Articles Posted in Outside Counsel

In the Fall of 2010 ALM Legal Intelligence administered an online survey that 176 US in-house lawyers took. LexisNexis CounselLink published the findings. In them respondents indicated whether or not they were “Instituting a 360° review process for all law firms”.

I blinked 360 times. A full-circle review suggests that peer law firms evaluate other law firms and that something or someone subordinate to law firms evaluate them. My guess is that the survey question was really asking about “full evaluation” but chose a grander term. Even if nearly one out ten of the responding law departments (7%) do this, surely they do not pull it off for all of their law firms. That would impose a monumental task.

People bang on about why it is hard for a law firm to re-orient itself away from piling up billable hours, relying on old technology, not unbundling services handled better and cheaper by others, and so on in the litany of changes resisted.

Law departments, too, move very slowly. Only if the general counsel solidly and clearly and repeatedly goads a new attitude toward outside law firms is it likely the entire department will change its march. Individual lawyers, even those who head large groups like litigation or intellectual property, can only do so much to alter the traditional dance between firm and department.

A second reason why new practices have not transformed law departments is that most practitioners inside spend only a smallish part of their working hours supervising law firms. Aside from litigation managers, most of the attention of inside attorneys focuses on issues on their desk, not with outside law firms. The urgency for external change is muted.

A group of large law firms in the U.S. has proposed that “sophisticated” clients be permitted more flexibility when they retain law firms. Recognizing large companies know what they are doing and can assume more risks, they would have more room to maneuver in such areas as potential conflicts of interest, limitations on liability they can agree to, and acceptance of counsel from lawyers not be admitted in states where the department wants legal advice. The group calls itself the Law Firm General Counsel Roundtable and it has tackled economically disadvantageous regulations on lawyers that have historically been aimed at protecting ignorant and intimidated individuals, regulations which hobble capable law departments who know enough to protect themselves (See my post of April 15, 2007: companies with in-house lawyers are sophisticated enough to enter into a hold-harmless agreement with its employee lawyers.).

The looser restrictions would apply to clients “based on such criteria as whether a firm is publicly traded, the size of its balance sheet, the number of jurisdictions in which it operates, and how much it uses legal services.” Such a safe-harbor for knowledgeable clients, and I presume one test would be an internal legal function, would help large business and modify some musty restrictions designed to protect less-informed clients. Years ago I proposed a similar flexibility (See my post of Sept. 21, 2008: “what if companies with revenue of more than $1 billion and a legal department of more than four lawyers were permitted to obtain legal services from anyone, even if they were not admitted to the bar of any state and regardless of their educational credentials.”). For more on this proposal, see the ABA J., June 2011 at 58.

Just because a law department assigns most of its work to a smallish number of preferred firms, there still remains a challenge when someone in the department needs to find an unusual legal specialist. When searching for a needle of expertise in the haystacks of hundreds of partners and associates, the task is daunting.

Preferred can help the law department and themselves with several actions. They can summarize their areas of arcane expertise and make that available to the department. They can come and visit to deepen the understanding of the department about their unusual pockets of experience. They can circulate articles or memos that spotlight talents that might otherwise not be known. They might even ask the law department to list potential occasional needs. All these efforts help spot the needle.

Even if a company does not enter into a fixed-fee arrangement for all-you-can-eat from a law firm in a specialized area, it might look into an arrangement where short calls are not billed. Alternatively, short calls are only billed a set amount such as $100 for a call of less than 20 minutes. The basic idea, permuted into a myriad variations, encourages the law firm to be able to weigh in on questions but not have to create new matters or bill every dime (See my post of Dec. 2, 2009: Telstra retainer agreement).

Every area of law is a possibility for such a retainer. At the SuperConference, a speaker from Home Depot described such an arrangement for bankruptcy preference issues. Club Med created such an outlet for questions on Mexican law. A law department I know supports a retainer arrangement for environmental health and safety questions.

It is important with these deals to define who can call the law firm and where the line is that allows the firm to shift from the all-in covered to hourly billing. The arrangements have the benefit of predictability for both sides and they might encourage the firm to keep track of questions and store answers.

An E-Bay procurement person who supports law department, speaking at Mitratech’s Interact Conference, explained her company’s use of a Tier 1 list of about a dozen law firms, each of which gets annual reviews and quarterly budget reviews. She mentioned that the company used more than 400 law firms five years ago, but has reduced that number to 250 and would like to converge it more.

Having covered the background facts, she mentioned that the law firms that represent e-Bay, and other law firms that would like to, have search systems that let them know quickly about lawsuits filed against the company. Often, they call to seek to be retained before the company itself has received the summons through its registered agent or however.

Some hard-nosed general counsel snort that project management counts as overhead and partners should not charge for the likes of those people. Like practice support specialists at UK firms, they are overhead.

Others, who have witnessed the plus side of project management or are more in tune with the benefits touted by law firms from skilful management of resources, may be amenable to some costs being passed on. They might find a fixed surcharge acceptable or a percentage of the fees charged. They might let a law firm apply the new skills and agree to pay what they – the inside managing counsel – deem to be the incremental value.

The broader question sweeps in all timekeepers other than paralegals and lawyers. Should e-discovery professionals bill their time? Should research and knowledge experts show up on invoices? What about graphical experts for trials?

According to a speaker at a recent conference from the law department of Office Depot, that department opened 7,489 matters in 2010 of which outside counsel assisted with a mere 2.4 percent! That ratio of inside to outside matters seems very low (See my post of May 24, 2011: 30% at The Williams Companies.). Slip-and-fall litigation in the multitude of Office Depot stores would on its own seem likely to drive that percentage much higher.

Maybe its internal lawyers open matters at the drop of a hat, perhaps because they are evaluated partly on how many matters they handle. More likely, I think, the number of matters handled by outside counsel is lower than one would expect, for several reasons.

One is that Office Depot’s law department might open multi-case matters, such as all slip and falls west of the Mississippi. Maybe it has assigned large groups of similar matters to one or more law firms and therefore does not open individual matters for them. Perhaps some other function at Office Depot supervises multitudes of small matters such as nuisance suites through Risk Management, small claims through the insurance group or single plaintiff discrimination suits through HR. Or perhaps an insurance company that covers the company with an EPLI policy does the chore. Maybe a matter need not be opened if outside counsel handles it below a modest sum or an aggregate spend by type of case (slip and falls in May).

What if a law department took the 12-to-20 law firms it most commonly turns to and calculated the percentage of the firm’s revenue that comes from the department? You know your spend and you can estimate the firm’s revenue from league tables or extrapolations from them. If a firm has hundreds of lawyers, even a seven figure spend might be only a small part of its revenue – not much clout (See my post of Feb. 20, 2008: Latham & Watkins as $2 billion revenue.).

If you were being aggressive on cost control or other requirements, you can lean more on the law firms that depend on you the most. I have not heard of any law department that explicitly quantifies and exploits its leverage in such a way, but the concept may have applicability.

An article describes a fixed-fee basis arrangement between Brunswick Corp. and K&L Gates. ‘Following the first year of representation, the fixed-fee contract had to be modified in order to provide more protection for the law firm.” Brunswick and K&L Gates agreed to set “a ceiling on fixed fees” and to switch a case to hourly billing if that ceiling is met.

I read into this brief reference several points to note. A ceiling on fees and the switchover operates somewhat like a collar (See my post of Dec. 7, 2005: collars to prevent injustice.).

Note that the two parties let a year go by so that they could spot the kinks and figure out improvements.