Lean(er) and Mean(er): Legal Departments Adapt to the New Economy
December 2009

Times are tough, and gaming companies worldwide are tightening their belts. Their legal departments are no exception. They are feeling the pinch along with everyone else. Like other operational and administrative departments, in-house legal has taken a big hit to its bottom line—its budget. Unlike some areas where cutbacks have kept pace with decreased demand, however, legal departments appear to be facing the perfect storm: increasing demand for their services in the face of shrinking resources. This perfect storm requires general counsels and their staff to take both difficult and creative measures in order to continue delivering effective legal services at an acceptable cost to stakeholders.

The Rock and the Hard Place
As participants in a heavily regulated industry,gaming companies cannot afford to skimp on excellent legal services. The industry was sharply reminded of this recently when the Hard Rock Casino was fined $500,000 for violations committed by its tenant, the Privé nightclub. Although the acts that the Nevada Gaming Control Board complained of were committed solely by Privé and its personnel, the Hard Rock was nevertheless penalized for its complacency in failing to address the issue. This bold enforcement action by the board was a fresh reminder that casino compliance requires ongoing proactive and preventive measures. Reacting to and dealing with problems after the fact is not good enough. Sufficient staff and resources—both compliance and legal—to provide a consistent level of oversight are critical.

Above and beyond compliance, with the drop in the economy, some gaming companies have seen an uptick in disputes that can end up in either the judicial or the alternative dispute resolution (ADR) process. For example, when companies are forced to take personnel actions against employees in a down economy, inevitably there are higher incidences of discrimination and harassment complaints. The causes vary from supervisors failing to follow proper procedures because they themselves are operating under increased stress levels to dismissed employees who normally would have simply moved on to a new job resorting to draconian measures in attempt hold on to a source of income. Either way, the result is more unwanted exposure for the company and more work for the legal department.

Other legal issues that appear with greater frequency during an economic downturn include breach of contract and collection actions when vendors or customers are unable to deliver or pay their bills; personal injury claims and business workouts; and disputes with shareholders, investors and lenders. In addition to supporting the usual day-to-day legal needs of the gaming business, today in-house legal counsel are confronted with more and more issues and disputes that are driven, in large part, by the financial hardships being suffered by all of us.

At the same time, the harsh reality is that these legal departments are having to take their share of the medicine. Despite the rising tide of disagreements, disputes and claims, they have experienced budget cutbacks, forced attrition of personnel, increased workloads, and less access to outside legal counsel for transactional and even some litigation support. There are no sacred cows in this downturn.

Tough Times Call for Creative Thinking
As a result, gaming legal departments have taken the usual steps to cut costs—everything from consolidating office supplies to conserving power in the office to cutting back on the use of outside vendors for day-to-day needs. They are watching their bottom lines and reviewing bills and invoices with a fine-tooth comb before authorizing payment. They have also, naturally, taken on more work as colleagues have been let go or were not rehired and as there is simply more work coming in the door that needs to be done. Beyond all of these normal cost-saving measures, some legal departments are experimenting with other creative ways to get more bang for their buck.

For example, in-house legal departments are referring less work to outside law firms. Only for the most complex deals are outside lawyers being called in to assist. Smaller, more mundane transactions are handled by in-house counsel whenever possible. As for litigation, including ADR, traditionally it has been farmed out to law firms because of licensing requirements and because these processes have their own unique rules and time schedules. Now, though, some in-house attorneys are updating their licenses and refamiliarizing themselves with courts and ADR forums in order to make appearances on behalf of their companies, sometimes even without the assistance of any outside counsel. Needless to say, for the lower risk/smaller dollar value cases, this can provide companies with significant savings over time.

For the larger, more complicated matters that are referred out to law firms, general counsels are keeping a tighter leash than ever to ensure that the fees and costs being incurred are reasonable and necessary. They stay very involved in the work as it progresses. As a result, they are able to identify opportunities to eliminate redundancies and realize efficiencies early on and, therefore, save money. Often times they reduce outside counsel fees and costs by taking the laboring oar for some aspects of the case, such as putting together first drafts of agreements or written discovery. Gaming legal departments are also diversifying the cadre of outside law firms that they work with, moving away from the $900 per hour multinational behemoth firms to smaller, regional firms that offer the same quality of service at much lower billing rates.

Putting Skin in the Game
Another creative move that some corporate legal departments are taking is to demand that their outside law firms put some skin in the game—i.e., take on some of the client’s risk. For a very long time now, the vast majority of business law firms have adhered to the billable hour model: The client gets billed by the hour for business-related legal work regardless of the outcome. Many times, this system works and is a fair representation of the value of services rendered. Other times, unfortunately, it doesn't’ work so well. For instance, it does not incentivize efficiency; generally, the more time is spent, the more fees are earned. This is good for the lawyers but not so good for the clients. Similarly, the
billable hour system cannot claim to incentivize the most effective representation, as law firms generally still get paid no matter the outcome for the client.

In addition, while most businesses live and die by their budgets, legal work—especially litigation—is inherently unpredictable, often resulting in actual expenses that are off from estimated budgets by many percentage points. Under the existing compensation model, the client bears all of the risk for this lack of predictability. If the legal work proceeds as planned, both the client and the lawyer benefit. If the legal work happens to involve a difficult judge, an unruly opposing counsel or a completely crazy opposing party, however, then the client bears 100 percent of the risk of increased legal fees required for the lawyer to deal with those previously unknown variables. This can result in some unpleasant surprises when the bills arrive.

Despite the known problems associated with this model, it has continued in place for many years now. There has simply not been enough of a demand for a better alternative. This economic downturn is changing that. In-house legal departments are more motivated than they have ever been to ensure that, to the extent possible, outside counsel’s interests are aligned with theirs and that the unpredictability of litigation is borne more equally by both lawyer and client. Consequently, general counsels are, with increasing frequency,demanding that their outside law firms propose and/or accept compensation arrangements that are different from the billable hour model.

These alternative fee arrangements (AFAs) run the gamut from flat fees to pure contingency to reduced hourly rates with a bonus component. What they have in common is that, unlike the straight billable hour model, outside counsel takes on some of the risk normally borne exclusively by the client. Moreover, for litigation matters, outside counsel’s interests are aligned with the client’s interests because there is a built-in financial incentive to obtain a victory for the client, as well as a penalty for failing to do so. From both the in-house counsel’s perspective and the perspective of many outside law firms, this is a win-win situation. There is no doubt that this is where the future lies for the relationship between gaming legal departments and outside counsel.

This economic downturn has hit the gaming industry probably harder than anything else it has ever encountered. At the same time, it has engendered in the businesses and people that make up this industry a level of resiliency and creativity that might never have been seen otherwise. Gaming legal departments reflect this fundamental shift in paradigms. Instead of faltering under the combined weight of increased responsibilities and diminished resources, general counsels and their staff are instead adapting by finding ways to get lean(er) and mean(er). 

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