WHY THE BILLABLE HOUR ENDURES

Last month, I wrote a New York Times op-ed discussing the billable hour regime and its unfortunate consequences for the legal profession. The piece generated a lot of response, most of which supported my themes. Readers generally agreed that the system rewards unproductive behavior, invites abuse, and pits attorneys’ financial self-interest against their clients’ goals.

Defending the billable hour

Even so, the Times published a responsive letter to the editor from the general counsel of Veolia Transportation — “the largest private sector operator of multiple modes of transit in North America,” according to its website – who defended hourly billing. He noted that alternatives to the billable hour “have not caught on because they do not allow the client the same opportunity to see the work as it is being done, evaluate its worth, and challenge when appropriate the relationship of time, task and cost.”

Theoretically, he has a point. In fact, the billable hour system arose from a desire for greater transparency. Before it gained widespread use, clients typically received a bill that included a single line: “For services rendered.” When today’s senior partners entered the profession, firms kept track of their time but didn’t impose mandatory minimum billable hour requirements. In fact, a 1958 ABA pamphlet recommended that attorneys maintain better time records and strive to bill clients 1,300 hours a year.

Unfortunately, transparency gave way to short-term profit-maximizing behavior that distorted the billable hour into an internal law firm measure of “productivity.” Quantity of time billed became more important than the quality or effectiveness of effort expended. Today’s required annual minimum hours typically run close to 2,000 — and most associates understand that enhancing their prospects for advancement requires many more.

Transparency yields to abuse

In theory, Veolia’s general counsel is correct about the billable hour’s transparency. But in practice, few clients are well-positioned to challenge “the relationship of time, task and cost.” For a complex case, what motions should be filed and how much time should their preparation take? How many witness depositions are needed? And of what length? What’s the right level of staffing to maximize the chances for success?

Some in-house counsel possess the sophistication to provide meaningful answers to these and other questions that underlie any effort to assess the relationship of hourly fees to “time, task and cost.” But most don’t. They trust their lawyers to do the right thing under an incentive structure that pushes those lawyers in the opposite direction.

Bankruptcy as a poster child

Embarrassing reports of billing deceit are rare. But the real problem isn’t such well-publicized abuses. Rather, it’s the cultural impact of the incentive structure. In most large law firms, one practice area is particularly revealing: big bankruptcy cases.

Large numbers of bodies billed at enormous hourly rates get thrown into such matters. All of the activity shows up in detailed time records accompanying massive fee petitions that courts routinely approve. Like the U.S. Trustee’s office that also reviews such filings, courts lack the resources to provide meaningful scrutiny of “time, task and cost.”

Petitions seeking hourly rates of $700 for associates and $1,000 for partners routinely go unchallenged, as do the listed activities that consume these attorneys’ time. Last year, when the U.S. Trustee proposed that firms disclose whether they charge higher hourly rates for the same attorneys performing non-bankruptcy work, the profession united in opposition.

The moral

The billable hour regime endures because, like the general counsel of Veolia, clients think they have it under control. But that requires a leap of faith as outside lawyers resolve the ongoing dilemma of a system that pits fiduciary responsibility to a client against the attorneys’ financial self-interest. With law firms obsessing over current year profits and partners seeking to maximize personal books of business to preserve their own positions in an eat-what-you-kill world of frenetic lateral partner movement, that dilemma becomes profound.

As for the billable hour’s impact on other aspects of the profession’s culture, another Times letter to the editor offered this: “Appearing before St. Peter, a young law firm associate asked why he was being taken at age 29. Taken aback, St. Peter said the associate’s billable hours made the associate appear to be 95.”

DEWEY: PROFILES IN SOMETHING

Some key players in the Dewey & LeBoeuf debacle are also among the profession’s leaders; that makes them role models. Some teach at law schools; that means they’re shaping tomorrow’s attorneys, too. But how do they look and sound without the Dewey spin machine?

Some readers might worry that spotlighting them erodes civility. But civility goes to the nature of discourse; it can never mean turning a blind eye to terrible things that a few powerful people do to innocent victims. Sadly, the personalities and trends that unraveled Dewey aren’t unique to it.

As to former chairman Steven H. Davis, David Lat’s analysis at Above the Law and Peter Lattman’s report at the NY Times  are sufficient; there’s no reason to pile on. Rather, I’ll look at the “Gang of Four” plus one: the men comprising the four-man office of the chairman who replaced Davis as the firm came unglued, and Morton Pierce. Here’s a preview.

Morton Pierce was chairman of Dewey Ballantine when merger discussions with Orrick, Herrington & Sutcliffe failed and LeBoeuf, Lamb, Greene & McRae entered the picture. After spearheading the deal with Davis, Pierce locked in a multi-year $6 million annual contract that he reportedly enhanced in the fall of 2011. In his May 3 resignation later, he reportedly claimed that the firm owed him $61 million.

As he spoke with The Wall Street Journal while packing boxes for White & Case, Pierce said that he hadn’t been actively involved in firm management since 2010. But the Dewey & LeBoeuf website said otherwise: “Morton Pierce is a Vice Chair of Dewey & LeBoeuf and co-chair of the Mergers and Acquisitions Practice Group. He is also a member of the firm’s global Executive Committee.” [UPDATE: Two days after this May 15 post, Pierce's page on the Dewey & LeBoeuf website finally disappeared. Such are the perils of losing an IT department too early in the unraveling process.] My post on Pierce will be titled “Accepting Responsibility.”

Martin Bienenstock, one of the Gang of Four, was an early big name hire for the newly formed Dewey & LeBoeuf. In November 2007, he left Weil, Gotshal & Manges after 30 years there. He got a guaranteed compensation deal and sat on the Executive Committee as his new firm careened toward disaster. As Dewey & LeBoeuf’s end neared, he maintained a consistent position throughout: “There are no plans to file bankruptcy. And anyone who says differently doesn’t know what they’re talking about.”

No one asked if he had a realistic plan for the firm’s survival. Ten days later, he and members of his bankruptcy group were on the way to Proskauer Rose. The title of my upcoming post on Pierce could work for Bienenstock, too. But because he teaches at Harvard Law School, I’m going to call it “Partnership, Professionalism, and What To Tell the Kids.”

Jeffrey Kessler, another of the Gang of Four, was also a lateral hire from Weil, Gotshal & Manges. He joined Dewey Ballantine in 2003. As a member of Dewey & LeBoeuf’s Executive Committee, he became a vocal proponent of the firm’s star system that gave top producers multi-year, multimillion-dollar contracts — one of which was his.

A sports law expert, Kessler analogized big-name attorneys to top athletes: “The value for the stars has gone up, while the value of service partners has gone down.” The title of my post on Kessler will be “Stars In Their Eyes.”

Richard Shutran, the third of the Gang of Four, was a Dewey Ballantine partner before the 2007 merger. He became co-chair of Dewey & LeBoeuf’s Corporate Department and Chairman of its Global Finance Practice Group. At the time of the firm’s $125 million bond offering in 2010, he told Bloomberg News that the bonds’ interest rates were more favorable than those from the firm’s bank. In March 2012, he said Dewey was in routine negotiations with lenders over its credit line. He also dismissed The American Lawyer’s retroactive revision of Dewey’s 2010 and 2011 financial performance numbers as much ado about nothing. My post on Shutran will be “Running the Numbers.”

L. Charles Landgraf, the last of the four, began his career at LeBoeuf Lamb 34 years ago. I don’t know him (or any of  the others), but my hunch is that Charley (as people call him) is a decent guy. My post on him will be called “The Plight of the Loyal Company Man.”

In future installments, we’ll take a closer look at each of them. Sometimes it won’t be pretty, but neither is what some of them personify about the profession’s evolution.

JON STEWART SHOULD HANDLE THIS ONE

Everyone in the media knows about the Friday afternoon “news dump.” It’s how the government, industry, and celebrities distribute stories that they hope will receive little public attention. These dumps happen on Friday afternoons because the items wind up in Saturday morning newspapers (and on websites) that draw far fewer readers than weekdays or Sundays.

The problem is that when a dump retracts a story that made earlier headlines, the injustices wrought by the original and incorrect report can persist. The Justice Department is the latest victim of that phenomenon. But the episode symbolizes a deeper problem: the power of talking heads, even when they don’t know what they’re talking about.

Perhaps you recall the late September headlines about the $16 muffins that showed up in an internal audit of Justice Department expenses associated with a judicial conference. The story was everywhere — network newscasts and front pages of newspapers. The NY Post was typical: “Feds $16 Muffin Hard to Swallow.” John Stossel used the muffins to launch one of his “government is too big” rants. FOX News brought out its stable of commentators to blast the feds. ABC, NBC, CBS, and CNN highlighted their broadcasts with the revelation. Congressional Democrats and Republicans united in a rare act of bipartisan outrage.

Except it wasn’t true.

Within a day of the original story, Hilton Hotels disputed the inspector general’s conclusion, but most of the media ignored it. In fact, even after facts contradicting what had been dubbed “Muffin-gate” began to emerge, Bill O’Reilly continued to claim credit for “breaking the story” and to exploit it as an example of government waste. He was in rare form during his September 28 appearance on Jon Stewart’s The Daily Show.

Which takes us to last Friday afternoon’s news dump. In the October 29, 2011 Saturday edition of the Times, an article appeared on page A11:

“Report of Justice Dept.’s $16 Muffin Greatly Exaggerated.”

It noted that the office of the Justice Department inspector general “retracted its much publicized claim that the agency had spent $16 per breakfast muffin at a conference. And it expressed regret for the ‘significant negative publicity’ for the department and the hotel that hosted the meeting….”

It turns out — as Hilton had first argued on September 22 — that the continental breakfast also included pastries, fruit, coffee, juice, taxes, a gratuity for the servers, and — oh yes — free use “of a ballroom and a dozen meeting rooms during the five-day conference.” Not a bad deal for a decent Washington, DC hotel.

This leads me to three points:

First, everyone should read Saturday newspapers more carefully.

Second, don’t rely on anyone to give you all of the facts, especially the talking heads on TV.

Third, Jon – the ball is in your court.

AND HUBRIS, too

David Brooks is right on this one — and the legal profession is Exhibit A.

Before resuming my imagined cross-examination of a distressingly real biglaw senior partner in “PUZZLE PIECES,” I want to pause on Brooks’ April 9 NY Times column. He makes my point in a broader context: the pervasive absence of thoughtful reflection that passes for leadership is not unique to big law firms.

Looking at corporate America, he asks, “Who’s in charge?”

Then he answers his own question: “They are superconfident, forceful and charismatic.”

To these characteristics, I would add another: hubris.

Having navigated internal politics to reach the pinnacle of power in their organizations, they don’t revisit their guiding principles. Armed with an MBA (or at least, the equivalent mentality of misguided metrics), they validate their governance using the same criteria that swept them to the top.

As a result, attorneys who enjoyed every advantage as they rose through the ranks have now tied themselves to a mypoic view that encourages them to pull up the ladder on their kids’ generation. Compared to the growing national debt that preoccupies many with concern for our progeny’s well-being, baby boomer greed is wreaking far more enduring havoc.

Brooks argues in favor of an alternative style: the humble hound — a leader who combines “extreme personal humility with intense professional will” and “thinks less about her mental strengths than about her weaknesses…She understands she is too quick to grasp pseudo-ojective models and confident projections that give the illusion of control.”

To save them from themselves, big law firms need more such leaders. But who will mentor candidates through the daunting journey into equity partnerships and then upward?

Certainly not 64-year-old senior partners who don’t think about their own retirements until they receive lists of firm nominees for their management committees, only to find that because of advancing age their names aren’t on them.

What can you say about a leader for whom the approach of a 65th birthday comes as a surprise?