Alternative Fee Arrangements - Duane Morris · 3 through trial. Several in-house lawyers also report success in getting fixed fee arrange-ments more readily for litigation that is

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California Litigation Vol. 22 • No 2 • 2009

Rebecca M. Lamberth Stephanie A. Hansen

Rebecca M. Lamberth is a partner in the At -

lanta office of Duane Morris LLP and prac-

tices in the areas of securities, professional

de fense and complex commercial litigation.

Stephanie A. Hansen is an associate in the

trial group of Duane Morris’s Atlanta office

with a focus on intellectual property liti ga -

tion. Christina C. Marshall is an associate in

the trial group of Duane Morris’s San Fran -

cisco office and specializes in complex com-

mercial and insurance coverage litigation.

I n today’s economy, an attorney can

scarcely pick up a legal publication

with out seeing an article touting alter-

native fee arrangements as ‘the next big

thing’ — or, more bluntly, the key to any

lawyer’s ability to get new clients in the

future. Everyone appears to agree that law

firms have to move away from hourly billing

for many types of legal work in order to keep

existing clients and attract new ones, but

have many law firms truly embraced alterna-

tive approaches to pricing legal work? And

by “embraced,” we mean how many firms

have offered or are now providing legal ser-

vices to clients on an alternative fee arrange-

ment basis other than discounted hourly

rates? When you probe beneath superficial

discussions of alternative fee arrangements,

you frequently learn that much of that dis-

cussion to date is theoretical rather than

based on existing or completed legal engage-

ments. It seems many law firms have not yet

Alternative Fee Arrangements:Who’s Responsible for Making Them Work?

By Rebecca M. Lamberth, Stephanie A. Hansen and Christina C. Marshall

Christina C. Marshall

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come to grips with the fact that the econom-

ics of the legal marketplace are changing.

Setting aside ‘bet the company’ litigation or

major transactions, it’s currently a buyers’

market. Just as the homeowner putting a

house on the market can’t bear the thought

of getting less than what the neighbors got

for their house five years ago — or even

early last year — many firms still appear

reluctant to receive “less” in legal fees today

than they did several years ago. What sellers

must realize, however, is that the only issue

of relevance is what the buyer will actually

pay today.

In-house counsel complain loudly and

with increasing frequency that law firms

need to understand the reality of their cor-

porate clients’ shrinking budgets and their

own legal departments’ increased workload.

Law firms that pitch for new business by

touting a single-minded objective of winning

the prospective client’s litigation are tone-

deaf to the budget constraints that top most

in-house counsel’s priority list. In the age of

electronic information, the simple truth is

that the costs of litigation and transactional

due diligence are rising even as corporations

are slashing their legal budgets along with

other corporate expenses. Rather than

bemoaning the fact that clients are unwilling

to accept this year’s rate increase, however,

law firms shouldn’t ignore the silver lining:

The current market provides a tremendous

opportunity for law firms to differentiate

themselves by offering creative fee arrange-

ments to attract new clients and additional

legal business.

On the flip side, in-house counsel share

responsibility for law firms’ real or perceived

reluctance to move away from the traditional

hourly fee structure. Every law firm — and

most lawyers — can readily recount in -

stances when in-house counsel have been

unwilling to hire a new law firm that is will-

ing to be innovative in their fee arrange-

ments rather than to continue giving legal

business to current outside counsel that

offer only traditional billing arrangements.

The responsibility for making alternative fee

arrangements succeed must be shared

equally between law firms and their corpo-

rate clients.

The Association of Corporate Counsel

recognizes the perceived disconnect

between corporate counsel and law firms

and, through the “ACC Value Challenge” ini-

‘Some law firms and

their clients have found

that fixed fee arrangements

are most successful

where the firm is offered a

significant volume of legal

work from a particular

client. This type of

arrangement is sometimes

called “bundling.’

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through trial. Several in-house lawyers also

report success in getting fixed fee arrange-

ments more readily for litigation that is

“commoditized.”

Transactional work is more commonly

offered on a fixed fee basis than litigation.

Even then, one big-firm attorney noted that

her fee agreements always include a provi-

sion stating that if additional unexpected

work arises from the project, the contract

will have to be renegotiated. This type of

provision or agreement between client and

outside counsel incorporates the concept of

a “look back” — which is generally intended

to permit an amicable and cooperative

reassessment of the pricing of a fixed fee

arrangement following conclusion of the liti-

gation or transaction if it turns out that the

law firm suffered an unexpected loss on the

matter.

The general counsel of a large corpora-

tion who is also heavily involved in the ACC

Value Challenge believes that incorporating

a “look back” opportunity into alternative

fee ar rangements can help create the much-

needed win/win situation for clients and law

firms. Agreeing to the possibility of a “look

back” at the outset of the legal matter makes

clear that it is neither party’s intent that the

law firm suffer a significant financial loss in

the event that unexpected factors drastical-

ly change the litigation or transaction. It

may also help both the client and the law

firm feel more comfortable agreeing to an

alternative arrangement in light of the

unpredictability of legal work. For this to

succeed, however, it is critical that both the

client and outside counsel communicate

openly and clearly from the outset of the

legal matter in order to understand each

other’s expectations and share as much

information as possible. Additionally, outside

counsel should be careful not to jump the

gun and attempt to capitalize on the look

back provision while the litigation or trans-

tiative, is seeking to promote a dialog

between in-house counsel and outside coun-

sel to help them con nect costs to values. As

part of the pro cess, ACC General Counsel

Susan Hackett agrees that corporate clients

need to reward the law firms trying to

understand their budgets and economics. “In

order to close the perceived gap between

the cost of legal services and what corporate

legal budgets will permit, corporate America

has to reward law firms who are showing

more creativity in fashioning fee arrange-

ments.” So let’s briefly consider several

forms of alternative fee arrangements and

how they can succeed.

— Flat Fee/Fixed —Fee Arrangements

One of the more popular fee agreement

alternatives with in-house counsel is, for

obvious reasons, a fixed or flat fee arrange-

ment. This type of arrangement typically

involves an agreement with the client to

charge a fixed fee for a specific project

regardless of how much time is expended on

the project. Predictability for purposes of

budgeting is the most critical feature of this

type of arrangement, but law firms that have

little experience with fixed fee arrangements

often fear they will underprice the engage-

ment. In many types of litigation, for in -

stance, the amount of work required will

depend on a variety of factors — including,

at times, unpredictable factors such as how

aggressive plaintiff’s counsel turns out to be

and how difficult it proves to be to identify,

collect and produce your client’s documents

and electronic information that prove rele-

vant to the litigation. Some firms are ad -

dressing this concern by setting a fixed fee

for each stage of the litigation. If the case is

won or settled early on, the client gets

predictability and incurs a much smaller

fixed legal fee than would have been the

case if the fee had been based on litigation

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work best in practice areas involving a con-

sistent amount of work. For instance, in-

house counsel for one major corporation

reported that outside counsel is paid a flat

monthly fee to handle all of the company’s

employee benefits work. Common issues and

familiarity 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 firm.

action remains underway, as this can badly

damage the relationship and spirit of joint

enterprise.

Perhaps counter-intuitively, some in-house

lawyers 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 fair

value price to do a “bang up job,” and would

rather have better work product that costs

more. Similarly, other in-house counsel have

expressed a fear that fixed fees encourage

law firms to “underwork” a case. In contrast,

other in-house counsel have indicated a pref-

erence for receiving a better value through

more modestly-priced fixed fee arrange-

ments. Such concerns can be addressed,

however, if good communication exists be -

tween client and outside counsel. As is fre-

quently the case when buyers and sellers are

negotiating over price, clarity and agreement

on the scope of work to be performed and

the client’s expectations are essential to the

successful negotiation and execution of a

fixed fee arrangement (as well as future

employment of the outside firm). Law firms

should not be shy about requesting from the

prospective client data material to their

efforts to calculate a fee that is both reason-

able and attractive to both parties to the

attorney/client relationship.

— Bundling Fee Arrangements —

Some law firms and their clients have

found that fixed fee arrangements are most

successful where the firm is offered a signifi-

cant volume of legal work from a particular

client. This type of arrangement is some-

times called “bundling.” In these types of

scenarios less risk exists that a firm may be

over- or under-compensated, as the fees are

likely to average out across the full scope of

all matters involved. Bundling appears to

‘As is readily apparent

when comparing the pros

and cons of each of these

arrangements, in-house

counsel’s motivation for

seeking a new billing

arrangement is often

very different from their

outside counsel’s

motivation for offering

such alternatives. ’

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Another large company at one time em -

ployed more than 300 outside firms, but has

significantly pared both the number of firms

utilized and the associated legal fees through

bundling arrangements.

— Blended Rates —

Many clients’ least favorite alternative

involves a blended rate — indeed, some in-

house counsel strongly assert that blended

rates do not constitute alternative fee ar -

rangements at all. In a blended rate arrange-

ment, the firm charges the same hourly

billing rate for everyone working on a matter

— thus a first-year associate’s work is billed

at the same rate as work performed by a

senior partner. One in-house counsel com-

mented that blended rates “just give firms an

opportunity to charge more for associate

time.”

— Outsourcing and Use —of Contract Lawyers

Several in-house lawyers have reported

that an increasing number of law firms report

the frequent use of out-sourcing for large liti-

gation projects, document reviews or due

diligence efforts. Reactions appear to be

mixed. Access to lower cost legal services

clearly captures the interest of corporate

counsel. At the same time, few deny having

concerns about the quality and reliability of

work product.

— Hybrid and —Contingency Arrangements

Another approach offers performance

incentives to the law firm. In these types of

arrangements — sometimes known as hybrid

contingency arrangements — the law firm

generally offers some form of discounted

billing rate with the opportunity for a bonus

in the event of a successful outcome. These

types of performance incentives must be

negotiated carefully or risk leaving one party

to the relationship feeling it has gotten the

raw end of the deal. One in-house attorney

recalled a fee arrangement pursuant to

which her company and outside counsel

negotiated lower hourly rates with a win con-

tingency. Although the litigation at issue was

expected to be long and protracted, the case

‘Even though some

alternative fee

arrangements benefit

both the law firm and the

client, because many fail to

produce the desired results

immediately, many

corporate clients still

cling to the traditional

structure of the

billable hour’

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ended up settling very early on and the law

firm re ceived a significant windfall based on

the win contingency built into the contract.

In order to avoid this scenario, some firms

negotiate a tiered bonus structure so that the

bonus increases with each agreed-upon stage

of the litigation or transaction.

—Success Requires —a “Win-Win” Opportunity

As is readily apparent when comparing the

pros and cons of each of these fee arrange-

ments, in-house counsel’s motivation for

seeking a new billing arrangement is often

very different than their outside counsel’s

motivation for offering such alternatives. This

disconnect may explain the sluggish move-

ment away from hourly billing. In order for

any arrangement to work successfully long

term, it must be a win-win for both the law

firms and their clients. So, what will it take to

achieve widespread alternatives?

First, law firms have to understand the

economics of corporate legal budgets. The

reality in the current economy is that legal

budgets are being slashed, while the amount

of legal work to be performed is steadily

increasing. As a result, corporate counsel are

increasingly cutting their losses by recogniz-

ing they don’t need to — and many tell us

they can’t afford to — win every case. How -

ever, they sometimes have difficulty reining

in outside counsel who are determined to

win no matter the cost to their client.

Moreover, law firms frequently turn a blind

eye to the needs of their clients — mistaken-

ly relying on the security of their existing

relationship and overvaluing their worth to

their client.

One in-house attorney complained that

law firms do not understand the concept of a

“loss leader.” From her perspective, firms

should be willing to compete for work by pro-

viding some services free of charge. At the

same time, the work must be high quality if

the firm expects to get additional paid work.

For example, some firms have agreed to

review all of a corporate client’s confidentiali-

ty agreements and letters of intent without

charge in exchange for getting all of that

client’s M&A work. By giving up a relatively

small amount in fees, the firms get the bene-

‘A firm may be willing to

try a new arrangement

once, but it must recognize

a benefit, financial or

otherwise, in order to

continue. In exchange

for thinking outside the

box, law firms are looking

for greater client loyalty,

a stronger client

relationship, and more

guaranteed work.’