Associates May Have Closer Eye On How They Are Billed Out

Former Obermayer Associate Sues

For former Obermayer Rebmann Maxwell & Hippel associate Ryan Leonard, the difference between the rate he was charged to the client and the rate he was given credit for internally meant him missing out on bonuses that were largely tied to profitability, according to a lawsuit he filed against the firm.

In the suit, filed in the Philadelphia Court of Common Pleas, Leonard alleged the firm charged and collected from the client a flat, blended hourly rate for work performed by any of the firm's timekeepers. But when the firm allocated that time into the system, it allegedly made associates' rates lower in some instances and made partners' rates higher. The firm paid out bonuses based on the attorneys' hours times their hourly rate. If that figure was two-and-a-half times more than their annual salary, a bonus was earned, Leonard alleged. By reducing the hourly rate, the chances for bonuses were decreased for some associates and increased for some partners, he alleged. He said this practice was not disclosed to the associates.

For its part, according to Leonard's complaint, Obermayer Rebmann management allegedly told Leonard that how it priced associates internally was the firm's business. The firm is not commenting on the suit.

'Partner Overcapacity'

James Cotterman, a principal with Altman Weil and A&FP Board of Editors member who focuses on law firm compensation models, says law firms will often write down associate or paralegal time if the firm determines certain work shouldn't be charged to the client. But he says it should be done for a reason, and those reasons should be communicated to the lawyer as a teaching moment.

Cotterman further notes that if there is a write-down for whatever reason, the client should be the beneficiary by paying for fewer hours. If a firm changes the rates after the fact rather than the hours, that wouldn't benefit the client, but only the partners, Cotterman says.

Such a scenario could be driven, in part, Cotterman notes, by an industry-wide problem of partner overcapacity, as was shown in Altman Weil's Law Firms in Transition survey published last month. (For more on the Survey, see, “Too Many Lawyers? Report Faults Firms for Resisting Layoffs,” in this issue.) As partners look to build up anemic hours and profitability, there may be more of a desire to find ways to do that.

“The partners know they are under more scrutiny now than they were 20 years ago,” Cotterman says of the industry. “I think it's a significant issue, overcapacity.”

Law Firms Need to Make a Profit

But in some respects, the way firms charge rates comes down to the simple business proposition of charging more than your cost in order to make a profit, Cotterman notes.

Last year, a Drinker Biddle & Reath contract lawyer faced attorney discipline charges for padding the number of hours he worked. While all agreed the activity was clearly improper, his filings with the disciplinary board gave some insight into how contract lawyers are paid out.

When Benjamin Hart Perkel worked at Drinker Biddle from 2011 through 2012, he was paid $40 an hour for document review work and charged out to a client at $245 an hour.

Some called that 513% markup “stratospheric,” while others said, if the client agreed to it, then so be it. The firm said it wasn't a markup, but rather, was representative of the overhead costs a large firm endures.

Tom Sager, the former general counsel of E.I. du Pont de Nemours & Co. who spearheaded the DuPont Legal Model, said last year that he tried to separate contract attorney work out from other portions of a matter because he wanted to avoid the markup. And Chicago-based Patrick Lamb, a former Big Law attorney who became disenchanted with the large-firm business model and created his own firm, Valorem Law Group, said last year that the markup was “stratospheric.” He said contract lawyers should come at a pass-through rate with perhaps a small markup. Other consultants said clients could quickly figure out they could get that type of work more cheaply.

As for the contract attorney's say in what he was charged out, Cotterman says it depends on how his contract with the firm was structured.

“I'm not sure he has a right to know what he is being charged to a client,” Cotterman says, unless the lawyer's compensation is based on a percentage of the rate he charges.

But if the attorney agreed to work for an hourly rate, then the lawyer can only attempt to renegotiate with the firm, Cotterman says. The lawyer could cite to the rate at which he is being charged out and argue that his value is clearly higher than what he is being paid. The lawyer then has the choice to leave if he feels he is being underpaid in that situation, according to Cotterman.

Regardless of the scenario, if compensation is somehow tied to hourly rates, associates should be informed and have the ability to ask questions. “I think there will be more scrutiny,” Cotterman says.

Lawyers at all levels, particularly in flat-fee situations, need to know the cost of doing business.

“If a compensation program is tied to metrics of raw dollars collected, the things that affect that are time, price and realization,” Cotterman says. Attorneys “need to know what is going on there.” Cotterman says that if lawyers don't know what they are being charged out at, they can't know what their income potential could be.

Gina Passarella is a Senior Staff Reporter for our Philadelphia-based ALM sibling, The Legal Intelligencer. She can be contacted at [email protected] and on Twitter @GPassarellaTLI.

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