Articles Posted in Outside Counsel

Insights about huge law firms, publicly-traded law firms, their profit margins, and commercial “nous” all appear in one item in the Economist, Aug. 23, 2008 at 55.

Vast revenue at huge firms. Baker & McKenzie brought in annual revenues of more than $2 billion (See my post of Feb. 20, 2008: Latham & Watkins and Skadden Arps breach $2 billion.). Further “Britain’s top four firms have reported revenues up by an average of 15% this year, with all four passing the £1 billion ($1.85 billion) mark.” It’s hard for any but the largest law departments to have much leverage over such behemoths (See my post of May 3, 2006: consequences of firms growing to behemoth size.).

Use of equity funds. An Australian firm that went public in May 2007, Slater & Gordon, used the money it raised to swallow up six smaller rivals within a year. Law firms in Britain are champing at the bit to have the same opportunity. Law department managers can foresee even more tumult among their providers and continued consolidation (See my post of Nov. 15, 2005: consequences of convergence and mergers.).

What if there were qualified purchasers of legal services, something like what I understand to be a qualified purchaser of securities? My vague memory from the hallowed halls of Columbia Law School is that under certain circumstances if you meet legislative requirements of experience, savvy and wealth, some investor protections do not apply. With the knowing loosening of strictures against unauthorized practice of law, 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.

Savvy in-house lawyers at big companies could make their own decisions about the quality of advice they receive and work done for them and the market flexibility would drive down legal costs.

The listings of “who represents corporate America” give a broad-brush sense of which law firms big law departments favor. Much more revealing would be data on proportional amounts spent on those firms. It is fine to list Big Firm A, Mega Firm B, and Prestigious Firm C as your go-to outside counsel, but that disclosure misleads us if Firm A gets one percent of the law department’s spend, Firm B gets two percent, and Firm C a mere three percent.

The metrics-freak in me wishes we could get a listing of firms retained as ranked by fees paid over a three-year period – to lessen the distortion of the one-shot matter where huge fees went out. I suspect that law firm size correlates positively and reliably to company size. Smaller law departments lack the negotiating power to drive down rates much, so they seek out smaller law firms, which for the most part have lower rates than their bigger brethren.

For insurance companies, moral hazard means “the tendency of policyholders to change their behavior, such as living on floodplains because their prospective flood losses are lowered due to their flood insurance coverage,” according to Richard B. McKenzie, Why Popcorn Costs so Much at the Movies (Copernicus Books 2008) at 35. mckenzie@uci.edu

For lawyers in companies, moral hazard means a willingness to run closer to the legal risk line because excellent law firms are available to defend the company if the legal risk bites you. As a lawyer in-house, you can take a more aggressive position and rush in where legal angels fear to tread if your backstop, your legal insurance policy, is a terrific law firm – even if legal fees soar.

Yes, it is expensive to have junior lawyers doing your work at $5 a minute and partners clocking at $10 a minute and higher. But have billing rates and the magnitude of legal risks companies face risen proportionately?

Any answer to this question founders on our inability to assess legal risk, both its likelihood and its consequences. Intertwined with that Gordian knot is the imprecision of legal complexity. I have addressed both risk and complexity (See my post of Nov.15, 2005: legal risk with 7 references.); March 13, 2007: complexity with 4 references.); and March 23, 2008: risk management with 18 references.)

Legal costs (aka billing rates) that are proportionate to legal risks and complexity should not offend us. If more is at stake, we should expect to put more on the table.

When Pfizer shrank ten law firms to one firm to handle all its employment related work, “all existing employment cases were transferred to the firm [Jackson Lewis] except for one single-plaintiff case and two class actions.” This baton-passing is reported in Corp. Counsel, Vol. 15, Sept. 2008 at 84, and it confirms my belief that law departments can transition pending cases to other law firms.

Unless you believe that you can change horses in mid-stream without loss of quality or duplication of spending, you have lost your leverage with your incumbent litigation firms. If the collateral losses are acceptable, you can credibly maintain that you will move cases to other firms (See my post of

(See my post of Aug. 14, 2005: costs of transferring matters underway; July 21, 2006: disputes the imagined losses from transitioning cases to a new firm; Sept. 3, 2006: transitions of matters; Dec. 4, 2006 generally on the transition of matters; May 26, 2007: term periods for fixed-fee deals and transitions; July 27, 2007: negotiate alternative fees midstream; Dec. 17, 2007: hassles to change firms; and March 25, 2008: how to converge firms.).

The billing rates of lawyers in the gigantic firms of the Rim (the coastal megalopolises, Chicago and Houston) are often much higher than the rates of even very large firms elsewhere. A telling quote in a profile of Anne Chwat, the general counsel for Burger King Holdings, Corp. Counsel, Vol. 15, Sept. 2008 at 71, quantifies one instance of savings from using non-Rim firms.

“For example, working with qualified firms based in Miami (where Burger King is headquartered) has saved us literally millions of dollars over using New York firms for the same work.” So-called “Regional firms” have many advantages, one being lower billing rates (See my post of Aug. 21, 2008: techniques to save costs with 24 references.)

Anne Chwat, the general counsel for Burger King Holdings, explains in a recent profile how her department selects outside counsel. She cites expertise as a crucial factor and then says that “we examine not only the credentials and ethical reputation of the law firm, but also the background and expertise of the specific attorneys who will be working with us.” The comment on “ethical reputation,” from Corp. Counsel, Vol. 15, Sept. 2008 at 71, intrigues me.

It is common for requests for proposal to ask about the malpractice insurance carried by a law firm. Some RFPs even ask for information about recent claims against the firm. But how Burger King’s in-house lawyers research the ethical reputation of a law firm is beyond me.

As an experiment, I searched on Google for “ethical reputation” and the names of three large New York City firms (Skadden, Davis Polk and Sullivan Cromwell). A total of nine hits came up (7, 1, and 1 respectively) and only one of those appeared from the squib to say something about the law firm and its ethical reputation. In short, precious little data exist on the ethical renown of at least these three major firms.

While writing my article about alternative fees that recently appeared in the New York Law Journal,

I thought about some of the ethical pressures of billing arrangements that are not based on chargeable hours. Both law firms and law departments face these conflicts.

Fixed fees permit law firms to enjoy windfalls – not unethical but it leaves a poor taste – and may cause them to slack off if the fee runs out before the work. Law departments may fail to disclose enough information for law firms to arrive at a reasonable flat fee for a bundle of work. Both sides shelter behind self-serving information asymmetry (See my post of Jan. 1, 2008: agency theory; Jan. 28, 2007: more on moral hazard; Dec. 23, 2005: asymmetric information and outside counsel; Sept. 22, 2006: challenges to rationality; Jan. 13, 2006 #1: asymmetric information in outside counsel relations; July 14, 2006: adverse selection; and Aug. 13, 2006: moral hazard and law departments.).

In some consulting projects I have spoken with partners at the primary firms of my client law department. The hope has been that they will identify aspects of the law department that can improve. Usually, however, what the partners say disappoints me, because they never take the gloves off.

As I scanned the encomium for GE’s law department by a group of eight partners who represent GE, published in Met. Corp. Counsel, Vol. 16, Aug. 2008 at 36, I gagged. A partner at Munger Tolles confides that GE’s in-house lawyers “are the most consistently excellent in-house lawyers I have encountered in my career.” An M&A partner at Allen & Overy burbles that “working with GE lawyers is like having additional partners on your side.” Weil Gotshal’s partner praised them fulsomely: “You are working with people who know what they’re doing; are very professional and very smart.” Not to be outdone, a King & Spaulding partner who has represented GE for thirty years laid it on thickly: “Every GE lawyer I’ve met is a class act. They are excellent managers of outside counsel.” From the standpoint of Paul Hastings, “they are not only tough, smart and dedicated, but they also challenge us in ways that make us all better lawyers.”

How do lawyers at the other firms these partners represent feel? Do they speak as highly of their own partners and associates (See my post of March 30, 2006: do partners fake praise of in-house counsel; and Oct. 30, 2006: patronizing attitude of law firm partners.)?