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When To Hire An In-House Counsel

September 28, 2016

By: Robert B. Nourian, Esq.*

Why and when should a company consider hiring its first in house lawyer?

There a number of reasons for Why, and, to some extent a company’s unique circumstances or industry can play a large part in the rationale for whether a first lawyer makes sense. Some of the more common reasons, however, include the following:

Commercial Agreements – Many companies have noticed an increasing trend toward complex, comprehensive contracts that they must enter into with their customers and suppliers. Transactions that used to be done via purchase order, verbal agreement or a company’s simple contract, are now in many cases only accomplished after a complex master agreement is executed. These agreements typically contain not only economic terms and performance criteria, but also risk allocation provisions that potentially expose a company to substantially more liability than they historically assumed.

With the heavier flow of contracts also comes the need to standardize, to some extent, the policies of the company as to what type of contract provisions the company is willing to generally accept and who, within the organization, coordinates the company’s stance on those policies.

Many companies find themselves in an uncertain state when it comes to their contractual arrangements and obligations. Also, sales people in the field are negotiating contracts, focusing only on economic terms and unknowingly agreeing to absorb additional risk and obligations on the company’s behalf. At other times, the CFO or other high level administrative personnel are the ones reviewing and negotiating contracts. But without legal training and with substantial competing demands on their time, it’s too much to expect these personnel to handle the contracts in the best way possible.

Increasing Outside Counsel Expense – At some point in a company’s development, cost inducing legal issues, which used to occur infrequently, appear to happen with much more regularity. And the annual cost of outside legal expense becomes an increasingly large line on item on a company’s income statement. When that happens, a management team will often determine that a large part of the outside counsel expense could be avoided or substantially reduced by adding a lawyer to the company’s ranks. How much of the outside counsel expense could be reduced is largely dependent upon the nature of the legal work – whether it’s mostly major litigation that generally is handled by outside firms or whether a substantial amount relates to commercial agreements, employment counseling, intellectual property issues, real estate and other similar issues that are effectively handled in-house with limited outside counsel assistance.

Even with major litigation, it can often be very helpful in reducing outside expense if an in-house lawyer can proactively manage a litigation matter being handled by an outside firm, including requiring budgets, status reports and keeping outside counsel focused on the company’s practical goals.

In terms of actual dollars, a company may have the ability to add a lawyer as a team member without increasing (and possibly even decreasing) the overall budget due to the reduction in outside counsel expense.

Of course, aside from the predictable level of legal expense, the greatest potential savings that an in-house counsel could produce might be the avoidance of unquantifiable costs associated with liability assumed unknowingly through inappropriate contractual arrangements or lack of corporate compliance as a result of not having day to day legal counsel monitoring a company’s business dealings and operations.

Regulations and Compliance – Businesses today find themselves in a climate heavily regulated by federal, state and international jurisdictions. The regulations seem to be increasing and ever changing. Coupled with increased enforcement at the federal and state levels, the environment presents a regulatory minefield for many businesses. As a result, companies increasingly are compelled to hire an in-house legal professional to manage all of the company’s compliance issues including: researching and monitoring current laws and regulations affecting the company’s business; training company personnel on proper compliance; monitoring compliance on an ongoing basis; and coordinating responses to an enforcement agency inquiry.

Certain industries such as life sciences, health care and financial services are obviously very heavily regulated with substantial compliance requirements, but companies that aren’t necessarily in heavily regulated industries are also feeling more regulated in areas such as employment laws, health care and ERISA, environmental, antitrust, foreign corrupt practices and many others.

An in-house lawyer often is the key person filling the role of a compliance officer, coordinating all of the company’s efforts in identifying applicable laws that affect the business, creating policies to remain in compliance with those laws, training relevant employees on how to maintain compliance, and monitoring, on an ongoing basis, the company’s compliance efforts.

Business-oriented, Real Time Legal Advice – It is generally acknowledged that an in- house lawyer, who has only his or her own employer as their client, is intimately familiar with and dedicated to their employer/client. Understanding a company’s business, industry, goals, risk tolerance, and internal dynamics provides a lawyer with the unmatched ability to provide quick, practical and effective counsel to business people both in the field and in the executive offices. Having a lawyer who understands the business and the company’s goals ultimately encourages business people to access that lawyer as a resource which improves the quality of the company’s contractual arrangements with outside parties.

So now that Why has been discussed, the question becomes When. Again, every company and industry is different. Some companies in the manufacturing area may decide to hire an internal lawyer when they see their annual outside legal bills consistently over the $300,000-$400,000 range. Other companies, even before getting to that point, realize that due to their industry (i.e. life sciences or software), their businesses are so heavily dependent upon legally-oriented transactions with heavy intellectual property components that they need a highly qualified in-house lawyer at an early stage to help them develop their business. Ultimately, it depends upon how much a company is spending or anticipates spending on outside legal expense. Also, to some extent, what the nature of that legal expense is. How intensive the contracting process and the regulatory and compliance environments have become is also a major factor in the decision of when to hire an in-house counsel. Finally, if non-lawyers are finding themselves spending too much time trying to review and negotiate contracts or figure out what laws and regulations they need to be in compliance with, or business people are clearly avoiding outside counsel review of contracts due to the fear of delay or the increased expense, that’s a clear sign that it might be the right time to add a lawyer to the team.

When the right lawyer is hired by a company, at the right time, it shouldn’t add to (and may lower) the company’s legal expense; should lower the company’s overall risk exposure and potential liability; and should add a practical solutions-oriented professional to the management team who will add value to the company’s strategic decision making process.

*Robert B. Nourian, Esq. is Managing Principal of Coleman|Nourian, a legal search and staffing company. He has been in the legal search industry for over 20 years. Prior to that, he corporate and securities attorney, first with a major New York City law firm, and then with Pepper practiced law for five years as a Hamilton in Philadelphia. He is a graduate of the University of Scranton and New York Law School, where he served as Managing Editor of the New York Law School Law Review.