Mother of All Rate Increases Still Couldn’t Keep Up With Big Law

Welcome back to the Big Law Business column. I’m Roy Strom, and today we look at how smaller law firms struggle to raise rates as fast as their larger peers. Sign up to receive this column in your Inbox on Thursday mornings.

It’s no secret Big Law billing rates have been soaring. Hourly rates have climbed at record levels in recent years, with the most recent data showing they rose by about 9% in the first quarter of 2024.

Even in this inflationary environment, my eyes popped when I saw my colleague James Nani report on what must be the mother of all billing rate hikes. A Brown Rudnick partner was juicing his hourly fee from $1,000 an hour to $1,500 representing creditors in a bankruptcy case.

People might roll their eyes at nearly 10% rate increases. But 50%? The bankruptcy judge overseeing the case had to intervene.

“That’s just beyond,” said Chief Judge Laurie Selber Silverstein. “There may be a reason. But a 50% increase in somebody’s rates is not something any client I ever had would have accepted.”

The judge denied the increase for Brown Rudnick partner Gerard Cicero. A partner at the firm promised to provide the judge a filing explaining why the increase is appropriate, according to a recording of the hearing. Cicero declined to comment.

It’s unclear what that filing will say or when it will be made—the Brown Rudnick partner who spoke at the hearing didn’t respond to a message for comment and neither did a firm spokesman.

I won’t lie, it feels like a hard case to make. In December, an hour of the lawyer’s work was worth $1,000. What could possibly have happened that by April, when he’s worth $1,500?

But, on the other hand, here’s something the firm might try to explain to the judge: Cicero’s extraordinary rate hike still failed to bring him in line with similarly experienced lawyers at larger law firms.

And that reveals a broad challenge for smaller firms like Brown Rudnick, which last year ranked 139th by revenue, according to AmLaw data.

The country’s top law firms are aggressively raising rates that are already significantly higher than those offered by smaller competitors. It’s unclear how quickly, or to what extent, smaller firms can make up the ground.

In the first quarter of the year, the country’s 100 largest firms by revenue increased their rates by 9.2% from the same period a year ago, Wells Fargo’s legal specialty group found. The firms ranked 100 to 200 were able to grow rates by a more modest 6.9%.

The bankruptcy case involving Brown Rudnick was a microcosm of that phenomenon.

Sullivan & Cromwell, a top 25 law firm by revenue, is representing the bankrupt fire protection manufacturer Kidde-Fenwal Inc., which filed Chapter 11 while defending thousands of lawsuits over its production of firefighting foam with per- and polyfluoroalkyl substances, or PFAS.

A good portion of Sullivan & Cromwell’s lawyers raised their rates by 9.7% from the beginning of the case through April, court records show. Their first-year associates are charging $850 an hour, up from $775.

A partner at the firm who was admitted to the New York bar the same year as Cicero, 2016, is charging $1,695 an hour—up 15% from last year.

That’s nearly $200 an hour higher than what Brown Rudnick tried to charge for Cicero.

John O’Connor, a San Francisco-based legal fee expert, told me he couldn’t recall seeing a 50% rate increase for a lawyer working on the same case. While he said the increase was “unusually high,” the $1,500 rate didn’t strike him as absurd.

“The issue I see is that, today, a $1,500-an-hour rate is not that uncommon,” O’Connor said in an interview.

In the Kidde-Fenwal case, Brown Rudnick represents the committee of unsecured creditors.

Another firm well known for representing creditor-side parties in Chapter 11 cases is Paul Hastings. The firm represented the unsecured creditors committee in the WeWork Inc. Chapter 11 case this year.

In that case, a Paul Hastings of counsel who was admitted to practice law in 2015 (the year Cicero was admitted to the New Jersey bar) charged $1,650 an hour in April, court records show. Again, higher than the rate the judge dinged Cicero for.

Brown Rudnick likely won’t win the argument by bringing those facts alone to the judge. Silverstein cautioned that if Cicero’s previous rate was “behind market,” the firm couldn’t “catch it all up at one time.”

“Clients that are actually paying a bill, I don’t think that’s how they think,” Silverstein said, referencing the fact that Brown Rudnick’s fees in the bankruptcy are paid out of the debtor’s pocket.

No doubt it would be a difficult conversation to hand a client a bill proposing a 50% rate increase. You might also argue it’s tough to charge a $2,400 hourly fee. Yet, that seems to have gone down ... smoothly enough?

If the problem is how quickly lawyers raise their rates—rather than how high they end up—smaller firms with historically lower rate structures will always be in a bind.

Because there’s no sign that firms with the highest rates will slow down. O’Connor, the fee expert, told me that at the top of the legal industry “there is no downward pressure on rates.”

“The greatest miracle existing is that of compound interest,” O’Connor said. “And what happens is, rate increases over time that are slightly above inflation tend to make for very high rates.”

Worth Your Time

On Paul Weiss: Mahira Dayal reports on Paul Weiss’ growth surge, and how the dealmakers it’s lured have translated into business. “At the end of the day, there’s no substitute for talent,” firm chairman Brad Karp told her.

On Burns & Levinson: On the other end of the spectrum, Meghan Tribe reports on Burns & Levinson pursuing all avenues of growth after a 13-lawyer group departed for a rival.

On Generative AI: In a wide-ranging test of generative AI tools at UK law firm Ashurst, Isabel Gottlieb reports the firm’s lawyers were able to write the first draft of briefs in about half the time it took them on their own.

That’s it for this week! Thanks for reading and please send me your thoughts, critiques, and tips.