Third Big Firm Overbilling Scandal
Forget stock option backdating; the real emerging scandal is big law firm billing practices. In the past month, we’ve had public scrutiny of the billing practices at old-line white-shoe NY firm Wilkie Farr, DC/Boston powerhouse WilmerHale and now the latest–1200 attorney national firm Holland & Knight. What big brand is headed for the fall next?
The Holland & Knight story is terrifying for every big firm client. Stated baldly, allegedly a partner at the firm treated invoices as works of fiction, manufacturing new hours/entries to increase the bill. Allegedly, this added up to at least $100,000 of overbilling, but this could be massively understated. Allegedly, the partner-in-question justified the billing by saying that he himself had done work that wasn’t billed to the client, so the partner grossed up other people’s time to adjust the bill to the actual accrued amount. This is not only unpersuasive, it may still be actionable–I tested on this exact practice last Spring (see exam and sample answer).
All of this alleged misconduct was identified by a junior partner on the firm, who escalated the matter internally until he reached a brick wall. He then ratted out the firm to the disciplinary authorities under MRPC 8.3, with a predictable adverse consequence to himself. He is now gone from the firm, working at a lower-paying and less prestigious firm, and trying to defend his reputation. Meanwhile, it’s unclear if the disciplinary authorities are going to do anything about it. The firm settled with the insurance company that paid the bills; I have to assume that some money was rebated.
Let’s be clear why the overbilling problem is so insidious:
* overbilling could be rampant among all lawyers. There are plenty of incentives to cheat (for associates, billable targets; for partners, compensation based on books of business)–recall the scandal when Clifford Chance associates hinted that they were pressured to overbill? As Patrick Schiltz argued so persuasively in 1998, the entire overbilling process becomes part of an attorney’s socialization to the industry. However, I disagree with those who think this is a big firm problem–in my class we cover some situations (In re Lawrence; In re Glasbrenner) where small firm lawyers have gotten their hand caught in the cookie jar too.
* Overbilling is the “perfect crime” (as quoted in the WSJ) because it’s hard to detect. Having said that, we shouldn’t ignore the client’s responsibility to police firms more carefully.
* There is no incentive for anyone at the law firm to whistleblow against the firm–it will come at significant personal cost, and meanwhile everyone benefits from riding the gravy train so long as they keep quiet. So it becomes a culture of silence, and the putative enforcement mechanism (self-policing) simply isn’t adequate to overcome this. Kudos to Matthew Farmer for his act of courage despite the adverse consequences.
The solution to overbilling is simple to state but hard to effectuate–get rid of hourly billing. FWIW, when I was GC at Epinions, I typically sought fixed-fee billing arrangements with my outside counsel. Some were receptive; others were not. When I do my side gigs now, I almost always do fixed-fee billing. Fixed-fee billing creates other problems, but it should eliminate many of these egregious overbilling situations.