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Category: Attorney-Client Relationship

Company Held in Contempt For Failing to Pay Attorney Fees

May 11, 2023

A recent Law 360 by Emily Sawicki, “Co. Held in Contempt For Failing To Pay $1M Atty Fee,” reports that a New Jersey federal judge has issued a contempt order against an India-based supplement company for failing to pay discovery misconduct fees and blocked its legal counsel from withdrawing, a year after the company was ordered to pay more than $1 million to opposing counsel following patent infringement claims dating back to 2015.  U.S. District Judge Robert B. Kugler found Prakruti Products Pvt. Ltd. in civil contempt, citing the $994,803.29 in discovery misconduct fees Prakruti still owed to Sabinsa Corp.

Judge Kugler issued an order on April 12 giving Prakruti until April 18 to issue payment.  As of oral argument on May 1, Prakruti had paid just $8,671 of what had been more than $1 million in outstanding fees toward Sabinsa, in order for the plaintiff to pay back $878,548.56 in ArentFox Schiff LLP law firm fees, $15,120 in "Indian-law counsel fees," $96,750.50 in Saiber LLC law firm fees and $13,035.23 in costs.

Judge Kugler ordered the clerk of the District of New Jersey's Camden Vicinage to enter default against Prakruti on Sabinsa's claim that Prakruti violated a 2015 settlement agreement between the two entities, and converted a summary judgment briefing, set to take place in May, into a briefing on Prakruti's default judgment.

In his order, Judge Kugler specified that, although Prakruti's attorneys, Gregory A. Krauss and James T. Wilson of Davidson Berquist Jackson & Gowdey LLP and Jason B. Lattimore of the Law Office of Jason B. Lattimore, would not be permitted to withdraw, "Prakruti's attorneys are not held jointly or severally liable with Prakruti for the remainder of the discovery misconduct fees."

The three had filed a motion to withdraw from their representation on April 14 and Lattimore provided reasoning in a letter dated April 25, saying, "a conflict of interest has arisen between Prakruti, on the one hand, and its current counsel, on the other," citing a pro se, ex parte letter entered into the docket by a Prakruti company director.  "It appears that Prakruti intends to shift blame for its current predicament from itself to its counsel for their supposed failure to provide 'proper representation,'" Lattimore wrote of the company's letter.

The fee amount itself was a point of contention, after then-U.S. Magistrate Judge Karen M. Williams calculated an initial award of about $879,724 to the ArentFox Schiff lawyers in November 2021, recalculated to $878,548 by U.S. Magistrate Judge Sharon A. King, in April 2022.  The award stems from an underlying patent infringement case brought by New Jersey-based Sabinsa, which claimed Prakruti was violating its patent by selling a turmeric supplement.

During a "contentious" discovery process, Judge Williams found that "Prakruti had withheld certain information from Sabinsa and also spoliated pertinent evidence," according to court documents.  The judge sanctioned Prakruti with an adverse inference, finding that Sabinsa's legal efforts to prove Prakruti's misconduct warranted an award of attorney fees against Prakruti.

Law Firm Charged with ‘Excessive and Unconscionable’ Attorney Fees in Suit

May 10, 2023

A recent Law.com by Alaina Lancaster, “Proskauer Rose Legal Malpractice Suit Claims Firm Charged ‘Excessive and Unconscionable’ Fees in Trustee Dispute,” reports that Proskauer Rose allegedly billed siblings embroiled in litigation over a family trust millions of dollars after initially estimating that their fees would total $100,000 or less, according to a legal malpractice suit filed May 5. 

The suit, surfaced by Law.com Radar and filed in Los Angeles County Superior Court, claims Proskauer Rose and Andrew M. Katzenstein, a partner in the firm’s private client services department, engaged in unnecessary and excessive work and improper billing practices, such as block billing and charging “unearned, unreasonable, excessive, and unconscionable fees,” according to the complaint.  Trustees Sharyl Gabriel and Susan Louise Gabriel-Potter claim that Proskauer Rose also overstaffed the underlying trust disputes involving their brother Robert Gabriel, additionally inflating costs.

The suit—filed by Makarem & Associates’ Ronald Makarem and Samuel Almon in Los Angeles—also asserts that the firm assigned attorneys who were not licensed in California to perform legal services in the litigation.  The filing alleges that Proskauer partner Matthew Triggs in Boca Raton, Florida, and Bridget Devoy—a former associate at the firm in Los Angeles who is now a counsel at McDermott Will & Emery—were tapped to work on the underlying matter without being licensed in California.  The suit asserts Devoy wasn’t licensed in California until May 14, 2018, but worked on the matter in 2017.

The lawsuit also alleges that the firm improperly advised the trustees on several matters, including guiding them to pay excessive distributions to Robert from the trusts.  “This advice was below the standard of care because, among other reasons, the distributions were not legally required, and were used by Robert to wage litigation against parties including Plaintiffs, which in turn caused Plaintiffs to incur damages, including legal fees incurred defending the litigation brought by Robert,” the complaint said.

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.

Philadelphia Bar Clarifies Advancement of Attorney Fees

August 24, 2022

A recent Law 360 story by James Boyle, “Philly, Pa. Bar Clarify How Attys Can Handle Advance Fees” reports that Pennsylvania attorneys can deposit advance fees into their operating accounts as long as the client clearly consents, according to a new ethics opinion jointly released by the Pennsylvania and Philadelphia Bar associations.

The PBA's Legal Ethics and Professional Responsibility Committee issued the opinion with the Philadelphia Bar's Professional Guidance Committee.  The opinion was issued as a clarification to a PBA ethics opinion from 1995, which said nonrefundable retainers from a new client were permissible, but it must be accompanied by a clear written agreement or deposited into a client escrow account.

According to Sarah Sweeney, co-chair of the Philadelphia Bar's Professional Guidance Committee, attorneys were confused whether there was a difference between a retainer fee that is earned upon receipt and an advance payment for legal services.  The new opinion makes that distinction.

"The [two committees] worked together in an effort to provide some clarity on the proper handling of legal fees paid at the outset of an engagement," Sweeney said in a statement.  "Specifically, the Opinion distinguishes fees that are earned upon receipt from fees that are simply paid in advance, and concludes that the former may be deposited in the attorney's operating account."  In other words, fees that are not earned upon receipt are considered advance fees, which are typically placed into an escrow account and drawn upon by the attorney as they represent the client.

Under the newly issued opinion, if there is an informed, written consent from the client, that fee can be placed into the attorney's operating account.  Fees that are considered earned upon receipt can be deposited into the operating account, as long as the attorneys clearly inform clients of the fee agreements.

"Ethics opinions are one of the most valuable services that we provide as Philadelphia's premier trade association for attorneys," Philadelphia Bar Association Chancellor Wesley R. Payne IV said in a statement.  "We were happy to partner with the Pennsylvania Bar Association in providing valuable clarity for our community on a common practice management issue."