By Javier A. Lopez and Monica McNulty
In today’s challenging, competitive business environment, finding qualified outside counsel with the right fee structuresis a top priority for corporate counsel. Following is some practical guidance to help corporatecounsel achieve this goal.
When retaining outside counsel, corporate counsel should focus on three key areas: 1) Conducting thorough research ofthe potential firm’s reputation, particularly its billing practices;2) Exploring flexible billing arrangements that are tailored to suit the nature of the engagement; and 3) Effectively communicating to create clear goals, strategies, and billing guidelines. By taking these steps, in-house and outside counsel canestablish productive relationships that will help prevent unwanted surprises from appearing on the bill.
Targeted research of The Potential firm’s Billing Practices and Reputation
After identifying several firmswith experience in the area oflaw for your engagement, it isequally important to vet thosefirms’ billing practices and reputations with respect to attorneysfees. Your network can provide in-valuable information about the billing practices of a particular firm. Your best resource to get a realisticperspective on their billing practices is their existing and former clients, or former attorneys who wereemployed at the firms. The legalcommunity is very tight. By tappinginto this resource, you can get asense of hourly rates, the nature ofthe firms’ time entries, and whetheryour contacts believe that the billingand the work product were in alignment. Even if your contacts workedwith different practice groups thanthe one you might be considering,there should be a significant degree of continuity between one area andthe next within the same firm.
During your initial contact withthe firm, ask for a budget for thedifferent phases of the litigation:Pleadings, Discovery, DispositiveMotions and Trial. This will helpyou compare apples to apples andassist you in selling which lawfirm you believe to be the correctone to your Board/CEO. Although every case is unique, if the firm recently handled a very similar matter, it is possible that it will notneed to duplicate certain tasks,which could result in a decreasedoverall fee for your matter. Forlitigation matters, another important factor is how well potentialcounsel knows the relevant court system or judge. In many cases,counsel’s understanding of the judicial circumstances of a case canhelp inform how quickly or slowlythe case is likely to proceed, and estimate how it could impact total fees. Intimate knowledge ofthe particular judge before whoma matter is pending is absolutelycritical to the bottom line of a case.There can be a stark difference inthe ability to get hearings in frontof a particular judge. For some, itcan take days or weeks; for others,it may take months.
When establishing a relationshipwith new outside counsel, considerproposing a “test run” with a smaller, less complicated matter that is likely to be resolved quickly. Thiswill give you a first-hand sense ofthe firm’s billing practices and allowyou to make an informed decisionbefore engaging the firm for morecomplicated matters. Giving thenew firm the opportunity to earnyour business and demonstrate thequality of its billing practices is thebest way to get the flavor of howthe firm works a case. Should you decide to later engage the firm formore complicated matters, you willhave already laid the groundworkand established expectations for thefirm’s bills.
Explore Flexible Billing Arrangements
Both inside and outside counsel have long had a relationshipof necessity with the billable hourmodel. However, alternative fees arrangements continue to become increasingly popular and may suit theneeds of certain engagements betterthan the traditional billable hour arrangement.
In a pure contingency arrangement, the law firm receives a fixedamount or percentage from any potential monetary recovery in a lawsuit. Usually, the client will only paythe hard expenses during the litigation. This structure is most commonfor plaintiff’s cases that may lead toa reasonably large potential recovery. In a pure contingency arrangement, the law firm bears nearly allof the risk of the engagement andis, therefore, invested in obtaining afavorable outcome.
Hybrid Fee Arrangement
In a hybrid fee arrangement, thelaw firm receives a percentage of itsusual hourly rate, and some level ofcontingency fee dependent on theoutcome of the matter. If the matter does not yield a favorable result,no additional fee is paid. If the firmobtains a successful outcome, it ispaid the agreed additional amount.Such arrangements shift part of therisk of the engagement to the law firm, and align the client and thelaw firm’s interests. This approachlets the firm have additional “skin inthe game.”
This arrangement is most common in plaintiffs’ cases, but can alsobe used on the defense side to create and reward the accomplishment of certain benchmarks or particularoutcomes. It can also be used on thedefense side to reward an ultimateoutcome that is significantly lessthan the amount the client is beingsued for.
Under such an arrangement, thefirm may agree to accept a reduced hourly rate, in exchange for the client’s agreement to pay a percentage of the difference between theamount the client is being sued forand the ultimate outcome. For example, the client may agree to paythe firm $300 per hour, althoughthat is significantly lower thanthe firm’s standard rates, and pay 30% of the difference between theamount sued for and the ultimateoutcome. If the client was sued for$2 million and the case was ultimately settled for $1.5 million, theclient would pay the law firm 30%of $500,000 or $150,000 at the endof the case. The hybrid fee arrangement allows significant room for creativitybecause benchmarks with a smallaward can be set throughout thecase and for a variety of reasons. Forexample, benchmarks might be setfor length of time for disposition ofthe matter to incentivize quick resolution, various outcomes (differentawards for settlement, prevailing at summary judgment, or prevailing attrial), or success on specific issuesin the case.
A blended rate is another availablealternative fee arrangement. Under ablended-fee arrangement, the hourlyrates of each of the attorneys on a file are considered and a single hourly rate is determined that applies to all attorneys. For example, the seniorpartner may typically charge $800per hour, the junior partner $650per hour and the associate $400 perhour. Based upon these rates, a single hourly rate of perhaps $500 per hour would be established for all attorneys billing on the file. This maybe most appealing in complex matters in which junior and senior partners are expected to do a significantamount of work, as it could help create sizable savings for the client.
Another possibility is to create astructure that rewards law firms forsubmitting bills below budget, for example, by awarding a percentage of the amount under budget.As an example, if the overall budgetfor a case is $500,000, but the caseis resolved for $350,000, the clientwould agree to pay the law firm apercentage of that savings.These are only a few examplesof possible alternative fee arrangements. Law firms are becoming increasingly willing (or should be) toevaluate these possibilities. The old mentality of “take it or leave it” bythe big law firm has gone by thewayside as the business of law hasevolved. You should feel absolutelycomfortable negotiating an arrangement that is beneficial for both yourcompany and the law firm.
Javier A. Lopez is a partner withKozyakTropin& Throckmortonand focuses his practice on litigation. Monica McNulty is an associate in firm’s healthcare and complexlitigation practice groups. They canbe reached at firstname.lastname@example.org email@example.com, respectively.
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