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.”

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.

A recent Law 360 story by Max Jaeger, “Sanctioned NFL Player Must Cover Atty Fees in Poaching Suit” reports that New York Giants wide receiver Kenny Golladay must cover more than $15,000 in attorney fees for his former agency after flouting a subpoena in litigation over whether he was poached by a rival, a Michigan judge said.  In an order, U.S. Magistrate Judge Anthony P. Patti overruled Golladay and approved $14,929 in attorney fees to cover Honigman LLP's representation of the wideout's former agents at Clarity Sports International LLC.  The judge refused to award fees for work by Dowd Bennett LLP, finding them "excessive and redundant" of work by Honigman's lawyers.

Clarity said it cost them a little over $20,000 to get Golladay to comply with a third-party subpoena for his deposition and document production.  The agency says in a separate suit that sports memorabilia sellers helped non-party Creative Arts Agency steal Golladay from them.  The wide receiver is not a party to that suit, but he ignored a 2020 subpoena, so Clarity sued to compel.  The court hit him with sanctions for his "cavalier and reckless attitude" and ordered him to pay Clarity's legal bills for giving them the "run-around."

Golladay opposed most of the Honigman fees, arguing that partner Jeff Lamb's four hours at $580 per hour merely duplicated 19.75 hours of work that partner Andrew Clark did at $455 per hour.  But the court disagreed.  "Although much of attorney Lamb's relevant work appears to have involved review and conference with other attorneys, the court considers such collaboration between partners and associates typical and substantive, as opposed to duplicative and redundant," Judge Patti wrote.

That was "especially true" given Clark was out on leave for two months, the judge said.  He also approved 11 hours that associate Nicholas Burandt contributed at $350 an hour.  Some work was duplicative, however, and the judge denied $5,400 to Dowd Bennett for the roughly 7.5 hours each contributed by Dowd Bennett partner John D. Comerford and associate James B. Martin, who charged $420 an hour and $300 an hour respectively.

Golladay argued he shouldn't have to pay their fees because Clarity retained them on a contingency basis in the underlying tortious interference case against CAA that's separately playing out in Pennsylvania federal court.  Because it is ongoing, Clarity had not "incurred" any fees yet, he argued.  "The court, however, struggles to find the logic in this latter argument, as it would imply that parties (or non-parties) would be shielded from sanctions for poor behavior whenever the opposing side has a contingency-fee relationship," Judge Patti said in his order.

Instead, the judge said Dowd Bennett LLP's contribution amounted to sending emails to Honigman counsel and editing filings, and awarding fees would be excessive.  "Although Respondent's behavior throughout this matter has undoubtedly been unacceptable and necessitated additional work by Petitioners, that work was frustrating more so than complicated," Judge Patti said.

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 reads:

Attorneys usually bill clients by the hour, in six minute increments (because those six minutes equal one tenth of an hour: 0.1).  Those hours are multiplied by the attorney’s hourly rate to determine the attorney’s fee.  There is another aspect of attorney billing that is not as well known, but equally important — legal fee auditing.  During an audit, a legal fee auditor reviews billing records to determine if hourly billing errors or inefficiencies occurred, and deducts unreasonable or unnecessary fees and costs.

Both the law and legal ethics restrict attorneys from billing clients fees that are unreasonable or unnecessary to the advancement of the client’s legal objectives.  This can include analysis of the reasonableness of the billing rate charged by attorneys.  Legal fee audits are used by consumers of legal services, including businesses, large insurance companies, cities, public and governmental agencies, and individual clients.  Legal fee audits can be necessary when there is a dispute between an attorney and client; when the losing party in a lawsuit is required to pay all or part of the prevailing party’s legal fees in litigation; when an insurance company is required to pay a portion of legal fees, or when some issues in a lawsuit allow recovery of  attorneys’ fees and when other issues do not (an allocation of fees). 

In an audit, the auditor interviews the client, and reviews invoices sent to the client in conjunction with legal case materials to identify all fees and costs reasonable and necessary to the advancement of the client’s legal objectives, and potentially deduct those that are not.  The auditor also reviews all invoices to identify any potential accounting errors and assure that time and expenses are billed accurately.  The auditor may also be asked to determine if the rate charged by the attorney is appropriate.

The legal fee auditor can be an invaluable asset to parties in deciding whether to file or settle a lawsuit, and to the courts charged with issuing attorneys’ fee awards.  The court is unlikely to take the time to review individual invoice entries to perform a proper allocation of recoverable and non-recoverable fees leaving the parties with the court’s “best approximation” of what the allocation should be.  The fee audit provides the court and the parties with the basis for which to allocate and appropriately award reasonable and necessary fees. 

Audits are considered a litigation best practice and a risk management tool and can save clients substantial amounts of money in unnecessary fees.  It has been my experience, over the past two decades of fee auditing, that early fee auditing can identify and correct areas of concern in billing practices and avoid larger disputes in litigation later.  In many cases, I have assisted clients and counsel in reaching agreement on proper billing practices and setting litigation cost expectations. 

In other cases, I have been asked by both plaintiffs and defendants to review attorneys’ fees and costs incurred and provide the parties and the court with my expert opinion regarding the total attorneys’ fees and costs were reasonably and necessarily incurred to pursue the client's legal objectives.  While the court does not always agree with my analysis of fees and costs incurred, it is usually assisted in its decision by the presentation of the audit report and presentation of expert testimony on the issues.

Jacqueline Vinaccia is a San Diego trial attorney, litigator, and national fee auditor expert, and a partner at Vanst Law LLP.  Her practice focuses on business and real estate litigation, general tort liability, insurance litigation and coverage, construction disputes, toxic torts, and municipal litigation.  Her attorney fee analyses have been cited by the U.S. District Court for Northern California and Western Washington, several California Superior Courts, as well as various other state courts and arbitrators throughout the United States.  She has published and presented extensively on the topic of attorney fee invoicing, including presentations to the National Association of Legal Fee Association (NALFA), and is considered one of the nation’s top fee experts by NALFA.

A recent Law 360 story by Daphne Zhang, “Insurer Overpaid For Policyholder’s Legal Bills, Judge Finds,” reports that a New York federal judge said that an insurer's decision to stop paying a GoPro accessory maker's attorney fees was reasonable, finding the policyholder's defense counsel billed administrative work at partner rates and logged excessive working hours.  U.S. District Judge Mae D'Agostino denied 360Heros Inc.'s motion for summary judgment against Main Street America Assurance Co., saying the carrier's payment of more than $2 million in attorney fees fully satisfied its defense obligations.

The judge sided with Main Street in finding that 360Hero's defense counsel, Gauntlett & Associates, repeatedly charged "unreasonable and excessive" legal fees in an underlying patent infringement suit with GoPro.  The camera company sued 360Heros alleging the harness maker used its copyrighted pictures and infringed two of its trademarks.  The suit was settled in May 2018. 360Heros sued Main Street in 2017 after the insurer stopped paying for its defense costs.

"Based on Gauntlett's repeated practice of billing excessive, redundant or otherwise unnecessary hours the court finds that a 15% reduction in Gauntlett's fees is warranted," the judge said.  According to the order, a Main Street attorney found in 2017 that the insurer overpaid for defense costs after retroactively reviewing the payment history.  Main Street subsequently stopped paying the policyholder's legal bills, which 360Hero claimed violated its insurance policy.  "The amount of unpaid fees is significantly less than the amount that the court finds were reasonably expended," Judge D'Agostino found, saying that Main Street was fully entitled not to pay because the defense counsel overcharged on legal bills.

Some of Gauntlett's invoices were billed without any tasks designated to a paralegal, the judge pointed out, and the firm repeatedly charged administrative work at partner rates. Gauntlett also charged full rates for travel, which should have been billed at half of their hourly rates, Judge D'Agostino said.  "For travel to a one-day out-of-town settlement conference, [one Gauntlett attorney] billed for $418.48 in meals," she said.

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