McAfee's suit against WilmerHale for allegedly improperly inflating its legal bills appears headed toward dismissal, further illuminating the hurdles that companies and D&O insurers face in resisting excessive defense bills.

McAfee previously filed suit against Wilmer Cutler Pickering Hale & Dorr LLP (now known as WilmerHale) in the United States District Court for the Eastern District of Texas, alleging that the firm performed unnecessary legal work in order to improperly inflate its legal bills. McAfee had retained WilmerHale to defend McAfee's former CEO, Prabhat Goyal, in a criminal securities fraud action that ultimately resulted in Mr. Goyal's conviction. A few months prior to Mr. Goyal's conviction, McAfee employed a legal audit firm, Legal Cost Control, Inc., to review WilmerHale's bills. Based on the results of this audit, McAfee asserted that WilmerHale's bills, which totaled approximately $12 million, were excessive, principally citing the law firm's employment of 50 attorney and 59 non-attorney timekeepers.

On July 17, 2008, WilmerHale moved to dismiss the case on several grounds, including that Mr. Goyal's indemnification agreement required the dispute to be heard in Delaware state court. In a minute order dated July 24, 2008, the court indicated that it would enter an order dismissing this case because (1) the matter was not ripe, (2) venue was improper, and (3) the plaintiffs had failed to state a cause of action.

As the costs of defending securities-related civil and criminal litigation continue to increase, McAfee's action against WilmerHale is illustrative of the problems corporations and their D&O insurers may face in challenging the legal fees submitted by defense counsel. Specifically, if McAfee pursues this litigation in an alternative forum, it will bear the burden of proving Wilmer Cutler's alleged misconduct, which likely will require substantial (and costly) discovery. The expense of bringing and maintaining litigation to challenge defense fees in many cases renders such litigation untenable, particularly where the sole basis for such an action is the allegedly excessive ultimate cost of the representation and where the possibility of obtaining evidence of wrongful conduct during discovery is questionable.

In addition, a company’s indemnification obligations to its former officer arises out of state law and the corporation's articles of incorporation or by laws, as well as, potentially, an indemnification agreement with the officer. Any pressure a corporation might place on defense counsel to reduce legal costs incurred on behalf of an officer or director arguably constitutes a breach of the applicable indemnification agreement to the extent that such pressure interferes with defense counsel's ability to provide an adequate defense. D&O insurers can face similar difficulties in challenging legal fees incurred on behalf of insureds given the concerns over potential allegations of bad faith spurred by such a challenge.

Nevertheless, it appears that corporations and insurers can improve their chances of limiting litigation costs through careful and contemporaneous monitoring of defense counsel and by clearly setting expectations at the outset of the representation, through, for example, the use of clear billing guidelines. If McAfee pursues its litigation in Delaware state court, it is unclear whether it will ultimately prevail on its claim that WilmerHale's employment of more than 100 timekeepers was improper. However, had McAfee addressed WilmerHale's staffing of the litigation at an earlier stage, that would have, at a minimum, required WilmerHale to explain or justify its staffing decisions and, in addition, would have sent a signal to WilmerHale that McAfee was closely examining its legal fees.

A copy of McAfee’s Third Amended Complaint can be found here.