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Article: Challenge Calif. Insurer Limits on Independent Counsel Rates

November 12, 2018

A recent Law 360 article by Susan P. White, “Challenge Calif. Insurer Limits on Independent Counsel Rates,” reports on hourly rates and independent counsel in insurance coverage litigation in California.  Susan P. White is a partner at Manatt Phelps & Phillips LLP in Los Angeles.  This article was posted with permission.  The article reads:

When a liability insurer agrees to defend its insured after the insured has been sued, this is often cause for celebration, as the insured believes its defense will be paid.  The insurer may reserve its rights to deny coverage, and advise that such reservation creates a “conflict of interest” entitling the insured to “independent” counsel.  Thus, instead of the insurer selecting the insured’s defense counsel, which is common under a duty to defend policy, the insured gets to choose its own counsel.  Still reason to celebrate, right?  But, as you may suspect, this selection right comes with a catch.  The insurer advises that while the insured can choose its own counsel, the insurer only agrees to pay a very low hourly rate, maybe $225 or $250 per hour (it varies, sometimes dramatically so), which is much less than what is being charged by the insured’s independent counsel.  If the litigation against the insured is significant, the delta between the rate the insurer agrees to pay and counsel’s actual rate can add up to millions of dollars.

An insurer claims it need only pay these low hourly rates pursuant to the requirements set forth in California Civil Code section 2860(c), which governs the financial relationship between an insurer and an insured’s independent counsel. Section 2860(c) states:

The insurer’s obligation to pay fees to the independent counsel selected by the insured is limited to the rates which are actually paid by the insurer to attorneys retained by it in the ordinary course of business in the defense of similar actions in the community where the claim arose or is being defended.

While section 2860(c) allows an insurer to only pay independent counsel the same rates it pays to other lawyers to defend similar actions in the same locale, an insured should not simply accept the insurer’s say so on this.  There are several ways to both challenge an insurer’s unilaterally imposed rates.  This article addresses a few such ways.

First, an insured should demand that the insurer produce detailed information about the counsel to whom it is paying these low rates.  An insurer often imposes “panel counsel rates” in these situations, which are rates that an insurer pays to certain law firms that have special agreements with the insurer, often in writing.  In these agreements, the panel counsel often agree to charge the insurer reduced hourly rates, regardless of the type of case, or location of the litigation, typically in exchange for the anticipation of a large volume of work from the insurer.  Under such a situation, an insured can argue that there is no “similarity” of actions as mandated by the statute.  Instead, the panel counsel’s rates are unaffected by the complexity, sophistication, nature of the allegations, legal claims, factual circumstances, location or any other factors of the cases in which they are appointed.  Thus, such rates provide no support under the § 2860 requirements.

Second, an insured should demand that the insurer provide detailed information about the specific cases that the insurer is touting as “similar actions in the community where the claim arose or is being defended,” to support the low hourly rates imposed.  With this information, an insured can ascertain whether such cases are, in fact, “similar” or not.  For example, are these purported “similar” actions less complex than the lawsuit against the insured? Do they involve different legal and/or factual issues?  What about the amounts in controversy — are they dramatically less and thus, the exposure potentials are not even comparable?  Also, where are these other actions pending?  Are they in different communities?  The more an insured can demonstrate dissimilarities the better to demonstrate that the insurer cannot support the hourly rate it seeks to impose pursuant to § 2860.

Third, if the parties cannot informally agree on an acceptable hourly rate for independent counsel, either party can seek to resolve the dispute through final and binding arbitration pursuant to § 2860.  And, in any arbitration, if the arbitrator determines that insurer’s evidence does not satisfy the § 2860 requirements, the insured should argue that a “reasonableness” standard should be applied to determine the appropriate rate for the insured’s independent counsel (with evidence to support that independent counsel’s actual rates are “reasonable”).  Indeed, a “reasonableness” standard is a ubiquitous standard for attorneys’ fees in insurance litigation and other contexts.

An insured need not simply accept its insurer’s word when it imposes inappropriately low hourly rates on an insured’s independent counsel.  Instead, an insured should challenge such rates, when appropriate, either informally or in arbitration.

Susan P. White is a partner at Manatt Phelps & Phillips LLP in Los Angeles.  Susan resolves complex insurance coverage disputes through litigation, arbitration and mediation.  These include bad faith claims, as well as other commercial and contract matters.  She has also successfully recovered millions in attorneys’ fees and costs for her insured clients.

New Class Action Guidelines Address Attorney Fee Issues in N.D. Cal.

November 7, 2018

A recent The Recorder story by Amanda Bronstad, “New Class Action Guidelines in Northern District of California Prompt Commendation and Concerns,” reports that the Northern District of California’s new procedural guidance for class action settlements is among the most detailed in the nation, prompting welcome relief to critics but raising fresh concerns for some practitioners.  The guidance, announced on Nov. 1, comes as little surprise to lawyers who practice in the Northern District of California, which is home to numerous consumer class actions and judges who have spoken out about reforms.  The guidance also mimics proposed changes to the Federal Rules 23 of Civil Procedure.

But the Northern District’s guidance seeks to implement some of the most far-reaching revisions in the country.  Many lawyers said it creates transparency that’s been long needed in the class action process.  “It’s a good first step,” said Joel Fleming, a partner at Block & Leviton in Boston.  “Sunlight is the best disinfectant and, generally speaking, having more information to the courts and the class is a good thing.”

Defense attorneys and law professors who have called for more transparency in the class action process praised the new procedures.  “They’ve done a wonderful job of figuring out what are the most important things to worry about, and let’s make sure every judge has a checklist,” said Brian Fitzpatrick, a professor at Vanderbilt University Law School.  “They are wise to focus on what happens to the money after the settlement’s approved because we don’t know.”

The guidelines apply to all of the district’s judges, some of whom already have detailed standing orders on class action settlements.  Others have raised numerous questions about class action settlements before approving them.  “It’s been my experience that the judges in the Northern District of California have been more attentive to these issues than others in the country,” said William Rubenstein, a professor at Harvard Law School.

Among other things, the guidance asks lawyers to provide billing calculations in class counsel’s fee request, identify the process used to select the settlement administrator, consider social media and a marketing specialist for the notice program, disclose relationships between the parties and cy pres recipients, and file an accounting of the settlement 21 days after distributing the fund to the class.  Most of the concerns, such as poor claims rates or leftover settlement funds that revert to the defendants, focus on consumer class actions, not securities fraud cases, Fleming said.  For most lawyers, he said, the guidelines shouldn’t impact how they do their jobs.

“If a settlement is reached that would benefit the attorneys more than class members, this information being required will probably serve as a deterrent because it’s getting at information that’s useful for class members to know,” Fleming said.  “But for plaintiffs’ lawyers doing their jobs, and keeping the best interests of class members at heart, I don’t think any of this would change the way you’d litigate your case or change the way you’d structure a settlement.  It will require careful review of your materials to make sure you’re complying, but it won’t have a strategic impact.”

The biggest change in the guidelines is the accounting guidance.  That revision is noteworthy because, in most cases, judges don’t keep up with what happens to a class action settlement after granting final approval.  And there’s a slew of information that lawyers are supposed to post on the settlement’s website: The number of notices sent to class members, claim forms submitted, opt-outs and objections, for example, and the average, largest and smallest amounts paid to class members, methods of notice and payment, number and amount of checks not cashed—all in an “easy-to-read chart.”

The accounting revision is similar to a requirement tucked into a class action reform bill that the U.S. House of Representative passed last year.  “It’s very hard to determine whether class settlements are doing what they’re supposed to be doing if you don’t know where the money goes and where it winds up, and you don’t know how much of the class gets paid,” said Andrew Trask, of counsel at Shook Hardy & Bacon in San Francisco.  “In the past, it’s the propriety information of the settlement vendor.  So the defendant might see that information in a few cases, but usually they don’t.  To the degree we continue to have debates over what class certification ought to be and what class settlement ought to look like, having that information publicly available is better than not having it.”

Fitzpatrick said the data also would help law professors who study class action trends.  “The data that we will be able to gather from these new guidelines will help inform a lot of debate and discussions about whether the class action system is working as intended,” he said.  “They’re making a great contribution to the public understanding of class actions by requiring the lawyers to be transparent and return to the court with this data.”  But the guidelines haven’t come without new concerns.  Rubenstein said the guidance could “dissuade lawyers from filing in the Northern District because it feels like more hoops to jump through.”

Fitzpatrick specifically flagged the revisions prompting plaintiffs attorneys to turn over their lodestar billing, which are the hours they worked on the case multiplied by their hourly rate.  He said such a mandate could encourage more judges to use the lodestar when assessing an attorney fee request that is based on a percentage of the settlement fund. That’s not required in the U.S. Court of Appeals for the Ninth Circuit, he said.

More importantly, he said, the practice raised concerns about the motivations of plaintiffs attorneys in settling class actions.  “The more and more courts that are doing lodestar cross-checks, the more lawyers are going to worry they need to bill a bunch of hours in order to get a decent fee award instead of focusing on the most important thing, which is getting the most recovery for the class,” Fitzpatrick said.  Fleming agreed that requiring lodestar could create “misaligned incentives” but, in most cases, plaintiffs lawyers are prepared to submit billing records as part of their fee requests in the event judges use them as cross-checks.

For more on the N.D. Cal.'s new class action guidelines, visit https://www.cand.uscourts.gov/ClassActionSettlementGuidance

Report: Some Lawyers Spend 30 Percent of Workday Billing Clients

October 5, 2018

A recent Texas Lawyer story by Brenda Sapino Jeffreys, “US Lawyers Spend Only 30 Percent of Workday on Billable Hours, Report Says, reports that U.S. lawyers are still spending too little of their workday on billable hours, a year after an eye-opening report found lawyers devoted only 29 percent — 2.3 hours — of each eight-hour workday to billable hours.  This year’s Legal Trends Report, prepared by Clio, a Canadian company that provides cloud-based practice management for firms, found that the average utilization rate improved only incrementally to 30 percent, which is 2.4 hours of billable hours each workday.

Additionally, the third annual Legal Trends Report, made public, finds that lawyers invoice clients for only 1.9 hours accomplished during an eight-hour workday and collect only 1.6 hours of that time.  That’s a lot of time not spent on billable hours.  Instead of completing billable hours during the workday, the lawyers spend their time on billing and financials; marketing and business development; and firm organization and administration.  “The fact that lawyers miss out on nearly 5.6 hours of billable work each day should be a wake-up call for why efficiency is so important to law firms — it’s a critical leverage point for increasing revenues,” Clio wrote in the report.

A large majority, 84 percent, of legal professionals surveyed for the report said they equate success with increasing firm revenue.  But George Psiharis, chief operating officer for Clio, said it is surprising that few of the lawyers and other legal professionals consider factors that can increase revenue — growing a client base and billing more hours — as important factors in a firm’s success.  Only 34 percent of the legal professionals said growing the firm’s client base is a key route to success, and only 23 percent said that billing more hours would make their firm more successful.

In contrast, 80 percent of lawyers said improving efficiency of firm operations is an important factor, and 77 percent said hiring more staff would also help the firm be successful.  “That was a big surprise for us. The top two things you think about doing for driving more revenue were at the bottom of the list,” Psiharis said.

However, increasing revenue by producing more billable hours, according to the report, is not as simple as working more than eight hours a day. Clio reports that the average full-time lawyer plans to work 46.8 hours a week, but actually works 49.6 hours a week.  That adds up to an extra 3.5 weeks of unplanned work each year.  Three-quarters of lawyers report that they work outside of regular business hours, and 39 percent said that negatively affects their personal life.

The report is based on data collected from nearly 70,000 legal professionals that are Clio clients, a survey of 1,968 legal professionals, including Clio users and non-users, and a survey of 1,336 consumers.  Psiharis said most of the company’s clients work at firms ranging from solos to middle-market firms of about 200 lawyers.

The report also found that billing rates at U.S. firms hit an average of $245 an hour as of February 2018, a level that keeps pace with the rise in the cost of living from 2010 through February.  Billing rates for nonlawyers, however, have changed little since 2011.

Some practice areas are more profitable than others, because of higher realization and collection rates.  For instance, intellectual property lawyers charge an average of $327 an hour and collect $258, while lawyers who represent juvenile court clients bill an average of $87 an hour and only collect $60.

The report shows these average billing rates for lawyers in 10 large metropolitan markets: $368/hour in New York; $346 in Los Angeles; $327 in Washington, D.C.; $312 in Chicago; $305 in Atlanta; $302 in Dallas; $297 in Miami; $288 in Boston; $287 in Houston; and $269 in Philadelphia.

Law’s $1,000-Plus Hourly Rate Club

July 23, 2018

A recent Wall Street Journal story by Vanessa O’Connell, “Big Law’s $1,000-Plus an Hour Club,” reports that leading attorneys in the U.S. are asking as much as $1,250 an hour, significantly more than in previous years, taking advantage of big clients' willingness to pay top dollar for certain types of services.  A few pioneers had raised their fees to more than $1,000 an hour about five years ago, at the peak of the economic boom.  But after the recession hit, many of the rest of the industry's elite were hesitant, until recently, to charge more than $990 an hour.

While companies have cut legal budgets and continue to push for hourly discounts and capped-fee deals with their law firms, many of them have shown they won't skimp on some kinds of legal advice, especially in high-stakes situations or when they think a star attorney might resolve their problem faster and more efficiently than a lesser-known talent.  Harvey Miller, a bankruptcy partner at New York-based Weil, Gotshal & Manges, said his firm had an "artificial constraint" limiting top partners' hourly fee because "$1,000 an hour is a lot of money."  It got rid of the cap after studying filings that showed other lawyers surpassing that barrier by about $50.

Today Mr. Miller and some other lawyers at Weil Gotshal ask as much as $1,045 an hour.  "The underlying principle is if you can get it, get it," he said.  "Not many attorneys can command four figures hourly, and I do have trouble swallowing that," said Thomas L. Sager, general counsel at chemical maker DuPont Co. Still, he added, DuPont pays more than $1,000 an hour to a "select few," particularly for mergers-and-acquisitions advice.

Janine Dascenzo, associate general counsel of General Electric Co. said that her company is willing to pay what it must when it needs a lawyer with "unique" expertise.  "We'll keep paying them a lot of money, because they're worth that," she added.  Industrywide, attorneys in finance-related practices such as M&A, bankruptcy law and taxes, tend to command a premium to their peers in other specialties.

One of the priciest attorneys over the past year, according to court filings, has been Kirk A. Radke, whose specialty at Kirkland & Ellis LLP in New York is advising clients on leveraged buyouts and forming private-equity funds.  As of early 2010, Mr. Radke, whose clients include private-equity firm Avista Capital Partners, had an hourly fee of $1,250.  Mr. Radke and Kirkland & Ellis declined to comment, as did Avista Capital.

Such rates are contributing to inflation across the $100 billion-a-year global corporate-law industry as the slow economic recovery has left many law firms struggling to finance the hefty pay packages they award their stars.  Since most law partners bill roughly 2,000 hours, those asking $1,100 hourly will bring in $2.2 million, a few million short of the $3 million or $4 million in annual compensation star attorneys get at many big firms.

To help fill the gap, the firms rely on the profit they often reap on the work of junior attorneys, or associates.  Dozens of associates at a time can work on a single case, and some firms bill as much as $700 an hour for their time, according to Valeo Partners, a Washington consulting firm that maintains a database of hourly legal rates in fields such as litigation, corporate law and intellectual property.  That strategy can fuel tensions with clients. "We are much less willing to pay an army of associates at the ever-increasing rate," said GE's Ms. Dascenzo.

"Plenty of clients say to me, 'I don't have any problems with your rate,' " said William F. Nelson, a Washington-based tax partner at Bingham McCutchen, who commands $1,095 an hour, up from $1,065 last year.  "But there is price pressure for associates, especially junior lawyers.  A small but growing number of top lawyers are using other arrangements in place of hourly billing.  David Boies, chairman of Boies, Schiller & Flexner and a prominent trial lawyer, charges $960 an hour, a spokeswoman for the firm said.  But just a third of his time is devoted to matters that are billed hourly.  More often his deals with clients involve alternatives such as pegging fees to his success, she said.

More typically, big law firms' managing partners dictate hourly rates annually, often studying what their rivals charge, according to disclosures in their attorney-fee filings in corporate-bankruptcy cases, which provide a rare public peek at the industry.  Such cases involve more than just bankruptcy lawyers; they frequently draw in a range of attorneys, including specialists in such areas as taxes, product liability and environmental and intellectual-property law.

This year, top litigators at Morgan, Lewis & Bockius LLP, a Philadelphia-based firm, are asking as much as $1,200 an hour.  A spokeswoman for the firm said "less than 1% of our partners are at rates of $1,000 or more."  Gregory B. Craig, a former counsel to the Obama White House who joined Skadden, Arps, Slate, Meagher & Flom LLP a year ago as a Washington-based litigation partner, is asking $1,065 an hour, according to a court filing last month.

M&A lawyer John M. Reiss, from White & Case in New York, started billing $1,100 an hour last year.  "Some clients do focus on the hourly rate, but in the end what really matters is their total cost and whether they got a fair price," said Mr. Reiss.  In recent years, pressure from clients for discounts has made it increasingly difficult for law firms to increase their lawyers' fees across the board.  Hourly rates for partners rose by an average 3% in 2009 and 2010, and 2.3% this year, compared with an 8% increase in 2008, according to Hildebrandt Baker Robbins.  The average law-firm partner now asks $635 an hour and bills $575, the firm said.  But a small group of attorneys in some specialties command significantly more.

Nearly 2.9% of partners at a group of 24 large U.S. and British law firms asked for $1,000 an hour or more in U.S. cases last year, up from 1.5% in 2009, according to Valeo.  London-based lawyers have tended to charge higher per-hour rates than their U.S.-based counterparts.  However, London attorneys typically don't bill as many hours on a case as do U.S. attorneys, some lawyers say.

Texas Companies Spend Record Legal Fees in 2017

May 4, 2018

A recent Texas Lawbook story by Mark Curriden, “Texas Companies Paid Record Legal Fees in 2017,” reports that Texas companies paid law firms that represent them a record-setting amount of money in 2017 and an increasing percentage of those legal fees are going to national law firms that have recently opened offices in Houston, Dallas and Austin.

Exclusive new financial data collected by The Texas Lawbook shows that the 50 largest corporate law firms operating in Texas – nearly all of them with offices in Houston – employed essentially the same number of lawyers in 2017 as they did in 2016 and 2015, but those law firms are charging higher rates and making considerably more money.

Nearly two-dozen law firms in Texas, led by Houston-based Vinson & Elkins and national firms Kirkland & Ellis and Winston & Strawn, generated record high revenues last year as a result of them routinely charging corporate clients $1,000 an hour or more.

At the same time, several large Texas legacy law firms are struggling for survival or at least seek stability.  "The Texas corporate legal market is experiencing dramatic changes and these changes are expensive," said Chicago law firm consultant Kent Zimmerman. "The numbers confirm that the rich law firms are getting richer and some long-time Texas law firms are getting left behind."

Legal industry analysts say the most important statistic in The Texas Lawbook data is the fact that revenue per lawyer at 14 law firms operating in Houston now exceed $1 million a year – an amount previously achieved by the most elite and expensive national firms. Only two of the 14 firms – V&E and Baker Botts – are headquartered in Texas.

"The formula for success is simple," Zimmerman said. "The law firms that pay the most get the best lawyers. The best lawyers get the best clients and the best work. The best clients pay the highest rates and generate the best revenues. And then you can use those revenues to pay the best lawyers and the cycle starts over again."

The 50 largest legal practices in the state generated $5.65 billion in revenues from their lawyers who office in the state – a 2.4 percent increase from 2016.

But the data also shows that elite national law firms that have opened offices in Houston and Dallas during the past few years are growing considerably faster than law firms headquartered in Texas and that growth is mostly at the expense of locally based firms.

Two excellent examples are Chicago-based Kirkland & Ellis and New York-based Simpson Thacher & Bartlett.

Kirkland opened its Houston office in April 2014, but it now has more than 130 lawyers and generated an estimated $187 million in revenues in 2017, making it the 11th largest legal operation in Texas.

Simpson Thacher, which debuted in Houston in 2011, has witnessed significant growth the past three years – from $25.6 million in revenues in 2015 to $47 million in 2017, an 83.6 percent jump.

The Texas Lawbook analysis of the exclusive data involving the 50 largest corporate law firms operating in Texas shows that:

  • Nearly 40 percent of the 7,000 corporate lawyers in Texas are now employed by law firms headquartered outside of the state;
  • The Texas offices of national law firms generated $2.57 billion in 2017 – a 38 percent increase from just two years ago;
  • By contrast, lawyers for Texas-based law firms brought in $3.1 billion in revenue in 2017, which is the same amount as the previous two years; and
  • Thirty-three of the top 50 law firms by revenue generated from their Texas offices were based outside of the state – up from three of the top 50 just seven years ago.

To be sure, large Texas legacy law firms – V&E, Baker Botts, Bracewell and Locke Lord, for example – still generate billions of dollars in combined revenues, employ thousands of lawyers and still do a huge majority of the legal work for businesses in Texas. Many of them are experiencing tremendous financial success.

The Texas Lawbook obtained the financial data from interviews with law firm leaders, law partners who recently departed the firms and legal industry analysts. Only one law firm – Houston-based Susman Godfrey – refused to provide any kind of statistics to The Texas Lawbook.

The 2017 data shows that Houston-based V&E is now the largest legal operation in Texas by revenue. V&E lawyers in Austin, Dallas and Houston brought in an estimated $484 million – a 6.6 percent increase over 2016 and a 15.5 percent jump from 2015.

"We had a truly fabulous year – a record year," said V&E Chairman Mark Kelly. "Demand was up, which was good. We have 112 summer associates coming in. So, we are ramping up for another great year and for expansion."

While national law firms have raided V&E for scores of lawyers during the past seven years, legal industry analysts say that V&E has also benefited from the national invasion in one simple way: the elite national law firms with dramatically higher rates provided cover to V&E to significantly increase the rates it charges clients.

Most Texas-based law firms decided to use their lower hourly rates as a marketing tool to retain business. But V&E, according to legal consultants, took the opposite approach.

"The challenge for law firms is attracting and keeping the best legal talent," Kelly said. "For law firms with revenues less than $1 million per lawyer, it will be tough for them to compete. We want the high-end work and that means we need the top talent."

Lawyers in the Texas offices of Baker Botts had $378 million in 2017 revenues for its Texas offices.

Haynes and Boone and Jackson Walker are two Texas-based law firms that increased their lawyer head count and their revenues at their Texas offices.

Haynes and Boone increased its Texas revenues to $272 million, which is 15.3 percent higher than in 2015. Jackson Walker's revenues hit $249 million in 2017, which is a 12.6 percent jump from two years earlier.

"2017 was our best year ever," said Haynes and Boone managing partner Tim Powers. "We saw strong performances across the board and we benefited from our clients doing some really great things.

"We are cautiously optimistic about 2018," Powers said. "The tax reform law will hopefully drive significant investment in Texas and infrastructure legislation could mean good work in the next year. But a trade war could have a devastating impact."

Thirteen law firms have seen their revenues in Texas grow by 20 percent or more from 2015 to 2017. All but one – Houston-based Gray Reed – is headquartered outside the state.

Gray Reed, which has 140 lawyers in Houston and Dallas, has seen its revenues grow from $50.4 million in 2015 to $65.7 million last year – a 30.5 percent jump.

"We've had three consecutive years of record revenues," said Gray Reed managing partner J. Cary Gray, who added that the firm has no interest in growing outside of Texas or merging with another firm. "There are certain legal services that people and businesses need handled by high quality lawyers, but they don't want to pay $1,000 an hour for it. That is our sweet spot."

NALFA Analysis: Partner Bankruptcy Rates

October 27, 2017

NALFA conducted a survey of partner hourly rates in bankruptcy cases.  NALFA examined dozens of court filings in bankruptcy cases over the past couple years.  The following results of our survey are...

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National Law Journal Cites NALFA Program

September 11, 2017

A recent NLJ article by Amanda Bronstad, “Judges Look to Profs in Awarding Lower Percentage Fees in Biggest Class Actions,” quotes NALFA’s CLE program, “View From the Bench: Awarding Attorney...

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