Negotiating the Law Firm's Engagement Letter Before Saying, "I Do"

Business
By Wendeen H. Eolis
New York Law Journal

Sitting as the chief judge in a succession of law firm beauty contests, John Wise*, president of a high-profile communications business, listened intently to the pitches for his company's pressing big-ticket litigation.

Sitting with him was Jim Foreman* his newly appointed general counsel. As their legal consultant, I arranged the meetings and accompanied them to orchestrate the proceedings, the purpose of which was to select and retain special counsel for a big-ticket litigation.

With eight hours of interviews at three law firms under their belts, Messrs. Wise and Foreman were poised to pick the pageant winner and sign on the dotted line. They sealed their selection with a call to the winning contestant that evening. During the interviewing process, Mr. Foreman had been duly impressed with the key partner; he had proffered a processional of legal talent and demonstrated an abundance of legal prowess while marketing his firm's wares. Mr. Wise was sold on the firm's presentation and anxious for Mr. Foreman to get the law firm on board.

The prize-winning firm's "intake" committee blessed the engagement, the next morning. A "welcome letter" followed within hours. Attached to the welcome letter was the law firm's standard "retention agreement" a document with an appropriate two-fold purpose (for the law firm): a) to trigger the green light for the new representation and b) to secure the firm's financial interests in a matter that was projected to approach $1,000,000 in legal costs to my client. The agreement set forth the scope of the work, and included general statements as to the firm's billing practices and called for an evergreen retainer in the amount of $50,000.

Mr. Foreman's mandate was to "embrace" their new counsel- not to dissect the wording of the agreement or nitpick over fractional issues. He signed the firm's standard engagement letter and transmitted it with his company's check for $50,000 as a rolling retainer-- in the blink of an eye; the firm's advice was on the way.

Fourteen months later, the litigation that brought the company to the firm had blossomed and settled; Messrs Wise and Foreman were satisfied, if not overjoyed with the results, except for the firm's last invoice in the matter, which brought the legal bills well north of $1,000,000.

The cost of the representation was nearly 25% higher than I had projected for the most complicated scenario outside of trial. The bloom swiftly faded from the rose, as Mr. Wise cozied up to a stack of statements that his accounting department flung his way with a terse message, "Your lawyers have a penchant for increasing their rates, often. They apply their increases without notation."

This type of complaint has encouraged a few states, including New York (the company's home court), to pass legislation that requires law firms to tender a written letter of engagement that contains an "explanation of attorney's fees to be charged, expenses and billing practices." The applicable New York State statute is 22 NYCRR Part 1215, effective March 4, 2002. The new statute applies to most types of representation prior to beginning new legal work- with wiggle room to take care of legal emergencies, wherein the engagement letter may be delayed to the soonest practicable time. The primary virtue of this provision in the statute is to bring attention to a law firm's billing policies, before the client/law firm wedding.

The required letter of engagement must also set forth the breadth of the anticipated services and address the scope of the work that is required. In this regard, New York and other states with laws that contain similar language have a clear salutary effect for both counselor and client. When saddled with this responsibility, lawyers necessarily spend considerable time, up front, in preparing the engagement letter-laying out the issues and providing useful insights into how the firm proposes to address their legal matters. The engagement letter (signature not required) can have a significant impact upon a client's legal standing in the event of a later dispute. A mutually signed retention agreement has even more teeth.

The provisions of the current statute in New York (and elsewhere), however, leave largely to judicial interpretation precisely what details about the engagement (and billing practices) are intended by the rule. Therefore, as a practical matter, companies in New York (like my client), and other states with similar statutes are not automatically better protected than those states without such legislation.

It is up to the consumers of legal services to familiarize themselves, fully with a law firm's policies, to the extent that they affect the calculation of client costs and how the invoice is composed-- before the meter begins to tick. (A law firm that is confident about the validity of its invoices may propose to charge a fee for a burdensome review).

The retention agreement that is ideal for a law firm is not necessarily ideal for the client. These days, many big companies and others with sophisticated legal departments often present their own billing policy statements to prospective outside counsel. Admittedly, this may seem risky or offensive to some, such as was the case with my client who was "under the gun." But a well-negotiated, carefully crafted agreement addresses the business objectives of both sides and provides the delicate balance that is necessary for an enduring relationship-one that is going to transcend the matter at hand.

Sitting in my office with Mr. Wise, I estimate that his company has paid approximately $250,000 more than they would have been billed with just a few reasonable changes in the law firm's boilerplate agreement.

Looking at the document, I spot the big trouble item: "Billing rates are periodically reviewed and adjusted." This is exactly what happened, quietly, on four separate occasions, over the fourteen months under review. The first increase occurred thirty-four days into the matter with a firm wide upward adjustment of 3%. The last increase took effect in the most recent invoice, another firm wide increase-this time 4%. In between the firm wide increases, the rates were separately elevated for partners and then associates and para legals.

The upward adjustments flowed as follows: (a) annual firm-wide rate revisions (January) (b) annual partner billing rate reviews (March) c) annual bumps of associates and paralegals following acceleration in associate starting salaries (September). The firm invoked this and other policies to keep its business healthy-in a manner it considered "least painful for clients to bear."

After recalculating the company's bills at the original billing rates of timekeepers as specified in the retention agreement (and researching others who later joined the team), I find that the $1,245,000 in billable time would have been reduced by $240,000. I also ponder the possibility that the key partner's increased rates could reflect a compensation reward by his firm- thanks to the new business my client infused into his portfolio! When I review the billable time, I find that the firm bills in time increments of ¼ hour rather than six minute intervals I would recommend; that would produce another chunk of change. Then, I scan the addendum to the retention agreement that spells out the firm's disbursement policy. Aside from items dubbed "expenses" that look like "allocable charges," the provisions secure travel accommodations fit for a king. I proceed through the letter, dissecting and redrafting the language and noting modifications that make fractional differences that add up.

At the end of the review, Mr. Wise faults mostly himself for getting stung, telling me that he did not see himself in a strong negotiating position; a mammoth lawsuit was at his door. In fact, law firms salivate for interesting legal work that can produce $1,000,000 of business in the course of the year! He now concurs that the negotiated retention agreement is a critical document, not only for the provisions it contains, but also for the way in which it structures the relationship between client and counselor.

In discussing the negotiating process, he says that he and his general counsel might have happily agreed to provisions that I or others might be more likely to resist-such as specified conditions for a premium or a discount on fees. He has been stunned by the obvious! A contract between client and counselor (whether it be oral or written, signed or unsigned) should be addressed with knowledgeable eyes on both sides and negotiated with mutual business and fiscal considerations in mind.

Ultimately, the firm volunteered to reduce its fees for the litigation by 10%. It proved to be a savvy move by the key partner who had so impressed Messrs. Wise and Foreman the first go round. The firm is currently acting for the company in a major transaction. The re-negotiated retention agreement should give Mr. Wise and Mr. Foreman a good bang for the buck and the firm a healthy profit from an efficiently managed matter.

Here are some pointers that were applied to the re-negotiated retention letter:

1) Include a statement that reinforces American Bar Association rules and legal requirements of a law firm to make "reasonable" fee charges and holds the law firm's feet to the fire with respect to cost-effective management of the work.

2) Insure that the law firm sets forth the legal issues to be addressed and the scope of the matter in clear layman language that fully comports to your understanding.

3) Require advance notice and/or authorization for billing rate increases prior to commencement of work at the increased rate and a cap on the percentage increase in a given year.

4) Ask for the lowest billing rate offered to standard commercial clients and for billing in time increments of six minutes.

5) Insist upon monthly bills, appropriate summaries (as advised by your accounting department), and clear information regarding personnel, and their individual rates.

6) Obtain bills that are broken out by matter with task-based billing descriptions (free of bundled tasks to the extent practicable).

7) Ask for notification of additions and deletions to your legal team and an opportunity to approve timekeepers who are regularly assigned to your work.

8) Offer your own policy statement for reimbursement of expenses, paying special attention to the difference between a law firm's expenses and allocable charges.

A retention agreement that reflects a mutually advantageous deal-with sufficient detail to insure an accurate and complete understanding between the parties- is the one most likely to work, long- term.

*The names of the parties have been changed for the purpose of confidentiality.