Friday, August 30, 2013

Who Is Really Responsible For Excessive Legal Bills?

Litigation is expensive, and federal litigation is especially so.  In cases we file, defense counsel frequently make reference to the fact that we represent our clients on a contingent fee basis and that is why the litigation is so expensive--because the plaintiff does not have to pay any legal bills and therefore the defendants bear a disproportionate financial burden.  Even Judge Rader, Chief Judge of the Federal Circuit Court of Appeals, said so in an op-ed piece in the New York Times.  Judge Rader's opinion suggests that contingent fee lawyers bring meritless cases, thus causing defendants to incur substantial legal bills unnecessarily. 

Thankfully, some developments in a dispute between Adam H. Victor and his (hopefully former) law firm belies the myth being advanced by so many who should know otherwise.  It's not the contingent fee lawyers who cause excessive legal fees; excessive legal fees are caused by the lawyers who bill those excessive fees. 

So in a nutshell, here's what happened:  
  • Mr. Victor engaged his firm for a legal project on April 22, 2010
  • The firm's initial estimate for the project was $400,000
  • Less than one month later, on May 20, 2010, the firm's bill was already at $600,000
  • Mr. Victor refused to pay the firm's bill, claiming it was too high
  • The firm sued Mr. Victor for the unpaid bill
Those are operative facts; now let me put a little more meat on the bone. . .

Mr. Victor's firm sent him a $675,000 bill for work they had initially estimated should cost about $400,000.  When Mr. Victor saw the bill, he apparently decided enough was enough and refused to pay it.  The firm sued him, and that just pissed him off.  Here's what Mr. Victor looks like when he's pissed off:

hourly legal fees more problem than contingent fee
Hiroko Masuike/The New York Times
Doesn't exactly look like the kind of guy you want to mess with, does he?  Not to me.

When the firm sued Mr. Victor for the unpaid bill, he counterclaimed (sued them back) accusing the firm of a “sweeping practice of overbilling.” Turns out, Mr. Victor was right.

During the litigation, Mr. Victor forced the firm to turn over a bunch of emails that had been exchanged internally between lawyers working on his matters.  Those emails proved an environment of "churning" bills and assigning "random people" to work full time on "random research projects," thus causing Mr. Victor's bills to skyrocket unnecessarily.  His lawyers even cheered the fact that they had already exceeded their initial estimate by $200,000 one month after taking on the task.

Here are some of the nuggets that showed up in those emails (see actual emails below):
Vince has random people working full time on random research projects in standard Vince "churn that bill, baby!" mode.
I hear we are already 200K over our estimate-that's Team [Firm]!
[W]ith the number of bodies being thrown at this thing it's going to stay stupidly high
Didn't you use 3 associates to prepare for a first day hearing where you filed 3 documents?
And it took all of them 4 days to write those motions 
Not exactly what a client likes to see: his lawyers cheering themselves on about how hard they are billing him.  Billing him right in the ass.

Not surprisingly, Mr. Victor amended his original complaint and threw in some fraud claims too. He demanded about $22 Million in damages based on those emails. Do you blame him?

The firm responded by saying things like "those things didn't really happen" and the emails were just "really bad attempts at humor."  Yeah, right.  As silly as those things sound, the one that really got me is this statement:  
[T]he amount of fees billed by [The Firm] are consistent with the work performed.
On its face, that statement seems to say "our bills were reasonable."  But it doesn't actually say that; not really. 

What it really says is "we didn't bill for work that wasn't actually done." In other words "we didn't commit criminal fraud."

Another thing it really says is "we make our lawyers actually do tons more work than is necessary just to get our bills as high as they are." At least that's what it says to me; and it should say that to you too.

But therein lies the rub. Big firms justify their enormous legal bills by saying: We don't bill for work we don't do.  But they don't get it.  It's not about making sure the firm actually does the work it bills for, it's about not doing work that isn't necessary! After all, billing for work that isn't even done is a crime.

To demonstrate my point, let's go back to the actual facts.  Roughly one month passed from the time Mr. Victor let loose the dogs until the day those dogs had already billed about $600,000. So Mr. Victor's firm billed him about $600,000 in one month.  

The typical lawyer at that firm bills roughly 1800 hours per year, or 150 hours per month.  Let's say the average hourly rate for lawyers is about $400, which is pretty close given the engagement letter they signed.  

So $600,000 translates to about 1500 billable hours at an average of $400 per hour. So 1500 billable hours in one month translates to about 10 lawyers billing full time for that whole month

How does that happen?  How is it possible that a common bankruptcy filing took 10 lawyers working full time a whole month to prepare?  It boggles the mind.  How can that be? 

The firm's lawyers say it's because of "random people working full time on random research projects." Ah, that's how it happened. Now it becomes easy to believe.

So the point of me saying all this is to draw attention to the real problem with runaway legal fees: The billable hour creates an enormous incentive for big firms to have their lawyers do random, unnecessary work. Big firms means lots of lawyers, all with an incentive to do unnecessary work. The dilemma faced by large companies (the only companies who can afford those enormous bills) is that they are almost forced to use big firms for a number of reasons.  

First, large companies means lots and lots of work. Lots and lots of work means you need lots and lots of lawyers, even if those lawyers are being efficient. So large companies have to decide whether to split up their work among smaller, more efficient firms, or to send all their work to one much larger firm. Typically, large companies choose to take the easy route and just hire mega-firms. Less administration by the company, fewer people to talk to, fewer (but much larger) bills. There are more reasons than just that, but that's a pretty good start. 

On the surface that seems like a reasonable approach. However, when large companies decide to aggregate their work with large firms, they fall victim to the problem that they have to accept the large-firm billing practices.  Gotta take the bad with the good. 

So here we are.  Large companies, the only ones with enough money to actually pay huge legal bills, feel forced to send their work to mega firms. The mega firms know this, and adopt a culture of throwing tons of bodies at every project because the client doesn't think they have any options.  Hence what is called the tyranny of the billable hour.

All that said, what this case has really shined a spotlight on is something most of us have known for a long time: Big firms bill the hell out of their clients, and then blame the other side.  Both sides do it, but when it's a big-firm on big-firm dispute, it's just called "complex litigation." When the dispute is a small-firm on big-firm dispute, they call the small firm trolls. In other words, when big firms are on both sides, it's easy to say "we have to bill this many hours because the other side has so many lawyers." But when a big firm is up against a small firm, they can't say that. Instead, they call the small firm names, like troll, just to heat up the dispute. But at the end of the day, it's all about "churn that bill, baby" for the big firms.

Mr. Victor had enough and he was able to prove it. Not surprisingly, Mr. Victor and his former firm settled about two months after those emails surfaced.  And not surprisingly, the big firm would like the whole mess to go away, and to pretend that there is not a culture of over-staffing matters just to get their bills as large as they can.  But the truth is right there in black and white.

You might notice that I intentionally left out the name of Mr. Victor's firm. If you must know, just follow any of the links above.  I did that because the name isn't important. The culture is the same at all big firms; it's unavoidable. If you want to succeed at a huge firm, it's all about production. Generate lots of billable hours or you're out. Although Mr. Victor was able to get definitive proof of that culture at his firm, it's the same way everywhere.