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Category: Hourly Billing

Article: What is a Legal Fee Audit?

October 7, 2021

A recent article by Jacqueline Vinaccia of Vanst Law LLP in San Diego “What is a Legal Fee Audit?,” reports on legal fee audits.  This article was posted with permission.  The article reads:

Attorneys usually bill clients by the hour, in six minute increments (because those six minutes equal one tenth of an hour: 0.1).  Those hours are multiplied by the attorney’s hourly rate to determine the attorney’s fee.  There is another aspect of attorney billing that is not as well known, but equally important — legal fee auditing.  During an audit, a legal fee auditor reviews billing records to determine if hourly billing errors or inefficiencies occurred, and deducts unreasonable or unnecessary fees and costs.

Both the law and legal ethics restrict attorneys from billing clients fees that are unreasonable or unnecessary to the advancement of the client’s legal objectives.  This can include analysis of the reasonableness of the billing rate charged by attorneys.  Legal fee audits are used by consumers of legal services, including businesses, large insurance companies, cities, public and governmental agencies, and individual clients.  Legal fee audits can be necessary when there is a dispute between an attorney and client; when the losing party in a lawsuit is required to pay all or part of the prevailing party’s legal fees in litigation; when an insurance company is required to pay a portion of legal fees, or when some issues in a lawsuit allow recovery of  attorneys’ fees and when other issues do not (an allocation of fees). 

In an audit, the auditor interviews the client, and reviews invoices sent to the client in conjunction with legal case materials to identify all fees and costs reasonable and necessary to the advancement of the client’s legal objectives, and potentially deduct those that are not.  The auditor also reviews all invoices to identify any potential accounting errors and assure that time and expenses are billed accurately.  The auditor may also be asked to determine if the rate charged by the attorney is appropriate.

The legal fee auditor can be an invaluable asset to parties in deciding whether to file or settle a lawsuit, and to the courts charged with issuing attorneys’ fee awards.  The court is unlikely to take the time to review individual invoice entries to perform a proper allocation of recoverable and non-recoverable fees leaving the parties with the court’s “best approximation” of what the allocation should be.  The fee audit provides the court and the parties with the basis for which to allocate and appropriately award reasonable and necessary fees. 

Audits are considered a litigation best practice and a risk management tool and can save clients substantial amounts of money in unnecessary fees.  It has been my experience, over the past two decades of fee auditing, that early fee auditing can identify and correct areas of concern in billing practices and avoid larger disputes in litigation later.  In many cases, I have assisted clients and counsel in reaching agreement on proper billing practices and setting litigation cost expectations. 

In other cases, I have been asked by both plaintiffs and defendants to review attorneys’ fees and costs incurred and provide the parties and the court with my expert opinion regarding the total attorneys’ fees and costs were reasonably and necessarily incurred to pursue the client's legal objectives.  While the court does not always agree with my analysis of fees and costs incurred, it is usually assisted in its decision by the presentation of the audit report and presentation of expert testimony on the issues.

Jacqueline Vinaccia is a San Diego trial attorney, litigator, and national fee auditor expert, and a partner at Vanst Law LLP.  Her practice focuses on business and real estate litigation, general tort liability, insurance litigation and coverage, construction disputes, toxic torts, and municipal litigation.  Her attorney fee analyses have been cited by the U.S. District Court for Northern California and Western Washington, several California Superior Courts, as well as various other state courts and arbitrators throughout the United States.  She has published and presented extensively on the topic of attorney fee invoicing, including presentations to the National Association of Legal Fee Association (NALFA), and is considered one of the nation’s top fee experts by NALFA.

Federal Judge Cites NALFA Survey in Attorney Fee Award

October 1, 2021

A federal judge has cited a NALFA survey in a class action attorney fee award.  U.S. District Judge Amos L. Mazzant of the U.S. District for the Eastern District of Texas referenced NALFA’s hourly rate survey in awarding attorney fees and expenses in Cone v. Porcelana Corona de Mexico, S.A.de C.V. et. al (“Vortens”).  The NALFA survey independently showed prevailing market rate data of class counsel in the Dallas-Fort Worth area. 

“To support its submitted rates, Class Counsel commissioned and submitted a survey conducted by the National Association of Legal Fee Analysis ("NALFA").  The sample of the NALFA survey was Dallas-Fort Worth metropolitan area plaintiffs’ counsel practicing in consumer related or product liability class-action work.  Class Counsel’s submitted hourly rates, while on the higher side, falls within the accepted range,” wrote Judge Mazzant.

NALFA conducts custom hourly rates for clients such as law firms to independently prove billing rates in court.  Lead plaintiffs’ counsel commissioned NALFA to conduct a billing rate survey of plaintiffs’ rates in class actions in the Dallas-Fort Worth area.  NALFA conducted this survey via email, employing its best practices measures.  In his 26-page fee order (pdf), Judge Mazzant accepted the hourly rate data and survey results and awarded over $4.3 million in attorney fees in the Vortens class settlement.

Gibson Dunn Under Fire for Billing Practices

September 23, 2021

A recent Law 360 story by Rose Krebs, “Gibson Dunn Under Fire For Billing in Landmark Theatres Suit,” reports that Gibson Dunn & Crutcher LLP and Ross Aronstam & Moritz LLP have been accused of problematic billing in a Delaware Chancery Court suit over a price adjustment dispute that followed the 2018 sale of Landmark Theatres to billionaire real estate developer's Charles S. Cohen's theatrical production and distribution company.

In a brief, Cohen Exhibition Company LLC told Vice Chancellor Paul A. Fioravanti Jr. that a request by Gibson Dunn and Ross Aronstam to have the buyer reimburse roughly $840,000 of the sellers' legal costs and expenses should be reduced by no less than about $396,000.  A lesser-than-sought amount should be awarded, in part, due to the firms' "failure to support the hourly billing rates" included in the fee motion, the brief says.

The sellers, Roma Landmark Theaters LLC and MCC Entertainment LLC, which are represented by the two law firms, told the court in August that buyer Cohen Exhibition Company should have to pay costs and expenses they incurred litigating a battle over post-closing adjustments that ended up being largely decided in their favor.

But Cohen raised issues with the billing.  "Both the Ross Aronstam and Gibson Dunn invoices contain significant redactions of time entries," Cohen said in Tuesday's filing.  "The redactions are particularly problematic insofar as they not only completely obscure the services performed ... but also because they even obscure the timekeeper and amount of time spent."  Cohen argues that due to the redacted information it is "completely impossible" for the court to assess the reasonableness of certain invoices.

The company also pointed to "excessively high charges for Westlaw research, in one month totaling over $20,000 alone" in Gibson Dunn's bills.  The online legal research service "offers attorneys a plan with unlimited access to Delaware cases, statutes, and briefs at a flat monthly fee," according to Cohen. Granting those fees would effectively mean Cohen paying for "Gibson Dunn's overhead in maintaining a legal research account with Westlaw," the company said.

Cohen additionally took aim at what it described as the "high hourly rates billed by the attorneys at Gibson Dunn."  "Here, plaintiffs' attorneys have not provided any proof as to what their customary billing rates are for comparable matters," the brief said, highlighting one rate of up to $1,645 per hour.  "Nor have they provided any evidence as to each attorney's background and years of experience to support the respective claimed rates."  Cohen also protested what it said was the firms' request for reimbursement for "preparing and litigating" an unsuccessful motion to dismiss counterclaims lodged by the buyer in the litigation.

Roma and MCC said in court papers that an arbitration decision went in their favor, entitling them "to receive nearly all of the escrowed funds." Thus, they argued they are entitled to reimbursement for costs and expenses, especially since alleged legal posturing by the buyer led to a delay in escrow funds being turned over.  The Chancery Court confirmed the arbitration decision and the seller plaintiffs were awarded roughly $2.6 million plus additional interest and other costs, according to the motion, which added, "The fee award sought here is fair and reasonable in light of these positive results."

Law Firms with Over 100 Attorneys Have Higher Rates Across All Experience Levels

September 4, 2021

NALFA recently released the results from our 2020 Litigation Hourly Rate Survey.  The results, published in The 2020 Litigation Hourly Rate Survey & Report, contains billing rate data on the very factors that correlate to hourly rates in litigation: geography, years of litigation experience, complexity of case, and litigation practice size.

This empirical survey and report provides macro and micro data of current hourly rate ranges for both defense and plaintiffs’ litigators, at various litigation experience levels, from large law firms to solo shops, in routine and complex litigation, and in the nation’s largest legal markets and beyond.  This is the nation’s largest and most comprehensive survey or study on hourly billing rates in litigation. 

Law firms with over 100 attorneys have higher rates across all litigation experience levels.  When compared to solo practitioners, law offices with 2-11 attorneys, and law firms with 12-99 attorneys, large law firms consistently have higher rates for litigators at all experience levels.  Almost half (49%) of litigators at large law firms bill at tier 2 rates ($401-$650).  While the percentages of litigators at smaller law firms and law offices who bill at tier 2 rates are lower.  "From our survey, the data analysis shows that associates at large law firms start with higher rates and raise them more frequently than litigators at small law firms and law offices," said Terry Jesse, Executive Director of NALFA.

The 2020 Litigation Hourly Rate Survey & Report is now available for purchase.  For more information on this survey, email NALFA Executive Director, Terry Jesse at terry@thenalfa.org or call us at (312) 907-7275.

Article: 5 Reasons Lawyers Often Fail to Secure Litigation Funding

August 24, 2021

A recent Law 360 article by Charles Agee, “5 Reasons Lawyers Often Fail To Secure Litigation Funding,” reports on litigation funding.  This article was posted with permission.  The article reads:

It's no secret that parties seeking litigation funding face steep odds in securing a deal.  How steep?  According to my firm's research, more than 95% of commercial litigation funding deals presented to any particular funder never advance to closing.  Experience tells me one of the overarching reasons the litigation finance deal closure rate is so low is that lawyers and their clients drastically underestimate the challenges and nuances of obtaining this specialized form of financing.

For many, the downside of trying and failing to secure funding is simply that — not obtaining the funding.  So why not approach a few funders and see if one bites?  On the surface, this approach has appeal; in reality, it is fraught with hidden costs.  The litigation fundraising process can be extremely laborious, and the time sunk into an unsuccessful deal typically is not billable.  Each year, leading law firms squander millions of dollars in time alone seeking funding for deals that do not bear fruit.

Even more concerning, lawyers who are unsuccessful in obtaining funding for their clients almost always damage their credibility with the client.  The good news is that these challenges can be anticipated and, in many instances, overcome.  To overcome those challenges, however, it is important to also examine why so many parties fail to obtain litigation funding. Here are the top five reasons why.

1. Misunderstanding the Funders' Acceptance Standards

Funders reject the lion's share of deals that they are shown because most of them should never have been brought to the market in the first place.  My colleagues and I have seen that far too many lawyers and clients present litigation opportunities that make no sense to pursue, regardless of who is funding the case.  Nothing can be done to change the substance of the underlying matter, and short of committing fraud, you are not going to sneak into a funder's vault with a meritless deal.

The best — and only — advice for these weak opportunities is to avoid the litigation fundraising process altogether.  But we also see that funders also reject a significant number of matters that are meritorious and economically viable enough for experienced litigation counsel to be willing to risk their own legal fees on a successful outcome.

Why are these opportunities declined?  The reason — and it may not be a satisfactory one — is that a litigation funder's diligence process and investment criteria are generally more rigorous than that of most law firms.  Unless a lawyer has a great deal of experience with funding, this disparity can be jarring and more than a little ego-bruising, especially when clients or colleagues are watching.

To appreciate why the litigation funders' bar is set so high, it is helpful to consider the investment proposition from their perspective.  The funder must develop a high degree of confidence in a financially successful outcome of a legal dispute — usually involving complex subject matter — because it will only receive an investment return if the underlying matter resolves favorably.

As a purely passive investor, the funder also must structure the deal in a way that achieves alignment with both counsel and client, and often the economics of even the strongest of cases are insufficient to do so.  Further, unlike a venture capital fund that can accept high levels of losses because of their upside in successful investments, litigation funders' more modest returns are too low to subsidize VC-level loss rates.

Because most litigation funders are relatively new and have not yet established substantial track records, this dynamic fosters a stronger bias toward risk aversion within the industry.  A litigation funder's diligence process is designed to find reasons not to invest in an opportunity. It also tends to follow a leave-no-stone-unturned approach, which can be exhausting for the party seeking funding.  However, even the most discriminating funders' processes can be successfully navigated with proper preparation and analysis before approaching the funder.

What are the main challenges counsel will face in the litigation, and how will these be overcome? What is counsel's track record in similar matters? What level of financial risk is counsel prepared to assume?  These are just a few of the questions that parties should consider before approaching funders. Lawyers and their clients are well-served to anticipate these and other questions that a skeptical investor might ask, and be prepared with clear and thoughtful responses.

2. Failing to Approach the Most Suitable Funders for the Opportunity

Parties seeking funding often fail to approach the funders most likely to invest in their claim.  There are currently 46 active commercial litigation funders in the U.S., each with different funding criteria, risk appetites, structuring preferences and return profiles.  Most parties seeking funding only present their opportunity to a few of these funders. This is a mistake, because even the largest funders in the world are not configured to accommodate every potential type of deal.

Without adequate knowledge of the market, it is difficult to know which funders are most suitable for a particular deal. It is critical to know what a funder's investment criteria are, including preferred deal size, type of litigation, jurisdictions and stage of litigation, among others.  Too often, parties meet resistance from funders that were never a good fit for the opportunity and elect to abandon the fundraising process altogether.  If they had only identified the right audience, they might have been able to secure funding.

3. Inadequately Packaging the Presentation of the Opportunity

First impressions matter, especially in litigation finance.  Our conversations with funders inform that the largest litigation funding firms see more than 1,000 opportunities a year and don't have the bandwidth to wade through poorly packaged opportunities.  Still, parties often fail to spend the time necessary to appropriately present an opportunity. The failure to properly present an opportunity often is the difference between a yes and a no.

What are the most common deficiencies in litigation fundraising presentations?  Most lawyers are more than capable of presenting the legal merits of an opportunity; however, we have observed time and again that they tend to fall short in demonstrating a thorough approach to the economics, i.e., the damages model and the budget.  Lawyers and clients may also downplay or omit entirely a case's potential challenges, whereas a funder expects these downsides to be soberly acknowledged and addressed.

Another similar mistake is to leave too many analytical black boxes in the presentation, such as factual questions that could be investigated now but are proposed to be left for discovery, or assumptions underlying the damages model that have not been rigorously researched.  The negative impression left by these and many other deficiencies is difficult to overcome.  Parties seeking funding should prepare a thoughtful and complete presentation of their financing opportunities.

4. Lacking Awareness of Norms That Guide Negotiations With Funders

A common misconception is that litigation funding deals are easy to negotiate and that funding agreements are relatively uniform.  In reality, these deals have several peculiarities and are governed by particular legal and ethical parameters.  Even parties with experience in other types of financing or business dealings struggle to extend their acumen to litigation financing deals.

Indeed, the process is guided by certain industry norms that outsiders may not necessarily appreciate or even be aware of. Parties that neglect to understand these nuances run a considerable risk of derailing the litigation fundraising process, sometimes after many months have been spent.  Each funder approaches the investment diligence and documentation processes differently.

For instance, some will provide parties a term sheet and, after the term sheet is executed, proceed to deeper diligence and final deal documents.  Other funders might have a three-phase negotiation process where the party is expected to execute a term sheet, a letter of intent and then a litigation funding agreement. Parties should be prepared to negotiate with the funder at each phase of the process.

Prior to closing, the last document to be negotiated is the definitive litigation funding agreement, or similarly named instrument.  While no two funding agreements are identical, most agreements have certain types of provisions that are essential to the funder, given the contingent-repayment, no-control nature of the investment.  Parties seeking funding should understand that these types of provisions are nonnegotiable and that pressing too hard can sour an otherwise fruitful closing process.

5. Prematurely Agreeing to Exclusivity With a Funder

Perhaps the most critical decision in the litigation fundraising process involves granting exclusivity to a funder.  Once a term sheet has been negotiated, a funder will nearly always require a period of exclusivity — sometimes more than 60 days — to complete its diligence and documentation of the transaction. After granting exclusivity, you are largely at the funder's mercy.

Parties seeking funding almost universally misread the significance of obtaining a term sheet from a funder, mistakenly believing that the probability of closing is far higher than it actually is.  Depending on the funder and the extent of its preliminary due diligence, the term sheet can merely be a hope certificate describing what a transaction might look like. Terms may be retraded or, as is often the case, the funder declines to proceed with the deal following a deeper dive into the opportunity.

Selecting the wrong funder for exclusivity may also hamper a party's future prospects of securing a deal with another funder, if negotiations with the original funder stall.  Funders will often assume that the deal with the original funder stalled because of a fatal flaw in the deal.

In an industry that is already risk-averse by nature, this kind of red flag in the middle of a fundraising process is extraordinarily difficult to overcome.  The key to avoiding this mistake — aside from refusing to grant exclusivity — is to understand the approach, process and track record of any funder requesting exclusivity.

The party seeking funding should also assess the extent of the funder's preliminary diligence and the degree to which the funder grasps the key issues.  Of course, ensuring that all material facts have been disclosed to the funder prior to exclusivity also helps avoid surprises. But candor may not be enough to avoid this pitfall.  Exclusivity is a necessary evil in the litigation finance industry — for now — and parties seeking funding should be extremely judicious in granting it.

Conclusion

While securing litigation funding may seem daunting, there are ways to beat those odds and maximize the chances of securing funding.  Parties that approach the market in a thoughtful and informed manner have a much higher likelihood of success and of avoiding wasteful dead ends.  As the market continues to mature, funders should innovate and improve their processes to make the experience more predictable and user-friendly.  Until then, experience in the market and knowledge of the funders and their approaches will remain the key to improving the odds of obtaining litigation financing.

Charles Agee is managing partner at Westfleet Advisors.