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August 24, 2016

Three causes of high legal fees:  Perfectionism isn’t the only challenge

Guest post by Carl Herstein, Chief Value Partner, Honigman

The AmLaw 200 and many smaller firms are in the early stages of trying to improve efficiency and provide higher quality at lower costs.  There are three major trends that have led to the ever-increasing costs of legal services and to the segmentation of the legal market:

1) Lawyers have to deal with the rapidly expanding size, scope, and complexity of American and international law. 

2) The impact of technology on the law.

3) The nature of the American legal system, with its emphasis on perfect procedure and perfect outcomes, is a decisive element. 

Those trends, in turn, have inspired a focus on improving the process of providing legal services, reducing costs, and improving quality.  The third point – perfectionism - is talked about a lot, but the first two have inspired far less discussion.

Why do I talk about the size, scope, and complexity of the law? Forty years ago, when I graduated from law school, at least it was a manageable proposition to try to do legal research. Nowadays, with the incredible number of cases, sources, and materials out there, it’s almost impossible in certain respects. Similarly, while there were statutes and regulations at the federal, state, local, and international levels, it was complicated but not overwhelming. In my judgment, it is now overwhelming. 

In 1976, when I left law school, there really was no environmental law. There was no healthcare law, no ERISA, and no significant practice in various other areas.  Now there are departments in each of the major law firms to deal with these things.  Law is more and more complex, so there’s more and more work for lawyers and law firms to handle. 

And of course we have a love-hate relationship with technology. Technology allows us to access all of these hundreds of thousands of cases. But the more you have, the more you have to encompass. Technology allows clients to preserve all sorts of data in the form of emails, voicemails, documents, notes, etc. Guess what: discovery in litigation matters is a herculean task. Again, new technology is helping us sort these things out, but every time it helps us solve a problem, it makes other problems more complex. 

When I started out, the typical commercial mortgage document was five to fifteen pages in part because it actually had to be typed. Now, it’s not surprising to get a 125- or 150-page commercial mortgage document. One of the resulting problems is that very few buyers can afford to have a lawyer read the whole thing. It takes five or six hours to read one of these documents and actually figure out whether it all makes sense. 

If you do read one of them, often you find that some of the provisions don’t jive; that, in attempting to address every potential problem in detail, people have just made terrible problems for themselves. So just a bit of gratuitous practical advice here: if you are writing documents, shorter and simpler is often better. 

We have a quest for perfection in America. This virtue is also a vice. We have wonderful procedural protections. We have tremendous appellate rights. If you have a claim, in many respects you have all the time in the world to prosecute it to a conclusion. Unfortunately, it makes the cost of dealing with a legal matter almost incalculable in many situations.

As a result of these factors driving ever-higher legal costs, the marketplace has segmented. Let’s say that you work in a 100-plus person law firm. A relatively modest commercial case comes in the door with a mere $1 million at stake. Since yours is not a mega-firm, but just a good regional firm like some here in Detroit, your clients are only going to be paying a mere $400 or $500 per hour for an experienced partner’s services. They are going to get billed $300 per hour for the second lawyer; perhaps $175 per hour for a legal assistant. You’ll have to hire an expert with similar costs, perhaps several. You’ll need a firm to help you with the electronic discovery simply because we have a few hundred thousand documents to review. 

Figure a seven-10 day trial could cost you a mere $150,000. It then probably costs $200,000 to get up to the trial with a complaint, motion practice, and discovery.  Now you’ve got a $350,000 budget for your million dollar case. No wonder clients think costs are out of control! 

Imagine you’re the defendant in that case. You think you have been wronged, not the other way around, yet the plaintiff is demanding $1 million from you. Your lawyers tell you they are going to charge $350,000 to vindicate you in a situation where you think your liability is zero.

 

This guest post is an excerpt from Carl Herstein’s thought provoking article “The Changing Legal Market: Some Thoughts for Law Students,” originally published in Of Counsel, Wolters Kluwer, August 2016.

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