Alternative Fee Arrangements - Duane Morris

1 1 California LitigationVol. 22 No 2 2009 Rebecca M. LamberthStephanie A. HansenRebecca M. Lamberth is a partner in the At -lanta office of Duane Morris LLP and prac-tices in the areas of securities, professionalde fense and complex commercial A. Hansen is an associate in thetrial group of Duane Morris s Atlanta officewith a focus on intellectual property liti ga -tion. Christina C. Marshall is an associate inthe trial group of Duane Morris s San Fran -cisco office and specializes in complex com-mercial and insurance coverage today s economy, an attorney canscarcely pick up a legal publicationwith out seeing an article touting alter-native fee Arrangements as the next bigthing or, more bluntly, the key to anylawyer s ability to get new clients in thefuture.

2 Everyone appears to agree that lawfirms have to move away from hourly billingfor many types of legal work in order to keepexisting clients and attract new ones, buthave many law firms truly embraced alterna-tive approaches to pricing legal work? Andby embraced, we mean how many firmshave offered or are now providing legal ser-vices to clients on an Alternative fee arrange-ment basis other than discounted hourlyrates? When you probe beneath superficialdiscussions of Alternative fee Arrangements ,you frequently learn that much of that dis-cussion to date is theoretical rather thanbased on existing or completed legal engage-ments. It seems many law firms have not yetAlternative Fee Arrangements :Who s Responsible for Making Them Work?By Rebecca M.

3 Lamberth, Stephanie A. Hansen and Christina C. MarshallChristina C. Marshall2 come to grips with the fact that the econom-ics of the legal marketplace are aside bet the company litigation ormajor transactions, it s currently a buyers market. Just as the homeowner putting ahouse on the market can t bear the thoughtof getting less than what the neighbors gotfor their house five years ago or evenearly last year many firms still appearreluctant to receive less in legal fees todaythan they did several years ago. What sellersmust realize, however, is that the only issueof relevance is what the buyer will actuallypay today. In-house counsel complain loudly andwith increasing frequency that law firmsneed to understand the reality of their cor-porate clients shrinking budgets and theirown legal departments increased firms that pitch for new business bytouting a single-minded objective of winningthe prospective client s litigation are tone-deaf to the budget constraints that top mostin-house counsel s priority list.

4 In the age ofelectronic information, the simple truth isthat the costs of litigation and transactionaldue diligence are rising even as corporationsare slashing their legal budgets along withother corporate expenses. Rather thanbemoaning the fact that clients are unwillingto accept this year s rate increase, however,law firms shouldn t ignore the silver lining:The current market provides a tremendousopportunity for law firms to differentiatethemselves by offering creative fee arrange-ments to attract new clients and additionallegal business. On the flip side, in-house counsel shareresponsibility for law firms real or perceivedreluctance to move away from the traditionalhourly fee structure. Every law firm andmost lawyers can readily recount in -stances when in-house counsel have beenunwilling to hire a new law firm that is will-ing to be innovative in their fee arrange-ments rather than to continue giving legalbusiness to current outside counsel thatoffer only traditional billing responsibility for making Alternative feearrangements succeed must be sharedequally between law firms and their corpo-rate clients.

5 The Association of Corporate Counselrecognizes the perceived disconnectbetween corporate counsel and law firmsand, through the ACC Value Challenge ini- Some law firms andtheir clients have foundthat fixed fee arrangementsare most successfulwhere the firm is offered asignificant volume of legalwork from a particularclient. This type of arrangement is sometimescalled bundling. 3through trial. Several in-house lawyers alsoreport success in getting fixed fee arrange-ments more readily for litigation that is commoditized. Transactional work is more commonlyoffered on a fixed fee basis than then, one big-firm attorney noted thather fee agreements always include a provi-sion stating that if additional unexpectedwork arises from the project, the contractwill have to be renegotiated.

6 This type ofprovision or agreement between client andoutside counsel incorporates the concept ofa look back which is generally intendedto permit an amicable and cooperativereassessment of the pricing of a fixed feearrangement following conclusion of the liti-gation or transaction if it turns out that thelaw firm suffered an unexpected loss on thematter. The general counsel of a large corpora-tion who is also heavily involved in the ACCV alue Challenge believes that incorporatinga look back opportunity into alternativefee ar rangements can help create the much-needed win/win situation for clients and lawfirms. Agreeing to the possibility of a lookback at the outset of the legal matter makesclear that it is neither party s intent that thelaw firm suffer a significant financial loss inthe event that unexpected factors drastical-ly change the litigation or transaction.

7 Itmay also help both the client and the lawfirm feel more comfortable agreeing to analternative arrangement in light of theunpredictability of legal work. For this tosucceed, however, it is critical that both theclient and outside counsel communicateopenly and clearly from the outset of thelegal matter in order to understand eachother s expectations and share as muchinformation as possible. Additionally, outsidecounsel should be careful not to jump thegun and attempt to capitalize on the lookback provision while the litigation or trans-tiative, is seeking to promote a dialogbetween in-house counsel and outside coun-sel to help them con nect costs to values. Aspart of the pro cess, ACC General CounselSusan Hackett agrees that corporate clientsneed to reward the law firms trying tounderstand their budgets and economics.

8 Inorder to close the perceived gap betweenthe cost of legal services and what corporatelegal budgets will permit, corporate Americahas to reward law firms who are showingmore creativity in fashioning fee arrange-ments. So let s briefly consider severalforms of Alternative fee Arrangements andhow they can succeed. Flat Fee/Fixed Fee ArrangementsOne of the more popular fee agreementalternatives with in-house counsel is, forobvious reasons, a fixed or flat fee arrange-ment. This type of arrangement typicallyinvolves an agreement with the client tocharge a fixed fee for a specific projectregardless of how much time is expended onthe project. Predictability for purposes ofbudgeting is the most critical feature of thistype of arrangement, but law firms that havelittle experience with fixed fee arrangementsoften fear they will underprice the engage-ment.

9 In many types of litigation , for in -stance, the amount of work required willdepend on a variety of factors including,at times, unpredictable factors such as howaggressive plaintiff s counsel turns out to beand how difficult it proves to be to identify,collect and produce your client s documentsand electronic information that prove rele-vant to the litigation . Some firms are ad -dressing this concern by setting a fixed feefor each stage of the litigation . If the case iswon or settled early on, the client gets predictability and incurs a much smallerfixed legal fee than would have been thecase if the fee had been based on litigation4 work best in practice areas involving a con-sistent amount of work. For instance, in-house counsel for one major corporationreported that outside counsel is paid a flatmonthly fee to handle all of the company semployee benefits work.

10 Common issues andfamiliarity with the corporate client s objec-tives across those matters contributes to effi-ciency and cost effectiveness, thereby bene-fiting both the client and the law remains underway, as this can badlydamage the relationship and spirit of counter-intuitively, some in-houselawyers have expressed suspicions of pro-posed flat fees that seem too low. One in-house attorney at a large international com-pany noted that her company has rejected low ball proposals because they are confi-dent they have a good idea regarding the fairvalue price to do a bang up job, and wouldrather have better work product that costsmore. Similarly, other in-house counsel haveexpressed a fear that fixed fees encouragelaw firms to underwork a case.