The CEO and executive vice president/general counsel of Precious Goods Inc. arrived at my office with two documents from the company’s outside lawyers: a dunning notice for $50,000 and an accompanying letter requesting an additional $50,000 retainer payment for continuing work on the company’s protracted lawsuit with its landlord. The Company already had paid the firm of Abel & Dunne $350,000 in legal fees over the past two years.
Until the last quarter, General Counsel Fred Waytz had routinely approved payment of the law firm’s bills within 30 days, no questions asked. He was ever mindful that the hotshot litigation boutique had been recommended to CEO Isabel Little by one of her well-placed lawyer friends. But with slumping revenues and accelerated litigation costs during the previous quarter, he allowed the company to fall 60 days behind in payment of the law firm’s invoices.
The dunning notice alone was enough to prompt Mr. Waytz to review the costs of the litigation. The additional retainer led him to head to the CEO’s office for comment. As soon as Ms. Little saw the correspondence she put the brakes on any further check writing to Abel & Dunne, asking Mr. Waytz to find a consultant to help them make sense of their legal bills instead. Ms. Little was seeing red!
A few particulars about the litigation are in order here.
The controversy between PGI and the landlord began when the company discovered that the usable space was 40 percent less than what was quoted in the lease. Then there was the landlord’s delay in completing renovations as specified in a rider to the lease. Next, there were the water damages that transformed Ms. Little’s plush office into quarters more befitting Chicken Little — complete with falling skies. PGI stopped paying its rent to the landlord and started looking for counsel to sue.
The law firm of Abel & Dunne was engaged to bring an action against the landlord. Initially, Abel & Dunne proposed a lawsuit for rescission but quickly dropped that idea since PGI was adamant about retaining the space. Instead, they contemplated claims of gross negligence and lost business opportunity as well as property damages and fraud.
PGI told the law firm to go full throttle and was pleased to learn that Abel & Dunne would be asking the court for punitive damages and reimbursement of legal fees.
Ms. Little described the financial arrangements as stated in their retention agreement: a $50,000 retainer at the outset with a provision for future advances to the firm “as appropriate,” and payment of invoices within 30 days. PGI forked over to Abel & Dunne a $50,000 retainer to meet the challenge of bringing the landlord to his knees and to insure a windfall for its troubles. Ms. Little would later concede that her attorneys had warned of a long tedious process and had cautioned, “Outcomes are never cast in stone until the case is closed.”
Within days of signing the agreement, the lawsuit was served. Counsel began pounding the defendant during discovery. Some key motions had gone their way; others did not, but the aggressive tactics of fighting on every point carried a price tag to match. Ms. Little was indifferent to costs; she had visions of recouped legal fees dancing in her head. Recently, however, the trial judge had grown impatient with both sides. He was pressing respective counsel to move settlement discussions forward, while they were getting ready for trial. Mr. Waytz, the general counsel, became increasingly pessimistic about the prospects for relief and doubted that legal fees would ever be in the mix.
Review of Bills
Following Abel & Dunne’s request for replenishment of its retainer, Mr. Waytz reviewed the bills against the estimates for various segments of the litigation. The fees had hurtled way past the predictions on virtually every item. He reported his growing concerns about the costs of the case and the prospects of success. His report sent PGI executives into a tailspin; weighing the merits of throwing the law firm out of the case and/or throwing in the towel.
Ms. Little took over the reins of reviewing the company’s position as to the case and the costs. She reached out to John Abel, the lawyer in charge of the matter. She questioned the firm’s strategies and bills. The firm’s lawyers insisted that PGI “encouraged them to use highly aggressive tactics,” which translated into expansive and expensive discovery and motion practice. Ms. Little complained that Mr. Abel rose to his firm’s defense each time she tried to get a word in edgewise, citing the costliness of responding to the company’s demands for “esoteric research and criticizing PGI’s frivolous inquiries about ministerial matters and other minutia associated with the case.” She said she was so bothered she forgot to ask for an updated assessment on the value of the case.
Ms. Little turned back the clock to her first meeting with Mr. Abel and his colleagues. “The lawyers sold their services by reeling off a prestigious list of clients with commercial real estate litigation matters,” she said. “During their dog-and-pony show, Mr. Abel and his colleagues boasted about the big awards they had obtained and they included specific references to punitive damages and legal fees.”
PGI retained Abel & Dunne with grandiose expectations of successful claims that would fund an extravagant restoration of the premises. With the outcome of the litigation increasingly uncertain and her confidence in counsel crumbling, Ms. Little was now crying foul.
The client’s lack of sophistication in litigation matters was becoming crystal clear. But I was still perplexed by the fact that the firm’s two years of bills equaled double the yearly rent for a lawsuit that originated over the provisions of a lease. As the story unfolded, and I sought to unravel the differences between client and counsel, the question of “reasonableness” of the fees jumped to the top of my radar screen.
In an initial discussion with Mr. Abel he immediately provided the law firm’s invoices. They were fully annotated in task-based billing statements. I set them aside, more interested at that point in getting a global picture of the relationship between client and counsel.
Mr. Abel was surprised to learn that the dunning notice and new retainer request had set off the current brouhaha, believing that it was the “reality check” teleconference he initiated with Ms. Little days before my first meeting with her that triggered it. Attorney Abel explained that he had recently “talked turkey” with CEO Little and General Counsel Waytz without mention — on either side — of his firm’s dunning/retainer correspondence. He summarized his comments as follows: He passed along the judge’s mandate to respective counsel –“Make good faith efforts in settlement talks.” He explained the implications of the judge’s pressing instructions, reiterating to the client his earliest caution from their first meeting: “Outcomes are never cast in stone until the case is closed.”
He became more pointed, saying that PGI’s claims for property damages and fraud were not likely to come out close to what they might want to hear. He was even more specific with regard to claims for punitive damages and requests for legal fees, saying “they were never a slam-dunk” for collecting them, and added that those claims would have to be tossed out the window in settlement talks.
The separate talks with PGI executives and partners of Abel & Dunne were enlightening as to their individual perspectives. Ms. Little was looking at responsibility for legal fees she had expected to recover. PGI’s hopes for a windfall had been reduced to prospects for recovery of a pittance. The lessons Ms. Little expected to teach the landlord in landing punitive damages were turning into lessons her lawyers were teaching her about the litigation process — at a heavy price.
For the law firm’s part, its lawyers were working diligently on trial preparation while facing questions about efficiency, and challenges about integrity. And Mr. Abel, who relied upon referral of legal matters from colleagues, worried that Ms. Little and Mr. Waytz might “bad mouth” the firm despite his faithful best efforts.
In preparation for the joint meeting, I eyeballed the bills. There were no immediately visible red flags. I was increasingly convinced that a detailed computer-based examination would lead me nowhere — except back to the nagging issue of “reasonableness” of the fees.
Moments into the joint meeting, Ms. Little blasted the law firm, suggesting that it had “eaten too well” on her dime, regardless of her “unwitting” demands. Mr. Abel promptly laid down the gauntlet; predicting that on motion the judge would excuse him from the case, despite the ongoing settlement talks and the proximity of a trial date.
It was my job to turn the mutual attention of PGI and Abel & Dunne to the critical business at hand — improving their relationship for the benefit of the litigation and for the purpose of resolving the fee issues. By reviewing the bills through discussion about the relationship rather than using a point-by-point legal fee audit, it was easier to probe the issue of “reasonableness” of the fees.
There was no disagreement as to the client’s prior approval of each segment of work, but at this juncture, it looked as if the billings would far outweigh the benefits of the litigation.
It was time to make further inquiries in search of answers as to whether or not each piece of work was “reasonable” and “necessary” as determined under U.S.C. 330 and as set forth in the American Bar Association Rules of Professional Conduct. Rule 1.5 in the ABA Rules sets forth eight exclusive factors to be included in the determination of reasonableness of a lawyer’s fee. They are:
•Time and labor required, novelty and difficulty of the matter and the
requisite skill to perform, properly, the service;
•Preclusion of other work by the lawyer;
•Fees customarily charged in the locality for similar services;
•Total fees involved and actual results obtained on the matter;
•Time limitations imposed on the lawyer by the client or other circumstances;
•The circumstances of the existing relationship with the client;
•The experience, reputation and ability of the lawyer;
•And, whether the fee is fixed or contingent.
During a second joint meeting, with an understanding of the dynamics between the parties in my head and the ABA Rules in my hand, I asked counsel to reconsider the “reasonableness” of their bills. Mr. Abel was amenable, suggesting that in the interim we refocus on moving the settlement discussions forward, pursuant to the trial judges wishes, leaving the fees for later discussion-possibly in the context of settlement results.
The case was settled several weeks later, after the judge convened another pre-trial conference and took center stage in the fray. Ultimately, the client got $100,000 in property damages. The landlord was obligated to lower the rent by 20 percent for the remaining term of the lease, an aggregate savings of approximately $400,000. He was also required to make repairs — estimated at $125,000 — in a timely manner, following execution of the settlement order. The judge appointed a special master to oversee the matter, as necessary, going forward, relieving Abel & Dunne from the case and sharply reducing legal costs in the event of any further disputes between PGI and its landlord under the terms of the lease.
Abel & Dunne were done, except for resolving the open balance on their total fees. The fees had risen to $420,000 by the closing of the engagement. [There were no charges made during the period of our fee negotiations] Mr. Abel volunteered a concession of $70,000 [a reduction of nearly 17 percent] on its “fully earned” $420,000 in fees, leaving PGI free and clear, having paid $350,000 prior to the dunning notice and request for additional retainer payment.
The deal was sealed with an agreement in which PGI acknowledged the reduction as an “accommodation” in consideration of the company’s financial crunch. We closed the case.
Foot Note: Names in this article have been changed to protect the privacy of the parties.