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The Verdict: Guilty Of Overcharging


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THE VERDICT: GUILTY OF OVERCHARGING

Lawyers with Bendini, Lambert & Locke lived the high life in John Grisham's summer-film blockbuster The Firm, dining at chic restaurants and hobnobbing at exclusive country clubs. But when all was said and done, Grisham exposed the white-shoes crew as nothing more than common thieves. Bendini Lambert went down for bilking clients. The scenario, though extreme, illustrates a problem faced by businesses every day: figuring out whether their lawyers are playing it straight.

The task is time-consuming and often unpleasant, but for companies battling ever diminishing budgets, it can be fruitful. General Dynamics Corp., for example, lopped off $186,000, or 42%, from just one bill when it discovered a law firm charging for what ended up being virtually useless research. Motorola Inc. saved a pocketful when it confronted counsel for billing it for hours spent preparing documents that, because of a statute passed a year earlier, were no longer

required.

A SQUEAL. For the most part, companies aren't grumbling about the relatively rare instances of outright fraud. What concerns them more are their lawyers' freewheeling spending habits. "Outside firms charge you for every squeal of the pig," complains Hans U. Stucki, senior litigation counsel at Motorola. Shelby Yastrow, general counsel at McDonald's Corp., relates a story from a few months back when he met with a New York firm to complain about excessive fees. A few days later, he was billed for that meeting. "They had sweet rolls and coffee brought in and billed us for that too," says Yastrow, who manages about 500 law firms used by McDonald's.

Lawyers and their clients are both to blame for their increasingly tense relationship. Corporations for a long time merely rubber-stamped their lawyers' bills. And most failed to spell out how much spending they would tolerate. For the lawyers' part, intense pressure to meet billing quotas invited excess charges--a situation that was only made worse by the recent recession. "Partners and associates risk being fired if they don't bill enough hours," says Robert Baum, a former associate with a big Washington, D.C., firm who recently left for a job at the Interior Dept.

Aggressive billing practices are no doubt one reason why the legal profession's receipts ballooned to about $91 billion in 1991, a doubling from 1984, according to the most recent figures from the Census Bureau. The tab for the insurance industry alone is exploding. Legal expenses for 1993 are expected to top $35 billion, up from $16 billion in 1987, according to a New York University study. Boston-based Liberty Mutual Insurance Co. estimates it will spend $400 million on lawyers this year--second only to its personnel expenditures.

Many companies, including Liberty Mutual, are fighting hard now to gain control of their legal budgets and rein in their lawyers' propensity to spend. Corporations such as Merck, Citicorp, and Walt Disney have adopted extensive guidelines that place caps on hourly fees and reimbursable expenses. The list of dos and don'ts covers everything from how much may be spent on photocopying to the number of attorneys authorized to work on particular matters. In addition, standardized billing formats have been set up to force lawyers to account for every dollar spent by detailing each task performed.

Thus far, the results have been impressive. Liberty Mutual, which only began its cost-cutting program in June, says it is running 3% below budget. It has pared back the number of firms it employs from 3,000 to 1,500, dropping counsel who refuse to comply with its cost structure. General Motors Corp. has gone a step further. Over a two-year period, the auto maker developed an extensive data base that tracks litigation and determines what the average cost for resolving certain matters should be. Firms whose fees fall outside the averages are asked to explain themselves--and often reduce their bills. "We have become enlightened consumers," says Robert C. Weinbaum, a senior member of GM's legal staff, who boasts that GM's legal costs have fallen by more than $40 million since 1990.

Surprisingly, many law firms seem to welcome some of the self-evaluation that is being pushed on them. Over the years, cost controls have become lax while well-heeled clients have sometimes been taken for granted. "I've tried to tell our people not to view this as an insult but as a challenge," says John J. Sheehy, head of litigation at New York-based Rogers & Wells. But lawyers such as Sheehy also caution companies against going too far. They note that what may seem to be overcharges are often simply the ordinary costs of getting a job done right.

Still, the urge to curb fees has become so wide-spread that auditing firms have emerged to perform this specialized task. Companies such as Legalgard Inc. and Legal Triage Services Inc., both based in Philadelphia, are flourishing. Legalgard has reviewed more than 4 million invoices and says that it finds suspect charges in four out of every five bills. While not every questionable bill is evidence of wrongdoing, John J. Marquess, founder of Legalgard, says that on average his audits have resulted in the trimming of lawyers' fees by 10% to 30%.

Although Marquess has uncovered everything from lawyers charging clients for their neckties to those who bill for more than 24 hours of work a day, he says that the bulk of his clients just want help figuring out what their lawyers are worth. "The days of being able to submit a bill and have it paid are over," says Marquess, whose clients include Mattel Inc. and Lucky Stores Inc. "At some point you have to draw the line."

For many companies, drawing the line involves straying from the traditional hourly billing format. Aluminum Co. of America, for instance, agreed on Aug. 1 to pay New York's LeBoeuf, Lamb, Leiby & MacRae $6 million to $7 million yearly to handle all of Alcoa's litigation. The flat-fee experiment, one of the first of its kind, reduces Alcoa's outside litigation firms from 150 to just one. But more important, says General Counsel Lee Holz, it will substantially reduce Alcoa's legal budget, although he wouldn't say by how much.

To land the deal, LeBoeuf agreed to take on several of Alcoa's in-house attorneys and open a Pittsburgh office. It also promised not to charge the company extra for routine office expenses, except when approved in an emergency situation. By using a flat fee, LeBoeuf can increase its profits if it can keep costs down. The firm stands to more than triple its earnings from Alcoa-related business, according to Grant Lewis, head of LeBoeuf's litigation group. About those firms that fail to see that times have changed, Lewis says: "If they don't bend, they're going to break."

DISCOUNTING. These days, lawyers are bending in ways unimaginable just a few years ago. Wilmer, Cutler & Pickering in Washington, D.C., recently offered to handle a sensitive matter, which involved accusations of bigotry in the awarding of franchises, on a contingency basis for McDonald's. Wilmer Cutler's fees will be based largely on the outcome of the suit. Richmond (Va.)-based Hunton & Williams is another McDonald's favorite because it routinely discounts fees when a case is lost.

Such sensitivity toward the client is being applauded by many businesses. But for some, it's too little, too late. Motorola got so fed up with its outside legal costs that it decided to see if it could do some of its litigation more cheaply itself. Internal studies reveal that Motorola's own lawyers do cost less--$118 per hour compared with $200 for outside counsel. Based on those figures, the company estimates that it saved $71,000 on a recent commercial matter.

While the '80s proved to be the decade of spending, the '90s are unfolding as the decade of saving. For lawyers, adapting to the times will take some doing. But if they can learn to restrain themselves, they may end up starring in fewer movies--at least as the villains.BATTLING THE BULGE OF LEGAL BILLS

-- Establish limits on how much to pay for services and what kinds of

expenditures are reimbursable

-- Issue billing formats that force law firms to break down their fees

-- Use alternative billing schemes, such as fixed fees, result-oriented

billing, and hourly rates that reflect many routine office expenses

-- Audit legal fees, either internally or by hiring a fee specialist

-- Upgrade in-house legal staff to manage all nonlitigation matters

DATA: BUSINESS WEEK

Linda Himelstein in New York


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