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 360 story by Rose Krebs, “X Corp. Accused of ‘Shirking’ Its Obligations in Legal Fee Row”, reports that three former top Twitter executives continue to urge the Delaware Chancery Court to order the Elon Musk-owned social media giant, now called X Corp., to reimburse them for at least $1.1 million in legal costs, accusing the company of "perpetually making excuses" for not meeting its obligations.  In a brief, former Twitter CEO Parag Agrawal, former Chief Legal Officer Vijaya Gadde and former Chief Financial Officer Ned Segal told the court that the company is "gaining a well-earned reputation for shirking its commitments."

They took aim at a cross-motion for summary judgment and accompanying brief X Corp. filed last month, after Agrawal, Gadde and Segal had already sought to have Chancellor Kathaleen St. J. McCormick summarily order the company to pay legal fees they have incurred in connection with Twitter-focused lawsuits and regulatory inquiries.

The three assert that, in their summary judgment bid, they established "beyond any doubt that Twitter has breached its advancement obligations."  "From the beginning of this dispute, plaintiffs have operated by the book — making timely demands for advancement, providing undertakings, and submitting good faith certifications from counsel attesting to the reasonableness of plaintiffs' attorneys' fees," their brief said.  "Plaintiffs have done everything prescribed by Delaware law to obtain advancement from Twitter."

They accuse the company of causing months of delays and "perpetually making excuses for its failure to meet its advancement obligations."  "Although Twitter would like to pretend it is a party that dutifully pays its contractual obligations as they come due, it is in fact perpetually delinquent and is gaining a well-earned reputation for shirking its commitments," they contend.

In a filing last month, 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.  The three sued the social media giant in Chancery Court 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 filing last month, the three argued: "Put simply, the world's richest person does not pay his bills."

But, its own filing, X Corp. has called into question the reasonableness of fees related to Gadde's appearance before the House Committee on Oversight and Reform during the committee's investigation into the influence of social media on U.S. elections.  In its own summary judgment filing last month, X Corp. called Gadde's request for fees excessive.

"Unlike many advancement actions, here, X Corp. does not challenge Gadde's entitlement to advancement of reasonable expenses — the company does not dispute that her testimony was required by reason of Gadde's role as former CLO of Twitter," the filing said. "Rather, the company here is challenging only the reasonableness of the fees for which Gadde seeks advancement with respect to the Congressional Inquiry."

X Corp. said Gadde is asking the company to advance "over $1.1 million" for fees incurred by her counsel, Sidley Austin LLP, "in connection with testifying for a single day."  That amount is "nearly 1,100%" what was incurred by two other former Twitter executives who also testified at the same hearing and were "similarly situated witnesses," X Corp. contended.

"The extreme delta between Gadde's legal fees and those of not one, but two separately represented, similarly situated, former Twitter executives who engaged similarly reputable law firms, is on its own sufficiently shocking to require that the reasonableness of Gadde's fees be thoroughly addressed now," the company argues.

X Corp. asked the court to "reduce any advancement award related to Gadde's representation in the congressional inquiry from $1,153,540.81 to $106,203.28 because Gadde failed to prove that all the fees and expenses were reasonably incurred."

But, ina filing, Gadde, Agrawal and Segal fired back.  "Twitter's challenge to these fees is particularly troubling given that Twitter's owner, Elon Musk, contributed to the exposure and complexity of the oversight inquiry when he publicly and repeatedly focused on Gadde and personally toured Capitol Hill to incite Republican lawmakers leading the oversight inquiry," their filing said.  They argued that "the record demonstrates that Gadde's fees incurred in the oversight inquiry are reasonable."

The three criticized the company for venting "invective at Gadde's counsel," including asserting that it engaged in "over-lawyering" and "extensive duplication of effort."  Gadde’s attorneys spent many hours prepping her for the committee’s questions, using five partners with hourly rates from $1,300 to $1,825, two associates charging more than $1,200 an hour and non-lawyer “policy adviser” Tracey LaTurner, who billed at $665 an hour.

"Aside from its invective, the only basis for Twitter's cross-motion is a false comparison between Gadde's attorneys' fees and the attorneys' fees of two other witnesses who testified in the same oversight inquiry," they said.

A recent Law 360 story by Celeste Bott, “DOL Says Fund ‘Bleeding Money,’ Questions Baker Botts Bills”, reports that the U.S. Department of Labor has asked an Illinois federal judge to prevent trustees from entirely draining a multi-employer benefit fund — after the agency accused them of misappropriating more than $2.8 million in assets and seemingly approving "gargantuan" legal fees charged by Baker Botts LLP.

In a motion for a temporary restraining order and preliminary injunction, the department said that without court intervention, trustees John Fernandez and Gary Meyers will keep "bleeding money" from the United Employee Benefit Fund and leave nothing for the participants and beneficiaries.  The fund provides life insurance for at least 63 employer-sponsored plans.

The Labor Department says it has evidence that the trustees are approving or failing to scrutinize the funds' soaring expenditures toward legal fees and other costs that are rapidly depleting its assets, leading those assets to shrink from $22 million in December 2018 to roughly $12 million in April 2023, and then "dramatically less" as of this May, "to the point where there is a substantial risk that all of the fund's assets will be imminently and completely dissipated."

The agency says Fernandez and Meyers "appear to be turning a blind eye" to unreasonable legal fees, claiming to have received a letter in May from the fund's counsel, Christopher Rillo of Baker Botts, stating that the firm had billed the fund millions in fees, in part to defend against the Employee Retirement Income Security Act lawsuit, and was owed millions more, far exceeding initial estimates.

The suit, first brought by Labor Secretary Marty Walsh last February, alleges that the benefit fund and its trustees used more than $2.8 million to pay home foreclosure costs and make direct payments to themselves.  The complaint also alleges that L. Steven Platt, a real estate attorney, helped transfer $1.1 million from the fund through his companies Husker Properties LLC and Mount Rinderhorn Capital LLC to save a trustee's home from foreclosure in late 2016.  Platt later argued in a motion to dismiss that he was merely following orders from the trustees.

Fernandez and Meyers were both named in the suit, as are the law firm Robbins Salomon & Patt Ltd. and real estate attorney David Schwalb, who the Labor Department alleged conducted prohibited transactions with the fund in 2016 and 2017.  Now, emergency measures are warranted because of "alarming information" the department has learned about the fund's rapidly depleting assets, the department said.

"The $1.385 million the Secretary caused to be restored to the fund between August and November 2021 is likely spent, presenting the distinct possibility that there will be nothing left to make whole the participants harmed by the trustees' violations," the DOL said.  "In addition to the very real possibility that all plan assets will be dissipated before this litigation is resolved, the issue of attorney's fees is concerning because the trustees brazenly amended the fund's governing document to allow the fund to give themselves and defendant Platt indemnification agreements that require it to advance their legal fees, including fees to defend against the Secretary's claims against them for fiduciary violations."

The agency claims that it has asked Rillo of Baker Botts numerous times for information about the fund's assets and legal bills, but it was not until days before the May mediation that he shared those details.  "Fund counsel implies that his 'substantial attorney's fees' are justified by the possibility his firm will recover more money for the fund than the Secretary's enforcement action will," the department said.  "Beyond that, the litigation Rillo filed on behalf of the fund to recover losses from ERISA violations is duplicative of the Secretary's claims — a fact belied by the fund's failed attempt to consolidate its actions with the Secretary's."

Rillo has said there is no insurance coverage available to pay the fund's legal fees in defending the ERISA action, with those costs to defend the trustees coming directly from the fund they are accused of mismanaging, the DOL said.  "Thus, it appears that the trustees are permitting the fund to cash in participants' insurance policies to obtain funds to pay their own enormous legal fees, as well as the unreasonable fees charged to the fund by fund managers," it said.

The department wants an appointed fiduciary to take control of the fund, its assets and participating plans and make sure it complies with ERISA, conduct analysis on whether the legal fees paid since Rillo became the fund's counsel are lawful and prevent the fund from cashing in any life insurance policies except for the benefit of the fund's participants.

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 360 story by Hailey Konnath, “Twitter Rips Wachtell’s $90M Fee Battling Musk To Close Sale”, reports that Twitter has accused Wachtell Lipton Rosen & Katz of exploiting "lame duck fiduciaries" as it "ran up the tab" and collected a "gargantuan" $90 million fee helping it defeat Elon Musk's effort to back out of his $44 billion acquisition, according to a lawsuit filed in San Francisco County court.  Twitter's new parent company, X Corp., said the firm violated its fiduciary and ethical obligations to the company, which had been "left unprotected by lame duck fiduciaries who had lost their motivation to act in Twitter's best interest" pending the $44 billion sale to Musk.  The company said the fee payment made to Wachtell was done under an "unenforceable contract" and must be voided.

Wachtell initially agreed to work on an hourly fee basis, but it later also solicited a "success fee" on top of its hourly billing, Twitter said in its complaint filed.  Wachtell's earlier invoices totaled $17.9 million, the company said.  "The $90 million fee collected from Twitter for a few months of work on a single matter represented nearly 10% of Wachtell's gross revenue in 2022, and over $1 million per Wachtell partner," according to the suit.

Twitter accused the firm of being at "the center of a spending spree" by Twitter's departing executives in the days and hours leading up to the deal's closing in October.  Those executives "ran up the tab at Twitter by, among other things, facilitating the improper payment of substantial gifts to preferred law firms like Wachtell," it said.  "Fully aware that nobody with an economic interest in Twitter's financial well-being was minding the store, Wachtell arranged to effectively line its pockets with funds from the company cash register while the keys were being handed over to the Musk parties," the complaint read.

Twitter hired Wachtell as part of the legal team that sued Musk in Delaware's Court of Chancery last year after the billionaire tried to back out of his promise to buy the company.  Ultimately, the firm helped Twitter obtain an expedited trial that put pressure on Musk before he finally agreed to close the deal on its original terms.  According to the complaint, Wachtell submitted "massive invoices" totaling millions of dollars in hourly billings from its partners, with "completely blank time entry descriptions."

Then, on the eve of the merger closing, the firm proposed to fundamentally alter its arrangement to secure additional compensation, Twitter said.  It did so "with the firm's work on the merger litigation in the Delaware Chancery Court already concluded, and without any foreseeable need for Twitter to utilize its services again," the company alleged.  Members of the departing Twitter board of directors had already signed their resignation letters when they met for the last time and signed off on the payment to the firm, Twitter said.

In the months since the Musk takeover, Twitter has been mired in controversy stemming from Musk's leadership.  A number of former workers who were laid off or resigned following the merger say the company has refused to pay them promised severance.  Twitter has also been accused of violating the Worker Adjustment and Retraining Notification Act and California's Private Attorneys General Act by failing to notify employees of layoffs.

On top of that, property owners have said Twitter stopped paying rent at its San Francisco and United Kingdom headquarters.  And former Twitter executives say the company owes them more than $1 million in legal expenses they've incurred responding to lawsuits and regulatory inquiries.

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