The days of large law firms allowing clients to skip or delay paying bills are dwindling. Look no further than the courts, where if clients don’t pay, they will face suit, no matter how prestigious or large the firm.
In an era when demand for legal services is softening, the country’s largest firms are increasingly going to courts and arbitration against their former clients to collect fees in what consultants say is the “new normal.”
According to a review of New York City court filings, fee disputes involving the wealthiest and largest law firms are rising from the past few years when filings were fewer or initiated by smaller firms.
So far in 2016, at least a dozen lawsuits have been filed in Manhattan or Brooklyn Supreme involving Am Law 100 and 200 law firms in fee disputes with their ex-clients, according to a New York Law Journal search, not counting many midsize firms that have also filed suits.
Fee litigation this year includes Wall Street firms such as Sullivan & Cromwell and Shearman & Sterling suing ex-clients in court to collect unpaid bills, to former clients suing firms such as Gibson Dunn & Crutcher and Boies Schiller & Flexner to stay arbitration demands against them over unpaid bills.
Other court cases this year include Arent Fox suing real estate firm Shinda Management Corp. for $506,125 in fees after representing it in NRLB litigation; Loeb & Loeb filing suit against ex-client Advanced Green Innovations for $825,000; Brown Rudnick obtaining a $645,717 judgment against Bartronics Asia Private Limited in September; Perkins Coie suing real estate investor Chaim Miller and others for $177,310; and Kaye Scholer suing Art Capital Group for $144,590, according to court documents.
Attorneys who frequently represent law firms in litigation say growing fee litigation is a signal of the flat demand for legal services, less loyalty between firms and clients, and delayed payments by corporations.
“This is the new normal, this is the environment we are in as law firms,” said Philip Touitou, a Hinshaw & Culbertson partner who has represented law firms in fee litigation. “Our clients expect us to be efficient and the law firms are demanding of themselves to be efficient. What that translates to is we can no longer wait 90 days, 120 days, a year or more to collect fees.”
Fee litigation, he said, is “now an unfortunate part” of law firms’ business.
Firms are pushing back against clients who stall payments by attempting to enforce their retainer agreements, which typically provide payments are due immediately or up to 30 or 60 days from an invoice, Touitou said.
“The days when a client sent all their legal work of all their varieties [to a firm] and had a long-term relationship have [changed] and so one consequence is that law firms are feeling less obligated to await payment,” Touitou said.
Ronald Minkoff, a Frankfurt Kurnit Klein + Selz partner who also represents attorneys in fee disputes, said there could be more fee litigation due to the pressure on firms to make budget, especially when associate salaries are rising and demand is flat.
Meanwhile, some of the stigma surrounding collection suits is gone, Minkoff said.
The suits are not only over large sums. For instance, Shearman & Sterling, which generated $860.5 million in revenue in 2015, filed suit in March against Safka Holdings for $25,645 in unpaid fees from a proposed real estate purchase. Invoices in court exhibits show that Shearman lawyers Alfred Groff and Chris Smith in 2013 billed $995 per hour and Ryan James Mahoney billed up to $610.
A Shearman spokeswoman declined to comment.
However, much of the litigation is over large sums in the hundreds of thousands of dollars or millions of dollars.
Sullivan & Cromwell filed a petition in May to confirm a $3.26 million arbitration award against coal baron Jim Justice—now the governor-elect of West Virginia—and his company, James C. Justice Companies, for unpaid fees. The law firm had represented Justice in Delaware litigation.
The fee dispute was resolved by June when the law firm filed discontinuance papers in court.
A Sullivan & Cromwell spokeswoman declined to comment.
Malpractice counterclaims are law firms’ largest risk when suing clients for fees.
That’s what happened when Atlanta-based firm Smith Gambrell & Russell sued mobile technology company TeleCommunications Systems for more than $2.39 million in fees and disbursements. The law firm had represented the company, as well as Verizon and T-Mobile through indemnity obligations, in IP suits.
Shortly after the June 2016 lawsuit, Telecommunications Systems, represented by litigator Jonathan Lupkin, filed a $3.4 million counterclaim for malpractice, contending the law firm missed a deadline to file application for legal fees in an underlying Texas suit.
In opposition court papers, Smith Gambrell argued that no deadline was missed and that the Texas judge would have denied a fee application in any case.
Smith Gambrell partner Jonathan Kline, who is representing the firm in the litigation, declined to comment.
Other cases tied to malpractice claims include Blank Rome’s suit against Princes Point and others, seeking more than $1.4 million in unpaid fees. The suit was filed shortly after Princes Point sued Blank Rome and others for legal malpractice.
Touitou, who is representing Blank Rome in this litigation, declined to comment on it.
Malpractice insurance carriers routinely discourage law firms from filing suit against former clients because of the high likelihood of malpractice counterclaims, Minkoff said.
Some law firms even temporarily hold off on fee litigation to wait out the three-year statue of limitations for malpractice claims in New York, he added.
Meanwhile, some large firms prefer the arbitration route, due to its privacy and lack of appeals process—even if the dispute ultimately lands in court.
Discover Growth Mutual Fund, a Cayman Islands fund, sued Gibson Dunn in late October, seeking to stay arbitration initiated by the law firm over $530,404 in unpaid bills.
The law firm had represented the fund in Southern District federal litigation. The retainer agreement, filed in court, showed partners Robert Weigel billed $1,155 per hour, Robert Serio billed $1,125 and associate Andrew Keats $825.The fee litigation was discontinued less than a week after it began. Mitchell Karlan, the Gibson Dunn partner handling the dispute, did not return a message seeking comment.
Coffee machine manufacturer Scanomat A/S filed suit against Boies Schiller & Flexner in November to stay an arbitration brought by the law firm over $427,481 in unpaid fees.
According to the firm’s arbitration papers filed in court, after the ex-client’s CEO claimed to be friends with chairman David Boies, the firm moved quickly to handle its case and “with extreme courtesy,” including waiving a $500,000 engagement fee. But the client refused to pay a dime, claiming it was “just a European company” with no understanding of the U.S. legal system, according to Boies’ court papers.
Boies Schiller general counsel Nicholas Gravante declined to comment, citing the pendency of the litigation.