Articles Posted in Outside Counsel

The huge US law firm, Holland & Knight, has a general counsel, Wall St. J., Aug. 30, 2006 at B2, as do many other major firms. Those GC partners serve as the legal advisor to the firm. With the growth of law firms, we will see more inside outside general counsel.

Some of their services may address issues with law departments, such as malpractice threats, discrimination as to the timekeepers who represent the department, billing irregularities, conflicts of interest, non-competes, marketing, or the terms of a fixed-fee agreement. Hence the corporate GC may fence with a law firm GC.

In a rational-actor model, corporate lawyers hire the law firm most suited to handle a matter according to an objective determination of various firms’ skills and costs (See my post of Aug. 22, 2006 that reviles “beauty contest” as a description.). This Dr. Spockian, information-processing model departs in many ways from reality.

Information imbalance. Law firm partners provide credence goods (See my post of April 26, 2006 on these trust-me services.) as to which it is very difficult to judge quality at the start. Moreover, those partners know more things about their staff and experience than do the inside lawyers who hire (See my post of Dec. 23, 2005 on information asymmetry.). Rationality drains out when information is missing or unbalanced.

Favoritism distorts objective rationality (See my posts of March 8, 2006 on the possibility of GCs dispensing work to future partners and March 7, 2006 on not using their former firms.). Friendships, enmities, or relationships skew the optimal decision process.

A recent article in InsideCounsel, Sept. 2006 at 46, refers to a survey by that magazine and one notable finding: “Law firm lawyers said getting them involved early on matters is the single most important thing legal departments can do to improve their relationships with firms.”

My cynical spin on that oft-repeated request for early retention is that for firms improved relations translates into bigger bills. Law firms assume the same rate of billing from the point they are retained, so the earlier the retention, the higher the billings. Of course, I must be wrong, because firms fundamentally yearn to give the best strategic advice as early as possible, and thereby serve their clients most tellingly. Money has nothing to do with their plea to hire us sooner. Do “good relations” to a law firm mean “hire us early and often, and pay our bills on time?”

Your key law firms will serve you better if they periodically gather all the lawyers and support staff in the firm that work on your business and encourage the group to share industry knowledge and client insights. An example of such a team, described in InsideCounsel, Sept. 2006 at 46, is at Thomson Hine, where its team that works on Parker Hannifin matters meets at least quarterly. The team discusses “everything from personnel changes in the client’s law department to market conditions.”

An astute law department would volunteer to send someone to attend those meetings, or parts of them. What I also commend about the practice is that Thompson Hine does not bill Parker Hannifin for the time team members spend in meetings (or preparing for them, I assume).

I commend the practice, client-service teams, along the lines of a relationship partner (See my posts of Dec. 3, 2005 on the vitality of that position; and Oct. 8, 2005 on passing the baton.). Both strengthen the relationship and its effectiveness.

In May 2006, 162 readers of InsideCounsel completed a survey which found that more than 8 out of 10 believed alternative fee arrangements are a tool to control litigation costs (See my post of Sept.17, 2006 for more on this survey by Butler Rubin.). The published comment after that datum, in InsideCounsel, Sept. 2006 at 31, goes wildly beyond: “Most survey respondents say pricing among law firms is not competitive when it comes to litigation services.” Given that alternative fees are viewed as a tool to manage costs, on what basis can one conclude anything about price competition in litigation?

A second question asked respondents whether they had ever used alternative fee arrangements. About 4 out of 10 had not ever done so. The summary that followed once again went way beyond the survey findings: “Hourly billing may still be the dominant billing model, but a growing number of corporate counsel are using alternative billing methods.” How do they know from that single data point that a growing number of in-house lawyers are doing anything? There is no trend data. And that 58 percent of respondents expect such fees will increase substantially over the next three years does not support the claim that a growing number are currently using alternative fees.

During May 2006, 162 readers of InsideCounsel completed a survey sponsored by a law firm, Butler Rubin. Asked “Do you believe alternative fee arrangements are a legitimate tool to control litigation costs?” about 84 percent of them agreed. Yet to another question, “Have you ever used alternative fee arrangements?” 40 percent admitted they had never used one. If we take this data for what it states, it illustrates an important point about statements and actions, InsideCounsel, Sept. 2006 at 31.

In terms of preferences (See my post of Sept. 17, 2006 on preferences revealed compared to expressed), many respondents expressed the answer expected of them – or which they would prefer to see themselves as holding – but their behavior contradicts that answer, since they have never varied from hourly billing.

The same gap between reality and how senior in-house lawyers would like to think they act or would like others to think they act appears in other areas, such as when asked about their use of technology, their support of diversity, their encouragement of professional development, and their commitment to good management practices of all kinds.

Fixed-fee deals are bespoke. Even so, to the extent any fixed-fee arrangement with a law firm is typical, it often includes in the set payment the firm’s out-of-pocket disbursements. It is also standard for those arrangements, however, to exclude very large disbursements such as for expert witnesses and sophisticated software.

A variation is for a law department to agree with its litigation counsel, handling cases on a fixed-fee, that the firm will pay all disbursements up to $10,000 per case. Regardless of the figure chosen, that approach makes sense. Something like a deductible, it shifts the initial cost burden to the law firm except for cases where there are extraordinary expenses such as significant travel, electronic discovery, or expert witnesses.

A fixed-fee arrangement with a law firm (See my post of April 5, 2006 with definitions of fixed and flat fees.) should reduce bill review precipitously. Nevertheless, the law department should continue to receive bills as it normally does and it should periodically check some of them (See my post of May 1, 2006 that doubts the ability of inside lawyers sometimes to review bills well.).

The department, after all, does not want its law firm to squander the fee and either seek a supplemental appropriation or scale back work and risk legal gaffes. Then too, when the term of the arrangement ends, the law department may want to compete the work again. The next time the department wants good data to inform its effort. A third reason is quality control: are the right outside lawyers doing the right tasks? And one final argument for some review: it is important that inside counsel keep their hand in the game.

Law departments that invite competitive bids should strive for transparency. All the law firms invited to propose should be given an equal opportunity to learn as much information as possible. To that end, the department should tell the firms the names of the firms it has invited to compete.

A spurned firm that has long served the department might be embarrassed if its failure to make the cut becomes public, but likely as not, even if concealed, the distressing news will eventually seep out. Furthermore, if the firm’s performance did not warrant an invitation, it should expect to pay the piper.

On the positive side, when the competing firms can gauge who else is taking part, they sharpen their competitive pencils and recognize that disclosure is fair and open.

Law departments often ask their firms to submit budgets on matters. Less often they negotiate fixed fees with their firms. Both methods of cost-control rest on four common elements, which both inside and outside lawyers need to handle skillfully. They need to:

1. Think through, state and critique the plausibility of both cost arrangements. This requires them also to articulate the assumptions that give reality (or not) to the budget or fee;

2. Embrace the principal of basic fairness: if events turn out to vary materially from what could have reasonably been projected, the sides need to reach an equitable adjustment;