The Role of Outside Counsel  - ADR Times (2024)

Legal spending by corporations will almost certainly continue to tighten in 2022. The days of unlimited corporate legal budgets have been gone for some time, as companies have worked to rein in their legal spending in the face of skyrocketing costs. These efforts have taken many forms. The key to many of the cost-cutting measures is increasing certainty in billing schemes.

These measures include increased use of alternative dispute resolution to end costly disputes quickly, the use of flat fees and other non-hourly billing arrangements, insistence on detailed litigation budgets, intensive bill review to eliminate duplication of effort and bill padding, greater use of technology, and the increased use of legal operations personnel, who support legal department functions without performing any legal work themselves, with a primary focus on greater efficiency. The Association of Corporate Counsel (ACC) reports that sixty-one percent of corporations now have at least one dedicated legal operations specialist.

Another way costs have been reduced is to use fewer outside law firms and put more varied tasks on the shoulders of the in-house legal department, whose lawyers cost a predictable amount no matter what tasks they perform. The results of a 2021 ACC survey showed that corporate legal departments are also being asked to perform functions in non-legal areas, such as risk management, data security, public affairs and communication, internal audits, human resources, and even physical security.

It is not surprising that in a time of expanding responsibility, a third of corporate legal departments expect to add attorneys in the coming year. What is more surprising, given the drive to bring business in-house, is the ACC’s finding that corporate legal departments also expect to increase spending on outside counsel. (“Outside counsel” simply means attorneys working with a business who are not its employees).

Why pay outside counsel at all? What advantages do non-employee attorneys bring to a business, and when should they be used?

The complexity of the legal environment

Theoretically, a license to practice law authorizes its holder to handle any kind of case, from capital murder to landlord-tenant disputes and everything in between. As a practical matter, this does not happen. Nor should it. The law is simply too complex to be competent in, let alone master, its entirety.

By one count, there are fifteen general areas of law:

1. Intellectual property law

2. Tax law

3. Employment law

4. Bankruptcy law

5. Real estate law

6. Contracts law

7. Family law

8. Criminal law

9. Commercial law

10. International law

11. Corporate law

12. Civil rights law

13. Environmental law

14. Personal injury law

15. Labor law

In reality, there are many more specialties and sub-specialties that can and do keep entire law firms busy.

Attorneys specialize in order to make the necessary task of keeping up with changing laws and regulations manageable. But as the name implies, corporate general counsel must deal with a broad range of topics that vary with the daily events of business. Is a major shareholder getting divorced? Family law issues may impact operations. Criminal penalties can be imposed on corporate parties for the actions of their agents, leading to fines, forfeitures, the prohibition against engaging in certain commercial activities, and

probation. Hiring non-citizens raises immigration issues, and shipping goods by the sea brings up maritime law. In short, a corporation may need advice in a great many areas of the law. If they come up often enough, in-house counsel will learn about them or someone will be hired to handle them. If they don’t, outside counsel will be retained.

Workflow issues

Often, outside counsel will serve as general counsel for a corporate client when the existing work does not justify taking on the financial burden of providing salary and benefits for a corporate legal department. This is a common situation for start-up businesses, which may not have much legal work immediately after their formation, especially if they are able to use form contracts and other one-size-fits-all documents. This strategy may cost three or more times per hour for legal work, as the national average salary for in-house corporate attorneys is $237,000, or $118 per hour, while $300 to $400 per hour is quite normal for attorneys billing outside rural areas. Rates can exceed $1,000 per hour for partners in major urban firms. So the decision whether to build in-house capability or use outside counsel rests largely on the volume of legal work and the related cost of benefits, support staff, and other overhead.

Even if a company establishes its own legal department, certain events will necessitate the help of outside counsel. Some legal situations simply require too much work in too

Legal spending by corporations will almost certainly continue to tighten in 2022. The days of unlimited corporate legal budgets have been gone for some time, as companies have worked to rein in their legal spending in the face of skyrocketing costs. These efforts have taken many forms. The key to many of the cost-cutting measures is increasing certainty in billing schemes.

The Role of Outside Counsel

These measures include increased use of alternative dispute resolution to end costly disputes quickly, the use of flat fees and other non-hourly billing arrangements, insistence on detailed litigation budgets, intensive bill review to eliminate duplication of effort and bill padding, greater use of technology, and the increased use of legal operations personnel, who support legal department functions without performing any legal work themselves, with a primary focus on greater efficiency. The Association of Corporate Counsel (ACC) reports that sixty-one percent of corporations now have at least one dedicated legal operations specialist.

Another way costs have been reduced is to use fewer outside law firms and put more varied tasks on the shoulders of the in-house legal department, whose lawyers cost a predictable amount no matter what tasks they perform. The results of a 2021 ACC survey showed that corporate legal departments are also being asked to perform functions in non-legal areas, such as risk management, data security, public affairs and communication, internal audits, human resources, and even physical security.

It is not surprising that in a time of expanding responsibility, a third of corporate legal departments expect to add attorneys in the coming year. What is more surprising, given the drive to bring business in-house, is the ACC’s finding that corporate legal departments also expect to increase spending on outside counsel. (“Outside counsel” simply means attorneys working with a business who are not its employees).

Why pay outside counsel at all? What advantages do non-employee attorneys bring to a business, and when should they be used?

The need for independence

When an employee is accused of wrongdoing, the company has a legal obligation to engage in an immediate investigation to determine what occurred and take timely and appropriate corrective action. Typical situations are reports of discrimination or harassment, bribery, or theft. To ignore the complaints may expose the company to liability and possible violation of state or federal law. Especially when the legal department’s role has been expanded into business planning and other areas beyond legal advice, its internal investigation may be seen as biased by its obligations to protect the company, opening it up to charges by both accused and accuser. In this context, it is best to retain independent outside counsel to perform the investigation, report, and recommend actions in response to the alleged misconduct.

Outside counsel plays an important role in corporate legal operations, even during efforts by management to control costs. Its prudent use can provide specific expertise, needed assistance when workflow demands it, and the assurance that the required investigation will be performed in an unbiased way when needed.