On The Money: Experts Discuss Data Driven Techniques For Evaluating Fees In Complex Bankruptcy Cases

TELL US A BIT ABOUT YOURSELF, PROFESSOR RAPOPORT, AND YOUR JOURNEY IN THE LEGAL PROFESSION

Professor Rapoport:

I’m a native Texan, with degrees from Rice University and Stanford Law School. The Bay Area felt like a good place to start off my legal career, so I moved to San Francisco and clerked for the Ninth Circuit Court of Appeals and then joined Morrison & Foerster. Mostly, I worked in MoFo’s bankruptcy and workouts group. In 1991, I moved into academia as a law professor at The Ohio State University. (Incidentally, Ohio State is very proud of the “The” in its name.) Since then, my academic career has been a fascinating journey. I’ve served in several law school and university administrative roles, even as I’ve stayed active as a law professor studying lawyer behavior, with a keen focus on ethical issues revolving around professionals’ fees. I’ve even enjoyed being a client and seeing fees from a client’s perspective. Working with UNLV’s former President, Len Jessup, I evaluated several of our outside counsel’s bills and provided guidance on which items I thought were reasonable and which ones could benefit from some reconsideration.

HOW ABOUT YOU, JOE? YOUR PATH IN THE LEGAL INDUSTRY TOOK A DETOUR.

Joe Tiano:

Well, I suppose a “detour” is one way to characterize it. And following Nancy’s career description is humbling, to say the least. For about 20 years, I was a corporate transactional lawyer in Big Law firms, mostly recently as a Partner with Pillsbury Winthrop for five years and, before that, as a partner with Thelen until it went bankrupt in 2008. Firsthand, I can say that an organization’s bankruptcy is hardly a fun experience. In 2014, I quit my job at Pillsbury and founded Legal Decoder. I wanted to take on a new challenge and I recognized early on where the legal industry must head. Clients are generally happy with outside counsel’s substantive knowledge, technical advice and judgment and responsiveness. The service delivery aspects of things handled by outside lawyers are basically fine. However, and this is a BIG however, clients abhor the lack of predictability, transparency and efficiency when it comes to pricing and evaluating outside counsel’s services. I felt and watched my law partners struggle with the same pricing challenges. The inability to accurately price and economically evaluate legal services hampers law firms. Pricing a matter can wind up being a complete crapshoot, but it doesn’t need to be. Until Legal Decoder came along, there was no technology or smart data analytics tools that allow clients and their law firms to accurately price and economically evaluate legal services. That’s the challenge I’ve taken on – or my “detour” — to help clients and their law firms thrive in their respective business.

WHEN DID YOU TWO MEET?

Professor Rapoport:

I think we met about four or five years ago, right?

Joe Tiano:

Yeah, it was right around the time that the U.S. Trustee Fee Examination Guidelines came out – late 2013 or 2014. I remember wanting to talk with Nancy about her views on the Trustee’s Guidelines. At the time, we were developing our Compliance Engine software, which automates legal fee analysis, and I wanted an expert view on how the algorithms should work in light of the Guidelines. Fortunately, Nancy agreed to talk and shared views on how a software program ideally aligns with the Guidelines. Ever since, we’ve been friends, talking about the legal industry and how it is evolving.

THE TOYS R US BANKRUPTCY IS A PRETTY HIGH PROFILE CASE AND MUST BE EXTRAORDINARILY COMPLEX. HOW DID YOU BECOME INVOLVED WITH FEE EXAMINATION, PROFESSOR?

Professor Rapoport:

My academic research, which combines ethics issues with both bankruptcy law and corporate governance, has positioned me to be a natural candidate to be a fee examiner or an expert witness on fee issues. My first appointment was in the Mirant case back in 2003, and I just recently wrapped up my work on the Caesars bankruptcy. Since then, I’ve been closely connected, either directly or through my academic research, to several high-profile bankruptcy cases. I like high-profile cases. They suit me well. They’re intellectually stimulating – with cutting-edge issues and ultra-sophisticated counsel — making cases like the Caesars bankruptcy and Toys R Us fascinating to work on.  

LEGAL FEES MOUNT VERY QUICKLY IN BIG-TICKET BANKRUPTCY CASES. WHAT’S YOUR PHILOSOPHY, PROFESSOR RAPOPORT, WHEN YOU’RE REVIEWING FEES IN A CASE LIKE CAESARS’ ENTERTAINMENT OR TOYS R US?

Professor Rapoport:

A fee examiner has one job, and only one job: to help the bankruptcy court comply with its duty to determine whether the fees that will be paid from estate funds are truly reasonable. Courts rely on fee examiners to go through the truly voluminous fee applications and provide them with a sense of whether, at the time the work was undertaken, the work was reasonable and necessary. My philosophy in reviewing fees is simple. I first seek to understand the context of what I’m reviewing, and then I apply my experience in past cases to ask questions of professionals when I think that their initial explanations do not fully demonstrate the reasonableness of their fees and expenses. I prefer a big-picture approach, although those who affiliate with me are tasked with a micro, line-by-line look as well. I don’t believe that the success of a fee examiner lies in the amount of fee reductions achieved over time. Some of an examiner’s success surely lies in the amount of time that the examiner saves the court, though. Some reductions may accompany fee reviews, especially in the beginning of an engagement. But I believe that the best fee examiners help a case’s professionals to exercise sound billing judgment by finding mechanisms that can confirm the reasonableness of fees and expenses. The very act of reviewing fees can trigger changed behavior.

Joe Tiano:

I wholeheartedly agree with Nancy. It is not about jamming lawyers on their fees. Their services are valuable, and they’re entitled to be compensated reasonably for their expertise. When I was practicing law, I detested when a client looked solely at the bottom line of the bill…just price, period… without viewing it in the context of the work that was undertaken and the valuable results obtained for a client. Context is critical, and so too is the ability to influence positive behavioral changes by lawyers, particularly lawyers in private practice, with the informed review of a legal bill. That’s one reason why I started Legal Decoder. It’s very easy for us to show a law firm partner an analysis of his or her bill and how it stacks up to the Trustee Guidelines and industry-wide metrics and standards. Once they see Legal Decoder’s automated, objective analysis versus industry benchmarks for themselves, there’s an “A-Ha” moment where they see their billing in a different light. Our corporate-side clients, usually GCs and Legal Ops professionals, use our legal analytics tool, which we call the Compliance Engine, to review invoices, scorecard outside counsel, perform annual outside counsel reviews and aid convergence and RFP initiatives. Law firms initially become interested in our Pricing Engine analytic tool because it helps them price matters – from patent litigation to M&A to internal investigations to IPOs — with true, data-driven accuracy. It’s a major help from a biz dev perspective as well as from a profitability perspective. We’re finding, recently, that law firms want to run data through the Compliance Engine to see what their clients are seeing. On this point, one of my investors said, “The same company that makes radar guns for the police also makes radar detectors.” So it comes as no surprise that outside counsel wants to see what their clients see.

Professor Rapoport:

Yes, indeed, to that point, I think that both Joe and I are sensitive to the fact that a professional’s time, when it’s billed by the hour, either gets paid or goes unrecovered. It’s not as if the professional can go back in time, do something else, and make up any missed payment. So to the extent that Legal Decoder can give law firms prospective guidance in terms of the efficiency of the work—in other words, was the right level of professional doing the right work for a reasonable amount of time? —the risk of billed time going uncompensated goes down, the client gets a more efficient work product, and everyone wins.

IS THERE ANYTHING UNIQUE ABOUT REVIEWING FEES IN THE TOYS R US CASE?

Professor Rapoport:

I can’t speak to the specifics of the case, as you probably can appreciate. But I can say that my efforts have been augmented by Legal Decoder and the software that Joe and his team have developed. There’s a couple of things that I really like about it. First, it allows me to start with a completely objective analysis, based on industry-wide data, and then I can supplement Legal Decoder’s analysis with my experience and understanding of the nuances of bankruptcy cases. There are times when I overrule Legal Decoder’s automated analysis – it happens only a small fraction of the time, but my judgment and experience occasionally supersede an algorithm Equally as important, Legal Decoder’s data analytics tool allows me to have a data driven, de-personalized dialogue with the professionals when it comes to the reasonableness of fees. I can show the professionals where they diverge from the norm—even the norm of the behavior in their own firm in that same case. The U.S. Trustee’s Guidelines are built in, as Joe said earlier, and that helps the professionals involved in Toys R Us to be extremely receptive to my feedback. Legal Decoder’s processing speed has also been game-changing, because my team and I can review professional fees in a fraction of the time. They’ve already been parsed by Legal Decoder’s software. As with almost everything else in life, speed and accuracy matter. Having Legal Decoder’s analysis and Joe’s participation in some conference calls, helps speed the process along, which helps the court and all of the affected professionals. 

For me, Legal Decoder’s technology could theoretically let me analyze fees in more than one large case at a time, applying the learning and experiences in one case to another. 

Joe Tiano:

 I can make three observations, mostly about how I’ve observed Nancy approach the fee review process. First, I suspect other fee reviewers at law firms or accounting firms are comparably qualified and as competent as Nancy, but she brings an element of neutrality to the case because she’s in academia, not a law firm. You can avoid the situation where a lawyer at one firm is subconsciously being overly difficult on fees charged by a rival firm or the flip side where there might be a natural reluctance to object to certain fees. Second, she’s open to data and technology. Not only has Legal Decoder coded to the standards and specifications in the U.S. Trustee Guidelines, we also leverage industry-wide data across all practice areas, not just data from a single firm or a single case. This is important when we validate and statistically refine our algorithms – capturing all types of legal spend data. Lastly, Nancy’s very thoughtful about fee review and her role in the case. Even though she perhaps could, Nancy does not second-guess strategic decisions made by the professionals. As someone who earned a living billing time for 20 years, I genuinely appreciate her approach.

WHAT TRENDS DO YOU SEE HAPPENING IN THE FEE EXAMINATION SPACE?

Joe Tiano:

The Professor is way more qualified to answer than I am.

Professor Rapoport:

Professional fees have been a major source of discussion in the media and among bankruptcy practitioners and commentators. The cost of bankruptcy is considerable, but I think the high costs are not about greed so much as about risk aversion. Companies do not want to be second-guessed about hiring a cheaper lawyer or banker. They worry that not spending the top rates—if something bad happens—will be held against them, even though there are many wonderful lawyers, accountants, and other advisors who don’t charge the top rates. Outside counsel worry about leaving any stones unturned, which leads to such phenomena as bringing several people to a hearing “just in case,” or having several layers of experienced lawyers review certain drafts to avoid making any mistakes. I don’t see costs decreasing, but I do believe that professionals will become more circumspect about staffing, work flow processes, and risk management. I also think that technology and legal analytics tools will help a court, or the U.S. Trustee, or a fee examiner assess reasonableness more efficiently in the future.

WHAT ABOUT THE LEGAL INDUSTRY AS A WHOLE? WHAT TRENDS DO YOU EXPECT WILL SHAPE THE INDUSTRY IN THE NEXT DECADE?

Joe Tiano:

Whoa. I can talk for hours and hours on this one. For the sake of HIGH PERFORMANCE COUNSEL’s readers, I’ll hit my highlights. I think the eight or nine truly elite law firms and smaller boutique firms are going to thrive. The other NLJ 350 firms will need to consolidate and find competitive differentiators. Next, the legal industry’s disruptors – specifically, innovative LegalTech and legal analytics companies, legal process outsourcers, and the Big 4 – are going to push change-averse lawyers to re-imagine their practice, embrace innovation, and become more sales-oriented. Finally, the practice of law is going to move towards a tech-enabled, mass-customization profession where process management is going to be a paramount skill for attorneys. Law schools and law firms are going to have to train lawyers differently.

Professor Rapoport:

That part about training lawyers differently is key. There will always be a huge need for people who can think analytically and strategically, but the other skills that clients will need their lawyers to have will include an ability to understand the client’s budget for legal costs, some experience in project management in order to perform an engagement competently and efficiently, and the ability to have serious discussions with the client about the costs and benefits of taking certain actions. Law schools can no longer afford to assume that teaching law students substantive law is sufficient to prepare them for serving their future clients. We need to teach our law students to have a better understanding of the pressures facing clients.