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The Freezin’ Season Arrives

Firms weigh idea of holding line on fees in ‘09

By DOUGLAS S. MALAN

Some Connecticut law firms are considering giving their clients a holiday gift that will last the whole year long. They are considering billing rate freezes for 2009 in recognition of the pressures placed on businesses that are being pummeled by the Wall Street meltdown and global economic downturn.

Hartford-based Pepe & Hazard was among the first firms in the country to publicly announce its intention to cut clients a break next year, and that news made waves in the national media. The firm’s clients include public companies, privately-held companies and major players in the financial services and construction realms.

“We’re living the financial crisis with [our clients] and counseling them on a daily basis,” said Alfred A. Turco, managing partner of Pepe & Hazard. “We were in a position to provide relief and we’d be missing an opportunity to partner with clients if we didn’t do this. It just seemed obvious that we needed to look at this possibility. It was an easy call.”

And it’s a rare one. Turco is not aware of the firm ever freezing billing rates in its 25-year history.

Pepe & Hazard decided on Nov. 18 to maintain its current billing level, which averages about $400 an hour for partners, with a high end of about $550 an hour.

Connecticut-based legal consultant Peter Giuliani has been encouraging his law firm clients to consider rate freezes. His clientele includes some of the largest firms in the region. “I think it’s a good strategy,” Giuliani said. “It creates a good excuse to talk to your clients about all sorts of things that may be coming down the pike. It’s an opportunity to realign” cost structure.

Turco said the rate freeze does not mean that attorneys will be laid off, even though certain practice areas—such as transactional work—will decline in demand. He said some attorneys might be shifted to other practice areas where there is more business. Also, the firm is taking a hard look at attorneys’ compensation packages, which include bonuses and raises tied to merit and cost of living increases, though nothing has been formalized.

While there could be adjustments in compensation, Turco said the firm will not implement any wage freezes. “How we judge people is being examined,” he said.

Some Complications

Levenfeld Pearlstein, a Chicago firm with 75 lawyers, also announced a fee freeze last week. The firm, which focuses on corporate law, litigation and real estate services, made the decision after learning in interviews earlier this year that clients were struggling to adjust their budgets to the tough economic times, said firm chairman Bryan Schwartz.

“Though the cost of running a law firm has increased significantly in 2008, we will not raise our rates in spite of this pressure,” Schwartz said in a letter to clients.

But Levenfield Pearlstein and Pepe & Hazard seem to be alone in making a definitive decision to freeze rates. Several legal consultants, including Giuliani, said they’re not aware of other firms adopting similar policies.

A blanket rate-freeze is “a mistake most firms learned not to make in the last recession,” said Peter Zeughauser, a legal consultant in California.

“A rate increase missed is a rate increase lost forever,” he said. “You never get the money back and you lose ground to the competition if everyone else is raising rates.”

But Giuliani says that logic applies only to a small fraction of law firms, those that are perhaps among the top 150 in the world. The largest firms in the world expect to raise billing rates by 3 to 5 percent in 2009, compared to 5 to 8 percent in the last several years, Zeughauser noted.

Michael Cantor, co-managing partner of Hartford-based Cantor Colburn, said freezing rates creates some complications for any firm, regardless of size.

“You can’t talk about a freeze in billing rates without talking about a wage freeze,” he said. “If you’re giving raises [to attorneys] and you don’t raise rates, then the firm will make much less in the coming year.” But instituting a wage freeze, Cantor said, can lead to the loss of good legal talent.

He declined to comment on what his firm is thinking when it comes to a rate freeze.

Turco said Pepe & Hazard’s decision was made without input from clients. One client asked about rates for 2009 as Pepe & Hazard’s management team was considering the freeze, but there was no pressure to make the decision, Turco said.

Though he doesn’t know what other firms are thinking when it comes to billing rates, Turco noted, “I suppose they’ve been grappling with the question.”

One managing partner at a well-known national firm based in Connecticut said clients have sent “a number of letters” demanding rate freezes. But the firm currently is undecided on any action, the managing partner said on condition of anonymity. He said the firm’s rates already are lower than the competition in major metropolitan markets, and would still be lower even if the firm increases its fees by $10 or $15 an hour next year.

For the most part, the topic is one that managing partners don’t enjoy discussing. “That’s a hot-button issue,” said Jim Veltrop, managing partner of Axinn, Veltrop & Harkrider in Hartford. He said his firm has not discussed freezing rates and declined to talk about the topic in general.

Marsha B. Moses, of Berchem, Moses & Devlin in Milford, said “the issue of rates is always sensitive but in this economic environment, lawyers have to be prepared to be upfront,” she said, noting that her firm is not considering a freeze.

She has not heard from colleagues at other law firms about freezing rates, but “that’s one place where you see the sensitivity. I suspect that’s an issue that doesn’t get discussed much [publicly].”

But behind closed doors, there are a lot of discussions as corporate clients have become increasingly unhappy with their legal bills.

Push For Fairer Rates

The Association of Corporate Counsel launched a “Value Challenge” program in September aimed at addressing the disparity between what law firms charge for their services and what corporate counsel believe they are getting for their money. It’s a concern that has become more pronounced in bad economic times.

The association “believes that many traditional law firm business models and many of the approaches to lawyer training and cost management are not aligned with what corporate clients want and need,” which is essentially high-quality counsel at a reasonable price, the ACC stated when the program debuted.

The program is designed to increase dialogue among corporate counsel, law firms and law schools, and the association will review outside counsel fees for a year to determine what changes are being made. Wal-Mart is one corporation that has been aggressive about its billing rate demands. Last year, the company instituted a rate freeze from outside counsel except for a select few attorneys who Wal-Mart deemed were contributing the greatest value.

Turco, of Pepe & Hazard, said his firm’s clients “have been flattered to think that we are thinking of them” when it comes to pressures on their businesses.

It’s a sentiment that clients probably aren’t used to feeling.

“If clients are surprised,” Turco said. “maybe it tells the profession that we take rate increases and clients for granted. There will be firms that understand that rate freezes are the right thing to do.”•

This story includes reporting from the National Law Journal, sister publication of the Connecticut Law Tribune.