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Corporate & Securities Law: Wall Street Law Blog
Legal Fees: Why Hourly Billing in Commercial Litigation is a Farce...
By Brett D. Sherman
Warning! Common sense ahead.
It is pretty much impossible for lawyers to bill litigation clients by the hour without raising serious conflicts between the best interests of attorneys and the clients they are bound to serve.
[Disclaimer - what follows is an attack on the billing practices of the vast majority if America's most powerful lawyers and law firms. The Sherman Law Firm, publisher of Wall Steeet Law Blog, DOES NOT BILL BY THE HOUR. Therefore, readers are cautioned to read with skepticism and to view this post as an advertisement on behalf of our firm.]
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The excerpts that follow are from a post on Wisegeek.com creatively titled What are Billable Hours?" -
"Nearly all law firms make their money by billing their clients by the hour. These are known as billable hours. The more hours billed, the more money the firm will make."
"If lawyers do not bill enough hours each year, they will not make enough money to cover their salaries. The firm's billable hours also cover overheads and partners' profit share."
No mystery so far. After all, when a law firm charges clients by the hour, isn't the firm really selling a product disguised as a service?
Think about it. McDonald's sell burgers. If burger sales plummet, so do profits. In the same way, most law firms sell hours. If the number of hours sold to clients plummets, well, you get the idea, right?
The upshot is this:
Yes, quality of representation is important. But only to a point (since poor quality representation should, in theory at least, eventually leave a firm with fewer clients).
But the most profitable firms are the firms that spend the most time on their cases (sell the most hours to their clients), regardless of result.
And this brings us back to the wise folks at Wisegeek.com:
"Many firms also set bonus or penalty clauses to make sure that each lawyer achieves their billable hour quota. This can exert pressure on both home and work life with longer hours in the office. Tedious, time consuming tasks such as proofreading corporate reports, document reviews and travel hours are all required to be billed by the hour."
Again, see What are billable hours?
This "billable hour quota" is the real kicker. Whether they admit it or not, nearly all firms have minimum billable hour requirements. These requirements are extremely difficult to meet (often at least 2000 billable hours). And there is intense pressure inside most firms to meet or exceed these quotas.
So, as a client, you may lose even when you win. (No, this is not a brain teaser.) How can you lose when you win?
Well, what if your "victory" costs more than it should because your counsel billed you more (sometimes far more) than they should. This happens all the time. To bill enough hours, some lawyers do unecessary or repetitive work. And, believe it or not, attorneys are rumored to pad the hours that they report so they can keep their bosses happy, or even to keep their jobs.
Clients often suspect that padding is going on, but it is really hard to know for sure. And it is nearly impossible to prove.
A quick hypothetical example to illustrate the problem-
Your company is the plaintiff in a lawsuit.
In the complaint, you seek $3 million in compensatory damages. You settle for $2 million. Sounds pretty good, right?
But then, when you add up the bills from your attorneys, you are a little bit disturbed. Legal fees, based on all the hours its lawyers, paralegals, etc. put into your case, plus expenses, is $1.5 million.
You think about complaining. The bill seems awfully high.
Then again, net "value" of settlement is $500,000. That's half a million more than you had before your very able lawyers put in all of those hours. At the end of the day, you feel like you won.
But how do you know that the actual fee wasn't way too high? What if the hourly billings etc. should have been closer to $1 million? Or 500,000?
Maybe your lawyers repeated research tasks or look under rocks for no justifiable reason. Or - worse - what if you were a victim of phantom billing?
A few extra hours per lawyer per week can add up to a lot of bogus fees very easily.
Think of it this way - Each unecessary or imaginary hour billed is money stolen directly from the client.
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Even some big firms concede serious problems with billing by their litigation clients by the hour.
In 2009, for example, Evan R. Chesler, a Presiding Partner (at least in 2009) at mega-firm and billable hour factory Cravath, Swaine & Moore wrote an opinion piece for Forbes Online called "The Billable Hour Must Go."
Here are some choice comments from the pen/keyboard of Attorney Chesler:
"Clients have long hated the billable hour, and I understand why. The hours seem to pile up to fill the available space."
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"The clients feel they have no control, that there is no correlation between cost and quality."
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"The billable hour makes no sense, not even for lawyers. If you are successful and win a case early on, you put yourself out of work. If you get bogged down in a land war in Asia, you make more money. That is frankly nuts."
Mr. Chesler also pointed out that elimination of the hourly billing model prevent clients from being "surprised by a whopper bill and met by the standard (albeit true) explanation that 'litigation is unpredictable'."
Enough said? We think so.
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