The Legal's Best Law Firm Corporate Practices

Nearly six months ago, The Legal asked law firms across the state to tell us what makes their corporate practices the best. Following a model we set last year when we conducted the Litigation Departments of the Year contest, based on Legal affiliate The American Lawyer’s own contest, we wanted to shift the focus this year to the Pennsylvania firms making an impact with their corporate work. It was the first time we had gone through the process with an eye on corporate practices and we weren’t sure just what to expect, but the submissions we received were numerous and impressive across the board.

In Germany, Union Culture Clashes With Amazon’s Labor Practices

But across the Atlantic — nein, non, no.

Even as President Obama spoke about middle-class jobs last week at an Amazon warehouse in Tennessee, Amazon was facing strikes at warehouses in Germany, its second-biggest market. Unions there say the company has imported American-style business practices — in particular, an antipathy to organized labor — that stand at odds with European norms.

“In Germany, the idea that warehouse workers are going to be getting opposition from an employer when it comes to the right to organize, that’s virtually unheard-of,” said Marcus Courtney, a technology and communications department head at Uni Global Union, a federation of trade unions based in Nyon, Switzerland. “It puts Amazon out in left field.”

Amazon is hardly out there alone, however. Large American technology companies are increasingly running into obstacles as they expand in Europe. For Facebook and Google, the running issue is privacy. Google was fined this year by German authorities for illegally collecting personal data while creating its Street View mapping service, after facing minimal sanctions over Street View at home. Meanwhile, European privacy regulators are considering tough regulations to protect consumers on the Internet, a direct challenge to Google, Facebook and other online companies that mine personal data.

Antitrust officials in Europe are scrutinizing Apple’s relationships with wireless carriers, as well as Google’s competitive practices. And Google, Apple and Amazon have all been criticized by European lawmakers for tactics that help them minimize their tax bills.

Amazon has been criticized for its working conditions in the United States — but not nearly to the same extent as in Europe. On the surface, Amazon’s labor problems in Germany revolve around wages.

The union says workers in warehouses in two small German cities are properly classified as retail employees, and should be paid at the higher rate required for people who work in department stores and other retail outlets. Amazon says they are more properly classified as warehouse workers, and paid at a lower rate.

The subtext, though, is Amazon’s opposition to unions in its warehouses as a general principle, because the company fears unions will slow down the kind of behind-the-scenes innovation that has propelled its growth.

Dave Clark, the company’s vice president of worldwide operations and customer service, says Amazon views unions as intermediaries that will want to have a say on everything from employee scheduling to changes in processes for handling and packaging orders. Amazon prizes its ability to quickly introduce changes like these into its warehouses to improve the experience of its customers, he said.

Last year, the company spent $775 million to buy a manufacturer of robots that it plans to eventually deploy in its warehouses, though it has not said when they would come to Germany. The last thing it wants is to have to get approval from unions for such changes.

“This really isn’t about higher wages,” Mr. Clark said. “It isn’t a cost question for us. It’s about what our relationship is with our people.”

“We’re still a developing industry,” he added — despite the fact that Amazon posted revenue of $15.7 billion in the last quarter and the company is enjoying a buoyant stock price.

In the United States, Amazon successfully thwarted efforts to unionize. Over a decade ago, Mr. Courtney of Uni Global led an unsuccessful effort in the company’s home state of Washington to organize Amazon’s customer service representatives.

Two years ago, an investigative article by The Morning Call newspaper in Pennsylvania’s Lehigh Valley chronicled poor working conditions in an Amazon warehouse in the state, including instances where it stationed paramedics outside to take heat-stressed workers to the emergency room. Amazon says it has addressed the problem by installing air-conditioning in all of its facilities.

More recently, a firm that provides temporary employees for Amazon warehouses is defending itself in a class-action suit that claims the firm shortchanged workers on pay as they waited in security lines to exit warehouses.

Jonathan Barnes, a spokesman for the staffing firm named in the suit, Integrity Staffing Solutions, declined to comment.

But it is a different story in Germany, where the powerful labor movement behind the Amazon strikes traces its roots back more than two centuries.

Mr. Courtney, the Swiss-based head of the federation of trade unions, said other American tech giants, including I.B.M. and Hewlett-Packard, have been more tolerant than Amazon of unions in their European operations.

And the strikes in Germany raise especially knotty problems for the company, which has ambitious expansion plans there.

DealBook: Hiring of Fired Trader Offers a Glimpse Into SAC’s Practices

The Legal's Best Law Firm Corporate Practices

Nearly six months ago, The Legal asked law firms across the state to tell us what makes their corporate practices the best. Following a model we set last year when we conducted the Litigation Departments of the Year contest, based on Legal affiliate The American Lawyer’s own contest, we wanted to shift the focus this year to the Pennsylvania firms making an impact with their corporate work. It was the first time we had gone through the process with an eye on corporate practices and we weren’t sure just what to expect, but the submissions we received were numerous and impressive across the board.

As LPL Financial Expands, Scrutiny of Its Practices Intensifies

The company, LPL Financial, has 13,300 brokers, 6,500 offices, 4.3 million customers — and a growing list of problems with regulators.

At a time when many big-name brokerage firms are losing market share, LPL executives in San Diego have guided the company out of obscurity to become the nation’s fourth-largest brokerage firm — after Wells Fargo, Morgan Stanley and Merrill Lynch — and the largest in much of rural America, where it specializes.

Now, as investors weigh whether to jump aboard the stock market’s record-breaking rally, LPL is one of the biggest firms trying to connect them with stocks, bonds and other products. But the low-cost model that has aided LPL’s explosive growth has brought with it shortcomings that point to the difficulties regulators face in overseeing far-flung financial advisers.

As LPL has expanded, state and federal authorities have censured the company and its brokers with unusual frequency. LPL brokers have been penalized for selling complex investments to unsophisticated investors, for speculative trading in customer accounts, and, in a few cases, for outright stealing from clients.

“LPL is on our radar screen more than any other firm,” said Lynne Egan, who oversees securities regulation in Montana. Last fall, Ms. Egan brought a case against LPL, accusing it of failing to supervise a broker. She said her office is preparing to bring another case against the company, involving multiple brokers.

In the last year and a half, state regulators in Illinois, Massachusetts, Montana, Oregon and Pennsylvania have penalized LPL for failing to oversee its brokers properly. Brokers at the company have faced the most common industry reprimand more frequently than brokers at its large competitors since the beginning of 2012, according to a review of data from the Financial Industry Regulatory Authority, or Finra, the industry’s self-regulator.

Executives for the firm declined to comment for this article, but a spokeswoman, Betsy Weinberger, said in a statement that LPL had taken “steps to enhance our overall platform, including investing in our compliance process and oversight capabilities to support our growth. We remain steadfast in our commitment to serving investors and doing the right thing.”

Ms. Weinberger said the company increased its risk and compliance budget 5 percent last year and 11 percent this year.

LPL was created in 1989 through a merger of two older brokerage firms, Linsco, of Boston, and Private Ledger, of San Diego. It grew to national prominence after 2005, when two large private investment firms, TPG Capital and Hellman & Friedman, bought LPL and financed a number of acquisitions from California to New York. LPL went public in 2010, and its stock has been up slightly since then.

LPL’s rapid growth, and the problems that came with it, reflect forces that are changing the way millions of ordinary Americans interact with Wall Street. Since the financial crisis hit in 2008, prominent firms like Merrill, which long catered to individual investors, have lost brokers and customers.

Many investors have turned instead to independent brokerage firms like LPL. Unlike employees of the industry giants, LPL brokers are essentially contractors. They get LPL e-mail addresses and come under LPL compliance but pay for office space and staff.

For LPL and its brokers, it is a lucrative arrangement. With overhead costs relatively low, the company can pass a large percentage of commissions and fees — upward of 80 percent — back to its brokers. LPL has said that such a model is also an advantage for investors because the company does not have its own investment products, like the mutual funds created by the big banks, that it wants to push onto its customers.

But analysts say that the high commissions leave LPL less money for compliance and can attract brokers interested in skirting the rules. Brad Hintz, an analyst at Sanford C. Bernstein, said that LPL’s management had done a good job expanding the company and improving its compliance technology, allowing brokers with high standards to do well. But he said the scattered nature of its offices was an Achilles’ heel that exposed the company to lawsuits and regulatory risks.

“If the Indians run off the reservations, you have no one guarding the borders,” he said.

This article has been revised to reflect the following correction:

Correction: March 22, 2013

An earlier version of a chart with this article misstated a metric in determining the frequency of regulatory actions. It is the number of regulatory actions per 10,000 advisers, not per 1,000 advisers.

The Legal's Best Law Firm Corporate Practices

The Legal Intelligencer will be publishing for the first time the Best Law Firm Corporate Practices supplement in 2013, honoring the top general corporate practices, as well as specialty transactional areas including: Real Estate; Finance and M&A; Bankruptcy/Reorganization; Non-litigation IP; and Corporate Governance.

As Economic Crisis Drags On, Firms in Spain Reshape Their Practices

Call it a sign of the times. In May the Spanish government announced the results of its beauty contest for legal work on a €35 billion emergency fund designed to reduce regional government debt. Bidders for the work, which involved setting up the legal framework for the banks to disperse the funds to unpaid suppliers, included Spain's three largest firms --Cuatrecasas, Goncalves Pereira; Garrigues; and Uria Menendez -- and at least one Magic Circle firm, Clifford Chance. While it wasn't surprising that Cuatrecasas, one of the oldest operating law firms in the Iberian market, ended up winning the work, what is shocking is the firm's suggested fee: €1.

That wasn't a fluke. Uria Menendez also volunteered to do the work for €1, and Garrigues and Clifford Chance offered reduced fees in an effort to land the prestigious assignment, which could lead to more work from the Spanish government. "Given the economic situation, we felt it was the right thing to do as a service to the government," says Cuatrecasas corporate partner Federico Roig. (Uria declined to comment. Garrigues and Clifford Chance confirmed that they offered a reduced fee, but say that it was a reasonable one.)

The economic crisis in Spain is now in its fifth year and shows little sign of abating soon. The country's banking system, which accounts for 20 percent of Spain's $1.49 trillion GDP, is on the brink of insolvency and will require up to a €100 billion ($123 billion) bailout from the European Union. And in order to comply with the E.U.'s conditions for the bailout funds, in July Spanish prime minister Mariano Rajoy proposed an austerity plan that would raise the Value Added Tax (VAT) on goods and services by 3 percent -- increasing it to 21 percent -- while also cutting unemployment benefits and reducing civil servants' pay. Although the Spanish government clearly needed to take action to reduce the country's deficit, the measures could stifle consumer spending and thus deepen the recession.

The prolonged downturn has affected law firms in the Iberian market, particularly those whose client base is primarily comprised of large Spanish companies. Although there's been an uptick in labor, tax, litigation and insolvency work in Spain and Portugal, financing and mergers and acquisition work has slowed ­dramatically.

At the three biggest Spanish firms, revenues from 2010 to 2011 increased only incrementally. Garrigues, the largest of the triumvirate, posted revenue of €355 million ($495 million) last year, up just 1 percent from 2010. Cuatrecasas' revenue saw a meager 0.4 percent increase during the same time period, with revenue of €241.7 million ($321 million) in 2010 and €242.6 million ($338 million) in 2011. And Uria Menendez reported a 1.5 percent increase last year, with revenue of €188 million ($262 million).

This year, things are looking even bleaker. Garrigues, the only firm in the region whose fiscal year ends on August 31, expects that its revenue will be down 2 percent to 3 percent for 2012. Global firms that work in the region, such as Freshfields Bruckhaus Deringer, Baker & McKenzie, Clifford Chance, and Jones Day, have been affected as well. While none of these firms disclose revenue figures for Spain, lawyers at the firms nonetheless admit that the crisis has affected their practice in the region.

In order to compensate for the loss of revenues from lucrative practice areas like M&A, firms have had to make critical changes: reducing operating costs, more actively managing their lawyers' practices, restructuring compensation plans, and -- in some cases -- reducing their head counts. "We increased our numbers [between 2000 and 2008] because the economy was booming and we thought it would continue," says Garrigues managing partner Fernando Vives. "So now we've had to reduce and adapt our workforce."

Although the 10 lawyers interviewed for this article were publicly stoic about Spain's economic crisis, in private conversations they were clearly worried about the effects of a continued downturn on their firms and their country. Nearly all expressed hope that the economy had bottomed out and would begin to turn around this fall. "We are facing the crisis more optimistically now, but not naively so," says Freshfields' managing partner for Spain, Inaki Gabilondo.

From the late 1990s until 2007, Spain had the fastest-growing economy in the European Union. The country experienced a decade­long real estate boom; at its peak in 2007, construction accounted for 16 percent of the GDP. The thriving real estate market, coupled with a high volume of leveraged buyout and M&A deals, attracted U.S. and U.K. law firms to the region, and spurred the growth of domestic firms within Spain and abroad. Spanish M&A activity more than doubled from 2003 to 2007, and the value of the deals peaked at $194 billion in 2007. But then came the downturn, fueled by the collapse of the real estate market in 2008, which in turn resulted in the crash of the cajas, the small Spanish savings banks that were heavy on home mortgages and have little access to capital since they aren't publicly traded.

The majority of the 45 cajas were forced to merge -- there are now just 14 -- and this helped generate enough work for big firms in Spain to weather the recession. But that work is drying up, and over the past five years M&A activity has declined steeply. "It's not a good time for corporate transactions. There aren't any takeovers or acquisitions," says Jose Maria Alonso, the head of Baker & Mc­Kenzie's dispute resolution team in Madrid and the former managing partner at Garrigues. Alonso cites two large deals that have been put on hold because of the crisis: the privatization of Spanish airport operator Aeropuertos Espanoles y Navegacion Aerea (AENA), and the initial public offering of lottery operator Loterias y Apuestas del Estado (LAE), which would have been the largest IPO in Spanish history.

Firms Beef Up Tax Practices in Silicon Valley as IRS Increases Scrutiny of IP Assets

If there was any doubt about the value of patents to high-tech companies, Apple Inc.'s recent $1 billion victory over Samsung Electronics erased it.

Now the Internal Revenue Service wants a share of the action. The agency is beefing up staff, both nationally and in the San Francisco Bay Area, to look more closely than ever at how high-tech companies price intellectual property transactions involving their overseas subsidiaries.

And it's cracking down on tech companies in Silicon Valley that it suspects are dodging taxes on the profits their IP generates. Companies, however, aren't opening their wallets. They're fighting back, creating a lot more work for both tax planners and litigators. Tax lawyers say they're trying to help clients stay out of tax trouble, advising them to either work with the IRS before there's a dispute, or make sure they have their facts ready when the tax man arrives.

The IRS has made no secret of the fact that it's increasingly focused on what's called transfer pricing, or how a multinational company allocates income and expenses among itself and its foreign subsidiaries for tax purposes. Companies have long used transfer pricing to shift assets to countries with lower corporate tax rates, such as Ireland.

"There's been a substantial increase in controversy work, not just in Silicon Valley, but nationwide," said Kenneth Clark, who chairs Fenwick & West's tax litigation group and successfully defended Xilinx Inc. in one of the biggest transfer pricing cases in recent years. "We're not only seeing more cases, but also a greater degree of intensity in questioning by the IRS. From the taxpayers' perspective, that can mean a tremendous amount of additional work."

Now in addition to manufactured goods, the IRS is homing in on the transfer pricing of what it calls "intangible" intellectual property. Taxing an intangible asset like a patent, however, is no easy task, lawyers said.

There's much room for subjective interpretation about issues such as a patent's actual market value, and who generates more profit from the patent: the parent company in the U.S. where the idea was patented, or the factory in a foreign country that actually makes the products that the parent company sells?

"You end up having a battle over who is adding value," said John Ryan, a partner at Bingham McCutchen in Palo Alto who focuses on tax planning and audit defense. "And reasonable minds differ."

Several IP-heavy tech companies in Silicon Valley recently disclosed transfer pricing disputes with the IRS in their Securities and Exchange Commission filings, including Hewlett-Packard Co., Adobe Systems Inc., Cadence Design Systems Inc., Juniper Networks Inc. and Yahoo Inc., and the potential liabilities are substantial.

Last year, the IRS told Juniper Networks that it owes nearly $900 million in additional taxes based on cost-sharing arrangements related to the licensing of "intangibles," after auditing the company's 2004 to 2006 tax returns. The Sunnyvale, Calif.-based maker of network infrastructure equipment is fighting the tax bill and said in a recent SEC filing that the IRS' position is "inconsistent with applicable tax laws, judicial precedent and existing Treasury regulations."

As Economic Crisis Drags On, Firms in Spain Reshape Their Practices

Call it a sign of the times. In May the Spanish government announced the results of its beauty contest for legal work on a €35 billion emergency fund designed to reduce regional government debt. Bidders for the work, which involved setting up the legal framework for the banks to disperse the funds to unpaid suppliers, included Spain's three largest firms --Cuatrecasas, Goncalves Pereira; Garrigues; and Uria Menendez -- and at least one Magic Circle firm, Clifford Chance. While it wasn't surprising that Cuatrecasas, one of the oldest operating law firms in the Iberian market, ended up winning the work, what is shocking is the firm's suggested fee: €1.

That wasn't a fluke. Uria Menendez also volunteered to do the work for €1, and Garrigues and Clifford Chance offered reduced fees in an effort to land the prestigious assignment, which could lead to more work from the Spanish government. "Given the economic situation, we felt it was the right thing to do as a service to the government," says Cuatrecasas corporate partner Federico Roig. (Uria declined to comment. Garrigues and Clifford Chance confirmed that they offered a reduced fee, but say that it was a reasonable one.)

The economic crisis in Spain is now in its fifth year and shows little sign of abating soon. The country's banking system, which accounts for 20 percent of Spain's $1.49 trillion GDP, is on the brink of insolvency and will require up to a €100 billion ($123 billion) bailout from the European Union. And in order to comply with the E.U.'s conditions for the bailout funds, in July Spanish prime minister Mariano Rajoy proposed an austerity plan that would raise the Value Added Tax (VAT) on goods and services by 3 percent -- increasing it to 21 percent -- while also cutting unemployment benefits and reducing civil servants' pay. Although the Spanish government clearly needed to take action to reduce the country's deficit, the measures could stifle consumer spending and thus deepen the recession.

The prolonged downturn has affected law firms in the Iberian market, particularly those whose client base is primarily comprised of large Spanish companies. Although there's been an uptick in labor, tax, litigation and insolvency work in Spain and Portugal, financing and mergers and acquisition work has slowed ­dramatically.

At the three biggest Spanish firms, revenues from 2010 to 2011 increased only incrementally. Garrigues, the largest of the triumvirate, posted revenue of €355 million ($495 million) last year, up just 1 percent from 2010. Cuatrecasas' revenue saw a meager 0.4 percent increase during the same time period, with revenue of €241.7 million ($321 million) in 2010 and €242.6 million ($338 million) in 2011. And Uria Menendez reported a 1.5 percent increase last year, with revenue of €188 million ($262 million).

This year, things are looking even bleaker. Garrigues, the only firm in the region whose fiscal year ends on August 31, expects that its revenue will be down 2 percent to 3 percent for 2012. Global firms that work in the region, such as Freshfields Bruckhaus Deringer, Baker & McKenzie, Clifford Chance, and Jones Day, have been affected as well. While none of these firms disclose revenue figures for Spain, lawyers at the firms nonetheless admit that the crisis has affected their practice in the region.

In order to compensate for the loss of revenues from lucrative practice areas like M&A, firms have had to make critical changes: reducing operating costs, more actively managing their lawyers' practices, restructuring compensation plans, and -- in some cases -- reducing their head counts. "We increased our numbers [between 2000 and 2008] because the economy was booming and we thought it would continue," says Garrigues managing partner Fernando Vives. "So now we've had to reduce and adapt our workforce."

Although the 10 lawyers interviewed for this article were publicly stoic about Spain's economic crisis, in private conversations they were clearly worried about the effects of a continued downturn on their firms and their country. Nearly all expressed hope that the economy had bottomed out and would begin to turn around this fall. "We are facing the crisis more optimistically now, but not naively so," says Freshfields' managing partner for Spain, Inaki Gabilondo.

From the late 1990s until 2007, Spain had the fastest-growing economy in the European Union. The country experienced a decade­long real estate boom; at its peak in 2007, construction accounted for 16 percent of the GDP. The thriving real estate market, coupled with a high volume of leveraged buyout and M&A deals, attracted U.S. and U.K. law firms to the region, and spurred the growth of domestic firms within Spain and abroad. Spanish M&A activity more than doubled from 2003 to 2007, and the value of the deals peaked at $194 billion in 2007. But then came the downturn, fueled by the collapse of the real estate market in 2008, which in turn resulted in the crash of the cajas, the small Spanish savings banks that were heavy on home mortgages and have little access to capital since they aren't publicly traded.

The majority of the 45 cajas were forced to merge -- there are now just 14 -- and this helped generate enough work for big firms in Spain to weather the recession. But that work is drying up, and over the past five years M&A activity has declined steeply. "It's not a good time for corporate transactions. There aren't any takeovers or acquisitions," says Jose Maria Alonso, the head of Baker & Mc­Kenzie's dispute resolution team in Madrid and the former managing partner at Garrigues. Alonso cites two large deals that have been put on hold because of the crisis: the privatization of Spanish airport operator Aeropuertos Espanoles y Navegacion Aerea (AENA), and the initial public offering of lottery operator Loterias y Apuestas del Estado (LAE), which would have been the largest IPO in Spanish history.