyed-in-advance plan can make all the difference. Software changes can be announced by placing a slide show kiosk in an employee lunchroom or library. Policy changes can be sent as log-in reminders or e-mail announcements.
• The surrounding structures, eg, reward and recognition systems, must be in tune with the new behavior. Focus on the positive, client impact rather than punitive lapse consequences.
• People must witness colleagues they admire modeling the change. Committee heads or managing partners need to “walk the walk, talk the talk” at every opportunity and interface.
• People must have the skills to do what is required of them to act accordingly. If the required skills are not inherent, treat training like it's low-carb. Let the staff have as much of it as they want.
• Maintaining flexibility, keeping an open ear to dissenting opinions, all the while limiting your firm's vulnerability is another delicate balancing act. You can agree to listen. However, the future of the firm, the security of all whom it employs, the community it serves and the opportunity for growth all hinge on your firms ability to limit negative influence.