International In-house Counsel Journal Vol. 6, No. 21, Autumn 2012, 1

In-house v. Outside Counsel: Best of both worlds

LISETTE LEUFTINK Corporate Legal Counsel, Airlines C.V.,

Gone are the days when in-house counsels send out all relevant cases to just one outside counsel, with whom it had a good and solid relationship built over years and years of cooperation. These days, in-house counsels have become more efficient and systematic when it comes to hiring outside counsels. ‘All bills will be paid without hesitation’ isn’t standard practice anymore. On the contrary, the costs for the services rendered have become one of the criteria for selecting outside counsels. Times have changed and so has the role of both the in-house counsel and the outside counsel. After years of experience as an outside counsel at a law firm in , with a specialization in corporate and insolvency law, I changed jobs and joined Transavia Airlines1 (“Transavia”) at Schiphol Airport as corporate legal counsel. Even though the basis of both jobs consists of being a legal consultant for a company, the role of an in- house counsel is very different from the role of an outside counsel. In this paper I will set out how I experienced these differences and in general the recent developments in both roles. And what are the consequences for the cooperation between the outside and in- house counsels and their teams? Furthermore I will discuss a recent development in EU legislation on air passenger rights, how this affects the EU aviation industry and why in this case a solid cooperation with an outstanding outside counsel is of paramount value.

Power shift A power shift has taken place between in-house and outside counsels. The in-house counsel has become more self reliant and therefore more important for the company it is employed by. More legal work is being done by the in-house legal department. As a consequence in-house counsels should have all-round legal business knowledge on a high . He (or she) should actively guard and represent the interests of the company on a legal level taking into account al other aspects of the business. The advantage is that for the business itself it becomes easier to obtain legal advice in an early stage from an in- house counsel, even just for a small legal check. You wouldn’t be bothered to call your outside counsel for these small questions. Also most employees won’t know who their outside counsel is and how to reach him. Seeking legal advice at an early stage of a project could avoid legal problems in the future.

1 Transavia Airlines C.V. (with brand name transavia.com) operates as a low cost carrier (with care) from different airports in the Netherlands on mainly destinations around the Mediterranean Sea. Transavia was founded in 1965 as Transavia Holland. Since 2003 Transavia is a 100% subsidiary of KLM, member of the KLM Group. Within the Air France KLM Group, Transavia operates as an independent member. Transavia holds a 40% interest in the French airline company S.A.S. (the remaining 60% are owned by Air France S.A.), which operates in the French market. Transavia France operates under the brand name of transavia.com, with an identical business model, website and image.

International In-house Counsel Journal ISSN 1754-0607 print/ISSN 1754-0607 online 2 Lisette Leuftink

In my experience, especially since the financial crisis, companies without a legal department were not likely to contact an outside counsel to advise on a project in an early stage of the project. They were focused on saving money and asking for legal advise, in their opinion, only costs money. The problem however was that when problems started to arise during the project itself, the outside counsel was only capable of damage control. In the end it would have been wiser (and cheaper) to ask the outside counsel for legal advice at the beginning of the project. For an outside counsel this remains a difficult issue to explain to its clients. “If you come to me now, it will save you money later”; who believes those kind words these days?! This is why an in-house counsel can be of value to a company. One of its tasks is to know what’s going on in other departments of its company and provide them with legal advice when necessary. I’m not saying outside counsels are redundant (on the contrary!), but they are managed in a different way. Nowadays, outside counsels are mainly called in for their specialized skills and won’t be asked for routine legal matters. This is different from the old days, where a company with a small or no legal department would have only one outside counsel who would advise the company on any legal matter it required. No specialized skills, but an all-round legal knowledge. A company almost never changed firms, due to the fact that the existing relationship and the trust build during the years valued most. A good relationship and an honest outside counsel still remain of great value, but are not the only requirements nowadays. What to expect? Now we established that in-house and outside counsels have a different role and different skills. But what do they expect from each other? And more importantly, what can they expect from each other? In my opinion it all starts with communication. Communication is key! The perspectives and motivations of in-house and outside counsels frequently diverge. The in-house counsel is driven by long/short term business objectives, while the outside counsel seeks to provide its client with subjective expertise. The in-house counsel also has budgetary concerns, while the outside counsel prefers to make money out of the deal. Also the outside counsel doesn’t have to report back to the shareholders or the board of directors. The outside counsel has a commercial perspective, which the in-house counsel does not have. The outside counsel is under pressure to make the client happy and to live up to his expectations to keep him on board. But what exactly is expected and what can be expected? The three C’s2 The minimum requirement is of course the competence of the outside counsel. The outside counsel must be able to competently perform the work its client asks (and pays) for. The in-house counsel calls in the outside counsel for having specialized skills on a certain legal subject; specialized skills the in-house counsel or his legal department lacks. Secondly, clients expect the outside counsel to be committed to their business, to have thorough knowledge of their industry and the recent developments. A client does not want to have to explain every new development (legal or strategic) and appreciates an up- to-date outside counsel. In practice however, that’s easier said than done. If an outside counsel is specialized in mergers and acquisitions, it is almost impossible to know all industries its clients operate in. His specialized skills are not oriented towards a certain industry, but to a certain legal practice. In this case an in-house counsel can’t expect the outside counsel to have full knowledge of the recent developments in the industry at the moment you call him in for the job. However, that doesn’t mean the outside counsel is not committed.

2 Competence, commitment and communication In-House V. Outside Counsel 3

It is clear that both parties have different expectations of each other. It is therefore of great importance that they communicate in an effective way and understand both their values in their differing roles. From both sides it must be expected that the communication is fast and clear. They should both express what they expect from each other. As a client you don’t want to have any doubts on whether your outside counsel understands your concerns or not. The fact that an outside counsel is dealing with an in- house counsel should make this easier, since an in-house counsel speaks the same the legal language, so they won’t get lost in translation. Being an in-house counsel for Transavia, I recently experienced the importance of a good cooperation between in-house and outside counsel. Recent developments in EU Legislation on air passenger rights have affected the EU aviation industry and therefore Transavia. Regulation (EC) 261/20043 (‘the Regulation’) established minimum rights to protect passengers who are faced with denied boarding, cancellation of flights and delay. It established common rules on compensation and assistance to passengers in case of the occurrence of foresaid events.

Objectives Regulation The Regulation has a double objective. Firstly, it seeks to ensure that passengers are adequately taken care of during flight disruptions. To that end, the Regulation provides that they are entitled to refreshments and meals during the disruption, but also to free hotel accommodation if they are stranded overnight. Secondly, the Regulation provides for compensation in case of cancellation and/or denied boarding as a result of overbooking. The compensation creates an ‘economic incentive’ by penalizing airlines for their decisions to cancel a flight for commercial reasons or deny boarding as a result of overbooking. The intention was to minimize the amount of overbooking and cancellations. In line with this second objective, an airline shall not be obliged to pay compensation to its passengers of a cancelled flight if it can prove that the cancellation is caused by ‘extraordinary circumstances’ which could not have been avoided even if all reasonable measures had been taken4. Or in short, an airline is not punished for an event over which it has no control.

Wallentin-Hermann v. The Regulation was meant to strengthen the rights of passengers, but at the same time to ensure that airlines operate under harmonized conditions in a liberalized market. The interests of both parties had to be taken into account. The message of the Regulation seemed clear. Unfortunately two recent rulings of the European Court of Justice (ECJ) left the interests of both parties completely out of balance. The first ruling of the ECJ is the Wallentin-Hermann v. Alitalia (“Wallentin-Hermann”) case of 22 December 20085. Mrs. Wallentin-Hermann booked three seats on a flight with Alitalia. The flight was due to depart at 6:45 in the morning. Having checked in, the passengers were informed 5 minutes before the scheduled departure time, that the flight had been cancelled. The cancellation was due to a complex engine defect in the turbine which had been discovered the night preceding that flight. The passengers were transferred to an Austrian Airlines flight, and eventually arrived at Brindisi at 2:15pm, 3 hours 40 minutes after their scheduled arrival time.

3 Regulation (EC) 261/2004 of the European Parliament and of the Council of 11 Feb. 2004 establishing common rules on compensation and assistance to passengers in the event of denied boarding and of cancellation or long delay of flights. It repealed the earlier Regulation (EC) No. 295/91 that dealt with denied boarding only. 4 Article 5 paragraph 3 of the Regulation. 5 ECJ Judgment of 22 December 2008, F. Wallentin-Hermann v. Alitalia- Linee Aeree Italiane SpA, Case C-549/07 4 Lisette Leuftink

Mrs Wallentin-Hermann claimed compensation from Alitalia under the Regulation due to the cancellation of her flight. Alitalia denied that it had to pay any compensation and relied on the “extraordinary circumstances” defense. The case first came before the District Commercial Court in Vienna, which upheld Mrs. Wallentin-Hermann’s claim and rejected Alitalia’s argument that the technical defects which affected the aircraft amounted to ‘extraordinary circumstances’. Alitalia appealed to the Commercial Court in Vienna, which decided to refer the case to the ECJ for a preliminary ruling on four questions, inter alia to establish whether a technical defect affecting an aircraft which results in the cancellation of the flight is covered by the term extraordinary circumstances within the meaning of Article 5(3) of the Regulation. In the absence of a clear definition of extraordinary circumstances the ECJ stated that extraordinary circumstances may be regarded as covering only circumstances which are not inherent in the normal exercise of the activity of the air carrier concerned and are beyond the actual control of that carrier on account of its nature or origin. The ECJ pointed out that air carriers are confronted as a matter of course in the exercise of their activity with various technical problems to which the operation of those aircraft inevitably gives rise. The resolution of a technical problem which comes to light during aircraft maintenance or is caused by failure to maintain an aircraft must therefore be regarded as inherent in the normal exercise of an air carrier’s activity and cannot constitute as such an ‘extraordinary circumstance’ within the meaning of Article 5(3) of the Regulation. The ECJ, however, did emphasize that this does not mean that is not possible for a technical defect to constitute an extraordinary circumstance. In order to establish the defense, the carrier must show not only that the cancellation was caused by extraordinary circumstances, but also that these circumstances could not have been avoided even if all reasonable measures had been taken. Technical problems are covered by extraordinary circumstances to the extent that they stem from events which: (i) are not inherent in the normal exercise of the activity of the air carrier concerned; and (ii) are beyond its actual control. But what exactly can be understood by ‘not inherent in’? The airline will have to “establish that, even if it had deployed all its resources in terms of staff or equipment and the financial means at its disposal, it would clearly not have been able – unless it had made intolerable sacrifices in the light of the capacities of its undertaking at the relevant time – to prevent the extraordinary circumstances with which it was confronted from leading to the cancellation of the flight.” This is, to put it mildly, not an easy task for an airline. Sturgeon-case Next to the Wallentin-Hermann ruling, on 9 November 2009 the airlines got confronted with another ECJ ruling, the so-called the Sturgeon-case6. Before the national courts, the applicants in the main actions claim from Condor and Air France respectively the compensation provided for in Article 7 of the Regulation on the ground that with those airlines they reached their airports of destination, in the first case, 25 and, in the second case, 22 hours after the scheduled arrival times. Condor and Air France assert that the applicants are not entitled to any compensation, since the flights concerned were not cancelled but delayed and the Regulation provides for a right to compensation only in the case of flight cancellation. In this ruling, the ECJ holds that the Regulation was to be interpreted as conferring a right to compensation laid down in Article 7 of the Regulation not only on passengers whose flights are cancelled, but also on passengers who suffer

6 ECJ judgment of 19 November 2009,joined cases Sturgeon v. Condor and Böck v Air France, cases C-402/07 and C-432/07 In-House V. Outside Counsel 5 such delay that they reach their final destination three hours or more after the original scheduled arrival time. The ECJ disregarded the provisions laid down in the Regulation which only provide delayed passengers with a right to care (drinks/meals and accommodation) and a right to reimbursement where the delay is for five hours or more. Furthermore these provisions only impose obligations on carriers with regard to delays on departure, not arrival. The ECJ stated that in both circumstances, the passengers suffer a loss of time and should therefore be treated equally7.

Cancellation and Delay Most European airlines took that the view of the ECJ is incorrect, since the right to compensation in the event of delay does not follow from the Regulation. The legislator, for logical reasons, intentionally made a distinction between cancellation and delay. After all, in case of a cancellation the flight booked by the passenger will not be operated. The airline will not perform its obligations under the agreement it has with the passenger. As a result the passenger is forced to make a new reservation on an alternative flight. While instead a delayed flight cannot be regarded as cancelled since it will be operated, irrespective of the duration of the delay and in the end the passenger is brought to its final destination on the booked flight and not on an alternative flight. Secondly, delay is never a result of an economically driven decision of the airline. Delay is neither in the advantage of the airline, nor of the passengers. Therefore the Regulation does not provide for compensation in case of delay, since the objective (penalizing the airlines with an economic incentive) does not influence the amount of delayed flights. The ECJ, however, ignored these arguments of the legislator and ruled as described above. Up to this day most European airlines have been fighting this ruling and have asked their national courts to ask preliminary questions to the ECJ to reconsider this ruling.

In practice To get back to the main subject of this paper; the relation between an outside and in- house counsel. For Transavia, both rulings have not been in its advantage, to say the least. The airlines are being penalized for something they have no influence on. Also the fact that the ECJ disregards clear provisions of the Regulation is contrary to the general principals of EU Law (such as equal treatment, proportionality and legal certainty). The ECJ has overstepped its powers. As a consequence, even in the Netherlands, different courts tend to rule differently on claims for compensation in case of delay and cancellation. The term ‘inherent in’ with regard to a technical defect is interpreted in many different ways and similar situations are ruled differently. The unpredictability and the legal uncertainty make it even more important for in-house and outside counsel to work together as efficient as possible. If a court applies the Sturgeon ruling and claims that passengers have a right to compensation in case of a delay of more than three hours, the only thing left for an airline is to prove that the delay was caused by an extraordinary circumstance, which could not have been avoided even if al reasonable measures had been taken. To prove the existence of extraordinary circumstances under the Regulation, an outside and in-house counsel must provide the court with as much evidence that the extraordinary circumstance could not have been avoided even if all reasonable measures had been taken. For Transavia, a solid cooperation between the in-house and the outside counsel and complying with the three C’s is of great value. First of all, the outside counsel must

7 Paragraph 54 of the Sturgeon judgment. 6 Lisette Leuftink understand the aviation business and why these two aforementioned ECJ rulings are of great disadvantage for Transavia (commitment). The outside counsel needs to understand the difference between delay and cancellation and why they cannot be treated equally (competence). Furthermore an outside counsel must have knowledge of the operation. The outside counsel, however, cannot operate on its own. Unlike the outside counsel, an in-house counsel for Transavia operates in aviation every day. Therefore Transavia cannot expect from an outside counsel to have the same level of knowledge of the business. The outside counsel does not have the same resources as the in-house counsel. As a consequence, the in-house counsel has to do the research to the reasons for the delay or cancellation of the flight and if extraordinary circumstances are applicable in that case. The in-house counsel must provide the outside counsel with as much information as possible to be able to defend the airline in court. Therefore, in these cases communication between the in-house and outside counsel is the basis for a (hopefully) successful court case. In practice the outside counsel prepares the formal legal defense, while the in-house counsel is responsible for the facts, the explanation of what caused the delay or cancellation and the extraordinary circumstance defense. The final defense before the court is therefore a result of a solid cooperation between the outside and in-house counsel. In my opinion, in the near future outside counsels will become super specialists (even more than they are now), preferably with a focus on a specific market (e.g. aviation). Within the aviation-team of the law firm involved each outside counsel will have its own specialization. The in-house counsel and the outside counsel will become a team with each having its own capacities. The in-house counsel must provide its company with all- round legal advice on a high level, while taking into account all aspects and interests of the business. The specialized knowledge of the outside counsel will be a supplement to the knowledge of the in-house counsel and vice versa. However, a cooperation between the most knowledgeable counsels won’t get you anywhere, if the cooperation is not based on the three C’s. A cooperation based on the three C’s will bring you the best of both worlds. *** Lisette Leuftink graduated from Leiden University with a Masters degree in Business Law. She worked as an attorney-at-law for a law firm in Amsterdam and was specialized in corporate and insolvency law. She was frequently appointed by the court of Amsterdam as trustee in different bankruptcies. In January 2012 Lisette joined Transavia as corporate legal counsel. You can reach her at [email protected] or via LinkedIn. Transavia Airlines C.V. (with brand name transavia.com) is a Dutch low cost airline that offers charter flights and scheduled flights to summer and winter holiday destinations around Europe and to the Mediterranean. Transavia is market leader in holiday air travel in the Netherlands. Its clients consist of tour operators, that have their own internet portals available to them, as well as final consumers with whom Transavia communicates through its up-to-date website. Transavia was founded in 1965 as Transavia Holland. Since 2003 Transavia is a wholly owned subsidiary of KLM, member of the AIR FRANCE KLM Group. Within the AIR FRANCE KLM Group, Transavia operates as an independent member. Transavia Airlines C.V. holds a 40% interest in the French airline company Transavia France S.A.S (the remaining 60% are owned by Air France S.A.), which operates in the French market. Transavia France operates under the brand name of transavia.com, with an identical business model, website and image.