Make Your Law Department into a "Profit Center" - "Chapter II"

Karin Stamy
Norfolk Southern Corporation

In our last issue, the newsletter described how a California court of appeals allowed a California corporation to recover legal fees for the work of in-house counsel.

On May 8, 2000, the California Supreme Court vacated the decision of the appeals court, and issued its own superseding decision, PLCM Group v. Drexler, 22 Cal.4^th 1084,95 Cal.Rptr.2d 198, 997 P.2d 511, 00 Daily Op. Serv. 3621 (May 8, 2000), with modifications at 2000 WL 709504 (June 2, 2000). The Supreme Court ruled that a prevailing corporate litigant, when represented by in-house litigation counsel, may recover a "market rate" attorneys fee award for lawsuits on contracts which include an attorneys fee clause. (Justice Chin, in a dissent, argued for a "cost-plus approach," i.e., the actual salary, costs, and overhead of in-house counsel.)

Two weeks after the California Supreme Court initially decided PLCM Group, the Utah Supreme Court similarly found that in-house attorneys fees are recoverable in cases involving contracts with fee provisions. Softsolutions, Inc. v. Brigham Young University, 200 UT 46, 2000 Utah Lexis 60, 396 Utah Adv. Rep. 14 (May 19, 2000). Unlike the California Court, however, the Utah Supreme Court employed the "cost-plus approach" to determine the appropriate fee amount. According to the Utah Supreme Court, a cost-plus fees award should be based on (1) the proportionate share of a in-house attorney’s salary, including benefits, allocable on a time expended basis, plus (2) an allocated share of overhead expenses, including office space, support staff, continuing legal education and other similar expenses.

Regardless of whether fees are calculated by a market-rate or cost-plus approach, the California and Utah Supreme Court decisions are good news for in-house practitioners and their companies who litigate contracts with fee recovery provisions in those states.

The attorneys who won the underlying case addressed in the California Supreme Court’s decision work in San Francisco. They are with the San Francisco based litigation department of a company, Aon Corp., which has subsidiary companies in insurance brokerage and human resources consulting. Laurie Falik, one of Aon’s in-house litigators, has been quoted as explaining,

"I can’t say this decision alone will cause a company to create an in-house litigation department if it didn't previously believe the efficiencies warranted it. But, more influential was the fact we could do all that work ourselves and we did do it, and I can assure anyone that we took less time than outside counsel would have taken." "Getting Respect," San Francisco Daily Journal: California Law Business, May 30, 2000.

(For a national survey of decisions on the recoverability of in-house fees, see footnote 5 of the Softsolutions, Inc. decision.)

Kim Lesniak, chair of the Corporate Counsel Committee, has suggested that the spiraling associate salary increases, which are expected to trigger increased billing rates, and the PLCM and Softsolutions decisions, may increase the pressure in some companies to shift more work to in-house counsel. If the work is tied to the "billable hour," such as Superfund defense litigation, the result may be a blurring of the quality of life distinctions that many in-house counsel point to as the reason to go into (and stay with) a corporate law department.

Jim Arnold assisted in this article.