A recent Legal Intelligencer story by Justin Henry, “Under Economic Pressure, Large Firms May Increasing Sue Clients for Nonpayment,” reports that economic pressures accelerated by the COVID-19 pandemic have forced many law firms into difficult conversations with clients, as they aim to balance flexibility during an economic downturn with their own budgetary constraints. In some instances, the challenge is leading to lawsuits. Over the last 12 months since the onset of the pandemic, Am Law 200 firms including Blank Rome, Buchanan Ingersoll & Rooney, Armstrong Teasdale and Baker McKenzie, among others, have sued clients for allegedly unpaid legal fees, court filings show.
Attorneys who represent law firms in collections disputes say firms are wary to sue clients over unpaid fees because it potentially leaves them vulnerable to counterclaims of legal malpractice. They say law firms see litigation as a last resort, especially during an economic downturn when flexibility in collections can be key to maintaining solid client relationships. But law firms are also on alert for exploitation by clients citing the economic tribulation of the last 12 months as a pretext to avoid costs, attorneys say. Industry leaders also said a large portion of these claims by law firms don’t show up on the public record because the services contracts include an arbitration provision for settling fee disputes.
“As firms become billion-dollar-plus big businesses, they tend to be run more like big billion-dollar-plus businesses,” said Ronald Minkoff, a litigation group partner at Frankfurt Kurnit Klein & Selz, who represents law firms in fee collections disputes. “If they feel that a client is taking advantage of them, they’re much more willing to call the client to account for that.”
Last summer, according to court filings, Buchanan found itself with $2.7 million in outstanding legal fees from Best Medical International, a medical device company that retained Buchanan for patent litigation against alleged infringers in which Buchanan was victorious. The fee is now the subject of ongoing litigation in the U.S. District Court for the Western District of Pennsylvania.
“Our cash flow difficulties do indeed continue to make it difficult to pay the Buchanan legal bill which now approaches $2.8 million,” said James Brady, Best Medical’s in-house counsel, in a May 11, 2020, email to Buchanan CEO Joe Dougherty, that was included in court documents. “We will do everything we can to achieve a reasonable settlement with Varian and Elekta so your firm can be fairly compensated. We appreciate your willingness to continue the forbearance on any collection efforts and we are hopeful a successful plan will be forthcoming soon.”
Court documents also included a May 12 email reply, in which Dougherty told Brady the firm’s board is “growing impatient with my forbearance on initiating collection efforts.” Dougherty added Buchanan “is not immune from cash flow challenges these days, and the $2.7 million owed is very significant to us.” Buchanan has annual revenue around $300 million, according to the most recent ALM data for the firm.
Best Medical took the firm to court in July, alleging it had breached fiduciary duties by failing to provide monthly estimates as promised in their initial contract, which the firm denies. Court records show Best Medical failed to pay monthly payments from Sept. 23, 2019, through Feb. 11, 2020, citing the opposing parties’ request to stay proceedings and postponing a potential settlement. Buchanan declined to comment for this story.
Armstrong Teasdale on March 17 filed a complaint in the U.S. District Court for the Eastern District of Missouri against former clients, who the firm had represented in multiple lawsuits and in various arbitrations before the American Arbitration Association from October 2018 to October 2020. The suit alleges that the clients owe more than $3.5 million to the firm, plus a 9% annual interest rate. That amount is equal to 2.3% of the firm’s 2020 revenue of $149.2 million.
In its complaint, Armstrong states the former clients paid legal bills invoiced through July 2019, but alleges that legal bills remain unpaid from then until September 2020, when the clients informed Armstrong they were retaining new counsel. Armstrong Teasdale declined to comment for this story. Blank Rome in a Jan. 8 complaint, filed in the Superior Court of the District of Columbia, claimed former clients Joseph Gurwicz and GR Ventures of New Jersey have outstanding legal fees for the firm’s services connected to preparing and filing a provisional patent application.
As of the date of filing, more than 100 invoices dated from Nov. 8, 2017, through Nov. 6, 2019, remain either partially or fully unpaid, the firm alleges. Of the $485,563 in legal costs incurred by Blank Rome on behalf of their client, the firm claims $187,860.85 have yet to be paid in full. In addition, Blank Rome said it’s owed an annual accrued interest rate of 6%, bumping the total amount of the firm’s claim to just over $211,000.
Last week the firm opted to withdraw from the case. Blank Rome declined to comment for this story. In another case, related to a five-figure fee, Baker McKenzie sued former client Catherine Brentzel in June 2020 in D.C. Superior Court. Last month, the court entered judgment in the amount of $77,325.88 in the law firm’s favor, court records show.
Minkoff said there had been a stigma attached to firms using the court to induce payments from clients, because it might signal poor client relationship management on the part of the law firm. But that has taken a back seat in recent years due to revenue pressures and stagnant demand, which have been ramped up by the COVID-19 pandemic, he said.
“There were businesses and law firms who were affected by the pandemic in a negative way, and that increased the pressure in these situations,” Minkoff said. “The Big Law numbers were not usually affected, particularly at the top levels, but the pressures that existed before the pandemic existed during the pandemic and will exist after the pandemic.” Minkoff said the industry may be in for a rise in the volume of fee collections disputes between firms and their clients, mirroring the uptick that occurred in the mid-2010s.
“Partners are under pressure to bring in as much money as they can, and that has led to more aggressive behavior in terms of fee collections and those kinds of disputes,” Minkoff said. He added that the rise in fee collections litigation coincides with firm protectionism in partnership agreements.
Expense-related pressures fall on the side of clients, who are sometimes surprised by high litigation fees and prefer to wait for a result to pay. “The firms are more aggressive, they have more tools at their disposal to get paid, they’re more willing to litigate to get paid, especially if it’s a sort of one-off arrangement,” Minkoff said. “Clients are faced with this kind of sticker shock.”
Akerman litigation partner Philip Touitou said law firms are even more focused on collections during the pandemic. He said the crisis has “changed the dynamic” between clients struggling to make payments and law firms, who work to balance accommodations for struggling clients with their own financial pressures to make budget. Touitou added that flexible fee structures are “here to stay” as law firms work to avoid potential fee disputes from the outset of a client engagement.
“I think the pandemic has only accelerated that effort,” Touitou said. He added that as firms reevaluate their costs after working remotely and cutting travel expenses to zero, they “may be in a better position to offer more flexible [fee] structures.” “I think the benefits of law firm cost consciousness will work to the benefits of clients,” he said.