Articles Posted in Outside Counsel

A profile in Executive Legal Adviser, Nov./Dec. 2005 at 31, quotes Michael B. Clark, general counsel of Steves & Sons: “I think young associates are making way too much money for what they are competent to handle. This is one of the biggest complaints I hear form other in-house lawyers – that we feel we have to pay for inflated young lawyer salaries.”

What if a law department refused to pay for any work done by first and second year associates, or mandated some less draconian reduction? What would law firms do? In olden days, partners’ rates bundled in the costs of their apprentice juniors.

According to a pop quiz in Corp. Counsel, Vol 12, Feb. 2006 at 190, “an institution of higher learning is credited with (or should be blamed for) devising the billable hour system used by most law firms.” The culprit? Harvard University.

I graduated Harvard College in 1974, and until now had never felt this shame. My alma mater. Why could that ignominy have not been visited on the Eli’s or the trade scholars down the Charles? Ah me, in billo unveritas.

An earlier post today commented on the methodology of this survey. Here, I accept the data as given, and remark on part of the findings.

The interviews asked the senior decision-makers to rank eight law-firm attributes for the degree to which companies were influenced by the attribute in selecting counsel. [I set aside for this post the relative infrequency with which even large companies select law firms they have not worked with.] The scale for the responses was from 1 (low value) to 10 (highest value.)

Communicate effectively 8.8

According to social scientists, mere possession of an item increases the value a person places on it. This they call the “endowment effect.” The effect shows up when someone has been the highest bidder for an item in an auction, or when they have touched the object for which they are bidding. In both cases, people bid higher, according to Strategy+Business, Issue 41, at 139, citing an article.

When a law department conducts a competitive bid, bidders from incumbent firms feel the endowment effect – “we possess that work now, so we will bid higher for it.” When a law department invites finalist firms to come and look at files, meet key clients, and talk with the in-house counsel, the department boosts the endowment effect and the bids. Perhaps the law department should identify the finalist firms, and thereby increase even more their competitive feelings.

American Express’s law department dislikes automatic billing rate increases by its law firms. “No matter how aggressive we get, firms believe that each year they get to raise their rates.” (From a teleconference hosted by ACC’s Law Department Management, Litigation and Small Law Department committees, and comments by the Chief Litigation Counsel of American Express, Stuart Alderoty)

Amex is currently in the process of patenting a solution to rate increases. Within this system, apparently, firms must demonstrate why the rate increase is justified. I am very curious what can be patented.

I previously considered most-favored nation (MFN) commitments by law firms, and found them wanting (See my posts of Oct. 30, 2005 and Nov. 21, 2005.). Even so, I would not accept the justification given by a law firm that refuses an MFN guarantee, rate discounts, or other alternative fee arrangements because “if we do it for you, we’ll have to do it for everyone.”

That argument is flimsy. Billing rates should not be monolithic for any lawyer – fixed for the year no matter what the lawyer is doing or for what client under what circumstances. Even less should rates be fixed by year out of law school or on some other broad band of lawyer, such as third year partners. (See my post of Nov. 21, 2005 on law firms linking rate increases to productivity increases.)

This is not phoolishness. American Express sets the fees it will pay litigation counsel for certain phases of predictable types of cases that should be resolved by a motion for summary judgment. According to a teleconference hosted by three ACC committees, where one of its litigators took part, if the case isn’t resolved during the fixed-fee phase, the firm works thereafter on a discounted hourly rate.

Phrankly speaking, a phine idea. The fixed fee gives the firm an incentive to resolve cases as promptly as possible; the reduction in the firm’s billing rates thereafter adds another dose of incentive.

Based on responses from 38 of the Fortune 250 general counsel, Corporate Counsel reports that 37 percent of them “did not fire a firm in 2005” (Corp. Counsel, Vol. 13, Jan. 2006 at 17). Companies in that elite bracket may have retained hundreds of firms during the year, so for nearly 40 percent of them to have kept the same herd goes to show the loyalty of law departments, their lawyers’ confidence that they choose firms wisely, and the capable performance of the firms.

But I want to make another point. To “fire” a law firm means to me to stop using a firm while it is in the midst of a matter. To fire a firm is not to cease using it after the matter it has handled ends; it is to terminate the representation in media res. What does this survey mean by the term?

About a third of the respondents (34%) said they had fired a firm during 2005 “for poor performance.” About the same percentage said they did so for some reason other than poor performance, technological capability (3% – one law department), or diversity (3%). Perhaps a disabling conflict, serious cost-overruns, departure of a key partner to another firm? It’s a poor survey that has “other” as such a commonly selected choice. Finally, why do the percentages not add to 100, unless some law departments fired more than one firm for different reasons.

A 1997 report by the California State Auditor of expert witnesses used by the California Department of Transportation’s Legal Division looked at expert witness fees. It found that payments made to one firm resulted in a ratio of billing rates to costs ranging from between 1.9 to 1 and 10 to 1. Overall, the ratio of billing rates to costs of that particular expert witness averaged 3.2 to 1, which was very close to the comparable figure from eight other expert witness.

Would it make sense for a law department to ask its key firms to disclose the ratio between what the firm pays an associate (plus benefits and other employee costs) and associate’s billing rate? The rest comprises firm overhead and partners’ profits.

“A legal consultant license is available to a lawyer admitted in a foreign country who has practiced law in the foreign country for three of the past five years, who possesses the necessary moral character and general fitness, who is over 26 years old, and who intends to practice and maintain an office as a legal consultant in New York State.” (NYSBA Journal, Vol. 78, Jan. 2006 at 35.)

Such a legal professional could fill a special niche for a law department that wants to find a lawyer who knows both US law and practice and has experience in a foreign country’s laws. After all, “the legal consultant statute and rules [such as that a legal consultant may not practice in NY courts] are designed to facilitate transnational legal practice.”