My post on the WSJ's story on Mr. Torkelson's inflated billings generated some critical responses. (I clarify in comment two below that my criticism is directed to the naming of Messrs Park and Coughlin; I do not question Torkelson's general statement about the firm's knowledge.)
One correspondent mentioned a recent WSJ law blog story (piggybacking on Fortune's Roger Parloff) that a special master has recommended that the Coughlin, Stoia firm be found inadequate to act as counsel for a class of investors suing Coca Cola. The master was disturbed that the firm (in its previous incarnation as Milberg) had, as he saw it, paid former Coke employees for documents he found they stole from Coke when they were fired.
My economic analysis my moral intuitions conflict in this case.
Sentiment
First, the sentimental response. There is something decidedly repellent about lawyers buying stolen property. It helps a bit that it is to pursue a case rather than purely for their own profit, but there is a mountain of authority holding that ethical violations cannot be excused on the ground that it was good for the client. There is obviously an element of self-interest as well. And use of the stolen property in legal proceedings seems to compound the wrong by tainting the legal process. Maybe news outlets trade on leaks and other stolen information (the movie The Insider comes to mind), but shouldn't lawyers be different?
Logic
There is some appeal to this reaction, but there are significant logical problems with it. It is a utilitarian truism that one would favor disclosure of even stolen information if disclosure left people better off, net of losses to the firm, than they would be if the information remained secret.
(You would also have to consider
increased
uncertainty in enforcing confidentiality agreements, and the risk that
firms would
spend money on more onerous methods of policing secrecy than they would
if courts refused to let the documents be used. Such things are hard
to measure, though, and would be offset to some degree by an increase
in the cost of unlawful behavior by virtue of an increased likelihood
of getting caught.)
Adequacy of Representation
The truism holds well in the class action context. A rational class member would prefer counsel who would obtain such documents--for free or for money--to counsel who would refuse out of deference to Coke's rights. Class members, after all, accuse Coke of fraud, and want counsel who could best prove that case. Adequacy of counsel is therefore an awkward doctrine to use to express disapproval of the transaction; disciplinary action would seem more appropriate.
One could argue, as the special master seemed to, that courts have to rely on class counsel so that honesty and adequacy go together. I think that is right, and it may well justify the result in this case, where the master found the firm resorted to pretextual justifications of its conduct. But paying for something someone else stole is not lying, and courts also rely on counsel to present the merits of a claim, which such documents might help do. It's not clear that the court's interest has a valence on the general problem of acquiring stolen information, though, again, it might in this case.
Disciplinary Rules & Third Party Rights to Information
I mentioned disciplinary rules a moment ago, but analysis under those rules is more complex than the opinion in this case lets on. The master mentioned MR 4.4(a), which provides lawyers must not "use methods of obtaining evidence that violate the legal rights of such a person." What are the rights in question?
Contract law presents one option. An employee who violates a confidentiality agreement breaches a contract. But contracts are, as Holmes put it, promises to perform or pay damages. Expectation damages, not specific performance, are the default remedy for breach. And damages (from the breaching employee, not the firm, who was not a party to the agreement) would not preclude the firm from acquiring the information. Acquisition would make the former employer worse off if a court would have specifically enforced a confidentiality term, but an injunction against disclosure would entail an equitable analysis including both the probability that damages could compensate for the breach and consideration of third-party effects. (More on this in a moment.)
Property law is another option. The master seemed impressed by this perspective, analogizing the stolen documents to a stolen desk or chair. That analogy is mistaken, however. The chair and desk may be analogized to the paper, but all concerned care about the information on it, not the paper itself. The information--the work, in copyright terms--is distinct from its embodiment--the (hard) copy. Absent discovery misconduct by the defendant, the case would not be materially different if the firm hired a disgruntled former employee with no stolen documents but an exceptionally good memory, who could guide the firm to documents and witnesses.
This distinction might seem the worst form of nit-picking, but in a securities fraud case it helps to focus on the information. If (I repeat, if) the information was accounting-related data Coke had an obligation to disclose (because it has registered securities) then it is hard to see why specific performance would be appropriate in contract law, and it would make no sense to conclude that Coke had exclusive rights in information federal law requires it to give away.
(Perhaps it would make sense before the disclosure obligation was triggered, but not after; I have no general objection to treating information as property--it happens all the time and is a large part of what copyright and trade secret are about--but the accounting data of a firm with registered securities are a special case.)
Not all stolen information cases will be about finances, though, so mandatory reporting duties will not take care of everything. But suppose instead of money human health is at risk. Even without the prospect of legally compelled disclosure, my moral compass begins to turn if we imagine an employee of a medical devices company who steals information showing the company is selling defective dialysis machines (Cf Balla v. Gambro, which was of course a mandatory disclosure case). Utilitarian analysis turns the same way.
Insofar as information is concerned, we can think of a continuum, with
information a firm has a legal obligation to disclose at one end, and
trade secrets at the other. Class counsel who obtains information at
the one end does no wrong; counsel who obtains information at the other
does. In between are hard cases. If this point seems right, this seems like a subject better-suited to analysis under a standard than a bright-line rule.
The Payment Problem
But what about payment? Even if class counsel might be justified in taking and using stolen information, isn't there something particularly odious about paying for it? The master seemed to think so, and I share that intuition. But this seems a muddled reaction. Fired employees may need money to live, especially if they contemplate assisting in cases that will make them pariah in their former industries, and they may demand payment as a condition for disclosure.
The master in the Coke litigation worried that payment might induce more employees to steal information. That is right, but it is incomplete analysis. If disclosure is good, there is nothing particularly wrong with payment to secure it. Basic economics suggests that payment be allowed where disclosure is desirable but would not otherwise occur. (That is roughly the logic of the California Supreme Court's General Dynamics decision, which recognizes a limited wrongful discharge cause of action by terminated in-house counsel.
Conclusion: Standards Analysis Considering Third-Party Effects
Here as elsewhere, moral intuitions are very sensitive to context. My dialysis machine example, or an example of obvious OPM-like fraud, make buying information seem regrettable but ultimately socially useful. Other examples, or a general presumption that such suits are shakedowns dressed up as lawsuits, will provoke the opposite reaction. The importance of context reinforces the idea that a standard would be more useful here than a rule.
Logic suggests that a court in such a case should use the equitable factors relevant to specific performance of a confidentiality obligation as a heuristic for evaluating the conduct of (and thus the adequacy of) class counsel. Harm to the firm, and inadequacy of damages, will most often be present, so the analysis would really be about third party effects of specific performance and, by extension, of rejecting class counsel. If counsel makes society better off through such a transaction (likely by avoiding third-party harm), it is at least not obvious that counsel's conduct should be condemned.
Although this idea may seem too wishy-washy to be useful, it has the virtue of looking closely at what a firm's rights actually are when performing a MR 4.4(a) analysis, and by doing so looking at whether class counsel's conduct is likely to be beneficial on balance. Both inquiries are relevant in such a case. (Though I have had certification as class counsel in mind as I write, the inquiry is relevant to any disciplinary action as well.)
Which is all well and good. But my intuition is unusually resistant to this analysis. Perhaps others can spot the flaws I have missed in this argument.
DM