Monday, May 18, 2009, 9:00 AM

The Hourly Rate Trap

The article, below, was written by Womble Carlyle litigator Press Millen and published in Incisive Media's law.com: http://tinyurl.com/pc6fg6


The Hourly Rate Trap
by Press Millen


Ask a lawyer what her hourly rate is and she’ll probably give you a dollar figure. Ask a client about his lawyer’s hourly rate and you may get a scowl. In fact, if you ask a client to describe his biggest complaint about his lawyer, don’t be surprised if he says it’s that hourly rate which is presumptively too high.

The imminent demise of the billable hour has been confidently predicted during the entirety of my nearly 25-year legal career. And yet, like Rasputin, no matter whether you try to stab it, shoot it, or poison it, the billable hour somehow manages to survive. This article deals with the hourly rate, one of the knottiest aspects of what appears to be an undying feature of the relationship between lawyers and their clients.

Bear with me while I recount a cautionary tale: In 2005, the Board of Directors of Hewlett-Packard was concerned about confidential board information leaking like a sieve to the media. H.P.’s “solution” to the problem was to hire private investigators who set about using a number of questionable techniques to investigate certain board members, employees, and even reporters. When the dust cleared, H.P’s Chairman had resigned, lawyers and others were indicted, a number of the principals were hauled before a Congressional committee, the SEC investigated, and the company paid a $14.5 million fine.

The real scandal, however, is that the plan was hatched with lawyers in the room.

How much would it have been worth to H.P. for one of its lawyers to say something like “Hey, before we do this, let’s make sure these investigators proceed in a lawful manner, because if they won’t (or can’t), we probably shouldn’t do it all?” Would that 30 seconds of advice have been worth it, even at $750 an hour? In retrospect, the lack of that advice ended up costing H.P. millions of dollars and even more in shattered lives, careers, and public opprobrium. H.P., no doubt, would have paid dearly for the counsel it never got.

That story is a microcosm of the fundamental problem with the billable hour: how do you measure the value of a lawyer’s time? And how do you measure the value of something bad that doesn’t happen? It’s also a stark example of why clients shouldn’t fall into the Hourly Rate Trap, i.e. allowing retention decisions to be guided principally by hourly rates. Here are five reasons why it’s a Trap:

1. It Ignores Arithmetic – at the most basic level, the hourly rate is just one factor in the complicated equation of how much a client ultimately pays. Until the rate is multiplied by some amount of time, it’s just an abstract number.

Here’s a concrete example: Lawyer A charges $500 an hour. Lawyer B is equally experienced, but charges 20% less, $400. The solution seems simple, hire Lawyer B and save 20% in legal fees. Lawyer B, though, has a problem. He can’t go anywhere or do anything without his associate, Lawyer C, carrying his bag. And Lawyer C charges $300 an hour. The client’s 20% savings just became a 40% change in the wrong direction.

Staffing, in other words, is likely to be a much larger factor in total cost than any lawyer’s hourly rate. Complaints from clients about “strangers” on bills are rife. “Who,” they ask, “is this lawyer and why is he working on my matter?”

Here, budgets are a necessary, but not sufficient, cure. In many industries, vendors bid low to get the work and then immediately set out to undermine or tear up the budget. That attitude has no place in the legal profession. A budget is something lawyers need to stand behind, quarter-by-quarter, not just use to obtain work.

2. It Ignores Knowledge – The arithmetic issue becomes more nuanced when the matter of knowledge is factored in. Imagine this issue: if your company files for an extension of time to answer a complaint, does it waive its right to seek dismissal for lack of personal jurisdiction? Associate A researches the issue and writes up the answer – “no waiver” – in an efficient half-hour charging your company $150. I charge $530 an hour, but I already know the answer to the question. My five seconds of time costs 74 cents.

Dozens, even hundreds, of similar examples could be provided. At some level, the lawyer charging $500 an hour should be more knowledgeable than the lawyer charging $250. Not only that, but the lawyer learned what he knows on someone else’s dime. That knowledge, as in the simple example of the extension, should benefit the client in a way that tangibly translates into a smaller bill.

Those savings (or additional costs) can be multiplied when the issue of “firm knowledge” is considered. Ideally, retention of a law firm entitles the client to the storehouse of knowledge of all of the firm’s lawyers. In practice, we all know that it doesn’t happen seamlessly. Nevertheless, a client should ask its law firm what it’s doing to facilitate the 74 cent answer in place of the $150 one.

The trendy name for this is “Knowledge Management.” In 1985, it meant hollering down the hallway to a colleague who might know the answer off the top of his head. That died out as law firms expanded to multiple floors (and then multiple cities). By 2000, it meant an email blasted out to the whole firm: “does anyone know anything about the FTC’s guidelines on therapeutic medical equipment joint ventures?” Yet a system that relies on volunteerism and lawyers paying attention to sporadic emails simply isn’t systematic enough.

In 2009, law firms need to demonstrate to clients that they have an accessible Knowledge Management system that allows lawyers to search the firm’s work product without relying on voluntary responses from possibly knowledgeable lawyers. As a practical matter, this means that a lawyer should almost never begin work for a client with a blank sheet of paper.

Here’s a simple example from my own practice. In 2007, the U.S. Supreme Court issued a decision, Bell Atlantic Corp. v. Twombly, which overruled a 50 year-old precedent and tightened up pleading standards on motions to dismiss. At my firm, if a client needs to file a brief on a motion to dismiss, I can run a standard computer search on Twombly in Westlaw which, in addition to retrieving the usual Westlaw materials, will also allow me to access all of my firm’s work product citing the case. As a result, I can pick and choose from among other briefs already written and then edit according to the needs of my client’s particular case. Needless to say, that process is at least five times more efficient than having an associate start from scratch. Assuming my numbers are correct, the $500 an hour lawyer is one-third the cost of the $300 lawyer.

3. It Ignores Experience – This may be the dirty little secret of litigation in the 21st Century. Because of the limited number of trials, especially long-form trials of major business disputes, many lawyers have simply never had the bracing experience of standing up in front of a jury and saying “let me tell you about my client’s case.”

The problem is not that those inexperienced lawyers are incapable of trying a case. Instead, their lack of experience makes it difficult for them to foresee – during the lengthy course of litigation – how the case will culminate at trial.

This is where the additional costs come in. As a result of lack of experience with the thing itself – the jury trial – many lawyers are prone to engage in pre-trial tasks that have little bearing on that ultimate event. The costs are found in witnesses who are deposed but never testify, experts whose opinions are never provided to the court, and categories of documents reviewed – documents and documents – that never see the light of day in court.

To put it simply, there is a significant cost difference between the $300 an hour lawyer who takes 16 hours to prepare for and take a deposition that the $500 lawyer recognizes from experience doesn’t need to be taken at all: it’s $4,800 vs. zero.

Another problem in this area is found in what one of our client’s calls “science projects.” These are costly forays into largely academic questions that have little or no bearing on the outcome of a case. Experience allows a lawyer to separate the real issues from the academic ones.

Inexperienced lawyers, moreover, often fail to understand the client’s business objective. Clients just hate to hear a lawyer say he spent $100,000 defending a $50,000 case. Other times, however, a client would have preferred an intricately negotiated license agreement to an off-the-shelf one that doesn’t accomplish all of the client’s objectives. The experienced lawyer seeks to understand the client’s business objective and then knows how to accomplish it with the appropriate amount of legal resources. He also makes sure he knows when his client’s objectives change.

The ways experience – even at a higher hourly rate – can ultimately save a client money are nearly limitless. A lawyer who fails to properly supervise, for example, an e-discovery vendor can cost a client six figures in no time. An expert engaging in a “science project” can do the same. What does it profit a client if he gains a 10% hourly rate discount, only to lose $150,000 to an inefficient vendor?

4. It Ignores “Magic” – In this context, “magic” is shorthand for those small but critical things that sometimes happen in the course of a representation. A deal is about to crater, but a lawyer who knows a top executive makes a five minute call and puts things back on track. A lawyer whose credibility with the court is irreproachable stands up and successfully vouches for her client’s position. Everything is stalled until a lawyer who knows the right person in a bureaucracy reaches out and obtains the comfort necessary to proceed.

In every case, these magic moments are just that, moments. As such, they don’t lend themselves to being measured according to an hourly rate. That being said, though, clients want to maximize magic moments, and lawyers who can make magic moments, it stands to reason, tend to have higher hourly rates.

The question becomes, is the client willing to forgo the possibility of a magic moment in order to save some on the incremental hourly rate?

5. It Ignores Wisdom – The difference between wisdom, on the one hand, and knowledge and experience, on the other is not always so clear. A lawyer may have an encyclopedic knowledge of, say, the federal precedent on taxpayer standing, but have no idea how to present that knowledge to a judge in a way that doesn’t offend that judge’s deep feelings about access to courts and fundamental fairness. Another lawyer may have the experience of having tried 50 cases to verdict, but refuse to accept that the case he’s facing now can’t be handled just like those others.

And this is where wisdom comes in. A lawyer sitting in a Board meeting may have little knowledge of the specifics of the California law on surreptitious surveillance, and no experience of engaging private investigators, yet still be wise enough to say “let’s think this through before we do it.” That wisdom can’t be measured in hourly increments, but it’s almost priceless.

Press Millen is a trial lawyer with Womble Carlyle Sandridge & Rice, PLLC in Raleigh, North Carolina.

Copyright 2009, Pressly M. Millen

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