August 19, 2011 3:28 PM

It's the Model

Posted by Steven Harper

Returning from vacation means tackling a pile of accumulated newspapers in a single sitting. That sounds like a chore, but it allows the mind to connect news items that otherwise might seem completely unrelated.

Consider these three stories that appeared in The Wall Street Journal on August 1, 2, and 3, respectively.

In “With Oracle and Dodgers Waiting, Boies Not Ready to Retire,” the Journal interviewed David Boies, the 70-year-old former Cravath, Swaine & Moore partner who decided to start his own firm in 1997. Boies has famously represented Al Gore in the 2000 election fight, plaintiffs challenging California’s law banning gay marriage, the NFL in its litigation with players, and a long string of other high-profile litigants. Boies explains why more than half of his firm’s cases include a potential success fee:

"Most firms still bill 80 percent to 90 percent of their work on an hourly basis. Hourly rate billing is bad for the client and I believe bad for the firm," Boies told the Journal. "It sets up a conflict between what's good for the lawyer and what's good for the client.”

But where are the clients with the will to resist the hourly billing regime? On August 2, WSJ introduced us to a few. In "Pricing Tactic Spooks Lawyers," the newspaper described how some clients have begun to counter big law's high fees with online reverse auctions that pit firms against each other in bidding for business. The result: cost reduction.

But economizing can be dangerous, as shown in the final episode of this unintentional trilogy. On August 3, the WSJ published an article that should make every big-firm attorney squirm. The story, headlined "Objection! Lawsuit Slams Temp Lawyers," reported that J-M Manufacturing is suing its former law firm, McDermott, Will & Emery, claiming that the firm didn't supervise adequately the work of contract attorneys from a third-party vendor. McDermott denies wrongdoing:

“J-M . . . keeps changing its story. Now [it] . . . claims that McDermott failed to supervise the contract lawyers that J-M retained. . . .”

According to the article, J-M alleges that it paid McDermott attorneys rates as high as $925 an hour, compared to $61 an hour to the firm supplying the temps. In other words and regardless of who retained them, using contract lawyers helped shave J-M'’s outside legal bills.

Here's the common thread. In the first article, Boies just says what everyone knows: the billable hour regime is a nightmare. The second reflects ongoing client efforts to reduce resulting legal costs. The third identifies a potential peril for law firms that attempt to oblige: a malpractice suit—the ultimate conflict with a client.

I don't know if McDermott did anything wrong, but clients should realize that putting the squeeze on outside lawyers is tricky. For example, cutting fees is one thing; expecting large-firm equity partners to do the obvious—reduce their own stunning income levels to help the cause—is something else, and it isn't happening.

Amid corporate belt-tightening that targeted outside legal costs, average equity partner profits for The Am Law 100 actually rose during the last two years. They're now back to pre-Great Recession levels of $1.4 million a year and it's a safe bet that next year's profits will be even higher. If I were a client, I'd ask, "How did that happen?"

"It's the successful model at work," most firm leaders would say without reflection or hesitation. "Growing equity partner earnings are essential to retain and attract top talent. Firms have become more efficient, so it's a win-win for clients and partners."

Clients should consider the untoward implications of austerity measures that don't dent equity partners' pocketbooks. Increased efficiency? Operating with fewer secretaries and putting locks on supply room cabinets don't account for the extraordinary profit wave that big law continues to ride.

Here's another explanation. The prevailing model requires increases in billable hours—big law's distorted definition of productivity—to offset fee reductions that clients demand. Concerned about attorney fatigue that compromises morale and work product? Too bad; the model ignores it.

Clients can and should seek lower big-law fees, but they should be careful what they wish for, scrutinize what they get, and wonder why equity partners' eye-popping profits keep growing along the way. The prevailing model rewards big-law equity partners handsomely, but that doesn't necessarily mean it's working for their clients or anyone else.

Steven J. Harper is an adjunct professor at Northwestern University and author. He recently retired as a partner at Kirkland & Ellis LLP, after 30 years in private practice. His blog about the legal profession, The Belly of the Beast, can be found at thebellyofthebeast.wordpress.com. A version of the column above was first published on The Belly of the Beast.

 

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