Service Snitch: Corporate / Business Lawyers: Passing Your Buck

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Corporate / Business Lawyers: Passing Your Buck

Corporate lawyers are typically the most talented in their field. Their prices are staggering, but so are the stakes: your company's profits, reputation, or survival. Most business decision-makers know little about the field of law and are not in a position to debate the merits of their law firm’s decisions. The fact that attorneys are experts in the art of intimidation also does not help matters. When you question one of the lawyer’s decisions, the response often involves a condescending barrage of legal terms, ending with a question about whether you’d like to lose your case, have your merger fail, pay more taxes, etc.

In-house attorneys know that their outside counsel counterparts become hostile and defensive when they feel like they’re dealing with a “backseat driver.” Since most in-house attorneys were formerly employed by law firms, they tend to have a little too much respect for the wishes of outside counsel.

This article will explain how to get top legal representation for a much better price than your colleagues are paying. It will also cover how to establish yourself as the boss right at the beginning, and how to maintain the balance of decision-making power in your favor.

What It Costs:

There are two kinds of assistance that one might receive from a corporate law firm – transactional work and litigation. Transactional work involves such things as buy-sell agreements, advice for managers and directors and restructuring of the corporate form.

How and what you pay for transactional work really depends on what you need. If you need something simple and straight-forward, such as forming a corporation, the lawyer will usually give you a flat fee of a few hundred to a few thousand dollars, depending on the complexity of the job. If you need advice on a one-time basis, the lawyer will charge you an hourly rate for that. An experienced corporate lawyer will generally charge between $250 and $450 per hour, but if you call a big firm in New York or California you could pay a much higher hourly rate. On the other side of the scale, if you find a solo practitioner who just left a big firm and is trying to start his/her own practice, you could pay $150 to $200 per hour for a great lawyer.

If you run a medium-sized or large company, you may need advice on a regular basis. Issues arise regarding products liability, intellectual property, employee liability and compensation issues, etc. Under this circumstance you might do something known as keeping a lawyer on retainer. This works in one of two ways, depending on how regularly you will need legal assistance. If your need is somewhat infrequent, you put down a few thousand dollars to ensure the lawyer’s availability and good-will. When you get advice, the lawyer just charges his time against the retainer.

The size of the retainer depends on the hourly fee – the higher the hourly fee, the higher the retainer will be. A small firm will ask for two or three thousand dollars. A larger firm could ask for quite a bit more.

You might ask why you should give over a retainer when you know that the lawyer will be available to answer your questions, anyway, and that the lawyer will happily bill you. The answer is that you should try to avoid it and work with a lawyer who will just bill you on a monthly basis, but because retainers are traditional, you’ll find that many experienced lawyers simply will not work with you until you give a retainer. So you may find someone you like and just have no choice in the issue.

If your need for transactional legal services is substantial, then you can negotiate a flat-rate monthly retainer agreement. Under this system, you pay a set sum each month (or whatever time period you agree on) and the lawyer will provide you with whatever services are covered under the retainer agreement whenever you need it, without billing you for anything over the retainer (except for out-of-pocket fees and other special costs.)

The cost of this kind of arrangement depends on how much work the law firm will need to do for you and how expensive the firm is. $10,000 to $15,000 per month is about average for this kind of arrangement, although larger companies definitely spend quite a bit more than this. The problem in the legal industry is that oftentimes you really want to work with one lawyer or firm that has great knowledge, experience and/or connections in your industry and so you’re going to wind up spending more money than you would like to.

If you’re considering corporate litigation, calculating your investment can be a bit more complex. First, you will have to pay all of the legal fees that you incur. You must also consider, however, the consequence of the litigation: the settlement or judgment. Whether you are pursuing a multimillion dollar claim or fending one off, you cannot consider your corporate lawyer's fees in isolation.

Unsurprisingly, corporate lawyers exploit this arrangement by forever insisting that the more your company invests in legal fees, the less net cost you'll sustain at the completion of the case. (Or, alternatively, the more net profit you will collect.) This is only partially true: your hopes of winning are bleak if you skimp on every cost, but on the other hand, no investment, no matter how expensive, will ever guarantee you more profit or less loss.

The legal fees themselves depend on the attorney you choose, the firm he works for, and the case you are pursuing. At a minimum, corporate law firms will charge $250 an hour; even if you agree on a flat charge instead of an hourly fee, the cost will average at least this much. The most exclusive names in the business charge upwards of $800 an hour. While some of that price tag goes towards the lawyer's experience and expertise, much of it is for the firm's reputation alone.

The biggest sting involved with litigation is the retainer fee. Commercial litigation never, ever costs less than $30,000 and frequently costs well into the hundreds of thousands, often in the millions for large cases. If it’s a very small case that is likely to settle immediately, your retainer will be around $10,000. If the case has any merit, your retainer will be no less than $25,000. Please see the ServiceSnitch article about divorce lawyers, which goes into great detail about how attorneys profit through litigation and how they make sure that you never see your retainer money again.

The Corporate Lawyer Says:

"Our clients demand results, and we deliver them swiftly and favorably. We will assign our top lawyers to you and dedicate every resource we have available to your project. We will conduct any research necessary and devise a detailed strategy for handling your case. We will never waste your hard-earned money through inefficiency or incompetence, and will promptly deliver our bills as scheduled. Any investment you choose to make in us will be worth it, because we will fight to save you millions of dollars and preserve your company's good name to the end."

The Snitch Says:

"One of a corporate law firm's purposes—often explicitly stated—is to shake as much money out of your opponent as possible. Nonetheless, the firm won't mind shaking you up a bit, either. The corporate law firm will entice your business by dangling the names of their senior partners during initial contact, and then, after you've signed on, shuffle your work into the hands of inexperienced new lawyers without your knowledge or your consent.

If you question the situation, the corporate lawyer will explain that you don’t want a partner doing the rote work for $500 per hour when he could just oversee the work of intelligent associate attorneys (“associates”) who get paid far less. And if he did that in good faith, he would be completely right. The problem is that he will deliberately fail to provide his associates with sufficient guidance, obligating them to spend as much time as possible researching issues that have been researched at his request dozens of times in the recent past for other clients.

Associates are required to bill for thousands of hours per year just to keep their jobs. Their bonuses and promotion opportunities depend on billing well over the minimum. Therefore, associates of all levels work together to help each other obtain “billable hours” at your expense. An associate can’t justify spending 12 hours researching a basic issue that the firm claims to specialize in, so that associate will spend 5 hours on it and then send it to a litigation associate who glances at it and makes a few changes and bills for an hour. It then might go to a tax associate, associates specializing in the law of various states or countries and anybody else that the first associate thinks he can do a favor for by helping them to rack up some “billables.” Those same people will do the same thing for the first associate – sending memos and legal documents to him to review for an hour or two just to help him rack up hours. Meanwhile, you’re paying for 12 hours of work on something that the firm already has in its database from the last client who had the same issue.

You should be especially suspicious of internal research reports written on your behalf – known in the legal industry as memoranda of law. These are formal documents involving lots of review and are frequently written just to rack up hours for the firm, for the associate writing the memo and for all the free-riders who it is sent to for “review.” Usually the firm already has in its database a memorandum just like it from previous clients, and usually just a few notes written on a pad or in a simple email would have achieved the same goal.

In the context of litigation, because firms get paid by the hour, they're never too concerned if your case drags on a little longer than expected, and they might even do some dragging themselves, despite the emotional and financial toll prolonged litigation will take on you and your colleagues. The corporate law firm might even willfully bypass an ideal settlement in favor of years of briefs, filings, depositions, and, of course, fees.

Of course, the corporate lawyer will try to prolong sending you bills until there has been some good news to sugarcoat it with – either a positive break in your case or some conclusive evidence that you can legally do whatever you are trying to do if the situation is transactional in nature.

You might ask yourself why corporate lawyers would engage in these kinds of expensive, deceptive practices, knowing that eventually clients will discover the duplicity and fire them. The reason is that most corporate decision-makers don’t realize that they’re being gypped, and even if they do, they accept it as a necessary evil. After all, doesn’t every lawyer operate that way? Additionally, if the firm does a good job the client may take the position that the lawyer’s services are expensive but valuable and worth the money.

The other possibility is that litigation is involved and the cost has become so enormous that the client has run out of funds, or that the client just lost the case outright. In such a circumstance it is highly unlikely that the client is going to avail itself of that firm’s services again, anyway. If the firm wins the case then the client will likely feel that the firm did a great job and was worth the price, since everyone loves winning after a grueling fight."

Protecting Yourself:

As obvious as this seems, too many companies fail to realize that you have to select a corporate lawyer on the same standards as you would for any other service: quality and price. You will find droves of low-quality, high-priced corporate lawyers, but, if you're persistent enough, you're sure to uncover high-quality, reasonably priced ones as well. As with other services, you must shop around.

Unlike other services, however, choosing the best corporate lawyer is more complex than simply choosing the lowest rates. Many cut-rate firms will lure you in with bargain prices, only to waste months and years on your case through incompetence or greed, and you'll end up paying far more than you would have to a pricier but more efficient firm. While you can always switch firms during litigation—and, if a firm fails to deliver results, you should—you will waste thousands of hours and tens of thousands of dollars in doing so. The best way to avoid this is to hire right the first time, and establish proper ground rules right at the beginning.

When conducting your search, however, you shouldn't really choose a firm, but individual lawyers instead. After all, the lawyers are the ones with the experience, the know-how, and the fighting spirit to favorably resolve your case, not the firm itself. Corporate law firms rub their hands in glee whenever you're forced to add more and more lawyers to your team, but if the first lawyer on your case is competent and self-sufficient, you can let him see your case through to completion on his own.

Don't restrict your search to lawyers at marquee firms. Big firms have the advantage of name-brand reputation, but not only are they are more expensive, they also cannot afford the individual attention to each case smaller firms can. The larger the firm, the more cases they will have on their books, and yours is apt to get lost in the shuffle until a major problem arises, by which point the time for action may have already passed. Whether you choose a big firm or small firm, your case will be handled by a small team of lawyers and assistants, so you will not boost your manpower by selecting a larger firm.

After narrowing your search to a handful of lawyers and firms, ask your candidates about their budget requirements for your project. Ask how long they think the case will last, how they plan to approach the case, and what they expect the outcome will be. Since you haven't hired the candidate yet and he knows you're interviewing others, you hold all the leverage; if you demand a budget up front, he will be forced to give a competitive estimate if he wants to land your case, and he and his firm will be accountable for that figure later on. If the candidate is not forthcoming about his budget or his strategy, you should look elsewhere. You'll want to hire an experienced lawyer, and lawyers who have handled similar cases in the past will know beforehand how to attack your case, how long it will last, and how much it will cost.

You have two options for negotiating a budget: a set payment for each task and an hourly rate. The first requires more work to draft; you and the firm will have to outline every step, every contingency, and every goal of the process and agree on a payment for each. The resulting advantages are flexibility and immediate accountability. If unanticipated difficulties arise, you can always add new tasks to your plan. If you're paying by the hour, on the other hand, all you can do is pray these new problems go away as quickly as possible. Moreover, if you pay by task, you know exactly how your money is being spent every time you get the bill. While a per-hour budget plan can be hammered out instantly, you'll have little concrete idea of what you're getting charged for later, and your lawyer has more incentive to dally with your case.

When you are ready to commit to a lawyer, you must insist on a retention agreement, the pre-nup of the legal world. In the retention agreement, you should outline your fee schedule and what expenses are and are not permitted. Specify consequences, such as deferred payment, for exceeding a budget cap. Set the goals you expect your lawyer to meet in writing. Be wary of any pre-prepared retention agreements the firm suggests you accept in lieu of your own; these form agreements are typically rife with extortionate late fee assignments and ludicrous escape clauses that permit your lawyer to leave a case before trial for no reason.

When you begin litigation, monitor your case's progress at every stage. Demand consistent feedback from the lawyer or lawyers on your team. Make sure the firm isn't foisting the bait-and-switch trick on your company; don't let your case be delegated to a less qualified or less talented lawyer than the one you expected would handle it. Consult with your lawyer in person regularly, even if you are charged for it. The better he and his colleagues understand your needs and concerns, the more efficiently your case will be addressed.

Although you should refuse to accept too little attention paid to your case, too much attention can be just as unfavorable. Willful over-handling of a case is so widespread in the legal world that it has its own name: "gold-plating". Lawyers who pore over every internal memo and waste hours drafting and revising routine correspondence will launch your bill into the stratosphere. One of the favorite tricks in the corporate lawyer's arsenal is to draw out the "discovery", or research period. The corporate lawyer will linger over the discovery until you discover you've blown thousands of dollars for him to do nothing.

Even the most hardened corporate execs are intimidated by lawyers, with their fancy degrees and their slippery doublespeak. Too many will cower in fear before their lawyer, never openly questioning what he does. Always remember, however, since you're paying him tens of thousands of dollars a week, you have the right to make any suggestion or raise any concern that you want to. If your corporate lawyer insists a task is necessary that you think is just a waste of time and money, demand a detailed rationale for his position.

If you ever notice a discrepancy in your bill, don't ignore it. Call the firm and ask for an exhaustive run-through of your bill, one charge at a time. Corporate law firms want to keep your lucrative business in their pockets for years to come, and they know that if you're dissatisfied with the bills and your concerns are not allayed, you may abandon them before the week is out. Even if the dispute is only over a small fraction of the charge, the corporate law firm may discount your bill up to 25% if your concern is legitimate—and sometimes, even if it's not—just to keep you happy, because a happy client is a loyal client.

Though all companies have to hire outside specialists from time to time, most large corporations maintain a stable of in-house lawyers as well. If you work for a company that has in-house counsel and you want a discreet second opinion on your outside lawyer's methods, make use of this resource. These attorneys often have large firm experience and have a good feel for what’s right and what’s not.

Just Because You Were Curious:

In case you were wondering just how much profit law firms can make, here’s some sample numbers: In 2003, Wachtell, Lipton, Rosen & Katz made $2,600,000 per partner. Willkie Farr & Gallagher made $1,400,000 per partner and Kasowitz, Benson, Torres & Friedman, a New York firm that broke into The Am Law 200 for the first time that year, made a staggering $2,900,000 per partner.

Here is a list of the five biggest law firms in the country and what their gross revenues were in 2003:

Skadden, Arps, Slate, Meagher & Flom $1,330,000,000
Baker & McKenzie $1,134,000,000
Jones Day $1,035,000,000
Latham & Watkins $1,033,000,000
Sidley Austin Brown & Wood $926,000,000

Posted by admin on 07/20 at 11:37 AM

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Thursday, July 20, 2006

Corporate / Business Lawyers: Passing Your Buck

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