Musk Suit Against Wachtell Hits Pioneering Use of Success Fees

Big Law’s increasingly popular use of success fees for handling bet-the-company deals is in the spotlight with Elon Musk’s suit against Wachtell Lipton Rosen & Katz over his rocky Twitter Inc. acquisition.

Wachtell has built a reputation as a go-to firm for such deals in transactions and litigation, often billing more like an investment bank than a law firm. Musk took direct aim at the firm’s bill practices and its use of success fees in his July 5 suit.

Twitter’s parent company, X Corp., sued the firm July 5 in San Francisco Superior Court, saying that a $90 million payment that Twitter made to Wachtell amounted to “unjust enrichment” and seeking restitution of the funds.

Growing concerns among clients that outside law firms are “running the meter,” over-staffing cases with too many lawyers or generating work that isn’t necessary are accelerating the use and acceptance of larger success fees and flat fees in the industry, said attorney Kenneth Feinberg, a former special administrator of the 9/11 Victim Compensation Fund.

Success fees are “becoming increasingly common as clients, especially large corporations, and major companies become more and more disenchanted over the last few years with hourly billings,” said Feinberg, a leading expert in alternative dispute resolution.

Wachtell is a preeminent deal and litigation firm, with some of the highest profits per equity partner (nearly $7.3 million last year) in the legal industry. It was one of the first law firms to link its fees to the value of successful deals, rather than linking them to hourly billing rates like many of its peers.

“It’s a win-win if one can tie one’s compensation to a successful objective result that will determine whether and to what extent compensation will be provided,” Feinberg said.

Wachtell did not immediately respond to a request for comment.

The firm might take a percentage of the value of the deal or a combination of hourly billing and a success fee after closing a deal, as was the case with Twitter, said Bruce MacEwen, a law firm consultant and publisher at Adam Smith, Esq.

“It’s just part of who they are,” MacEwen said.

Wachtell may use success fees probably as much or more than any other firm, MacEwen said.

Money’s Worth

The suit includes several exhibits that shine a light on the billing practices of the storied Wall Street firm.

Wachtell “often received a fee in the range of 60 to 80 percent of the fees paid to investment advisors,” the firm states in a fee memo included in court documents. The firm also lists in the memo seven representations from 2020 to 2022 where Wachtell’s fees ranged from 67% to 100% of those charged by investment banks on those deals.

In premium-billing matters involving substantial litigation Wachtell lawyers “frequently invoice on a fee basis of 2x-2.5x of run-rate amounts,” the firm also said.

“The total fee amounts in these illustrative matters range from approximately $33mm to $134mm,” the firm said in the memo.

Wachtell’s $90 million “success” fee in its work for Twitter is a tiny fraction of the total $44 billion that Musk paid for the social media platform.

“Frankly, given the acrobatics that Elon Musk was going through to squirm out of this deal, I think that’s reasonable,” MacEwen said. “Old Twitter, so to speak, totally got its money’s worth,” he said.

Wachtell vs. Icahn

Wachtell has recognized for decades that charging by the hour “makes very little sense in certain cases,” Feinberg said.

“The advice they provide a client like Twitter is worth way beyond any reasonable hourly rate,” he said.

The Twitter lawsuit isn’t the first time that Wachtell has faced litigation by the acquiring party on a deal.

Billionaire activist investor Carl Icahn and CVR Energy Inc. sued the firm in 2013 for malpractice in New York federal court. Wachtell represented CVR in its failed attempt to ward off Icahn’s takeover bid. The malpractice claims were ultimately dismissed by a Manhattan federal judge in October 2019.

Documents with details about the firm’s fee arrangements also were made public as part of that litigation.

“While our fees are not based on the amount involved in a matter, experience indicates that merger and acquisition and takeover fees have typically ranged [from] 1 percent or more on matters under $250 million and 0.1 of 1 percent or less on matters over $25 billion,” the firm said in a document in the record entitled “Billing and Retention Policies.”

Wachtell also stated in that document that it would not give clients details about how it staffs matters or how the work was done.

“The firm does not furnish long-form descriptions of services or details as to particular lawyers and hours,” the firm said in the document.

The case is: X Corp. vs. Wachtell, Lipton, Rosen & Katz, No. CGC-23-607461, California Superior Court (7/5/2023).