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Óctober 30, 2008 - text has been modified to remove typographical errors..

'Smaller' Client Claims Reed Smith's Big-Client Focus Led to Inflated Bills

Gina Passarella
The Legal Intelligencer
December 4, 2007

It is not uncommon to see international firms shed practice areas or attorneys that do not fit in with their economic models. But one client is arguing that maybe it is professional negligence for those firms tokeep their smaller clients.

The high demands on partners in global law firms to increase profits,the client said, ultimately led to its claims of professional negligence against Reed Smith. The religious nonprofit alleged it was excessively charged for its legal representation in a routine employment discrimination case, according to the complaint in The Bair Foundation v. Reed Smith.

And the nonprofit's attorney said he thinks these large firms shouldn't represent the smaller organizations.

The Bair Foundation, described in the complaint as a Christian charitable foundation devoted to foster care for children, sued Reed Smith in Lawrence County Common Pleas Court in Pennsylvania after it was allegedly charged nearly $1 million in legal fees and costs in defense of the suit.

The Bair Foundation brings claims of breach of contract, breach of fiduciary duty, legal negligence, fraud and unjust enrichment.The foundation said in the complaint that it was originally told the case would cost them $50,000. That was then upped to $112,000 during the case. The final price tag in legal fees and costs for the litigation,which the foundation ultimately lost, was $960,409, according to the complaint.

"In implementing its ambitious strategy of capturing global clients,which Reed Smith boasts results in 'a constant increase in revenue per partner,' it has acknowledged that comparatively small regional or local law firms can or perhaps should service smaller clients," the complaint stated. "This is so because such firms typically charge much lower fees than 'white shoe' international law firms like Reed Smith and are therefore more affordable to these smaller clients. However, Reed Smith has inexplicably continued to represent certain much smaller clients which lack substantial financial resources, such asBair, a not-for-profit charitable foundation."

The foundation's attorney, Bruce C. Fox of Obermayer Rebmann Maxwell & Hippel in Pittsburgh, said no explanation was ever given as to why the fees increased to nearly $1 million. He said his client was "badly taken advantage of."

Fox said he doesn't think large, international firms should representclients like the Bair Foundation because of global law firms' economic models.

Reed Smith has had an enduring relationship with the Bair Foundation during which it has always provided competent and effective legal counsel," the firm's counsel, William Pietragallo II of Pietragallo Bosick & Gordon in Pittsburgh, said in a statement. "The reality is that the foundation's insurance paid most of the legal fees in this case without question or complaint. Inevitably time allows the truth to surface. When it does, Reed Smith will prevail."

The complaint alleges that Reed Smith took advantage of Bair's lack oflegal sophistication by engaging in "inappropriate billing practices."These allegations included overstaffing of the case, failure to describe billing entries by subject matter or activity, secretly raising the rates of the lawyers billing Bair and billing at rates that exceeded what was promised, according to the complaint.

The complaint also alleges that Reed Smith failed to advise Bair to notify its insurance carrier of the discrimination suit. The carrier originally rejected any claims by Bair because of the failure to notify, but ultimately agreed to pay a portion of the defense costs and indemnification.

According to the complaint, Reed Smith charged Bair an additional $26,660 to negotiate with the insurance carrier. The complaint further alleges that Reed Smith failed to raise certaind efenses that Fox said would be obvious to anyone who practices employment law. One example was the use of the Religious Organization Exemption as a defense, the complaint stated. Reed Smith neglected to bring that defense or to raise the point that one of the plaintiffs in the underlying suit had recently filed for bankruptcy, according to thecomplaint.

Reed Smith had done work for Bair in the past and had built a trusting relationship, the foundation said in the complaint, but then the firm took advantage of the trust.

"Circumstances were ideal for churning because there were two checkwriters splitting the cost of Reed Smith's legal fees," according to the complaint. "Because the cost of defense was shared between Bair and AIG, neither had especially strong incentives to carefully monitor ReedSmith's legal bills, to question or criticize Reed Smith's opaque and unspecific time entries, or to otherwise manage and control Reed Smith's overstaffing of the case and excessive billing."

The Bair Foundation is based in Lawrence County on the Pennsylvania-Ohio border and has a location in Ohio, where Reed Smith represented the organization in the discrimination suit.

The underlying suit was brought by two employees of the foundation in the U.S. District Court for the Northern District of Ohio. They claimed religious discrimination and Bair hired Reed Smith to defend the claims because the firm had represented the foundation in similar matters before, according to the complaint. Reed Smith has also represented Bairin small matters involving Bair's status as a charitable foundation.

Fox said he expects an answer to the complaint in January.

Copyright 2008 ALM Properties, Inc. All rights reserved.

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