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Alternative Fees for Litigation: Collaborating with Clients to Structure Non-Hourly Billing Arrangements

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific WEDNESDAY, JULY 20, 2016

Nicole Nehama Auerbach, Founding Partner, Valorem Law Group, Chicago Paul A. Williams, Partner, Shook Hardy & Bacon, Kansas City, Mo. Sonia Miller-Van Oort, Sapientia Law Group, Minneapolis

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Negotiating Alternative Fee Arrangements for Litigation: Structuring and Implementing Non-Hourly Billing

Nicole Auerbach – Valorem Law Group nicole.auerbach@valoremlaw.com @ValoremNic Paul A. Williams – Shook, Hardy & Bacon, L.L.P. pwilliams@shb.com Sonia Miller-Van Oort – Sapientia Law Group soniamv@sapientialaw.com

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Topics for Discussion

• 1. The Problem with Billing by the Hour
• 2. Use of AFAs Continue to Trend Upward
• 3. What Is and Is Not an AFA
• 4. AFAs in Action - How they Work
• 5. Why Skin in the Game?
• 6. Important Factors for your AFAs
• 7. Elements for AFA Success
• 8. Was my AFA a Success?
• 9. Lessons Learned with AFAs
• 10. Ethical Considerations

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What is an Alternative Fee?

An alternative fee is a fee that eliminates the incentive for law firms to spend more time on a matter and instead creates an incentive to achieve the same or better outcomes in a more efficient manner.

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The trouble with hours: a brief summary

• 1. Fee structures incentivize behaviors
• a. Law firm has incentive to bill more
• b. Rounding errors
• c. Fraud
• d. Aggregating services
• e. “Boiling the Ocean to Make a Cup of

Tea”

• 2. Traditional law firm model compensates

for hours

• 3. No shared risk

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Under hourly engagement, first question asked? “How many people can I put on this matter?”

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Under hourly engagement, last question asked (if asked at all)? “What are your goals with this matter?”

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Use Of Alternative Fees Are At An All Time High

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That’s Because AFAs Save Money

12

Trending

• Portfolio

– Bundling – Examples – Routine Employment; Product Liability; NPEs – Frequently Combined with Convergence Initiatives – Captures Efficiencies at All Levels

• Value-Based

– Determining Appropriate Level of Treatment

• Phased Approach (e.g., Class Actions, Patent Litigation)

– Addresses uncertainty of later phases (trial)

• Risk Sharing/Alignment of Interests (“Skin in the Game”)

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Trending

• Reverse Auctions

– Caveat Emptor

• Capped Fees

– One-sided approach

• “One Size Fits All”

– Inflexible

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When Clients Are Asked, Guess the Result:

1. Would you rather have an experienced lawyer or a rookie handle your legal problem? 2. Would you rather know the cost of your matter in advance or be surprised? 3. Would you prefer your lawyers to have “skin in the game” or be indifferent to the result?

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Fee Structures Must Promote Client Priorities.

Budget Certainty Reduce Legal Spend Reduce Time To Resolution

None of these are accomplished using billable hour system

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What Is An “Alternative” Fee

Short answer: anything that doesn’t involve simply billing by time spent on a matter. * = debated Examples Fixed Fee (whole case or by phase) Fixed Fee with holdback/results bonus Contingency Flat sum plus contingency Retainer (monthly, yearly) Portfolio Fee Risk Collar * Capped Fee (whole case or by phase) * Price per click for ESI *

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Debates about what is NOT an AFA

• Blended Rates
• Discounted Rates
• Capped Fees or collars

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Wolves in Sheep’s Clothing:

“We estimated the number of hours it would take, multiplied by the hourly rate of the person doing the work, and then added in a contingency

• r safety factor to protect us. Then we added a

success contingency.”

This approach guarantees that the fixed fee will be higher than the hourly approach.

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Fixed Fees with Holdback

Agreed Monthly Fee Amount of monthly fee actually paid Portion of monthly fee withheld

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Month 1--January

Fee Paid Holdback Total

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Month 3--March

Fee Paid Holdback Total

The incentive to perform grows each month.

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Risk Collars*

• Billing by the Hour,

BUT…

• Shared Risk/Reward
• Incentive for Counsel

to Be Cost-Effective

• More Budget Certainty

than Traditional Billing

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50/50 Risk Collar Model

(time billed hourly) 50% bonus to firm

• n savings if

performance better than projected budget Client 50% savings to client

• n overage if

projected budget exceeded Law Firm

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Fixed Fee Plus Bonus Model

(fixed monthly payment) (variable monthly contribution to bucket)

????

(0-2x bucket amount based

• n result)

Client Law Firm

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Hybrid “Contingency” Model

(low, fixed monthly or lump sum payment)

????

(lower percentage of the recovery than full contingency) Client total recovery Law Firm

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Contingency Model

(single initial payment) (contingency fee of 30%) Client Law Firm (outcome)

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Portfolio Model

(Fixed monthly payment for all work of certain type; expectations defined up front) Client Agreed Upon or Discretionary Bonus Law Firm

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“Share the Savings” Model

(low, fixed monthly payment) Client % of savings Law Firm

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Why skin in the game?

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Why Skin in the Game?

1. Ensures lawyers will keep best team on matter

2. Ensures work that will influence outcome is done 3. Matter won’t languish 4. Lawyers will never “lose interest” or assign inexperienced younger lawyers to learn on cases 5. Aligns lawyer’s economic interests with clients’ 6. It puts the “trial” back in “trial lawyers” 7. Can improve client’s leverage in litigation 8. Clients want shared risk/reward

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Important Factors in Structuring the AFA

• What is success to the

client?

• Closing of a deal?
• Time?
• Winning a motion?
• Recovering damages?
• Minimizing damages?
• What are your material

assumptions about the substantive case?

• Claims/counterclaims
• Discovery plan, including anticipated

ESI burden

• Experts
• Opportunity for dispositive

motion/early resolution

• Is there an alignment of

company & firm interests?

• Settlement Authority
• Balance Spend & Risk
• Staffing/Leverage Plan
• Expertise needed
• Efficiency allocations
• Costs for providing services

(people/technology)

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Important Factors in Structuring the AFA

• How do you define the

scope of work?

• What tasks are included?
• Is trial part of scope?
• Expenses (in or out?)
• Maximize Upside

(performance bonus)

• Minimize Downside

(kick-outs/ collars/renegotiation)

• What historical litigation

data and client information do you have?

• Case Volume & Spend
• Cycle Time?
• Venue considerations?
• Profitability Model (fees &

expenses)

• Fixed fee or discount (not

both)

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What Kinds of Matters

• Not based on litigation or transactional

nature of matter, BUT… (1) Experience handling particular type of matter (2) Data available to analyze and build (3) How much risk the firm is able to withstand at any given time

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The Very Best Alternative Fee?

a simple one

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Elements for AFA Success- Pricing

• Scope/price work to

support objectives

• Establish and manage

to budget

• Define success

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Elements for AFA Success- Process Improvement

• Doing the right things
• Elimination of waste
• Efficient legal services,

not egos

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Elements for AFA Success- Project Management

• Active management of

process

• Delivering results and

profitability through active management of resources

• Honest tracking of time
• Data analysis as-you-go

and post-matter (metrics)

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Evaluation of the AFA

• Is the client happy?
• What do the metrics show?
• What did we learn?
• Did the client give us additional work because of

this result?

• Is there more of this kind of work that we can do

faster and cheaper now that we have this experience?

• Did we miss out on work because of the time we

spent on this matter?

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Lessons Learned In Structuring AFAs

 Address everything,

including goal of client (for purposes of triggering bonuses/milestones) up front and in writing  For litigation – try not to include cost of trial and appeal (drives up the total fee since most cases settle)  Negotiate trial (and appeal) fee towards the end of discovery.  Make sure the skin in the game is substantial enough to drive behaviors (on both sides)  Be clear at engagement what the material assumptions are

• n which the AFA is based so

that out-of-scope work is clear  Be flexible and mindful of client’s familiarity and comfort level with AFAs; keep it simple

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Ethical Considerations

1. Clarity of Retainer Agreement

Model Rule 1.5(b): “The scope of the representation and the basis or rate of the fee and expenses for which the client will be responsible shall be communicated to the client, preferably in writing, before or within a reasonable time after commencing the representation, except when the lawyer will charge a regularly represented client on the same basis or rate. Any changes in the basis or rate

• f the fee or expenses shall also be communicated to the client.”

Comment 5: Fee arrangement “May not be made whose terms might induce the lawyer improperly to curtail services for the client or perform them in a way contrary to the client’s interest.” (Model Rule 1.5, comment 5)

• What is earned when? How do you handle a windfall?
• What is included in the scope of work; what warrants a

“change order”?

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Ethical Considerations

• 2. Bills/Record-Keeping
• How are services provided tracked and reported?
• How are metrics defined, tracked and reported?
• 3. Financials
• How do you handle “true-up” dollars owed (both ways)?
• In fee recovery litigation, how calculate value of fees paid?

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You know what they say about the train leaving the station?

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