Source: http://www.thenalfa.org/blog/category/fee-scholarship/
Timestamp: 2019-04-21 16:01:48+00:00

Document:
When a liability insurer agrees to defend its insured after the insured has been sued, this is often cause for celebration, as the insured believes its defense will be paid. The insurer may reserve its rights to deny coverage, and advise that such reservation creates a “conflict of interest” entitling the insured to “independent” counsel. Thus, instead of the insurer selecting the insured’s defense counsel, which is common under a duty to defend policy, the insured gets to choose its own counsel. Still reason to celebrate, right? But, as you may suspect, this selection right comes with a catch. The insurer advises that while the insured can choose its own counsel, the insurer only agrees to pay a very low hourly rate, maybe $225 or $250 per hour (it varies, sometimes dramatically so), which is much less than what is being charged by the insured’s independent counsel. If the litigation against the insured is significant, the delta between the rate the insurer agrees to pay and counsel’s actual rate can add up to millions of dollars.
The insurer’s obligation to pay fees to the independent counsel selected by the insured is limited to the rates which are actually paid by the insurer to attorneys retained by it in the ordinary course of business in the defense of similar actions in the community where the claim arose or is being defended.
While section 2860(c) allows an insurer to only pay independent counsel the same rates it pays to other lawyers to defend similar actions in the same locale, an insured should not simply accept the insurer’s say so on this. There are several ways to both challenge an insurer’s unilaterally imposed rates. This article addresses a few such ways.
First, an insured should demand that the insurer produce detailed information about the counsel to whom it is paying these low rates. An insurer often imposes “panel counsel rates” in these situations, which are rates that an insurer pays to certain law firms that have special agreements with the insurer, often in writing. In these agreements, the panel counsel often agree to charge the insurer reduced hourly rates, regardless of the type of case, or location of the litigation, typically in exchange for the anticipation of a large volume of work from the insurer. Under such a situation, an insured can argue that there is no “similarity” of actions as mandated by the statute. Instead, the panel counsel’s rates are unaffected by the complexity, sophistication, nature of the allegations, legal claims, factual circumstances, location or any other factors of the cases in which they are appointed. Thus, such rates provide no support under the § 2860 requirements.
Second, an insured should demand that the insurer provide detailed information about the specific cases that the insurer is touting as “similar actions in the community where the claim arose or is being defended,” to support the low hourly rates imposed. With this information, an insured can ascertain whether such cases are, in fact, “similar” or not. For example, are these purported “similar” actions less complex than the lawsuit against the insured? Do they involve different legal and/or factual issues? What about the amounts in controversy — are they dramatically less and thus, the exposure potentials are not even comparable? Also, where are these other actions pending? Are they in different communities? The more an insured can demonstrate dissimilarities the better to demonstrate that the insurer cannot support the hourly rate it seeks to impose pursuant to § 2860.
Third, if the parties cannot informally agree on an acceptable hourly rate for independent counsel, either party can seek to resolve the dispute through final and binding arbitration pursuant to § 2860. And, in any arbitration, if the arbitrator determines that insurer’s evidence does not satisfy the § 2860 requirements, the insured should argue that a “reasonableness” standard should be applied to determine the appropriate rate for the insured’s independent counsel (with evidence to support that independent counsel’s actual rates are “reasonable”). Indeed, a “reasonableness” standard is a ubiquitous standard for attorneys’ fees in insurance litigation and other contexts.
An insured need not simply accept its insurer’s word when it imposes inappropriately low hourly rates on an insured’s independent counsel. Instead, an insured should challenge such rates, when appropriate, either informally or in arbitration.
Susan P. White is a partner at Manatt Phelps & Phillips LLP in Los Angeles. Susan resolves complex insurance coverage disputes through litigation, arbitration and mediation. These include bad faith claims, as well as other commercial and contract matters. She has also successfully recovered millions in attorneys’ fees and costs for her insured clients.
A recent Texas Lawyer story by Amanda Bronstad, “Mikal Watts Wants One-Third of Expected $500M Fee Corn Settlement,” reports that Texas plaintiffs attorney Mikal Watts is asking for at least $150 million in legal fees from the $1.5 billion settlement with Syngenta AG, citing his firm’s “unique position in this litigation.” The Watts Guerra attorney’s fee request, filed last month but updated on Aug. 3, sets up a potential clash over what could be an estimated $500 million in fees in the class action settlement, which resolves claims by more than 600,000 farmers who alleged Syngenta sold genetically modified corn seed that China refused to import, causing farmers to lose billions of dollars. In a separate request for fees, lead counsel in the federal multidistrict litigation in Kansas are seeking that amount—about 33 percent of the total settlement fund.
“This fee request is based on Watts Guerra’s enormous investment in this litigation,” Watts wrote in his motion. “It is on the high end of the range, perhaps, but not unprecedented.” Watts claims to represent 57,000 farmers who could be entitled to between $345 million and $750 million under the settlement. The requests come as at least four other lawyers have challenged the fees in the deal, particularly those going to Watts. Oppositions to the fee requests are due Aug. 17.
The Syngenta litigation was coordinated in both federal multidistrict litigation in Kansas and in two proceedings in Minnesota and Illinois state courts. In their fee request, the lead lawyers in Syngenta want 50 percent of the $500 million, plus about $6.7 million in costs and expenses, which would go to a total 44 law firms. They want another 12.5 percent to go to the lead lawyers in the Minnesota state court, and 17.5 percent to attorneys in Illinois state court. The remaining $100 million would be reserved for other lawyers.
The dispute mirrors fee fights that have erupted in mass torts between plaintiffs attorneys appointed to represent members of a class action and those who have brought individual suits on behalf of their clients. The vast majority of the farmers Watts represents have retainer agreements with him and filed individual suits in Minnesota state court. Last year, as part of the federal multidistrict litigation, a jury awarded $217.7 million to a class of Kansas farmers in the first bellwether trial. It was one of eight subclasses of farmers planned for trials. A second, on behalf of Minnesota farmers, was ongoing when both sides struck a deal.
The initial settlement called for two agreements—one on behalf of the class, and one on behalf of the individual plaintiffs, according to court filings. But the negotiated deal encompassed four subclasses—two on behalf of farmers, one for grain handling facilities and another for ethanol producers. Final approval of the settlement is set for Nov. 15.
Earlier this year, two attorneys in Beaumont, Texas, claiming to represent 9,000 farmers filed a motion to delay approval of the settlement, insisting the lead lawyers who negotiated the deal kept their clients in the dark on “how the settlement would be divided and distributed between the class actions and the individual producer plaintiffs.” In particular, they claimed Watts and another lawyer on the plaintiffs settlement negotiation committee, Clayton Clark of Clark, Love & Hutson in Houston, dropped a more favorable settlement for farmers with individual lawsuits in exchange for higher fees.
Another lawyer, D. Allen Hossley of Hossley & Embry in Tyler, Texas, who claimed to represent 650 farmers, joined the motion, filed by Mitchell Toups, of Weller, Green, Toups & Terrell and Richard Coffman of The Coffman Law Firm (Toups and Coffman are now seeking $34 million in fees, while Hossley wants nearly $2.7 million).
On April 24, Minneapolis attorney Doug Nill sued Watts. He claimed Watts, firm partner Guerra and Jon Givens, of counsel, who lives in Alaska, and 13 other small law firms or solo practitioners conspired to convince 60,000 farmers not to participate in the class action, and now could end up with $200 million in fees. The suit asked to void the retainer agreements, which included a contingency fee rate of 40 percent. In his fee request, Watts said he would drop his contingency fee to 33.3 percent. When accounting for what he had agreed to pay lead lawyers in the federal multidistrict litigation—referred to as a common benefit assessment—his contingency fee would drop to less than 24.2 percent, he wrote.
But, anticipating that “some of the other common benefit counsel” may demand one-third of the settlement for themselves, he insisted that his fees come out of the $500 million and that he get reimbursed for the $12.8 million in common benefit expenses he paid in the Minnesota state court litigation. He cited a 2015 joint prosecution agreement that was designed to resolve future fee disputes among lawyers in both the Minnesota state court cases and federal multidistrict litigation.
Watts backed up his fee request, which also includes 332 law firms that worked on his cases, with expert reports from six prominent legal scholars, including Brian Fitzpatrick of Vanderbilt Law School and Geoffrey Miller of New York University School of Law.
Raise rates across the board.
Discount from the higher rates where necessary.
Increase rates more for partners.
Increase rates more for more distinct practices.
Exit, or leverage up, practices where realized rates (i.e. after discounting) don’t rise.
Billing rate increases have been on a roller coaster, see Figure 1. Before the onset of the great recession, standard rates rose 7 to 8 percent annually with realized (collected) rates rising 5 to 6 percent. When the recession hit, the standard rate increase dropped to between 1 and 2 percent and, as economics would predict, realized rates actually declined. Thereafter, things have steadily improved. The market now trundles along with standard rates rising at 3 percent and realized rates at 2.5 percent, comfortably above inflation at 1.5 percent.
The fact that realized rates have gone from declining to rising at a steady rate indicates that bargaining power has shifted back from clients to law firms. The question becomes: must the new steady-state rate of increase be lower than it was before the onset of the great recession? If law firms have the bargaining power to raise standard rates an average of 3 percent, and realize a rate increase of 2.5 percent, then do they have the power to raise rates at, say, 7 percent and realize a 5 percent increase?
Three conditions must be met for increasing rates to work for law firms. The first is that growth in the value clients derive from a firm’s offerings should exceed the increase in rates. On this, the value a client derives is formally equal to the change in the risk-weighted expected value of the outcome of a client’s business venture, or legal-proceeding, that results from the law firm’s services. As the business world grows more uncertain, complex, and volatile, then services which mitigate these new risks create greater value for clients. Mitigating these emerging risks is what the leading-edge offerings of elite law firms do. Hence, these firms are at liberty to raise rates.
The second condition required for raising rates to be effective relates to competition. If Firm A raises rates and Firm B offers the same service at the pre-increase rate then, in theory, clients turn to Firm B. However, in the elite law world, firms’ offerings are not that fungible—in the highly-specialized segments where elite firms play, there simply aren’t that many viable “Firm B” providers. Even where there are other technically-capable firms, different firms offer different levels of reassurance because of clients’ varying history and comfort with the idiosyncratic perspectives of individual lawyers. A related observation is that firms tend to raise rates at comparable rates. Thus, even where there is a viable Firm B, there may be little cost saving incentive for the client to switch firms.
The third condition is evidenced by the historical data: rate increases only stick when the economy is humming along. While there is always much uncertainty about the economy, and by historical standards we are overdue a recession, today’s economic fundamentals look fairly robust. Firms should be assertive in benefitting from today’s strong economic tailwinds, emboldened by the knowledge that they’ll be buffeted by the headwinds when the economy turns.
The reason elite law firms have not been increasing rates assertively may have more to do with the emotional than with the rational. Elite law firms’ belief in the value of the services they provide took a battering through the great recession, and gets beaten down daily by dire warnings of the industry’s imminent disruption. But the recession has ended and disruption is not an existential threat to elite law firms. Nor is it an existential threat to the differentiated service lines within the portfolio of services offered by the broader group of preeminent firms. Yes, it’ll hurt the commodity-only firms and commodity service lines within other firms, and it will require changes in how all firms operate, but it won’t destroy the core of the elite law firm profit engine: big bucks for bespoke mitigation of major risks.
When I suggest raising rates assertively some partners respond that their clients won’t pay any increase. True, some clients won’t. But many will and many more will bear part of the increase. Thus, it’s normal for an increase in standard rates to be accompanied by more discounting and hence a decline in realization (i.e. the ratio of realized, or collected, rates to standard, or rate card, rates). This is not of itself a problem as it’s realized rates that drive a firm’s economics. The important point is that, other than in the aftermath of a recession’s onset, the effect of an increase in standard rates is a significant, albeit lower, increase in realized rates. For example, standard rates rose by 33 percent from 2007 to 2017 and, although realization declined from 89 to 82 percent, realized rates still rose by a healthy 22 percent.
It’s instructive to take a closer look at the above realization decline. As shown in Figure 2, by far the biggest component of this decline was in the ratio of worked (i.e. negotiated or agreed) rates to standard rates—5 points of the 7-percentage point fall. This reflects growth of the volume of work being executed not at standard rates but at client or matter-specific discounted rates.
The dynamics of discounts are a competition between two irrationalities. On the one hand, clients have an irrational liking for discounts. They make clients feel they’re getting a bargain and they’re easy for the legal department to explain to management. The irrationality, of course, is that the focus should be on the discounted rate not on the distance between it and some putative standard rate.
On the other hand, firms have an irrational dislike for discounting. Too many firms still think of realization rate as a measure of profitability. It can be absurdly hard to get lawyers to internalize that, in order to assess profitability accurately, you have to look at the combined effect of leverage and realization using measures such as margin per partner hour. Indeed, higher-leverage and higher-discount work is often more profitable than lower-leverage and zero-discount work. But partners have been conditioned to think of discounts as a demerit, and partners hate demerits. This unhelpful conditioning gets reinforced by finance departments reporting on hours and realization but not on leverage or margin per partner hour.
The look at realization in Figure 2 also shows that two percentage points of decline are due to increased billing write offs. These write offs reflect quality-of-work issues and budget overruns. As quality issues are probably fairly constant, it’s reasonable to attribute this increase to more budget overruns, in turn a reflection of more work being done under fixed, capped, or other alternative fee arrangements (AFAs). But here again, lower realization doesn’t mean lower profitability—increased leverage can more than offset the realization decline. Indeed, over 70 percent of firms say AFAs are as profitable, or more profitable, than work billed at hourly rates, (data source: Altman Weil’s 2017 Law Firms in Transition report).
Partners are often reticent to raise their own billing rates assertively. This is a problem of itself but also has severe second-order consequences. First, it effectively sets a cap on the billing rates of counsel and senior associates as there has to be headroom between their rates and those of partners. This becomes a constraint not just on revenue but on profitability. While typical businesses have their highest markup on their highest-value offerings, this billing rate cap leads many law firms to have a lower markup (i.e. the number of times a lawyer’s billing rate exceeds their comp on a cost-per-hour basis) on senior associates and counsel than they realize on their relatively low-value junior associates. By compressing markups in this way, firms are leaving money on the table. There’s consistent market feedback that indirectly corroborates this perspective: clients object most to the billing rates of junior lawyers.
Holding back on partner billing rates also makes it harder to raise leverage. Part of the reason some partners push back on raising their own rates is they feel some of the work they do is not truly partner level and hence shouldn’t be billed at full partner-level rates. This underlying failure to delegate is a disservice to clients (by not letting the work flow to the lowest-priced lawyer capable of doing it), to associates (who are left bereft of experience), and to other partners (who contribute disproportionately to a firm’s profit pool by leveraging more). Hence, part of the logic for raising partner rates is to realize the benefits of improved leverage.
If you offer customers something they need that you alone can provide then you can set the price close to the value they derive from your service. If, on the other hand, you offer customers something that many others offer, then you are constrained to pricing it at the level set by others. In reality, a law firm’s various offerings fall at different points along a spectrum between these theoretical extremes. This simple observation has a pricing implication that many law firms effectively ignore: billing rates, and hence billing rate increases, should vary markedly across the range of a firm’s offerings. In particular, the billing rates for a firm’s offerings that are most distinct from those competitors can provide should be priced more aggressively than those for its less-distinct offerings.
The low billing rate growth we’ve seen of late may well be a manifestation of firms adhering to a philosophy of a single firm-wide billing rate increase and having this increase be set by the rate that is appropriate for the less-distinct offerings. The reality is that market dynamics have evolved in recent years to the point that a firm’s pricing power varies sharply across its practices; adhering to a single increase set by the less-distinct offerings is now leaving serious money on the table. If internal firm harmony requires a single rate increase, then better to raise standard rates strongly across the board and discount from these as necessary for the less-distinct offerings.
There is an old adage in strategy consulting: 80 percent of strategy is deciding what not to do. The ‘what not to do’ for elite law firms is offer commodity services. How does one recognize commodity services? By definition, commodity services are offerings that many other firms can provide. By extension, commodity services are those where a firm effectively cannot set the price but must adhere to the price level set by rivals. This translates to commodity offerings being those where the realized rates (i.e. after discounting) don’t rise following a standard rate increase.
To adhere to a strategy of differentiation, firms should exit practices where realized rates can’t be increased above the rate of inflation. In some circumstances, so doing is more than the fabric of a partnership can bear. Where this is the case, an alternative that may buy some time is to operate the practice at greater leverage than the rest of the firm. So doing mitigates the effect of a commodity practice on per-partner profitability. However, it is really only a holding measure as leverage can’t be increased indefinitely and managing businesses with dramatically different fundamental strategies requires an ambidexterity that few trained business leaders, let alone lawyers, possess.
Most people make decisions based on objective facts interpreted through a lens of emotional biases and personal predispositions. Partners are alike most people in that they employ such a lens; partners are unlike most people in that they refuse to recognize they employ such a lens. There is nothing to be gained by leaders trying to get partners to recognize what they’re doing; however, there is value in leaders shaping the lens through which partners interpret the world.
At many firms today, this lens says lawyers are of declining value and the market is stagnating. While this is true perhaps at the middle and lower tiers, this is objectively untrue for elite firms and for the differentiated practices within the broader swath of preeminent firms. This lens issue needs to be addressed first before partners can analyze robustly the case for billing rate increases. Specifically, the lens should be reshaped by restoring and bolstering partners’ confidence in the value of their offerings. To this end, firm leaders should talk to clients (many of them really value you!), share more of the positive client feedback with partners, highlight firm recognition and awards, have clients come and speak at partner meetings, host alumni roundtable discussions of the value of outside counsel, etc. The forthcoming 2017 Am Law results will probably help too: despite the pervasive gloom and doom, the top end of the market is prospering; I suspect we’ll see double-digit percent increases in profitability at most elite firms.
Having reshaped the lens, the next step is to create opportunities for partners to discuss billing rate history, profitability, and future billing rate policy. The key here is to give partners the data and let them chew on it. Don’t lecture them or tell them what to do; rather give them the parameters and let them figure it out for themselves—so doing is the first step toward adoption of the desired changes.
Partners’ deliberations should perhaps start with a review of the firm’s billing rate history and dynamics, including firm-specific versions of Figures 1 and 2 here, supplemented with the same views for individual offices, practices and key clients. It would also be useful to profile how partner rates set a cap on rates for counsel and senior associates, leading to markup compression and, perversely, a firm having the lowest markups on the time of its highest value lawyers.
Partners should then discuss some of the less-obvious dynamics around billing rates. These could include, for example: the connection between leverage and partner billing rates (particularly how low partner rates suppress leverage); the pervasive observation that leverage varies more with individual partners than with practice or client type; and, in cultural contexts where it would help, partners could debate the relationship between compensation and billing rate—the two tend to correlate at professional services firms although it’s sort of misleading as it’s not a causal relationship; rather both are separately reflective of the economic value of a partner’s practice, so proceed with caution.
The final element is for partners to discuss the process by which billing rates are set. While most partners prefer control of their own rates, many recognize that having an abstract committee set the rate allows them some plausible deniability in conversations with clients.
All this is to say it’s a new billing rate world out there. Law firm leaders would do well to buy the option of increasing billing rates assertively at year end by starting to prepare partners for such increases now.
Hugh A. Simons, Ph.D., is a former senior partner and executive committee member at The Boston Consulting Group and the former chief operating officer at Ropes & Gray.
Attorneys can’t always get what they want in attorney fees. There are statutory limitations, fees subject to court approval, and fee agreements that violate public policy.
Probate proceedings. Attorney fees in a probate proceeding are strictly statutory and don’t arise from contract. See Prob C §§10800, 10810, 13660. An attorney can’t charge more than the statutorily-permitted amount, but may agree to charge or receive less than that amount.
Indigent defendants. Attorney fees for counsel assigned to represent indigent criminal defendants are set by the trial court (Pen C §987.2) or by the court of appeals in appellate matters (Pen C §1241).
Judicial foreclosures. Attorney fees in judicial foreclosure matters are set by the trial court, regardless of any contrary provision in the mortgage or deed of trust. CCP §730.
Workers’ compensation. Attorney fees for representation in Workers’ Compensation Appeals Board matters are set by the Appeals Board (Lab C §5801) and by a court or Appeals Board in third-party matters (Lab C §3860(f)). But fee agreements for a reasonable amount will be enforced if the amount agreed on coincides with the Appeals Board’s determination of a reasonable fee. Lab C §4906.
Contingent fees under federal law. An attorney-client agreement with a plaintiff under the Federal Tort Claims Act calling for a contingent fee in excess of 20 percent of any compromise, award, or settlement, or more than 25 percent of any judgment is not only void, but is an offense punishable by a fine of $2000, or 1 year in jail. 28 USC §2678. See also 42 USC §406 (maximum fee for representing plaintiff in Social Security Administration proceedings is 25 percent of past due benefits; attempt to collect fee in excess of maximum is misdemeanor).
Contingent fees in medical malpractice cases. Maximum fee limits have been set under Bus & P C §6146.
This is just a sampling—many statutes limit attorney fees. When you take on a matter in an unfamiliar area of law, investigate possible limitations on the ability to negotiate fees.
fee agreement in workers’ compensation third-party actions (Lab C §3860(f)).
Agreements Violating Public Policy or Ethical Standards. Attorney-client fee agreements that are contrary to public policy, even if not explicitly in violation of an ethical canon or rule, won’t be enforced. Similarly, fee agreements that violate California Rules of Professional Conduct aren’t enforceable. The Rules include prohibitions against charging an unconscionable fee (Cal Rules of Prof Cond 4–200), agreeing to share fees between an attorney and a nonattorney (Cal Rules of Prof Cond 1–320), and nonrefundable retainer fees that fail to meet the classification of a “true retainer fee which is paid solely for the purpose of ensuring the availability of the [Bar] member for the matter” (Cal Rules of Prof Cond 3–700(D)(2)).
When it comes to attorney fees in class actions, it pays to be in the U.S. Court of Appeals for the Seventh Circuit — and it's tough to get what you want in the Second and Ninth circuits. That's according to two leading academic research reports that federal judges increasingly cite in determining how much in fees to award plaintiffs attorneys who work on contingency.
New York University School of Law professor Geoffrey Miller and the late Theodore Eisenberg, a professor at Cornell Law School, authored one of the studies. The second is a 2010 study conducted by Brian Fitzpatrick, a professor at Vanderbilt University Law School.
Both reports found that federal judges tend to determine a percentage of the settlement amount, then crosscheck it against the hours that plaintiffs attorneys spent multiplied by a reasonable hourly rate — called the lodestar. They also found that as the size of the settlement goes up, the percentage of fees that judges award to plaintiffs attorneys goes down. That's particularly true when it comes to the largest class action settlements.
Fee awards aren't evenly spread out: The vast majority of class action fee awards come in the Second, Ninth, First and Seventh circuits, Fitzpatrick said. He attributed much of that to the larger cities in those circuits — Boston, New York, Chicago, San Francisco and Los Angeles. "The lawyers are there, the defendants are often there, and I think judges with a lot of experience are often there, so that attracts these cases," he said.
Benchmarks might matter: The Ninth Circuit is one of the few circuits with a benchmark that judges cite in determining fees — 25 percent based on its 2011 holding in In re Bluetooth Headset Products Liability Litigation. Fitzpatrick said "that really limits the number of times a court would award more than 25 percent. It's working as a ceiling in the Ninth Circuit." Miller said having a benchmark didn't seem to matter when it comes to lower fee awards — his report found the Ninth Circuit stuck to 25 percent for the most part.
The Second Circuit has experience: The Second Circuit handled nearly a third of all the cases, according to the Eisenberg/Miller report. Many are securities class actions. The circuit doesn't have a benchmark, but it did set forth six factors for judges to consider in a 2000 ruling called Goldberger v. Integrated Resources. It's the circuit in which a judge is most likely to reject the original fee request made by lawyers. "It's a hard road to convince a district judge in the Second Circuit that your fee request ought to be accepted without question," Miller said.
One of the most generous circuits is the Seventh: That's due in large part to a 2001 decision in In re Synthroid Marketing Litigation, in which the Seventh Circuit downplayed the significance of using the percentage of the settlement fund by directing judges to look at market rates when assessing the lodestar component of an attorney fee request. "They have said clearly you should not lower the percentage over the entire amount of the settlement," Fitzpatrick said. "You should do it on a marginal basis. I see more district courts doing it in the Seventh Circuit than anywhere else because of those admonitions."

References: § 2860
 § 2860
 § 2860
 § 2860
 §987
 §1241
 §730
 §5801
 §3860
 §4906
 §2678
 §406
 §6146
 §3860
 v.