Insurer’s Suit Warns Lawyers to Watch Bills
Fireman’s Fund’s Exhibit A was a photograph of several Latham & Watkins paralegals, each dressed for success in a T-shirt that read “Born to Bill.”
The insurance company, in court to challenge the respected Los Angeles-based law firm’s fees, suggested that the shirts symbolized Latham’s “scorched-earth” policy of preparing cases for trial in a manner to generate millions of dollars in fees.
The firm insisted that the shirt was irrelevant to the 1988 legal fee dispute. But a few weeks ago, the two sides settled, Latham paying $1.5 million.
Fireman’s Fund decision to take on Latham--a 600-lawyer firm that is California’s second largest--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.” He added: “And we think we’re winning.”
Terms of the Latham settlement prohibit either party from discussing the case. But court files offer a rare insight into the way big law firms, which are privately held and which jealously guard financial particulars, bill their cases.
The Latham case stemmed from a civil suit that its San Diego branch handled in San Diego Superior Court. Fireman’s Fund complained that Latham submitted abusive bills for meals, hotels and travel.
According to court documents, the events that led to the case began in early 1987, when Latham’s San Diego branch was retained to defend National University of San Diego against two administrators who had sued for wrongful termination.
San Diego’s biggest law firm, Gray, Cary, Ames & Frye, represented the former officials, Raymond L. Everett and his wife, Nancy B. Walker. They alleged that National fired them for threatening to disclose evidence that could cost the school its accreditation.
As National’s insurer, Fireman’s Fund was required under California law to pay its legal fees.
In February, 1988, midway through the trial, Everett and Walker settled for $1.5 million. 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, in turn, sued Latham, alleging fraud and malpractice in its defense of National.
Fireman’s Fund sprinkled the court file with bills it considered abusive.
One 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 bay-front 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, the court documents said.
On one occasion, Faustman billed for a trip he made from San Diego to El Cajon to watch another lawyer try a case--10 hours at $150 an hour, or $1,500. He said later under oath that he considered it professional education, according to the court file.
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.
In the $1.5-million settlement agreement, neither side admitted liability. The statement indicated that Latham was willing to pay an amount equal to the National settlement and to forgo the $600,000 in fees it had demanded.
Latham & Watkins is one of the nation’s powerhouse law firms. It has offices in Los Angeles, San Diego, Costa Mesa, San Francisco, Washington, Chicago, New York and London. It clients in recent years 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 recently for Chapter 11 bankruptcy court protection. Drexel Burnham Lambert, the investment house where convicted junk bond king Michael Milken rose to fame and ignominy, at one time contributed 5% of Latham’s revenue, according to a San Francisco legal paper, the Recorder.
Another trade paper, the National Law Journal, said Latham partners pull down about $660,000 a year. Beginning lawyers start at $70,000 a year, the paper reported.
That kind of money produces an 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.
“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,” said Schratz, who stressed that none of his comments were about Latham & Watkins or the recently concluded case.
Los Angeles lawyer Charles S. Vogel, president of State Bar of California, disputed Schratz.
“The incidence of overbilling is not significant in occurrence,” he said. “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,” he 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.
Donald P. (Pat) Newell, managing partner of Latham’s 60-lawyer San Diego office, said of the Fireman’s Fund case: “In over 50 years, we’ve never had a dispute like this. It’s really an aberration, an isolated matter.”
All the other lawyers involved in the case declined to comment, citing the settlement agreement.
