2 Cases Signal Insurers’ Rebellion Against Lawyers

Exhibit A in the reams of court papers documenting the legal cat fight between the Fireman’s Fund insurance company and the Latham & Watkins law firm is a photograph of several of the firm’s paralegals, each dressed for success in a T-shirt that reads, “Born to Bill.”

The firm, a respected Los Angeles-based legal giant, insisted that the shirt was irrelevant to the case at hand, a 1988 legal fee dispute. But the insurance company suggested that it symbolized the Latham firm’s mentality, that the law firm employed a “scorched-earth” policy in preparing cases for trial--a practice designed to generate millions of dollars in fees.

About a month ago, the two sides settled the case, with Latham paying $1.5 million. Because the deal involved 600-lawyer Latham, the second-largest law firm in California, the settlement underscored the emergence of an insurance industry movement to challenge rising legal bills--even from the most prominent and powerful firms.

“A lot of people don’t like insurance companies,” said Jim Schratz, Fireman’s Fund vice president for claims. “But a lot of people don’t like lawyers, too. So it’s a fair fight.”

Schratz added a few moments later, “And we think we’re winning.”

The two most striking California challenges to legal bills have both involved cases in San Diego--the Latham case and the unrelated, so-called “Alliance” case. Though other cases are in the works around the country, these two, both of which evolved over the past few years, are the first in the nation that generated legal bills that led to headlines, Schratz said.

The Latham case stemmed from a civil suit that its San Diego branch office handled in San Diego Superior Court.

Fireman’s Fund alleged that Latham’s bills were abusive. It objected to the firm’s costly tactics. It complained of tabs for meals, hotels and travel, and spiced its lawsuit with details of billed dinners that included “lobster scampi de la casa.”

Meanwhile, for months now in San Diego federal court, prosecutors, Fireman’s Fund and other insurance firms have been trying a piece of the Alliance case, in which about 20 California attorneys are charged with generating at least $50 million in fraudulent bills. That case, a massive chunk of civil and criminal litigation, is due to continue for weeks or even months.

The Alliance case stands apart because of the scale of the alleged fraud, according to lawyers and insurance company experts. What makes the Latham case so intriguing is that the court files in the case offer a rare insight into the way big law firms, which are privately held and which jealously guard financial particulars, bill their cases.

Latham & Watkins is very big. It has offices in San Diego, Los Angeles, Costa Mesa, San Francisco, Washington, Chicago, New York and London, according to a lawyer’s guide.

Latham’s clients in recent years, eager to be allied with the legal cachet of a firm with worldwide resources, have included RJR Nabisco Capital Corp., Beatrice Co., Bell Atlantic Corp. and Safeway Inc., according to a legal trade magazine.

Its recent clients have also included First Executive Corp., the Los Angeles-based insurance holding company that was hard hit by a souring portfolio of junk bonds and filed last month for Chapter 11 bankruptcy court protection. Drexel Burnham Lambert, the failed investment house, used to contribute 5% of Latham’s revenues, according to a San Francisco legal paper, the Recorder.

According to another trade paper, the National Law Journal, Latham partners pull down about $660,000 a year. Beginning lawyers start at about $70,000 a year, the paper reported.

To provide those kinds of paychecks, basic economics dictates that the lawyers and paralegals at the firm must bill as many hours as possible each year.

According to data Latham supplies to law school placement offices, its associates average 2,100 billable hours each year. That means its lawyers are billing--as opposed to chatting in the office or eating lunch--at least eight hours each day, every day of the business year.

It’s that kind of economic pressure that tempts lawyers, particularly at big firms, to pad the bills, said Schratz of Fireman’s Fund, which is based in Novato, north of San Francisco. The line between honest billing and fraud, Schratz said, seems to have blurred.

“If you’re talking about padding bills, if by that you mean fraud, it is rampant, absolutely rampant” in lawyers’ bills, he said. “I have no doubt about that at all.”

“From my perspective, if you’re given my definition of fraud--that is, if you put down an hour of work and you didn’t work that hour, that’s fraud--a rough estimate would be 70% of all bills involve some fraud,” Schratz said.

The current president of the State Bar of California, Los Angeles lawyer Charles S. Vogel, disputed Schratz’s charge.

“My view is that the vast majority of lawyers are honest,” Vogel said last week. “The incidence of overbilling is not significant in occurrence. Occasionally, it may be that there is an extraordinary case where there is significant overbilling.

“But I am surprised that a sophisticated consumer of legal services such as an insurance company would have a difficult time controlling any overruns,” Vogel said.

But it is attorneys, Schratz said, who “have gotten very sophisticated--in the way they bury things.”

For example, Schratz said, a firm “might bill half an hour for research but spread that out over a year, half an hour once a month or twice a month. Now, over the course of a year, an adjuster is not going to think to sit down and add up all those half-hour entries.”

“We saw that on a couple cases, and we were literally billed 200 hours for a four-page memo,” Schratz said.

Fireman’s Fund now retains a legal auditing firm to pick through the bills of its outside lawyers, Schratz said. Several times, “eight to 10 so far,” the company has gone to court or arbitration to reduce what it views as excessive fees, he said. “We have won every single one of them,” he said.

Schratz stressed that none of his comments were about Latham & Watkins or the recently concluded case. A part of the $1.5-million settlement, dated April 29, bars anyone involved in the case from talking about it.

In fact, the deal provides that, if anyone from Fireman’s Fund talks about the Latham case, the insurance company must pay Latham $75,000 in damages, according to a copy of the agreement on file at the San Diego County Courthouse.

Donald P. (Pat) Newell, the managing partner of Latham’s 60-lawyer San Diego office, also declined to comment directly on the case. But he said: “In over 50 years, we’ve never had a dispute like this. It’s really an aberration, an isolated matter.”

Newell also said the firm had learned from the case that “where an insurance company is also involved, it’s really important that very clear lines of communication be established and adhered to, so there aren’t any misunderstandings as the case progresses.”

According to the court documents, the case began in early 1987, when Latham’s San Diego branch was retained to defend National University of San Diego in a suit for wrongful termination filed by two former administrators. As National’s insurance carrier, Fireman’s Fund was required under California law to pay for its legal fees.

San Diego’s biggest law firm, Gray, Cary, Ames & Frye, represented the two former officials.

National is a 20-year-old institution that specializes in night school for working students, many of whom are in the U.S. military.

The two administrators, Raymond L. Everett and his wife, Nancy B. Walker, alleged in their suit that National fired them for threatening to give accreditation officials evidence that could cost the school its accreditation. The Western Assn. of Schools and Colleges had put the school on probation, then later restored its accreditation.

Latham’s position was that Gray, Cary, Ames & Frye litigated the case aggressively, staffed it with up to eight lawyers, compelling Latham to respond, according to documents filed on Latham’s behalf.

Fireman’s Fund claimed that Latham “ ‘churned’ the case for fees totaling $1.1 million as an adjunct to a ‘scorched earth’ policy, which on some days showed seven lawyers and as many staff billing on the case,” according to the court file.

Latham, according to Fireman’s Fund, violated the spirit of the rules that govern the way lawyers exchange information before a trial. At 5:30 p.m. on June 30, 1987, Latham delivered to Gray, Cary a list of written questions on the case--123 questions, with 244 sub-parts, according to the court file.

The delivery was made 30 minutes after the close of business and only six hours and 30 minutes before a new state law went into effect that would have limited Latham to 35 questions and no sub-parts, according to Fireman’s Fund.

Latham was formally knocked for other gamesmanship by three judges--one federal judge and two Superior Court judges--who ruled in separate decisions that Latham violated the letter of the rules, too. The sanctions issued in connection with the National case eventually totaled $47,662.

The bulk of that, $36,416, was issued by San Diego Superior Court Judge Judith McConnell, who found that Latham withheld documents, violated court orders and filed misleading briefs.

Eventually, Latham paid Gray, Cary the $47,662, according to a brief filed by Fireman’s Fund.

In February, 1988, midway through the trial, Everett and Walker were awarded $1.5 million in a settlement. Fireman’s Fund maintained that the case could have been settled early on “in the $250,000 range,” according to the file. Latham said it recommended an early settlement of $500,000 or $600,000.

In November, 1988, Latham sued Fireman’s Fund in San Diego Superior Court for $600,000 in unpaid legal fees. The next month, Fireman’s Fund sued Latham right back, alleging fraud and malpractice in its defense of National.

Fireman’s Fund then sprinkled the court file with bills it considered abusive.

There was the $176.46 dinner bill for the Latham partner in charge of the case, his assistant, a jury expert and perhaps a fourth person at a luxurious bayfront San Diego restaurant, Anthony’s Star of the Sea Room.

Dinner included loin of swordfish (for two) at $41, halibut for $16.50, a special of the day at $24.75, as well as two orders of lobster scampi de la casa at $10.50 each, wine, beer and dessert, according to Fireman’s Fund. Dinner came to $156.46. The tip was $20, or 13%.

The day after the sumptuous dinner, the partner, David F. Faustman, presented both sides of the National case to a “mock jury” consisting of a Latham librarian, two paralegals and two young lawyers, who billed 34 hours for this service, Fireman’s Fund said.

Fireman’s complained bitterly that it thought it was getting an experienced trial lawyer, because Faustman said he was one, according to his testimony under oath. But Faustman had made partner without ever trying a case before a jury, according to the court documents.

On one occasion, Faustman billed for a trip to El Cajon to watch another lawyer try a case, a total of 10 hours at $150 an hour, or $1,500, the court file indicates. According to papers filed by the insurance company, Faustman testified under oath that the trip was “part of his conscientious efforts to improve and educate himself.”

Fireman’s Fund was outraged. “Faustman’s proclamation that he was an experienced trial lawyer is the moral equivalent of a guy in a surgeon’s gown, standing in a surgery room, telling the prospective heart transplant patient he is an ‘experienced surgeon,’ when in fact his surgical experience consisted of neutering dogs,” it said in court papers.

During the early 1988 trial of the National case, Latham rented a hotel suite in downtown San Diego for Faustman so he could stay close to the office and the courthouse, rather than drive each night to his home in Poway, 30 minutes away, Fireman’s Fund said.

The insurance company balked at the bill, pointing out that the Gray, Cary attorney, Denny Schoville, lived in Jamul, also a 30-minute drive, and went home at night.

Eventually, the case turned truly petty, with lawyers on all sides taking time and money to complain about allegations of name-calling, spitting, cats and cockroaches.

Faustman allegedly called a young Gray, Cary lawyer a “sniveling little (expletive),” and Fireman’s Fund lawyer Milt Silverman a “schmuck,” according to court documents filed by the insurance company.

A few months ago, as the case neared an end, there were charges from Fireman’s Fund that Faustman made offensively loud smacking sounds while eating doughnut holes during the formal interview of a potential witness, according to the file.

Fireman’s Fund also charged that Faustman, in a huff, left a room and spit on a window at Silverman’s office.

Faustman said in court papers that all of these allegations were nonsense.

Then, Vera P. Pardee, a lawyer representing Latham, from the San Diego firm of Seltzer, Caplan, Wilkins & McMahon, said the room in which a number of the witness interviews were being held was frequented by a cat, who crawled on laps and jackets, and by a cockroach. Pardee said the roach crawled down her arm, and she had to fish it out of her dress.

Silverman responded that the room, which was in his office, was clean and well-lighted, according to the file.

On April 29, as the fee dispute neared a trial date, Latham agreed to a settlement by paying Fireman’s Fund $1.5 million.

In a joint statement, Latham said its insurance carrier had agreed to pay the $1.5 million to “avoid the extraordinary expense of an anticipated four-month trial.”

In the settlement agreement filed in court, neither side admitted liability. But the statement indicated that Latham was willing to pay an amount precisely equal to the underlying National settlement and to forgo the $600,000 in fees it had demanded.

All the lawyers involved in the case declined to comment, citing the settlement agreement.