Articles Posted in Outside Counsel

A provocative law review article, Lester Brickman, “The Market for Contingent Fee-Financed Tort Litigation: Is It Price Competitive?,” 25 Cardozo L.R. 65, 99 argues that contingency-fee firms stick to the same fee percentage (about 30% of the recovery) because of the so-called “signaling function” of the standard rate. The one-third fee is very well known and states a threshold. Brickman argues that a lower fee conceded by a lawyer signals to a tort plaintiff a “shirking or inferior quality lawyer.” Like perfume and yachts, expensiveness cries out quality.

Major law firms operate in a journalistic orgy of economic signals. The billing rates of leading firms are trumpeted; their revenues come out in league tables; the stratospheric salaries paid new lawyers make headlines; and net profits per partner are published like lottery winners. Taken together, all this economic data creates for corporate consumers of these firms’ legal wares a clear signal: “We are very good and very costly, and we are all equally costly at the high-end sellers’ market.”

The received wisdom is that in-house lawyers can knowledgeably assess the appropriateness of bills submitted by law firms. This folk wisdom can’t be doubted if the lawyer, while at the law department, has handled many similar matters with outside counsel, or if the lawyer was for some time the billing partner on such matters, or if the services rendered fell in a practice area familiar to the lawyer. But these are substantial and often unmet “ifs” for many corporate counsels.

Worse, if the billing firm has survived convergence, there is less incentive to challenge a bill where the inside lawyer has the stigmata of infrequent experience, no background, or lack of legal training.

Outside counsel might be handling an unusual legal problem, or the lawyer went inside as a fourth year associate who had never prepared bills, or the litigation associate now inside receives a bill covering environmental remediation – or all three conditions of uncommonness, inexperience, and substantive ignorance combine.

If a client issues stock to a law firm, most commonly the client lacks cash to pay in full for the firm’s services. During the boom days of Silicon Valley, it was not uncommon for stripling companies to pay their law firms cash and also to issue them stock. Apparently the debate continues, at least in Britain according to Legal Week, Vol. 8, April 6, 2006 at 10, where 42 percent of the law firms responding to a survey favor the tactic – they would accept stock in payment of fees – as against 58 percent who would not.

Might a company, facing a huge lawsuit or company-defining transaction, say to its lead law firm: “We expect a discount from your standard fees, but if our stock price one year from the closing date (or resolution of the matter) has risen from today’s price, you will get that percentage rise applied to your fees.” Hence, if the discount was 10 percent but the price of the company’s shares rose 15 percent after the major legal event, the firm would earn back the discount, plus 5 percent.

OK, calm down. Don’t take any part of this idea to heart, but only to illustrate linking legal outcome to share price. I don’t even know if such an arrangement is legal, but perhaps shadow shares as a form of sweetener could alter the performance and economics of very expensive law firms.

According to a consultant quoted in Law Practice, Vol. 32, April/May 2006 at 10, “one major client of several big firms refuses to pay any more for associates with less than two years’ experience than it would have to pay for legal assistants.”

Even so, that client might be overpaying (See my post of Feb. 28, 2006 about complaints over associate compensation, Nov. 21, 2005 on imposed staffing profiles, May 30, 2005 about hiring only partners, and Nov. 19, 2005 about USF&G using only partners.).

Deep down, and in their most honest self-reflection, law firm partners might wish there were no in-house counsel. Those inside lawyers clog the arteries that would otherwise flow smoothly, but for their legal cholesterol. The unexpressed resentment is dis-lawyer-heartening – a tmesis, which means the “separation of the parts of a compound word by another word inserted between them” as explained in the American Scholar, Vol. 75, Spring 2006 at 81 (Barbara Wallraff).

What law firm would choose partnering, a Janus-word that stares simultaneously at the incompatible ideals of making lots of money but carrying the bag for corporate counsel, if there could instead instructions straight from the executive to the partner? There must be competition at some level between the two sets of lawyers who want work and accolades from the same ultimate client. The inside lawyers is un-meddling-desirable.

This is a hot topic. Crunched to save costs, many law departments freeze rate increases by their law firms. General counsel say, “We are losing money,” or “We can’t pass on cost increases to our customers,” so you law firms, our partners in legal service, need to share the pain (See my posts of May 1, 2005 and Dec. 16, 2005 on the malevolent sides of “partnering.”).

As a stop-gap measure the moratorium can perhaps be defended. To impose an Ice Age, however, not only makes law firms hot under the collar but also cools their ardor for assigning the best lawyers to your matters and giving their all. Economically, to the law firm a rate freeze is an imposed discount on what they see as cost-of-living annual upticks (See my post of April 23, 2006 on rebates compared to discounts.). Firms with six-pack ab rates are punished as much as flabby, couch potato firms with bloated rates.

Far better for law departments to negotiate fixed-fee arrangements or selectively grant rate increases that reward lawyers who have gained inability during the past year (See my posts of April 5, 2006 on “fixed fee” compared to “flat fee” and March 12, 2006 on selective rate increases by law firms.).

Every law department I have consulted to pegs the bill-approval level of its lawyers by their level. If you are an associate general counsel, the authorizations lets you sign off on bills up to $35,000. If you are an assistant general counsel, $25,000 (See my post of March 23, 2006 on the rank difference between the two titles.). Changes in approval levels follow in lock-step fashion, so when you are promoted, you can request payment for larger invoices (See my post of Aug. 24, 2005 about a bank’s authorization levels and my post of April 9, 2006 on the terms “invoice,” “bill,” or “statement.”).

Cutting against this one-title-fits-all approach, it is true that lawyers in different specialties use outside counsel in different amounts. Some specialists, and in particular litigators, spend much more than others, and much more than their business unit generalist colleagues (See my post of Nov. 8, 2005 on the irony of specialists relying more on outside lawyers.).

A more meaningful approval scheme might set approval levels in some relation to the amount of bills likely to be reviewed by the particular lawyer. When someone sees a small amount of bills, that lawyer might get a lower threshold for approval than a lawyer at the same level who sees 10 times as much in outside counsel bills. Workable or not, the idea is to match authority levels to experience and practicality.

Why might those letters now mean Under-used Thereafter by Managers and Supervisors? Let’s catalog why.

The task structure fit best with litigation, which accounts for something around half of the spending; the remainder of legal services never lent itself to a taxonomic approach suitable for coding. Even within litigation, the categories could be used very broadly and would not clearly distinguish what timekeepers were doing.

On the law department side, three punctures let out a lot of UTBMS air. One, you need software to sort through the time entries and place them in their appropriate categories. Not every law department had that software. The bigger nail is that most law departments do not have enough similar matters to make meaningful comparisons on performance across law firms and – here’s the real inhibitor – law departments do not take the time to analyze what data they could develop from the UTBMS codes.

What is the difference between a law firm agreeing to discount its rates and agreeing to rebate a portion of the fees paid to it if the fee total exceeds an agreed-upon amount? Timing, certainly. Psychology, too, since the rebate encourages a law department to use the firm more.

An economist would argue that a law department which accepts a 10 percent discount from a law firm should, alternatively, seek perhaps a 12 percent rebate from that firm. The discount savings come immediately; the rebate savings come later and have some risk of “payment,” in that the department might not exceed the rebate trigger level. Hence, the net present value of the discount today is equal to the higher rebate value tomorrow (See my post of March 26, 2006 on economists’ terms of art.).

“Research suggests that decision-makers don’t realize just how easily and often their objectivity is compromised.” Blunt words from Daniel Gilbert, a psychology professor at Harvard, in the NY Times, April 16, 2006 at WK12, who emphasizes our penchant for uncritically accepting evidence when it pleases us (“I like firm XYZ, so I look for confirming facts; firm ABC I’m against, so I spot and remember criticisms of it.”)

Gilbert writes that “Dozens of studies have shown that when people try to overcome their judgmental biases – for example when they are given information [RWM: opera tickets or football seats or Michelin four star meals] and told not to let it influence their judgment – they simply can’t comply…”

On the other side of the credit card, “while people underestimate the influence of self-interest on their own judgments and decisions, they overestimate its influence on others.” Marketers still urge lawyers to take prospects to the SuperBowl.