Legal opinions in corporate transactions affected by FCC regulation: an economic approach.

• Author: Quale, John C.

1. INTRODUCTION

   In 1996, the Subcommittee on Legal Opinions (Subcommittee) of the Federal Communications Bar Association (FCBA) published a report on legal opinion practice in corporate transactions where a Federal Communications Commission (FCC) licensee is one of the parties.(1) The FCBA Report consists of suggested language for opinions, accompanied by commentary explaining the recommended interpretation of the language.

   The Subcommittee's foreword describes the FCBA Report as an "attempt[] to reach a consensus on the scope and language of opinions in FCC-related transactions."(2) According to the Subcommittee, the FCBA Report is designed to facilitate negotiation and interpretation of legal opinions issued by communications lawyers.(3) "Inspired"(4) by the efforts of the Business Law Section of the American Bar Association (ABA) to develop the Legal Opinion Accord,(5) the FCBA Report cites the ABA Accord, particularly its assumptions and definitions, as "a very helpful guide for communications opinions."(6)

   This Article responds to the Subcommittee's request for comments on the FCBA Report.(7) After a brief background on the role of legal opinions in corporate transactions generally, the major sections of the FCBA Report are analyzed, assessing whether it accomplishes its goals and comparing it to the ABA Accord and the more recent TriBar Report, which presents an exhaustive treatment of legal opinion customary practice. In carrying out this analysis, the Article argues that legal opinions add value to corporate transactions only when a lawyer is the least-cost provider of the information sought. Lawyers should not act as insurers or guarantors of corporate transactions;(8) to ask lawyers to do so unnecessarily raises the costs of consummating corporate transactions. The Article concludes that the FCBA Report diverges in many cases from the ABA Accord and the TriBar Report without adequate explanation and imposes opinion obligations in many instances where a lawyer is not the least-cost provider of the requested information.

2. LEGAL OPINION PRACTICE

   1. The Purpose of Legal Opinions

      Parties to business transactions frequently look to legal counsel for assurance that the transaction documents are enforceable and comply with applicable laws. Typically, a lawyer delivers an opinion to a party or parties to the transaction other than the lawyer's client. For example, where the lawyer represents the seller, the lawyer ordinarily gives a legal opinion to a buyer, underwriter, or investor. As such, legal opinions simply provide comfort to the parties to the transaction that the law will not prevent the transaction from being consummated.(9)

      Given the highly technical nature of the FCC's regulatory framework, opinion recipients in FCC-regulated transactions often are not satisfied with a general opinion from the company's counsel, which ordinarily is assumed not to address specialized areas of law such as communications regulations. Instead, recipients seek specific assurance that execution, delivery, and performance of the transaction documents will not violate the Communications Act of 1934, as amended (Communications Act), and request that a communications practitioner deliver this opinion. Opinion recipients have also requested communications lawyers to opine on numerous other regulatory matters, such as the status of FCC licenses, FCC proceedings, and compliance by the company with FCC regulations. By their very nature, these opinions require extensive knowledge of factual matters (e.g., whether internal FCC procedures were properly followed when issuing a license or whether the company has violated any FCC regulations in operating its business) and may require the opinion giver to address matters that have little to do with his or her legal training. These requests for nonlegal (i.e., factual) opinions raise questions as to the underlying purpose of legal opinions. Why are lawyers asked to opine as to certain legal or factual matters in connection with corporate transactions? Who, if anyone, benefits from these opinions?

      One answer is that lawyers often times are the least-cost provider of the information sought.(10) For example, counsel to seller in a sale of assets is best able to opine as to whether the purchase agreement has been duly authorized and is enforceable against seller in accordance with its terms. For counsel to buyer to answer this legal question through due diligence would require him or her to duplicate work that seller's counsel likely has already undertaken. Similarly, in the context of an underwritten offering of securities, counsel to seller is best able to determine the capitalization of seller and whether the issuance of the securities will violate any provisions of seller's charter or bylaws. To ask counsel to the underwriter to confirm this legal conclusion through due diligence would duplicate the work of seller's counsel.

      Although a legal opinion may be viewed as the least-cost source of information in corporate transactions, practically speaking, an opinion may serve other less value-enhancing purposes. For example, a legal opinion might be viewed as insurance (in the form of damages for malpractice or negligence) provided by the firm or lawyer giving the opinion. To the extent that legal opinions operate as insurance, opinion practice arguably subtracts value from corporate transactions; law firms and lawyers are not in the business of providing insurance and to ask them to do so merely adds unnecessary costs to doing deals.(11)

      One use of legal opinions is undeniably efficient--when the lawyer is the only source of the information sought. Specifically, because lawyers have a state-sanctioned monopoly for the practice of law, to the extent that a legal opinion addresses a purely legal issue, only a lawyer cart give the opinion. Accordingly, requesting an opinion from a lawyer concerning a purely legal issue is an efficient and appropriate use of a legal opinion. Arguably, legal opinions add value to corporate transactions only when the lawyer is the least-cost provider of the information. Because lawyers have a monopoly on pure legal opinions, they are by definition the least-cost producers of such opinions.(12)

   2. Recent Trends

      Delivering overly expansive legal opinions should be of particular concern to lawyers in light of recent case law suggesting that legal opinion practice can expose a lawyer to serious risk of liability. This risk is heightened when the facts upon which the opinion giver relied turn out to be false; courts have shown an increasing willingness to disregard opinion givers' qualifying statements and to hold them liable to nonclients for erroneous statements.(13)

      Several recent cases illustrate this trend. Kline v. First Western Government Securities, Inc., for example, was an appeal of a summary judgment in favor of the opinion giver where the plaintiffs alleged, inter alia, affirmative misrepresentations and material omissions in three legal opinions given to a securities dealer.(14) The opinions addressed the tax treatment of gains and losses incurred by investors in forward contracts.(15)

      The opinions were addressed to the dealer, not to the investors, and contained the following extensive disclaimers: (1) the opinions are predicated on facts supplied by the client, are assumed to be true, and have not been independently verified; (2) the opinions are for the personal use of the client (i.e., the securities dealer) only, and are not to be relied on by anyone else; (3) the Internal Revenue Service (IRS) and courts likely will challenge the stance taken by the opinion; and (4) the opining attorneys express no opinion about the advisability of the transaction to any particular investor because to do so would be "impossible" without knowing the "individual facts and circumstances affecting the particular taxpayer."(16)

      Plaintiffs invested in forward contracts, incurred losses, and deducted these losses on their income tax filings. The IRS subsequently disallowed the deductions. Plaintiffs argued that the legal opinions made material misrepresentations and omitted material facts concerning the actual structure of the transactions. In reality, the facts supplied by the dealer to counsel did not accurately portray the substance of the "forward contracts" scheme. Thus, the legal opinion was in some sense "hypothetical"; that is, counsel may have reached an accurate legal conclusion with respect to the facts supplied by the client, but those facts bore an inaccurate resemblance to the underlying transactions into which investors, including plaintiffs, entered.

      The Third Circuit reversed the lower court's grant of summary judgment in favor of the opinion giver on the omissions claim and upheld the denial of summary judgment on the misrepresentation claim.(17) It ruled that the investors had standing to sue and could have reasonably relied on the opinion despite the disclaimers contained in the opinion. The court determined that, due to counsel's alleged "long and close relationship" with the dealer, it may well have known that the facts that the client provided were not a complete and accurate description of the transactions. The court further determined that when a law firm has "good reason to know" that the facts provided are materially inaccurate or incomplete, "it cannot escape liability simply by including in an opinion letter a statement that its opinion is based on provided facts."(18) Finally, the court held that reliance by investors like plaintiffs, notwithstanding the letter's express limitations, may have been reasonable because counsel knew the legal opinion was being distributed to investors. The court concluded that both the misrepresentation and omission claims by plaintiffs should be tried and remanded the case to the district court for further proceedings consistent with its opinion.

      In a strongly worded dissent, Judge Greenberg...