Articles Posted in Outside Counsel

Most general counsel who profess to control their outside counsel costs admire rebates or discounted hourly rates (See my post of April 23, 2006 on rebates compared to discounts; Oct. 31, 2005 on British practices and low-balling; but see my post of Sept. 10, 2005 on the scarcity of discounts in real life.). Discounts on standard hourly rates are as low-lying fruit as they are low value.

Nevertheless, general counsel persevere:

even though it is not possible to prove savings (See my posts of May 4, 2005; and Aug. 24, 2005 savaging discounts on hourly rates.);

From a recent directory, the NJ Legal Almanac, Aug. 2006, I looked at size and location statistics for the 17 largest law firms based in New Jersey and the law departments of the 19 largest companies headquartered in New Jersey.

The median percentage of lawyers at the firms who are physically based in New Jersey is 98 percent, whereas the law department median is 69 percent; the respective averages are 92 and 71 percent (Honeywell at only 24 percent in-state brings down the corporate average, as did Wyeth (41%) and Chubb (53%).

As to sheer number of lawyers, the firms averaged 92 lawyers, while the 17 largest departments averaged 50 lawyers, a bit more than half the size (See my post of Aug. 14, 2006 about large departments lagging large firms in size.).

According to the Wall St. J., June 13, 2006 at A3, one of the insurance companies covering Purdue Pharma’s defense of nearly 1,400 lawsuits over OxyContin, Purdue hired 40 law firms in 32 states to fight the claims. Perdue’s legal team included 322 partners, 849 associates and 1,023 paralegals. All told, that army of legal talent billed more than 1.2 million hours, and more than $400 million in defense costs (a blended rate in the mid-$300 dollar range).

The amount and scope of this defense team’s effort is daunting. A question, though, arises: when an insurance policy covers litigation costs, how does that coverage reflect itself in the law department’s budget for outside counsel (See my post of Jan. 30, 2006 about Purdue Pharma’s use of contract lawyers.)? Of deeper significance even is the issue raised by the dispute between Purdue and its carrier over the costs of defense: how much control do insurers have over how their clients’ litigation is handled?

Law firms dislike capped fees because under them they can charge their normal rates but may not exceed the cap. Much more favorable are fixed fees, because then the law firm receives the agree-to amount regardless of how efficiently it accomplishes the tasks or goal. A capped fee might be “For this Hart-Scott-Rodino submission, our fees will not exceed $200,000.” The preferred arrangement, a fixed fee, would be “For this H-S-R submission, our fees will be $200,000.”

Unlike a fixed fee, a capped fee does not allow the firm to keep the benefits of efficiency, such as if less lawyer time is recorded due to the law firm’s investments in technology and knowledge management. Capped fees have no upside; fixed fees reward productivity and expertise.

For this reason, if requested, some law firms quote capped fees at as much as a 25 percent premium to their quote for a fixed fee. Law departments should take note of this possibility.

One often hears of law firms and their expectations of 2,000+ chargeable hours per year (See my post of Nov. 2, 2006 on the prevalence of this widely-circulated figure.). Such goals concern law departments because they suspect the efforts of associates to achieve that Herculean feat leads to lower quality and higher bills (See my post of Oct. 20, 2005 on these worries.). In fact, the vaunted metric may be a myth.

Contrary to the wide-spread assumption, data from a recent survey shows that annual billable hours in major law firms actually run around the 1,800 to 1,900 hour mark. Eerily, that is the same estimate used for chargeable hours in law departments (See my post of Sept. 25, 2005 on this as a standard for internal costs per hour.). That the work pace in-house is slower than outside may then also be a myth.

With so-called tiered discounts, a law firm agrees to a step-wise volume discount off its standard rates. As fees paid the firm exceed one plateau after another, the discount rate rises for the new level. For example, a firm might propose a discount of five percent for the first $1.0 million in fees paid, a discount of 10 percent on fees paid between $1 and $3 million, and a final step increase to a 15 percent discount on fees paid over $3 million (See my posts of Aug. 13, 2006 on tiers based on something other than volume of fees paid; Nov. 25, 2005 on another view of tiered fees; and Aug. 22, 2006 on tiered rates for individual lawyers based on the difficulty of work.).

Typically, stepped volume discounts do not apply to matters under separate alternative billing arrangements such as fixed fee, capped fee, blended rate or incentive, although the fees paid by the legal department under the other arrangements would be included for purposes of reaching the next threshold of discount level. What also may differ is whether the higher discounts apply retroactively (See my post of Aug. 8, 2006 on this topic.).

Although it is useful for law department lawyers to evaluate the performance of the outside firms they manage, it often proves difficult to persuade them to complete the evaluations. At FMC Technologies, a lawyer can’t close a matter in the department’s matter management system without an evaluation of the matter’s outside counsel.

Thus, to get credit for finishing a matter, and to show reduced cycle time from open to close, the in-house lawyer has an incentive to complete outside counsel performance evaluations. This useful inducement comes from Counsel to Counsel, Nov. 2006 at 10.

Let’s parse some data about the number of law firms employed by law departments as the departments increase in size. The data comes from 2004 and 2005 and is in the 2006 Altman Weil Law Department Metrics Benchmarking Survey, published in partnership with LexisNexis Martindale-Hubble and reproduced in InsideCounsel, Nov. 2006 at 106.

Combining the data for the two years, single lawyer departments retained an average of 8 firms; 2-3 lawyer departments retained 16 firms; 4-10 lawyer departments retained 48; 11-25 retained 98; and larger departments retained about 140. Hence, until 25 lawyers and very roughly, each time the in-house group doubles in size, the number of firms it retains also doubles.

This linear relationship is somewhat counter-intuitive, since you would think that a beefier in-house group would reduce the need to go outside. The explanation has to do with the legal complexity of larger companies and the demands for local counsel of far-flung litigation.

During May 2006, 162 readers of InsideCounsel completed a survey sponsored by a law firm, Butler Rubin, regarding alternative fee arrangements in litigation. As noted before (See my post of Sept. 17, 2006.), 40 percent of the respondents had zero experience with AFAs in litigation.

Thus, as reported in InsideCounsel, Nov. 2006 at 45, about a hundred respondents could have answered the question, “Why do you negotiate an alternative fee arrangement with your outside counsel?” Some 32.9 percent of them selected “belief in risk sharing with outside counsel,” while 38.4 percent selected “desire for predictability of legal fees.”

What troubles me is that the results confound plaintiff cases, where there is a risk of low or no recovery, and the much more common defendant cases. Risk sharing applies to the former, where the law department has a chance to recover money and use it to reward the firm; fee predictability applies to the latter, as a defendant. There are really two situations being described. What also troubles me is that the survey and discussion seem pitched to single case situations. They make no mention of portfolios of multiple cases handled under an alternative fee arrangement.

Blended rates can take a number of forms: a single blended rate for all lawyers of a firm ($295 per lawyer), multiple blended rates based on lawyer titles or years of experience ($330 for partners and $260 for associates), or even blended rates by practice area ($310 for litigators; $360 for anti-trust lawyers) (See my posts of Aug. 21, 2005 on differences in blended rates between firms; Sept. 5, 2005 on whether blended rate bills reduce costs; Jan. 10, 2006 on hybrid arrangements; and June 13, 2006 on the difference between effective rates and blended rates.).

Blended rates offer some ease and consistency in budgeting for both the law firm and the client when hours are relatively predictable. They also eliminate some client and firm overhead related to tracking and maintaining separate rate databases. Blended rates encourage law firms to delegate work to lower-cost lawyers or paralegals