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.

A recent Law.com by Maria Dinzeo, “Law Firm Partner Hourly Rates Rose Last Year at Biggest Clip in at Least a Decade,” reports that hourly rates for law firm partners jumped 4.5% in 2022, driven in part by law firms’ fears of profitability losses from inflation and a drop in M&A activity, according to a report from LexisNexis CounselLink.  The report, based on $52 billion in legal spending across 420,000 timekeepers and 1.4 million legal matters, says that annual percentage increase was the largest since CounselLink put out its first report in 2013.

The largest portion of corporate spending went to partners at the 50 largest firms, those with 750 lawyers or more, where the average partner billed at a 46% higher rate than the next tier of firms with 501-750 lawyers.  The 50 largest law firms also saw their market share swell to 47.3%, particularly in regulatory and compliance, mergers and acquisitions and financial matters, where the 50 largest firms consumed 55% of legal billing in 2022.

“There’s all this increased regulatory pressure going on out there.  And who do you want to handle this stuff?  You’re gonna go to the firms that you think had the most insight into this and that’s going to be the big firms,” said report author Kris Satkunas, director of strategic consulting for CounselLink.  She also recently took a preliminary peak at this year’s numbers, and partner rates are on track to rise 5.4%, an even bigger increase than the 2022 record.  Those rates rose 3.4% in 2021 and 3.5% in 2020.

“It’s a very big leap compared to where we have been running for the last 10 years.  But that number will change.  Will it go up or down?  I don’t know,” she said.  “But that’s where things stand today through the first four months of the year.”  Satkunas noted that 25% of partners had increases of over 10% last year.  She said some legal departments also reported seeing double-digit rate increases.  The hikes could be attributed to firms beginning to feel the effects of inflation and less demand for certain types of work.  “I think there’s some fear about being able to hit profitability,” she said.

M&A activity also declined in 2022 after hitting an all-time high in 2020, experts say, when high demand for M&A work, with accompanying litigation, tax, real estate and intellectual property issues, gave firms more work than they could handle.  “M&A was the gift that kept on giving in 2020 and 2021,” said law firm consultant Kent Zimmermann of the Zeughauser Group.  “The massive demand for talent led to a big rate increase and that caused some firms to pull away a lot relative to their peers on profitability and talent advantage.”  Even though M&A work has slowed, Zimmermann said firms are still vying to attract the “best” lawyers as a path toward profitability.

“Even though demand is soft, that rate lever is still important,” he said.  “If there is any recession, it’s looking like it’s going to be short and shallow, so law firms are thinking.  We need to plan two to four years ahead.  We can’t under-do it on the rate increases.  It’s a big driver of our ability to enhance profitability and compete and attract the best lawyers.”

Some firms raised rates twice over the span of 12 months to keep up.  “The internal messaging was we need to pay to be competitive in the market for associates and their pay is going up,” Zimmermann said.  “You need the best and brightest associates and this is what it takes.”

If law firms have only two levers to profitability- raising rates or drumming up more work— raising rates is the easier of the two, Satkunas said.  “Typically, they are more comfortable raising rates.  It’s actually easier to raise rates and go find new customers or find new new work,” she said.  Though alternative-fee arrangements have grown more popular in recent years, this year’s report notes that their adoption remains largely unchanged, and represented 6.3% of total legal billings in 2022, according to the CounselLink report.

“At the end of the day, I believe that most corporate counsel are just more comfortable negotiating an hourly rate discount than being creative.  It’s easier to negotiate a rate than it is to have to think about, what’s the value of this matter, what am I willing to pay for the outcome I want?” Satkunas said.  “I’m disappointed and I really would love to see a real meaningful uptick in the use of AFA’s but it just hasn’t happened.”

A recent Law.com by Riley Brennan, “In Fee Fight, State Appeals Court Rejects Contractual Interpretation That Would Result in ‘Windfall’ to 1 Law Firm,” reports that, in a dispute over a contingency fee following a lateral move, the Kansas Court of Appeals ruled that the only reasonable interpretation of a law firm’s operating agreement with one of its now-former owners is the one that allows the firm to recover under the doctrine of quantum meruit.

The appeals court reversed and remanded a lower court’s grant of summary judgment to plaintiff Krigel & Krigel, instead siding with defendant Shank and Heinemann’s interpretation of its operating agreement with attorney Stephen Moore.  In an April 21 opinion, Judge Patrick McAnany for the Kansas Court of Appeals, ruled that the operating agreement between the Shank firm and Moore wasn’t a waiver of the firm’s right to recover in quantum meruit.

Moore originally worked at Shank, first as an associate, then later as one of three owners of the firm, according to the opinion.  Eventually, he left Shank to join Krigel.  On his exit, Moore took one of Shank’s contingent fee cases, representing client Trudi Shouse.  Shouse hired the Shank firm on a contingent fee basis to pursue her claim in an employment dispute.

According to the court, “She acknowledged in her engagement agreement with the firm that Shank would have an attorney’s lien against any award or settlement in the matter.”   Yet, two years later, Moore left Shank, taking the Shouse litigation with him.  Days later the Shouse employment litigation was settled, but Krigel refused to honor Shank’s attorney lien, according McAnany’s opinion.

Krigel sought a declaratory judgment against Shank, looking to invalidate its attorney lien claim, in an attempt to avoid sharing the contingent fee with Shank.  The firms then filed competing motions for summary judgment, with the district court entering judgment in favor of Krigel and against Shank.  This left Krigel entitled to retain the entire contingent fee from the Shouse litigation, excluding Shank, according the opinion.

But McAnany determined the district court had erred in this ruling.  “Shank represented Shouse for the majority of her case,” McAnany said.  ”It paid $2,401.68 in expenses, provided the staff needed to assist with the case, and paid the overhead costs that come with operating a law firm.  It also compensated Moore for the time he worked at the firm.  Interpreting the operating agreement as a waiver of quantum meruit recovery in the Shouse action would result in a windfall to Krigel, which has provided no consideration for the benefit.”

According to McAnany, there was “nothing in the operating agreement that could be construed as an express waiver by Shank of its right to relief through quantum meruit upon Shouse discharging Shank and retaining Krigel in its stead.” 

“Under such an arrangement, the departing senior attorney may be compensated for capital contributions to the firm and the attorney’s share of the tangible assets of the firm but not for any intangibles such as goodwill or for work in progress or a share in unrealized recoveries in pending cases.  Such an arrangement does not signal a disregard for the value of these intangibles for which a departing attorney realizes no monetary consideration,” McAnany wrote.  “Rather, the arrangement recognizes the importance of husbanding the value of these intangibles for the cultivation and development of new attorneys who will carry on the task of maintaining and expanding clients for the future health of the firm.  We fail to see how such an arrangement could ever be viewed as an abandonment of the firm’s right to seek relief through quantum meruit from clients who choose to take their legal business elsewhere.”

The district court’s interpretation of the operating agreement was also inconsistent with Shank’s actions and the concept of principal-agent relationships, according to McAnany.  “Shank took on Shouse’s case on a contingent fee basis and spelled out in the engagement agreement its right to an attorney’s lien against any recovery by Shouse if she went to another law firm,” McAnany wrote.  “And when Shouse left and Krigel settled the case, Shank asserted its attorney lien for the work done on the case before Shouse left.  None of this is consistent with waiver, but it is entirely consistent with the right to claim quantum meruit.”

The appeals court also rejected the district court’s interpretation of the agreement’s provision that valued contingency fee cases at zero.  “The district court believed that its interpretation of the operating agreement was reasonable because allowing quantum meruit in the Shouse case would allow Moore to make a quantum meruit claim in the cases that stayed at Shank and this was ‘[t]he result that the parties presumably sought to avoid when they set the contingency case book value at zero,’” McAnany said.  “Such an interpretation ignores the fact that Moore had no quantum meruit claim in cases he worked on while at Shank.  The clients were the clients of Shank and Moore was paid for his work on the firm’s clients through his compensation agreement with the firm.”  Likewise, the appeals court said Krigel’s interpretation of that provision of the operating agreement did not hold up to scrutiny when applied to different scenarios.

“[U]nder Krigel’s theory, death of one of the owners necessarily would trigger these same provisions of the operating agreement; and because the value of contingent fee matters would not be calculated in arriving at the value of the deceased owner’s equity in the firm, a contingent fee client—or all the firm’s contingent fee clients, for that matter—would be free to pick up and move to a different firm and, in the process, insulate the proceeds of any recovery in their cases from a claim under quantum meruit by Shank for legal work performed on their behalf,” McAnany determined.  “The same could be said of the other means by which an owner of the Shank firm could depart: an owner being expelled from the firm or being disbarred.  Such an outcome based on Krigel’s interpretation of the operating agreement would be an absolute absurdity.  Moreover, we cannot rewrite the operating agreement under the guise of construction in order to accommodate Krigel’s theory of waiver.”

A recent Bloomberg Law by Roy Strom, “Big Law Attorney Billing Rate at 15-Year Low, Wells Fargo Says,” reports that big law firms face pressure to downsize as attorneys bill hours at a historically low rate, a Wells Fargo & Co. survey of 66 of the largest US law firms shows.  The first quarter data shows attorneys billed at an annual pace of less than 1,600 hours, the lowest figure in at least 15 years, said Owen Burman, managing director of the Wells Fargo legal specialty group.

Firms including Cooley, Gunderson Dettmer and Goodwin Procter have already laid off lawyers this year, and “I would not be surprised to see more announcements of that sort,” Burman said.  Corporate transactions have dried up in the wake of frenzied hiring during the pandemic, causing demand for lawyers’ time to drop.  Demand fell 1.5% from the year-ago period while the number of lawyers rose nearly 5%, according to the survey.

The drop in productivity squeezes firms’ bottom lines.  Profits per partner fell 4% last year, Wells Fargo reported earlier.  While law firms remain highly-profitable businesses that can choose to invest in a recovery by keeping lawyers employed, less than 1,600 annual billable hours is “not something firms have historically accommodated,” Burman said.

The big associate classes scheduled to join firms, along with attrition that has been below expectations, will add pressure for firms to shed headcount, he said.  The 66 of the 100 largest US law firms that responded to the Wells Fargo survey saw revenue increase 4.7% from the first quarter last year.  That is largely thanks to rate increases and healthy collections from work done in 2022.

Firms will shed lawyers while at the same time adding talent in key areas, said Kent Zimmermann, a partner at law firm consultancy Zeughauser Group.  “Targeted right-sizing will continue to pick up with a focus on lawyers who underperform expectations for years,” Zimmermann said.  “Simultaneously, firms will continue to invest in teams of lawyers who are highly productive in doing the work and bringing it in at rates that drive increased profitability.”