When should you fire your outside counsel?

In the business world, it’s often a good idea to cut your losses by firing suppliers when you are dissatisfied with the service they provide. When that service provider happens to be a law firm, however, a little extra thought might be prudent. General counsel often wonder if firing outside counsel might somehow get them burned, but if it’s done right you can avoid potential legal liabilities, even in today’s litigious environment.

Lee Cusenbary, general counsel for San Antonio-based drug manufacturer Mission Pharmacal, is a one-man legal shop, so he hires outside counsel regularly and relies on them heavily. His relationships with outside counsel are incredibly valuable because there is only so much legal work he can handle by himself. Any outside counsel he hires must deliver stellar work and be extremely reliable, because Cusenbary doesn’t have the manpower to help him fix any problems caused by their work. ‘I’m a client so if I don’t want to use them, I don’t have to,’ he says.

While this is true, once you do decide to use outside counsel, you have to stick with whatever agreement you sign. Experts therefore caution general counsel to do extensive due diligence on law firms before entering into agreements with them in order to make sure they can do the work required, thereby decreasing the possible need to terminate.

Liability for firing outside counsel

According to the American Bar Association’s (ABA) Model Rules of Professional Conduct, a potential for liability exists whenever a client-lawyer relationship has been terminated, even when the client is a legal entity or attorney. Rule 1.16 of the Model Rules places common-sense requirements on an attorney severing a professional relationship with a client, such as requiring the lawyer to give the client ample notice of the termination. However, it does not address situations where it is the client doing the terminating.

It is standard practice for corporate law departments to utilize written retention agreements when formalizing a relationship with outside counsel, says Michael Baroni, general counsel and corporate secretary of Palace Entertainment. However, many retention agreements don’t address liability issues that could arise when outside counsel is terminated.

Generally, liability can arise when, in terminating the outside firm, general counsel violates the terms of the retainer agreement. An example of this is if the company has agreed to pay outside counsel a monthly fee for a specified period of time – even if the contract is terminated, the payment agreement may still be enforceable.

The terms of the retention agreement are key when severing outside counsel relationships. For that reason, if a retention agreement includes references to potential liability for malpractice, Baroni says he won’t trust it.

‘There’s no real power to draft an anti-malpractice section in a retention agreement,’ he says, because if malpractice occurs, it is dealt with using appropriate methods such as pursuing legal action against the offender.

However, Baroni notes that he has never filed a malpractice action against a firm, even when its work has been suspect. ‘I find it best just to walk away from the relationship,’ he says.

Is walking away or firing best?

In fact, most general counsel will opt to let the business relationship with outside counsel end when the case ends. For example, Cusenbary says he rarely ceases the relationship mid-litigation due to the expense associated with the hiring of new counsel, ‘but if I am displeased, I will not rehire a firm.’

Additionally, he cautions general counsel against firing legal counsel in the middle of a case. ‘My concern is hurting the case by changing counsel during the middle of discovery,’ he explains. ‘New counsel will have to learn all the history behind the case and learn the witness’s testimony.

There is a balance that has to be struck between finding more appropriate litigation counsel and the probability of doing better in the long run by sticking it out with unresponsive or overbilling attorneys.’

That said, there will be times when outside counsel will be fired. When Baroni was hired two years ago as Palace Entertainment’s general counsel, he personally met with the outside counsel firms that were handling most of the company’s litigation. What he found was that at least one law firm lacked control over Palace’s legal matters and case facts. Although that firm had provided legal counsel to Palace for decades, Baroni terminated the professional relationship.

‘I was appalled at the complete lack of respect they showed me as general counsel,’ Baroni recalls. ‘They kept me waiting 45 minutes, padded their bill and showed a general lack of interest.’

Baroni felt that as general counsel, firing the firm was necessary because it wasn’t meeting its ethical obligations or the ABA Canons pertaining to demonstrating a certain level of care towards its client. ‘You can’t let outside counsel run free and go wild,’ Baroni says.

Reputation matters

Some experts believe there is very little to fear with regard to firing outside counsel because these companies’ reputations and ability to get additional work would be negatively affected if they sued corporate counsel. Indeed, these types of lawsuits are very rare.

‘It would be bad for the firm’s reputation,’ says Cleveland attorney Gregg Eisenberg, a partner with Benesch Friedlander’s corporate and securities practice group and a member of the firm’s executive committee.

Eisenberg, who also believes that ‘not calling back is probably a good way to deal with poor performance’, feels there are other steps general counsel can take to reduce potential liability when firing outside counsel. For example, he advises corporate law departments to utilize ‘open-ended’ engagement letters when retaining outside counsel.

To keep the relationships with the private firms hired by general counsel positive, he suggests that general counsel conduct timely reviews of invoices submitted by outside counsel as well as maintaining open lines of communication with them. He points out that lack of competency, lack of responsiveness and billing errors are the three top reasons a professional relationship is terminated.

‘The job of outside counsel is to make the inside counsel a star,’ says Eisenberg, ‘so outside counsel should be a star to its client.’