December 30, 2018

Does an O'Melveny lawyer's profit motive interfere? (Please let me tell you about "margin")

       A month ago, a tweet made its way around the internet. In it, a young woman described a chilling ordeal she went through after allegedly being raped. It’s the sort of thing that causes you to step back and question what sort of society we live in.

       According to her tweets, this young woman overcame significant adversity and got into Harvard University of all schools. Back in 2014, she was allegedly sexually violated by a man at her school. Distressed by the aftermath, she tried to seek help from the school. Disappointed with Harvard's response to her requests for help, she sacrificed even more of her life to sue the school, demanding a jury trial raise to "raise awareness about what she described as Harvard’s inadequacy in handling sexual assault cases."

       I remember hearing of fights at O'Melveny over which partner gets a client's "margin." Margin is the difference between what non-partners are billed out at and what they are paid, less another small amount for overhead. For example, a third-year associate might be billed out at $600+ an hour, but they are paid $110-140 or so an hour, with another $150-$200 or so going to overheard. That excess ($600 minus $140 minus $200) is called the margin.

       Some law firms are “lockstep,” meaning that partners share profits based on seniority. But O’Melveny was an “eat what you kill” firm, meaning that partners had to fight with one another to see who gets the margin. Ostensibly, the margin went to the partner who most deserved it, i.e. the partner who sold the work (that's kind of a big sales commission though, isn't it?) But in reality politics played a role. Sometimes the fights over margin were career-ending. I heard of two promising careers that died because a person with less political power fought for margin.

       Margin is the raison d'être for partners. There is even a website where firms rank each other according to how much margin their partners made. The press often talks about partners' $1,000+ per hour billing rates, but that's small potatoes. The real game is margin. Why get excited about earning $1,000+ for an hour of work, when you can earn $1,500 of margin for five hours of someone else’s work? Margin is the business model. It's why they're there, what gets them up in the morning, and the end all and be all. Businesses are best summarized by their management's dreams. Here, the dream was to have a rich client get involved in a massive legal matter, e.g. a lawsuit or a government enforcement action. Then they could have a bunch of attorneys billing hours, and flooding the partners' accounts with margin.

       And O’Melveny made a fortune off of this young woman’s ordeal. To make sure she never got her requested jury trial, O'Melveny spent two and a half years raising every technicality and preparing thousands of pieces of paper (the docket shows 150 separate court filings). Eventually, on June 26, 2018, they got the court to dismiss her case via a summary judgment order. Basically, it wasn't Harvard's fault that she felt uncomfortable and harassed at the school, because she was hesitant and not aggressive enough. She did not immediately use some options. She waited a bit before doing this and that, and so on. She appealed to the First Circuit, but later she abandoned the case. Ironically, in light of all the money made off of her, it appears as if she abandoned the case for financial reasons. I say this because the only thing she received in exchange, was the other side's agreement to not sue her for costs.

       I don't know anything about what happened to this young woman. But had I worked on the case, I would have advised Harvard that she probably did not come to their school to contrive trauma and sue them. Something probably happened to throw her life off its normal path. I would have recommended some sort of quick solution, with the goal of ensuring that nothing is added to her haunting memories. In my opinion, that would have been best for Harvard and for the young woman.

       The problem with such advice, is that lawyers can’t make money via quick resolutions. I've heard of lawyers using rhetoric such as, "this is an important question" or "you have to teach the other side a lesson" -- to convince their client to litigate extensively and pay more, in legal fees, than the other side requested in damages -- only to ultimately lose what was a bad case from the start.

       This all begs a question – since margin is at the forefront of every partner's thoughts, should it be disclosed? Should what are essentially sales commissions, markups on labor, and multi-level marketing scheme payments be separated out as their own line item on bills? Let me give an example.

       Currently, a bill might look like this:

o'melveny profits per partner

        Should it look like this instead? 

       Firms do this calculation internally to see how to split the funds among the partners, associates and overheard, so why not share this information with the client and, when bills must be filed with the courts, share this information with the public? In this case, 20% of the bill is a sales commission to Partner A for "selling the work" ($135,000 / $680,000 = 20%) and 7% of it is a payment to politically powerful partners who were not involved in the matter, reminiscent of a multi-level marketing scheme ($47,500 / $680,000 = 7%).

       Ultimately, lawyers are there to do what is best for their clients and, perhaps more generally, to make the public feel that society is run fairly, and that justice is or will be done. Partners’ profit motive might interfere with these goals. I don't know the solution to this problem -- or the bigger problem of runaway legal costs -- but greater discussion and disclosure might be a start.