Litigation is an engine room of firms’ earnings but many clients, keen to keep a grip on the purse-strings, are forcing a reworking of fee arrangements
Ever since The Lawyer launched the Global Litigation Top 50 in November 2008 it has focused on the money. For the past five years, neatly kicking off in time to coincide with the start of the global financial meltdown, we have ranked the world’s 50 largest disputes practices by their revenue.
And how’s this for an indicator? Each year since 2011 the total revenue generated by the top 50 firms has grown by $1.5bn (£900m) – a rise of 14 per cent over the period. Since 2008, when we began tracking global litigation revenue, the total has grown by 25.5 per cent, from $19.389bn to this year’s $24.35bn.
No wonder many of the world’s top firms have made bulking up their litigation and arbitration teams a strategic priority, a trend reflected in the changing make-up of the Top 50 list and the growing size of teams in the seven disputes hotspots The Lawyer tracks (London, New York, Paris, Hong Kong, Washington DC, Singapore and Geneva).
But this year, as part of a significant overhaul of the Litigation Top 50, we have taken that theme of focusing on the money a bit further. We have looked a little more closely at the fees generated by heavyweight cross-border litigation and arbitration teams asking how, in these costs-constrained days, top firms are re-engineering their practices to win and hang on to premium work.
In other words, during this year’s research we asked firms to tell us precisely how flexible they are being when it comes to the economics of litigation. What are they offering in the way of alternative fee arrangements (AFAs)? Is third-party funding a growing part of their offering? And where does legal process outsourcing (LPO) fit into the mix, if at all?
But there’s more. This year we also probed into the flipside of this equation. For the first time in the Global Litigation Top 50 we have surveyed the world’s leading in-house lawyers to find out what they are looking for from their external lawyers in terms of fees. Most agree they are looking for lower fees and certainty about costs, but what else?
The results of these two related but separate research projects are contained within this year’s Global Litigation Top 50. And, as if that was not enough, for the first time the data is being made available as a digital benchmarking tool online.
Getting it wrong
“Keeping costs proportionate in litigation in the UK is a real challenge and somehow we’re getting it wrong – I’ve conducted litigation in a number of jurisdictions and, aside from the US, we are the most expensive.”
So says Simon Rose, head of corporate legal affairs and group property at United Biscuits (UK). And he’s hardly alone. Even lawyers at some of the world’s biggest – and richest – companies have at least one eye on the costs when litigating.
“For the past several years we’ve met our goal of using some type of AFA in 90 per cent of our new cases,” says David Howard, deputy general counsel for litigation and antitrust at Microsoft. “Discounted rates are more or less a given, so we wouldn’t consider them an AFA. So, we’d look for a ‘not to exceed by’ phase; or fixed fees; or fixed fee with some uplift potential. We’ve done straight contingency in some cases. The most prevalent is the ‘not to exceed by’ phase or fixed fees. Also, package deals for a group of cases.”
The subject of AFAs is hardly new. Indeed, one UK managing partner recalls reading an article on whether or not they are a good thing for law firms “that was published in 1965”.
But it is fair to say the past five years’ market turmoil have placed them squarely at the top of many in-house lawyers’ minds. Consequently, they have rocketed up the agendas of litigation teams in law firms.
“These days, clients are looking for some degree of certainty when it comes to costs, although it can be difficult to provide in the litigation context,” says London head of Kirkland & Ellis’ litigation and arbitration group, Chris Colbridge, who adds a note of caution: “You might be able to quote a range, but when you explore the merits of the case, realise the number of documents or size up your opponent and their legal team, it’s difficult to say to what expense you’re going to be put.”
In this year’s Global Litigation Top 50 we have included more detail than ever before on precisely what fee packages the world’s top firms are offering. For example, check out this bit of costs certainty from Squire Sanders: “We handled a case acting for the majority shareholders in the defence of an action brought against them by minority shareholders in a capped fee arrangement. For each category of work (pre-action defence preparation, preparing the defence, discovery, accounting experts etc) we agreed an overall ‘cap’ whereby the client was charged either what was on the clock or the cap, whichever was the smaller. So if the cap for discovery was £50,000 and there was £70,000 on the clock we charged £50,000. But, if there was only £35,000 on the clock the client was charged £35,000. In this way, the financial director had certainty that his costs budget would not exceed the cap.”
No doubt this approach went down well with the client.
“Clients like budgets rather than estimates,” confirms Colbridge. “And more often than not they’re looking to understand the litigation process and break it down. Previously, they didn’t want this level of detail, but the more sophisticated clients are now willing to get into it.”
One area where firms can “break it down” and offer cost savings is on the huge data review exercises associated with litigation.
As Cleary Gottlieb Steen & Hamilton partner Sunil Gadhia points out, in certain areas such as financial services investigations and related litigation, as well as antitrust and follow-on damages claims, “because of the experience we’ve had and our platform in Washington, New York and Brussels, we can manage the review cost-effectively”.
Cleary still prefers to do this in-house rather than turn to an LPO, by bringing in contract attorneys who are priced at a much more effective rate than using paralegals to review documents.
“Working with contract attorneys is significantly cheaper than putting associates, trainees or paralegals, who are traditionally charged out at higher rates, on document review,” adds Gadhia. “Don’t underestimate the efficiencies you can get.”
The full Top 50 report, available exclusively online, includes details of AFAs offered by some 40 per cent of the top 50 firms. A sample of three is included in this print version (see box on AFA examples). For clients looking for fees certainty or rivals looking for ideas, it’s required reading.
Making the grade
Of course, it’s not possible to draw a direct correlation between those firms that are most flexible on fees and those that have shown the most positive movement in this year’s total revenue table, however tempting it might be to try.
The rankings in the main table are determined by the amount of revenue a firm generates from its core litigation and arbitration practices worldwide along with fee income derived from contentious practice groups it may have elsewhere, such as employment, property or construction.
Consequently, the larger a firm is in total the higher it is likely to be in the main table (the world’s largest firm, DLA Piper, is number one), while the more emphasis strategically it places on disputes the more likely it is to have recruited heavily in that area and, again, show a rise through the ranks.
For example, over the past few years Quinn Emanuel Urquhart & Sullivan has been a bellwether for the world’s disputes market, climbing consistently up the rankings from joint 21st in 2008, with a litigation revenue of $385m, to fifth this year ($835.5m). That is a 117 per cent rise in five years (see box on five-year risers and fallers).
Quinn Emanuel posted another double-digit rise in fee income in 2012, the most recent full financial year for the US firms that dominate this list (for UK firms the financial year under consideration is 2012/13). The US litigation boutique’s disputes-related fee income rose by 15.4 per cent last year, from $724m to $835.5m.
The firm is unusual – although not unique – in this list, in that it is primarily a claimant-side practice and one that is used to employing a variety of novel fee structures. In the UK, around 15 per cent of its cases are contingency fee-style cases, while globally around 5 per cent include some sort of AFA other than discounted hourly rates.
Further down this year’s table – a new entry at number 44 – comes the first appearance of one of Quinn Emanuel’s biggest rivals, Boies Schiller & Flexner, which posted an estimated litigation revenue of $285.3m.
Earlier this year Boies Schiller followed Quinn Emanuel’s lead by launching in the UK, snaring Bingham McCutchen partner Natasha Harrison to launch its first non-US office.
Both Baker & McKenzie and WilmerHale, the latter best known in the UK for the strength of its arbitration practice and the former for it geographic footprint, enter this year’s top 10 at the expense of Latham and Greenberg Traurig, which slip to 11th and 12th respectively.
More significant falls can be found over at Squire Sanders and Mayer Brown, which slip seven and nine places in the table respectively, the biggest falls this year, and McDermott Will & Emery and Clifford Chance, which both drop by four places.
Vinson & Elkins, Debevoise & Plimpton and the now-defunct Dewey & Leboeuf fall out of this year’s table to be replaced by Boies Schiller, Hunton & Williams and Allen & Overy (A&O). (While there is no place for Dewey this year, a significant number of that firm’s former litigation lawyers are now helping generate fee income at former rivals).
Last year’s biggest faller on revenue, Bingham McCutchen, managed to reverse that trend this year with a 6.4 per cent rise, although over the past three years the firm’s disputes revenues are 2 per cent down.
Dechert, another faller in 2012, slipped two places to 48th place despite posting a 3 per cent rise in total litigation fee income.
In contrast, Squire Sanders, one of last year’s biggest risers with a 37.2 per cent increase, saw a 9.2 per cent reversal, from $341m to $309.6m.
DLA Piper once more claims the crown of the world’s largest litigation practice by fee income with a 7.8 per cent rise taking its total to $1,090.8m, ahead of second-placed Skadden Arps Slate Meagher & Flom’s $987m.
But there is a more telling indicator of a firm’s prowess at litigation than sheer bulk of revenue: revenue per litigation lawyer (RPLL) or revenue per litigation partner (RPLP).
While DLA Piper secured the top spot in terms of total revenue the sheer number of lawyers it took to generate that $1bn-plus income plus the firm’s global office network is reflected in the level of fees generated on average by each person.
By extension, this metric also offers a clue to the relative level of the profitability of a firm’s litigation practice overall and the complexity of the matters involved. In last year’s Global Litigation Top 50, Bob Mathias, joint global leader and US chair of DLA Piper’s litigation practice, admitted that increasing the level of his firm’s RPLL was “one of our goals”.
On the basis of the numbers produced by The Lawyer (but provided by DLA Piper), it has so far failed. DLA Piper’s RPLL in 2011 was $720,000. Its RPLL in this year’s report is $590,000, a drop of 18.1 per cent (Skadden’s was more than twice that, at $1.76m).
Stephen Sly, joint global head of litigation and regulatory, says: “Last year we experienced difficulty in identifying the extent of contentious business being conducted outside of our litigation group, with the result that we understated the number of lawyers undertaking contentious work. Our figures now demonstrate growth in our top-line and a continuing improvement in revenues per lawyer.”
The ranking changes significantly when firms’ results are ordered by RPLL. On this ranking the table is dominated by elite, New York-headquartered US firms.
Skadden still misses out on the top spot, with Cravath Swaine & Moore snaring the bragging rights, followed by litigation powerhouse Paul Weiss Rifkind Wharton & Garrison. Simpson Thacher & Bartlett, Clearyand Sullivan & Cromwell complete the top six, with the highest position of any UK firm taken by A&O in 10th place. In contrast, DLA Piper falls to 46th.
Generally, the few UK firms that do make the gross revenue charts do better when ranked by RPLL. Freshfields moves up from 15th to 13th, while Clifford Chance’s ranking is elevated from 34th to 23rd.
Irwin Mitchell, this year’s 50th ranked firm, also moves up, to 44th while Clyde & Co all but anchors the RPLL ranking in 49th place with an average fee income per head of $0.48m. K&L Gates, 21st when ranked by total litigation revenue, tumles to 50th on RPLL.
AFA examples: flexibility on fees
Please provide one example of a case in the past 12 months that has used an alternative fee arrangement (AFA) you would regard as innovative.
Akin Gump has a volume of litigation with a particular client. In this long-term relationship, a number of fee approaches have been utilised.
Most recently, we had a monthly collar arrangement. In this deal, each month the number of hours worked, times the rates for each timekeeper, would be compared to the collar fee amount. Then, the normal collar calculations would be applied for any fees worked over or under the agreed amount.
Although this approach did meet the client’s need for fee predictability on a monthly basis, over time it became burdensome to manage. First, the client had to monitor closely activity on each matter and over the entire portfolio of cases. This required a significant amount of expensive in-house resources. Second, given the volume of work, the client had to also monitor which timekeepers were performing work and if their rates had been approved. This effort became burdensome, given the number of timekeepers involved and the need to review and adjust rates on an annual basis. The third factor was dealing with the ebb and flow of caseloads on a monthly basis.
The solution was converting the collar fee to a fixed monthly fee for the portfolio, This has reduced the client’s burden for monitoring activities, timekeepers and rates. It also allows Akin Gump to manage the work efficiently throughout the year, taking into account increases and decreases in workload. Finally, it allows both client and firm to focus more on driving successful legal results.
What proportion of your cases over the past 12 months have included the use of an legal process outsourcing (LPO) provider?
Approximately 25 per cent of our cases will involve the use of an LPO provider, typically arising from the use of e-disclosure services or the use
of paralegals for large document review exercises. At the beginning of 2013 we introduced CMS Evidence, our in-house e-disclosure and document management solution. We can now offer this service to clients at a competitive price.
In one international arbitration we agreed a fixed fee (calculated at 70 per cent of rates) on a hybrid conditional fee agreement with monthly fixed payments. 75 per cent of it is financed by third-party funding and 25 per cent by the client.
What proportion of your contentious clients have requested some sort of AFA other than discounted hourly rates over the past 12 months?
Around 50 per cent.
What proportion of the firm’s disputes in the past 12 months included an AFA?
Around 35 per cent globally.
Provide one example of a case in the past 12 months that has used an AFA that you would regard as innovative.
We worked on an antitrust claim for a manufacturer of networking and technology products. The claim alleged exclusionary and anticompetitive acts to maintain an alleged monopoly.
We agreed a fixed monthly fee for all legal services, excluding document review and discovery.
Winston reports actual work performed in excess of the monthly fee. A discounted rate is used to calculate the value of this ‘overage’ subject to a monthly cap. At the resolution of the case we will receive 50 per cent of the discounted overage fees.
The client may choose to pay the remaining 50 per cent of the overage fees as a success bonus, as determined by them.
Five-year risers and fallers
Latham & Watkins may want to reassess its practice mix as a result of this year’s Global Litigation Top 50. The firm is one of the biggest – and certainly the highest profile – faller in terms of its position in the annual table.
Five years ago Latham was second to Skadden Arps Slate Meagher & Flom in the table. This year it is 11th.
But it is far from being the only major faller. O’Melveny & Myers has taken a tumble from seventh to 16th, while Mayer Brown has dropped from 9th to 28th place.
In contrast, the top end of the table broke through the $1bn barrier last year for the first time, a trend that continues this year, with DLA Piper, top firm for the second year in a row, posting $1,090.8bn (£668.1bn).
Of the UK firms in the list Norton Rose Fulbright has made the most progress up the table, largely propelled by its merger activity in recent years. In 2008 legacy Norton Rose did not feature at all; this year it makes the upper half, in 24th position.
Freshfields Bruckhaus Deringer’s investment in disputes globally is also reflected. In 2008 the magic circle firm was a respectable 27th. This year it is 15th.
“Dispute revenues last year were more than 25 per cent of the firm,” says Freshfields’ global dispute resolution head Chris Pugh. “What’s the target? We’ve never had one as such, but we recognised several years ago that in certain parts of the world such as the US and Asia we were light or undersized. We’ve gone from two partners to 16 partners in the US and from two to six in Asia. We’re now much more of a balanced international group. Plus the issues clients have come to the firm with have generally been more contentious over the past few years, so we’ve grown as a response to that.”
Hong Kong: preferred regional forum for cross-border commercial disputes
One way of telling the importance of a particular jurisdiction is to look at where the global firms are sending their senior, heavyweight practice leaders. In the past few years a number have relocated their global litigation heads to Hong Kong, illustrating a profound shift of focus from traditional global centres such as New York and London to the Far East.
Clifford Chance, Freshfields Bruckhaus Deringer and Hogan Lovells have done just that.
In February Clifford Chancerelocated its London head of banking litigation Matthew Newick to Hong Kong. A year before that Freshfields transferred global co-head of arbitration Lucy Reed and head of international commercial disputes Geoff Nicholas to Hong Kong, from New York and London respectively.
Hogan Lovells is among the latest to jump on the bandwagon. It elected London-based global head of litigation Patrick Sherrington to the Asia managing partner role in May. Sherrington has relocated to Hong Kong for the new management role and is also tasked with building up the firm’s litigation practice in Asia.
Another trend in the region that showcases the international firms’ heightened emphasis on litigation is heads of litigation being given regional management roles. Linklaters is a case in point. The firm has recently elected global litigation head Marc Harvey, based in Hong Kong, to the Asia managing partner role.
While growth in corporate and capital markets work in Hong Kong has been largely flat over the year, some of the established players, such as Herbert Smith Freehills (HSF) and Mayer Brown JSM report a steady rise in the size of their litigation teams.
At HSF, the number of dispute resolution fee-earners in Hong Kong has increased from 53 at the end of December 2012 to the current count of 58, 45 of whom are lawyers. The number of partners in the Hong Kong dispute resolution group also rose to 10 from last year’s seven.
According to Justin D’Agostino, a dispute resolution partner based in Hong Kong and the firm’s Greater China managing partner, 2013 has been the busiest year on record for the Hong Kong disputes practice.
The firm recently won a high court case for UBS’ private wealth management division in defending allegations by a former client, Great City Enterprises, which claimed that certain transactions in its account with UBS were entered into without its authority. It was one of the first cases to be tried in Hong Kong involving allegations of unauthorised trading arising from the global financial crisis.
The strong workflow over the past year also resulted in the secondment of two litigation partners – Allison Alcasabas from New York and Julian Copeman from London – to Hong Kong.
However, HSF also saw two partners leave to join rival firms this year. In the summer financial services regulatory partner Tim Mak left for Freshfields, while former Asia dispute resolution head Gavin Lewis moved to Linklaters.
Mayer Brown JSM’s Hong Kong litigation team has also seen a 25 per cent lawyer headcount increase, from last year’s 40 to 50, making it the largest litigation practice in the city by qualified lawyer headcount.
Hong Kong’s buoyant dispute resolution market is growing on the back of significant trade with and investment from China. As the value and complexity of commercial transactions in the region continues to rise, the number and sophistication of cross-border disputes is also increasing.
“At least half the cases we handle have a major mainland China element, either with major assets located in the mainland or contracts entered in China or governed by PRC law,” says Thomas So, a litigation partner at Mayer Brown JSM. “Hong Kong continues to be a preferred forum to resolve cross-border commercial disputes among not only foreign companies but also Chinese, Hong Kong and Taiwanese clients.”
For the full Hong Kong results go to www.thelawyer.com/litigationtop50
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