According to the post, the proposed U.S. minimum at DLA Piper for new clients would be $200,000.  Apparently this strategy will continue to entrench annual increases in profits per partner at Big Law firms. 

The Wall Street Journal also reported recently on the pay gap widening between the “superstar” Big Law lawyers and the “ordinary” Big Law partners — a pay gap of 8 to 10 times what the “ordinary” partners are making.  The lead example in the story notes:

Washington litigator Jamie Wareham switched firms Monday, joining DLA Piper, where he will make about $5 million a year, a significant raise from his pay at Paul, Hastings, Janofsky & Walker LLP, where he was one of the highest-paid partners

How much work are we talking about here?  According to one author, “at DLA Piper and its reportedly lower profit margin (26 percent), Wareham will have to produce almost $20 million to support a $5 million share of firm profits. Again, at a blended hourly rate of $500, that means more than 40,000 hours.”

While this system may work for firms representing global giants such as Chevron (referenced in the WSJ article and fined $8.6 billion in an environmental case), it does not sound like this economic model is well suited for the service of most companies. 

What does the future hold?  Probably greater separation between Big Law billable rates, salaries and profits per partner and everyone else, and the creation of more boutique and mid-sized firms to handle the legal work of U.S. corporations at more reasonable rates.

The interesting portion of the article is as follows:

As big law firms move forward with fewer associates and partners, it becomes more obvious that at many firms partners are doing some of the work associates used to do.

As work for certain practice areas such as mergers and acquisitions has dried up, partners at big law firms began having more trouble finding partner-level work. They are doing associate work when they can justify billing that to the client, thus draining the market for associates, one D.C. area partner explains.

That starts a domino effect. A partner who, for example, bills $700 per hour “may be doing a bit more hands-on supervising him- or herself, rather than relying on the $500 per hour partner,” he says. “The $500-level partner is running out of matters, so he’s doing more work that might otherwise be done by the $400-level associate. The $400-level associate is hogging more of the junior-level work. Anytime there is a shortage of work, anybody in a position to delegate is going to become less generous about delegating.

“It’s very natural,” he adds. “Attorneys are going to look out for their own numbers first and try to get work from wherever they can. If it’s not the level of work they’re used to, they’re less inclined to delegate where they believe they can justify billing it to the client.”

The result: In practice areas where there is a shortage of work, clients end up getting more senior-level attorneys, but at the higher price those attorneys bill.

Depending on the work involved, bumping work up to more senior-level attorneys can be a good deal for clients. If the work is complex, the client might prefer to pay a premium for a partner’s attention to the matter.

But when the work is less complex, more sophisticated clients will question whether certain work could have been done by lower-level attorneys.

 Or by a smaller law firm that is properly staffed.

Here is the chart:

The dark blue line are “corporate counsel.”  The light blue line are “private practice” attorneys.  Who is more concerned about law firm profitability?  Who is more concerned about pricing?

Another part of the study shows a marked difference in opinion between the two groups when asked whether they agree with the statement that “law firms are too profitable”:

When the top 19 law firms in the U.S. see profits per partner of over $2 million, what is your conclusion?

According to Law.com, a former equity partner in the Los Angeles office of Seyfarth Shaw, a large national employment law firm, has filed suit against the firm.  The suit alleges that the attorney was improperly demoted by the firm because of his role in representing a former client who won a $30 million malpractice verdict against the firm.  The interesting quote comes at the end of the article from an alleged email written by the managing partner of the Los Angeles office “urging partners in December 2008 to bolster their fee collection efforts by ‘prying cash out of our clients’ hands.’ “

Ouch.

Followers of this blog are aware of our occasional commentary on “law firm economics,” namely, how large, institutional law firms manage to churn out huge profits per partner every year despite the public relations spin that they are really concerned about how much their clients are spending on legal fees.  Today we read about a California case involving a national employment law firm that is perhaps the clearest example of how large law firms turn routine employment cases into Armageddon-like clashes between civilizations.  The case is Nazir v. United Airlines, Inc., ___ Cal.App.4th ___ (Oct. 9, 2009).  The California Court of Appeals characterized it as “a case involving what may well be the most oppressive motion ever presented to a superior court.” 

More after the break.

The court of appeals described the employer’s initial filing as follows: 

Defendants filed a motion for summary judgment/summary adjudication, seeking adjudication of 44 issues, most of which were not proper subjects of adjudication.  Defendants’ separate statement was 196 pages long, setting forth hundreds of facts, many of them not material—as defendants’ own papers conceded.  And the moving papers concluded with a request for judicial notice of 174 pages.  All told, defendants’ moving papers were 1056 pages.

After the plaintiff filed a response in opposition, the defendant dropped yet another bomb on the superior court:

Defendants’ reply included, and properly, their response to plaintiff’s additional disputed facts.  Defendants’ reply also included, not so properly, a 297-page “Reply Separate Statement” and 153 pages of “Exhibits and Evidence in Support of Defendants’ Reply.”  And the reply culminated with 324 pages of evidentiary objections, consisting of 764 specific objections, 325 of which were directed to portions of plaintiff’s declaration, many of which objections were frivolous.  In all, defendants filed 1150 pages of reply.

These efforts somehow resulted in the superior court granting the employer’s motion for summary judgment.  On appeal, however, the court of appeals reversed the ruling as to eight causes of action (including discrimination, harassment, retaliation and intentional infliction of emotional distress) and sent the case back to the superior court for a jury trial.  The plaintiff was also awarded the costs of appeal.

For those interested, the opinion reports the participants as follows:

The underlying facts of the case are interesting as well. 

(Hat tip to The UCL Practitioner.)

“Cravath, Swaine & Moore LLP, the fifth-most profitable U.S. law firm, is offering $80,000 to incoming lawyers to defer their starting dates for a year, according to an internal memo obtained by Bloomberg News.”  Bloomberg.com article here.  The Business Insider has a story here.  The Manpower Employment Blawg has a post about the topic here.

As a client, are you excited about paying for attorneys who are doing no work for you to take a year off?  Do you really feel that you are getting great value from your law firm when they are using your fees to subsidize a $250,000 signing bonus for a lawyer who has never practiced law?  Just asking.

UPDATE:  Additional thoughts on this topic here.

Lately, the press has been reporting on alleged dissatisfaction with the billable hour model.  (For example, see here.)  In our opinion, the problem with the billable hour model is not the model itself, but rather a lack of trust in attorney/client relationship.  That is a topic for another day. 

The bullet point in the email caught our attention, however, because it illustrates our thoughts in prior posts regarding the misguided priorities in law firm economics (for our prior posts on law firm economics, see here).  More after the break.

The bullet point in the email we received yesterday said: 

“How firms are successfully moving away from billable hours to achieve revenue equal to 200% of the lawyers’ hourly rates.”

In our view, this kind of mindset is the very reason that the billable hour model is distrusted.  The alleged failure of the billable hour model falls directly on those firms who have abused it by expending unnecessary amounts of effort on projects.  That abuse of the billable hour has ensured one thing – - record profits per partner and revenues for BigLaw.  (See here, for example.)

The current rallying cry is for the elimination of the billable hour system.  As mentioned above, this hue and cry arises from an abuse of trust in the attorney/client relationship.  (our previous post on the incentives in alternative billing arrangements is here).  Those crying for elimination of the billable hour model believe that going to fixed fee or other types of alternative billing arrangements will help control legal costs.  On the contrary, as this small bullet point illustrates, BigLaw will always ensure that profits per partner do not decline. 

We believe that focusing on increasing profitability without consideration of client needs is looking at the situation backwards.  The foremost priority of an attorney should be to serve clients.  As a matter of justice, attorneys should make a fair rate of return on their work.  But playing a shell game with alternative billing arrangements to “lock in” profits seems contrary to the spirit of professionalism that we should be following.

Today’s ABA Journal article on the $250,000 White & Case holiday party taking place while the firm is laying off 70 lawyers and 100 staff members speaks for itself.  According to W&C’s website, it has over 2,400 lawyers in 25 countries and a labor and employment practice.  According to this source, profits per partner last year at W&C were $1.67 million.  Not to single out W&C, but is a $250,000 holiday party (last year’s was reportedly $500,000 with fireworks) something that a client with a run-of-the-mill employment discrimination case wants to be funding?  After all, the holiday party is part of the firm’s “overhead” that goes into calculating billing rates.

Perhaps this explains the decisionmaking process.

As part of our ongoing discussion about economic issues in the legal practice of employment law (recent posts here and here), I offer some brief thoughts on alternative billing arrangements in employment cases (and welcome comments) after the break.

The first issue with alternative billing arrangements in employment litigation is proper risk sharing between the law firm and client.  In the employment litigation field, different types of cases require different levels of work.  A hostile work environment case, for example, may involve numerous depositions of witnesses.  A reduction-in-force case may require the retention of a statistical expert, but have few witness depositions.  Each case presents its own specific needs relative to the proper evaluation and defense of the action.  Assigning a fixed fee to all “employment discrimination or harassment cases” involves too great a variance in risk.  In some cases, the law firm will have to perform significantly less than the negotiated amount.  In others, the proper defense of the case will require the expenditure of more effort.  Few clients have enough employment litigation matters to spread this risk evenly.

The second issue, which flows from the first, is that assigning a fixed fee to a case (or cases) places improper incentives on law firms.  The “AmLaw 100″ profits per partner are a matter of public record (or at least public speculation) in a national publication.  Year after year, large firms manage to increase or maintain significant profits per partner.  And they do so despite implementing “alternate billing arrangements.”  How is that the case and how is that relevant to fixed fees?

Simply put, many decisions at large law firms are driven by the desire to maintain a certain level of profitability.  Associate salaries, billable hour requirements, which costs to pass thru to clients (and whether they get marked up) and even who to hire are decisions influenced by the bottom line.  In this economic reality — where a certain level of profitability has to be maintained — fixed fee cases give psychological incentives to the law firm that are directly contrary to the client’s best interest.

For example, the firm will have the incentive to assign the case to the least expensive attorney(s) available.  Some firms increase the profit margin on this kind of work by hiring contract attorneys at a significantly lower hourly wage than the expensive “big firm associates” we all read about.  Law firms do not advertise the distinction between the different “classes” of associates to the public, so the client may not have any idea which kind of associate is doing their work. 

There is also an incentive to the firm to do the least amount of work possible in order to maximize the number of profitable cases.  Yes, some cases will result in more work than the fixed fee.  But everything will be done to ensure that this is rare.  Again, is it in the best interest of the client for the driving motivator of the attorney to be doing the least amount of work possible?

Perhaps in the end, alternative billing arrangements are the only way for corporate America to rein in the outrageous hourly rates, associate salaries, and legal bills that we see today.  In the end, corporations that continue to hire institutional law firms to handle employment cases will pay one way or the other to maintain the profits per partner that their institutional attorneys have come to expect. 

In my opinion, fixed fee billing arrangements achieve cost savings by negatively impacting the core trust in the attorney client relationship.  They do so by placing perverse incentives on the attorney to staff cases inappropriately and to avoid doing work that may be necessary on a case in order to maintain a certain level of profitability.  The billable hour may not be the best system in the world, but it depends on client trust in the attorney and the attorney’s integrity in making sure that every matter is handled with the best interest of the client in mind.

Comments are welcome.

The following paragraphs in the article caught our attention.  The emphasis in bold is mine.

As revenue is driven higher to sustain the holy grail of profits per partner, chargeable hour requirements whip associates to unworldly billable hours or perhaps bill padding. Burning the candles too short and slogging through mind-numbing piles of paper take its toll. Mega-firms suffer from high turnover rates, and in turn, law departments suffer from seeing the fees they invested in training walk out the door to another firm.

A related downside for law departments is that the astronomical starting salaries of associates, with the commensurate bumps in pay up the line, make recruitment and retention harder for law departments — recruitment because some associates may expect top dollar, retention because some in-house lawyers may be enticed to defect to law firms.

On the partner side, seven-figure incomes create volatility and departures of groups of partners, a consequence that is negative for law departments. Partners decamp for firms that dangle higher profit distributions and lose nimbleness as they become conservative.

This article raises some of the issues I have discussed elsewhere, namely, the intense pressure on attorneys at institutional law firms to bill hours and generate profits.  This pressure can lead to astronomical bills in employment cases.  Read this post for example.  This post, citing the same case, argues that companies should move their employment litigation to small and medium sized law firms. 

As a “small firm” lawyer, I happen to agree with that view.  But I also happen to think that it does not make economic sense for super-sized institutional law firms to handle single plaintiff employment cases.  In a single-plaintiff Title VII case, for example, the compensatory and punitive damages are capped at a maximum of $300,000 for a large employer.  Although the company may face additional liability for the plaintiff’s attorneys’ fees if he/she prevails at trial, should it really cost $500,000 to $1 million to defend such a case?

UPDATE:  A Law.com article on November 18 discusses the concern of GCs that law firm mergers will result in increased upward pressure on billable rates and hours.

At a recent presentation by in-house counsel, several attorneys commented on the increasing pressure from their company to reduce legal costs.  The major item that they focused on was reducing the hourly rate for attorneys at the institutional law firms they use.  But as the Washington Post article above notes, large, institutional law firms are businesses too — they are concerned about their profits as well.  

Merely negotiating an hourly rate reduction from an institutional law firm will come at a cost; the question is what that cost will be.  As the article notes, many large firms are hiring contract attorneys to handle matters instead of salaried associates.  This allows the firms to pay the contract attorneys substantially less than a salaried “superstar” associate — who can get close to $200,000 a year right out of law school at top firms — while charging clients a lower hourly rate.  At the same time, the firm maintains its normal profit margin.  So who loses in this transaction?  One suspects that the client is the one who loses out, because they are getting contract attorney work while continuing to think they are getting “name-brand” service.

The other issue with simply negotiating lower hourly rates is that the attorneys in the institutional firm still face the same economic pressures as when their rates were higher.  Their rent has not gone down; nor have their salaries gone down.  If hourly rates are going down, how can they continue to maintain their profit margins?  One way is to increase the number of hours they bill.  But human beings can only handle so many hours — this is a limited way to increase profits and, quite frankly, most institutional firm lawyers were already billing as many hours as they could handle before you negotiated the rate reduction.  It does not take a Ph.D. to see one possible (and unethical) way for attorneys to deal with that pressure — overbill so that you yield the same revenue for a project at the lower rate.  While this is not common, clients should consider if they want to place that kind of pressure on their attorneys for the sake of an hourly rate reduction.

Very few companies get beyond the band-aid approach of negotiating hourly rate reductions to truly consider creative options to reduce legal costs while maintaining a high level of quality in the legal services being delivered.  One general counsel at a recent presentation did speak about his use of smaller, focused firms in specific practice areas that deliver high quality legal services without him having to pay for the bloated overhead of an institutional law firm.  Nevertheless, this kind of creative thinking is the exception and not the rule.  One legal consultant suggests that perhaps there is a scientific/psychological reason why in-house lawyers continue to hire expensive institutional law firms in the face of the many economic reasons why not to.

In coming weeks, we will continue to explore economic issues in employment litigation.  We encourage readers to comment on this topic as well.