Note: This case study by Wendeen H. Eolis has previously appeared in the New York Law Journal. The issues remain highly relevant in the current demands of clients for accountability by outside law firms.
The relationship between a client and outside counsel begins for better or worse in the courting process, but the rubber meets the road upon signing of an agreement. Even a retention agreement frequently passes muster with little review.
And later the proverbial you know what hits the fan! EOLIS clients report, increasingly, disgruntlement with their outdated retainer agreements with law firms accustomed to proffering boiler plate documents on the presumption that the client will conclude there is no negotiation in the cards. Not so atypically, clients cry uncle and then call me to review their legal fees.
The case study below is real except for name changes to protect the confidentiality of the assignment.
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The CEO and executive vice president/general counsel of Precious Goods Inc. arrived at my office with two documents from the company's outside lawyers: a dunning notice for $50,000 and an accompanying letter requesting an additional $50,000 retainer payment for continuing work on the company's protracted lawsuit with its landlord. The Company already had paid the firm of Abel & Dunne $350,000 in legal fees over the past two years.
Until the last quarter, General Counsel Fred Waytz had routinely approved payment of the law firm's bills within 30 days, no questions asked. He was ever mindful that the hotshot litigation boutique had been recommended to CEO Isabel Little by one of her well-placed lawyer friends. But with slumping revenues and accelerated litigation costs during the previous quarter, he allowed the company to fall 60 days behind in payment of the law firm's invoices.
The dunning notice alone was enough to prompt Mr. Waytz to review the costs of the litigation. The additional retainer led him to head to the CEO's office for comment. As soon as Ms. Little saw the correspondence she put the brakes on any further check writing to Abel & Dunne, asking Mr. Waytz to find a consultant to help them make sense of their legal bills instead. Ms. Little was seeing red!
Litigation Details
A few particulars about the litigation are in order here.
The controversy between PGI and the landlord began when the company discovered that the usable space was 40 percent less than what was quoted in the lease. Then there was the landlord's delay in completing renovations as specified in a rider to the lease. Next, there were the water damages that transformed Ms. Little's plush office into quarters more befitting Chicken Little -- complete with falling skies. PGI stopped paying its rent to the landlord and started looking for counsel to sue.
The law firm of Abel & Dunne was engaged to bring an action against the landlord. Initially, Abel & Dunne proposed a lawsuit for rescission but quickly dropped that idea since PGI was adamant about retaining the space. Instead, they contemplated claims of gross negligence and lost business opportunity as well as property damages and fraud.
PGI told the law firm to go full throttle and was pleased to learn that Abel & Dunne would be asking the court for punitive damages and reimbursement of legal fees.
Ms. Little described the financial arrangements as stated in their retention agreement: a $50,000 retainer at the outset with a provision for future advances to the firm "as appropriate," and payment of invoices within 30 days. PGI forked over to Abel & Dunne a $50,000 retainer to meet the challenge of bringing the landlord to his knees and to insure a windfall for its troubles. Ms. Little would later concede that her attorneys had warned of a long tedious process and had cautioned, "Outcomes are never cast in stone until the case is closed."
Within days of signing the agreement, the lawsuit was served. Counsel began pounding the defendant during discovery. Some key motions had gone their way; others did not, but the aggressive tactics of fighting on every point carried a price tag to match. Ms. Little was indifferent to costs; she had visions of recouped legal fees dancing in her head. Recently, however, the trial judge had grown impatient with both sides. He was pressing respective counsel to move settlement discussions forward, while they were getting ready for trial. Mr. Waytz, the general counsel, became increasingly pessimistic about the prospects for relief and doubted that legal fees would ever be in the mix.
Review of Bills
Following Abel & Dunne's request for replenishment of its retainer, Mr. Waytz reviewed the bills against the estimates for various segments of the litigation. The fees had hurtled way past the predictions on virtually every item. He reported his growing concerns about the costs of the case and the prospects of success. His report sent PGI executives into a tailspin; weighing the merits of throwing the law firm out of the case and/or throwing in the towel.
Ms. Little took over the reins of reviewing the company's position as to the case and the costs. She reached out to John Abel, the lawyer in charge of the matter. She questioned the firm's strategies and bills. The firm's lawyers insisted that PGI "encouraged them to use highly aggressive tactics," which translated into expansive and expensive discovery and motion practice. Ms. Little complained that Mr. Abel rose to his firm's defense each time she tried to get a word in edgewise, citing the costliness of responding to the company's demands for "esoteric research and criticizing PGI's frivolous inquiries about ministerial matters and other minutia associated with the case." She said she was so bothered she forgot to ask for an updated assessment on the value of the case.
First Meeting
Ms. Little turned back the clock to her first meeting with Mr. Abel and his colleagues. "The lawyers sold their services by reeling off a prestigious list of clients with commercial real estate litigation matters," she said. "During their dog-and-pony show, Mr. Abel and his colleagues boasted about the big awards they had obtained and they included specific references to punitive damages and legal fees."
PGI retained Abel & Dunne with grandiose expectations of successful claims that would fund an extravagant restoration of the premises. With the outcome of the litigation increasingly uncertain and her confidence in counsel crumbling, Ms. Little was now crying foul.
The client's lack of sophistication in litigation matters was becoming crystal clear. But I was still perplexed by the fact that the firm's two years of bills equaled double the yearly rent for a lawsuit that originated over the provisions of a lease. As the story unfolded, and I sought to unravel the differences between client and counsel, the question of "reasonableness" of the fees jumped to the top of my radar screen.
Note: part 2 of this article will appear next week centering on the results of Eolis’ examination of the relationship
