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A Client’s Worst Nightmare: When Your Attorney Becomes a Bigger Foe Than Your Adversary

November 17, 2014

Back in 2013, when the NY Times ran the now infamous DLA Piper “Churn that bill, baby!” article, I wrote a post asking for a client to provide me with some actual DLA Piper bills and I would offer up some proof of “actual excessive billing.” Well, lo and behold, I didn’t get any DLA Piper bills, but I did recently get the next best thing–bills from a litigation case that involves the Big Law firm of Lowenstein & Sandler, in a no-holds-barred cage fight with none other than DLA Piper.  Trust me, you don’t want to be the paying client when these two law firms get into the ring…

 

In early 2009, Donn Rappaport was on top of the world. He was a world-renowned data marketing expert, as well as the Chairman and CEO of ALC in Princeton, New Jersey, a highly profitable data marketing company. He had just served a successful term as the Chairman of the Direct Marketing Association, the largest marketing association in the world, and still served on its Board. During this time, he was approached by the start-up Zumbox Inc., for his advice and counsel on bringing a new product to market. Zumbox had developed a proprietary digital mail system, and was looking for experienced advisors and potential investors. Rappaport was impressed, and in May of 2009, Rappaport agreed to not only invest in Zumbox, but to serve on the Board and become the interim CEO. In addition, the parties agreed that ALC would provide Zumbox with necessary sales, marketing and strategic planning services. The future looked bright for both companies.

Unfortunately, Rappaport and other Zumbox Board Members began to have serious philosophical differences about the best course of action for Zumbox’s future. These differences eventually led to the Board terminating Rappaport from his positions in January of 2010. Like many once-promising marriages, a messy divorce was looming. Although the parties had entered into an Executive Employment Agreement (EEA) that included clear severance and arbitration clauses, they could not reach an amicable resolution on those issues or the alleged breach of the ALC services agreement.

No problem. Rappaport was a battle-tested CEO who was ready for any contingency. For over fifteen years he had almost exclusively used the prestigious law firm of Lowenstein Sandler LLP for all of ALC’s corporate legal needs.

Rappaport knew Lowenstein was expensive, but as an experienced business leader, he believed “you get what you pay for, and I wanted the best.” While that may be a good rule to live by in the business world, such trust in the legal world of litigation can lead to a client’s worst nightmare – runaway and uncontrollable legal bills.

The danger lies in the inherent conflict of interest an attorney or firm faces when billing by the hour. A fundamental precept of the attorney-client relationship is that the attorney acts as the trusted fiduciary of the client.

Trust Me

This is NOT a relationship of equals. The client’s interests must always come before the attorney’s. This is true even when the client is a sophisticated businessperson like Rappaport. Balanced against these lofty fiduciary duties, however, are the real world economics and pressures of the modern law firm. The average partner at an Am Law 100 firm made $1.5 million in 2013, which is also the same amount the average Lowenstein partner made (Lowenstein has been listed as either the first or second highest grossing law firm in New Jersey every year since 2009) . These huge numbers are brought in by requiring the firm’s attorneys to meet increasingly high billable hour quotas, now averaging between 1900 to 2400 hours annually at most large firms. By contrast, in the 1950’s, the American Bar Association determined that 1300 hours was the most an attorney could reasonably be expected to bill in a year. Because of the laws of physics, we know that time has not expanded since the 1950’s. Rather, this massive increase in required billable hours quotas has made large law firm partners wealthy. Far too often, however, this unquenchable thirst for more profit by firms has unethically put their financial interests ahead of their fiduciary duty to their clients. Rather than encourage efficiency and effectiveness, billable hour quotas encourage inefficiency and conflict.

While clients remain largely in the dark about this very real danger to their bank accounts and bottom lines, this conflict of interest is no secret in the legal industry. A 2002 report on billable hours by the ABA recognized the “corrosive impact of [the] emphasis on billable hours” on the legal profession. That report noted at least 15 intended and unintended negative consequences from this “overreliance on billable hours,” including but not limited, to:

  • Puts client’s interests in conflict with lawyer’s interests
  • Does not encourage project or case planning
  • Provides no predictability of cost for client
  • Discourages communication between lawyer and client
  • Fails to discourage excessive lawyering and duplication of effort
  • Client, not attorney, is at risk for inefficiencies, training, and bill padding
  • Fails to promote a risk/benefit analysis

Equally disturbing for clients, a 2007 survey by the noted professor and billing ethics expert William G. Ross, revealed that 67% of responding lawyers had “specific knowledge” of bill padding, and a further 55% of those lawyers admitted that they themselves had performed unnecessary tasks to increase their billable output.

So, beginning in early 2010 and continuing through at least May of 2012, Rappaport and ALC received a firsthand and costly education on dangers of the billable hour, as their “trusted” attorneys at Lowenstein put their financial interests ahead of the efficient and effective resolution of their client’s legal issues.

  1. Lowenstein failed to develop a strategy, case plan, or budget, and immediately engaged in excessive lawyering and overstaffing:

The disputes between Rappaport, ALC and Zumbox were relatively straightforward: a breach of employment contract case between Rappaport and Zumbox, and a collection case between ALC and Zumbox. The total amount of damages involved in the employment case was around $200,000, and $495,000 for the collection case. Rappaport, being a savvy businessman, assumed that Lowenstein would expertly analyze the problem and develop a comprehensive strategy and budget to most cost-effectively solve the problem.

Lowenstein, however, saw a “golden goose” and started the billable stopwatch – six stopwatches to be more accurate. In the first two months alone, Lowenstein had 6 different partners bill significant time on the matter, for a total of 178.1 billable hours, or $95,810. The average billable rate for all of this work was a staggering $538 per hour. During this time, Lowenstein partners spent significant time billing for preparation of a Complaint in the employment breach of contract case, even though the EEA had a clear arbitration clause, a preliminary issue that any fresh-out-of-law-school associate would be able to easily identify with a cursory review.  Equally troubling, only two of the six partners billing that time had any real litigation experience. The other four partners were corporate and/or bankruptcy lawyers, and while Rappaport had trust in these lawyers’ corporate work, they would be no one’s objective choice to lead a tightly run litigation matter.

The next two months brought another 66.5 hours, bringing the billing frenzy after the first four months to 244.6 hours, or $129,878 of legal bills.

Those are massive numbers and Rappaport might have accepted those billings had the resultant work been carried out with a cohesive strategy and/or achieved results. But, other than pad all of those partner’s billing timesheets, almost nothing had been accomplished at this point

  1. Lowenstein failed to communicate a cost risk/benefit analysis to allow Rappaport and ALC to a properly make key settlement decisions:

Not surprisingly, Rappaport complained about the mounting costs and lack of strategy, and demanded change. In response, Lowenstein put the cases on a 5-month holding pattern, billing only 35.3 hours on the cases from May through September of 2010. Thankfully, someone at Lowenstein also finally discovered the Arbitration Clause in the EEA, and the California firm of Margolis & Tisman was brought in to handle the employment case, which was clearly required to be arbitrated in Los Angeles.

Much to Rappaport and ALC’s relief, in late 2010, the parties reached a tentative global settlement that would pay Rappaport and ALC $555,000 to resolve the cases. However, the Zumbox offer was for an initial payment of $255,000, with the balance being paid over time. Concerned with a potential default, Rappaport wanted the settlement to include a stipulated judgment provision, which would provide him and ALC with more protection in the case of any default. Lowenstein claims that Zumbox would not agree to the stipulated judgment provision and that it advised Rappaport and ALC to accept the settlement regardless. Rappaport could not understand why Lowenstein was unable to obtain the security of a Stipulated Judgment, and the settlement negotiations fell apart.

The bigger issue is again Lowenstein’s inherent conflict of interest and lack of transparency with their client. Up until this point in the litigation, Rappaport’s exposure was less than $150,000 in legal fees. He had legitimate concerns about a potential default by a still struggling company and obtaining further protection. But, because Rappaport was not given any reasonable estimate of further litigation costs, which eventually included another $400,000 in fees, he was unable to make an educated cost/benefit risk analysis of whether to accept or deny the settlement offer on the table.

Rappaport told me that had he been told that their overall litigation costs would likely have surpassed any award of damages at trial, he “almost certainly” would have accepted Zumbox’s offer even without the protection of a stipulated judgment in the event of a default.

Ironically, the ultimate settlement reached between Rappaport/ALC and Zumbox, more than 2 years later—and less than 6 months after Rappaport retained new counsel to represent him and ALC—did include a Stipulated Judgment. But it was a costly 2-year delay: During that time, (a) Rappaport and ALC were forced to incur an additional $200,000 in legal costs and fees; and (b) Zumbox ran out of money and funding, and no longer had liquid assets upon which the stipulated judgment could be collected.

  1. Lowenstein discovery tactics were inefficient, ineffective and designed more for the profit of Lowenstein than to effectively move the case forward:

Around May of 2011, Zumbox retained DLA Piper, one of the largest law firms in the world, and an epic “clash of the titans” discovery battle ensued. Or as Kathryn Kirmayer, a partner at Crowell & Moring, and a leader in flat fee pricing for complex litigation, notes: “Discovery in the United States has to be the single most inefficient process ever devised,” and is the direct “progeny of the billable hour.” But, as any big firm lawyer knows, those inefficient processes also liberally grease the profit wheels of large (and small) law firms.

Between May and September of 2011, Lowenstein billed Rappaport and ALC a total of 316 hours for over $97,000, a majority of which was spent on discovery, and more specifically, e-discovery. In July, an additional $21,000 was billed as expenses for “document conversion and scanning services.”  Margolis & Tisman, the California firm engaged by Lowenstein billed an additional 49.2 hours for another $19,000, during this same time frame, and in November, billed an additional 89 hours for over $34,000, almost all of which was for document production. In January and February of 2012, Lowenstein added another 76 hours or almost $25,000 of billing, again related mostly to email discovery. Before Rappaport and ALC knew what hit them, Lowenstein and their compatriots had racked up 530 hours of total billing in this time period, or almost $200,000 of fees and expenses – this in addition to the approximately $200,000 previously billed by Lowenstein for these matters. A significant part of this billing was associated with repeated shuffling over tens of thousands of mostly irrelevant emails.

So what did all of this highly expensive work on the email production and review produce? Absolutely nothing. When Rappaport and ALC demanded a status report on the email findings, Lowenstein informed them that its team had reviewed approximately 500 emails and found nothing of value in them, thus there was nothing of substance to report on.

There can be little doubt as to which side was to blame for the all out email war, given what one telling internal Lowenstein email noted in November of 2011: “Zumbox halfheartedly asked for our documents . . . [so] I made a soft commitment to produce ‘some’ documents by the end of the month.”

That certainly does not sound like sufficient justification for Lowenstein’s massive e-discovery billings.

  1. Lowenstein abandons its client and pushes through a procedurally flawed motion to withdraw

By November of 2011, with almost $400,000 having already been billed and no end in sight, Rappaport realized that he had been placing far too much trust in the two lead attorneys on the matter, Peter Ehrenberg and Sharon Levine, both of whom he had worked with over the years on corporate matters. Unfortunately, he was now learning the hard way, that while Ehrenberg and Levine might be good corporate attorneys, they were the wrong persons to be leading his litigation matters. Rappaport knew he had to step in because the ever-escalating legal bills would soon be greater than any damages award or settlement he could obtain. So he demanded a hard budget. Lowenstein scrambled to put one together, and unbelievably, as revealed in internal emails, their chief motivation in providing a budget, appeared designed to convince Rappaport to “shut down” the case, and “that this may go away if the budget costs start to approach the maximum recovery.” Again, and in a blatant disregard of their fiduciary duty to their clients, Lowenstein lawyers put their financial interests ahead of their clients. Realizing they had a client who was extremely unhappy with their lack of strategy and performance, and increasingly likely to stop paying their bloated bills, they disingenuously attempted to convince him to give up his valid claims by finally providing a budget deep into the litigation.

However, Lowenstein’s ploy backfired. Rather than convince Rappaport to “walk away” from the litigation, he instead demanded that they reimburse him for much of their work, which he considered “seriously lacking.” He demanded that the firm write off half of their Zumbox legal bills, and moving forward, work at a reduced cost. Lowenstein now had a full-scale fee dispute on their hands, and Rappaport now had to simultaneously do battle with his own firm as well as with Zumbox. When these negotiations broke down, Lowenstein filed a motion to withdraw from the cases, essentially abandoning their clients in the middle of the cases, and after billing and collecting close to $400,000 in legal fees and costs.

Incredibly, Lowenstein tried to limit its abandonment of ALC and Rappaport to the Zumbox matters only, arrogantly intending to continue to represent ALC as general corporate counsel, even as it accused ALC and Rappaport of being uncooperative, recalcitrant, nonpaying clients in the motion to withdraw.

Rappaport and ALC strenuously objected to the attempted withdrawal, but were summarily rebuffed by the firm. Because Rappaport and ALC had exclusively used Lowenstein for almost all of their legal matters for 15 years, they had no other firm to readily turn to. As a last resort, they requested a continuance of the motion to withdraw, which was set to be heard on June 4, 2012. Lowenstein again denied this request and informed them to immediately get other counsel, as any opposition to the withdrawal motion was due by May 21.

Unbelievably, Lowenstein’s motion to withdraw was granted prematurely on May 21, 2012, without Rappaport and ALC being heard or their position represented, because Lowenstein, again acting solely in its own interests, failed to inform the court of the fact that their clients intended to oppose the motion and were scrambling to engage new counsel. Lowenstein then refused to even notify the court of its error in prematurely ruling on the motion and failed to have the matter filed under seal as promised.

  1. A Silver Lining?

Although it was hard to foresee any positive coming from Lowenstein’s withdrawal at the time, its withdrawal did lead to Rappaport and ALC engaging new and effective counsel, Princeton-based Taylor Colicchio, who were able, after picking up the pieces, to resurrect the prior failed settlement. In less than 6 months from Lowenstein’s withdrawal, the employment case was arbitrated in Los Angeles by Taylor Colicchio (without the need of additional expense of “ local counsel”) and ultimately settled for the same $555,000 amount, including a Stipulated Judgment provision in the event of a Zumbox default.

As happens far too often when business disputes end in litigation, the only winners are the attorneys. Or, as Steven J. Harper, former Am Law 100 partner, and author of the “Lawyer Bubble,” noted in a New York Times’ Op-Ed:

“The billable hour system is the way most lawyers in big firms charge clients, but it serves no one. Well, almost no one. It brings most equity partners in those firms great wealth.”

Unfortunately, as shown above, it is unwary clients that are paying for all those summerhouses and country club memberships.

Is there a moral to this story? Yes, and it is one that Rappaport, ALC, and far too many other abused clients and businesses have learned the hard way. Clients must demand that their attorneys be held to the same professional standards they require in any other business situation. Litigation is almost always expensive, even with honest and transparent firms. It becomes a no-win situation if clients – even long-term clients – are left in the dark or are too trusting. Clients need to stay informed of their costs at every stage of the proceedings in order to make the right business decisions. The billable hour is not your friend, but rather a very dangerous foe.

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4 Comments leave one →
  1. November 24, 2014 10:20 am

    Just one more sad tale in the lonesome City of Big Firmlandia.

  2. Dave Stevens permalink
    January 14, 2015 6:44 pm

    The moral of the story is to hire a lawyer, not a firm. You need a relationship with the person who is handling your case BEFORE you have a case, or, if you don’t have a skilled general counsel, you should have a separate counsel who can be an advocate for you when dealing with a large firm.

    [Originally posted on LinkedIn]

  3. January 14, 2015 6:48 pm

    Mike, I loved your article and passed out copies to just about everyone I know. Having recently spent 6 years in litigation over a matter where the legal bills were larger than the issue at stake, it seemed like this legal business model has reached the point where even the courts are feeding it. It is becoming impossible for anyone except those with the deepest pockets who can go in search of dare I say it, “Justice”. Try and approach ANY firm or individual about using the normal business model of asking for a bid and contract for the job you want done and they act like they have been insulted.

    [Originally posted on LinkedIn]

  4. March 25, 2015 2:52 am

    “Good counselors lack no clients” Shakespeare. (measure for measure)

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