As students graduate from law schools they are faced with more and more choices of whom to work for or how they will bill for their services. The traditional practices, such as hourly billing and contingent fees, are changing as clients demand more efficient and valuable service. One of the opportunities available to students is to become an in-house attorney. The number of students making this choice is growing and the incentives to do so are growing as well. In-house departments may offer a better salary, benefits and work environment.
In-house legal departments can solve some of the problems that clients have with outside counsel. These problems include economic waste by attorneys, incentives to be inefficient and many others. The attorney is an employee of the company and therefore he is subject to the control of the company when comes to what work he does and the costs that are to be incurred. The in-house department can provide better control, more predictable legal costs and more efficiency. Traditional private law firms bills are somewhat unknown until the attorney actually bills the client. The client knows what the attorney's hourly rate is but not exactly how long the work will take or what expenses will be charged on top of the hourly rate. With an in-house department the company pays knows the lawyer's salary and benefits and is not concerned with hourly billing rates. The company will know what expenses are occurred since the lawyer is an employee and the company can set policies to cover expenses. This paper discusses the problems with traditional billing and the solutions and benefits of in-house departments.
II. The Problems With Hourly Billing and Expense Reimbursements
There are many problems with the traditional practice of hourly billing for legal services. These problems have led to the utilization of alternative practices for the benefit of the client as well as the attorneys themselves. These problems frustrate not only the clients and how they see their attorney's work, but also the attorneys themselves are frustrated. A brief illustration of these problems is given below, but a more extensive explanation is given in the fixed fee paper on this site.
A. Minimum Increment Billing
Minimum incremental billing is the practice of attorneys to bill for, say, blocks of six minutes of time (one-tenth of an hour) no matter how little time they spend. Under this practice, a one-minute phone call would result in a charge for at least six minutes. If an attorney bills $300 an hour that one-minute phone call would cost $30. This can led to an attorney billing more time than actually expended.
B. Expense Reimbursement
Another problem with the current billable hour method is that any expenses that the attorney incurs are charged to the client on top of the hourly rate. The client has no control of these expenses, which can cause economic waste by the attorney. These expenses may include first-class airfare, copies, faxes, overtime meals, coffee and donuts for meetings, secretarial hours and others incurred in working for the client. Some firms even charge a surplus on top of expenses as "overhead".
C. Double Billing
Double billing does occur by attorneys and some forms are considered acceptable. "Double billing" refers to the practice of billing a client, or clients, more than once for the same period of time. One example of this practice involves. A lawyer may legitimately charge for time spent on a client's behalf doing things other than legal research or advocacy. For example, he may need to travel to another city. Some lawyers would charge less per hour for such time, but almost all would charge something. Now suppose the lawyer is using what would usually be down time for some productive purpose.
How should an attorney bill for his work if he is flying for one client and, while flying, works for another client? Some say that since the client for whom he is traveling would pay the attorney even if he watched the in-flight movie, he should get paid if he chooses to work for another. Some even suggest the result should be no different if the work is for the same client for whom he is flying. The issue is under dispute and will lead to changes, such as other alternative billing practices.1
D. Recycling Work
Another way that attorneys double bill is by recycling work. Recycling work occurs when the attorney does research and work for one client and bills them for those hours worked. Then another client comes to the attorney with the same issue. Some might argue that the attorney should bill close to nothing and others would say to bill the same since that is what the work is worth.2 Of course the attorney may not know what future work he will do. Then maybe the answer would be to provide rebates for past work that benefits current work. That would most definitely be a record keeper's nightmare. In-house attorneys do not have this problem because there is only one client and there is no incentive to double bill.
III. In-house Counsel
Many companies set up a legal department. They hire, as employees, attorneys out of school or from other firms or companies. The attorneys are paid a salary and benefits. These lawyers include transaction and litigation attorneys. Their work may range from tax to product liability. In-house attorneys perform much of the work traditionally done by conventional lawfirms. When outside counsel is needed, the in-house lawyers can also be helpful in making their work more efficient. The in-house attorneys can do a great share of the company's legal work so that the outside bill is much cheaper. In the future in-house practice may offer more opportunities and benefits than a more traditional law firm career.
In one article the author lists ten predictions for the 1990's legal environment. They include:
"1. Reduced demand (for outside counsel) . . . 2. Renewed in-house growth . . . 3. Better in-house pay . . . 4. Recruiting advantages (of better benefits and work environment) . . . 5. Better resources (for providing specific legal work for that company) . . . 6. A buyer's market . . . 7. Advancement potential . . . 8. Spreading the financial risk . . . 9. Marketing backlash . . . 10. Lifestyle issues . . . "3 Cleveland discusses the dilemma that leads to these changes.
As more lawyers go in-house law firms must pay higher salaries to get good talent. To justify the salary law firms must require associates to increase their number of billable hours per year. This negatively affects the outside attorneys lifestyle making recruitment more difficult. As salaries go up so may the billable rate of the attorneys causing companies need to cut legal work done on the outside thus, more sophisticated work will be done in-house. With less spent on outside counsel more can be paid to develop in-house resources and better salaries for those in-house lawyers. 4 The situation just throws gasoline on the fire, as prices and salaries rise working conditions worsen which causes salaries to rise which in turn rises prices. Definitely a slippery slope if there ever was one. Cleveland also states; "While no one anticipates that the number of in-house lawyers will surpass those in private practice, the differential will narrow. Inside lawyers will begin to exert a greater influence on the "legal business" by becoming more active in the American Bar Association and state and local bar groups."5
In retrospect Cleveland failed to mention one major if not primary benefit of in-house counsel in the nineties. Aside from salary most corporations grant in-house attorneys stock options which have great potential to increase compensation. In the nineties the performance of the stock market has been spectacular. Another advantage of being an in-house attorney is that the attorney does not have to bill hours, one of the many irritating tasks lawyers in law firms have to perform.
Corporate lawyers do not have the pressure to get clients and they also generally have a more relaxed work environment in terms of hours and atmosphere. The number of hours required is less in the in-house department. Since the attorneys are there to prevent problems before they arise the workload is more consistent and less rush jobs need to be done. The in-house allows for a good balance of family and work without being in two places at once.
A 1998 survey by the American Corporate Counsel Association (ACCA) provided some facts about the current environment of in-house corporate practice.6 The survey showed that the practice is becoming more diverse and the amount of pro bono work the attorneys are doing is increasing.7 The proportion of women is up to 37 percent and the number of minorities is up to 9 percent.8 Pro bono work was performed by thirty-eight percent of the in-house attorneys.9 The survey also provided that " . . . the typical in-house counsel is male. He is also 43 years old, a 17-year graduate from law school, and works for a public for-profit company with seven attorneys in the legal department."10 The range of these legal departments range from one to 300 at one site and one to 617 at all company sites.11 The majority (sixty- percent) of departments contained five or fewer attorneys.12 The survey also stated that 95 percent of the attorneys have or expect internet access by the year 2000.13 These numbers show that the environment and resources of in-house departments may make them highly competitive in the recruiting arena.
One author was surprised to hear, when talking with students, how many if them were looking to go in-house.14 He stated that the reasons they wanted to go in-house included, the "fixation on billable hours in private practice", "stress associated with client development" and the " competitive environment of law firm practice."15 These seem to be common thoughts about the big private law firm and things that students are and should be concerned with.
The author did state one problem of in-house counsel is that they are "wedded" to their one client.16 In private practice if the attorney has a problem with his client he can withdraw and be done with it, but this would mean finding a new job possibly without a referral for an in-house attorney.17 He adds that the relationship allows the attorney to provide more input and have more of an impact on the operations of the company.18 These attorneys usually have a business background and can advise on all aspects of the business. Much of the work in-house attorneys do is legal compliance.19 The proactive approach allows the company to prevent problems before they arise.
IV. History
A. The 1980's and in-house as a result
In the postwar years a "... significant percentage of lawyers began serving corporations almost exclusively."20 As one chief legal officer described how inside counsel were seen in the 1950s, " . . . jobs in corporate law departments were for second raters, or lawyers who had failed to make partner at some of the better firms."21 In the 1970's and 80's the lawyers had the upper hand. There was a high amount of legal work that clients needed completed and this left them subject to the lawyer's demands. In the 1990's a recession led to the reverse of this situation.
As clients sought to lower costs and to become more efficient, it was they who were making the demands. With more attorneys looking for work and competition high, lawyers had to change the way they did business. In particular they had to give clients more efficient and predictable service. One way to do this was to offer alternative billing practices.
B. The Need to Budget and Control Attorney's Fees
Companies like all individuals needing legal work, were subject to the attorneys' whims in the 1980s. In the 1990s companies began to question how their attorneys were billing them for various services. The companies started with the bill they were given and questioned whether all the charges were necessary and proper. They hired investigative companies to find these "inequities".22 Upon finding that the attorneys were not the most efficient and did not have the company's bottom line in mind they sought to get control of their legal costs. As a result some started to hire attorneys in-house in order to lower costs and to more easily police the work.
In one article Michael Magness explained the great opportunity for corporations to get high quality attorneys to join their legal department.23 He explained that due to the recession many law firms were laying off good, experienced attorneys.24 This allowed in-house departments to expand their size with quality lawyers without having to train them. Magness also explained that more graduating quality students were available because law firms were hiring less and were visiting fewer campuses.25
One example of a growing in-house corporate department is The Travelers Companies and is discussed in a 1991 article by George McKeon.26 The company's corporate department numbered twenty lawyers in the early eighties and grew to eighty in 1991.27 They have a staff counsel operation of 500 lawyers in fifty-three offices in twenty-four states that defends their policyholders.28 This is considered part of their law department as well.29 The staff counsel handles about 60 percent of Travelers casualty-property litigation and has led to substantial legal savings.30 Attorneys in these staff counsel offices are rewarded with bonuses based on cost savings created by the attorney.31 This is an incentive to be efficient as opposed to hourly billing which may be an incentive to be inefficient. George McKeon describes what they have done as:
"We assembled a group of outstanding achievement-oriented lawyers, provided an environment in which they were highly motivated, and made sure they understand that their jobs were to solve or prevent problems - creating value that would more than pay for the cost of their services."32
V. Ethics
For the in-house attorney, many ethical issues may arise because the attorney's position is one of lawyer but also as employee. Who is his client? Who pays the bill? Does it matter? To whom can you provide legal services? These problems are mentioned in every article about in-house attorneys and face those attorneys on daily basis. Below some of these issues are discussed but not all, and careful consideration is warranted.
A. Simultaneous Representation of Clients
1. Inadvertent Conflicts
As an in-house counsel the attorney has to be very careful that someone does not get the impression that the attorney is working on the individual's behalf. As one article states:
"... the lawyer must clarify whom the lawyer intends to represent when the lawyer knows or reasonably should know that, contrary to the lawyer's own intention, a person, individual, or agents of the entity, on behalf of the entity, reasonably rely on the lawyer to provide legal services to that person or entity...."33
This could apply to corporations, partnerships, officers, partners, and employees. The lawyer may need to advise the individual to get independent counsel if the individual's interest is adverse to the lawyer's side.34 Also the lawyer should not appear to be disinterested when dealing with an individual without representation.35 The bottom line is that the employee or whom ever the attorney is speaking to must not think that the attorney is speaking to him as his attorney.
2. Joint Representation
There are many reasons an in-house attorney would want to represent both the company and the employee who is also a defendant. One is that the employer may be obligated to pay the employees legal fees and it would be cheaper to have one lawyer handle the case. The cost would be lower if there is joint representation since some duties would not need to be duplicated. Joint representation may provide a united front and consistency that would be beneficial. Another reason is that the company may have more control over the proceeding if they have control of the employee's lawyer as well.36 A final reason would be that if the in-house attorney represents the employee the other party would not be able to contact him ex parte without permission.37
a. Unauthorized Practice of Law
An in-house corporate attorney may perform legal service for the corporation but may not through their employment perform service for others.38 This rule affects insurance companies whose counsel represents policyholders. Many opinions have held that the insurer has an interest in protecting the insured and that the attorney is actually representing the company.39 Outside of the insurance arena there have been different views and the attorney should be careful even in the insurance setting.40 It appears that defending policyholders is permissible in most jurisdictions but that outside the insurance arena it is not. The future will bring some answers to the issue of unauthorized practice of law. The insurance companies are allowed to continue defending policyholders, even though they do not appear to have concrete authority when compared to other companies.
Some people have called for what is called a multidisciplinary practice. These one-stop shopping service centers would provide legal, accounting, insurance and all other services that are needed. These are prohibited by current rules but may be soon will be reality. This issue is much to complicated to go into in detail here.
B. Representing Conflicting Interest
Under any situation where the attorney attempts to represent two parties, conflicts will exist that limit the lawyer's ability to fully represent both sides. The attorney must think carefully whether he wants to continue with the engagement. Model Rule 1.7(b) states:
"A lawyer shall not represent a client if the representation of that client may be materially limited by the lawyer's responsibilities to another client or to a third person, or by the lawyer's own interests, unless:
(1) the lawyer reasonably believes the representation will not be adversely affected; and
(2) the client consents after consultation. When representation of multiple clients in a single matter is undertaken, the consultation shall include explanation of the implications of the common representation and the advantages and risks involved."41
This arises for example when the attorney represents both the company and the employee in a case. The attorney should monitor the situation for possible further conflicts. The attorney must be very careful to avoid tendency to favor their employer over the employee. This is a very difficult situation because withdrawing from representing the company would entail quitting his job. Again the attorney may be best to advise the employee to seek outside counsel if the lawyer foresees major problems.
C. Third Party Payment of Legal Fees
If an attorney is representing an employee and the company is paying the legal fees some ethical considerations may arise. The attorney must remember that it does not matter who pays the bill, the client is the employee and no different treatment should be given to the person footing the bill. If the attorney sees this as a possibly major problem they might want to advise the employee to hire outside counsel.
1. Confidentiality
One area where an ethical issue may arise has to do with attorney client confidentiality. If the company is paying the attorney fees for the employee, the attorney may come across information in confidence that is harmful to the employee and he may feel obligated to tell the company. The attorney may not break privilege just because another is paying the bill. The lawyer has the same duty of client confidentiality that he would if the employee had paid the bill himself. The attorney may want to advise the parties of this fact before going further with an engagement.
2. Control
The attorney should not allow the company's position and payment of fees to affect his representation. The attorney must not harm the employee's interest to allow the company to control the progression of the case. The employee is the client and the lawyer must do what they wish and should not let the employer affect his performance. This is one problem where being ethical and following the rules may cost the attorney his job by him being forced to withdrawal.
C. Lawyer Self Interest
Conflicts may arise between the company and the attorney himself. The lawyer must not allow his own financial interest, or otherwise, affect his ability to represent the company. The lawyer must not allow business transaction such as stock options affect his ability to represent his client. Also, the attorney should not allow the fact, that the attorney can be fired at any time, stop him from taking an adverse stand on issues such as sexual harassment, etc.42 This is an example where problems that face all employees cause the attorney to consider the ethical rules.
D. Court-Ordered Attorneys' Fees
One article described a case where in-house attorneys were seeking court appointed attorneys' fees and the judge pondered whether market rates were appropriate.43 The Judge thought that the standard market fee did not reflect what the attorneys' actual costs were and what the client actually paid.44 In the end the judge said he was bound by precedent and awarded fees based on $150 to $200 per hour for the attorneys and seventy-five dollars per hour for the paralegals.45 The fact that the Judge thought the cost to the in-house attorneys was lower implies how the in-house counsel saves money and is more efficient otherwise he would be saying the outside counsel would be charging more than actual costs. This perhaps-another benefit of in house counsel, the company received reimbursement possibly greater than their costs.
VI. Client Service and Economic impact
A. Solutions to the Billable Hour's Problems
Having in-house attorneys solves the costly problems of the traditional hourly billing mentioned above. In-house attorneys do not bill hours to their employer so they do not have to worry about minimal incremental billable amounts. Whenever the employer/client needs advice, he can make a phone call to the legal department without being billed 15 minutes for a 60-second phone call. The employer can ask for legal help when normally they would not bother with such simple matters to save money. This allows for potential problems to be prevented where with a private firm the company may not want to incur the costs of seeking advice before a problem arises. The legal fees for the company are in a way fixed and the company can use the legal department for issues they would normally not, without increasing their legal costs.
Having in-house attorneys also solves one major problem with the billable hour, not specifically mentioned above. That problem is the incentive to spend more time doing legal work than is actually needed. Under the traditional system the more hours you spend the more you get paid. In other words inefficiency is rewarded. The in-house attorney has an incentive to do work more efficiently, the faster he gets done the less over-time he has to work. More efficient work saves the company money and benefits everyone. This may possibly be the biggest benefit of the in-house department. The attorney and company have a greater trust, in that the company does not have to question whether the lawyer spent the amount of time billed or if the padded their bills.
The corporation is the only client that the in-house lawyer has so there is no chance of double billing his clients. All work the attorney does would be compensated for with his salary and benefits package. There is no incentive for the attorney to double bill because his fees are fixed. If the attorney works on the plane while traveling, it is just less work he will do later and makes no difference to how much he is paid.
The attorney will not do the same research each time the same issue comes up because that will just increase the amount of hours he works and decrease the amount he is paid per hour. The research will add to the department's knowledge base and will make them even more efficient in the future. The company's legal department will develop a legal knowledge specifically tailored to the company's operation.
The in-house attorney system also solves the problem of costly expense reimbursement normally associated with outside counsel. The company will set guidelines for acceptable expenses that will be reimbursed by the company. The company may require specific airlines, hotels, car rental companies are used in order to be reimbursed for the expense. The reason for this is many companies have volume discount agreements with certain providers, which lowers their costs. The company may also require the lawyer to fly coach while outside counsel may be able to fly first class and have the client pay for it. Also, some companies might provide per diem (per day) reimbursement amounts for food and hotel while traveling on business. This would make it in the attorney's best interest to keep costs low to avoid out of pocket expense or even maximize the amount of excess cash he gets to keep. More savings would arise in not paying surpluses on top of normal expenses like copy costs, overtime meals, and secretarial overtime salaries. The in-house department can do things like copy cost by using their own secretarial staff whom the company controls as well. The need for overtime may not be needed in-house.
B. Budget, Control, Predictability and outside Cooperation
In-house legal departments have many advantages. The company has the ability to predict the legal costs of these departments and to budget for the year in advance. Thus, the company can keep these budgets in line because they have control over the attorneys as employers. This allows them to monitor the work and tasks the attorneys do. The in-house department is also very helpful when outside counsel is needed. They can cooperate with the outside firm and create a synergy with them that will be more efficient than with companies without legal departments. The in-house department will be able to do some of the thing that the outside firm is not needed to do, such as compiling files and other tasks that do not require specialized legal knowledge. The in-house attorneys can also act as liaisons between management and the outside counsel by providing communications to both sides thus lowering the outside counsel time spent explain legal terms and ideas.
VII. Societal Impact
A. Efficiency for all
Having in-house attorneys reduces economic waste and that indirectly benefits society as a whole. If a manufacturing company saves thousand of dollars because its attorneys fly coach or do not need to fly at all then society will be better off. The lower the legal fees of the company the lower the production costs or costs of providing a service by the company. This means that the savings will be available to be passed on to the consumer in the form of lower prices. If the prices are not lowered the money from the savings is available to be paid to shareholders in the form of dividends. These dividends allow the shareholder to invest in other companies and therefore fuel innovation and progress.
B. On-going access to legal advice
One advantage to having an attorney on salary is that the company will have on-going access to legal advice. This is an advantage to consumers as there will be a presence in the corporation that will be concerned with the legal ramifications of all the company's actions. The company will be able to offer advice without increasing the legal fees of the company and without slowing the decision process unnecessarily. Society will benefit from the company's awareness of its actions and concern for those people that are affected by them. As mentioned earlier the one of the attorney's duties is to insure legal compliance and prevent problems before they arise.46 This would benefit everyone involved. If the problems do not arise no one can be hurt. The attorney may act as the company's conscious and steer it in the ethical direction.
VIII. Conclusion
This article has shown the advantages of in-house practices and the problems they solve. The client is given control over their legal cost since the lawyer is an employee of the company and they can dictate and monitor the attorney's actions. The attorneys are paid a type of flat fee in the form of their salaries and it is in their interest to be more efficient. The quicker they complete a task the more free time they will have. The company can control the legal expenses the attorney incurs by setting guidelines for these expenses. The attorney has no incentive to spend more time than they need since they are not paid by the hour. Also, the attorney will not double bill because they have no interest in inflating hours.
Another advantage of being an in-house attorney is not having to keep track of every minute of the workday. To a law student this may not seem like a major inconvenience but when the phone rings thirty times and you work on twenty clients throughout the day an attorney tends to lose track. The learning curve and inefficiency adds to this problem. Some people feel a type of guilt associated with billing when they know they could have completed the task quicker. This combined with minimum billable hour requirements creates a lot of stress to the lawyer and it is a huge plus as an in-house attorney to not have to deal with. I heard one attorney say that in their new corporate position they work ninety hours a week but they love every minute of it. He went on to say that he wears blue jeans to work and would not have it any other way.
A career in-house may not be for everyone. The in-house attorney will draft less documents and make less court appearances than a lawyer in a private firm. The lawyer may not have a window office with a huge wooden desk with a cigar humidor on the corner. The in-house attorney may still be considered a little bit less than the big firm attorney. These things are something to consider but as stated above there are many benefits of in-house practice to consider.
In the current economic market think of the possibility of the attorney's stock options. Better yet what if the firm has yet to go public and you can be a part of taking it public. Sure a private practice may earn hundreds of thousands of dollars a year, but a in-house attorney might earn that amount in a week. This is a rarity of course, but it has happened. Students should think bout going home every day before the kids go to bed or even before nightfall. The lower hours and relaxed environment provide less stress and an overall higher quality of life. What about not going to black tie affairs in order to land a client but instead wearing slacks (maybe jeans) and a collared shirt to work.
1 Douglas Richmond, Professional Responsibility and the Bottom Line: The Ethics of Billing, 20 S. Ill. U. L. J. 261, at 278 (1996)
2 Douglas Richmond, Professional Responsibility and the Bottom Line: The Ethics of Billing, 20 S. Ill. U. L. J. 261 (1996)
3 Allen L. Cleveland, In-House Gets the Upper Hand; 10 Reasons Why the Deck Is Stacked Against Firms, Texas Lawyer 26 (1991)
4 Id
5 Id
6 Family Law: In-House Corporate Attorneys: A Profile of the Profession, 22 AK
Bar Rag 19 (1998)
7 Id
8 Id
9 Id
10 Id
11 Id
12 Id
13 Id
14 Marc I. Steinberg, The Role of Inside Counsel in the 1990s: A View from Outside, 49 SMU L. Rev. 483, 484 (1996)
15 Id
16 Id
17 Id at 485
18 Id at 485
19 Id
20 John W. Bickel II and William A. Brewer III, The Demise of the Billable Hour, Texas Lawyer, 26 (1992)
21 H.J. Aibel, Corporate Counsel and Business Ethics: A Personal Review, 59 Mo. L. Rev. 427, 427 (1994)
22 John W. Bickel II and William A. Brewer III, The Demise of the Billable Hour, Texas Lawyer, 26 (1992)
23 Michael K. Magness, Recruiting: Law Firm Woes Offer In-House Opportunity, The American Lawyer, 38 (1991)
24 Id
25 Id
26George McKeon, Traveling The Road To In-House Efficiency, The American Lawyer 40 (1991)
27 Id
28 Id
29 Id
30 Id
31 Id
32 Id
33 Nancy J. Moore, Conflicts of Interest for In-House Counsel: Issues Emerging from the Expanding Role of the Attorney-Employee, 39 S. Tex. L. Rev. 497, 502 (1998)
34 Id at 503
35 Model Rules of Professional Conduct Rule 4.3 (1997).
36 Nancy J. Moore, Conflicts of Interest for In-House Counsel: Issues Emerging from the Expanding Role of the Attorney-Employee, 39 S. Tex. L. Rev. 497, 502 (1998)
37 Id at 508
38 Id at 509
39 Id at 510
40 Id at 514
41 Model Rules of Professional Conduct Rule 1.7(b) (1997)
42 Nancy J. Moore, Conflicts of Interest for In-House Counsel: Issues Emerging from the Expanding Role of the Attorney-Employee, 39 S. Tex. L. Rev. 497, 502 (1998)
43 Jennifer Thelen The Recorder, In-House Attorneys Win Fight Over Fee Standard The American Lawyer, 55 (1995)
44 Id
45 Id
46 Marc I. Steinberg, The Role of Inside Counsel in the 1990s: A View from Outside, 49 SMU L. Rev. 483, 489 (1996)