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Avoiding Law Firm Implosions by Mandating Firms to Undergo Annual Stress Tests


Avoiding Law Firm Implosions by Mandating Firms to Undergo Annual Stress Tests.

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I Know You Hate Keeping Time Sheets, but Even in the New Era You Must Still Do So and Here’s Why


Taxi meter

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                                                                                      Jerome Kowalski

                                                                                      Kowalski & Associates

                                                                                      December, 2012

 

Some time ago, I wrote that even in the era of alternative fee arrangements and value billing, it remained essential for lawyers to record time.  I’ve been asked to revisit the issue and still come to the same conclusion, perhaps even more forcibly. There are myriad reasons that compel this conclusion.

First, despite the continued proliferation of AFA’s and value billing arrangements, the American Bar Association Model Rules of Professional Responsibility does not specifically permit for pure value billing.   Accordingly, well informed lawyers must be exceedingly careful in drafting their AFA agreements so as to meet the Model Rules.  But, even in a carefully drafted AFA, with both parties negotiating in good faith, some courts have continued to hold that fixed fees are unethical and unenforceable, requiring a plaintiff law firm suing a client to prove the value of its services based on the hours actually billed.

Sure, as others observed the old model of the client getting in your cab and all that you were concerned with was that the meter is running, but the taxi driver didn’t really care where you’re going no longer applies. In the old days, it was just about getting your fare. Today, you need to be far more concerned about where your client is going, but you need to keep that meter  ticking away for a variety of reasons, not all of which relates to collecting your fare at the end of the ride.

Just yesterday, the Delaware Chancery Court, in a derivative case in which plaintiffs’ counsel obtained a judgment of some $375,000,000,000, the court awarded plaintiffs’ counsel total fees of $285,000,000 (no, those are not typos).  The fee award came to a staggering $35,000 an hour.  Defense counsel argued for fees of less than $14,000,000.  Clearly, the battleground was neither the plaintiffs’ counsel’s customary and hourly fees nor the amount of hours billed to the case.  But, in order for these plaintiffs to celebrate a huge payday, they were required to submit a written application, which included details of its hourly billing, Similar rules exist in every bankruptcy court in the nation, which approves every fee application for every professional, save for those rare instances for which the court previously approved either a fixed or contingent fee.

In a case decided just last May, noted New York attorney Thomas Puccio successfully prosecuted a class action on behalf of New York City police entitled Scott v City of New York officers and thereafter filed a fee application for some $2,000,000, based on reconstructed time records. Puccio’s award was knocked down to $515,000,  The reason:  Puccio and his colleagues did not keep detailed contemporaneous time in derogation of Second Circuit rules which provide:

 “All applications for attorney’s fees, whether submitted by profit-making or non-profit lawyers, for any work done after the date of this opinion should normally be disallowed unless accompanied by contemporaneous time records indicating, for each attorney, the date, the hours expended, and the nature of the work done.”

As one commentator on this case observed:

“This issue arises because the lawyer for New York City police officers, who successfully sued New York City for overtime violations, sought over $2 million in attorneys’ fees. He submitted a 96-page attachment to the fee motion reflecting more than 2,000 hours of work. But these were not contemporaneous records. The lawyer acknowledged that “the entries were prepared instead ‘by my office working with outside paralegal assistance under my general supervision'” and that “the paralegals based the entries on ‘an extensive database of incoming emails maintain by my law firm in a computer folder.'” In other words, the time records in support of the fee application were prepared after the case ended, not contemporaneously. The time entries were also riddled with errors and mistakes.”

The simple point is not simply that keeping accurate, detailed and timely time records is not simply the gold standard, it remains the only standard.  Yes, virtually every lawyer abhors the notion of justifying his or her daily existence in twelve minute increments, and, yes, we all now know we sell valuable services not hours, time accurate, detailed and timely record keeping still remains with us.

But, there is more.

We have also recently learned essential the need to engage in project management, particularly in AFA engagements. Project management requires maintain GANT, PERT or similar charts, identifying critical paths and projections of the time necessary for each player to reach each critical path. Each player must also provide estimates as to when he or she will reach each critical path. No project manager can effectively carry out his or her responsibilities without tracking  in real time the time expended by each player. And at  the end of the day, in order to measure the profitability of the project and the efficiency of each player, an analysis of the time expended is a vital, indeed, essential tool. Lessons learned in the required post mortem of every completed project leads to more informed decisions on future pricing. Indeed, many RFP’s require law firms to describe their project management programs.  Some clients also require that the project management software be available to the client on an extranet.

Time management is also an essential tool for risk management.  In a recently well publicized case, a counsel at a large law firm was arrested for allegedly defalcating with many millions of dollars of client escrow funds.  While all of the facts are not in, it appears that the alleged perpetrator was handling work for some regular firm clients, not recording their time and privately charging the clients for his work.  These moonlighting activities ultimately apparently required the alleged perpetrator to deposit funds in an escrow account.  Since the matter was not recorded on the firm’s records, the young lawyer apparently went across the street and opened an escrow account in the firm’s name and he was the sole signatory.  The funds in this escrow account seem to have disappeared, with the law firm being the subject of claims for the funds as well as a failure to adequately supervise the alleged miscreant. It may well be that if this lawyer’s time charges were more carefully monitored, the entire problem may well have been avoided.

While you cannot always foil a determined and clever thief, requiring lawyers to account for all of their time, including non-billable time does serve as a deterrent.  Yes, banks with security cameras and guards stationed on the banking floor do get robbed.  But, some number of thefts are deterred.

Finally, I have long advocated that finders, minders and grinders all need to be equitably compensated.  In this more perfect world, lawyers who make contributions to the firm by entertaining clients, blogging, attending conferences, speaking at seminars, writing important articles, as well as those lawyers who toil away at pure client services or engage in the thankless task of managing the enterprise, are entitled to compensation for their efforts.  These efforts shouldn’t be simply recalled anecdotally, but recorded on a timely basis.

So you’re still incredibly annoyed about recording your time in twelve minutes increments, I am afraid  you’re just going to keep sucking it up. You’re probably equally annoyed about developing creative methods of pain and pleasure to assure timely compliance with time keeping requirements, but that annoyance is not quite going away either.

As they say, there’s an app for that:  A wide variety of timekeeping programs allow a timekeeper to toggle on and off at his or her computer time working on client matters.  And for the road warrior, there are IPad, IPhone and Android apps that you can also toggle on or off and the information is downloaded to your mainframe or your cloud.

The Law Firm of the Twenty-first Century isn’t your granddaddy’s law firm. But it still requires detailed, accurate and timely time keeping of all of your activities.

© Jerome Kowalski, December, 2011.  All Rights Reserved.

 Jerry Kowalski, who provides consulting services to law firms, is also a dynamic (and often humorous) speaker on topics of interest to the profession and can be reached at jkowalski@kowalskiassociates.com

A Cost Way Too High to Pay: The New York Times on the Price of Law School Tuition


A Cost Way Too High to Pay: The New York Times on the Price of Law School Tuition.

A Cost Way Too High to Pay: The New York Times on the Price of Law School Tuition


English: The New York Times building in New Yo...

Image via Wikipedia

                                                                             Jerome Kowalski

                                                                             Kowalski & Associates

                                                                             December, 2011

David Segal of The New York Times today continued with his hard hitting series exposing the continuing crisis in American legal education. In his current piece, entitled “The Price to Play Its Way,” Segal features The Duncan Law School in the Appalachians (why there is a need for a law school in the Appalachians in a grotesquely over-lawyered nation is a separate question. I’ve addressed elsewhere.  I have also covered  Segal’s previous revelations concerning law schools revelations about legal education being akin to the non-existent Emperor’s new clothes elsewhere in this blog.

Segal’s basic premise is that law schools are unnecessarily over priced because of capricious rules and grotesquely unnecessary requirements promulgated by the American Bar Association’s Section on Legal Education and Admission to the Bar. In order  to comply with the ABA’s outmoded requirements, Duncan is required to maintain a fairly bare boned library at an annual cost of $175,000, while in truth, that cost can be eliminated virtually in its entirety through the use of computer terminals and a Wi Fi installation, just as most law firms have done.  The largest expense item for Duncan is maintaining the ABA mandated 16 full time faculty members, along with three adjuncts, which soaks up 75% of Duncan’s budget.  In Segal’s previous installment, Segal described how law school graduates acquire no practical lawyering skills at law schools, largely because they are taught by full time faculty who rarely have spent a nanosecond practicing law.  The result, Segal explained is lowered hiring by law firms and a general refusal by clients to pay for the hours spent during a lawyer’s first two years of employment, during which he or she is largely engaged in the basic skills of lawyering.

Duncan apparently endeavors to run a lean machine, charging tuition of only $28,664 per annum. With housing and other costs, that tab could run to $50,000, Segal reports.

[Update:]  On Tuesday, December 20, 2011, two days the Times article appeared, the ABA withdrew its provisional accreditation of Duncan .

[Update:   On December 22, Duncan sued the ABA claiming antitrust violations. As reported in local media “The lawsuit, according to LMU officials, alleges the American Bar Association denied the Duncan School of Law provisional accreditation as a means of limiting the number of law schools, and therefore attorneys, across the country.” After reading the entire series by David Segal – you can start here – I leave it to the reader to insert an appropriate bon mot ].

Segal’s report comes on the heels of a report issued by Dean Jim Chin of the University of Louisville, in which Dean Chin said, as reported by The National Law Journal:

 “Using the debt standards set by mortgage providers as guidelines, Chen concluded that law graduates need to earn three times their law school tuition annually to enjoy what he termed “adequate” financial viability. That assumes they borrow only the amount of their law school tuition and lack additional debt — a conservative assumption, Chen said.

Thus, graduates of relatively low-cost schools charging annual tuition of $16,000 would need to earn $48,000; graduates of schools charging $32,000 would need to earn $96,000; and graduates of schools charging $48,000 would need to earn $144,000.

To maintain a “good” level of financial viability — meaning they could easily secure loans and would be very financially secure — graduates must earn six times their annual tuition, Chen calculates. That means graduates of $16,000-a-year schools would need to earn $96,000; graduates of $32,000 schools would need to earn $192,000; and graduates of $48,000 schools would need to earn $288,000.

To maintain “marginal” financial viability, graduates of $16,000-a-year schools would need to earn at least $32,000; graduates of $32,000 schools would need to earn $64,000; and graduates of $48,000 schools would need to earn $96,000.

According to the National Association of Law Placement, new law graduates earn, on average, $68,500.”

Thus, using Chen’s algorithm, Duncan graduates would need to earn $144,000 to maintain adequate living standards and $288,000 for better standard of living. Neither one of those numbers appears to be within Duncan Law School’s grasps.  And Duncan is not alone, it only was featured by The Times as this week’s poster child.

Chen’s paper is an interesting follow on to the paper written by Professor Herwig Schlunk of Villanova in 2009, using pre-recession data, in which he included only  pre-recession in which he looked at the value proposition of law school.  The title of Schlunk’s work says it all:  “Mamas: Don’t Let Your Babies Grow Up to Be Lawyers.”  and since Schlunk wrote his paper, starting salaries for lawyers has decreased by approximately $10,000 and law school tuitions have increased by approximately 10%.

Law school professors seem to be doing considerably better.  Their median pay is $120,000 to $150,000; with some “superstars” earning more than $300,000.   By any measure, that’s not bad pay for teaching three courses a week, writing the occasional hour and taking on unlimited clients for private gigs and getting to charge those clients premium fees, after all a “professor” skilled or not, gets to bill at the highest end of the food chain.

Segal suggests that this entire exercise is part of the ABA’s guild system, creating artificial barriers to entry, while forcing law firms to bill young associates at $300 an hour, so that they can get paid a sufficiently high salary in order to pay off their artificially high student loans.  The real problem with this circular reasoning is that the music seems to have stopped playing and there are way too few seats for the players to pounce upon. NALP reported that only 60% of 2010 law school graduates actually found jobs requiring a law degree and, as noted, their median salary was only $68,500. It’s highly unlikely that universities will do the right thing by closing down their law schools since law schools and medical schools are second only to athletic programs in bringing the cash home to universities. Law professors are most unlikely to blow the whistles on their own safe perches, with but a few notable exceptions, such as Brian Tamahana.

Professor Larry Ribstein of the University of  Illinois School of Law, never a big fan of Segal, is a proponent for simply deregulating the practice of law. Ribstein got up even earlier than I did today and, read Segal’s piece and quickly posted at length on his sensational blog, “Truth on the Market” as follows:

 The NYT article typically fails to articulate the causes and cures of our over-priced legal system beyond the commonplace that the ABA somehow manages to restrict competition. Segal blames the law professors, finding comfort in the scam-bloggers’ simple-minded denunciation of high-priced legal scholarship. But since Segal doesn’t explain how a bunch of eggheads sitting around writing useless articles came to control the ABA, he sounds like he’s blaming the mosquitoes for banning DDT. This narrow focus isn’t surprising given Segal’s mission, which not to analyze or educate, but to entertain with simplistic narratives and pithy quotes.

So what’s really happening? The cause of the current situation, as I make clear in my Practicing Theory, is obviously the practicing bar, a powerful lawyer interest group with an incentive to keep the price of legal services high. Lawyers operate not only through the ABA but also local bar associations. Legal educators (law professors, law school and university administrators) come into the picture because they manage the key instrument for doing so — the academic institutions that keep the price of entry high. If the lawyers really wanted to make law school cheaper and more “practical” they could do it in an instant.

Gillian Hadfield’s suggestion to Segal of alternative accrediting bodies is one possible future world, but there are others. The route to all of these worlds isn’t simply changing the law school accreditation system (accreditation is pervasive throughout the education world), but changing the system of lawyer licensing which maintains the current one-size-fits-all approach. But how to do that when the powerful lawyers’ guild has maintained its grip on the process for almost a century?

As I have discussed (Practicing Theory, Law’s Information Revolution, Delawyering the Corporation, Death of Big Law) the answer lies in the current rise of technology and global competition, which are combining with the soaring costs of legal services to crack the foundations of the current regulatory system. Systemic changes such as changing the choice of law rules regulation of the structure of law practice and changing the intellectual property rules governing legal information products (Law’s Information Revolution, Law as a Byproduct) could hasten this process.

Reform of law school accreditation ultimately will come along with significant changes to lawyer licensing whether lawyers and law professors like it or not. Regulation of legal services will be unbundled, with only core legal services (however that comes to be defined) subject to anything like the current level of regulation, and other areas regulated at different levels or deregulated altogether. [Emphasis supplied]

Both Segal and Ribstein have, in my opinion, missed the train.  The market abhors guild type rules. That’s why even in tightly controlled economies, there are always black markets.

As I have suggested a number of times, the market for providing legal services is already widely deregulated. The Duncans of this world have only a very short half life and even top tier law schools will continue to suffer serious body blows as the demand for BigLaw associates will continue to wane.  Duncan-type law school graduates will largely be competing at a distinct competitive disadvantage with thoroughly unregulated Internet based providers of legal services, which do not need to post their bar admission certificates on their web sites. At the same time, BigLaw will be competing, again to its competitive disadvantage, with offshore unregulated alternative providers of legal services, which are continuing to grab sizeable market share and are indifferent to the requirements of having an ABA sanctioned law degree or even an American bar admission. The market – consumers of legal services – large and small are equally indifferent as to whether these providers of legal services have an ABA accredited education or even a bar admission.

Regulators are largely indifferent to the Internet based providers of legal services. Forty-eight of the fifty states have greeted ubiquitous ads by these Internet providers with a gaping yawn. The State of Washington early on began a proceeding against LegalZom.com, which was settled by requiring Legal Zoom.com to include a disclaimer on its advertising that it does not provide advice [sic].  That little side step. Stands in sharp contrast to a Missouri court’s holding. After submission of evidence from both sides, the court found that LegalZom.com is in fact actively practicing law.  LegalZoom.com got out from under that ruling by another two step:  The Missouri case was brought by several class action firms, which promptly settled with LegalZoom.com, under an arrangement in which LegalZoom will make some small changes in its advertising and operations and, presumably, the class action plaintiffs’ counsel will cash a check for legal fees. LegalZoom.com is now doing battle with North Carolina in order to obtain approval for a prepaid legal serviced plan, not unlike that being offered by competing Rocketlawyer.com.

The academies won’t solve their problems by opening branches abroad.  India already has over 900 law schools.

As John Kennedy famously said in 1961 in accepting personal blame for the Cuban Bay of Pigs fiasco, “Victory has a thousand fathers; defeat is an orphan.”  The law school tuition crisis, say the law schools, is the fault of the profession, which needs to charge high hourly rates to sustain the BigLaw model.  Academics point a finger at the ABA.  Law firms seem pretty indifferent; they are just cutting back on new hires and starting salaries, for those lucky enough to grab the brass ring, don’t support tuition loan amortization, food and shelter.

© Jerome Kowalski, December, 2011.  All Rights Reserved.

 

Jerry Kowalski, who provides consulting services to law firms, is also a dynamic (and often humorous) speaker on topics of interest to the profession and can be reached at jkowalski@kowalskiassociates.com .

What are the Most Significant Legaltech Changes You Have Seen During Your Careers?


What are the Most Significant Legaltech Changes You Have Seen During Your Careers?.

What They Don’t Teach Law Students: Lawyering


What They Don’t Teach Law Students: Lawyering.

What They Don’t Teach Law Students: Lawyering


Jerome Kowalski

Kowalski & Associates

November, 2011

 

David Segal, a venerable reporter for The New York Times continues his series of feature length exposes on the serious shortcomings and often blatant fraud in modern American legal education in his piece today entitled “What They Don’t Teach Law Students: Lawyering” . I previously addressed this critical issue and proposed some solutions; particularly following the rest of the world and requiring mandatory clerkships by law school graduates as a condition for bar admission, as required by every other nation in the world.

Segal previously exposed the fact that law school education is a rigged losing game as well as the shell game many law schools engage in with regard to the vanishing law school merit scholarship.

Segal and the Times continue to travel where few dare to tread.  Hopefully his powerful voice and  the venerable Times will be the catalyst for much needed change.

 

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