A recent Law 360 story by Brian Steele, “Paul Hastings Seeks $3.9M in Kwok Ch. 11 Fees and Costs”, reports that attorneys with Paul Hastings LLP have sought additional fees and costs of nearly $3.9 million for overseeing the Chapter 11 bankruptcy of Ho Wan Kwok during July and August, continuing to make good on their promise that a previous $12 million fee request was "only the beginning."

In an interim fee application filed in the U.S. Bankruptcy Court for the District of Connecticut, counsel for Chapter 11 trustee Luc A. Despins – himself a Paul Hastings attorney – asked for $3.76 million in fees and more than $146,000 in reimbursements for the firm.  The application notes that Despins filed or prosecuted several adversary proceedings during the fee period and gained access to tens of millions of dollars in escrow funds.  A "substantial portion of the fees" resulted from obstructive acts by Kwok and his associates, the application argued.

"During the fee period, the trustee and Paul Hastings continued the investigation into the financial affairs of the individual debtor and his corporate 'shell game' to shield companies and assets under his ownership and/or control from his creditors," the application said.  "Given the vast network of companies affiliated with the individual debtor, and the fact that these companies or their assets are located around the world, the trustee's investigation was, and continues to be, extensive."

Kwok filed for Chapter 11 protection in Connecticut in February 2022, claiming less than $100,000 in assets and more than $376 million in liabilities.  He was arrested in March 2023 on allegations that he operated a multifaceted $1 billion scheme of securities fraud, wire fraud and money laundering.  Once among the richest men in China, Kwok fled in 2014 amid corruption charges that he claimed were trumped up. He later gained a social media following as a critic of the Chinese government.

In its first interim fee application filed in May, Paul Hastings sought $12.3 million in attorney fees plus costs, noting that the request was "only the beginning" and adding that "what could initially have been perceived as a $100 to $150 million case has now turned into a case involving assets and claims many multiples of that."  The second application sought more than $8.2 million.  To date, Paul Hastings has collected $18.7 million for its work on the case, according to the application.

The debtors in the case are Kwok and two of his companies, Genever Holdings LLC and Genever Holdings Corp., the latter of which is based in the British Virgin Islands.  All three filed for Chapter 11 protection at different times, and a Connecticut bankruptcy judge is administering the cases jointly.  Paul Hastings represents Despins as trustee and the Genever entities.

During the fee period, the firm said that it recorded a total of 3,031.6 hours by attorneys and paraprofessionals.  The application lists 22 docket numbers linked to the case, including 11 adversary proceedings.  Paul Hastings has worked to minimize costs by delegating work to junior attorneys, paraprofessionals and lower-cost local counsel, according to the application.  The latest requested amount does not include a firm-wide hourly rate increase that went into effect Aug. 1; it also excludes pay for 21 timekeepers who billed less than five hours, and it incorporates a reduction to Despins' hourly rate from $1,975 to $1,860.

Other firms and organizations filed separate requests Monday for fees and costs in the case.  Despins' and Genever's local and conflicts counsel, Neubert Pepe & Monteith PC, is seeking more than $285,000, while British Virgin Islands counsel Harney Westwood & Riegels LP wants about $480,000.  Claims and noticing agent Epiq Corporate Restructuring asked for roughly $99,000 in fees and $7,500 in expenses, and Pullman & Comley LLC, which represents the official committee of unsecured creditors, requested about $88,000.

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 by Andrew Maloney, “Where Are Partner Billing Rates Surging the Most in Big Law,” reports that, while partner billing rates rose last year all over, they skyrocketed in certain practice areas in Big Law and several U.S. cities, according to a new analysis.  Going forward, billing rates are expected to continue another steep increase this year.  Partner billing rates surged to record levels last year “in all tiers of law firms and in all practice areas,” but it was high-dollar practices that commanded some of the largest rate increases, with mergers and acquisitions, commercial and contracts, and corporate practices leading the way, according to the latest trends report from LexisNexis CounselLink.

Hourly rates for all partners jumped between 2021 and 2022 by 4.5%. That’s higher than the increases in 2020 (3.5%) and 2021 (3.4%), and the highest since CounselLink first began producing the trends report in 2013.  The median hourly rate for partners in M&A shot up much more, with a 6.4% jump between 2021 and 2022.  Commercial and contracts, corporate, and labor and employment practices also notched significant rate increases, growing 5.8%, 5.6% and 5.6%, respectively, last year.

With the exception of labor and employment, the median hourly rates charged by partners in each of those practices was $675 or more, according to CounselLink.  The median rate for M&A partners was $955, the highest rate of any practice area in the report.  For commercial and contracts, it was $706. And for corporate work, it was $675.  The median hourly rate for partners in labor and employment was $530.  The trends report is based on $52 billion in legal spending across 420,000 timekeepers and 1.4 million legal matters.

Kris Satkunas, director of strategic consulting for CounselLink, noted that partner rates were on pace to rise 5.4% in 2023, even higher than last year’s record growth.  “There’s still a lot of work to be done in 2023 that has yet to be billed.  So, could that change?  Yes, of course,” she said.  “But we’re on this trajectory right now, and my gut feeling is that it probably won’t go down.  It may go up even a little bit.”

While the 2022 rate growth happened in a year of slower demand, she said she’s not convinced there’s a correlation between rate growth and demand at the practice level.  More often, she said, it’s a firm-wide decision.  She noted that M&A rates, for instance, were still growing at a decent clip a couple of years ago when the practice area was as busy as ever.  In 2022, as demand faltered, the rates grew more than ever.  Analysts told Law.com that partner billing rates rose partly because law firms were feeling the effects of inflation and trying to maintain profitability as demand took a hit.

Rates are higher for practices such as M&A partly because that work is more often done by the larger, more expensive firms, Satkunas said.  “These are kind of the big, high-risk, bet-the-farm sort of matters, and those corporate counsel want to go to the firms they have the most faith in, and those tend to be the larger firms,” she said.  Indeed, the trends report noted that in 2022, the “Largest 50″ firms handled 68% of M&A work. “With regard to the other high rate practices of regulatory & compliance, commercial & contracts and corporate, the ‘Largest 50′ firms had 57 percent of the work from these practices,” the authors wrote.

Overall, the largest firms increased market share, the report noted, with their largest gains in regulatory and compliance, corporate and real estate work.  But head count size didn’t always determine the largest rate increases.  In 2022, the median rate at firms with 501-750 lawyers grew by 9%, but only 3% for the largest firms, the report said.

Rates by City

The report also noted many of the largest legal markets saw the biggest jumps in rates.  Six major metropolitan areas saw median partner rate growth climb higher than 5%: Washington, D.C. (a 6.6% jump, to $925 per hour), Chicago (5.8%, to $765 per hour), Los Angeles (5.7%, to $795 per hour), New York (5.5%, to $975 per hour), San Francisco (5.5%, to $608 per hour) and Seattle (5.1%, to $780 per hour).

“On the opposite side of the spectrum, two cities saw hourly growth rate below 2 percent: Dallas and Detroit,” the report noted.  Utah led the way in terms of partner billing rate growth among states, with the median rate climbing 6.2% in 2022, up to about $350 per hour.

Satkunas said some of the growth among cities and states is a reflection of the size of law firms there. Dallas and Detroit have some large firms, but also plenty of midsize and smaller firms that didn’t raise rates quite as much.  Law firm partners in Utah had more double-digit increases than partners in other states, she noted. Utah just has a smaller population of law firm partners than most states and is thus more susceptible to outliers.

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

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

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

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

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

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

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

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

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