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

Transcription

1 Presenting a live 90-minute webinar with interactive Q&A Alternative Fees for Litigation: Collaborating with Clients to Structure Non-Hourly Billing Arrangements WEDNESDAY, JULY 20, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: 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 The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 10.

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5 Negotiating Alternative Fee Arrangements for Litigation: Structuring and Implementing Non-Hourly Billing Nicole Auerbach Valorem Law Paul A. Williams Shook, Hardy & Bacon, L.L.P. Sonia Miller-Van Oort Sapientia Law Group 5

6 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 6

7 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. 7

8 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 8

9 Under hourly engagement, first question asked? How many people can I put on this matter? 9

10 Under hourly engagement, last question asked (if asked at all)? What are your goals with this matter? 10

11 Use Of Alternative Fees Are At An All Time High 11

12 That s Because AFAs Save Money 12

13 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 ) 13

14 Trending Reverse Auctions Caveat Emptor Capped Fees One-sided approach One Size Fits All Inflexible 14

15 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? 15

16 Fee Structures Must Promote Client Priorities. Budget Certainty Reduce Legal Spend Reduce Time To Resolution None of these are accomplished using billable hour system 16

17 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 * 17

18 Debates about what is NOT Blended Rates an AFA Discounted Rates Capped Fees or collars 18

19 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 or 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. 19

20 Fixed Fees with Holdback Portion of monthly fee withheld Agreed Monthly Fee Amount of monthly fee actually paid 20

21 Month 1--January Fee Paid Holdback Total 21

22 Month 3--March The incentive to perform grows each month. Fee Paid Holdback Total 22

23 Risk Collars* Billing by the Hour, BUT Shared Risk/Reward Incentive for Counsel to Be Cost-Effective More Budget Certainty than Traditional Billing 23

24 50/50 Risk Collar Model (time billed hourly) Client Law Firm 50% bonus to firm on savings if performance better than projected budget 50% savings to client on overage if projected budget exceeded 24

25 Fixed Fee Plus Bonus Model (fixed monthly payment) Client (variable monthly contribution to bucket) Law Firm???? (0-2x bucket amount based on result) 25

26 Hybrid Contingency Model Client (low, fixed monthly or lump sum payment) total recovery Law Firm???? (lower percentage of the recovery than full contingency) 26

27 Contingency Model Client (single initial payment) Law Firm (contingency fee of 30%) (outcome) 27

28 Portfolio Model Client (Fixed monthly payment for all work of certain type; expectations defined up front) Agreed Upon or Discretionary Bonus Law Firm 28

29 Share the Savings Model Client (low, fixed monthly payment) Law Firm % of savings 29

30 Why skin in the game? 30

31 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 31

32 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) 32

33 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) 33

34 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 34

35 The Very Best Alternative Fee? a simple one 35

36 Elements for AFA Success- Pricing Scope/price work to support objectives Establish and manage to budget Define success 36

37 Elements for AFA Success- Process Doing the right things Improvement Elimination of waste Efficient legal services, not egos 37

38 Elements for AFA Success- Project Active management of process Delivering results and profitability through active management of resources Management Honest tracking of time Data analysis as-you-go and post-matter (metrics) 38

39 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? 39

40 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 on 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 40

41 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 of 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? 41

42 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? 42

43 You know what they say about the train leaving the station? 43