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National law firms and their clients are wrangling over another round of rising billable rates. Most national firms have not increased their billable rates since 2001. Yet, some clients are sure to resist the rate increases, and most insurance companies are unwilling to pay any billable rate above $500 per hour. The tension between outside counsel and general counsel over billable rates must be evaluated relative to the rising cost of other services in today’s world. When a general counsel takes time to do so, he or she will realize the rising rates are reasonable. For example, I went to my doctor for my annual physical last month. My doctor spent about 15 minutes with me. When I left his office, I received a bill for more than $800 dollars. That brings the hourly fee for my doctor, who is not a specialist, to about $2,400 — assuming that $200 of the $800 bill are expenses for his practice. Now, the cynical GC might argue that doctors have years of skill and training, and handle issues of life and death. But, good lawyers have years of experience and solve serious problems for their clients, too. Here’s another example: I took my car in for service last week. While the dealership kept my car all day, it only spent about three hours working on it. The hourly rate for service was $92, which is more than some legal assistants bill per hour and many of them have four years of college and years more of experience. Still not convinced that service costs are rising everywhere? Well, consider the folks who mow my lawn each week. They arrive and spend a good 10 minutes blowing cut grass and leaves into my neighbor’s yard. At the end of the month, I get a bill for about $375. That is $375 for 40 minutes of work each month. Now, to be fair, there are three men on the crew, which brings the hourly rate for unskilled labor to more than $100 per hour. Surely, young associates with doctoral degrees must be worth more, right? Just yesterday, we needed a plumber. The plumber spent about 30 minutes at our home. He used no parts. His bill was $275. That brings his hourly rate to $550. Should a partner in a national law firm with 20 years of experience be able to charge more for his or her services than a plumber? It bears mention that the plumber does not have half the overhead that a lawyer has, including staggering rent, rising malpractice rates and increasing employee expenses. My wife just told me to get a haircut. She sent me to the young man who cuts her hair. He spent about 15 minutes cutting my hair. Those who know me can attest that I do not have a whole lot of hair to cut. His bill for services rendered was $75. That makes his hourly rate $300. He never attended college (except maybe beauty school), did not have to pay for law school and does not work on Mondays. The thought of having three-day weekends convinced me that perhaps I should have learned to cut hair. The truth is that the cost of services for everything from landscape maintenance to personal grooming has been rising steadily over the past decade. Yet, some general counsel want to pay the same rates for legal services that they did back in 1990. Even worse, insurance companies are taking control of the process and trying to tell lawyers how to practice law in much the same way that they have succeeded in telling doctors how to practice medicine. And, if you think that has been a success, just try to call your doctor to speak with him the next time you have a problem. Doctors have little time for patients in an environment in which they must see as many as 40 patients a day to maintain their standard of living. When GCs have a plumbing problem at home, they will pay whatever the plumber charges to fix it. And, when the new BMW needs service, there is no negotiating with the dealership over its rates. Yet, when it comes to legal fees, general counsel think differently. But, why? INSTANT GRATIFICATION There are several reasons. First, the legal department at most companies is not a revenue producer, it is a cost center with increasing pressure from management to control rising legal costs. And while top-flight outside legal representation can help reduce settlement costs and save money in the long run, we live in a time of immediate gratification; companies want to save money in the short term, too. Second, the results of good legal representation are not immediately apparent. When I get a haircut, I can look in the mirror and see the results before I pay the bill. But, large cases take years to resolve themselves, and the results are unknown when most outside counsel bills are paid. Third, there are seminars aimed at trying to convince general counsel that their outside counsel are dishonest hooligans out to take advantage of their corporate clients at the first opportunity. These pundits suggest that an adversarial relationship is better than one of trust and confidence because many times their sponsors are peddling services such as fee audits. Outside counsel must share some of the blame. For years, some firms have not focused on staffing cases wisely or efficiently. Turnover at many firms has increased the cost of handling legal matters for GCs. And, some firms continue to recruit talent in ways that all but ignore the realities of the marketplace. Finally, the fact that most partners in national firms make significantly more money than general counsel also breeds resentment. We live in a time when a case of tomatoes is selling for $80; a good pair of dress shoes goes for $300; and filling the family car with gas costs $50. Yet, there is a natural tendency to cling to pricing that was familiar when we entered the business world and began to earn a living. My father, who is in his 70s, is outraged that his favorite scotch is now more than $40 per bottle because it is the same scotch he paid $2 a bottle for when he was in his late-20s. People often are able to rationalize those things they can see. When you purchase a car for $35,000, you know you are spending a lot of money, but you can go out and drive it. Legal advice is different. You cannot touch it or hold it in your hands. You cannot drive it. The results of good outside legal work are not immediately apparent. Sometimes they take years to achieve. And so, there is an inclination for GCs to think that the value of it needs to be questioned. Moreover, unlike other investments, money spent on outside legal services is more often to avoid a liability than to make more money. Usually, it is a liability that the company never believed it had in the first place. So, it is difficult to rationalize spending any money on outside legal fees, much less thousands of dollars. How many of us lawyers (whether you’re in-house or at a firm or a solo) have been at cocktail parties where friends pull us aside and ask for our legal advice about a particular set of circumstances without any expectation that they should pay for that advice? Here’s an idea: At the next party, try asking your friend who owns a dry cleaners to press a few shirts for free. Just see what happens. And yet, people do not think twice about asking lawyers for free legal advice. Why? Because folks just do not know how to attach value to the spoken word or to a concise and correct answer. So, it is against this behavioral background that outside counsel and GCs debate and discuss rising rates. The question a general counsel should ask is whether the rates charged by outside counsel are reasonable in light of what others are charging and whether the legal representation adds value to the corporation. Many general counsel complain about hourly billing and discuss, while never approving, alternative billing arrangements. The truth is that hourly billing by qualified outside counsel more often benefits the client because all but a handful of cases are resolved short of trial. Where the reputation of a GC’s outside counsel causes the GC’s opponent to settle early, the GC’s company achieves a fine result that is not reflected in the hours billed. Yet, general counsel rarely talk about this dynamic and how it provides advantages to their companies. Consider a law firm that takes on a major matter for an important client on an hourly basis. The case must be staffed, and that means that the firm must commit significant resources over a 36- to 48-month period to handle the matter. Yet, at any moment, without much warning, the case may settle. Then, the firm is left to replace the business at a moment’s notice, or have professionals sit idle and produce little or no income for the firm. Those who comment that hourly lawyers do not take risks are wrong. The business is fraught with risk because overhead is high and fixed, and business fluctuates wildly between feast and famine. Many big-firm lawyers go to sleep at night thinking about where the next piece of business will come from to keep their teams busy and how to train eager young lawyers to be trial lawyers when general counsel repeatedly tell big-firm partners that they will not pay for new lawyers to work on their matters. Recently, I heard about an online auction for legal services reminiscent of buying baseball cards on eBay. A national client apparently decided that legal services are fungible, like buying raw materials sold in bulk for manufacturing. The client pre-qualified law firms and then pit them against each other anonymously in an online auction in which, at the end of the day, the hourly rates bid for top partners ranged from $225 to more than $500 per hour. I suspect that the low bidder just might have different abilities and talents than the high bidder. I am reminded of my father and his scotch. At one time, he bought cheap scotch and poured it into empty bottles of his favorite scotch. I guess it made him feel better about what he was drinking in much the same way the online auction must make the client feel it is getting great legal representation at cut-rate prices. A good trial lawyer is not a day laborer. A good trial lawyer is an artist who constantly is working to be better at his or her craft. I have seen general counsel buy indiscernible works of visual art on canvas for thousands of dollars, without batting an eye. But, when it comes to legal services, some of those same GCs believe they are buying commodities that should be priced accordingly. A good lawyer is worth his weight in gold, because a good lawyer can save a general counsel’s company money in the long run. A good lawyer also knows how to manage his team to the GC’s benefit. So, when my billable rate goes up next year, to something only slightly more than my plumber charges, give me a break. Steven M. Zager is a partner in Akin Gump Strauss Hauer & Feld in Houston.

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