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Category: Legal Bills / Legal Costs

Where Are Partner Billing Rates Surging the Most?

May 24, 2023

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.

Report: Sharp Rise in Partner Hourly Rates Last Year

May 22, 2023

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.”

Can Rates Make Up for Expense Growth Much Longer?

April 18, 2023

A recent the American Lawyer story by Dan Roe, “Can Rates Make Up for Expense Growth Much Longer?,” reports that large law firms became more expensive to operate and less profitable in 2022, despite growing in terms of revenue and head count.  While equity partners took home less money, associate and nonequity partner compensation continued to rise. Rate increases managed to keep gross revenue in the black as demand slid by nearly 2%.  Still, the profit margin for The Am Law 100 fell 2 percentage points to 42%, wiping out the profitability gains of 2021 and putting firms below the average 2020 profit margin of 43%. 

“The margin on the billable dollar is contracting, and that is causing law firms to increase their rates, and that is why GCs are saying, ‘Hey, maybe we bring this work in-house,’” says Aon Law Firm Advisory Team manager George Wolf.

Facing seemingly unavoidable increases in personnel expenses, law firms looked to technology for efficiency and real estate for cost savings in 2022.  But despite realization rates holding strong, some observers believe legal departments are at the end of their rope on rate hikes, prompting Big Law to get smart or shrink in the coming years.

Head-Count Growth, Comp Increases and Tech Investments Drove Expenses Up

Head-count growth accounted for a majority of the expense increases in the Am Law 100 last year.  Across the cohort of firms, head counts grew nearly 4.7%, compared to average expense increases of roughly 7%.  Law firms that saw the most expense growth were mostly firms that hired aggressively: Goodwin Procter posted a 24% increase in head count and a commensurate 22% increase in expenses.  Willkie Farr & Gallagher also saw a 22% increase in expenses with 19.5% more attorneys.

In addition to Goodwin, other tech-centric firms that staffed up to meet demand saw similar expense increases: Cooley was up almost 18% on expenses and 11.5% on lawyer head count, and Morrison & Foerster raised head count 6% with an expense increase of 11.9%.  On average, law firms saw expenses rise 3 percentage points more than head count.

Among the firms where head count increases significantly trailed expense increases, firm leaders most commonly cited increases in attorney compensation—particularly for associates.  “It’s a battle for talent at every level, and the reality is, for us to attract and retain and develop the best talent, we need to stay competitive with our peers in the market,” says Husch Blackwell CEO Paul Eberle, whose firm saw expenses rise 18.4% amid a 6.2% increase in head count.

At Baker & Hostetler, first-year associate compensation went up to $200,000 from $175,000, which partly influenced the firm’s 10% average rate increase in 2022.  Vinson & Elkins saw a similar situation, with expenses up 7.5% and head count down 3.2%; firm chair Keith Fullenweider says associate compensation was among the primary expense drivers.  Nonequity partners also got more expensive last year, with nonequity compensation per partner rising 2.7% in the Am Law 100 last year.

Big Law is also going big on tech, with firm leaders citing technology investments as the third-biggest source of expense increases in 2022 behind head count growth and compensation increases.  “From an expense standpoint, we’re witnessing more of a reallocation of expenses than a raw increase in typical areas of spend,” says Alston & Bird chairman Richard Hays. “It’s less on space but more on technology.”

Law firms in the Am Law 100 are spreading their tech budget across multiple areas, but data analytics, automation and artificial intelligence appear to lead the way.  Several firms including DLA Piper, Eversheds Sutherland, and Orrick, Herrington & Sutcliffe are testing an AI legal assistant called CoCounsel, and firms including DLA Piper and Debevoise & Plimpton are building out data analytics capabilities to improve efficiency and increase AI-oriented service offerings for clients.

Finally, the return of travel and events is also driving expenses up, although firm leaders had seen that coming. “Expenses went down dramatically in the form of events, travel, all those things,” says law firm management consultant Ralph Baxter, formerly the chairman and CEO of Orrick. “Every firm leader should be able to manage expectations.  What we saw in those two previous years is not going to repeat.”

Rates Went Up, but Realization Held

The Am Law 100 raised rates by an average of 7.2% by mid-2022, according to data from Wolters Kluwer ELM Solutions released in February, although the report showed significant variance between firms.  Roughly 40% of timekeepers didn’t raise rates at all through June 2022, but 9% raised rates by 20% or more.  About 15 firms in the Am Law 100 brought rates up 10% to 20%.

“Rates typically go up with the consumer price index, maybe 3% to 5% annually,” says Chris Ryan, executive vice president at HBR Consulting. “Now you’re seeing this much bigger swing and variance, which is probably alarming to legal departments who are asked to do more with diminishing budgets, given the state of uncertainty.”

Data collected by The American Lawyer shows that fewer firms were willing to raise rates by less than 3% this year: Whereas more than 20 firms in 2021 kept rate hikes at or below 3%, only seven firms in 2022 reported sub-3% rate increases.  This year will likely be a repeat of 2022, law firms indicated.

Despite raising rates more dramatically than usual, law firms didn’t report substantial drops in realization last year. Having raised rates 10% in 2022 after rate increases of 5.9% to 7.3% for the three years prior, BakerHostetler chairman and CEO Paul Schmidt says clients understood the situation. “Last year was a fairly strong (rate) increase, but with inflation, there was not much pushback on it,” Schmidt says.

How the Inflationary Cycle Ends

Ultimately, if Am Law 100 firms do nothing as billable hours continue to decline, that will indicate that work is leaving Big Law altogether.  “You don’t measure demand for soybeans by how many hours you spend harvesting soybeans,” says Baxter.  “People need legal services more than ever—there’s more regulation, more law, more controversy.  But if you see fewer billable hours, that means demand is moving away from the Am Law 100 to somewhere else.”

That “somewhere” could be in-house legal departments, alternative legal service providers, or regional law firms with lower rates.  “I’ve talked to a lot of regional firms over the past few years that get hired by a big client who has litigation in a place where (the firm) is centered.  The client hires them because they’re there, but they see how good the lawyers are, how responsive they are, how much less expensive they are, and they take them to other places,” Baxter added.

Speaking with in-house counsel, Wolf says legal departments are incensed by associate rate hikes—see the $1,060/hour second-year Kirkland & Ellis associate bill that recently went viral on legal Twitter.  “The rates that are being charged for younger attorneys are driving in-house counsel to start building staff again,” Wolf says.  “The offshoot of that is that’s where the least amount of work is available in law firms—younger attorneys.  And you need midlevel attorneys to help train them, and right now there’s a dearth of midlevels because of the Great Resignation.  That’s causing a problem for managing partners and law firm leaders.”

Rather than pulling back on rate hikes, law firms are looking to squeeze more value out of their personnel using technology, with the goal of reducing staffing costs for clients and compensation costs for firms.  “You’ve seen this shift toward looking at the profitability of individual practices and using data in a different way so they can position themselves in a better light with clients,” Ryan says.  “I think that firms are looking at those kinds of models and are more open to them than ever.”

Firms like DLA Piper, Orrick, Debevoise, Winston & Strawn, Mayer Brown, and Gibson, Dunn & Crutcher have all made investments in AI practices of late, with promises to deliver more efficiency to clients in addition to using AI to help them solve their legal problems.  “At its core, we think of it as making lawyers more efficient, increasing their quality of lives, increasing the work product if we can, or at a minimum ensuring it’s the same,” Orrick innovation adviser Vedika Mehera told Legaltech News in March.

Law firms’ substantial investments in artificial intelligence and data infrastructure could also have something to do with the existential threat such technologies pose to the billable hour.  “Generative AI is making it possible to do a lot of the work law firms do way faster,” Baxter says.  “If you continue to base how much you charge on how many hours it took you, then you’re going to have a material hit to your revenue—and an unnecessary one.”

However, on an aggregate basis, the Am Law 100 has made little progress on AFA adoption in recent years, with 18% of its 2023 revenue coming from such arrangements.  In high-stakes litigation, some firms have had success keeping clients who might have been priced out of their services by organizing litigation funding.  At Nixon Peabody, where rates went up 5% to 6% last year, chairman and CEO Stephen Zubiago says the firm has involved litigation funding with an increasing number of clients.  Regardless of which levers they choose to pull, firms will have to find ways to outrun expense growth in a climate where clients are holding tighter to their dollars as firms are losing a grip on their own spend.

NY Law Firm: Environmental Company Failed to Pay Legal Fees

November 15, 2022

A recent Law 360 story by Emily Lever, NY Firm Says Enviro Co. Failed To Pay Legal Fees” reports that Bochner IP PLLC sued environmental company Global Thermostat in New York state court over allegedly skipping out on a $102,000 bill for its work on intellectual property transactions aimed at fending off bankruptcy, saying Global Thermostat "never intended to pay" in full.

When Global Thermostat found itself at risk of bankruptcy, the company's co-founder agreed to grant it the use of her intellectual property, according to a complaint filed in New York Supreme Court.  Bochner handled the IP transactions, for which Global Thermostat paid the first few installments of the six-figure legal bill — a deliberate deception to create a false sense that Global Thermostat intended to and could pay the full bill, according to Bochner.

"Defendants successfully closed on the transactions and avoided bankruptcy, without having to fulfill their obligations to plaintiff," the complaint says.  Global Thermostat, a startup billing itself as being able to suck carbon dioxide out of the atmosphere and stop climate change, was co-founded in 2010 by Graciella Chichilnisky based on technologies she patented.

Global Thermostat PBC, Global Thermostat Operations LLC and Global Thermostat Licensing LLC sought new investors to save them from a possible bankruptcy, according to the complaint.  The companies paid Chichilnisky royalties for her technology, but potential investors insisted Chichilnisky transfer the patents to the companies as a condition of investment, according to the complaint.

Chichilnisky agreed, and the companies agreed to pay her legal fees in connection with the transfer of IP as compensation for the loss of royalties.  Bochner, a civil litigation and intellectual property firm, represented Chichilnisky in the transaction.  Bochner drafted a settlement that allowed the companies to avoid bankruptcy, according to the complaint.

Global Thermostat paid Bochner's first three invoices, which were each for $20,000, before the settlement closed.  But once the settlement was finalized Aug. 12, they stopped paying, leaving $102,679.25 worth of invoices unpaid, according to the complaint.  The companies "failed to disclose material information of their intent and/or ability to pay" to give Bochner the impression they would pay the full legal bill and to keep the firm working on the settlement that would preserve their business, according to Bochner.

"Defendants made these assertions and payments in order to induce plaintiff into believing it would be paid for all further work done in negotiating and finalizing the transactions," the complaint says.  Global Thermostat also ignored demands for payment from other firms that worked on the transaction, according to the complaint.

Insurer Must Pay Attorney Fees in Nassar Coverage Action

August 31, 2022

A recent Law 360 story by Celeste Bott, “USAG Keeps Fee Award in Nassar Coverage Suit reports that Liberty Underwriters Insurance Inc. must pony up the remainder of a roughly $2.1 million judgment for USA Gymnastics, a Seventh Circuit panel ruled, saying the insurer failed to show that any portion of the fees incurred during investigations into sexual abuse by former team doctor Larry Nassar were not reasonable and necessary.

At issue are legal costs incurred when USA Gymnastics responded to investigations by both houses of Congress, the Indiana Attorney General's Office, and the U.S. Olympic and Paralympic Committee into Nassar's conduct.  During oral arguments in the case, a three-judge Seventh Circuit panel pushed the Liberty Mutual unit to address why it paid more than $1.4 million toward those defense costs if it believed it owed no reimbursement.  In the court's opinion, written by Chief Circuit Judge Diane Sykes, the court noted that in light of that payment, all that remains up for discussion is the remaining $458,472.26 of the lower court's judgment.

Liberty argued that a district court and a bankruptcy court wrongly applied a presumption established in Thomson Inc. v. Insurance Company of North America, an Indiana case, that an insured's defense costs are reasonable and necessary if the insured has secured, supervised and paid for a defense.

Liberty said the Thomson presumption does not apply because USAG failed to adequately supervise the outside counsel it engaged and did not pay the full amount of legal fees it incurred.  Liberty cited a Seventh Circuit ruling in Metavante Corp. v. Emigrant Savings Bank, in which the appellate court observed that a "prevailing party's general counsel, or similar corporate officer, has a duty, imposed by various provisions of federal and state law, to scrutinize the bills before paying them,"

The panel was unpersuaded by those arguments. It clarified Tuesday that that duty does not require a party to request write-offs from outside attorneys or ask them questions about invoices.  "We hold that a litigant may supervise its outside counsel without refusing to pay portions of legal bills or engaging in hairsplitting about those bills.  Nothing in the case law provides otherwise," the Seventh Circuit said.  Also, no Seventh Circuit case law mentions a requirement that the party seeking fees must have paid its fees in full for the presumption of reasonableness to apply, the panel said.

The insurer also argued on appeal that USA Gymnastics's damages expert had a flawed methodology and that its chief legal officer, C.J. Schneider, was effectively a "rubber stamp" for defense counsel.  It also said his review of the work of his own law firm, Miller Johnson, constituted a conflict of interest.  But an apparent conflict of interest does not negate the presumption under governing case law and "an insurer's objections to a policyholder's selection of defense counsel lose force when the insurer disclaims its duty to defend and turns out to be wrong on the law," the panel said.

Liberty could have reserved its defense that it had no duty to defend and assumed USAG's defense, choosing and supervising the lawyers defending USAG and seeking reimbursement later, the court said.  "Liberty chose not to do so, instead electing to gamble by not defending USAG. With the benefit of hindsight, Liberty now identifies a purported conflict of interest," the panel said.  "The case law does not reward such a choice, and Liberty cannot use the purported conflict to render the presumption inapplicable."

Further, Schneider was not the only one engaging in an internal review of USAG's legal bills, as its CEO and chief financial officer also checked the bills and approved them for payment, the court said.  And, while Liberty asserts that the nearly $8 million in grant funds USAG received from the National Gymnastics Foundation removed the incentive for USAG to drive down costs, the very basis for the Thomson presumption, it does not cite evidence to back that up, the panel held.

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...

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