Litigators are seeing even once resilient big-ticket fees come under pressure from the boardroom as companies look for ways to slash their legal bills. James Boxell reports

In an era of mammoth banking investigations and costly disputes involving Russian billionaires, litigators are still feted as the big-billing bread winners of many law firms. But evidence is mounting that they are being forced to scrap far harder for business, particularly on the more routine cases that make up a large slice of the litigation market, as an anecdote from one senior partner at a London disputes practice shows.

"Freshfields Bruckhaus Deringer had sent us a conflict case and the client immediately wanted a 20% discount," the partner says. "I said 'well yes, but Freshfields start at £750 an hour and I'm starting at £600 so it's a bit different'. I think these GCs sometimes believe they have to go back to their board and say they've got 20% off no matter what. In the end I did come down to £500, but unbelievably somebody else came in at £400 and won the work. What we are seeing more of is the sophisticated GC who knows their market well, so on a straightforward case where you don't need much disclosure or fact-finding – the kind of brain surgery that we provide – they prefer to spend their money on getting a top QC instead."

Hourly bill in the dock

Indeed, famously resilient litigation fees appear to be coming under growing pressure as boardroom demands to slash legal bills start to target the once 'no cap' disputes arena, with even the hallowed hourly bill being questioned.

Litigators stress that this belt-tightening does not usually extend to top-end disputes and regulatory work, where worried clients remain willing to pay top dollar for cases involving the risk of huge fines or serious reputational damage.

But if general counsel such as Karen Clayton at National Grid (pictured, below) are to be believed, the campaign against traditional fee structures is gathering pace. Speaking about hourly billing, she says: "It's been that way forever and a day, and I'm very keen to move away from it. I'm a litigator myself, but I believe there are inefficiencies to the hourly rate, and that a lot more value can be created if clients and law firms can come to some sort of arrangement, potentially including fixed-fee work."

In a lecture at the London office of Freshfields late last year, Lord Neuberger, president of the Supreme Court, went further, saying that the hourly rate encouraged "inefficiency or worse" and was having a "malign" impact, with some lawyers stringing out work to a "surprising" extent.

Leading litigators are nevertheless sanguine about their prospects, arguing that they have been negotiating for a while with clients over novel billing structures such as fixed fees and conditional fee arrangements. "Maybe the reason litigation is under the spotlight is because of this large number of investigations, which are taking up a lot of time and manpower," says Deirdre Walker (pictured, below), head of dispute resolution and litigation for EMEA at Norton Rose Fulbright. "But I think the cost pressure has been around for a while."

Answering criticism over hourly fees and bill inflation, another senior London litigator responds: "Clients are always saying this, aren't they? I sometimes go to these in-house conferences and hear them bashing their external lawyers and, of course litigation is expensive, and yes they do try to get the best deal they can, but if they have a big case then they want it done properly."

The recent disclosures by Deutsche Bank, Morgan Stanley, Barclays and Royal Bank of Scotland about their multibillion-dollar litigation expenses show that, for those law firms working at the top end of the market, litigation and regulatory compliance work remains extremely lucrative. The proposed launch of Jenner & Block, a Chicago litigation specialist, in London demonstrates that the Americans think there is still money to be made in the UK. As does the success of Quinn Emanuel Urquhart & Sullivan.

"Cases like Libor aren't nearly as fee sensitive," says Tim Hardy, head of CMS Cameron McKenna's litigation department. "I would like all my cases to be about situations where the company is facing quite a bit of embarrassment around the case, because then the fee sensitivity goes out of the window. Those are the type of big cases that we try to do."

Hardy's view on the resilience of big-ticket fees is shared by David Allen, head of litigation for Mayer Brown in London. "A lot of this is about derivatives and other financial products," Allen says. "I think pretty much any investment bank would say there aren't many law firms that can litigate these cases to their satisfaction. That's not to say there aren't fee negotiations going on, and it's not to say that some companies do not have a procurement-driven process for panels. But if you're the GC of an investment bank, ultimately you will want to instruct the law firm that you most trust to do a good job, far more than the one that offers a 20% discount."

Bill Urquhart, name partner at US litigation specialist Quinn Emanuel, says: "There is pressure from the banking community as well, but what I think is happening is that there are just more high-exposure, high-value cases in the banking community now, so it makes sense that they will be willing to pay a premium."

The tale of two cities

Talking to senior litigators it does seem, however, that there is a widening gap between the more exotic – and profitable – banking, regulatory and oligarch work, and the more run of the mill process-driven disputes. "It's a tale of two cities," is how Michael Madden, managing partner of Winston & Strawn's London office, describes it. "You have the big 'bet the farm' cases such as fraud and shareholder disputes, many of which emanate from the CIS, and the significant regulatory inquiries… The costs involved can be staggering. If a firm has two or three of these cases, then it is in a comfortable position.

"But in industries where litigation is more of a regular event and where the clients are perhaps more familiar with the process, or where the costs of the litigation are factored into the business, those clients can be more demanding on fees. The best example is insurance litigation, but it is happening in other areas too, such as intellectual property (IP) and real estate. Firms have to be much more efficient, more leveraged in terms of partners to associates and make best use of technology to maintain profitability. In that sector of the market there is a degree of pressure on rates."

It is a phenomenon that has long taken root in the US, according to Urquhart, who speaks of the "constant pressure from corporations on fees". He adds that there is an effort afoot among the in-house lawyers to commoditise legal services, which extends to repetitive litigation-type work, so there is a lot of pressure on law firms.

"There is commoditisation in areas such as consumer class actions, or so-called 'troll actions' and product liability cases where companies figure they should only spend 'x' amount of money," says Urquhart. "But for a big IP case the client is looking for the best person they can find and are willing to pay a premium."

Can we fix it?

Despite the resilience of the top end of the litigation market, propped up by the woes of the finance sector, senior commercial litigators acknowledge that they are coming under more pressure to arrange fixed-fee deals on big disputes, particularly when they can identify the stages of a case or break it down into yearly budgets.

Lawyers are realistic about the need to meet the client halfway, while Walker stresses that in-house teams in turn "recognise that fixed fees are difficult in litigation". But it is obvious that law firms are not entirely happy about their wider use, especially the drive for so-called 'capped fees', where a client benefits if a case comes in under budget but the law firm has to pick up the bill if it goes over.

"Capped fees are very much for the benefit of the client – there is no advantage to the law firm at all other than maintaining the client relationship," says Walker. "We are doing it [capped fees] where it is a long-standing client of the firm, and on volume work and work of a repetitive nature, so it's easier to identify what the stages are."

Allen says the "market is changing" as a result of an understandable desire for "certainty" from cash-strapped clients. "Even with a huge piece of litigation, if you've got enough experience and know enough about the case, you can prepare fairly detailed and accurate budgets. If you think of a GC or head of litigation in-house, it is his or her nightmare to put a figure in the books that later turns out to be twice that amount."

But Allen adds that there are still significant questions around the structure of fixed or capped-fee deals. "To run an entire case on a fixed-fee basis is almost certainly going to be a recipe for unhappiness," he says. "It might be unhappiness for the client, or it might be for the law firm. What you want is much more of a partnership. You don't want one or other party sitting there completely aggrieved."

And on doing the calculations for capped fees, Allen says: "For us, it's a huge exercise: it takes a lot of time that we don't recover from the client and once that's in we're stuck with it. If we come in under budget then the client benefits; if we go over then the client benefits. In that case, it's happiness all round for the client, but it's not really in either party's interest for there to be a huge disparity between the time on the clock and the time actually billed, because you want to have a relationship that works and is mutually beneficial." 

Perfect conditions

The more entrepreneurial litigators also seem increasingly happy to take on cases on a conditional fee basis, while voicing deep frustration about the new 'damages-based agreements' regime in London, which is considered largely unworkable in its present form. 

"We are very much prepared to back our judgement and our skill by taking an economic interest in cases," says Richard East, founding partner of Quinn Emanuel's London office. "I've got to the point where I am always willing to talk about alternative fee structures, even in circumstances when this hasn't been raised by the client."

The epic legal battle between Russian billionaires Boris Berezovsky and Roman Abramovich, which finally drew to a close in late 2012, provides a clear example of the growing acceptance of alternative fee arrangements among litigators and their clients on even large mandates. The battle, which centred round claims by Berezovsky that he had been coerced by Abramovich to sell his stake in Russian oil company Sibneft at a significant undervalue, and that Abramovich had sold his shares in Russian aluminium company Rusal without his consent, saw Addleshaw Goddard take a role advising Berezovsky on a conditional fee agreement (CFA) basis. The firm agreed to act on a 50% fee basis for all of the work, with an 100% uplift if successful.

Berezovzky's claims were wholly dismissed in August 2012 and he was ordered to pay £35m in legal costs to his Russian rival. However, Addleshaws was more successful in a related battle, winning a £15m success fee after settling a case that had seen Berezovsky issue a second set of proceedings relating to the death of his former friend Badri Patarkatsishvili in February 2008, claiming that Patarkatsishvili's family held assets in which he had an interest. In total Addleshaws generated fee income of £50m from the cases, having taken on the mandate in January 2009.

Hardy at CMS Cameron McKenna – which won its first CFA case last year when it successfully advised the Hackney Empire in a 10-year dispute with insurer Aviva – says: "I was happy doing CFAs before the rules changed, and I have two ongoing. I'm prepared to agree a conditional fee if that is what clients want me to do, so I'll maybe charge 70% of my headline rate; 30% to be at risk. Then if I'm successful at the end, I can bill that 30% with 100% uplift, but that is just a fee arrangement with my client. However, nobody has actually bought that because the attraction of the CFA was that it was recoverable from the other party."

It is an approach that has found favour among other entrepreneurial types, with one senior London-based litigator saying: "My perfect solution would be to get about 70% of our rates upfront on an hourly basis, and, depending on how much was in play if you were seeking a damages award, then about 5% to 10% damages. So given our cost base we would still be profitable on our rates, but leaving room for some considerable upside."

Urquhart adds: "We have a pretty good understanding of risk and we would like to do more contingency litigation, particularly on ones where we are settling the cases for $3bn (£1.8bn). But if they don't look really good at the outset, I would advise that you don't take them on."

With these kinds of sums at stake, it is clear that litigation is going to be propping up many law firms' profits for the immediate future. But it is also certain that litigation partners will increasingly come under the same kind of billing scrutiny as their colleagues in other parts of the firm. "We live in a world where good value is the name of the game," East concludes. "You can no longer churn out average work at top-quality prices. If you're charging top-quality prices, they expect top-quality work; you have to have specialism, demarcation. They will measure the value of what they get by reference to what goes out of their pockets. That's the key."

————————————————————————————————————————————–

Litigators: on top of the bill

The rise of litigation funders is well-established, but what has been less noted is the new discipline they are helping to enforce among litigators on billing practices.

According to Susan Dunn of Harbour Litigation Funding, one of the longest-established UK funders, it is an area where law firms sorely need assistance. She says: "There is a massive tendency for lawyers to underestimate their costs, in part because they don't think about the assumptions and in part because sometimes if they told the clients what they really think it will cost they would worry nobody would ever hire them. But also because, apart from the odd firm, they don't keep historic data."

Ross Clark, UK chief investment officer at rival funder Burford, is slightly more forgiving, arguing that litigators are getting better on budgeting than is sometimes assumed, and that law firms are "moving in this direction anyway" because of the Jackson reforms and the punitive new rules on budgeting for cases. "I don't get looks of horror when you ask for this," he says. "It's the way the tide is flowing."

However, with law firm partners all acknowledging the widening use of litigation funders, it is little surprise that the thorny issue of putting a firm cost on a dispute or piece of litigation has become deadly serious – the business model and profits of the funders depends on it.

Harbour has £180m in two investment funds, while Burford raised $300m (£182m) through a listing on London's junior Aim exchange, with a further $40m (£24m) of capital available. There are large sums of money being staked, adding to the pressure on litigators' budget-setting skills. "I'm just looking at what they think is realistic, because when we take a case I'll park the entire £3m budget on day one in the name of 'x' versus 'y', and I want to make sure I'm not going to overrun," adds Dunn. "If halfway through the case they tell me that the claim value has declined or even stayed the same, and they say 'oh I've got the budget wrong and need to double it', that has a devastating impact for everybody involved."

The funds make their money by taking on the costs of pursuing litigation on behalf of a client in exchange for a share of any award. "I've been doing this for more than 11 years, and when we first started it was really targeted at insolvent companies or entities," says Dunn. "But over time, with the Jackson reforms and suchlike, funding has become something used by every type of claimant. So we are funding everybody from the insolvent to the FTSE 100, where companies are now saying 'you know what, I don't want to spend my money on litigation costs: I'd rather someone else pay for it. They are experienced and I'm happy to give them a share of the proceeds if they are successful'."

Clark says the level of interest for his company's services has "grown rapidly". He adds: "Even compared to this time last time year, we have seen a more than doubling of enquiries. And the quality is getting better all the time." Burford has taken on a new head of underwriting to cope with the extra demand and another new staff member.

Harbour was receiving 25 new enquiries a month in the summer of 2012, but this rose to 50 in January this year.

Both companies say they are usually approached by lawyers – increasingly by barristers as GCs cut out the middleman – rather than by claimants directly. "In a typical deal, there is an element of risk taken on by the law firm," says Clark. According to funders, this focuses the lawyers' minds on costs. Dunn concludes: "It's not actually that difficult if you just concentrate."

Related events:

• Legal Week Commercial Litigation Forum
• Legal Week Trust & Estates Litigation Forum