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Category: Legal Spend

Utah Sues Insurer Over Coverage of Defense Fees

February 4, 2021

A recent Law 360 story by Daphne Zhang “Utah Asks Insurer To Pay $1.8M Atty Fee in Trade Secrets Suit”, reports that Utah's Department of Administrative Services sued an AIG subsidiary, seeking to compel the carrier to cover the $1.8 million it spent defending Utah State University in an underlying trade secrets suit.  The department told a Utah federal judge that Lexington Insurance Co. breached the insurance contract by refusing to reimburse its legal bills incurred in defending Utah State University Research Foundation against global weather analytics company GeoMetWatch in the underlying suit.

According to the suit, AIG has asserted that the fee incurred by the Utah Attorney General's Office from defending the university in the underlying litigation is defined as "employees salary" under its policy and contended that it will not pay for the state's defense costs.  Utah and its state administrative department said AIG has denied coverage for the underlying defense costs without any written explanation.  The Beehive State is alleging breach of contract and breach of good faith and fair dealing, and asking the court to hold that AIG should cover it in the underlying litigation and pay damages.

The department said its risk management division insures the state of Utah and its agencies for property and personal injury up to $1 million.  The state also held an excess liability policy from Lexington that covers loss once the $1 million primary policy is exhausted.

In March 2018, the division notified AIG that it had incurred over $1.195 million of legal bills in the underlying action and requested reimbursement under the policy.  The federal claims in the underlying case are currently pending in the Tenth Circuit and state claims are pending in Utah state court.  As of the filing of the suit, Utah has incurred over $1.8 million in attorney fees, according to the complaint.

AIG then requested documentation of attorney fees.  The underlying case was under a protective order, requiring the AIG staff to sign a non-disclosure agreement before reviewing the documents.  In November 2018, one of the attorneys representing Utah State University sent AIG the requested documents and reminded AIG to sign the agreement to comply with the protective order.  In May 2019, the division asked AIG to respond to its defense cost claim and made the request again a month later.  In April, the director of the division wrote to AIG regarding its alleged failure to pay the defense costs in the underlying litigation.

Defense Firms and Clients Can Boast About Attorney Fee Wins

January 25, 2021

A recent Law.com story by Christine Simmons, “Both Law Firms and Clients Can Boast About Fee Wins,” reports that, several organizations have reported that, despite the Am Law 200’s worst fears, the legal industry enjoyed growth in 2020.  Citi Private Bank Law Firm Group and Hildebrandt Consulting have projected mid-single digit growth in revenue and mid to high single digit growth in profits. 

Last year, large firms managed to raise rate about 5%, according to James Jones, a senior fellow at the Georgetown Law Center on Ethics and the Legal Profession.  That’s remarkable considering the chaotic and depressing environment of 2020, and even more remarkable that the average annual rate increase for firms since 2008 has been about 3%.

But weren’t general counsel in cost control mode?  After all, according to survey data collected in June 2020 from 223 corporate legal departments, 89% of respondents said controlling outside counsel costs was a high priority.  So what gives?  How could law firms push through high rates at a time of such fee pressure?

Reconciling legal departments’ pressing need to cut costs with law firms’ revenue, profit and rate growth in 2020 requires a closer look at law firm segmentation, sector performance and the trajectory of the year.  But in the legal industry, 2020 is also a story about demand and the benefits of close cooperation on fee agreements, allowing both law firms and legal departments to have some bragging rights.

The Conversation

The lucrative year extended up and down the Am Law 100 and likely into the Second Hundred, but it came at different client relations strategies.  For the elite, rate and fee pressure was so little they could give out double bonuses to associates without billable hour requirements.  Wall Street firms and the Am Law 20 saw the benefit of ‘fight to quality” during an unpredictable year in business.  Meanwhile, some law firms did work with their clients on a mix of fee strategies and arrangements, to the benefit of both.

For instance, at Akerman, ranked No. 88 in the Am Law 100 last year, CEO Scott Meyers said collections remained steady last year, although Akerman worked with its clients to help them meet their own budgets while paying their legal bills.  “We’re close to our clients,” he said.  “We reached out to each one to understand, ‘what’s your financial position?  What’s your cash position?  What can you do, what can’t you do?’”  At the end of the financial year, the firm said it had a 6.5% increase in gross revenue in 2020.

Fee pressure, of course, depends on the industry.  And those with insurance industry clients and municipal clients are among those seeing the most discount pressure.  Mark Thompson, president and CEO of Marshall Dennehey Warner Coleman & Goggin, said while the firm’s hospital clients have returned to their pre-COVID payment rates, the firms’ base of municipal government clients haven’t yet returned to pre-COVID fee arrangements as a result of financial distress. “That is going to remain a problem going forward,” Thompson said in a Dec. 22 article. 

But nearly all sectors saw pressure in the beginning of the pandemic. At General Motors, the automaker reached out to the 19 firms on its panel of “strategic legal partners.” The second quarter presented an enormous, worrisome question mark, and the automaker—like so many businesses of all sizes—was looking to preserve cash.

GM general counsel Craig Glidden said the company didn’t know what would happen in the auto markets, which meant asking firms for help. And those firms stepped up, agreeing to deferred billing and alternative fee arrangements to relieve some of the company’s pressure.

The Significance

Yes, law departments are seeking high cost savings.  The 2021 Report on the State of the Legal Market from Thomson Reuters and Georgetown Law said spending on outside counsel did, in fact, decrease in the second and third quarters of 2020.  The report said 81% of legal departments found that general enforcement of billing guidelines, including reductions of invoice fees and expenses, was the most effective way to keep billing down.  Meanwhile, 53% of respondents requested standard discounts; 49% of respondents reduced timekeeper rate increases; and 45% used volume discounts.

At the same time work, the report shows that the average daily demand for law firm services per lawyer, based on billable hours, increased in the second half of the year, picking up in November to almost match the previous two year average.  So what happened to the portrait of the general counsel scrutinizing every line item and grilling firms about rate increase and discounts?

That picture is becoming increasingly faint.  Instead, the portrait emerging from 2020 is one of cooperation and demand.  Clients rushed to law firms for urgent legal advice during the pandemic, including counseling for workplace laws, PPP loans, restructuring and data security concerns.  Secondly, the circumstances from the pandemic gave rise to conversations about pricing, driving both sides of the law firm-client relationship to seek common ground—both in the form of tried-and-true alternative fee arrangements and those that reflect a more innovative approach.

Law firms have some leverage.  Just because a client wants a discount doesn’t mean a firm has to provide it.  “Clients understand the difficulty of onboarding new external counsel,” says McKinsey & Co. senior partner Alex D’Amico.  “There’s a real cost to bringing on a new firm.”

Defense Rates Expected to Rise at Lower Pace in 2021

January 15, 2021

A recent Legal Intelligencer story by Andrew Maloney, “Rate Pressure and Rising Expenses Are Expected to Challenger Firms in 2021,” reports that law firms may have weathered the COVID-19 financial storm last year, but firm leaders and legal observers say economic pressures could bear down again in 2021, including increased expenses, rate pressure and cash-strapped clients.

Big Law likely won’t be able to count on government loans this time , either.  Overall, firms and analysts are optimistic about business this year.  Firms mostly said they expect a return to some version of normalcy by the second or third quarter of the year, according to a report this week from Thomson Reuters and Georgetown Law’s Center on Ethics and the Legal Profession.

At the same time, the pandemic “is likely to continue to pose economic challenges for law firms” this year, the report said, even as vaccines are being distributed en masse.  “First, it is not clear that the same tools used by firms to address the crisis since March will be as readily available in 2021.  Some law firms may well not enter the new year with the same cash cushions they had from 2019,” the report stated.  It notes many firms used the pandemic to increase billing and collections efforts, and as a consequence, may not have as much on-hand heading into this year as usual.

In addition, there’s growing concern about the ability to raise rates this year, while corporate legal departments, with 2021 budget goals, are looking for areas to trim.  ”It may be harder to implement the same level of rate increases at the end of 2020 that firms enjoyed at the end of 2019,” the authors added.

James Jones, a senior fellow at the Georgetown Law Center on Ethics and the Legal Profession and lead author of the report, said he was “dubious” firms could boost rates at the same level they did last year—about 5%.  The average annual rate increase for firms since 2008 has been about 3%, he said.

Jones also pointed to a recent Thomson Reuters survey of more than 200 legal departments that found about 89% said holding down outside counsel costs was one of their highest priorities for 2021.  He noted that corporations have significantly increased personnel whose job is to oversee outside counsel agreements.  According to Reuters’ Legal Department Operations Index, about 57% of companies had people in those roles in 2019. In 2020 that number shot up to 81%.  “So, given the economic uncertainties and enormous pressure that companies are under, I would be surprised if they sit still for a 5% increase,” Jones said in an interview.

Joshua Lorentz, a partner at Dinsmore & Shohl who chairs the firm’s finance committee, said the firm ended 2020 “on a solid note” and expects 2021 to be a “net gain” for business.  But he said one wrinkle to the budgeting process this year is figuring out where to set rates, as clients try to forecast how much COVID-19 will alter their bottom lines again.  “I don’t know that a majority of companies are asking for discounts, but perhaps discounts for new work, COVID discounts. For some clients, we’re willing to lean into that,” Lorentz said.

He said the firm is evaluating which clients needed breaks in 2020 and having discussions about their projections for 2021.  ”And with all that information, we’re able to see who needs us to lean in, who appears to be weathering the COVID situation.  Then we try to budget conservatively on top of that,” he said.  As an example of that conservative budgeting approach, Lorentz said Dinsmore is preparing this year’s numbers as if expenses such as conferences and business travel will still go forward as they would in a pre-pandemic year.

“And if it ends up that things get canceled in February and March and in the summer, then it’s additional profit for the partnership and the attorneys,” he said.  “But if we don’t budget for it, and things suddenly get clear, it’s tough to go find the money.”

Rising Expenses

The Georgetown and Thomson Reuters report noted that “almost all firms” significantly reduced costs by being more efficient about physical office space, staffing, in-person meetings and business travel in 2020, and such drastic changes could amount to a “tipping point” that permanently alters how firms do business.

Lathrop GPM could be one of those firms. Managing partner Cameron Garrison said this week that while he hopes to have a firmwide return to in-person work later this year, “I do expect that our typical work week may look very different once we return to the office.”  He said in an email that’s a result of the firm likely continuing to leverage remote work options for its staff.

At the same time, for many firms, the savings created through remote work and reduced travel are likely a one-time deal.  “I think the challenge that we’re going to have in 2021 is the very sharp expense reductions that we saw when we went into lockdown.  Those expense reductions—they’re not going to repeat, and we’re going to see our expense numbers rising again,” said Michael McKenney, managing director of Citi Private Bank’s Law Firm Group.  “So that margin expansion that we saw is unlikely to repeat.”

However, McKenney said many firms are “very, very strong” in terms of how much cash they have on-hand entering 2021.  He noted rate increases have been “very steady” since the financial crisis of 2008, and there are plenty of signs COVID-19 won’t hamstring the market this year the way it did in 2020.  “The outlook, particularly if vaccine distribution is handled better than it has been initially, is for a fairly vigorous rebound in a level of activity,” McKenney said, noting that some of the most leveraged practices that were hit hard almost a year ago are starting to come back.

“We saw corporate M&A shut down, capital markets activity was reduced, litigation was hampered because it was very hard to take depositions.  Juries were not sitting,” he said.  “Those things have begun to reopen, and people are doing them very successfully virtually.  Corporate M&A is back up, capital markets is back up, so many of our leverageable practices—practices that generate strong hours—are coming back.”  Garrison, the Lathrop firm leader, said the long-term economic and societal effects of COVID-19 are still unknown.  But one area that could pick up as a result of economic pain in the short term is pro bono.

“While not an economic challenge, I also believe that firms will be challenged with increased pro bono requests due to an increase in people facing financial hardship,” he said.  “We are very focused on balancing the pro bono time we can offer to support our communities while increasing the support that we add to our clients.”

Insurers Refuse to Pay $18M in Defense Fees in Experian Class Actions

November 19, 2020

A recent Law 360 story by Joanne Faulkner, “Insurers Deny Liability in Experian’s $18M Legal Fees Suit,” reports that two insurers have told a London judge they are entitled to refuse to pay Experian's $18 million claim for coverage of its U.S. legal fees in a pair of class actions over errant credit reporting because the litigation stems from deliberate data erasure by staff at the company.  Zurich Insurance PLC and a subsidiary of SCOR said Experian's policy excludes "deliberate acts" such as those that allegedly form the basis of two major class action suits in the U.S., a newly public Nov. 13 defense said, after the company sued to claw back litigation fees.

The claims made against Experian — which said it has racked up millions of dollars in liabilities and legal costs defending the suits — were for statutory damages according to the U.S. Fair Credit Reporting Act.  If Experian is liable, it is the result of a "wilful (or reckless) failure on the part of an employee or employees … to comply with the FCRA," the defense said. 

Experian says in its October High Court suit that it paid a class of more than 100,000 payday loan customers $24 million to settle a lawsuit in January brought by lead plaintiff Demeta Reyes.  A $5 million deal was reached with consumers in the so-called Smith action.  The customers said they were harmed by inaccurate reporting of their credit history.  The insurers said that Experian's alleged liability in the Reyes action arises out of the deleting of loan records —  particularly those held by an entity called Delbert Services Corp.  In the Smith action, it is connected to the re-reporting of records relating to loans held by CashCall Inc.  Experian directors were involved in the decision-making in both incidents, the insurers said.

From April 2015 through April 2016, Experian held a complex multitiered insurance "tower" consisting of a primary policy from XL Specialty Insurance Co. and several layers of excess coverage, Experian says.  Zurich and SCOR unit General Security Indemnity Co. of Arizona are each liable for half of a $20 million excess policy, which kicked in once the underlying coverage was depleted, Experian says.  So far the insurers have only paid out a slice of the $20 million excess that Experian says it is entitled to, the company alleges.

Experian is also seeking a declaration from the court that the insurers will cover financial penalties that Experian may have to pay as a result of investigations into a 2015 cyberattack.  The two insurers said that coverage is provided for regulatory fines and penalties, but Experian must prove that any sanction is "lawfully insurable."

Experian says it has run up costs of more than $32 million defending two major related class suits.  Thousands of consumers successfully argued that Experian's failure to delete certain negative information in their consumer credit reports caused them harm.

Experian says it should be able to recover $18 million in legal costs from the insurers under its third-party liability and first-party insurance policies.  The suit also name-checks an action brought by Carolyn Clark alleging the company violated the FCRA, which ended up costing Experian more than $21 million. The company says it could be entitled to an indemnity of $14.3 million from the insurers to cover the costs from that case.

Article: Five Cost-Cutting Strategies for Corporate Legal Departments

October 22, 2020

A recent Law.com article by Nathan Wenzel of SimpleLegal Inc., “5 Cost-Cutting Strategies For Corporate Legal Department,” reports on legal cost measures for corporate legal departments.  This article was posted with permission.  The article reads:

Corporate legal departments have long been focused on reducing legal spending.  The emphasis on cost-cutting has only increased in 2020 as the economic uncertainties of the pandemic have caused companies to scrutinize expenses across the board.

According to a recent report from the Corporate Legal Operations Consortium, 61 cents of every dollar spent on legal costs in 2020 goes to external legal costs — a 15-cent increase from 2018.  This uptick, combined with the year's novel challenges, has many legal departments looking for new ways to control legal expenses beyond reviewing line items, which has proven to be ineffective for many companies.

While there's been a lot of chatter in the industry about the need to switch to fixed fees or alternative fee arrangements to reduce costs, these shifts have been slow to take hold.  They're also difficult to measure if we retain a focus on the billable hour.

When clients ask firms for fixed fees but also request the hours worked so they "know that the fixed fee was the right price," then we haven't really made the change to fixed fees.  It is a difficult transition and one that will take time.  We should always push toward better alignment of price and value, but we need to balance near-term realities with long-term goals.

In the near term, we need to control costs — even if that only means focusing on hourly rates.  In the long term, we need to align the work to the right types of providers at the right price, where price has very little connection to hourly rates.  No one wants to buy time.  We want outcomes, not hours.

To solve for both the short-term and long-term goals, we start with data.  Analyzing and reducing your legal spending start with asking yourself the following questions:

What am I spending now, on what and with which providers?
How does my current spending compare to past spending?
How am I allocating my legal work?
What metrics am I using to measure cost control?
Are there other cost considerations I'm overlooking?

1.  Understand where you are now.

The first step of implementing a change is to understand the current state. Reducing legal spending first requires knowing where you are right now.  This means not only keeping up with the total dollar figure of your spending, but how much you're spending in each practice area and with which law firms or providers.

Don't forget to also investigate the work you currently perform in-house.  With an understanding of outside legal spend and in-house legal work, you will have the current picture of how you allocate the demand for legal services from the business to the supply of legal services you have available.  With this deeper insight, you'll start to see where you can actually have an impact on spending.

Without this data, you risk investing time into an area that looks compelling but won't create real savings.  For example, reducing money spent on compliance may seem like a good idea because the partners at your primary firm have very high billing rates.  But if only 5% of your annual spending goes toward compliance work or if the primary compliance firm effectively leverages associates and paralegals, your efforts won't translate into real savings for the business.

When you track data and analyze legal spending details from your e-billing system, you'll be better equipped to start a real conversation about reductions.  You can identify the practice areas and firms where your efforts will create real returns.

2.  Compare now to where you used to be.

Your business is not static.  It's important to understand where you are today, but it is even more important to understand how things change over time. After you determine where you're spending your money today, you need to compare those numbers to what you were doing last year or the last time you negotiated rates and pricing.

You may have a reliable history of sending work to a single attorney or team at a firm. You may have increased the amount of work sent to a particular firm or in a particular practice area.  If you used to send $2 million worth of business to a firm and now spend $5 million with that firm, that's a powerful position for starting rate and price negotiations.

Additionally, if your team uses multiple firms for similar work, you may benefit from consolidating that work with fewer preferred firms.  Larger companies may go through a formal panel selection process annually or every few years.  A preferred panel is a great tool to provide the best legal services to the business at the best price if you have the team and time to implement this type of program.  But you can still achieve the benefits of allocating work to fewer firms without a full preferred panel program.

You don't always know what the demand for legal services will be from year to year.  But if your data shows that you have a history of allocating work among several firms, ask those firms what they would be willing to do to earn a greater share of that work.

3. Understand how you're allocating work.

After you have an understanding of the dollar value of your legal spending, you need to know how you're allocating different types of work, to whom and why. How you're assigning your legal work certainly depends on finding the provider with the right expertise but should be equally dependent on its business impact and complexity.

Your high-impact, high-complexity work probably belongs with the more expensive firms.  An example of a high-impact matter could be a large litigation that threatens the balance sheet of the company.  Or it might be a patent for the core technology driving your business.  In either case, you might choose to work with the very best money can buy.

Every year the legal press makes a big deal about high billable rates for eye-catching headlines.  But for your highest-impact and highest-complexity work, those firms and lawyers are probably a bargain at twice the price.  You're buying outcomes, not hours.

Too many companies simply send the rest of their work along with their high-impact work without stopping to see if smaller matters would be better handled by a lower-cost provider.  There are a variety of suppliers beyond the Am Law 100, such as specialty firms, alternative legal service providers, nonlegal consultants and your in-house team.

Your low-impact, low-complexity work probably doesn't need to go to the premier firms.  Specialty firms, alternative legal service providers, consultants and solo practitioners may not have massive staff and unlimited support resources, but they can still provide high-quality work at a fraction of the price.

You may also have high-impact but routine work where speed and a deep understanding of business issues are important.  The most common example here is commercial contracts.

For customer contracts, any delay in reviewing costs the company revenue. An extensive back-and-forth over mundane legal minutiae could cause your company to miss a quarter's revenue target.  In-house teams will have a better understanding of business priorities and can better deliver the right kind of legal work with speed at the right price.

When you satisfy your demand with the right mix of supply, the potential for savings is much greater than through rate discounts alone.  Allocating work based on impact and complexity provides far greater cost savings than a 10% rate reduction when the right provider is already half the price.

4. Use the right metrics.

You can't manage what you can't measure.  You get what you incentivize.  These two classic business statements tell us that we need to measure savings with the right metrics.

How are you measuring cost savings today?  Is it through average hourly rates?  Adjustments to bills based on guidelines?  If you measure discounts on rates to determine savings, you're going to focus on high hourly rate firms that discount their hour rates.  But is that really saving your company any money?

Achieving savings by reallocating work rather than by negotiating rate discounts definitely makes sense.  But with the wrong metrics it is harder for the C-suite to understand what you've accomplished.  If you measure and report savings only as the discount on standard rates, the reallocation effort appears to have achieved nothing.  In fact, if the work was moved in-house or to a provider with a lower but not discounted rate, it may appear that you have lost savings because you won't have a discount to report.

In fact, with the wrong metrics, if you were to implement a routing tool for automated nondisclosure agreement review, it might appear to be a driver of cost even if it created hard dollar savings from external counsel and soft dollar savings — i.e., efficiencies — from allowing in-house counsel to spend time on high-impact, high-complexity work.  With the right metrics, you can show the true return on these investments.

To demonstrate the full value of the savings and quality initiatives, you might need to use new metrics.  I am certainly not advocating for cherry-picking data or choosing vanity metrics.  To the contrary, the right metrics will actually make more sense to the business, the CEO and the board.

Legal expense as a percentage of revenue has been promoted in Association of Corporate Counsel benchmarking studies and Altman Weil Inc. surveys. It is well understood and trusted by chief financial officers and CEOs.

Whichever metrics are used to measure legal cost controls, just remember that you get what you incentivize.  If you're going to achieve cost savings, you need to use the right metrics to incentivize your team and showcase results.

5. Monitor compliance with your billing guidelines, consider automation of certain legal tasks and standardize workflows.

The preceding four steps are the critical actions that build on each other to significantly trim legal spending.  It's a journey.  You don't need to take all the steps all at once to achieve results.  Alongside those major considerations, there are a couple other things to keep in mind to run alongside those longer-term initiatives.

The first is billing guidelines.  Your billing guidelines let your firms know what it means to be a good legal partner to your department and a good business partner to your company.

Guidelines often devolve into rules about copy charges and not billing excessively for underqualified people — things your firms probably already do on their own to better serve their clients.  You should always be monitoring compliance with your billing guidelines and enforcing timekeeper rates, but it is important to remember that ensuring that your firms only bill for work in accordance with your guidelines isn't actual savings — it only prevents overcharging.

Another way to reduce legal costs and improve response time is to automate low-complexity, low-impact legal tasks and standardize workflows.  Automation of basic document review by artificially intelligent contract review tools can be a big time and money saver.  As an example, nondisclosure agreements are high-volume but typically low-impact documents that can be reviewed with the help of AI-enabled tools.

In addition to automation, standardized playbooks designed by the legal team to give other departments a checklist of items to review can also help improve turnaround time and reduce costs.  For example, a sourcing manager in a procurement department could be given a checklist of five or six specific business and legal terms to review before sending to the legal team.

Automation and standardization improve speed of delivery and reduce cost of delivery for the business.

The Path to Lower Legal Spending

It's time to shift the perspective on cost reduction beyond hourly rates and copy charges.  As legal departments, you need to look at where you are now, how that compares to the past, how you're allocating your work and whether you're using the right legal spending metrics to achieve real savings.  These steps with effective legal billing guidelines, automation and standardization provide the foundation to match your company's demand for legal services to the right legal service providers to trim your spending while improving delivery.

Nathan Wenzel is co-founder at SimpleLegal Inc.