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Category: Alternative Fees

Report: Sharp Rise in Partner Hourly Rates Last Year

May 22, 2023

A recent Law.com by Maria Dinzeo, “Law Firm Partner Hourly Rates Rose Last Year at Biggest Clip in at Least a Decade,” reports that hourly rates for law firm partners jumped 4.5% in 2022, driven in part by law firms’ fears of profitability losses from inflation and a drop in M&A activity, according to a report from LexisNexis CounselLink.  The report, based on $52 billion in legal spending across 420,000 timekeepers and 1.4 million legal matters, says that annual percentage increase was the largest since CounselLink put out its first report in 2013.

The largest portion of corporate spending went to partners at the 50 largest firms, those with 750 lawyers or more, where the average partner billed at a 46% higher rate than the next tier of firms with 501-750 lawyers.  The 50 largest law firms also saw their market share swell to 47.3%, particularly in regulatory and compliance, mergers and acquisitions and financial matters, where the 50 largest firms consumed 55% of legal billing in 2022.

“There’s all this increased regulatory pressure going on out there.  And who do you want to handle this stuff?  You’re gonna go to the firms that you think had the most insight into this and that’s going to be the big firms,” said report author Kris Satkunas, director of strategic consulting for CounselLink.  She also recently took a preliminary peak at this year’s numbers, and partner rates are on track to rise 5.4%, an even bigger increase than the 2022 record.  Those rates rose 3.4% in 2021 and 3.5% in 2020.

“It’s a very big leap compared to where we have been running for the last 10 years.  But that number will change.  Will it go up or down?  I don’t know,” she said.  “But that’s where things stand today through the first four months of the year.”  Satkunas noted that 25% of partners had increases of over 10% last year.  She said some legal departments also reported seeing double-digit rate increases.  The hikes could be attributed to firms beginning to feel the effects of inflation and less demand for certain types of work.  “I think there’s some fear about being able to hit profitability,” she said.

M&A activity also declined in 2022 after hitting an all-time high in 2020, experts say, when high demand for M&A work, with accompanying litigation, tax, real estate and intellectual property issues, gave firms more work than they could handle.  “M&A was the gift that kept on giving in 2020 and 2021,” said law firm consultant Kent Zimmermann of the Zeughauser Group.  “The massive demand for talent led to a big rate increase and that caused some firms to pull away a lot relative to their peers on profitability and talent advantage.”  Even though M&A work has slowed, Zimmermann said firms are still vying to attract the “best” lawyers as a path toward profitability.

“Even though demand is soft, that rate lever is still important,” he said.  “If there is any recession, it’s looking like it’s going to be short and shallow, so law firms are thinking.  We need to plan two to four years ahead.  We can’t under-do it on the rate increases.  It’s a big driver of our ability to enhance profitability and compete and attract the best lawyers.”

Some firms raised rates twice over the span of 12 months to keep up.  “The internal messaging was we need to pay to be competitive in the market for associates and their pay is going up,” Zimmermann said.  “You need the best and brightest associates and this is what it takes.”

If law firms have only two levers to profitability- raising rates or drumming up more work— raising rates is the easier of the two, Satkunas said.  “Typically, they are more comfortable raising rates.  It’s actually easier to raise rates and go find new customers or find new new work,” she said.  Though alternative-fee arrangements have grown more popular in recent years, this year’s report notes that their adoption remains largely unchanged, and represented 6.3% of total legal billings in 2022, according to the CounselLink report.

“At the end of the day, I believe that most corporate counsel are just more comfortable negotiating an hourly rate discount than being creative.  It’s easier to negotiate a rate than it is to have to think about, what’s the value of this matter, what am I willing to pay for the outcome I want?” Satkunas said.  “I’m disappointed and I really would love to see a real meaningful uptick in the use of AFA’s but it just hasn’t happened.”

ABA Issues New Guidelines on Prepaid Attorney Fees

May 5, 2023

A recent Law 360 by Aaron West, “ABA Stresses Client Protections in New Prepaid Fees Guidance,” reports that a committee of the American Bar Association issued new guidance on the ethical obligations surrounding retainers and prepaid attorney fees, offering guardrails to protect clients from paying non-refundable fees for unearned legal work.  The opinion from the Standing Committee on Ethics and Professional Responsibility spells out how lawyers should handle advance non-contingent fees paid by clients for single-issue matters like divorce, defense of criminal charges and certain civil litigation, among others.

"[ABA Rule 1.15] requires that fees paid in advance must be held in a trust account until the services for which the fees will be paid are actually rendered, thereby allocating various risks to lawyer and client," the opinion says, referring to the flat fee rule at issue in the guidance.

According to the ABA's Formal Opinion 505, the problem it seeks to clarify stems from flat fees being classified as retainers, which are often nonrefundable. Attorneys shouldn't consider retainers as a "payment for the performance of services, but rather is compensation for the lawyer's promise of availability," according to the opinion.

"Given the rarity and unusual nature of a general retainer, and the fact that very few clients would actually need or benefit from one, the nature of the fee and lawyer's obligations and client's benefits under such an agreement must be explained clearly and in detail," the opinion states.  When it comes to handling upfront fees, the committee suggested that attorneys use "plain language."

"Instead of 'retainer' say 'advance' and explain that it is a 'deposit for fees,'" the opinion says.  "Explain that the sum deposited will be applied to the balance owed for work on the matter, and how and when this will happen."  The committee also stressed that "an advance fee paid by a client to a lawyer for legal services to be provided in the future cannot be non-refundable."

"Any unearned portion must be returned to the client," the opinion says. "Labeling a fee paid in advance for work to be done in the future as 'earned upon receipt' or 'nonrefundable' does not make it so."  The ethics committee periodically issues opinions to guide lawyers, courts and the public in interpreting and applying ABA model ethics rules to specific issues of legal practice, client-lawyer relationships and judicial behavior.

Although the ABA Model Rules provide guidance that U.S. legal jurisdictions can adopt, many states have their own rules that aren't necessarily in line with the ABA model.  In the case of ABA Rule 1.15, multiple jurisdictions have rules on the books that don't align with the new guidelines.

For instance, California and Oregon have their own model rules that clarify and outline how flat fees paid in advance of legal services should be deposited or labeled.  The ABA in its opinion acknowledges the jurisdictional discrepancy but also says that the approach "departs from the safekeeping policy of the Model Rules" and "creates unnecessary risks for the client."  While it's important to safeguard client payments from being considered non-refundable when an attorney hasn't yet earned them, too broad of an approach also risks preventing states from creating their own legal regulatory rules.

Can Rates Make Up for Expense Growth Much Longer?

April 18, 2023

A recent the American Lawyer story by Dan Roe, “Can Rates Make Up for Expense Growth Much Longer?,” reports that large law firms became more expensive to operate and less profitable in 2022, despite growing in terms of revenue and head count.  While equity partners took home less money, associate and nonequity partner compensation continued to rise. Rate increases managed to keep gross revenue in the black as demand slid by nearly 2%.  Still, the profit margin for The Am Law 100 fell 2 percentage points to 42%, wiping out the profitability gains of 2021 and putting firms below the average 2020 profit margin of 43%. 

“The margin on the billable dollar is contracting, and that is causing law firms to increase their rates, and that is why GCs are saying, ‘Hey, maybe we bring this work in-house,’” says Aon Law Firm Advisory Team manager George Wolf.

Facing seemingly unavoidable increases in personnel expenses, law firms looked to technology for efficiency and real estate for cost savings in 2022.  But despite realization rates holding strong, some observers believe legal departments are at the end of their rope on rate hikes, prompting Big Law to get smart or shrink in the coming years.

Head-Count Growth, Comp Increases and Tech Investments Drove Expenses Up

Head-count growth accounted for a majority of the expense increases in the Am Law 100 last year.  Across the cohort of firms, head counts grew nearly 4.7%, compared to average expense increases of roughly 7%.  Law firms that saw the most expense growth were mostly firms that hired aggressively: Goodwin Procter posted a 24% increase in head count and a commensurate 22% increase in expenses.  Willkie Farr & Gallagher also saw a 22% increase in expenses with 19.5% more attorneys.

In addition to Goodwin, other tech-centric firms that staffed up to meet demand saw similar expense increases: Cooley was up almost 18% on expenses and 11.5% on lawyer head count, and Morrison & Foerster raised head count 6% with an expense increase of 11.9%.  On average, law firms saw expenses rise 3 percentage points more than head count.

Among the firms where head count increases significantly trailed expense increases, firm leaders most commonly cited increases in attorney compensation—particularly for associates.  “It’s a battle for talent at every level, and the reality is, for us to attract and retain and develop the best talent, we need to stay competitive with our peers in the market,” says Husch Blackwell CEO Paul Eberle, whose firm saw expenses rise 18.4% amid a 6.2% increase in head count.

At Baker & Hostetler, first-year associate compensation went up to $200,000 from $175,000, which partly influenced the firm’s 10% average rate increase in 2022.  Vinson & Elkins saw a similar situation, with expenses up 7.5% and head count down 3.2%; firm chair Keith Fullenweider says associate compensation was among the primary expense drivers.  Nonequity partners also got more expensive last year, with nonequity compensation per partner rising 2.7% in the Am Law 100 last year.

Big Law is also going big on tech, with firm leaders citing technology investments as the third-biggest source of expense increases in 2022 behind head count growth and compensation increases.  “From an expense standpoint, we’re witnessing more of a reallocation of expenses than a raw increase in typical areas of spend,” says Alston & Bird chairman Richard Hays. “It’s less on space but more on technology.”

Law firms in the Am Law 100 are spreading their tech budget across multiple areas, but data analytics, automation and artificial intelligence appear to lead the way.  Several firms including DLA Piper, Eversheds Sutherland, and Orrick, Herrington & Sutcliffe are testing an AI legal assistant called CoCounsel, and firms including DLA Piper and Debevoise & Plimpton are building out data analytics capabilities to improve efficiency and increase AI-oriented service offerings for clients.

Finally, the return of travel and events is also driving expenses up, although firm leaders had seen that coming. “Expenses went down dramatically in the form of events, travel, all those things,” says law firm management consultant Ralph Baxter, formerly the chairman and CEO of Orrick. “Every firm leader should be able to manage expectations.  What we saw in those two previous years is not going to repeat.”

Rates Went Up, but Realization Held

The Am Law 100 raised rates by an average of 7.2% by mid-2022, according to data from Wolters Kluwer ELM Solutions released in February, although the report showed significant variance between firms.  Roughly 40% of timekeepers didn’t raise rates at all through June 2022, but 9% raised rates by 20% or more.  About 15 firms in the Am Law 100 brought rates up 10% to 20%.

“Rates typically go up with the consumer price index, maybe 3% to 5% annually,” says Chris Ryan, executive vice president at HBR Consulting. “Now you’re seeing this much bigger swing and variance, which is probably alarming to legal departments who are asked to do more with diminishing budgets, given the state of uncertainty.”

Data collected by The American Lawyer shows that fewer firms were willing to raise rates by less than 3% this year: Whereas more than 20 firms in 2021 kept rate hikes at or below 3%, only seven firms in 2022 reported sub-3% rate increases.  This year will likely be a repeat of 2022, law firms indicated.

Despite raising rates more dramatically than usual, law firms didn’t report substantial drops in realization last year. Having raised rates 10% in 2022 after rate increases of 5.9% to 7.3% for the three years prior, BakerHostetler chairman and CEO Paul Schmidt says clients understood the situation. “Last year was a fairly strong (rate) increase, but with inflation, there was not much pushback on it,” Schmidt says.

How the Inflationary Cycle Ends

Ultimately, if Am Law 100 firms do nothing as billable hours continue to decline, that will indicate that work is leaving Big Law altogether.  “You don’t measure demand for soybeans by how many hours you spend harvesting soybeans,” says Baxter.  “People need legal services more than ever—there’s more regulation, more law, more controversy.  But if you see fewer billable hours, that means demand is moving away from the Am Law 100 to somewhere else.”

That “somewhere” could be in-house legal departments, alternative legal service providers, or regional law firms with lower rates.  “I’ve talked to a lot of regional firms over the past few years that get hired by a big client who has litigation in a place where (the firm) is centered.  The client hires them because they’re there, but they see how good the lawyers are, how responsive they are, how much less expensive they are, and they take them to other places,” Baxter added.

Speaking with in-house counsel, Wolf says legal departments are incensed by associate rate hikes—see the $1,060/hour second-year Kirkland & Ellis associate bill that recently went viral on legal Twitter.  “The rates that are being charged for younger attorneys are driving in-house counsel to start building staff again,” Wolf says.  “The offshoot of that is that’s where the least amount of work is available in law firms—younger attorneys.  And you need midlevel attorneys to help train them, and right now there’s a dearth of midlevels because of the Great Resignation.  That’s causing a problem for managing partners and law firm leaders.”

Rather than pulling back on rate hikes, law firms are looking to squeeze more value out of their personnel using technology, with the goal of reducing staffing costs for clients and compensation costs for firms.  “You’ve seen this shift toward looking at the profitability of individual practices and using data in a different way so they can position themselves in a better light with clients,” Ryan says.  “I think that firms are looking at those kinds of models and are more open to them than ever.”

Firms like DLA Piper, Orrick, Debevoise, Winston & Strawn, Mayer Brown, and Gibson, Dunn & Crutcher have all made investments in AI practices of late, with promises to deliver more efficiency to clients in addition to using AI to help them solve their legal problems.  “At its core, we think of it as making lawyers more efficient, increasing their quality of lives, increasing the work product if we can, or at a minimum ensuring it’s the same,” Orrick innovation adviser Vedika Mehera told Legaltech News in March.

Law firms’ substantial investments in artificial intelligence and data infrastructure could also have something to do with the existential threat such technologies pose to the billable hour.  “Generative AI is making it possible to do a lot of the work law firms do way faster,” Baxter says.  “If you continue to base how much you charge on how many hours it took you, then you’re going to have a material hit to your revenue—and an unnecessary one.”

However, on an aggregate basis, the Am Law 100 has made little progress on AFA adoption in recent years, with 18% of its 2023 revenue coming from such arrangements.  In high-stakes litigation, some firms have had success keeping clients who might have been priced out of their services by organizing litigation funding.  At Nixon Peabody, where rates went up 5% to 6% last year, chairman and CEO Stephen Zubiago says the firm has involved litigation funding with an increasing number of clients.  Regardless of which levers they choose to pull, firms will have to find ways to outrun expense growth in a climate where clients are holding tighter to their dollars as firms are losing a grip on their own spend.

Client Drops Attorney Fee Dispute Against Law Firm

May 16, 2022

A recent Law 360 story by Caroline Simson, “Taiwanese Co. Says It Won’t Arbitrate Fisch Sigler Fee Dispute” reports that a Taiwanese manufacturer of smartphone camera lenses is pressing a DC federal court to quash arbitration initiated by intellectual property boutique Fisch Sigler LLP seeking millions in additional fees for its work on a "meandering, inconclusive" and expensive patent lawsuit that settled last year.  Largan Precision Co. Ltd. told the court in the lawsuit filed May 10 that it never gave its informed consent to arbitrate the dispute with Fisch Sigler, which is set to be heard by the DC Bar Attorney/Client Arbitration Board, or the ACAB.

The company noted that while the DC Court of Appeals requires any attorney who is a DC Bar member to submit to arbitration before the ACAB if a client chooses that venue to pursue a fee dispute in matters with some connection to DC, there has never been any such rule for clients.  Largan argued that since it intends to challenge the validity of an arbitration agreement that was "quietly added" to its engagement agreement with the firm near the end of their negotiations, that question should be left to the court.

"[G]overning precedent makes plain that only a court, and not an arbitration panel, can decide the threshold issue of whether a valid agreement to arbitrate exists, unless there is clear and unmistakable evidence that the parties agreed to have that question decided by the arbitrators," the company wrote.  "There is nothing here to suggest that the parties ever discussed, let alone agreed to, the ACAB deciding the specific issue of arbitrability."

Largan alleges in the litigation that the firm has already gotten $4.5 million in "fixed fee" payments.  It's now seeking an additional $5.6 million in success fees — despite the fact that Largan agreed to settle the litigation in Texas due to the outcome of parallel litigation in Taiwan that Fisch Sigler had not worked on, according to the brief.  The underlying dispute for which Largan engaged Fisch Sigler involved another Taiwanese company called Ability Opto-Electronics Technology Co. Ltd., which Largan accused of misappropriating its trade secrets in 2013.

While litigation was ongoing in Taiwan, Largan hired Fisch Sigler to file a patent infringement lawsuit in the U.S. against Ability Opto-Electronics Technology and two other entities in Texas.  Largan alleges that while the lawsuit was ongoing, Fisch Sigler charged a fixed fee despite not doing all the work that was supposed to be included under that fee.  That included depositions and a hearing in mid-2020 that Largan says never took place.

Largan won some $50 million in the Taiwanese litigation in early 2021, and it subsequently approached Fisch Sigler about settling the Texas litigation.  The company claims that the litigation had gone poorly, and that there was no reason to continue with it at that point.  It was then that the firm attempted to collect the success fee "based on the resolution of a litigation in Taiwan in which it had no role — and despite achieving nothing resembling success from the meandering, inconclusive, yet very expensive litigation it had pursued for Largan against [Ability Opto-Electronics Technology] and others in Texas and, later, California," according to the suit.

Article: When Are Outside Fee Experts Required to Prove Attorney Fees?

April 21, 2021

A recent Daily Business Review article by Jonathan Mann, "Appellate Brief: When Expert Testimony is Required to Obtain an Award of Attorney Fees," reports on whether a party seeking an award of attorney fees needs an expert witness to testify in support of the reasonableness of fees requested in Florida.  This article was posted with permission.  The article reads:

Whether a party seeking an award of attorney fees needs an expert witness to testify in support of the reasonableness of the fees requested has been the subject of much discussion and many written legal opinions in Florida.  The answer depends on the type of case, against whom fees are being sought, and in what area of the state the case is proceeding.

The general rule is that a party seeking an award of attorney fees from the other party to litigation must introduce the testimony of an expert witness in support of the request.  Family law proceedings under Chapter 61 are a notable exception, as the statute expressly provides that expert testimony of a fee witness is unnecessary to seek an award of attorney’s fees from the other side in proceedings under that chapter.  The general rule requiring expert testimony appears to hold true when seeking fees in the same proceeding pursuant to a charging lien.  See, Roshkind v. Machiela, 45 So.3d 480 (Fla. 4th DCA 2010).  But things are more uncertain when an attorney seeks unpaid attorney fees from the attorney’s own client or former client.

The Fourth DCA held in Valentin Rodriguez v. Altomare, 261 So. 3d 590 (Fla. 4th DCA 2018) that expert fee witness testimony was unnecessary in a separate breach of contract suit by an attorney against his former client.  The attorney sued his former client for unpaid legal fees under a flat fee contract in a criminal case.  Notably, the case involved a flat fee arrangement.  The former client did not dispute the amount of the fee, and had even acknowledged the debt by executing a promissory note for the unpaid balance.

The Fourth DCA recently reaffirmed and clarified its position on the issue of the necessity of expert fee witness testimony in separate breach of contract actions in Ramblewood East Condominium Association v. Kaye Bender Rembaum, 294 So. 3d 923 (Fla. 4th DCA 2020).  Robin Bresky assisted in presenting oral argument for the appellee before the Fourth DCA in the Ramblewood appeal, and the appellee successfully defended the award of attorney fees.  In that case, the Fourth DCA relied upon Rodriguez in affirming an award of attorney fees for a law firm that filed a separate breach of contract action to collect unpaid attorney fees even though the firm did not present expert testimony as to the reasonableness of fees.  The fee agreement at issue in Ramblewood was not a flat fee like the one in Rodriguez.

The Third DCA also recently followed Rodriguez in Law Offices of Granoff & Kessler v. Glass, 305 So. 3d 345 (Fla. 3d DCA 2020). In Granoff, a law firm sued its former client for unpaid attorney fees incurred in a dissolution of marriage proceeding by bringing a separate breach of contract claim against the former client under the attorney-client fee agreement.  The Third DCA held that expert fee witness testimony is not necessary when an attorney files a separate breach of contract suit as long as the attorney testifies regarding the fees and submits the billing invoices into evidence.  The court noted that in such a case, the fees are sought from a former client who agreed to pay them rather than an adverse party who did not.

In so ruling, the Third DCA certified conflict with Snow v. Harlan Bakeries, 932 So. 2d 411 (Fla. 2d DCA 2006) and the case went to the Florida Supreme Court.  The Granoff & Kessler case was fully briefed and awaiting disposition in the Florida Supreme Court until March 26.  However, on that date the Supreme Court entered an order determining that it should decline to exercise jurisdiction.

As a result, the apparent split that currently exists among Florida DCAs on the issue of whether an attorney pursuing fees from a former client in a separate proceeding must introduce the testimony of an expert fee witness remains.  Thus, whether a party seeking attorney fees requires diligent attention to the facts and circumstances of the particular situation.  For now, it appears that expert fee witness testimony is unnecessary to pursue attorney fees in a separate action in the circuit courts within the Third and Fourth Districts, whereas the opposite is true in the Second and Fifth Districts.  The answer is unclear in the First District, but the cautious practitioner would always be wise to introduce such testimony in support of the request for attorney fees to avoid any possibility of a challenge on such grounds on appeal.

Jonathan Mann is a senior associate at Bresky Law.  Prior to joining the firm, Mann worked as a judicial staff attorney to Judge George A. Shahood at Florida’s Fourth District Court of Appeal.  In this role, Mann managed civil and criminal appeals and gained extensive experience in the appellate process and procedural rules.

Polsinelli Sued Over Billing Issues

January 22, 2021

A recent Law 360 story by Craig Clough, “Polsinelli Says Clients’ ‘Slacking Off’ Claims are “Meritless”,” reports that Polsinelli PC urged a Pennsylvania federal judge to toss a lawsuit...

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