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 360 story by Lauren Berg, “Musk’s X Corp. Slams Ex-Twitter Exec’s ‘Egregious’ Fee Bid”, reports that Elon Musk's social media company X Corp. urged the Delaware Chancery Court to reject three former top Twitter executives' bid seeking reimbursement for more than $1 million in legal fees, arguing that former Chief Legal Officer Vijaya Gadde's demand, in particular, is "egregious and unreasonable."

X Corp. claims it has already paid Gadde's counsel more than $106,000 for fees related to her appearance before the House Committee on Oversight and Reform during its investigation into the influence of social media on U.S. elections, which was in line with fees paid to counsel for other testifying Twitter executives, according to the company's brief unsealed opposing the summary judgment bid brought by Gadde, former Twitter CEO Parag Agrawal and former Chief Financial Officer Ned Segal.

But Gadde is demanding an "egregious and unreasonable" $1.15 million in fees without establishing what the facts are for determining reasonableness, such as the nature of her attorneys' work and the time spent on it, according to the opposition.  "Gadde's submission hides those facts from the court's review through invoices that aggregate vague time descriptions in undifferentiated, block-billed time entries," X Corp. said. 

"The court is thus obstructed from assessing, for example only, whether the time spent 'evaluating public materials' (even the partner-in-charge could not explain what it meant) was reasonable, given there is no way of knowing how much of the time-keeper's 150-plus hours was devoted to it."  X Corp. said it doesn't dispute that Gadde is entitled to advancement of fees related to the inquiry, only that it disputes the reasonableness of her asserted fees.

Gadde, Agrawal and Segal sued the social media giant in April, saying they incurred significant expenses after becoming involved in several legal proceedings because of their former roles as Twitter executives.  They contend that per company bylaws and indemnification agreements, X Corp., as Twitter's successor, is obligated to advance their legal expenses.  Musk fired the three when he took ownership and control of the business in October 2022. Indemnification agreements covering them, however, remain in effect for proceedings related to their former position as officers, the complaint said.

In a motion for immediate payment in July, the trio argued: "Put simply, the world's richest person does not pay his bills."  And in their motion for summary judgment earlier this summer, the former executives accused the company of "perpetually making excuses" for not meeting its obligations and that it is "gaining a well-earned reputation for shirking its commitments."

They said the social media giant had advanced them roughly $575,000 for their legal costs, but is still "wrongfully" withholding about $1.1 million owed, along with roughly $270,000 in interest and "fees-on-fees" for having to litigate the Chancery suit.  But in its own motion for summary judgment, X Corp. called into question the reasonableness of fees related to Gadde's appearance in the Congressional inquiry, asking the court to reduce any advancement award to her from $1.15 million to $106,203.

In its opposition brief, the company reiterated those arguments, saying Gadde is asking the court to "rubberstamp her facially unreasonable Congressional inquiry fees simply because her counsel filed affidavits stating that, in their opinion, their fees are reasonable."  X Corp. said Gadde is seeking fees amounting to 1,100% of those incurred by two other Twitter executives who testified at the hearing.  There are issues of fact regarding the reasonableness of Gadde's fees that preclude summary judgment in her favor for advancement of fees that exceed $106,203, the opposition states.

A recent Law 360 story by Greg Lamm, “Wash. AG Disputes $5.7M Legal Costs To Thrift Chain”, reports that the Washington Attorney General's Office said a thrift store chain has inflated the legal costs that the state must pay after the state Supreme Court cleared the chain of deceptive advertising charges brought by the state, urging a trial judge to slash nearly $2 million from the chain's $5.7 million claim for attorneys' fees and costs.  The state attorney general's office said Value Village owner TVI Inc. seeks to recover nearly $1 million for more than 1,500 attorney hours for work relating to appellate proceedings, which the company failed to request on appeal, according to a brief filed in Washington state court.

In addition to chopping off the $1 million, the state attorney general's office urged the trial judge to reduce the remaining balance of TVI's fee request by 15%, arguing that TVI used block-billing, which the state called "a disfavored billing practice," according to the brief.  "While the documentation of work performed need not be in minute detail to support a fee petition, practices such block-billing make it virtually impossible to determine how much time was spent on particular activities." the brief said.

In its brief responding to the Bellevue, Washington-based company's fee request, the state attorney general's office also accused TVI of redacting billing entries, which the state said made it impossible to evaluate whether a large portion of billing time was reasonable.  TVI also improperly included thousands of dollars in fees for a federal lawsuit filed against the state in 2017 that was eventually tossed, the brief said.

The state Attorney General's Office sued TVI in 2017 in Washington state court, alleging the Value Village owner ran an aggressive marketing campaign that allegedly deceived consumers and donors into believing that the for-profit company was a charity.  In February, the state Supreme Court sided with TVI, in a unanimous ruling that said the thrift chain's marketing campaign touting its support for its charity partners was protected by the First Amendment.  The state high court sent the case back to the trial court to dismiss the state Consumer Protection Act claims and to rule on attorneys' fees and costs.

On Aug. 9, King County Superior Court Judge David Whedbee ruled that TVI was entitled to recover attorneys' fees and costs in the litigation.  Judge Whedbee said he would determine the exact amount during the second phase of the case.

A recent Law 360 story by Emily Johnson, “Davis Polk Blasted Over Fees Bid For Paul Hastings Work”, reports that U.S.-based Chinese nationals — whose suit accusing Paul Hastings LLP of not registering as a foreign agent was dismissed earlier this month — called a request from the defendants' legal team at Davis Polk & Wardwell LLP for more than $327,000 in attorney fees "grossly excessive" and unreasonable.

Tao An and other Chinese nationals argued that Davis Polk attorneys' request is not rational, because "in essence … the entirety of their handling" consisted of arguing a motion to dismiss and a motion for sanctions, according to the plaintiff's brief filed.  After their suit was tossed, the plaintiffs were sanctioned on Aug. 2 and ordered to pay attorney fees for the defendants.

"If the relief they sought in their motions was so obviously warranted to be in their favor, as they argued, it simply should not have taken in excess of $300,000 in legal fees to accomplish," the plaintiffs said. "The rates applied are also unreasonable, the number of attorneys was excessive, and the amount of hours spent were excessive.  If the court is to award fees, it is respectfully requested that the amount be reasonable.  The amount sought is clearly not reasonable."

U.S. District Judge Valerie Caproni dismissed the suit brought by the plaintiffs earlier this month, finding that the plaintiffs didn't provide any facts to support their claim that Paul Hastings' representation of Jinshang Bank, which is controlled and operated by the Chinese Communist Party, qualified the firm as an agent of a foreign principal under the Foreign Agents Registration Act, or FARA.  The judge found that the case, filed in November, was part of a harassment campaign against Paul Hastings and one of its former attorneys, Luc A. Despins.

After finding that the suit was frivolous, Judge Caproni ordered the plaintiffs to pay the defendants' attorney fees.  The plaintiffs pushed back on exhibits submitted by Davis Polk of other firms' billable hours, arguing that billable hours in bankruptcy cases in the Southern District of New York are not relevant to show reasonable fees for this case, saying, "Practice in bankruptcy court is a much more specialized and heavily detailed practice than the instant matter."

"Those cases are vastly different, and vastly more complicated, than the instant case," the plaintiffs said.  In their motion for attorney fees filed Aug. 11, the defendants showed that other firms — Weil Gotshal & Manges LLP, Latham & Watkins LLP, Simpson Thacher & Bartlett LLP, Skadden Arps Slate Meagher & Flom LLP and White & Case LLP — charged anywhere from $1,250 to $2,230 for an hour of a partner's time.  The defendants also showed ranges for counsel and associates at these firms.

In the motion for attorney fees, Greg D. Andres of Davis Polk said that he served as lead counsel in this suit, leveraging his expertise as co-head of the firm's white collar defense and investigations practice and 20 years of litigation experience that includes handling FARA matters.  Andres said he was among the prosecutors assigned to Special Counsel Robert Mueller's prosecution of Paul Manafort, who was handed a 73-month prison sentence in 2019 after he pled guilty to failing to register as a foreign agent, among other charges.

"My standard hourly billing rate for 2022 was $1,990 in 2022, and $2,200 as of January 1, 2023," Andres said.  "Paul Hastings was charged a discounted hourly rate for my work related to this action of $1,592 in 2022 and $1,760 as of January 1, 2023."  The plaintiffs argued that the standard for reasonable attorney fees should be an hourly rate considering that a client would want to spend the "minimum necessary to litigate the case effectively."

"The defendants, of course, may choose whomever they wish to represent them, but that does not make defendant's counsel's hourly rates 'reasonable,'" the plaintiffs said.  "Pursuant to this honorable court's order, and indeed controlling law on the subject, calls for any award to be based on a 'reasonable attorney's fee', it would be an outright abuse of discretion, a distortion of justice, and an outright violation of controlling law, to rely on the defendants' bankruptcy case rates to provide any guidance to calculate a 'reasonable fee' in this matter."

The plaintiffs said that Davis Polk's exhibits submitted are "unsupported hearsay" and include vague descriptions of time spent on litigating this suit.  The plaintiffs cast doubt on why the defendants' legal team included five lawyers and three legal assistants.  "This begs the question why so many people were needed to work on the case — other than to artificially inflate their legal bills," the plaintiffs said.  The plaintiffs also said the firm's exhibits are "unreliable due to excessive block billing and over billing, two practices that go against legal billing best practices."

A recent Law 360 story by Ryan Boyson, “’Joint Juice’ Attys Get $8M in Fees For $12.8M False Ad Suit”, reports that three plaintiffs firms have been awarded roughly $8 million in fees and costs for years of work that led to a $12.8 million false advertising judgment against Premier Nutrition over its Joint Juice supplement, after a California federal judge dismissed criticisms that those fees were "bloated and unreasonable."  In an eight-page order, U.S. District Judge Richard Seeborg granted the fee request, filed by attorneys from Blood Hurst & O'Reardon LLP, Lynch Carpenter LLP and Iredale & Yoo APC.

The lion's share of the roughly $8 million in total fees and costs awarded went to Blood Hurst, which began laying the groundwork for the false advertising class action against Premier back in 2012.  Judge Seeborg shaved the total award down by about $300,000, after the attorneys had originally sought roughly $8.3 million.  But he didn't come close to adopting the roughly $2.4 million fee award sought by Premier, which savaged Blood Hurst and Lynch Carpenter's billing practices as "bloated and unreasonable" and "riddled with inefficiencies" and "extravagant expenses."

"None of these arguments are particularly potent," Judge Seeborg said.  "The hours of work submitted by plaintiff's counsel and the structure of their practice appear reasonable, and in any event their professional judgment in these areas is entitled to deference."  "The fact that plaintiff's counsel has prosecuted this case for a decade without receiving compensation clearly militates in favor of exercising" the court's broad discretion on how to compensate prevailing parties," Judge Seeborg added.

Blood Hurst also has nine other certified class actions pending against Premier in various states, all claiming that the Post Holdings Inc. unit promoted its "Joint Juice" product as an effective joint health remedy, despite scientific studies on the product's active ingredient, glucosamine, finding it has no impact on joint health whatsoever, according to court documents.

Judge Seeborg allowed Blood Hurst to submit fees and costs for precursor litigation that made the current case — Mary Beth Montera v. Premier Nutrition Corp. — possible.  But he cautioned that if the firm prevails in the other Joint Juice class actions, it won't be allowed to bill for those hours again.  "It should go without saying ... that plaintiff's counsel will not be entitled to receive duplicative recovery should any of the other related cases be litigated successfully," Judge Seeborg said.

In contesting the class attorney fee request, Premier had contended that most of the pre-2021 work the attorneys were billing for had little to do with the Montera case specifically, and therefore should be denied.  But in the order, Judge Seeborg begged to differ.  "Before December 2016, plaintiff's counsel had already undertaken a substantial amount of work that facilitated a successful outcome in Montera," he wrote.

A recent Law 360 story by Brian Steele, “Ex-Client Owes McCarter & English $1M For Bills, Jury Finds”, reports that McCarter & English LLP won a clean sweep of a multiparty verdict in...

Read Full Post

A recent Law 360 story by Brian Steele, “McCarter & English Client Didn’t Notice Rate Hikes, Jury Hears”, reports that a dietary supplement company founder battling McCarter & English...

Read Full Post

A recent Law 360 story by Vince Sullivan, “Pillsbury’s Fee Bid Slashed For ’Over-Lawyering’”, reports that a Delaware bankruptcy judge reduced the fees payable to Pillsbury Winthrop Shaw...

Read Full Post

A recent Law.com story by Dan Roe, “Twitter Fee Lawsuit Brings Wachtell’s Billing Practices to Light”, reports that, in addition to charging hourly fees on par with top Wall Street law firms,...

Read Full Post