Move Over Billable Hour, There’s A New IP Fee Arrangement In Town
Using alternative fee arrangements (AFAs) like modified contingency or capped, fixed, or flat fees to replace the billable hour in IP cases.
September 11, 2014
The practice of law has changed greatly over the past decades. We have witnessed great growth in solo and small firm practice, as well as a large movement to in-house practice. We are even seeing growth in freelance attorneys who only assist other lawyers with document drafting and litigation and appeals support.
But, what hasn’t changed— for the most part— is the billable hour. Law firms continue to bill clients by the hour and require employees to record their days in six-minute increments. The lack of flexibility is not reflective of the art that is the practice of the law. Attorneys must constantly adapt to changing forces, new laws, new rulings, and unique situations. Our approach to billing should follow suit.
It is time for the billable hour to step down as the dominant law firm billing model, especially in IP cases. This article addresses why this must happen, and what alternative fee arrangements (AFAs) can step in to replace time-based billing.
AFAs better support the attorney-client relationship
AFAs provide greater flexibility for lawyers to meet the particular circumstances involving any given IP case. This also enables us to more easily support the goals of the attorney-client relationship.
Goal #1: Mutual trust
Trust is essential to any successful attorney-client relationship. There are several ways for the billable hour model to undermine that trust. For instance:
- A client loses trust when she feels her attorney has charged more for a matter than the result appears to warrant
- A client may also lose trust when she feels that her matter has more lawyers on staff than appears necessary
- A lawyer’s trust diminishes when her client expects her to leave no stone unturned, but that same client only expects to pay for the most essential of tasks
Implementing creative alternative fee arrangements can help alleviate these possibilities and assist in establishing attorney-client relationships built on trust.
Goal #2: Budget certainty
Clients need to budget for legal spend, and they generally need that legal spend to precisely match that budget. Many clients would much rather prefer their lawyers come in at budget rather than under budget. This is often due to the fact that clients could have budgeted for those unspent expenses elsewhere. On the other side of the equation, it is clear that a lawyer coming in over budget is a problem.
Clients require certainty in their legal spend. Alternative fee arrangements would allow for the certainty that client budgeting processes require.
Goal #3: Mutual investment
It is easy to take risks with someone else’s investment, but that does not mean it benefits either or both parties. For instance, a full contingency arrangement in which the client pays no fees or expenses can turn out quite poorly for the lawyer. But when clients pay at least some portion of the fees or expenses, they tend toward greater reasonableness in deciding on strategy. And clients likely feel that lawyers are more efficient and strategic in their approach when the lawyers have fees at risk.
The answer to this predicament is a fee arrangement in which both client and lawyer have “skin the game” because they have each made some financial investment. They will each stay involved and will more likely have a meeting of minds on strategy.
Goal #4: Value
Law firms are, generally, for-profit entities. This means that any result that does not provide a profit for the firm is not a successful one. This is true even if the client is pleased with a reduced legal spend. And clients need to feel that their legal spend was worth it, no matter how much or how little was spent.
We need to look to fee arrangements outside of the billable hour that leave firms with acceptable profits and clients feeling like they got their money’s worth.
Three alternatives to the billable hour fee arrangement
AFAs provide multiple, creative modes through which lawyers and clients can modify the hourly billing model—or abandon it altogether. The examples below are not exhaustive. Instead, they are illustrative of the creative arrangements we can create for any given situation. These options can be combined with one another so that, for example, a client’s case is assessed on a flat-fee basis and litigated for a partial contingency.
AFA #1: The modified contingency fee arrangement
One of the simplest alternatives to the billable hour is the contingency fee, where the attorney only receives payment when the client does. IP lawyers can modify the contingency fee arrangement for plaintiff or defense work.
When representing plaintiffs in an IP lawsuit, the firm and client can agree to a partial contingency arrangement in which the client pays costs (which is often considerable in patent litigation) and/or a percentage of the law firm’s hourly rate. This would help align the goals and strategy of the client and the law firm.
For example, a client is more likely to accept a reasonable offer if it has money at risk. This arrangement would also help prevent a situation where a client lacks incentive to agree to a settlement because he or she has spent nothing on the litigation. Similarly, if the client is participating in the financing of the litigation, he or she is more likely to pursue reasonable and efficient strategies, rather than insisting that every stone be turned.
Defense lawyers can modify the contingency fee structure to better suit defense cases. One solution includes tying the fee to the amount the defendant ultimately pays the plaintiff in the litigation. For example, in a case in which a plaintiff is seeking $20M, the fee agreement might look something like this:
- Set one fee if the client pays more than $10M
- Assign a higher fee if the client pays more than $5M, but less than $10M
- Set an even higher fee if the client pays $5M or less
- Assign a premium fee if the client pays nothing
IP lawyers should take care to avoid pursuing pure contingency arrangements, as IP cases are often expensive. To take a patent case under a contingent fee arrangement is to place significant fees at risk. The client, on the other hand, faces no direct monetary risk. As a result, the client and the law firm can find themselves on different pages in the litigation, which can lead to problems in the relationship.
AFA #2: The capped fee arrangement
Caps provide a not-to-exceed dollar amount that you can use for each phase of the litigation, for the entire litigation, or both. Caps give the client certainty for budgeting purposes and force the law firm to set a deliberate strategy.
For utmost effectiveness, caps require good communication on the front end. A law firm must lay out clearly which assumptions it has built into its proposed caps.
For example, if the firm assumes that it will retain one liability expert and one damages expert, it needs to state this assumption explicitly in the proposal. The same is true if the firm assumes that it will only employ certain defenses while avoiding others. A well-drafted capped fee agreement should include a provision that allows the client and the law firm to revisit the caps. This is especially important if something unexpected occurs that materially changes the litigation and upsets the assumptions.
AFA #3: The fixed- or flat-fee arrangement
Under the fixed- or flat-fee arrangement, the firm essentially agrees to do any work the client sends its way for a fixed monthly or annual amount. It requires the utmost in trust between law firm and client. To work best, the law firm will perform a large volume of work under a fixed- or flat-fee arrangement and will feel fairly compensated for that work.
As with the contingency arrangement, however, there is risk of misalignment of strategy and goals. To help avoid this misalignment, the client and law firm can agree on an initial monthly hourly goal. If the law firm regularly exceeds that goal, the parties will know it is time to reassess. The downside here is that the billable hour still factors into the arrangement in a significant way.
To avoid relying on the billable hour, the parties could agree to a finite team that only works on behalf of that client (e.g., two partners, two junior associates, two senior associates and a paralegal). That team will do whatever work the client sends with no collective billable hour expectation. We see this as the ultimate rejection of the billable hour model.
Law firms need to make room for AFAs
Right now, the law firm institution is the biggest impediment to AFAs. Law firms most often measure their success by comparing firm revenue to firm capacity. They determine that capacity by multiplying their billable hour expectations by their hourly rates. There is little hope of moving away from the billable hour model when a firm builds its measure of success on hourly rate.
But, when a firm measures its success simply in profits-per-partner, it has already made the mental leap needed to move away from that billable hour model. Many factors affect profits-per-partner, including:
- The number of non-partners
- Overhead expenses
Law firms ought to measure success more like their corporate clients, with little to no regard for billable hours. Only then will we break the ties that bind us to the billable hour model.
It is time for IP litigation firms to think outside the billable hour box. Doing so will provide for improved client-lawyer relationships and increased investment in case strategy by all parties to an IP case. It will also bring this aspect of the practice of law in line with the other changes occurring in the industry and lead to more productive IP litigation for everyone who is a part of the IP litigation equation.
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