Transcript Alternative Fees: Aligning the Interests of Lawyer and

Alternative Fees:
Aligning the Interests of
Lawyer and Client
Texas Lawyer In-House Counsel Summit
March 27, 2014
Alternative Fees
What are “Alternative Fees”
“Alternative Fees” means any fee arrangement other
than straight hourly billing.
Examples of Alternative Fees:
• Fixed Fee (Project-based)
• Recurring Flat Fee
• Contingent Fee / Success Bonus
• Blended Fees
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Alternative Fees
Status of Alternative Fees
According to a 2012 comprehensive survey of 218 large law firms
and 206 corporate legal departments:
• 99% of law firms and 72% of corporate legal departments
reported using alternative fees for some legal work.
• BUT: Only 6% of law firms reported that more than half of
their revenue was generated from alternative fees.
• 67% of law firms reported that alternative fees accounted for
less than 25% of their fees.
• Only 12% of corporate law departments reported that more
than half of their legal fees were alternative fees.
Source: “Speaking Different Languages: Alternative Fee Arrangements for Law Firms
and Legal Departments,” ALM Legal Intelligence (April 2012).
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Alternative Fees
Hourly Fees – History
• Hourly billing did not become the predominate legal
fee model in the United States until the 1970s.
• In the early days of American legal history, lawyers
inherited from English legal practice a system of
highly-regulated legal fees.
• Many states adopted statutory legal fee schedules.
• In the 1800s, legal fees increasingly became
deregulated, along with other sectors of the economy.
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Alternative Fees
Hourly Fees – History
• Until the 1960s, most lawyers did not keep detailed
time records.
• Instead, bills were often sent at the completion of a
legal matter and were loosely based on factors such as
the time involved, difficulty of the work, results
achieved, etc.
• Many bar associations adopted standardized fees
schedules and the applicable rules of ethics often
contained lists of factors to be considered in
determining the appropriate legal fee to be charged.
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Alternative Fees
Hourly Fees – History
• In the 1970s, hourly billing became the predominate
legal fee model.
• Popular legal management studies concluded that
lawyers who kept detailed time records made
more money than lawyers who did not.
• Time records allowed clients to better appreciate
the effort required to accomplish a legal task.
• More detailed time records seen as a way to justify
a larger fee.
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Alternative Fees
Hourly Fees – Advantages
• Lawyers and clients are accustomed to hourly billing.
• Hourly rates allow for comparisons between lawyers
and firms.
• Allows for expeditious retention of a lawyer or firm.
• Detailed billing statements allow client to closely
monitor the lawyer’s work, and can facilitate better
communication.
• Provides an “objective” fee – no disputes over “value”
or “results” after-the-fact.
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Alternative Fees
Hourly Fees – Disadvantages
• Hourly fees create a misalignment of economic
interests between lawyer and client.
• Lawyers receive a larger fee if they work more
hours. Inefficiency is rewarded.
• Lawyers have no direct economic incentive to seek
an early resolution of a case or legal matter.
• Lawyers have no incentive to find ways of being
more efficient (such as legal process outsourcing).
• The lawyer is not economically invested in
achieving a successful result.
• The legal fee charged may have no relation to the
value of the services to the client.
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Alternative Fees
Hourly Fees – Disadvantages
• Hourly legal fees tend to be unpredictable. Budgeting
is difficult for both law firm and client. The more
complex the matter, the more difficult it is to budget.
• Legal cost control requires constant vigilance and
attention by the client and law firm to create and
enforce budgets.
• It also requires effort by the law firm to document
client-imposed restrictions on budget (“CYA”).
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Alternative Fees
Hourly Fees – Disadvantages
• Hourly fees put all of the risks and burdens on the
client.
• Client must enforce budgets.
• Client must ensure that hours are devoted to
highest priority tasks.
• Client must police lawyer inefficiency.
• Client pays same legal fee regardless of outcome or
results achieved.
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Alternative Fees
Example of Economic Misalignment
Assume your company is sued for patent infringement by
a patent troll in the Eastern District of Texas.
• You engage a law firm on an hourly fee basis.
• You have reason to believe the plaintiff is being
represented by contingent fee attorneys.
Economic Incentives:
• Your company: minimize legal spend and exposure.
• Defendant’s Counsel: maximize hourly billing.
• Patent Troll: maximize your cost of defense.
• Plaintiff’s counsel: efficiently get the case to a
settlement opportunity.
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Alternative Fees
Example of Economic Misalignment
You have a defense based on invalidity of the patent that could be
brought with an early summary judgment motion. But, to bring the
motion early would require a modification to the Court’s procedural
rules to allow the early MSJ.
• Defendant’s counsel is unlikely to suggest a modification to
the default procedures because it could lead to an early
termination of the case.
• Plaintiff’s counsel is also unlikely to suggest a modification to
the default procedures (but may go along if the modification
is suggested by Defendant).
• Onus is on the Defendant (client) to insist that counsel
propose the modification and fight in court for the
modification if necessary.
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Alternative Fees
Example of Economic Misalignment
The attorneys are negotiating discovery limits, such as the number of
requests for production, electronic discovery limits, etc. The default
rules are for unlimited RFP’s and full e-discovery.
• Defendant’s counsel is unlikely to suggest limits on discovery.
Document review / production provides for easy billable
opportunities with little accountability.
• Plaintiff’s counsel is also unlikely to suggest discovery
modifications (although they might agree if there were
assurances that limited discovery could be more targeted).
• Onus is on the Defendant (client) to insist that counsel
propose discovery limitations.
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Alternative Fees
Fixed Fees
“Fixed fees” are a sum certain for accomplishing a
project or a task. Traditionally used for routine or
commoditized legal tasks.
Examples:
• Draft a will
• Traffic tickets
• Title search
• Divorce
• Name change
• Patent prosecution
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Alternative Fees
Fixed Fees
Advantages
• Budgeting certainty
• Shifts the budgeting risks to lawyer
• Creates incentives for efficiency
• Price matches value
Disadvantages
• Difficult to price for large or complex matters
• Difficult to apply to litigation matters
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Alternative Fees
Flat Fees
“Flat Fees” typically refers to a recurring sum certain fee
for handling a matter or collection of matters.
Examples:
• Flat monthly billing for litigation
• Bulk rate billing for handling a collection of matters
Flat fees can be phased or tiered to reflect anticipated
changes in the work over time.
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Alternative Fees
Flat Fees
Advantages
• Budgeting certainty
• Shifts the budgeting risks to lawyer
• Creates incentives for efficiency
• More adapted to complex or long-term engagements
• Easy to compare settlement options to the costs of
continued litigation
Disadvantages
• Potential for economic misalignment
• Law firm lacks incentive to work hard if the fee is the
same
• Law firm not incentivized to seek early resolution
• Fee does not always match value (especially in short term)
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Alternative Fees
Success Fees
“Success Fees” represent a fee that is paid to the lawyer
only if a success event is achieved.
Examples:
• Contingent fee – lawyer receives a percentage of
recovery
• Reverse contingent fee – lawyer receives a
percentage if damages exposure held below a
defined amount
• Defined success bonuses (Examples: Dismissal of
case, settlement below a defined threshold,
closing of a transaction, issuance of a patent, etc.)
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Alternative Fees
Success Fees
Advantages
• Maximizes incentives to achieve the objective
• Fee should almost always match value
• Creates incentives for efficiency
• Shifts risks of success to lawyer
Disadvantages
• Difficult to adapt to defense-side litigation
• Limits pool of potential lawyers
• Delays ability to retain a lawyer (due diligence)
• If not structured properly, can lead to economic
misalignment
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Alternative Fees
Aligning Economic Incentives
Your company is sued by a patent troll in the Eastern
District of Texas.
• As GC, you may be inexperienced in patent
litigation.
• You are interested in exploring an early settlement
if it can be achieved lower than the cost of
defense.
• If settlement is not possible, you want to defend
aggressively. But, at this time, you do not have a
good grasp on your defenses or a fully formed case
strategy.
What are your options for an alternative fee?
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Alternative Fees
Aligning Economic Incentives
Fixed fee – Unlikely that lawyer and client can agree on a lump sum
to handle the entire matter.
• Client unwilling to commit to pay full litigation fee if case
may settle or be dismissed early.
• Law Firm unwilling to take a smaller fee but commit to
handle the case through trial.
Flat fee (monthly) – Client can hire counsel on this basis, but
incentives not aligned. Law Firm has no incentive to seek early
resolution, and no incentive to work the case aggressively if monthly
fee is fixed.
Pure success fee – Most lawyers will not handle defense case on this
basis. Would require care in defining success events.
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Alternative Fees
Aligning Economic Incentives
Hybrid Fee:
• Fixed fee for case through scheduling conference. Includes:
• Early case assessment
• Settlement negotiations
• Indemnity
• Answer and 26(f) conference
• Phased flat monthly fee, beginning with 16(b) conference
• Fee for litigation through claim construction hearing
• Step-up in fee after claim construction
• Step-up in fee 30 days before pre-trial conference
• Flat fee for each day of trial
• Success bonus
• Defined as a function of a “hold back” from flat fees
• Different multiples of hold back for various success
events
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Alternative Fees
Early Case Assessment
The “Early Case Assessment” is the most important legal
spend on litigation matters. It gives you the information
you need to make important strategic decisions regarding
every aspect of the case.
• Litigation strategy
• Allocation of resources
• Discovery plan
• Settlement economics
• Engagement of counsel
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Alternative Fees
Early Case Assessment
The Early Case Assessment should be a deliverable memo
that includes at least the following:
• Assessment of the strengths and weaknesses of
the plaintiff’s case
• Identification and assessment of potential
defenses
• Damages assessment
• Litigation strategy alternatives
• Discovery strategy
• Indemnity / Insurance coverage assessment
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Alternative Fees
Early Case Assessment
Advantages of the Early Case Assessment:
• Forces strategic thinking early in the litigation
• Capable of “fixed fee” pricing
• Allows you to get to know new counsel without
long-term commitment
• Deliverable memo is useful even if law firm is not
retained long-term
• Information is useful both in early settlement
negotiations and also in conducting the litigation
• Law firm able to more creatively approach
alternative fees after completing ECA
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Alternative Fees
Legal Process Outsourcing
Outsourcing of various legal processes to compliment
alternative fee structures:
• Practical considerations due to the explosion of
outsourcing
• Protection for quality assurances, confidentiality
and informed consent, and reasonableness of fees
• Why in-house counsel should care
• How outside counsel can incorporate with
alternative fees
• Common strategies
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Alternative Fees
Practical Considerations in Legal Outsourcing
• In 2008, ABA issues opinion detailing lawyer
responsibilities when outsourcing legal work either
domestically or internationally.
• ABA formal ethics opinion 08-451 (Aug. 5, 2008):
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Alternative Fees
Practical Considerations in Legal Outsourcing
• Quality Assurances – U.S. based contract attorneys
or paralegals or non-lawyers. Lawyer duty to
“supervise” to ensure competency. (Model Rules
5.1, 5.3).
• Quality Assurances – Foreign based lawyers or
paralegals or non-lawyers. Additional duties.
Assess training in foreign jurisdiction, foreign
ethical rules, securitize work-product, and assess
foreign legal jurisdiction generally. (Model Rule
1.1).
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Alternative Fees
Practical Considerations in Legal Outsourcing
• Client Informed Consent – may be necessary for
outsourcing lawyer to inform client and may get
informed consent. How much supervision is there?
Client may have a veto. (ABA ethics opinion 88356).
• Protection of Confidential Information – Lawyer
duty to minimize disclosure to others subject to
lawyer’s supervision. Execute written
confidentiality agreements. Ensure no conflicts by
outside service provider. (Model Rule 1.6).
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Alternative Fees
Practical Considerations in Legal Outsourcing
• Reasonableness of Fees – fees charged must be
reasonable and comply with Model Rule 1.5. If
passed through to client, no markup is permitted.
• Unauthorized Practice – mindful to not permit
unauthorized practice in various jurisdictions.
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Alternative Fees
Why In-House Counsel Should Care
***
ABA Op. 08-051 at 2.
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Alternative Fees
Why In-House Counsel Should Care
• Since 2008, an explosion of outsourcing.
• India has emerged as a top foreign outsourcing
venue – UK or US trained lawyers and non-lawyers;
English common law.
• Legal process outsourcing to India estimated
statistics:
⁻ $699 million in 2012
⁻ $880 million in 2013
⁻ $1.109 billion in 2014
Source: http://www.bpmwatch.com/knowledgebase/lpo/lpo-markettrends-and-growth-figures-20111028/
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Alternative Fees
Outside Counsel Can Incorporate with Alternative Fees
• Reluctance by U.S. law firms to “outsource.”
What’s the incentive? Are firm and client interests
aligned?
• How to chose the right service provider?
⁻ India alone now has an estimated 200 legal
process outsourcing providers.
⁻ U.S. presence?
⁻ India delivery centers?
⁻ ISO processes or certifications?
⁻ Established client base (corporation or law
firm)?
⁻ Range of services? Legal services “core”?
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Alternative Fees
Outside Counsel Can Incorporate with Alternative Fees
• Early case assessment – is the case presented ideal
for outsourcing certain tasks (i.e, form drafting,
diligence, document review and coding,
intellectual property services such as prior art
searches or claim charting infringement, ediscovery tools).
• Alternative fees structured in such a way to
optimize legal provider services. Win for client and
win for the law firm.
• Case by case determination – key is to
communicate and work with client.
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Alternative Fees
Common Strategies
• Be smart on what services to outsource. In-house
should be diligent. Some things are best suited for
domestic firms and persons.
• In India, a lot of “fly by night” services. Make sure
your outside counsel has good controls.
• If in litigation, do you want your opponent to
know? Several providers offer trial services –
treatment of opponent's “confidential attorneys’
eyes only” information?
• Protective order issues – do you need court
approval? Can the provider show adequate
safeguards?
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Alternative Fees
Donald Puckett represents businesses and select individuals in patent infringement
litigation, patent licensing, and other complex business litigation. Prior to
establishing SKIERMONT PUCKETT LLP, he was a Partner at The Ware Firm in
Dallas. He previously worked as an associate in the Dallas office of McKool Smith
PC and the Dallas office of Carrington, Coleman, Sloman & Blumenthal LLP.
Rajkumar Vinnakota’s practice focuses on complex commercial litigation in both federal
and state courts, including intellectual property, trade secrets, energy, business torts, and
insurance matters. Kumar’s technical background includes work experience as a process
engineer at ExxonMobil Chemical and chemical plant design studies at Kellogg Brown
and Root (KBR) in Houston, Texas. Prior to joining SKIERMONT PUCKETT LLP, he was
a senior associate at Shore Chan Bragalone DePumpo LLP in Dallas, Texas. He
previously worked as an associate in the Dallas office of Andrews Kurth LLP.
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Alternative Fees
Alternative Fee Agreements
SKIERMONT PUCKETT LLP rarely bills clients by the hour.
We do not believe lawyers should make more money just because they take a long time to complete a task. That
simply rewards inefficiency. Instead, we use Alternative Fee Agreements (“AFAs”) that align our firm’s interests
with our clients’ interests.
AFAs can include flat monthly fees, fixed project-based fees, success bonuses, contingent fees, blended flat fees
with a bonus or contingent component, and many other creative fee structures. Our attorneys have experience
crafting a variety of different AFAs that best fit our clients’ needs. We will explore any fee agreement that is based
on the value of our work to our clients, rather than the number of hours we spend working on the case. In short, we
want our fee to be linked to successful results rather than the number of hours worked.
In our experience, AFAs reduce total client legal costs because they reward efficiency. Unlike the billable hour,
AFAs also provide clients with greater monthly and yearly budget certainty. Most fundamentally, we believe it is
only fair that we should be compensated more when we win, and less if we lose.
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Alternative Fees
END OF PRESENTATION
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