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Category: Study / Report

Why Law Firms Struggle with Outside Counsel Guidelines

December 4, 2019

A recent the American Lawyer article by Dan Packel, “Why Firms Struggle With Outside Counsel Guidelines – and Pay the Price,” reports on a new survey that draws a straight line between lower realization rates and law firms’ failure to communicate the substance of outside counsel guidelines to billing attorneys.  The article reads:

Law firms are struggling to comply with clients’ outside counsel guidelines, leading to slower rates of realization and increasing write-offs, according to a recent report from timekeeping technology company Bellefield and the Association of Legal Administrators.  In the groups’ inaugural survey of respondents from nearly 200 law firms, they found that firms’ failure to communicate the substance of these guidelines to the attorneys who actually bill leads to invoices that are rejected or reduced.

“They’ve got to make that business case to attorneys,” said Patricia Nagy, a director at Proxy PR who helped write the report.  “Attorneys are being overwhelmed with new tasks, in terms of compliance and information governance, but this one hits directly and immediately to their pocketbooks if they don’t comply.”

While corporate legal departments have been probing the consequences of these outside counsel guidelines for several years, this is the first effort to gauge their impact on law firms.  The survey received participation from 198 firms, over 20% of which have over 300 attorneys.  Almost 35% had between 51 and 299 attorneys, and nearly 30% had between 10 and 50.

Nagy said that she was surprised to discover that nearly one-quarter of firms surveyed made no effort at all to communicate these guidelines to billing attorneys.  Over 52% of firms share these guidelines with attorneys via email, and 24% simply post them on the firm’s intranet, with the hopes that lawyers look at them.  “We weren’t surprised there were a lot of process failures,” Nagy said.  “What was surprising was the degree of the failures, and that a lot of them were using ‘hope’ strategies.”  Indeed, even among the firms that communicate these guidelines to billing attorneys, 82% do not require acknowledgment of receipt, and attorneys are only monitored to ensure they are following guidelines 55% of the time.

As a consequence, when navigating clients’ e-billing systems, firms are finding that an increasing number of invoices are being rejected, even as firms have managed to keep rates robust.  The ALA and Bellefield survey shows that 70% of firms believe that e-billing has not improved billing and collections, with billing and collection cycles expanding, for the most part by 30 days, according to 41% of respondents, or 60 days, per 29%.

Rejections are also a growing problem. Nearly half the firms surveyed experience 5% to 10% of their e-bills rejected or reduced.  And 15% do not appeal rejections, either because of inadequate staffing or because they treat them as a cost of doing business.  Nagy noted that as clients increasingly use metrics to evaluate outside counsel, firms that make less friction during the invoicing process are more likely to receive repeat business.

Asked how they would like to improve the process, nearly 60% of respondents asked for more visibility into what corporate law departments actually want.  This tracks with a conclusion that these guidelines have actually made it harder for firms to communicate with clients, a sentiment shared with 40% of respondents, compared to 11% who point to improved communications.  And 45% of respondents hoped for a technological solution that would help them make sense of these guidelines.  With different guidelines coming in from each client, automation becomes a particularly challenging task.

NALFA Conducts Hourly Rate Survey of Class Counsel in Dallas

August 26, 2019

NALFA conducts hourly rate surveys for law firms, corporate legal departments, and government agencies.  Our surveys provide the most accurate and current hourly rates within a given geography and practice area.  We can design hourly rate surveys for specific cases.  Our hourly rate surveys assist state and federal courts in awarding attorney fees in large, complex litigation throughout the U.S. 

NALFA recently conducted an hourly rate survey of plaintiffs’ counsel in the Dallas-Fort Worth area.  This hourly rate survey was conduct for a Dallas area law firm seeking attorney fees in a product liability class action.  The last hourly rate survey of this type was conducted by the Dallas Bar Association in 2015.

This survey was conducted via email from May 5th-19th.  The survey results are private.  Only the client, survey participants, and members of the NALFA network received the results and findings.  The survey results show the current average hourly rate range for plaintiffs’ associate, senior associate, partner, and senior partner in class action litigation in the Dallas-Fort Worth area.  Participants of this survey can see how their hourly rates compare to those of their litigation peers.

For more on NALFA’s Custom Hourly Rate Surveys, visit http://www.thenalfa.org/hourly-rate-surveys/.

$75M Fee Award Draws Judicial Scrutiny in State Street Case

July 4, 2019

A recent Law 360 story by Aaron Leibowitz, “$75M Fee Award in State Street Row Faces Judge’s Scrutiny,” reports that a Boston federal judge heard arguments on whether to reduce a $75 million attorney fee award for three firms that brokered a $300 million class action settlement with State Street Corp., saying the firms may have misled him about how fees are typically calculated in massive deals like this one.

In the first of up to three days of hearings, lawyers representing Labaton Sucharow LLP, Thornton Law Firm and Lieff Cabraser Heimann & Bernstein LLP said the 25% cut of the settlement that they received was reasonable under the circumstances, even in a so-called "megafund" settlement worth hundreds of millions of dollars   Some experts have suggested attorneys should receive a relatively smaller percentage of the total award when a settlement is that large.  Richard Heimann, an in-house attorney representing Lieff Cabraser, said the firms made note of those expert opinions when they first filed their fee request in 2016, and never had any intention of leading the judge astray.

"We discussed all this in the briefs," Heimann told U.S. District Judge Mark L. Wolf. "We were hardly hiding from your honor."  But Judge Wolf wondered why the firms had failed to mention in those briefs that a study they cited found that, in settlements ranging from $250 million to $500 million, the average fee award was 17.8%, well below the 25% they requested after their $300 million settlement.  The judge said he "basically trusted" the firms' own calculations at the time, suggesting it would have been difficult to reject their proposal given that multiple regulatory agencies had already reviewed it.

But a lot has changed since then, the judge noted. He has since vacated his original attorney fee award in the wake of a Boston Globe report that raised questions about the double-billing of attorneys' hours and a special master's investigation that found additional billing issues.

"I know much more than I knew in 2016," the judge said.  The special master, retired U.S. District Judge Gerald Rosen, held in his report that the 25% figure the firms used for attorney fees was proper, a point that his attorney emphasized again in court.  But Judge Rosen has maintained that Judge Wolf should lower the fee award by as much as to $10.6 million, including more than $4 million for hours that were allegedly double-billed and $2.3 million for so-called contract attorneys at Thornton who were paid a higher rate than he said they should have earned.

As the hearing wore into the late afternoon, attorneys for the three firms described their billing practices in detail and grappled with the varying definitions of contract attorneys versus staff attorneys.  Judge Rosen has suggested only that the billing for contract attorneys was improper, but the arguments also addressed rates charged for some staff attorneys who pored over documents in the case.

Joan Lukey of Choate Hall & Stewart LLP, representing Labaton, said the firm defines staff attorneys as those who are not on track to become partners but receive full benefits and do in-depth document work. In the State Street case, some received more than $400 an hour, she said.  "It troubles me when I hear suggestions that they should be treated as something other than what they are, which is very skilled and talented attorneys," Lukey said.

Frank Bednarz, a representative of the Hamilton Lincoln Law Institute — a nonprofit firm that has provided amicus guidance to Judge Wolf in the case — countered that those rates were far higher than what staff attorneys should be charged.  A more appropriate figure, he said, would be around $200 an hour.

A representative for Labaton told Law360 after the hearing that the firm hopes Judge Wolf ultimately accepts the special master's recommendations.  "Counsel for Special Master Rosen highlighted some of the factors supporting the reasonableness of the court’s original award of a 25% fee to class counsel," the firm said.  "That included the special master’s view that the underlying State Street action hinged on a complex and challenging case, with novel legal issues, at substantial risk of success, and the excellent work done by counsel in obtaining a record recovery for the class — against a highly formidable adversary."

Representatives for other parties in the case did not immediately return requests for comment after the hearing.  The underlying suit, filed in 2011, alleged that State Street swindled millions of dollars a year from its clients on their indirect foreign exchange trades over the course of a decade.

The hearing will continue with witness testimony on some of the key issues that Judge Rosen flagged in his report, including allegedly false representations made to the court by Thornton's Garrett Bradley, a former Massachusetts state representative.  Judge Rosen's attorney, William Sinnott of Barrett & Singal PC, said that there was "no legitimate basis" for Bradley to sign the fee declaration he submitted in the case, in part because the firm did not have any hourly clients.  "It was just so outrageously inaccurate," Sinnott said.

The case is Arkansas Teacher Retirement System v. State Street Corp. et al., case number 1:11-cv-10230, in the U.S. District Court for the District of Massachusetts.

Hourly Billing Still King in Corporate Legal Departments

June 25, 2019

A recent Law 360 story by Kevin Penton, “Hourly Billing Still King Among In-House Departments,” reports that hourly rates are by far the most common type of fee structure used by corporate legal departments when employing law firms, according to a benchmark report released by the Association of Corporate Counsel and legal search firm Major Lindsey & Africa.  Just over two-thirds of the legal departments surveyed hire law firms using either standard hourly rates or discounted hourly rates, followed by nearly 45% that use flat fees and 31% that cap the fees, according to the Global Legal Department Benchmarking Report.

Yet while the traditional hourly rate continues to reign supreme, legal departments at companies are also increasingly varying the fee structures they use, implementing structures such as contingency fees, performance-based holdbacks and incentive or success fees, said Lee Udelsman, a partner in Major Lindsey & Africa’s in-house practice group, to Law360.  “Companies should get a lot of kudos for being creative in this area,” Udelsman said.

Legal departments sought to hire law firms most frequently for matters involving commercial law, with contracts, data privacy, commercial litigation, trademarks, and mergers and acquisitions also leading the departments to seek assistance more relatively frequently, according to the report prepared by Major Lindsey & Africa and the ACC — a global legal organization that represents more than 45,000 in-house counsel.

The report also analyzed what members of legal departments consider important and whether they think their own sectors are meeting those standards.  On a scale of 1 to 5, with 5 being the most important and satisfied, the report found that legal department initiatives and activities being aligned with the strategic priorities of clients was most important, at 4.6, followed by legal departments clearly demonstrating their value to company leaders and others, at 4.4.

Yet those who took the survey found their departments lacking for both performance attributes, as the report refers to them.  Aligning department initiatives with client priorities netted a score of 4.0, while demonstrating the departments' values to key stakeholders returned a score of 3.8, according to the report.  “Respondents realize that there’s opportunity for improvement," said Greg Richter, partner and vice president of retained search and advisory services at Major Lindsey & Africa, to Law360.

On average, lawyers comprise 68.2% of the staffs of legal departments, followed by 12% for paralegals and case managers, 8.2% for secretaries and administrative staff, and 6.8% for various nonlegal professionals, according to the report.  Legal departments went over budget in 2018, setting aside an average of $12.4 million while actually spending nearly $16.7 million, according to the report.  The average cost per hour for attorneys was $114 and for nonlawyers was $63, according to the report's findings.

"The ability to compare your law department to more than 500 others in such detail is incredibly significant for performance-focused general counsel worldwide," said Richter in a statement.  Officials at ACC and Major Lindsey & Africa both expressed surprise at the relatively-low rates of technology adoption at legal departments, with only 43.9 percent using eSignature, 27.2 percent using eBilling, and less than 42 percent using technology management for contracts or documents.

Article: Court Reduces Class Action Fee Award After Reversionary Clause

April 29, 2019

A recent New York Law Journal article by Thomas E.L. Dewey of Dewey Pegno & Kramarsky, “District Court Reduces Class Counsel’s Attorney Fee Award in Light of Reversionary Clause,” reports on a case, Grice v. Pepsi Beverages Co., where a district court reduced an attorney fee award in a class action by more than one-third based primarily on the reversionary clause in the settlement agreement.  This article was posted with permission.  The article reads:

When parties to a class action reach a settlement agreement and include a clause that defendant will not oppose class counsel’s attorney fee award, they may expect that the unopposed fee will be approved by the court.  But a recent decision from the Southern District of New York reminds us that courts have an interest in ensuring the reasonableness of attorney fees and protecting the members of the class. Courts are particularly wary of reversionary clauses, which allow the defendant to recoup portions of the settlement fund not claimed during a claims process.

In Grice v. Pepsi Beverages Co., No. 17-CV-8853 (JPO), 2019 WL 340714 (S.D.N.Y. Jan. 28, 2019), after reaching a class action settlement, class counsel sought approval of their attorney fees.  The court reduced the attorney fee award by more than one-third based primarily on the reversionary clause in the settlement agreement.

Background

In Grice, plaintiffs brought a class action against defendant Pepsi Beverages Company (Pepsi) based on Pepsi’s alleged violations of the Fair Credit Reporting Act (FCRA). Id. at *1  Plaintiffs alleged that Pepsi had violated the FCRA by procuring plaintiffs’ consumer reports for employment purposes without making the required disclosure in a stand-alone document. Id.  Less than eight months after the case was filed and before any significant discovery or motion practice, the parties engaged in a private mediation and settled the case. Id.

Under the proposed settlement, Pepsi agreed to pay approximately $1.2 million to a common fund, which would cover all payments owed under the settlement, including class member payouts, attorney fees and costs, the cost of settlement administration, and a service fee to the named class plaintiff. Id.  After deducting all costs and fees, the remaining amount in the settlement fund was $710,850, which was to be distributed to the class members submitting valid claims forms. Id.  However, only about 8 percent of the class members submitted valid claims forms. Id.  This low participation rate triggered a reversionary clause under the settlement agreement that allowed Pepsi to claw back 40 percent of the settlement fund, meaning that only $426,510 remained to be distributed among the participating class members. Id.

Class counsel then moved for an attorney fee award of $397,387. Id.  The $397,387 attorney fee figure represented one-third of the initial $1.2 million common fund. Id.  In support of their application, class counsel stated that they had worked over 450 hours at hourly rates ranging from $500-875 per hour, which resulted in a lodestar figure of $331,281. Id.

Per the terms of the settlement agreement, Pepsi agreed not to oppose the attorney fee award and no class member objected to the motion. Id.

District Court Reduces Attorney Fee Award

Even without a motion opposing class counsel’s proposed attorney fee award, Judge J. Paul Oetken performed an in-depth analysis of the reasonableness of the requested fees, and ultimately ruled that a lower amount was appropriate.

In determining the reasonableness of class counsel’s attorney fees, the court followed the three-step analysis set forth in Goldberger v. Integrated Res., 209 F.3d 43, 47 (2d Cir. 2000). Id. at *2.  The first step in the Goldberger analysis is to compare the attorney fee sought to fees in other common fund settlements of similar size and complexity. Id.  The court noted that recent studies of attorney fees in common fund settlements for similarly sized cases found the median percentage to be 26.4 percent to 30 percent of the settlement fund. Id.  The court also cited empirical evidence showing that for FCRA cases, the median fee is approximately 29 percent. Id.  In distinguishing the cases offered by class counsel, the court reasoned that those cases “differ[] materially” while the empirical studies offered a more comprehensive view. Id. at *3.

The court determined that the Grice class action was “not very complex” since it involved a “single claim” and a “single statutory provision.” Id.  Therefore, the “magnitude and complexity” of the case favored a baseline fee percentage on the lower end of the median fees found by empirical studies. Id. (citing McGreevy v. Life Alert Emergency Response, 258 F. Supp. 3d 380, 386 (S.D.N.Y. 2017)).  Furthermore, the court noted that the parties settled early in the litigation, without any extensive discovery. Id.  The court rejected class counsel’s arguments that the need to prove willfulness under the FCRA statute and the inherently complex nature of Rule 23 class actions justified a higher baseline fee percentage. Id.  As such, the court concluded that a reasonable baseline fee for this case was 27 percent. Id.

The second step in the Goldberger analysis is to consider (1) the risk of the litigation; (2) the quality of class counsel’s representation; and (3) any remaining public policy considerations to determine whether there is any basis to further adjust the baseline fee. Id.  With respect to the riskiness of litigation, the court determined that though class counsel would have had to prove willfulness in order to recover any statutory damages under the FCRA, the risks were “not so unusual as to merit a change in the reasonable baseline fee for this case.” Id. at *4 (quoting McGreevy, 258 F. Supp. 3d at 387).

Next, to analyze the quality of class counsel’s representation, the court compared the total possible recovery to that obtained in the settlement. Id.  The court noted that each class member had obtained a recovery of $51.54, which was only 5 percent of their maximum potential recovery, since the FCRA statutory damages range from $100 to $1,000. Id. (citing 15 U.S.C. §1681n(a)(1)(A)).  However, this payout was “generally in line with other FCRA class action settlement recoveries” and in light of the “factual and legal hurdles” the class would have had to overcome to obtain a favorable judgment, the court determined that the settlement was a “good result” for the class members. Id.  Despite finding that the settlement was favorable, the court ruled that it was “not so exceptional as to merit an increase in the baseline percentage, especially where the court does not have the benefits of an adversarial examination of the issues.” Id.

Finally, the court considered any other policy considerations to determine whether to adjust the baseline fee.  Significantly, the court found that the public policy consideration that “distinguish[ed] this case from other common fund cases is the reversionary nature of the settlement fund.” Id. at *5.  The court explained that the reversion clause in the settlement agreement, which allowed Pepsi to claw back 40 percent of the settlement fund since the participation rate was less than 60 percent, was the “least favored” way to distribute unclaimed common settlement funds due to its potential to create perverse incentives. Id.  The court pointed out that if class counsel’s fees were calculated based on the gross settlement amount prior to reversion, class counsel risk having an incentive to acquiesce in such reversion arrangements even if they are not in the best interest of the class. Id.  Here, the fee award requested by class counsel was calculated as one-third of the gross settlement prior to the reversion. Id.  As such, the court determined that a further reduction of the baseline percentage from 27 percent to 22 percent was appropriate, resulting in an attorney fee award of $262,300. Id.

The third step involved a lodestar “cross-check” on the reasonableness of the award. Id.  A reasonable fee under lodestar is generally “the product of a reasonable hourly rate and the reasonable number of hours required by the case.” Id. (quoting Millea v. Metro-North R.R. Co., 658 F.3d 154, 166 (2d Cir. 2011)).  Notwithstanding class counsel’s hourly rates of $500 and $875 in other states, the court determined that the “prevailing market rates in the Southern District of New York” for partners in consumer cases is $300 per hour. Id. at *5-6.  The court accepted class counsel’s representation that they had worked 450.4 hours on the case, despite their failure to “substantiate their representation.” Id. at *6.  Based on the lodestar cross-check, the court concluded that the $262,300 fee award was reasonable. Id.

Practice Tips

The Grice case provides helpful insight into the factors courts consider when faced with a class action attorney fee award motion.  Furthermore, this case reminds us that even if the class action settlement agreement includes a clause that defendant will not oppose class counsel’s attorney fee award and even if no other class member objects, the award may still be modified sua sponte by the court.  In class actions, courts typically take on a proactive role in approving settlements and awarding costs.  Here, the court reduced the proposed attorney fee award by more than one-third.

This case also shows that courts disfavor reversionary clauses and practitioners should be mindful that including such clauses may result in a lower attorney fee award.  As explained by Judge Oetken, there are other options to address a situation when some portion of a common fund goes unclaimed: (1) pro rata redistribution among the class members who did make claims; (2) escheat to the state; or (3) cy pres distribution to charitable organizations. Id. at *5.  The court described reversion as the “least favored” option due to “its potential to create perverse incentives.” Id.  In drafting settlement agreements, practitioners should consider whether including a reversion clause is in the best interests of the class and how such clauses may be perceived by courts.

Thomas E.L. Dewey is a partner at Dewey Pegno & Kramarsky.  Sarah A. Sheridan, an associate at the firm, assisted in the preparation of the article.