A recent Law 360 story by Aebra Coe, “Law Firms See Revenue Growth Amid Soaring Billing Rates”, reports that as of the end of the third quarter of 2023, U.S. law firms had increased their revenues, on average, by 4.6% year-over-year as a result of "the highest growth in billing rates we've seen," according to a new report from Wells Fargo Legal Specialty Group.  Law firms brought in more revenue even as demand continued to lag, increasing just 0.2% as of the end of the third quarter across the cohort of more than 120 law firms surveyed by Wells Fargo, according to the report.

The rise in revenue was largely fueled by a 7.9% year-over-year increase in billing rates among all the law firms, and an 8.2% increase among the respondents ranked in the top 100 in the U.S. by revenue, the report said.  With the jump in revenue, law firms also posted an increase in net income and profits per partner as of the end of September, with net income on average increasing by 2.7% and profits per partner by 1%.  However, those results were buttressed by strong numbers reported by the largest law firms, with smaller firms faring less well.

Among the top 50 law firms by revenue, net income was up 5.2%, among the top 100 firms it was up 3.7%, and among the firms ranked in the second 100 by revenue, net income actually fell by 3.9%.  For those that performed well on net income, one major contributor was an industrywide reining in of expense growth, according to the report.  Expense growth slowed to 5.6% at the end of the third quarter, down from 6.2% midyear and 12.8% this time last year.

Alongside the differences in net income, law firms' expense growth also varied based on firm size, with the largest firms seeing smaller upticks than those among the second 50 largest and second 100 largest by revenue.  One part of the expense equation for firms is lawyer headcount, which continued to increase during the third quarter, although at 3.5%, the pace was slightly slower than in the previous year.

Because of the flat demand and increases in headcount, lawyer productivity among the cohort remained low, with an average annualized pace of 1,540 billable hours per lawyer, maintaining levels logged midyear that are well below 2018, 2019 and 2021 figures, the report found.  Of the more than 120 law firms surveyed by Wells Fargo for the report, 65 were among the 100 largest in the U.S. by revenue, 30 were among the second 100, and the remainder represented regional law firms, according to the bank's legal specialty group.

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, Wachtell, Lipton, Rosen & Katz routinely charges success fees that rival the fees of investment banks in merger and acquisition transactions, according to an email Wachtell partner William Savitt sent to Twitter’s in-house counsel on the eve of Elon Musk’s takeover of the company.

The firm also adds success fees between two and two-and-a-half times the firm’s hourly fees in “premium billing matters that involve substantial litigation,” according to the email.  Wachtell’s billing structure diverges from Big Law’s traditional hourly structure by billing clients in the manner of investment banks, negotiating success fees by a percentage of deal value or bankers’ fees.

Last week, Musk sued Wachtell in California Superior Court on counts of unjust enrichment and breach of fiduciary duty, alleging Wachtell took advantage of Twitter’s “lame duck” in-house counsel ahead of the company’s sale to Musk and pushed through a success fee that represented the bulk of Wachtell’s $90 million fee for four months of work.

The lawsuit, filed by Reid Collins & Tsai, referenced Twitter’s master retention agreement, signed by Savitt, which made no mention of a contingent or success fee. (The document also states the retention agreement supplements any fee arrangement entered into between Twitter and outside counsel.  No such documents appeared in the complaint.)

In an emailed statement, Wachtell said the firm was “extremely proud” of its work representing Twitter, which “generated billions of dollars in shareholder value by compelling Elon Musk to abide by his contractual obligation to buy Twitter for $54.20 per share,” the firm said.  “The fee for our work was entirely appropriate and expressly approved by Twitter’s board of directors, which was independently advised.  The suit against us is meritless, and we will respond to it in due course.”  Simpson Thacher & Bartlett advised Twitter’s board in the deal.

Last October, when Twitter’s in-house counsel asked Savitt to justify the $90 million fee—which included $26 million in work billed hourly—by outlining comparable arrangements, such that Twitter’s board could approve the fee before the sale, Savitt outlined two methods.

In the first, “Engagement fees as a percentage of banker fees,” Wachtell stated it was frequently paid 60% to 80% of the fees paid to investment advisers.  In seven examples, the firm described instances of being paid between 67% and “over 100%” of the fees charged by investment banks.

The second billing method referenced litigation-intensive engagements, citing examples of the firm charging up to three times its “run-rate” (its hourly rate plus costs and other disbursements) and stating it frequently invoices two to two and a half times its hourly rate.

Wachtell has guarded its billing arrangements and declined to comment for previous American Lawyer articles discussing them.  Yet, in 2015, The American Lawyer obtained a standard fee arrangement Wachtell sent to client CVR Energy in January 2012.  In it, Wachtell stated its “extraordinary expertise and sophistication” didn’t lend itself to hourly fees, with the firm preferring to “base our fees not on time but on the intensity of the firm’s efforts, the responsibility assumed, the complexity of the matter and the result achieved.”

In the CVR Energy engagement letter, the firm said it typically charged 1% or more of the total value of M&A and takeover deals worth less than $250 million and charged 0.1% of matters worth more than $25 billion.  Compared with billing based on total deal value, Wachtell’s apparent preference toward billing a portion of banker fees in deals or multiplying hourly fees in litigation-heavy matters appears more lucrative.

Had Wachtell billed 0.1% of the $44 billion Twitter sale, it would have made $44 million.  Instead, the firm offered Twitter the opportunity to base its fees on those charged by the investment banks on the deal.  Three weeks before partner Benjamin Roth pitched Wachtell’s services to Twitter’s in-house counsel, news outlets reported Goldman Sachs and JPMorgan Chase & Co. were poised to earn a combined $133 million in fees if the deal went through.

Alternatively, a litigation multiplier of 2.5 would place Wachtell’s success fee near $90 million if the addition of the firm’s October hourly fees, which weren’t discussed in the lawsuit, brought the total hourly bill to $36 million.  Twitter also waived its standard 15% discount for outside counsel, according to the complaint. Additionally, Musk took issue with several Wachtell partners leaving time entry descriptions blank.  Wachtell’s highest-billing partners, according to billing records surfaced in the complaint, include Savitt at $1,850 an hour and Leo Strine, of counsel and the former chief justice of the Delaware Supreme Court, at $2,000.

Strine was central to Roth’s email pitch to Twitter Chief Legal Officer Vijaya Gadde, general counsel Sean Edgett and Chief Financial Officer Ned Segal in early June 2022.  “I’ve been following with interest the news about your pending transaction with Elon Musk,” Roth wrote, saying later in the same email, “Leo Strine is now with our firm and sits about 25 feet down the hall from me.”

Roth also emphasized litigation co-chair Savitt’s experience litigating in Delaware and Savitt’s representation of Roth and the firm in a malpractice lawsuit filed by Carl Icahn over the CVR deal.  In 2013, Icahn sued Wachtell for not disclosing to CVR executives that the company’s investment banks would earn more money if the company accepted an existing bid (rather than the banks being incentivized to drive bids up).  The lawsuit also said Wachtell broke from its own engagement letter and billed based on the success fees of the banks instead of using total deal value, with CVR’s counsel stating, “Wachtell is perversely incentivized to negotiate engagement letters that benefit the investment bankers, not the client.”

A recent Law.com article by Diana C. Manning, “Mid-Year Billing Tips: The Devil Is In The Details”, reports that the art of billing is an inevitable part of any law practice, so buckle up, because the devil is in the details.  This article was posted with permission.  The article reads:

In an earlier installment on effective and efficient billing practices, we covered the “lay of the land” on billing successfully for both seasoned practitioners and new attorneys.  This summer edition promises not to disappoint, covering such topics as billing guidelines and risk management.  The art of billing is an inevitable part of any law practice, so buckle up, because the devil is in the details.

Billing Guidelines

It is an essential practice to develop a written set of billing guidelines as part of the engagement agreement with a client. Apart from the obligations set out in the RPCs (see ABA Model Rules 1.4 & 1.5), attorneys have an interest in maintaining written billing standards agreed to by the client for transparency in collecting fees and for the defense of potential claims centered on the attorney’s bills.  As a matter of practice, most institutional clients require acceptance of and adherence to their own set of established billing guidelines as part of the retention.  These standards serve as the blueprint for billing throughout a given representation, and set out various requirements and prohibitions for getting paid.  At the outset, be sure to develop a familiarity with the billing guidelines for a given matter, which typically includes such details as timing of the client’s invoice, payment schedules, personnel rates, and task-specific guidelines.  Not being cued in on a client’s billing particulars can lead to swift phone calls from the client, rejected invoices, outright non-payment, and client dissatisfaction.

A common pitfall is overstaffing on routine or ordinary tasks that can yield duplicative charges. See J.E.V. v. K.V., 426 N.J. Super. 475, 494 (App. Div. 2012) (“deducting $5,625 from the counsel fees, stating that amount was unreasonable because the situation only warranted one attorney when two were present.”); Bell v. Prefix, 784 F. Supp. 2d 778, 787 (E.D. Mich. 2011) (finding it “not reasonable to consistently bill a party for two attorneys to do the same work/review each other’s work.”).  Root this out early on by designating a legal team with members who have clearly defined roles and can allay fears of overstaffing.  A cohesive legal team will also minimize inefficiencies that can strain the attorney-client relationship and be a detriment to billing success. See Universal Drilling v. Newpark Drilling Fluids, 2011 U.S. Dist. LEXIS 17203, at *8 (D. Colo. Feb. 22, 2011) (“The court lauds the economies that can be obtained by delegating the bulk of litigation responsibilities to associate attorneys, and recognizes that the limited oversight and guidance of more senior attorneys to provide supervision and review of such work may be appropriately billed as well.”).  When client satisfaction is paramount, lawyers should always strive to leave the positive impression of efficiency with a results-oriented billing practice.

Risk Management in Attorney Billing

Clarity is key when it comes to billing formats.  Regardless of the particular matter, the goal is to convey in a clear and articulable manner as much information as is reasonable, both for the client and the attorney’s benefit. See, e.g., Handschu v. Special Services Division, 727 F.Supp.2d 239, 242 (S.D.N.Y. 2010)(Attorneys seeking court-ordered compensation “must document the application with contemporaneous time records … that should specific, for each attorney, the date, the hours expended, and the nature of the work done.”); Bell v. Prefix, 784 F. Supp. 2d 778, 787 (E.D. Mich. 2011)(“Both attorneys frequently utilized non-descript ‘block-billing’ in their entries.  In other words, for many entries it is not possible for the Court to ascertain what the attorney was doing.”).  From a risk management standpoint, clarity in billing entries allows a client to better understand the what and why for each billed activity taken on the client’s behalf.  As the adage goes, it is quality rather than quantity that matters.  For attorney billing, this means being able to project the quality of representation in billing entries that are both clear and helpful to the client.

Another incentive for honing your billing practices is to reduce the likelihood of a potential fee dispute, or catalyst for a malpractice claim or disciplinary action.  Excessive billing can lead to disciplinary action. See In re Coffey’s Case, 152 N.H. 503, 511-12 (2005)(finding violation of RPCs, including “charging his client a clearly excessive fee” where attorney “billed 225 hours to write a brief”).  State disciplinary authorities routinely conduct audits of the books and records of attorneys and law firms that engage in the private practice of law within a given jurisdiction.  A discussion on the topic of audit compliance programs may well be reserved for a future publication, but suffice it to say for present purposes that ethical billing is critical to the integrity of the legal profession, and falling short of ethical standards in this regard can jeopardize a practitioner’s law license.  Apart from state disciplinary arms, law firms will conduct audits of legal fees and expenses for risk management purposes.  The rise in unique and client-specific billing guidelines often requires law firms to employ personnel whose responsibilities include compliance with billing guidelines.

The Bottom Line

Throughout the attorney-client relationship, lawyers and law firms should keep an open dialogue with the client when it comes to billing expectations.  Communication is key.  Practitioners will also want to master the billing guidelines of clients early on and keep up-to-date with any changes.  The scrutiny over bills by clients (and ethics authorities) has only increased with advancements in technology.  The goal for practitioners should be to develop a system for billing that is both ethical and efficient.

Diana C. Manning is the managing principal at Bressler, Amery & Ross.

A recent Law 360 story by Rachel Riley, “Wash. Judges Ask If Atty Fee Split Restrains Competition”, reports that Washington state appellate judges scrutinized a fee-splitting agreement that a Seattle lawyer says illegally stifles competition, looking for ways the contract might limit the careers of departing attorneys or otherwise go against the public's interest.  Washington Court of Appeals Judge Ian S. Birk said attorney James Banks' challenge against Seattle Truck Law PLLC hinges on the question of whether the arrangement imposes "a burden on subsequent client choice" that violates the Rules of Professional Conduct.

The employment contract requires Banks to pay 40-50% of contingency fees he earns from former Seattle Truck clients back to the firm during the three years following his departure.  Banks has argued that the provision is illegal because it could potentially discourage an attorney from leaving the firm or from taking existing clients with them, given that they would have to split the fees.

Christopher L. Hilgenfeld of Davis Grimm Payne & Marra, representing Seattle Truck Law, contended Banks presented no evidence at trial that the fee split had impacted client choice.  "The clients' fee did not change in this matter," Hilgenfeld said.  "The client got to make whatever choice they wanted to make.  And they did not pay a different fee."

But Judge Birk questioned how an attorney would even get such evidence, since asking a prospective or former client to provide a declaration for their lawyer's own personal legal squabbles would be a conflict of interest.  "The attorneys would be in the position of having to get declarations from their clients about what the clients felt in order to serve the attorneys' personal interests in the resolution of this law firm dispute. That doesn't sound very normal," Judge Birk said.  "To me it looks like, in case law, the courts look at the agreement itself and judge whether they believe the terms are so onerous it creates a restraint," Judge Birk added.

According to Banks, Seattle Truck Law was founded by Tennessee-based personal injury attorney Morgan Adams of Truck Wreck Justice, who lured him in when he was a junior attorney and structured the employment contract to the Seattle firm's advantage.  Banks argues the trial court erred in granting Seattle Truck Law summary judgment in its breach-of-contract claims against him and ruled that the firm was entitled to about $200,000 of the fees he collected from settling cases for clients from the firm.

"Of course attorneys can divide up fees that have already been earned, profits that are already on the way," said Gary W. Manca of Talmadge/Fitzpatrick, representing Banks. "But here these are contingency fees that have not yet been earned."  Manca emphasized that it's not necessary to provide evidence that the agreement in fact had these limiting effects, but only that it "could have a deleterious effect on client choice and professional freedom."

But Judge David Mann, too, questioned if that's the case with this agreement, given that the half of the fees Banks was contractually entitled to after the split was actually more than his cut of fees earned on contingency cases while working at the firm. 

"No client is getting harmed here," Judge Mann said. "He's not going to cut back on his work because he's earning less. He's actually earning more.  Where is there a public injury?"  Manca responded that Banks took on new costs by leaving the firm because he had to pay overhead costs associated with starting a new practice, such as staffing and insurance.

Seattle Truck has contended that most of the work on the settlements was done while Banks was still working at the firm.  It also argues the fee split provision works in the public's favor because it incentivizes young attorneys to stick with their firms and gain experience before departing to practice on their own.  "Law firms would be greatly reduced if a big case comes in if they feel like that attorney is going to have a good relationship and the client could walk out the door," Hilgenfield said.

A recent Law.com by Andrew Maloney, “Where Are Partner Billing Rates Surging the Most in Big Law,” reports that, while partner billing rates rose last year all over, they skyrocketed in certain practice areas in Big Law and several U.S. cities, according to a new analysis.  Going forward, billing rates are expected to continue another steep increase this year.  Partner billing rates surged to record levels last year “in all tiers of law firms and in all practice areas,” but it was high-dollar practices that commanded some of the largest rate increases, with mergers and acquisitions, commercial and contracts, and corporate practices leading the way, according to the latest trends report from LexisNexis CounselLink.

Hourly rates for all partners jumped between 2021 and 2022 by 4.5%. That’s higher than the increases in 2020 (3.5%) and 2021 (3.4%), and the highest since CounselLink first began producing the trends report in 2013.  The median hourly rate for partners in M&A shot up much more, with a 6.4% jump between 2021 and 2022.  Commercial and contracts, corporate, and labor and employment practices also notched significant rate increases, growing 5.8%, 5.6% and 5.6%, respectively, last year.

With the exception of labor and employment, the median hourly rates charged by partners in each of those practices was $675 or more, according to CounselLink.  The median rate for M&A partners was $955, the highest rate of any practice area in the report.  For commercial and contracts, it was $706. And for corporate work, it was $675.  The median hourly rate for partners in labor and employment was $530.  The trends report is based on $52 billion in legal spending across 420,000 timekeepers and 1.4 million legal matters.

Kris Satkunas, director of strategic consulting for CounselLink, noted that partner rates were on pace to rise 5.4% in 2023, even higher than last year’s record growth.  “There’s still a lot of work to be done in 2023 that has yet to be billed.  So, could that change?  Yes, of course,” she said.  “But we’re on this trajectory right now, and my gut feeling is that it probably won’t go down.  It may go up even a little bit.”

While the 2022 rate growth happened in a year of slower demand, she said she’s not convinced there’s a correlation between rate growth and demand at the practice level.  More often, she said, it’s a firm-wide decision.  She noted that M&A rates, for instance, were still growing at a decent clip a couple of years ago when the practice area was as busy as ever.  In 2022, as demand faltered, the rates grew more than ever.  Analysts told Law.com that partner billing rates rose partly because law firms were feeling the effects of inflation and trying to maintain profitability as demand took a hit.

Rates are higher for practices such as M&A partly because that work is more often done by the larger, more expensive firms, Satkunas said.  “These are kind of the big, high-risk, bet-the-farm sort of matters, and those corporate counsel want to go to the firms they have the most faith in, and those tend to be the larger firms,” she said.  Indeed, the trends report noted that in 2022, the “Largest 50″ firms handled 68% of M&A work. “With regard to the other high rate practices of regulatory & compliance, commercial & contracts and corporate, the ‘Largest 50′ firms had 57 percent of the work from these practices,” the authors wrote.

Overall, the largest firms increased market share, the report noted, with their largest gains in regulatory and compliance, corporate and real estate work.  But head count size didn’t always determine the largest rate increases.  In 2022, the median rate at firms with 501-750 lawyers grew by 9%, but only 3% for the largest firms, the report said.

Rates by City

The report also noted many of the largest legal markets saw the biggest jumps in rates.  Six major metropolitan areas saw median partner rate growth climb higher than 5%: Washington, D.C. (a 6.6% jump, to $925 per hour), Chicago (5.8%, to $765 per hour), Los Angeles (5.7%, to $795 per hour), New York (5.5%, to $975 per hour), San Francisco (5.5%, to $608 per hour) and Seattle (5.1%, to $780 per hour).

“On the opposite side of the spectrum, two cities saw hourly growth rate below 2 percent: Dallas and Detroit,” the report noted.  Utah led the way in terms of partner billing rate growth among states, with the median rate climbing 6.2% in 2022, up to about $350 per hour.

Satkunas said some of the growth among cities and states is a reflection of the size of law firms there. Dallas and Detroit have some large firms, but also plenty of midsize and smaller firms that didn’t raise rates quite as much.  Law firm partners in Utah had more double-digit increases than partners in other states, she noted. Utah just has a smaller population of law firm partners than most states and is thus more susceptible to outliers.

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