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.com article by Suzanne Ganier of QuisLex, “Conventional Wisdom is Wrong: Legal Bill Review Won’t Harm Your Relationship with Outside Counsel”, reports on legal bill review.  This article was posted with permission.  The article reads:

Legal departments use various tools to manage spend and reduce costs, including shifting work from one law firm to another, moving from larger to smaller law firms, pulling more work in-house and employing more alternative legal service providers.  However, many legal departments aren’t employing one tool that can reduce costs immediately and support other tools to produce long-term cost containment: legal bill review.

Not using legal bill review as a primary tool for cost containment is like trying to build a house without a hammer; you may be able to do it, but it’s going to be a lot more difficult.  Most corporate legal departments recognize bill review will reduce outside counsel legal spend, as those partners don’t always comply with the department legal billing guidelines.  High outside counsel spend can have a domino effect across the legal department, resulting in smaller budgets for other needs including technology and headcount.

So why don’t more legal departments implement bill review?  The simple answer is relationships.  Many fear legal bill review will irreparably harm the rapport with long-time outside counsel who are often handling sensitive issues, high-stakes litigation and other issues of the utmost importance to the organization.

These relationships have often been nurtured over time, involving people that have worked together for many years.  And these relationships have hopefully resulted in success for all.  But corporate legal departments are part of businesses, which live and die by budgets, revenue and margins.  To remain competitive, they must stay hyper-focused on cost containment – in all areas, including the legal department.  For this reason, legal bill review doesn’t just make sense; it becomes a necessity not only to be fiscally responsible, but also to help the business maximize its competitiveness.  However, this fact doesn’t alleviate concerns about harming relationships with the department’s law firms.  That so many have considered and rejected or have discontinued legal bill review due to such concerns demonstrates their power.  So how do you solve this problem?

Acknowledge the Issue

First, recognize the problem.  In this context, acknowledge three things:

1. Legal bill review is a cost containment necessity.
2. Corporate legal departments are implementing legal bill review.
3. The law firms they work with are going to be concerned that legal bill review means their bills will be unjustifiably reduced.

Corporate legal departments often don’t acknowledge one or all of these points.  Some believe they can reach cost containment goals through other means such as rate negotiations, discounts or e-billing (building that house without the hammer).  Others think if they advocate for the law firm under the guise of protecting the relationship, they can make legal bill review magically disappear.  Such thinking fails to admit the importance of cost containment, which can be harmful to the business.

Have the Conversation

Have a frank and open conversation about legal bill review with your outside counsel.  Go beyond discussing the nuts and bolts and talk to the firms about why bill review is necessary to meet the financial and strategic goals of the business.  Recognize the value of the relationship but focus on the fact that both the corporate legal department and the law firm are businesses and how it is in the best interest of both that the relationship be treated as a business as opposed to a personal one.  Acknowledge that with the implementation of legal bill review, the firm will undoubtedly see their invoices reduced for failure to comply with the legal billing guidelines.  But reassure the firm it will continue to get paid for its time and effort and will be further helped to acclimate to the process.

Be frank, open and transparent with each law firm, and they will return the favor.  Such conversations will not only ease the implementation of legal bill review, but they will also help to strengthen the relationship.

Show Them How to Do It 

There isn’t a class in law school called “Appropriate Legal Billing” (although some would argue there should be,) and there isn’t much training on this topic.  Even attorneys of long standing may not understand billing best practices and know how to comply with a client’s legal billing guidelines.  Frustrated counsel often wish their clients would give them more guidance.  Nothing will hurt a relationship faster than telling firms to change their behavior but not providing the details on how.  Providing firms with specific training on how to meet your expectations will further improve the relationship.  If law firms can see they aren’t being left to figure it out on their own, they will be more inclined to view legal bill review as a partnership, thereby strengthening that relationship.

Ask for Help

Most importantly, ask for help. Explain to the law firm why, as a valued partner, it’s being asked to do this.  People want to help; if you give them the opportunity, they will usually go out of their way to offer it.  Being honest about what your business needs and how firms can help meet those needs opens the door to that help and makes the relationship between law firms and the corporate legal department stronger.

It’s a cliché, but still true – change is never easy. But change doesn’t have to be painful.  While law firms are never going to celebrate legal bill review, it doesn’t have to harm the relationship between law firm and client and, perhaps, can even enhance it. 

A recent Law.com story by Adolfo Pesquera, “3 Lawyers? One’s Enough, Court Rules in Insurer’s Fight Over Attorney Fees”, reports that a Texas state district court was found to have erred in denying an insurer’s summary judgment motion in an attorney fees dispute, where plaintiffs alleged more than one attorney was needed to avoid a “potential” conflict of interest.

The Ninth District Court of Appeals reversed a ruling of the Montgomery County 457th District Court in a case where a government entity and two elected officials depended on a Directors and Officers policy from Mid-Continent Casualty Co. to provide for their defense when a losing candidate filed suit alleging election irregularities.

Insurer Right to Control Defense

The reversal hinged on Mid-Continent’s right under the policy to control the defense, and whether there was an actual conflict of interest that the insurer formally recognized.  In the underlying suit, third-place candidate Edgar Clayton sued Harris County Municipal Utility District No. 400 and the two candidates who placed ahead of him, Ann Marie Wright and Cheryl Smith.

The court ultimately dismissed the lawsuit with prejudice, but the parties disagreed about how many lawyers the insurer should provide the district.  James Stilwell of Stilwell, Earl & Apostolakis, based in The Woodlands, Texas, and acting for the district responded to Mid-Continent’s letter agreeing to defend but preserving its reservation of rights.  Stilwell told Mid-Continent that was a “possibility of a conflict of interest in representation regarding Mid-Continent’s desire to have a single attorney represent all three defendants.”

Stilwell and the district were informed by a claims adjuster for Mid-Continent that it was the opinion of coverage attorney Brent Cooper of Cooper & Scully that Mid-Continent had the right to select defense counsel “because the facts to be adjudicated are not necessarily the same facts that control coverage,” and the Houston attorney Britt Harris had been retained by Mid-Continent as their counsel.

Instead, Stilwell’s subsequent correspondence informed Mid-Continent that the elected officials would be represented by Houston-area attorneys and Bruce Tough and Kenna Seiler, and the district by its general counsel, Chris Skinner of Schwartz, Page & Harding.

Conflict of Interest?

Stilwell asserted the potential conflict had to do with Wright and Clayton having run on the same slate against Smith, as well as the district’s desire to defend the election through trial, whereas the individual directors possibly wanting a do-over or settlement.

Mid-Continent attorney Mark Lewis cut a check made out to the district for $4,290 in attorney fees, which covered the period up to Mid-Continent’s offer to assume the defense.  Stilwell, in a pre-suit demand letter asked for attorney fees of $151,750 for the Clayton suit defense, plus $5,600 attorney fees for defending the wrongful denial.

Referring to the Texas Disciplinary Rules of Professional Conduct, the Ninth District court noted a lawyer may only represent multiple clients if he reasonably believes each client will not be materially affected, and each client consents after full disclosure of possible adverse consequences of common representation.

The deposition testimony and affidavit generally averred that the defendants discussed material conflicts at a board meeting and would not waive those conflicts, and they requested separate counsel, the opinion stated.  Nevertheless, the Ninth District held that the district’s “arguments are without merit.”

“We note that the information on which appellees rely falls outside the eight-corners of the pleadings and the insurance policy,” the court said.  In addition, the court said Stilwell’s responses to Mid-Continent referred only to “potential” conflicts, but never stipulating actual conflicts.

“We conclude that Clayton’s petition did not allege facts that would necessitate separate counsel. Clayton does not allege anything in his petition that would make the interests of Wright, Smith, or MUD 400 adverse to the interests of each other,” the court said.

A recent Law 360 story by Aaron Keller, “Conn. Lawyer Says Colo. Companies Stiffed $107K Legal Bills”, reports that two Colorado companies, one of which purported to be working on a cryptocurrency exchange, stiffed a Connecticut attorney on legal bills and costs totaling nearly $107,000 in connection with representations in underlying securities lawsuits in Florida and Illinois, a new federal lawsuit alleges.

Edward Stone Law PC, a small Greenwich, Connecticut-based firm with a sophisticated niche practice in commercial litigation, insurance and pensions, says Net Savings Link Inc. and the China Food and Beverage Co. have both failed to pay legal fees and expenses connected with the two core matters.  The defendants share the same Boulder, Colorado, address, according to a breach of contract complaint filed in the U.S. District Court for the District of Connecticut, and they share James A. Tilton of Pennsylvania as president, according to several exhibits.

The complaint alleges that the two companies are jointly and severally liable for the sum in dispute.  "Case is simple," attorney Eddie Stone said when contacted by Law360.  "We provided legal services and despite numerous promises that our invoices would get paid — we got stiffed."

The first underlying matter dates back to April 27, 2021, in Florida, where the complaint says the Colorado companies racked up $25,530 in fees and costs.  The firm's hourly fees were between $375 and $550 per hour, according to a retainer agreement filed as an exhibit.  The retainer letter adds that the Florida dispute involved claims by Jake P. Noch and potentially by his company Pro Music Rights Inc.

The Florida matter referenced in the Connecticut complaint appears to be state court lawsuit, filed in Collier County on June 15, 2021. Noch sued Net Savings and Tilton for allegedly defaulting on a promissory note connected to an even earlier settlement of a $1.3 million dispute surrounding Noch's unpaid duties as the CEO of Net Savings.  Net Savings allegedly promised to trade shares of its common stock to settle the debt but did not follow through because of a depository trust company chill on the necessary shares.  Securities fraud was among the causes of action in Noch's Florida case.

The firm says its work included "drafting pleadings, participating in discovery, representing defendants at status conferences and representing defendants at mediation" before a federal magistrate judge.  The defendants incurred $51,855 in legal costs under the same hourly rates referenced in the Florida matter, according to Connecticut court papers.

That number ballooned to $81,409 because of a 1% monthly interest fee contained in the underlying agreement, Stone alleges.  The Connecticut complaint alleges two counts of breach of contract and an account stated claim that appears to have been pled in the alternative.  Tilton is not named in the Connecticut complaint and is not a named defendant; his name appears only in retainer and billing agreements attached as exhibits.  However, securities issues appear to have plagued him for quite some time.

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