Houston Patent & Contingent Fee Business Litigation Lawyer & Attorney : McClanahan Myers Espey Law Firm : Intellectual Property, Commercial Litigation

     Washington Mutual and Wachovia have two things in common. First, they were spectacular business failures. Second, they were two of the nation’s largest holders of “bank owned life insurance” or “BOLI” policies. The combination of these two facts creates interesting issues concerning the legality of the BOLI policies and who may benefit from the deaths of the banks’ former employees.

     Bank owned life insurance generally refers to policies that a bank purchases on the lives of its employees. But unlike traditional forms of life insurance, the bank designates itself as the policy beneficiary—meaning that the bank is entitled to the policy benefits when the insured employee dies. BOLI policies also remain in force even if the insured person no longer works for the bank. The policies are therefore similar to those often referred to as “dead peasant” or “janitor” insurance.

     Washington Mutual and Wachovia had enormous appetites for BOLI policies. As of June 30, 2008, Washington Mutual reported to the Office of Thrift Supervision that it maintained $5.072 billion in BOLI holdings. Wachovia likewise reported a staggering $14.575 billion of BOLI holdings.  Notably, those amounts are reported in cash surrender value, meaning that the policies’ benefit amounts are likely substantially higher.

     Washington Mutual’s assets were acquired by JP Morgan Chase in September and Wachovia was acquired by Wells Fargo earlier this month. These transactions create interesting questions concerning the validity of the policies on the lives of the former employees and who may profit from their deaths. 

     Assuming that the Washington Mutual and Wachovia employees consented to the BOLI policies on their lives (a big assumption indeed), Washington Mutual and Wachovia may have had the insurable interest necessary to support the BOLI policies. But what about JP Morgan Chase and Wells Fargo? WaMu and Wachovia employees, especially former employees who left long before the collapse, probably never imagined that Chase and Wells Fargo might one day benefit from their deaths. Thus, two issues surface. First, who will receive the BOLI policy benefits when WaMu and Wachovia’s former employees die? Second, if Chase and Wells Fargo are the expected beneficiaries of those policies, do they have the insurable interest necessary to ensure the policies’ validity? 

 For more information on this topic, please contact any of the firm's partners at mmellp.com.

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     Virtually every jurisdiction in the United States recognizes a person’s right to insure his or her own life and name another as the policy beneficiary, either through an assignment or express designation. The designated beneficiary or assignee is thereafter deemed to have an insurable interest in the insured person’s life by virtue of that designation or assignment. 

     In the context of life or viatical settlements, the requirement of an insurable interest is typically satisfied when the insured person assigns the policy to the purchaser. The insured person in a “stranger owned life insurance” or “STOLI” transaction may likewise satisfy the insurable interest requirement through designation or assignment. Thus, it is arguable that the beneficiary in both life settlement and STOLI transactions have an insurable interest in the insured person’s life because of the assignment—an act taken by the insured person himself.

     One matter absent from the current debate over life settlement and STOLI transactions, however, involves the maintenance of an insurable interest after a secondary transfer of the policy. Most contracts may be transferred time and time again. But life insurance policies are not like most contracts because the requirement of an insurable interest is a fundamental. It is therefore likely that the second (or third, or fourth) assignee of the life insurance contract will not have an insurable interest in the insured person’s life—the insured person did not assign the policy to the subsequent owner or name it as the policy beneficiary. And in many jurisdictions, the absence of an insurable interest renders the policy void as a wagering contract that violates public policy.

     To learn more about this topic, please contact any of the firm's partners at mmellp.com.

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     “No Win No Fee” is a general reference to a contingent-fee agreement. A contingent-fee agreement is a contract between an attorney and client that describes how the attorney is to be paid for his or her work. Under a pure contingent-fee agreement, the attorney receives a fee only when the contingency is met—usually when the client recovers money from the opponent. Thus, “no win no fee” is an apt description. Without a recovery for the client, no fee is owed to the attorney.  It may also be referred to as a "success fee."  

     Except when prohibited by law (such as in criminal defense or some family law cases), contingent-fee agreements can be used in a variety of situations. It is important for the client to understand that, like most contracts, the terms of a contingent-fee agreement are negotiable. Negotiable terms may include the work the attorney is expected to do, the attorney’s percentage of the recovery, who will advance the case expenses, how those expenses will be subtracted from the recovery, and how any non-cash recovery will be valued. Because these terms are negotiable, the client who is shopping for legal services may want to have a disinterested attorney review the proposed contract to ensure that it meets the client’s needs.

     For more information this topic, please contact any of the firm’s partners at mmellp.com.

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     I'm not a member of the Association of Corporate Counsel because I'm not an in-house counsel.  I am an advocate for affordable litigation, however, and I was delighted to learn from my friend Steve Matthews about the ACC and its "Value Challenge."  The challenge states:

“ACC believes that many traditional law firm business models and many of the approaches to lawyer training and cost management are not aligned with what corporate clients want and need: value-driven, high-quality legal services that deliver solutions for a reasonable cost and develop lawyers as counselors (not just content-providers), advocates (not just process-doers) and professional partners.” 

     I totally agree.

     My firm advocates a litigation staffing model that answers the Value Challenge head on. In our website, we propose a solution that helps a company reduce the cost of litigation by bringing as much work in-house as possible. We call it “in-sourcing.” Forbes Magazine recently ran an advertorial about it. 

     The idea is that even in complicated cases, what the client really needs is the right trial lawyer in the courtroom. Much of the work that causes litigation to be so expensive, such as discovery, document review and production, and motion practice, can be handled in-house, by the client's own employees.

     In traditional hourly billing, everything is done by outside counsel and their staffs at very expensive rates. Starting salaries for baby lawyers are now as high as $180,000. Why should a corporate client pay hundreds of dollars per hour for the “education” of such lawyers at tasks that can be done better and cheaper by corporate employees?   The incentive should be efficiency, not opportunities for more hours and higher billings.   Outside counsel often charge millions of dollars to handle a single case. Is that really necessary? Certainly you need the right trial lawyer in the courtroom and to supervise your in-house staff on the case. But you don’t need all the extra baggage that usually comes with the services of a top-tier trial lawyer. 

     Unfortunately, we are not yet past the days of scorched-earth discovery and litigation tactics. Some litigants, encouraged by their hourly-compensated lawyers, refuse to play by society’s rules and get caught. A litigant and its outside counsel were recently sanctioned $4.3 million for “abuse of advocacy” in a patent case. Earlier this year that same litigant and a different firm were assessed $10 million for “misbehavior” in disregarding claims construction.  The Value Challenge sets a higher standard.

     So let's look at the Challenge again. What do corporate clients want and need?

“Value-driven, high-quality legal services that deliver solutions for a reasonable cost and develop lawyers as counselors (not just content-providers), advocates (not just process-doers) and professional partners.” 

     That’s what “Legal In-sourcing” does. Just hire what you need. Do everything you can in-house.  Get a high-quality, top tier trial lawyer.  Let him or her lead your in-house team one case at a time. Use his partners and staff only as necessary. Nurture talent and develop experience in-house. Use in-house staff to locate and produce documents, review documents produced by your opponent and make coding entries into trial software programs. Conduct legal research in-house. Write initial drafts of the motions, responses and briefs in-house. Take the routine depositions in-house. Use the trial lawyer and his staff only as necessary. We know that most cases get resolved before trial. Most of the labor-intensive work that is done before trial can be done in-house.

     The lead trial lawyer must, of course, remain involved at all times, but as a supervisor, not as a provider of the labor pool. This makes him and his firm true “professional partners” with the in-house staff on a case by case basis. 

     What does all this get the corporate litigant? Value-driven, high-quality legal services that deliver solutions for a reasonable cost, and develop in-house lawyers as counselors, advocates and professional partners. 

     At our firm, we call it “Legal In-sourcing.” It answers the “Value Challenge” perfectly!

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     How many litigants are willing, even if able, to pay high hourly rates so that big firms can pay “breath-taking” starting salaries to baby lawyers? According to the American Bar Association Journal, first-year law associates are being paid starting salaries as high as $180,000 per year. “As Economy Stalls, So Do Salaries … But Not Associate Hours,” ABAJournal.com, September 29, 2008.  And as those lawyers mature, their rates go up, not down. Guess who pays for that! Clients do.

     Perhaps that is why the average cost of a patent infringement lawsuit in Texas was $2,637,179 in 2005. “Report of the Economic Survey,” American Intellectual Property Law Association 2005, at p. I-109.  The little guy can’t afford to play in that league. Indeed, even some larger corporate litigants are saying “enough” to continually escalating costs of litigation.

     As a former chairman of the Court Costs and Delay committee of the State Bar of Texas, I have been concerned about controlling the high cost of litigation for more than two decades. That is why our firm handles patent and other complicated commercial litigation on contingency fee. The little guy has access to the legal system. The big guy keeps its costs down. The law firm, not the client, bears the cost of paying the lawyer salaries.   In the event of a “breath-taking” result, the client and lawyer share in the recovery. Law firms may choose to pay breath-taking salaries if they wish, but it should not be at their clients’ expense.

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     The appropriate use, or misuse, of certain life insurance products remains a hot topic of conversation. Earlier this year, Florida passed legislation about who may benefit from life insurance policies. The State of Washington recently banned “dead peasant” insurance. And more than twenty-five states are now analyzing regulations concerning life settlements and “stranger owned” life insurance.

     Policy makers addressing these issues should, first and foremost, consider the impact of human nature on transactions in which one may profit from the death of another. Human nature is a dangerous thing, writes George Will. There are few statements so consistently true. 

     Insurance products have been abused by speculators since the beginning of insurance itself. Life insurance is no different. And that vehicle, fueled by human nature, will always present a profit opportunity for the unscrupulous.

     One fascinating example of such unscrupulous speculation is a policy purchased by National Convenience Stores, Inc., the former operator of the Stop-N-Go chain of convenience stores. During the summer of 1991, NCS bought insurance on the lives of all its Texas employees. It also designated itself as the policy beneficiary and was entitled to $250,000 every time an employee died on the job. 
 

     At the time it bought the policy, NCS’ business was failing. It filed for bankruptcy protection just a few months later. In December of 1991, the company, according to one executive, “had no money in the bank.” 

     But while its core business was failing, NCS experienced a remarkable number of employee deaths. Six employees died during the policy term, mostly from robbery-related murders. NCS was paid $1.5 million in policy benefits. And because the policy premium was approximately $620,000, the bankrupt company profited by almost $900,000 because of employee deaths. The insurance broker who placed the policy and had to process the claims, suggested prayer a way to control the mounting losses.

     Notably, NCS decided not to invest in many safety devices because it stated that it could not afford them. It decided against bullet-proof glass and drop safes for stores in high-crime areas. It also decided against having multiple employees on duty during late-night hours when crime was highest. Once it emerged from bankruptcy, and after the policy term expired, NCS was acquired by a competitor that installed new safety devices. On-the-job deaths then decreased dramatically.
 

     The NCS example is worthy of consideration. Defenders of practices such as broad-based, leveraged, corporate owned life insurance often argue that the coverage poses no moral hazard because the corporate beneficiary would never murder its insured employees. But as the NCS policy demonstrates, murder is not the relevant inquiry. The relevant inquiry, the moral hazard, is whether one wagers on the early death of another. NCS made a substantial profit, not from murder, but by depriving its employees of a safe work environment. 

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     Last October, television personality Larry King filed suit against insurance brokers Alan Meltzer and the Meltzer Group, Inc.  The suit concerned policies that are sometimes called “Stranger Owned Life Insurance,” "STOLI," or “Speculator Owned Life Insurance.”  (see the complaint).  The essence of a “STOLI” transaction is that the insured person buys the policy on his life while intending to immediately sell the policy to a third party.

    King alleged that, on the advice of the brokers, he bought a $10 million policy on himself and promptly sold it for $550,000. He also sold an existing $5 million policy for $850,000 in cash. King’s suit alleged that the brokers were liable to him because he did not receive enough money for the policies, the brokers did not adequately advise him about his continuing life insurance needs, he had unexpected tax consequences from the transactions, and the brokers improperly benefitted themselves at his expense.

     King’s suit also alleged that the brokers sold the policies on his life to an entity named Coventry First, LLC, a member of The Coventry Group. As I have previously written, The Coventry Group is the brokerage firm that drafted memos concerning Winn-Dixie’s policies of “Corporate Owned Life Insurance” that spawned the name “dead peasant” insurance for COLI products.  (see the entry). 

     King agreed to a settlement during July 2008.  The presiding court entered an order dismissing the case on August 4, 2008 because of the settlement.  The parties did not disclose the settlement terms. 

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   Corporate owned life insurance (policies that pay death benefits to an employer when its employees die) has been a frequent subject of debate for several years. These debates include the morality of employers insuring their employees’ lives without consent, to legality under state law, to the policies’ use as a federal income tax sham. And in virtually every debate, the phrases “dead peasant” or “janitor” insurance are used to describe the coverage.

    Defenders of corporate owned life insurance claim that “dead peasant insurance” is an inflammatory description created by the media. A law firm that represents large corporations that bought the insurance argues, for example, that COLI plans have been “christened by the media” as dead peasant policies. Others have argued that the media has “sensationalized” stories with phrases like “janitor” and “dead peasant” insurance.

    These criticisms fairly raise the question “How, in fact, did dead peasant insurance get its name?”

    In 1993, Winn Dixie Stores bought COLI policies on approximately 36,000 of its employees, without their knowledge or consent. The Coventry Group, a large insurance brokerage firm well-versed in COLI transactions, helped place the policies, which were underwritten by AIG Life Insurance Company. On October 30, 1996, Lawrence J. Kramer, the Coventry Group’s vice president and general counsel, distributed a memo stating “Here is a very rough beginning of the booklet we are preparing for Winn-Dixie.  A section on Dead Peasants remains to be written, and Peggy is preparing sample journal entries for various scenarios.” The “dead peasants” referenced in the memo were deceased Winn-Dixie employees whose deaths resulted in policy benefits to the company. A similar memo states “I want a summary sheet that has Surrender in one column, the Exit Strategy 1A in the second column and the Dead Peasants in the third column.”

    These memos were part of the court’s record in a lawsuit in which the United States Court of Appeals for the Eleventh Circuit held that Winn-Dixie’s COLI policies were a sham transaction for federal income tax purposes. The memos were later used by reporters such as Ellen Schultz and Theo Francis of the Wall Street Journal and L.M. Sixel of the Houston Chronicle and incorporated into articles about corporate owned life insurance. Thus, the phrase “dead peasant insurance” is not a creation of the media. It is a term used within the insurance industry to describe employees whose lives are insured by policies of corporate owned life insurance for an employer’s benefit.

     For more information on this topic, contact any of the firm's parters at mmellp.com.

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       In “Judge Weighs Jury Consideration of Future Damages in Patent Suits,” (Texas Lawyer, August 11, 2008, p. 5), Lynne Marek writes that U.S. District Judge Ron Clark, who sits in the Eastern District of Texas, has stated that juries may take up the question of “future damages” for ongoing violations of a patent. That is a really good idea!

       A plaintiff in a patent case always wants to recover damages for past infringement. As to the future, however, he might want something different. If he wants to prevent future infringement, he might want an injunction. That has historically been his only remedy. The problem is that if the defendant fails to do the right thing, the plaintiff must go back to court, perhaps many times, to continually enforce his rights. That is a waste of everyone’s time and money. Moreover, recent court decisions have made it more difficult to get an injunction than before.  

       Allowing the jury to find future damages should not prove too difficult or speculative. We have done it for years in personal injury and other cases. There is no conceptual reason why we cannot do it in patent cases as well.

       Judge Clark’s order leaves flexibility as to how to best award future damages from case to case. According to EDTexweblog.com, Judge Clark noted: “In formulating their jury instructions, the parties should consider whether the jury should be instructed regarding a future reasonable royalty rate, lost profits, price per unit, or some other appropriate measure of future damages. Of course, the instructions and question(s) will depend on the evidence submitted, and the theories of recovery pending at that time." 

    If injunctions against future infringement are to be difficult to get, without future damages there will be no relief available to the aggrieved inventor for continued infringement in the future. He will have to return to court to sue again, at a later date, for what happened in the past. What a waste of judicial resources! Judge Clark’s idea will give us a practical way to resolve the infringement once and for all in one trial. What can be wrong with that?

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