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Recession Forces Law Firms, Clients to Get Creative
By DOUG SHERWIN, The Daily Transcript
Friday, May 4, 2012
Law Week - Friday - 2012
California’s financial woes have squeezed the state’s judicial budget — with more cuts looming in November — resulting in case backlogs and reduced access to the court system.
The funding shortfall has forced businesses to consider alternative resolution techniques and made law firms dabble in creative billing arrangements, according to industry experts who gathered at a Daily Transcript roundtable sponsored by California Bank & Trust.
“The whole system seems to lack common sense,” said San Diego attorney Robert Caplan, managing member of Seltzer Caplan McMahon & Vitek. “One of our attorneys got an arbitration award and, to get an order out of the court, it takes four or five months just to get a hearing. These things seem to be ridiculous.”
Civil lawsuits shoulder the brunt of the backlog because criminal trials are constitutionally required to be heard within a certain timeframe. Many civil trials end up taking the maximum five-year time frame to start. Faced with a lengthy delay, companies are choosing to go to arbitration or mediation to find a solution.
“We see it all the time where high asset people are starting to say, ‘I don’t know if I want to pursue that breach of lease case,’” said Ken Lange, a partner in the San Diego office of Kimball, Tirey & St. John who represents shopping centers and commercial office buildings.
The San Diego law firm Hecht Solberg Robinson Goldberg and Bagley represents a lot of companies as well, and its clients are hesitant to go to court because of the expense and uncertainty about the outcome.
“So there’s a lot of pressure to do arbitrations and other alternative dispute resolutions to the point where almost 95 percent of the cases we get are settled before they ever get to court,” said Darryl Solberg, managing partner of Hecht Solberg. “Business people are making an economic decision. Is it beneficial to continue it and not have a resolution? Or am I going to be able to get at least a resolution I can deal with in a shorter period of time.”
Caplan said the litigators in his firm still like going to trial because it preserves their ability to appeal and keeps all the rules of evidence. But he acknowledges the firm’s business attorneys prefer mediation.
Corporate attorney Eddie Wang Rodriguez, managing member of Mintz Levin Cohn Ferris Glovskey and Popeo’s San Diego office, doesn’t like courtrooms either. He agrees that, in most cases, it’s an economic decision.
“We look at the cost of doing business,” he said. “If you have ‘x’ number of litigation matters a year, how much are you willing to spend? Let’s just budget for that and get them resolved quickly as possible. If arbitration is the way to do it, let’s go that route.”
During the last three years, California’s courts have absorbed $653 million in budget cuts, amounting to a 23 percent reduction in general funds, according to the California Administrative Office of the Courts. Gov. Jerry Brown’s proposal for the 2012-13 budget includes a provision that would cut an additional $125 million if his tax extension measure doesn’t pass in November.
The funding shortfall is having an effect on everybody.
“For us, delayed justice is no justice,” said Vince Bartolotta, a founding partner of the personal injury law firm Thorsnes Bartolotta McGuire. “If you have a seriously injured head of household and that individual not only can’t work, but they have no money and their only opportunity is through the court system, then they can’t get their matter heard until five years out, what do they do in the meantime? It falls back on all of us taxpayers to try to help that family.”
Cases can get moved from courtroom to courtroom — from Riverside to Indio in some instances — adding significant travel costs to the law firm. Delays also can add costs because the attorneys’ fees continue to pile up until the case is heard.
“But when you’re asking for attorney’s fees at the end of a case, the judges are like, ‘Why is it costing so much?’ Because of your court system,” said P. Randolph Finch Jr., managing partner of Marks, Finch, Thornton & Baird. “It seems the longer they’re on the bench, the more they get out of touch with the realities of running a business.”
Companies, like the courts, are feeling the pinch of the recession, and they are asking for alternative fee arrangements to help contain their legal costs. One popular option is paying one flat rate for an entire case or a cap on certain portions of a case.
Some law firms try to blend the billable hour model with the flat-fee model.
“We’ve had a number of discussions with different clients about alternative fee arrangements,” said San Diego’s Pat Mendes, a partner with Tyson & Mendes. “But the predominant price model still has to be hourly, and is hourly, just because of the uncertainty that’s associated with it. You never know what direction a litigated matter is going to go.”
Law firms can even lose clients if a litigated matter drags on too long.
“We have handled clients for years on the business side, and you have one litigation matter that involves more fees than the entire business, and then you lost the client because they’re annoyed with you,” Caplan said.
Law firms have to watch their own bottom line and be careful to cover their costs.
Lesa Christenson, a partner with the San Diego family law firm ABC&K, said she’s really conscious about her billing and makes sure not to carry big receivables.
“In our case, the people still want to fight over the same issues in the same manner, but there’s less to fight over,” she said. “If you put it in hard dollars, sometimes you can get them to back down. They don’t see it as a biz cost; it is a life cost.”
Finch, the managing partner of Marks Finch, said the recession actually has given smaller firms an opportunity with the national firms. His firm took advantage of the recessed real estate market and signed a favorable 10-year lease.
“We can deliver the same or better results at a much lower cost that is beneficial,” Finch said.
Other local offices that have been successful chalk it up to a strong firm culture.
“We’re a people industry,” Rodriguez said. “If you have a good culture — people who are there because they enjoy being at the firm, they like the clients, they like practicing with each other — they will stick together when times get rough.”
“You work hard, you work long hours sometimes, and it’s important to feel good about the people you’re in the trenches with,” he said.