A recent Law.com article, “’Exploring the American Rule on Attorney Fees”, reports on the American Rule doctrine and the limits of the offer of judgment rule in New Jersey.  The article reads:

In the recent J.P. Electric, Inc. v. LPMG Construction Management, LLC case, approved for publication on Nov. 2, a trial judge granted defendant’s motion for involuntary dismissal at the conclusion of plaintiff’s proofs.  Prior to trial, defendant had made an offer for judgment to be taken against it under the offer of judgment rule, R.4:58.  After dismissal of plaintiff’s case, defendant filed a motion to have plaintiff pay its fees and costs.  The trial judge denied the motion, holding that where a plaintiff’s claim is dismissed, without plaintiff having secured a favorable verdict and money judgment, as required by the rule, defendant had no right to collect its fees from the plaintiff. Defendant appealed the court’s denial of its fee application.

The Appellate Division opinion, affirming the trial judge, held that for a defendant who has invoked R.4:58 by offering to have judgment taken, it would be necessary for plaintiff to have recovered a money judgment to compare the amount of the judgment with the monetary offer made by defendant.  That comparison requirement is specifically set forth in R.4:58-2 and R.4:58-3 but, of course, there was no money judgment because of the dismissal as a matter of law.

The Appellate Division’s two-page opinion affirming the trial court contained emphatic language: “Lest there be any doubt, a mid-trial involuntary dismissal does not entitle a defendant offeror to fee-shifting under the Rule.”  No doubt the reason for a two-page opinion to be published.  A forceful reminder to trial courts and trial bar of the specific limitations of the offer of judgment rule.

The appellate court held that the policy reasons inherent in the rule’s language would be undermined if such fee shifting were permitted, because the rule is not one designed to transform an offer of judgment into a general fee-shifting rule.  Further, R.4:58-3(c) also provides that no allowances shall be granted if a plaintiff’s claim is dismissed or if a no-cause verdict is returned.

Of course the Supreme Court by rule or the Legislature by statute could provide that in an offer-of-judgment context, dismissal of plaintiff’s case after an offer of judgment is made might also allow defendant to recover fees and costs on post-trial application to the trial judge by creating a new exception to the American Rule of fee payment.

Under the American Rule, the prevailing party is ordinarily not entitled to collect fees from the adversary.  This is based upon the policy that, “Sound judicial administration will be best advanced if litigant’s bear their own counsel fees.” See, Guarantee Insurance Co. v. Saltman, 217 N.J. Super. 604, 609-610 (App. Div. 1987), which furnishes a concise history of the rule and its application.  There are some exceptions to the ordinary application of the American Rule, as when it is permitted by court rule or statute; or pursuant to the terms of a contract; or when counsel fees are a traditional element of damages in the action; or where an insured has incurred counsel fees in defending an action under a disclaimed liability or indemnity policy.

The first reported case in which counsel for plaintiff made application for fees from the insurer after plaintiff’s success in requiring the insurer to defend and indemnify a workers’ compensation claim against its insured because of convoluted policy language was Gerhardt v. Continental Ins. Co., 48 N.J. 291 (1966).

In Gerhardt, Justice Jacobs, writing for a unanimous court, rejected arguments that Ms. Gerhardt should qualify for reimbursement of her fees in the successful coverage action under the inherent equitable power of the court and by analogy to fee payments where a coverage claim on a liability policy had been successful.  Justice Jacobs pointed out that exceptions to the American Rule, that each party bear its own fees, generally rests on statutory provisions which have no counterpart in New Jersey law.  He wrote that when the New Jersey rules were originally adopted, they embraced the view that sound judicial administration would be best advanced by having each litigant bear counsel fees incurred, except in a few specially designated instances.

The American Rule and its exceptions have been argued to the court over the years.  The argument for awarding fees to a successful plaintiff is based on equitable considerations, i.e., to give the successful party full benefit of the sums to which it was found entitled. Sears Mortgage Corp. v. Rase, 134 N.J. 326, 3540356 (1993); Shore Orthopedic Group v. Equitable Life Assur. Soc., 199 N.J. 310 (2009); In re Estate of Vayda, 184 N.J. 115 (2005).  “The American Rule prohibits recovery of counsel fees by the prevailing party against the losing party … The purposes behind the American Rule are threefold: (1) unrestricted access to the courts for all persons; (2) ensuring equity by not penalizing persons for exercising their right to litigate a dispute, even if they lose; and (3) administrative convenience.” Occhifinto v. Olivo Constr. Co., 221 N.J. 443, 449 (2015).

On through the years and to present, the courts as indicated have expressed their support of the American Rule.  If there are proceedings in J.P. Electric seeking relief from the Supreme Court, chances for success are indeed bleak based on the judicial history of New Jersey.

A recent Law 360 article by Hilary Gerzhoy and Julienne Pasichow, “Avoiding The Ethical Pitfalls of Crowdfunded Legal Fees”, reports on the ethics of crowdfunding for legal fees.  This article was posted with permission.  The article reads:

Within two days of being charged with manslaughter in the death of Jordan Neely, Daniel Penny had crowdfunded over $1.5 million to cover his legal fees.  Penny was charged with killing Neely, a Michael Jackson impersonator, on a New York City subway after placing him a fatal chokehold.  The case was widely covered and highly politicized.

Democrats, including Rep. Alexandria Ocasio-Cortez, D-N.Y., and New York Gov. Kathy Hochul, called for charges against Penny and justice for Neely's family.  Republicans, including Florida Gov. Ron DeSantis, Rep. Marjorie Taylor Greene, R-Ga., and Rep. Matt Gaetz, R-Fla., voiced their support for Penny.

Crowdfunding legal services is a relatively new phenomenon.  It's most often used to fund litigation involving individuals — as opposed to corporate entities — that implicates human rights issues, the environment and judicial review.

In one widely publicized case, two Yemeni refugees with valid immigrant visas were intercepted at Dulles International Airport, handcuffed and sent out of the country — the result of former President Donald Trump's temporary seven-country travel ban, which had been signed just a few hours earlier while the brothers were en route.  The crowdfunding campaign raised $36,600 in its first week.

While crowdfunding legal services provides a way for many to access lawyers when representation would otherwise be unaffordable, it also comes with a bevy of ethics risks.  This article will examine the key ethical rules governing crowd-sourced legal funds and the steps lawyers can take to mitigate their risk.

The Daniel Penny Case

In May, the Manhattan District Attorney's office charged Penny, a 24-year-old U.S. Marines veteran, with second-degree manslaughter after he killed Neely on a New York City subway earlier that month.  For more than three minutes, Penny placed Neely in a fatal chokehold leading to his death.  Penny claimed self-defense, stating that Neely was threatening passengers on the train.  It was later learned that Neely had been suffering from a mental health crisis and was experiencing homelessness at the time he was killed.  Penny was released on $100,000 bond.  On June 28, he appeared in court in Manhattan to plead not guilty.

The law firm representing Penny — Raiser & Kenniff PC — arranged for a fundraiser on the Christian crowdfunding site GiveSendGo to cover Penny's legal fees.  As of Sept. 29, the fundraiser has collected nearly $3 million.  How can Penny's legal team use those crowd-sourced funds? What restrictions are imposed by the ethics rules?

This article will examine the critical steps to ensure compliance with the American Bar Association's Model Rules of Professional Conduct, which are largely adopted in most jurisdictions.

Confidentiality Runs to the Client, Not the Funders

Perhaps the most fundamental feature of the lawyer-client relationship is the protection of client confidences.  Model Rule of Professional Conduct 1.6 prohibits a lawyer from revealing "information relating to the representation of a client unless the client gives informed consent, the disclosure is impliedly authorized in order to carry out the representation or the disclosure is permitted [under certain enumerated circumstances]."

A lawyer must make reasonable efforts to prevent inadvertent or unauthorized access to the information, a standard that is highly fact-dependent and considers the sensitivity of the information and the extent to which additional safeguards would enhance security versus hinder the representation.  Lawyers who organize fundraisers, manage crowdfunded donations and apply them toward legal fees must ensure that they neither represent nor imply that they will provide information about the representation to donors in exchange for donations.

It is best to obtain informed consent for any information that will be disclosed to donors and to steer clear of "providing specific information about how the funds will be used to effectuate the legal strategy," as articulated by the D.C. Bar in a 2018 ethics opinion.  To avoid any ambiguity, lawyers should note in the narrative section of the fundraiser that they will not provide any information about the objectives of the representation, actions taken, specific uses of the funds or developments in the case.

When donors fund a lawyer's representation of a client through crowd-sourcing, they must do so with the understanding that they will receive no information about the representation.  We recommend including the proposed narrative language for the fundraiser in the engagement letter signed by the client, which should also describe the fundraising arrangement and the fact that the collected funds will be applied to legal fees and expenses as they are earned or incurred.

There may be instances in which a client wants a lawyer to provide case updates to donors or specific individuals.  To do so, the lawyer must obtain informed consent from the client.  This requires that the lawyer explain the risks of disclosure to the client and have the client approve of the exact information to be disclosed.

Most importantly, the client must understand that disclosing privileged and confidential information about the representation to third parties will destroy the attorney-client privilege and prevent the lawyer from later claiming privilege over the disclosed information.  The same warning should also be given to a client who is managing the fundraiser themselves and wishes to disclose case information or updates to donors.

Crowd-sourced Funds Cannot Interfere with a Lawyer's Professional Independence

Before accepting crowd-sourced funds as payment for legal services, a lawyer must obtain informed consent from the client.  This is true regardless of whether the lawyer is self-administering the funds as they are earned or whether the client is paying the lawyer's invoices using crowd-sourced funds.  Lawyers should consider including relevant language providing for this arrangement in their engagement letter with the client.  Under the Model Rules, even if such an arrangement is in place, a lawyer may not, under any circumstances, allow the person or persons paying the lawyer's fees to "direct or regulate the lawyer's professional judgment in rendering such legal services."

While donors' generosity often enables a client to pursue legal claims or defenses where it would otherwise be financially impossible, donors cannot control how the fundraised money is used within the representation.  Only the client determines the objectives of the representation and whether to follow the lawyer's recommended strategy.

Ensuring that the narrative statement on the fundraising website contains language informing donors that they will not be permitted to exert control or influence over the objectives of the representation or the methods by which they are carried out — in addition to not being entitled to case information — may prove helpful in warding off donors who believe that their dollars earn them a say in the representation.  There may be situations in which the donors' interests differ from those of the client — for example, where donors may wish to minimize the amount spent on the representation to get more for less or avoid taking steps in the representation that may be costly.

In circumstances where the lawyer is aware of divergent interests between the donors and the client, the lawyer cannot accept the representation or continue the crowdfunded payment arrangement unless the lawyer is certain that they can exercise independent judgment and will not allow the donors to interfere with their professional decision making.

Be Circumspect About Trial Publicity

Crowdfunded cases are often those that are highly publicized, political and involve public figures. They tend to come with an increased public desire for publicity and insider information.  Many of these cases go to trial, which further extends the period in which the public remains interested and heightens public intrigue.

Model Rule 3.6 governs trial publicity and warns lawyers against making statements that are likely to prejudice the proceedings in any way.  This is all the more true in highly publicized cases, where a lawyer's statements about a case are likely to be widely disseminated.  While media attention on a case does not change lawyers' confidentiality obligations under Model Rule 1.6, Model Rule 3.6 provides that lawyers can provide concrete facts about the case if they are unlikely to cause prejudice.

Lawyers can reveal basic information about the claim at issue, people involved, public records, the existence of a pending investigation, the scheduling or results of litigation, and requests for help in obtaining evidence, and they can offer warnings of danger to an individual or to the public.  In criminal cases, lawyers can provide additional information to the public, including, among other things, information about the residence and occupation of the accused, and the location, time and place of the arrest.

Where a client has suffered prejudice due to recent bad publicity, the lawyer can make statements to mitigate that prejudice.  A lawyer should not speak publicly about a case, however, without the consent of their client after the client weighs the risks and benefits of such disclosures.

Treat Cowdfunded Legal Fees as Advanced Fees, Safeguarding Them in a Trust Account

The two most prominent ethics opinions to address crowdfunded legal fees, a 2015 Philadelphia Bar opinion and a 2018 D.C. Bar opinion, emphasize the importance of safeguarding crowdfunded fees in a trust account and not moving them over to an operating account until they are earned.

As the D.C. Bar opinion notes, because crowdfunding can "trigger areas of confusion that may not be present in a traditional client-self pay situation," lawyers should establish, in a written fee agreement, the rate of their fees, the scope of the representation and specific plans for crowdfunded money, such as the ownership of excess crowdfunds and responsibility for payment if the crowdfunds do not fully cover legal fees and expenses.

Critically, funds collected by a lawyer on a client's behalf through crowdfunding should be treated as advanced fees and placed in a trust account for the client.  In the crowdfunded legal fees context, lawyers need to be especially cognizant of their duty not to charge excessive fees under Rule 1.5.  For example, if a matter resolves quickly, a lawyer would be hard-pressed to claim all of the proceeds of the fundraiser as fees.

Conclusion

The crowdfunding of legal fees represents an exciting opportunity to provide access to legal services to those for whom it might be otherwise unattainable.  With a principled approach — paying special attention to your obligations to maintain confidentiality and your professional independence, and safeguarding funds in a trust account — you can protect yourself from ethics mishaps while serving a wider array of clients.

Hilary Gerzhoy is a partner and vice chair of the legal ethics and malpractice group at HWG LLP.  Julienne Pasichow is an associate at the firm.

A recent Law 360 article by Lourdes Fuentes, “Twitter Legal Fees Suit Offers Crash Course in Billing Ethics”, reports on ethical lessons from the recent Twitter fee dispute litigation case.  This article was posted with permission.  The article reads:

Corp.'s case against law firm Wachtell Lipton Rosen & Katz, filed over Twitter's legal bill in connection with Elon Musk's $44 billion acquisition of the company, highlights the importance of following proper billing practices, which are governed not only by contract law but also by the higher standards imposed on lawyers by the rules of professional conduct.  The claims in X Corp. v. Wachtell Lipton Rosen & Katz, filed in early July in California's San Francisco County Superior Court, include restitution (unjust enrichment), breach of fiduciary duty, aiding and abetting breach of fiduciary duty, and violation of California Business and Professions Code, Section 17200.

The pleading contains a litany of facts but recounts a concise timeline. From when Wachtell was retained on June 21, 2022, to the Oct. 13 party held to celebrate the month-end closing of the deal at the original $44 billion price, only 114 days had elapsed.  In that time, Twitter received two invoices.  These invoices were included as exhibits to the complaint.  A review of the invoices reveals blank time entries, vague descriptions, irrelevant references and block billing, among other issues.  The invoices amount to close to $18 million.

To compound these perceived improprieties, the final fee statement then added an extra $72 million dollars to that tab.  This was a "success fee" that was referenced in the closing day letter agreement drafted by Wachtell and signed by Twitter's then-chief legal officer, Vijaya Gadde, allegedly hours before the closing sale of Twitter on Oct. 27.  Significantly, the success fee had not been outlined in the engagement letter.

While the validity of the claims will be decided in court, the suit spotlights vital legal billing practices and ethical considerations for attorneys and clients alike.  Even if Wachtell defeats X, the suit has put the reputation of the firm's billing practices at risk.  Moreover, the suit has put the reputation and ethics of individual attorneys at risk by disclosing the invoices at issue, tying timekeeper names to time entries.

Further, the answer to whether the $90 million is fair pay or windfall may not be based on the amount itself, but on whether the parties followed the rules of professional conduct governing attorney-client relationships.  By reexamining billing approaches in light of the Twitter fees case, law firms and clients can take away important lessons on proper billing practices.

The Relevant Rules

Client and lawyer can maintain a positive partnership that is founded on transparency and trust by following an ethical road map.

The claims in the complaint provide us with a good starting point.  They are based on common law tort, contract law and the American Bar Association's Model Rules of Professional Conduct, which have been similarly adopted to varying degrees in other states' jurisdictions.  These are:

    Section 6147 of the California Business and Professions Code, which addresses contingency fees;

    Rule 1.5 of both the California and New York Rules of Professional Conduct, which prohibit unreasonable or unconscionable fees;[6] and

    Rule 1.8 of both the California and New York Rules of Professional Conduct, which prohibit soliciting gifts from clients.

By keeping these rules — or their equivalent from your jurisdiction — top of mind, practitioners can avoid the appearance of impropriety. Though not mentioned in the complaint, I would also add ABA Rule 1.4, which deals with attorney-client communications, to this list.

8 Crucial Steps for Success Fees

Fees based on the outcome of a case, like the success fee in the Twitter case, are permissible, but they still need to be reasonable.  While the ABA rules do not specifically mention success fees, they state that a fee may be contingent on the outcome of the matter for which the service is rendered.  The rules do, however, state that:

A contingent fee agreement shall be in a writing signed by the client and shall state the method by which the fee is to be determined.  Success fees are common in transactional matters, but these are typically negotiated as part of an engagement letter.  They are structured to incentivize the law firm to achieve the best possible outcome for the client.  However, the exact nature and amount of these fees can vary and are a subject of negotiation between the parties.  As a result, it is crucial for both parties to follow these steps.

Transparency and Disclosure

All terms related to the success fee should be clearly stated in the engagement letter or contract.  This includes how the fee is calculated, when it is to be paid, and under what conditions it may be modified or waived.

Reasonableness of the Fee

All fees must be reasonable.  Look for guidance in ABA Rule 1.5 for factors that can be considered to determine reasonableness of a success fee. These can include:

    The novelty and difficulty of the case;

    The skill required to properly provide legal services;

    Comparable rates in your area for like services;

    The amount at issue and the results obtained;

    Time limitations imposed by the client or by the circumstances;

    The reputation, experience and ability of the lawyers performing the services; and

    Whether the fee is fixed or contingent.

Proportionality

The success fee should be proportional to the value provided by the law firm.  This could be in relation to the deal size, the complexity of the transaction or the level of risk involved.

Incentive Alignment

Make sure that the fee structure selected aligns the firm's incentives with the client's goals.  Otherwise, it could be considered a conflict of interest, among other ethical pitfalls.

Regulatory Compliance

Understand your state-specific rules or regulations that might apply.  For example, California's Section 6147 speaks to contingency fee agreements.  Research your jurisdiction's rules and regulations.  Remember, as well, that some jurisdictions may cap or ban certain types of fees.

Dispute Resolution

Include a clause specifying how any disputes over the success fee will be resolved, whether through arbitration, mediation or court proceedings.

Periodic Review

It may be prudent to include provisions for reviewing the success fee arrangement at various stages of the transaction.

Client Consent

Explicit, informed consent from the client is crucial, especially if the success fee arrangement is unconventional or complex.  It is important to note that all fees must not only be reasonable but also adequately explained to clients.  Circumventing clear documentation enables end-runs around billing safeguards in violation of ABA Rule 1.5 and violates Rule 1.4.

While a lawyer and client may renegotiate a fee agreement during an ongoing relationship, the lawyer typically carries the burden of establishing fairness of the new arrangement if it is ever challenged.  Fee agreements entered during the attorney-client relationship will get heightened scrutiny to avoid the appearance of undue influence or impropriety.

In the case of Twitter, the success fee was agreed upon allegedly hours before the closing of the deal.  Although Twitter's old board agreed to the fees, the circumstances in which this transpired could be perceived as unethical and improper because of the lateness of the agreement made by the parties to include a success fee.  Hence, in addition to challenging the fee as unreasonable, the lawsuit claims that, based on the facts leading to the closing day letter agreement, the success fee should be considered a gift, and hence a violation of ABA Rule 1.8.

10 Proper Billing Practices

The controversy highlighted in the Twitter fee case provides a valuable reminder of the heightened scrutiny in attorney-client relationships due to its fiduciary nature and the rules of professional conduct.  In addition to the steps specific to success fees outlined above, it is important to keep these broader billing best practices in mind.

Engagement

Always formalize the fee arrangement in a written agreement.  This holds true whether you are dealing with an hourly rate, a contingency fee or some other type of fee structure.  Any modifications to the engagement terms or fee structure should also be put in writing.

Transparency

Clearly outline how legal fees will be calculated, any percentages that may accrue in the case of a contingency fee and any other expenses that will be deducted from the recovery.

Client Communication

Keep the client informed about any developments.

Alternative Fee Arrangements

There is nothing wrong with exploring creative billing options that can benefit both parties, but ensure they are in line with ethical guidelines and are clearly outlined in the agreement.

Data-Driven Metrics

Consider using data-driven methods to establish fees, especially for alternative fee arrangements.  This adds an element of fairness and can help align incentives between client and lawyer.  Notably, today we have the benefit of using artificial intelligence to come up with creative data-based alternative fee arrangements.

Review and Oversight

Periodically review the billing practices to ensure compliance with your client guidelines.  Train your timekeepers in proper billing practices and client-specific billing guidelines.  This training should be done annually and while onboarding new personnel.

Regulations

Understand the rules governing fees and conflicts of interest.  Train your lawyers in the rules of professional conduct.  This training should be done annually and while onboarding new personnel.

Fiduciary Duty

Always act in the best interest of the client, keeping in mind the fiduciary nature of the attorney-client relationship.

Avoid Surprises

Be proactive to avoid sticker shock.  Discuss potential scenarios and outcomes openly with the client, so they know what to expect in terms of fees.

For example, one fact alleged in the complaint is that:

[I]n the middle of the board's final October 27 meeting, former Twitter general counsel Sean Edgett sent the chart of fees that the Twitter board was meeting to approve.  Upon seeing the magnitude of the fees being presented for the board's approval, one former Twitter director immediately exclaimed in an email reply to Edgett: "O My Freaking God."

Regular Invoicing

Provide detailed invoices that outline the work done, the time spent and the costs incurred.  This not only aids transparency but will also help in resolving any disputes that may arise.  Also remember, your time entries should be treated with as much care as any work product; they should be clear, concise, descriptive and grammatically correct.

By following this ethical road map, the parties will reduce the likelihood of disputes and misunderstandings and, also, maintain a good working relationship.

Conclusion

Whether you are the client or the lawyer, beware falling asleep at the wheel when it comes to new engagements, modifications to billing and billing practices generally.  To do so may risk legal action and your reputation.

Lourdes Fuentes is a seasoned litigator, Founder & Chair of Karta Legal LLC, law firm partner and CEO.  She has a law degree from the University of Pennsylvania and is also a certified Legal Project Manager and Lean Six Sigma Black Belt.  With decades in the field, her expertise lies in optimizing legal operations and promoting ethical billing.  Lourdes founded Karta Legal to tackle these specific challenges, offering tailored solutions that include innovative technology adoption and process improvement.  Her firm caters to a diverse range of clients—from Fortune 100 companies to specialized boutique law firms—ensuring they adhere to transparent and ethical billing practices.

A recent Law.com article by Suzanne Ganier of QuisLex, “Conventional Wisdom is Wrong: Legal Bill Review Won’t Harm Your Relationship with Outside Counsel”, reports on legal bill review.  This article was posted with permission.  The article reads:

Legal departments use various tools to manage spend and reduce costs, including shifting work from one law firm to another, moving from larger to smaller law firms, pulling more work in-house and employing more alternative legal service providers.  However, many legal departments aren’t employing one tool that can reduce costs immediately and support other tools to produce long-term cost containment: legal bill review.

Not using legal bill review as a primary tool for cost containment is like trying to build a house without a hammer; you may be able to do it, but it’s going to be a lot more difficult.  Most corporate legal departments recognize bill review will reduce outside counsel legal spend, as those partners don’t always comply with the department legal billing guidelines.  High outside counsel spend can have a domino effect across the legal department, resulting in smaller budgets for other needs including technology and headcount.

So why don’t more legal departments implement bill review?  The simple answer is relationships.  Many fear legal bill review will irreparably harm the rapport with long-time outside counsel who are often handling sensitive issues, high-stakes litigation and other issues of the utmost importance to the organization.

These relationships have often been nurtured over time, involving people that have worked together for many years.  And these relationships have hopefully resulted in success for all.  But corporate legal departments are part of businesses, which live and die by budgets, revenue and margins.  To remain competitive, they must stay hyper-focused on cost containment – in all areas, including the legal department.  For this reason, legal bill review doesn’t just make sense; it becomes a necessity not only to be fiscally responsible, but also to help the business maximize its competitiveness.  However, this fact doesn’t alleviate concerns about harming relationships with the department’s law firms.  That so many have considered and rejected or have discontinued legal bill review due to such concerns demonstrates their power.  So how do you solve this problem?

Acknowledge the Issue

First, recognize the problem.  In this context, acknowledge three things:

1. Legal bill review is a cost containment necessity.
2. Corporate legal departments are implementing legal bill review.
3. The law firms they work with are going to be concerned that legal bill review means their bills will be unjustifiably reduced.

Corporate legal departments often don’t acknowledge one or all of these points.  Some believe they can reach cost containment goals through other means such as rate negotiations, discounts or e-billing (building that house without the hammer).  Others think if they advocate for the law firm under the guise of protecting the relationship, they can make legal bill review magically disappear.  Such thinking fails to admit the importance of cost containment, which can be harmful to the business.

Have the Conversation

Have a frank and open conversation about legal bill review with your outside counsel.  Go beyond discussing the nuts and bolts and talk to the firms about why bill review is necessary to meet the financial and strategic goals of the business.  Recognize the value of the relationship but focus on the fact that both the corporate legal department and the law firm are businesses and how it is in the best interest of both that the relationship be treated as a business as opposed to a personal one.  Acknowledge that with the implementation of legal bill review, the firm will undoubtedly see their invoices reduced for failure to comply with the legal billing guidelines.  But reassure the firm it will continue to get paid for its time and effort and will be further helped to acclimate to the process.

Be frank, open and transparent with each law firm, and they will return the favor.  Such conversations will not only ease the implementation of legal bill review, but they will also help to strengthen the relationship.

Show Them How to Do It 

There isn’t a class in law school called “Appropriate Legal Billing” (although some would argue there should be,) and there isn’t much training on this topic.  Even attorneys of long standing may not understand billing best practices and know how to comply with a client’s legal billing guidelines.  Frustrated counsel often wish their clients would give them more guidance.  Nothing will hurt a relationship faster than telling firms to change their behavior but not providing the details on how.  Providing firms with specific training on how to meet your expectations will further improve the relationship.  If law firms can see they aren’t being left to figure it out on their own, they will be more inclined to view legal bill review as a partnership, thereby strengthening that relationship.

Ask for Help

Most importantly, ask for help. Explain to the law firm why, as a valued partner, it’s being asked to do this.  People want to help; if you give them the opportunity, they will usually go out of their way to offer it.  Being honest about what your business needs and how firms can help meet those needs opens the door to that help and makes the relationship between law firms and the corporate legal department stronger.

It’s a cliché, but still true – change is never easy. But change doesn’t have to be painful.  While law firms are never going to celebrate legal bill review, it doesn’t have to harm the relationship between law firm and client and, perhaps, can even enhance it. 

A recent Law 360 article by Theodore Boutrous, Lee Crain, and Randi Kira Brown of Gibson Dunn LLP, “How NY SLAPP Defendants Can Recover Fees in Fed. Court”, reports on attorney fee recovery in New York SLAPP suits in federal court.  This article was posted with permission.  The article reads:

Meritless defamation lawsuits have long plagued media defendants.  These strategic lawsuits against public participation, often called SLAPP suits, are designed to chill speech.  States across the country have been experimenting with statutes to address this problem for over 30 years. New York — a jurisdiction that many newspapers, magazines, publishing houses and television networks call home — did not have a strong solution to this problem for many years, but the 2020 amendments to New York's anti-SLAPP law were meant to change that.

Among other things, New York's anti-SLAPP law protects defamation defendants by raising the standard of proof on defamation claims for plaintiffs and by providing for fee shifting, allowing victorious defamation defendants to recover the costs they spent in their defense.  Fee-shifting provisions are essential components of anti-SLAPP laws, as the purpose of SLAPP suits is often to punish and chill the exercise of speech rights by imposing litigation costs.

There is so far no federal anti-SLAPP law. Defamation defendants therefore often must consider whether, and to what extent, state anti-SLAPP laws apply in federal court.  If not, a litigious SLAPP plaintiff need only forum-shop to try to avoid any of the provisions of state anti-SLAPP statutes, including state anti-SLAPP fee-shifting rules.  In other words, if that plaintiff files a defamation claim in federal court, she can argue she is no subject to the specter of fee-shifting because the anti-SLAPP law only applies in state court.

Federal courts have been split as to whether certain anti-SLAPP laws apply in federal court under the U.S. Supreme Court's Erie doctrine from the 1938 case Erie Railroad Co. v. Tompkins.  Under that doctrine, courts consider whether an anti-SLAPP law is procedural or substantive and, if procedural, whether it conflicts with the Federal Rules of Civil Procedure.  

New York's anti-SLAPP law was specifically designed to avoid this problem.  How?  Legislative innovation.  Unlike other anti-SLAPP laws, New York law doesn't only create a motion-based procedural vehicle for a defendant to defeat a defamation claim and recover attorney fees.  Instead, a key innovation New York adopted to help SLAPP defendants was to establish a substantive cause of action for defendants to seek fee shifting for SLAPP lawsuits — effectively an anti-SLAPP tort.

Specifically, New York's fee-shifting provision provides a defendant the right to "maintain an action, claim, cross claim or counterclaim to recover damages, including costs and attorney's fees, from any person who commenced or continued [a SLAPP] action," according to Section 70-a(1) of the New York Civil Rights Law.

So far, though, federal courts in New York have not consistently allowed parties to recover these fees, seemingly due to confusion about how the statute works and the best ways to invoke it in federal court.  For example, in Executive Park Partners LLC v. Benicci Inc. in May, the U.S. District Court for the Southern District of New York refused to apply the fee-shifting provision of the anti-SLAPP statute, holding that the plaintiff cannot file a motion for fees in federal court.

An anti-SLAPP motion, brought under Rule 3211(g) of the New York Civil Practice Law and Rules, conflicts with the Federal Rules of Civil Procedure, the court said, and is thus inapplicable in federal court.  By contrast, in 2021, the U.S. District Court for the Northern District of New York applied the fee-shifting provision in Harris v. American Accounting Association, though without addressing the difference between an anti-SLAPP fee-shifting motion and a cause of action to seek those same fees.

The Southern District of New York appears to have suggested last year in Carroll v. Trump that even a counterclaim is not cognizable in federal court because a Section 3211(g) motion is inapplicable, though the court failed to specifically address why a substantive claim was subject to the same Erie analysis as a state-law motion.  By contrast, in March, the Southern District of New York expressly recognized in Max v. Lissner that an anti-SLAPP claim is cognizable in federal court, even if an anti-SLAPP motion is not.

Given this conflicting backdrop and the state of uncertainty, defamation defendants seeking to invoke New York's anti-SLAPP law in federal court need to tread carefully in deploying it.  Simply filing a motion under the statute for fees may well result in a denial under Erie.  But New York law doesn't limit defendants to mere motion practice.  When a defendant prevails on a defamation claim, they should invoke their rights under the anti-SLAPP statute to counterclaim or bring a new action entirely under the statute to recover their fees — as the New York anti-SLAPP statute expressly allows.

And bringing such a substantive cause of action — essentially a substantive anti-SLAPP tort — will effectuate the Legislature's intent to ensure that the anti-SLAPP statute's protections are available in federal or state court.  It will ensure that courts will see the New York anti-SLAPP statute for what it is: A statute that confers substantive rights on defendants that plaintiffs can't try to forum-shop their way out of simply by filing in federal court.

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