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Guest post: The United States of Innovation – viewed from Wall Street, it could be a whole lot better

The other night I was fortunate enough to be invited to attend the FT’s Innovative Lawyers 2013 US awards ceremony. (The report was published here the next day in the paper, and you can download a PDF.)

Since this is now an annual event – this year marks the fourth time they’ve done it in the US – it’s an occasion to step back and see how the conversation has evolved. Here’s the telling final paragraph of last year’s introductory piece, following a lengthy series of anecdotes from managing partners about ‘buggy whips’, ‘new market dynamics’, ‘requiring behaviour to change’, ‘the wow factor’, and ‘adapting to the moving cheese’:

All the chairmen of the top firms talk about change and the need to ‘not fight the last war’. And yet at the same time they cannot, they say, see their firms being all that different in five years’ time.

How much innovation were firms really prepared to engage in last year? I rest my case.

Continuing into the articles about the meat of innovation last year, one apiece is devoted to:

• identifying ways to make sure corporate deals get regulatory approval;

• working offensively and defensively with patents;

• helping clients themselves ‘become more innovative’;

• extending techniques of debt restructuring from the corporate arena to entire countries (Exhibit A: Greece);

• enhancing associate training and experimenting with secondments;

• getting serious about alternative fees;

• fighting class actions; and

• advising on partnership and corporate structures for exploiting shale gas.

Maybe I’m jaded, but I find this all a bit underwhelming; aren’t these things law firms should always be doing? Granted, they may be going about these particular tasks in innovative legal ways, but that’s not what I have top of mind when I’m on a quest to uncover innovation in ‘the business of law’ (as the FT puts it).

Let me hasten to add that this is not the FT’s fault in the least; each year they receive an ever-increasing number of submissions (now well into the hundreds), and I’m sure they diligently select the standouts from the pack. It’s just that this is the type of raw material law firms give them to work with.

So has the needle moved in the past year?

From the introduction, we get some hints:

Key to success of [a large Blackstone deal, creating the world’s second largest vodka company] was White & Case’s global footprint, internal collaborations, and the ability to show what the client considered unusual behaviour. Tom Lauria, the White & Case partner on the deal, was described as an ‘atypical’ lawyer. […]

In early FT Innovative Lawyer reports, atypical behaviour meant anticipating instructions as well as being commercial and intensely committed; in effect, being in the driving seat of the car. But as the bar to entry rises, it has begun to mean having a key role in designing that car. […]

Brad Karp, chairman of Paul Weiss, says, ‘We had another record-breaking year but we understand that we cannot be complacent in this market. The stakes are higher, the problems more intractable but the opportunities are more transformative.’

I agree with Brad Karp – indeed, his words succinctly capture the most important features of our landscape today. Yet I have to laugh when the most flattering thing a highly sophisticated client can say about a lawyer’s standout performance was that it was – ‘atypical’ – presumably for that poor category of lost souls also known as lawyers.

Moving right along, we find Simpson Thacher advising Smithfield Foods in its takeover by Shuanghui International of China. No national security implications were anticipated. As Larry Pope, the Smithfield chief executive, quipped, ‘We’re not exporting tanks and guns and cyber security – these are pork chops.’ Not so fast. Turns out the US Treasury thought sausages were an issue of national security. As the FT acknowledges, this deal (which did go through) could bring Chinese flags to a small town in rural Virginia.

Next, Cravath, representing Vivendi, created an important precedent in securities litigation by rebutting a ‘fraud on the market’ presumption, a judicially blessed theory that had dominated securities class action jurisprudence since 1987. Basically, the doctrine permits plaintiffs to achieve class action status without having to prove they made investment decisions in reliance on the defendant’s alleged misstatements.

Kudos due indeed. I’ve never been a fan of the ‘fraud on the market’ theory, which seems to disembowel reliance, materiality, and indeed the epistemological bedrock of the very notion of fraud itself, but I’m struggling with what’s innovative about zealous advocacy for one’s client. I won’t go on in this vein.

We do come to an interesting creature distinctively different from the rest of the innovators presented by the FT, however:

Dewey & LeBoeuf continues to cast a shadow, nearly 18 months after its demise. The biggest law firm failure in history had many causes; perhaps one was its opaqueness over its financial position, not only with the outside world but also with its own partners. That it misstated its financial health to closely watched annual rankings compiled by the American Lawyer magazine was one shocking detail of the tragedy, but one that revealed a wider truth about how unaccountable firms’ financial reporting is, particularly in the US, where if figures are released at all they can consist solely of revenue and profit per partner.

In that context, K&L Gates‘ decision to publish detailed annual reports of its finances to a US Securities and Exchange Commission reporting standard – from bank debt to overheads and partner capital – was ground-breaking among its peers.

While it is true that UK-headquartered firms have long published their results with a similar level of detail, this culture has not permeated the US. Perhaps the bold move by K&L Gates will help change that.

When I think ‘innovation’, this is the kind of thing I’m thinking about. Certainly, K&L’s move was innovative in the dictionary sense of not having been done before in the US. But it’s also the essence of what innovation means to me: It’s a business innovation, not a legal innovation. Here’s a bit of what I had to say about it at the time:

As a securities lawyer, I’ve read my share of financial disclosure documents, but I’ve never seen one in our industry – until today, when K&L Gates released its 2012 results.

When you think about it, this is a preposterous state of affairs.

And I added:

Rankings mislead, and one-dimensional rankings intrinsically mislead.

Isn’t a list of firms by gross revenue (the venerable Fortune 500) kind of fascinating? Undoubtedly, but beyond the mere impression of one sort of relative size, what do we really learn? Nothing. For example, Wal-Mart’s gross revenue according to the 2012 Fortune 500 was $447bn, making it #2 on the list. Exxon was #1 at $453bn.

Think for just a second.

How different could these businesses possibly be? Wal-Mart sells at a very small retail mark-up stuff that somebody else made. Exxon has to find, produce, transport, refine, and transport again everything it sells, creating and maintaining in the process one of the most complex supply chains ever created, traversing some of the world’s nastiest neighbourhoods, and requiring sophisticated and temperamental technology.

Calling one #1 and the other #2 is beginning to look a bit nonsensical, is it not?

But a law firm is a law firm is a law firm, right?

Not in my book.

Cravath and K&L can’t really be compared on a single list in any way that makes sense to a thinking observer. So I applauded K&L’s financial disclosure as a true innovation in my eyes.

This may be where I philosophically part ways with the FT and my friend Reena SenGupta, who’s the inspiration and motivating force behind the Innovative Lawyers reports.

Adam Smith, Esq., is all about the ‘economics of law firms’, and their strategies, competitive distinctions, barriers to entry, and yes, innovation on the business front.

The FT report receives submissions about, and professionally and smartly judges, innovations on the legal practice front.

Without question, the world in which we and our clients navigate has never been more multidimensional, cross-border, full of duelling regulatory authorities and basic philosophies of rights and responsibilities (see: EU vs US data privacy presumptions), and therefore never more demanding of legal innovations. Year after year, the FT resoundingly laps the field in reporting on the cutting edge of legal practice at the very top of the professional field across the globe.

I just have a different take on ‘innovation’.

Bruce MacEwen is president of Adam Smith Esq, the legal research and consulting company. Click here to visit the website.