Presentation Transcript

1. Alternative Fees:Aligning the Interests of Lawyer and ClientTexas Lawyer In-House Counsel SummitMarch 27, 2014

2. 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
3. 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).
4. 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.
5. 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.
6. 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.
7. 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.
8. 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.
9. 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”).
10. 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.
11. 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.
12. 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.
13. 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.
14. 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
15. 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
16. 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.
17. 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)
18. 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.)
19. 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
20. Alternative Fees Aligning Economic Incentives Your company is sued by a patent troll in the Eastern District of Texas. As GC, you may beinexperienced 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?
21. 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.
22. 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
23. 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
24. 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
25. 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
26. 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
27. 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):
28. 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).
29. 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 88-356). 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).
30. Alternative Fees Practical Considerations in Legal Outsourcing Reasonableness ofFees – 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.
31. Alternative Fees Why In-House Counsel Should Care *** ABA Op. 08-051 at 2.
32. 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-market-trends-and-growth-figures-20111028/
33. 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”?
34. 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, e-discovery 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.
35. 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?
36. 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’spractice 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.
37. 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.
38. Alternative Fees END OF PRESENTATION