A good anlaysis of the profitability of alternative fee arrangements:
By David McMahon & Jeevan Subbiah
This is a follow up in our series, How to Select New Counsel and Manage Legal Fees, related to litigation management for startup companies to help ease the frustration and confusion of hiring and managing legal counsel for the first time. As you may recall, previously we have discussed typical legal needs for a startup, tips for selecting an attorney, big and small firm size, and crowdfunding and The Jobs Act.
The initial stages of litigation management become important as you close in on hiring counsel. Early litigation management can include negotiating a billing rate appropriate for your legal needs, determining whether your work can be billed at an hourly or project rate, considering deferred billing and regularly reviewing your legal billing for inconsistencies and excessive charges. As we have noted earlier in this series, legal billing is changing drastically due to the challenging economy. Many common billing practices, such as billing clients for routine overhead costs, such as utilities, copy services, library maintenance and rent, are considered excessive. You may want to discuss these types of costs in advance with your lawyer. In addition, you should consider having your legal counsel managed either by a dedicated person internally or by a third party law firm.Continue Reading...
David McMahon & Jeevan Subbiah
I was recently speaking at a litigation management seminar and I was asked some questions regarding our method and protocol utilized in a qualitative legal audit or legal fee analysis.
The following is a basic outline of tips on how we conduct our analysis:
- A Fee Analysis Can Result in Substantial Savings – A typical analysis where we recommend the client undertake a full blown review saves our clients an average of 25% to 30% although results can vary.
- Were the Attorney’s Fees Reasonable and Necessary? - Our firm can provide an independent analysis, review, and evaluation of the reasonableness and necessity of attorneys’ fees billed by various law firms retained by the insured to represent the company in litigation or on complex transactional matters.
- Were the Non Attorney Vendor Invoices Reasonable and Necessary? - In addition to the attorney fees invoices, we also review invoices submitted by non attorney vendors and other professionals and render an opinion on the reasonableness and necessity of those charges. We also frequently review the work product of the firm and its consultants/experts so that we have the appropriate context to review the fees.
- Did the Insured Manage the Legal Fees? - We also analyze the reasonableness of steps taken or not taken by the insured to institute cost effective measures to manage legal fees and related costs generated by their counsel and consultants.
- A Fee Analysis Can Aid In Negotiation – We recommend that a fee analysis be undertaken prior to mediation in a contested fee case. It can be a powerful settlement tool.
OUR METHOD OF REVIEW
During a fee analysis, we review the individualized legal and factual billing situation in detail and prepare supporting reports and charts (varying from one page summaries to detailed reports) to document our findings. We generally focus on the following key areas:
- Billing Guidelines - Did Billing Guidelines exist and were they followed?
- Redacted and Non Original Invoices/Multiple Submissions of Invoices - The bills may have been redacted or otherwise do not appear to be the original invoices. There may be multiple submissions of individual invoices. For these reasons, the reliability of many of the entries may be subject to question.
- Erroneous Recast Bills - Bills recast by counsel may contain inconsistencies, errors and mistakes.
- Incorrect Sums of Fees Submitted - The total sum of fees the applicant seeks to recover may not add up to the totals of the invoices which we independently calculate and verify.
- Improper Billing Entries - Billing entries may not comply with generally accepted billing practices and applicable case law for the following reasons:
- Block Billing - Entries couched in the highly disfavored block billed format contain two or more tasks in one billing entry. We typically recommend a 25% deduction for block billed entries.
- Vague Billing - Billing entries are unreliable when they are extremely vague in nature and fail to describe the work being performed with any specificity whatsoever. We often recommend a 25% deduction for vague entries.
- Clerical and Administrative Work - Time billed at professional rates for clerical and administrative work which is arguably in violation of ABA Formal Opinion 93-379. We usually recommend a 100% deduction for administrative entries.
- Combination Block Bills - Time included in a combination block entry (along with another improper format such as Block/Administrative) should be deducted. We recommend a 35% deduction for these entries.
- Unusual Hourly and Billing Rate Increments - Billing entries should be recorded accurately by one tenth of an hour increments and not rounded up to quarter hour or full hour increments. In addition, billing rates should be in full hour increments. Calculating an hourly or rate adjustment may be necessary where this is the case.
- Non Covered or Non Defense Related Work – We also focus on billing entries for work that is not recoverable under the insurance policy, billing guidelines or generally accepted billing practices, such as the following:
- Non Covered Lobbying Work
- Non Covered Internal Work/ Billing for the Business of the Insured
- Non Covered Insurance Coverage Work
- White Paper Work
- Excessive IT Work and Computer-Related Charges
- Erroneous Matters on the Bills
- Burden of Proof on Fee Applicant - When numerous anomalies exist, the fee applicant may not have met its burden of proof in establishing the right to recover fees requested, either in whole or in part.
- Cost/Expense Backup - The applicant may have failed to provide any cost backup for significant expenditures or copies of receipts and backup over $100 in amount (to determine whether the firm has complied with ABA Ethical Opinion 93‑379 as to the billing of costs and disbursements). For this reason the applicant may not have met its burden of proof establishing the right to recover those significant costs and disbursements.
- Haphazard Fee Allocations by Applicant – In cases where the applicant allocated the fees in order to seek reimbursement for selected claims, the fee allocations may be haphazard and the protocol and/or methodology for making the allocations may be subject to question.
- Transient Billers - The bills may include time billed at professional rates for a large number of transient billers who billed small amounts of time that did little to move the case forward. Due to the apparent lack of utility of the work performed by the transient billers, their fees could be deducted entirely.
- Work on Motions Lost by Fee Applicant - There may be significant time incurred on motions that were lost by the fee applicant. These fees may be subject to scrutiny.
- Research Projects - The work done on selected research projects may be excessive, unreasonable and unnecessary.
- Conclusion: Deduction Due to Unreasonable Fees - For the various reasons outlined above, the fees you have incurred may not reasonable or necessary. Therefore, taking a deduction may be warranted.
What if a client requests that the lawyer switch from being compensated by the hour to accepting a contingency fee instead? How would the lawyer avoid any conflicts, fulfill her duties of disclosure and avoid any other ethical violations to make that change, and how would this be done in a way to maximize its enforceability?
The American Bar Association (ABA) issued a new formal opinion (11-458, Changing Fee Arrangements During Representation, Aug. 4, 2011) which may help answer that question. 11-458 clarifies the circumstances wherein a lawyer may modify an existing fee agreement during the representation, or "change horses midstream."
Generally, modifications of fee arrangements are permissible under the Model Rules, but the lawyer must show any modification was (1) reasonable under the circumstances [ABA Model Rule 1.5(a), hereinafter "Rule"], (2) communicated and explained to the client [Rule 1.4 and 1.5(b)], and (3) accepted by the client.
Being a contract between two parties, fee arrangements are generally governed by simple rules of contract law. However, counsel has special burdens due to the lawyer's fiduciary duty to the client. Thus, any changes in the arrangement will be initially regarded as suspect, and lawyers are not free to change the existing relationship by only giving notice to the client. First and foremost, the new arrangement must be fair and reasonable for the client in light of the circumstances, under Rule 1.5(a).
- For example, many firms increase their hourly billing rates annually without negotiating every rate increase with the client. If clearly communicated to the client this may be permissible, so long as (1) the client is informed, (2) the client consents, and (3) the increase is reasonable under the circumstances;
- A lawyer and client also may agree to change an hourly fee agreement to a contingent fee agreement, or vice-versa, provided that the lawyer complies with Rule 1.5(c) (requirements for a contingent fee agreement include a writing signed by the client);
- However, a lawyer may not unilaterally impose a "success fee" on a client, in essence altering the arrangement from an hourly rate to a contingency fee, without the client's informed consent; and
- An attorney may request new security for a fee, provided that Rule 1.8(a) is complied with (disclosure and consent requirements of doing business with a current client).
Consequently, it is possible to change horses midstream, but the jump from one horse to the other should be done carefully, and with both eyes wide open.
In Cotchett, Pitre & MCarthy v. Universal Paragon Corp., 2010 DJDAR 13771 (2010) the California Court Of Appeal for the First Appellate District decided a unique fee case concerning a contingency fee award. The fee claim was based on the value of property received in settlement, as opposed to a cash resolution.
Universal Paragon Corp. (UPC) hired the law firm of Cotchett, Pitre & McCarthy (CP&M) to represent the company in an environmental case. The parties entered into a unique contingency fee retainer agreement. The Agreement stipulated that if UPC received property rather than cash in settlement, CP&M would receive a 16 percent contingency payment, based on the value of the property. The payment was to be based on a combination of the last settlement offer and the value of the property received.
Settlement was ultimately reached in the litigation. The Agreement provided for an award of real property to UPC. CP&M then sent a letter to UPC claiming legal fees of over $19 million. The demand reflected 16 percent of the damages range set forth in the prior settlement statement, which was $86.5 to $155.7 million.
UPC contested the amount of the fee award and the parties agreed to arbitrate the controversy. The arbitrator awarded CP&M $7.5 million in attorney fees and expenses. The trial court confirmed the award, and UPC appealed, contending the fee award was unconscionable.
The court of appeal affirmed the grant of fees and that amount of the award. The court of appeal noted that Rule 4‑200 of the Rules of Professional Conduct prohibits attorneys from entering into an agreement to charge an illegal or unconscionable fee. The court stated that a contractual term is unconscionable if, due to unequal bargaining power between the parties, the result of the contract is unfair.
The court concluded that the contingency fee arrangement was fair. It specifically found that UPC was a sophisticated party who employed outside counsel to negotiate the fee agreement with CP&M. The court found that UPC’s counsel was able to influence and negotiate the terms of the Agreement at arms length.
The Court also found the contingency fee awarded was not substantively unconscionable. The parties negotiated and agreed to base the contingency fee on the fair market value of the property received, which the arbitrator took into consideration in making the award.
The court concluded that the fee did not violate public policy.