Articles Posted in Outside Counsel

An in-house lawyer based in England told me that many law firms their negotiate caps on their firm’s liabilities. In return for granting discounts or other economic concessions, firms may ask law departments to limit their liabilities in malpractice actions.

I had not heard of US-based law firms that seek such a quid pro quo but it certainly seems to be a bargaining chip that inside counsel might put on the table. As I think negligence actions by law departments happen rarely, a concession on that right might save the face for a firm to agree cost reductions (See my post of July 26, 2010: data on malpractice actions; and Nov. 8, 2009: malpractice of law firms with 8 references.).

I love actual data about law departments, hardly a surprise to steady readers, so I appreciate when data appears on what law firms charge per hour or per type of service (See my post of June 2, 2010: CT TyMetrix Real Rate Report; Oct. 14, 2010: AIPLA data; and Oct. 22, 2010: AFA data from LexisNexis CounselLink.). I can foresee, however, that law firm leaders will balk at submitting their invoices electronically if the intermediary service provider discloses that data, even in the aggregate.

The foreseeable next step will be disclosure of what law firms charge on average for common tasks, such as reviewing 10K disclosures, updating pension plans, or preparing a response to an EEOC charge. Law firm leaders will oppose price transparency because the information will inexorably press fees down. Just as car dealers have little room to negotiate when all cost data stares out from the Internet, so law firms will not want the lowest-common denominator of publicly-available prices to drive fee arrangements.

Not likely, would be my answer. If the methodology resembles what the magazine controversially publishes about law school rankings, general counsel won’t learn much that they don’t already know. The name brand firms will strut through the top 25, the factors that go into the rankings will be criticized (size, profit per partner, citations in publications), the weightings given them will be questioned (what about diversity??), ads and RFPs will brag, and big reputations will get bigger. Even the subsequent years of the rankings, where rises and falls in rankings will be invested with deep significance, will fail to impress the market.

In fine, the rankings will generate discussion and disputation far out of proportion to their effect on general counsel.

Law departments seem reluctant to insist that their law firms deliver all work product electronically. The requirement may be a common request in outside counsel guidelines but there is little enthusiasm for enforcement. Maybe the ugly truth is that in-house lawyers don’t make use of the output from law firms. They don’t have effective means to store and retrieve the information so why bother to collect it. Or perhaps they sense that it is unlikely they will need the research or documents in the future.

Perhaps the lack of compliance can be partially remedied if law firms deliver each quarter a CD of the work product.

LexisNexis CounselLink, an e-billing and matter management provider, found that approximately 16 percent of “law firm fees billed to clients in the first six months of 2010 were invoiced according to rules of AFAs” (alternative fee arrangements). The article that states this, Met. Corp. Counsel, Oct. 2010 at 42, adds that the same analysis for the first six months of 2008 found 3.9 percent and last year 10.5 percent. The author’s conclusion is that “the use of AFAs has been growing rapidly in the past 24 months.”

It is terrific to have some empirical data, even if several questions about it come to mind. I have written the author for clarification. For one, hopefully the definition of AFA does not include discounts from hourly rates. Strictly speaking, discounts may be an alternative to full hourly rates, but discounts do not change the underlying economic dynamic. Fixed fees, unit costs, performance-based payments, contingency work, those are all true alternatives to hourly billing.

Meanwhile, whatever the definition, the trend upwards from this data remains unarguable.

You have retained a law firm to investigate possible wrong-doing in your company. The firm does its work, submits its report and, not surprisingly, recommends that you retain them further to take care of some of the (costly) recommendations. For example, you had a potential FCPA violation and one of the firm’s recommendations is that it review and assess all your contracts with foreign purchasers that are worth more than $25,000 – estimated fees of $2.3 million.

What if you had said to the firm before they submitted their recommendations, “We will consider your recommendations and for those we agree to implement we will retain your biggest competitor.”

Hmmmm. Is there a chance that the firm would temper its recommendations to bring them more in line with what is truly needed than to lavishly urge services for their own account? This Solomonic method separates the analysis and conclusions from potential, self-serving financial gain. A similar check and balance happens with IT projects: the consultants that recommend changes are sometimes barred from the implementation work.

If your law department has a juicy lawsuit to be filed against a deep pocket, give some thought to a method a judge used to choose the lead counsel in a 2000 price-fixing class action. As described in Fortune, Nov. 1, 2010 at 92, “an inventive federal judge set up a blind bidding contest. Each firm [vying to be selected as lead counsel] had to state a floor amount that victims would receive before lawyers saw a dime; the lawyers would get to keep 25% of the excess.” The winning floor, by the way, was no pittance: $405 million.

A law department could use the same auction method. “Firms, how much of the recovery will we – the client – get to keep before you take a piece of the action.” Confident firms, who understand the dynamics and economics of the suit, will propose higher floors (and perhaps lower percentages for themselves above the floor). It sounds to me like a creative framework (See my post of May 21, 2007: auctions with 7 references.).

An adulatory profile of David Boies mentions that his firm “imitates investment banks by charging flat fees.” That puts them at the cutting edge of law firms since Boies Schiller takes on some major cases. It was the next line that floored me, from Fortune, Nov. 1, 2010 at 92.

“A signing bonus, for example, can be $10 million – regardless of how much lawyer time actually gets put in.” If a general counsel genuinely believes that one particular lawyer holds the keys to the magic kingdom, that lawyer dominates the terms of engagement. But $10 million for the privilege of snagging a particular partner?

The press release by Thomson’s Hildebrandt BakerRobbins, regarding the first benchmark survey by the merged consulting groups, makes much of the year-over-year decline in median total legal spending. The consulting firm touted management prowess on the part of law departments as the cause of the drop from 2008 to 2009.

Perhaps, but my explanation, quoted extensively in an article by Corporate Counsel, proposed a much more prosaic explanation: business fell off sharply during 2009 and legal expenses dropped proportionately. Far fewer purchases and sales, not nearly as many big acquisitions and divestitures, very little activity in the equity or bond markets, less expansion and growth: when business declines, so does legal spending.

To borrow a phrase from political lore, it’s the economy, stupid.

A piece in the Economist, Oct. 9, 2010 at 24, links lack of productivity growth in European countries partly to their restrictions on professional services. It notes that “many European countries are rife with anti-competitive rules. Architects and lawyers’ fees in Italy and Germany are subject to price floors and ceilings.” No revolution in legal services awaits if the law bars competition on price.

Governmental regulation of what lawyers can and cannot charge their clients will certainly stifle market-based competition among law firms and muzzle legal departments that want to see innovation in pricing. As the Economist puts it well, “Such restrictions limit the ability of efficient newcomers to compete for market share, cosseting incumbents and raising costs across the economy.” Europe is not the only area to lag in this domain (See my post of May 2, 2008: restrictions in India on law firms and advertising.). Over time, barriers to open competition among law firms will weaken and fall.