Alternative fee agreements are not going to do away with the billable hour

From time to time there are articles like this one published in the New York Times last March, attacking the billable hour as the basis for billing clients for services rendered.  Such articles usually have two themes -- that the billable hour results in legal services costing too much, and that the billable hour system is in many ways corrosive to the legal profession.  Alternative billing arrangements are usually held up as the solution that might magically benefit everyone.  However, these are two different issues.  The measures clients impose to control their legal spend are a separate issue from law firms' internal culture.

Insurance defense firms usually are not mentioned in this debate, because we all have been operating under layered cost controls at least since the late 1980's.  These layered cost control measures have long included pre-negotiated and below market billing rates; stringent litigation management guidelines that require pre-authorization for extra staffing, for filing of motions, for depositions, for legal research over a minimal amount, and for other selected activities; detailed litigation plans, which have been a requirement dating back to the 1990's (predating the legal project management fad by at least a decade); detailed budgets organized by standardized ABA uniform task and activity codes; detailed and contemporaneous time records, with each entry coded with the uniform task and activity codes; submission of electronic bills in standard formats, to facilitate automated review and analysis of the bills; routine reviews of bills by claims departments or third party auditing services, resulting in write-offs or write-downs of time considered excessive or not compliant with guidelines; and random audits of sample closed cases, sometimes more than a year after they were concluded.  And yes, after all of that, the insurers are also adopting flat fee or other alternative billing arrangements.

So, with the perspective gained from having practiced under that regime for most of my professional career, I can say with confidence that the billable hour system is not going anywhere.

 The bottom line is that having access to the billing data and the analysis of that data is tremendously valuable to the clients/insurers.  I doubt that it would be possible to negotiate workable alternative fee agreements without having such data to analyze.

 All that billable hour data is necessary in the first place to structure smart alternative fee agreements, and to decide which parts of the services can be “outsourced” to cheaper providers, such as a captive "staff counsel" law firm.  I doubt that any insurer would want to move entirely to flat fee arrangements, for example, and be cut off from that data in its larger markets.

 

Law firms themselves are also dependent on the billable hour system to measure and control productivity, and have invested in expensive back office computer systems for the collection and analysis of billable hour data.   

 

In practice, alternative billing arrangements do not appear to be supplanting the billable hour system, but rather are yet another layer of cost controls that will overlay, and be dependent upon, the billable hour system.  For example, imagine that a corporation's general counsel sends a group of cases to a law firm to defend under a flat fee deal, and halfway through the contract period, one of the flat fee cases goes to trial and results in an enormous plaintiff's verdict.  Do you think that the corporation's general counsel is not going to ask for a copy of the entire file, including all the time records? 

 

In sum, the adoption of flat fee billing or other alternative billing arrangements is not likely to transform the billable hour culture of law firms.   The billable hour culture is in my view a consequence of the information age, in which it became economically feasible to record activity in six minute increments and then store, aggregate and analyze the data with computers over weeks, months, and years.  As we have seen in professional sports, see Moneyball, the technology is driving the collection and analysis of more data, not less.  

 

Later:  Here's confirmation from a managing partner interviewed by Jim Hassett:  "Clients could get more out of their law firms if they fully embraced change and trusted it. For example, we have a client that does a lot of fixed fee work with us. They require almost every project to be a fixed fee, yet we still have to submit detailed time reports that they use to see how they’re doing."  Of course.  The client there not only wants the predictability of the fixed fee, but it also wants the detailed time reports so that it can evaluate the fixed fee deal at its conclusion, use the data to negotiate the next fixed fee deal, and compare how different lawyers and different firms handle similar matters.    That client is actually being very smart.  They know that regardless of all the talk about embracing change, the law firm is going to keep detailed time records anyway, because the law firm needs the data for the same reason the client needs it, as well as for purposes of internal law firm management.  Since the law firm is going to keep detailed time records regardless, the client correctly concludes that there is no good reason not to ask for the detailed time records. 

 

I do wonder whether, in a flat fee environment, such time records are as meticulously entered and reviewed by law firms as in a normal hourly fee matter.  I would expect that time-keeping practices would get a bit sloppy in a flat fee matter. 

 

Keeping accurate and properly coded time records is an acquired skill that takes effort.  It's work.  On an hourly fee deal, there is a strong incentive to keep good time -- you want the bill to be paid, and be paid timely.  On a flat fee deal, what is the incentive to keep "good time"?  By "good time", I am not just talking about overstated or understated time  -- which is one possible issue -- but rather descriptive time entries that are properly broken down into discrete tasks with appropriate coding (e.g., no block billing).


The dark side of alternative fee agreements

Alternative fee agreements have received a lot of favorable press in recent years, with the praise usually coming in tandem with criticism of the billable hour.

However, there is a dark side to alternative fee agreements.  Because a law firm's obligations to its clients extend beyond mere contractual duties, the law firm which undertakes matters under an alternative fee agreement can be exposed to wildly disproportionate risks. 

Some of these risks are illustrated by the recent decision in Cunningham & Associates v. ARAG, LLC, No. 11-1983 (D.D.C. Jan. 31, 2012), in which a law firm brought suit against an insurance company providing pre-paid legal services. As recounted by the District Court, the law firm alleged that under its agreement with ARAG, it undertook the legal representation of four of the defendants' insureds in four different matters which collectively demanded over 900 hours of attorney time, but for which the defendants allegedly only paid $2,300.00 to date.  The defendants then terminated their contract with the plaintiff law firm, which termination was in the law firm's view due to defendants refusal to reimburse the firm for reasonable fees and expenses incurred.

The law firm recently filed suit against the defendants, alleging fraud, negligent misrepresentation, breach of the implied contractual duty of good faith and fair dealing, quantum meruit, unjust enrichment, and violations of the D.C. Consumer Protection Act.  In its complaint, the law firm sought damages of $140,715.00 in compensatory damages plus interests and costs, $422,145.00 in compensatory and treble damages under the consumer protection statute, attorney's fees, and $500,000 in punitive damages.  The attachments to the complaint included the ARAG Attorney Network Application, the ARAG Attorney Agreement, and the ARAG North America, Inc. Attorney Reimbursement Fee Schedule (which are all available through PACER for anyone interested).

In its opinion, the District Court granted the defendants' motion to compel mediation, and stayed the action for 45 days so that mediation could take place.  The contract between the parties required four hours of non-binding mediation in Des Moines, Iowa.

 


The sea change in online legal content

There's been a sea change in online legal content.  Large law firms have always had countless white papers, newsletters, and client alerts, but full access to such resources was usually reserved for firm clients, or prospective clients, or to readers who would at least fill out a contact form online.  Many firms would coyly omit any case citations, and then say that anyone interested should call.  That's changed. 

Now it appears that the gates have been mostly thrown open to Google and other search engines.  Search on any legal topic, and you will find page after page of high quality legal analysis, freely available to all comers, complete with pinpoint cites to cases.  In many instances, you will find publishable articles which must have taken many weeks to write and edit.

This sea change isn't just the result of the recession, although that doubtless has been an important factor, and maybe was the tipping point.  Other factors include the ongoing conversion of the federal and state courts to electronic case filing, the ongoing conversion of federal and state agencies to electronic records, the widespread adoption of internet publishing software by law firms, the growing capabilities of search engines to find and organize all of this material while weeding out the spam, and the perceived pressure to show up in search engine results at least as well as your direct competition.  

There was a time when I wouldn't bother doing ordinary Google searches on a legal topic, but for now I find that it should be the first step.

Law firm marketing consultants have been advocating "content marketing" for a long time, and even now, some are advocating that the response to the glut of online legal content is more and better online legal content


Search engine makes Recap database more valuable

The Recap archive is now more useful to litigators, since there is a search engine to access the downloaded pleadings.  I had previously complained about the lack of a search engine, so now that they have one, it's only fair that I point that out.   (Recap is that Firefox plug-in that comes alive when you use Pacer, and sends a copy of any filing you download to the Internet Archive to improve public access.)

Now, if you wish to view the pleadings in an important precedent because you are working on a similar matter, the Recap search engine should be a useful tool.  Chances are good that if you want to look at the pleadings, someone else has had the same thought.

 


Judges are not like pigs, hunting for truffles buried in briefs

"Judges are not like pigs, hunting for truffles buried in briefs."   It's a good line, but somewhat overused.  A search of Google Scholar indicates that the line has been used in 262 judicial opinions.

Still, it is a judicial rebuke that has to sting.  The Courts want pinpoint cites to the record.  The revised Federal Rule 56 now specifically requires pinpoint cites to the record.

 


Maryland courts adopt a uniform rule for cell phone use

Up to now, each Circuit Court in Maryland has had its own rules for cell phone use, and they varied dramatically.  Some Circuits prohibited cell phones entirely, and you had to leave your cell phone in the car.  Some prohibited cell phones with cameras.  Further, the rules were enforced inconsistently.  Just based on my own experience, Circuit Courts that banned cell phones entirely would look the other way on court days when settlement conferences were held.  Also, there was different treatment for different types of cell phones.  For instance, somehow, Courthouse security guards didn't seem to realize that Iphones have a built-in camera.  In fact, the Courts, while wanting to either prohibit or restrict the use of cell phones, obviously came to depend on the fact that counsel would have cell phones.  I attended one pretrial/settlement conference in Baltimore City, and informed the mediator that the adjuster would be participating by telephone, as previously authorized by the court.  The mediator responded, "There's no speaker phone in the conference room."  I said no problem, and set up my cell phone on the table in speaker phone mode, and conferenced in the adjuster.  This must go on all the time. Think about it -- how many pay phones do you see in courthouses these days?

That's all over now, I hope.  Maryland has adopted a uniform rule for cell phone use, effective today.

Here is the text of the new rule.

The big thing to remember is that the cell phone better darn well be off when you are in the courtroom. 

 

 


Recap of Pacer -- what's the point?

I read about Recap, and of course immediately downloaded it to try it out.  In case you haven't heard, it is the Firefox plug-in that comes alive when you use Pacer, and sends a copy of any filing you download to the Internet Archive to improve public access.  Recap already has its fans and its detractors.

A couple of points should be mentioned.  The first is that the Recap plug-in only works if you log in to Pacer.  If you log in through the ECF system as a filing attorney, and download a pleading that way, no Recap copy is sent to the Internet Archive.  The second is that the Recap plug-in only works if you log in to Pacer using Firefox.  The third is that usually you do not have to download copies of your own filings, since you uploaded them and had to have the pdfs to do it.  All obvious, practical points, which lead to me to the conclusion that to "Recap" a pleading is usually going to be a conscious decision for somebody.  That is, someone has to conclude that the case filings have importance or public interest, and should have easier public availability, and then log in to Pacer using Firefox with the Recap plug-in.  I don't think it is likely that run-of-the-mill pleadings are going to be "Recapped" by accident.  For that reason, I think the privacy concerns are overblown. 

Now after using it, however, I'm wondering what's the point of it?  Or to put it bluntly, what's in it for me, or for my clients? 

The thing is, you can't go to the Internet Archive and do a text search of a law library of Pacer downloads.  That's deliberate, as the "Recap Repository" makes clear here

Okay, so if I want to run a search, I've got to use Pacer, and I guess that means I would have to go to each individual Pacer site, log in, and run the search.  And maybe then I might see some Recap icons on the docket sheets that would tell me that there is a free copy available.  That makes no sense from a time management point of view.  

Anyway, I get this uneasy feeling that all Recap would accomplish is to allow other counsel in federal cases to get free copies of pleadings I download.  That's not a very compelling reason to use it.

One suggested benefit of Recap is that it would allow an attorney to view a document through Pacer a second time without having to pay the per page fee again.  I have to agree that that could be a benefit; however, usually it is just as easy to save a copy of the pdf on your own hard drive for future reference.  In complex, multi-party litigation, use of Recap could effectively create a cost-free pleadings archive for the litigants, organized by the Pacer docket sheet itself. Maybe all counsel could come to an agreement to download pleadings through Pacer-Recap.  I can't see that anyone would undertake it on their own.

To the extent one's client could view even public filings on Pacer as sensitive, the client would probably object to the pleadings being copied wholesale to the Internet Archive.  Even though Pacer is open to the public, the requirement to have a Pacer account and pay the 8 cents a page viewing fee, discourages casual access.  All those $2.40 fees add up.

Journalists, political "opposition research" operatives, and other gadflys will be glad to get free access to court pleadings through Recap, but the people paying the bills probably will not like it.







Reviewing your law firm network security - a framework

    I was asked by our managing partner to outline possible steps to enhance our network security, and I thought I would share them more widely.
 
I.  At the individual work station level
 
        1. Use stronger passwords for system login, and change them quarterly. 
 
        2. Encrypt client files on laptops with Truecrypt, which is free, opensource and highly recommmended.  www.truecrpt.org  It would be possible to encrypt only the folder(s) that contain confidential materials.  This would be protection not only against malware threats but also against breach of confidentiality following the theft or loss of the laptop.
 
        3. Make sure that most users are operating with limited accounts. not admin accounts.  E.g., I can't see any reason why a legal secretary should be logging in daily as an admin account user.
 
        4. Make sure software firewalls are enabled on all machines. This will help prevent malware from spreading through internal network.
 
        5. Regularly scan for malware with one of the top rated products.
 
        6. Keep all software updated. It is now said that applications are a more significant security vulnerability than Windows. A good example is adobe acrobat reader, which is used to view pdfs. Recently Adobe has issued a whole slew of security patches.  All of the firm computers should be running the latest patched version of Adobe Acrobat Reader.
 
        7. Use firefox browser running noscript addon except when you absolutely need ie.  It is said that Firefox is more secure than IE.  Noscript is a free addon to Firefox that prevents websites from running javascript or activeX sc
 
        8. Use roboform, or a cheaper equivalent, to manage passwords. This will facilitate use of strong passwords, and will be some protection against keylogging malware (since the passwords will not be typed in).
 
        9. Use special diligence to secure and regularly scan any firm computers used for internet banking.  Special diligence now means more than you probably think.  Basically, a small business ideally should have a highly secure, dedicated computer for online banking chores, that is not used for emailing or web surfing or anything else.  That probably means a non-Windows operating system too.
 
        10. Periodic training of all employees never to open an attachment to any email unless it was expected.  Even if from a known person, an attachment should not be opened without confirming that that person sent one.  E.g., we have had malware attached to emails that were "spoofed" to look like they came from members of our law firm.  Also, there should be training to never click on a hyperlink in an unexpected email.  Aside from infected attachments, internet criminals want to trick you into visiting a website that is infected with malware set up to exploit known security vulnerabilities in Windows, IE, and common applications.
 
        11. As we upgrade computers, move to windows 7 which has more powerful security, or apple machines.
 
        12. Use a commercial email scanning and filtering service.  On one day recently, our service (AppRiver) picked off 5 emails containing viruses that were addressed to me, and it is picking off about 50 spam emails a day.  
 
        13. I don't think it is necessary for all machines to run the exact same antivirus and antispy software.  I think there is value to having "biodiversity", since not all software catches all the threats.  However, all the AV software that we run should be set to update daily on an automatic basis.
 
        14. Turn desktop computers off at night, unless there is a specific reason to keep it on.  Used to be that people thought turning the computers on and off each day would cause them to wear out quicker.  Now, leaving a machine on all night just makes it a valuable target for hackers.
 
        15. No file sharing software, such as LimeWire or bittorrent,should be allowed.  Too risky.
 
II.  Network Security
 
        1. Use opendns as the network dns server to limit exposure to dns hijacking and phishing attacks. Use opendns settings to deny access to known porn and gambling sites, at minimum.
 
        2. Need to keep servers and router patched.
 
        3. Consider a network security appliance, such as Astaro.  www.astaro.com
 
III.  Website security
 
        1.  Again, there is a need to use a strong password.
 
        2.  Do you know whether the software that runs your website has vulnerabilities?  Better look into it.  The most prevalent form of malware is now trojan horse programs served up by legitimate websites that have been infected by malware.  If and when you visit such a website, you will be bombarded with scores of different types of malware, testing every sort of vulnerability.  You do not necessarily have to click on anything or download anything there to pick up a malware infection, but clicking on links on such a website would increase the chances of infection.  Again, this situation can exist on any legitimate website which has been hacked into, including your own law firm website.  As aptly quoted by Brian Krebs in his excellent Security Fix blog on the Washington Post website:

"There is no such thing as safe browsing today and it is no longer the case that only the red light district sites are responsible for malware," writes X-Force Director Kris Lamb. "We've reached a tipping point where every Web site should be viewed as suspicious and every user is at risk."

See Brian Krebs, Phishing Attacks on the Wane, Security Fix, Aug. 27, 2009.  Krebs recommends using the Firefox browser with the Noscript add-on as one means of reducing this risk. 


 
IV      Wireless security
 
        1.  Wireless routers are a huge security risk. If there are patches to the router operating software, the patches should be downloaded and installed.  The routers should be checked periodically to make sure they do not have the default passwords (like "admin") to access the router.  If someone does a hard reset to the wireless router, that could result in the default password being enabled again, and the wireless router could then be easily compromised.
 
        2.  The encryption for the wireless router should be the highest level.  By the way, in recent news reports it has been said that the basic form of WPA encryption has been cracked in 60 seconds.
 
        3.  Smart phones.  Do you realize that smart phones can be set up to access everything on a Windows Exchange network, by remote access to a computer on the network?  For instance, there is an application for the IPhone that allows such access, called  "WinAdmin."  But there are others too.   This capability would add a whole new level of freakout if your Iphone is stolen.  I would recommend thinking twice or thrice about security before setting up your Iphone to do this.


The Changing Legal Profession

A couple of good articles have come to my attention about the changing legal profession.  First, there is a good retrospective paper available as part of the "Virtual Law Library" on the D.C. Bar website:

The Changing Legal Profession, by Abe Krash.  Abe Krash practiced for 50 years with Arnold & Porter.  Here's a quote:

As Judge Rifkind noted, “an apprenticeship under a good master” is a critical part of learning the craft of lawyering. In the past, when firms were smaller, partners knew many of the associates, and they had an interest in training them for the reason that a goodly number of associates would become partners in the future. However, as to many associates with whom they now work, partners do not have such an interest. As I have noted, the turnover rate of associates at most large firms is extremely high, and only a handful of associates will be elevated to partnership. There is accordingly a diminished incentive for partners personally to invest valuable time in training associates who will leave the firm. A partner may understandably ask: why should I devote a lot of effort to training this associate when he or she will be gone from the firm in a year or two?

Coincidentally, there is a recent article in Findlaw, "Junior Associates - The State of the Legal Profession",which states at one point:

The training and loyalty of junior associates is closely tied to the issue of high salaries. Lack of "real world" legal training haunts most junior associates, who are routinely assigned to tedious document review projects.

Training a highly-paid first year associate who will most likely move on in a couple of years is a dilemma faced by many firms. According to the panel, 78% of lawyers are leaving their firms after only 1 or 2 years.