Nov. 4 (Bloomberg) -- Lawyer Mark Peroff made a promise to the Japanese maker of the video game ``Final Fantasy'' when he moved to Hiscock & Barclay, a 200-attorney firm in upstate New York: I'll cut my legal fees if you follow me.

The answer from his Tokyo-based client Square Enix Holdings Co.: ``We're on board,'' according to Peroff, who works out of Hiscock's Manhattan office and says he's undercutting larger New York firms' hourly fees by up to 20 percent.

Companies including Square Enix, Shell Oil Co. and Fidelity Investments are trying to reduce legal costs after swallowing 6 percent to 9 percent annual fee increases over the last eight years, according to the Association of Corporate Counsel. Hourly rates should drop in 2009, given the decline in legal business with the economic slowdown, the Washington-based group said.

``As we start to see law firms slow down in response to the economic situation, general counsels are going to realize that their leverage is continuing to increase,'' said James Wilber, a Milwaukee-based consultant at Altman Weil who advises corporate legal departments. They likely won't accept automatic rate increases and will push for leaner staffing, he said.

Fidelity, the world's largest mutual-fund company, told outside attorneys in a May memo it expects a 10 percent discount from those charging the Boston-based firm more than $500,000 a year.

For those billing $1 million to $5 million, Fidelity wants a 12.5 percent price break, its top lawyer, Marc Gary, wrote in the memo.

Demanding Discounts

``This is nothing but prudent management of our relationships,'' spokeswoman Anne Crowley said, declining to elaborate. Gary didn't reply to requests for further comment.

Houston-based Shell wants law firms to maintain the same fees they've been charging, Carla Herron, the attorney in charge of litigation, said in an interview in New York.

``We have asked our outside counsel to hold the line because we think litigation costs are getting out of control,'' she said. If lawyers refuse to hold rates steady next year, ``that will influence our decision'' on business allocated to them, she said. ``Most firms cooperate.''

During Herron's eight years at the unit of The Hague, Netherlands-based Royal Dutch Shell Plc, outside firms have raised rates about 8 percent a year, she said.

Forgoing fee increases could shave 1 percent to 2 percent off revenue next year, according to Terry Conner, managing partner of Dallas-based Haynes and Boone, which he says will be up 7 percent to 10 percent.

Less Hiring

While he doesn't foresee the need to fire associates, his firm may cut hiring if the economy remains poor in 2009, he said.

``No firm is immune from the basic equation of supply and demand,'' he said. ``The rate piece is a significant component of revenue.''

Even with corporate backlash, many firms are still planning fee increases of 6 percent to 7 percent for 2009, said Andrew Johnman of Barclays Capital in New York, which lends to law partnerships.

``You would've thought firms would have backed off in this environment,'' he said.

Rate increases in recent years reflect rising costs, particularly in the competition for associates. Firms raised pay for salaried lawyers by 16 percent in 2006 and by 10 percent in 2007. Associate salaries held steady this year.

New law school graduates earn $160,000 a year in big New York firms. Some of them paid senior associates bonuses of as much as $115,000 last year.

`Stop the Madness'

The raises heightened tensions with companies over fees, said Susan Hackett, senior vice president of the Association of Corporate Counsel. Average company legal budgets in 2007 grew 10 percent to 15 percent, she said.

``It's a perennial problem, but I think the level of frustration hit a high-water mark with the raise of associate salaries,'' Hackett said. ``It's about saying, `Stop the madness.'''

The association launched an initiative in September to push law firms for lower rates and more efficiency. It will hold about 40 meetings between partners and in-house lawyers around the U.S., according to Hackett.

Clorox Co. intends to assign more legal work to staff lawyers rather than outside firms, said Laura Stein, general counsel of the Oakland, California-based maker of household cleaning products.

``It is really critical for us to connect value to needed legal services,'' she said.

In-House Expansion

Almost half of corporate legal departments planned to grow in 2008, compared with 40 percent last year, according to a June survey of 126 U.S. companies by Altman Weil. About one-fourth said they'd reduce the use of outside firms, compared with 16 percent last year.

While companies are beefing up legal staffs, Hiscock is cutting rates.

Peroff and Darren Saunders, both trademark litigators, defected from 1,700-lawyer K&L Gates earlier this year to start a Manhattan office for Hiscock after their former Pittsburgh-based firm raised rates twice in 2007, according to Saunders.

``We'll have more control and won't be subject to rate increases that strain client relations,'' said Saunders, 48.

The attorneys opened the office with five others from several firms including 1,750-lawyer Greenberg Traurig, based in Miami, and 700-attorney Sonnenschein Nath & Rosenthal, based in Chicago.

Lower Overhead

``They were able to give a discount right out of the box,'' said Hiscock's managing partner, John Langan. ``The clients loved it, and we still make a very good profit on that.''

Hiscock fees range from $500 to $750 an hour, versus up to $950 at larger New York firms. Peroff, 60, was charging clients such as Square Enix $725 at K&L, which planned another 10 percent increase this year, he said.

The switch to Hiscock was confirmed by Square Enix in an e-mail from Hiroshi Haradi of the company's legal and intellectual property division. Peter Kalis, chairman of K&L Gates, declined to comment.

Hiscock's largest offices are in Rochester, Syracuse, Buffalo and Albany, New York. The firm can afford reduced fees in Manhattan because of lower costs outside of New York City, according to Langan.

``Our rent space in Upper New York is a fraction of what it is in the city,'' he said. ``Since we can run our business with a much lower overhead, we can allow our partners in New York to bill at a lower rate.''

Nontraditional Firms

Other nontraditional law firms are taking advantage of the economic downturn. Axiom Global Inc., a service which sends its lawyers to work at corporations temporarily, is on track to exceed its 2007 gross revenue of $40 million by 40 to 50 percent, Chief Executive Officer Mark Harris said.

Axiom charges clients, which according to its Web site have included American Express Co. and JPMorgan Chase & Co., a maximum of slightly more than $200 an hour, Harris said.

Hiscock and Barclay has previously represented Bloomberg News in Freedom of Information cases and access to court documents.

To contact the reporter on this story: Carlyn Kolker in New York at ckolker@bloomberg.net; Lindsay Fortado in New York at lfortado@bloomberg.net.

Last Updated: November 4, 2008 12:30 EST