Alternative Fee Arrangements:
Identifying Value and Drafting
Critical Terms
Jake M. Holdreith
Robins, Kaplan, Miller & Ciresi L.L.P
612-349-8483.
jmholdreith@rkmc.com
Why Consider AFAs?
“Objective” goals:
• Predictable cost: fixed fees, caps, timing
arrangements.
• Ex-post valuation: contingent fees, kickers or
success fees, hold-backs.
• Cash flow: contingent fees, cost financing,
litigation financing, enforcement entities.
• Avoidance of bill reviews.
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Why Consider AFAs?
“Subjective” goals:
• Shared risk leads to better decision-making.
• Motivation and focus.
• Partnership.
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Why It Can Be Hard To Price Legal
Services:
It can be very difficult for lawyer and for client
to determine the value up front:
• How much will it cost the lawyer in time and
expenses to get to the result?
• What will the result be?
• What will the result turn out to be worth to
the client?
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Contingent Fees Allow Ex Post
Valuation
• Fee is determined by outcome. Client is
usually protected.
• Law firm needs to do a good risk assessment.
• Client needs to be assured law firm is
structured for contingent fee risk:
– Capitalization
– Experience
– Compensation Structure
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What Makes A Good AFA (Not
Contingent) Opportunity?
•
•
•
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Trust Relationship, Good Faith
Ability To Benchmark Cost Up Front
Clear Value Of Outcome
Sufficient Information To Assess Risk
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Pitfalls
• I win, you lose negotiation.
– Every successful AFA I have been involved in
comes from a joint effort to create mutual value.
– Holding back information leads to problems.
• Failure to do sufficient diligence.
– AFAs should be as data driven as possible.
• Use history, benchmarks.
• Consider mechanisms for mid-course corrections.
• Failure of clarity in the value of the outcome.
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Pitfalls
• Failure to identify and describe scope of work
that falls within the AFA.
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Is The Billable Hour The Cockroach of
Legal Services?
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History
• Contingent fee arrangements and fixed fee
arrangements substantially pre-date the
billable hour.
• The Billable Hour came into currency after a
1958 pamphlet of the ABA recommended
tracking time and keeping detailed records as
a remedy to reform fee-for-service schedules.
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Questions About The Billable Hour
• Is it a perverse incentive that divides the client’s
interest and the lawyer’s interest?
– Consider a great result in the early stages.
– Consider a poor result in the late stages.
• Does time reflect value?
• How does a client judge whether the time was
–
–
–
–
Necessary
Valuable
Reasonable
Efficient
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Benefits Of The AFA
• Aligning Lawyer And Client Interests Improves
Partnership
• Skin In The Game Can Improve:
– Motivation And Focus
– Shared Decision making
• Fixed Portions Can Improve Budget
Predictability
• Contingent Portions Can Protect Client Cash
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Types Of Alternative Billing Arrangements
• Full contingency:
– Client fronts costs.
– Attorney fronts costs.
• Partial contingency:
– Reduced billing rate.
– Fixed billing amount.
– Cap.
• Moving the claim to
another entity:
– Gets cash flow off the
books.
– Can insulate from
counterclaims.
– Can shift the fee risk.
• Fixed Fee
–
–
–
–
Per case.
By Task.
With True-up.
Bundle or volume.
Tip: see Dupont’s
overview:
http://www.dupontlegalmo
del.com/alternative-feesfor-litigation-improvedcontrol-and-higher-value/
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Miller & Ciresi L.L.P.
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Fixed Fee (Not Based On Time):
Variations
• Flat fee: single sum or per time period to
provide budget certainty.
• Fixed fee per portfolio.
• Fixed fee with contingent portion:
– Success fee (reward only).
– Shared risk (fee goes up or down).
– Often works well for defense cases.
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Hybrid Variations
• Blended rate with success fee.
• Reduced rate or cap with success fee.
• Full rates to get past some point, followed by a
hybrid.
• Fixed rate for initial case period with
settlement effort, followed by full rates (used
by Marriott, for example).
• Budget with shared savings.
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Client Experience
“The alternative arrangement, particularly the
contingent fee, causes the firm to use smaller
teams. I think that is good for the client as well
as the firm. It means that everyone on the case
knows the case. My experience with the billable
hour is that knowledge is diffused among too
many lawyers. Thus, the contingent fee makes
the handling of a case more effective as well as
more efficient.”
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Client Experience:
“In litigation, there’s a phase for each step. We pay the
law firm 80% of their fee, and the 20% goes into a
success budget. At the end of the matter we’ve got this
success budget, and we use a formula as to how the
success bucket is divvied up. Firms on average get
107% of what they actually would have billed. It forces
the law firm to be efficient and to make well-thoughtout case assessments at the very beginning, because it
will determine what the margin for the firm will be.”
Daniel Harper, VP, GC and Secretary for Océ North America, a printing company for professionals .
Source: Specific Tactics to Delight In-House Counsel by Larry Bodine.
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Pick The Right Case
• What makes a good fixed + success fee
opportunity?
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–
–
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Predictable costs.
Predictable timing.
Clear goals.
Client need for budget predictability.
Client desire to align interests without giving up too
much of the upside.
– Non-monetary objective (e.g. injunction, behavior
modification).
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Pick The Right Case
• What makes a good hybrid or contingent fee
opportunity?
– Client desire to avoid cash flow burden.
– Desire to align interests.
– Past damages sufficient to justify the investment
or client willingness to pay for nonmonetary
success.
– Case is triable, merits are strong.
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Pick the Right Case:
Justify The Contingent Investment
• Minimum 3:1
• Preferred: 10:1
• Why?
– Risk premium.
– Lost opportunity cost.
– Time value of money.
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Cost To Try A Patent Case
• Real world examples:
– $5-20 Million total
• Out-of-pocket expenses: $1-5 Million.
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Justify The Investment: Continued
•
•
•
•
The math: 3:1 return.
Investment: $7M.
Return needed: $21 M.
Recovery needed with a 40% contingent fee:
$52.5 M.
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Properly Allocate Risk And Reward
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Myth: The Contingent Lawyer Works
For Free
• You don’t want a lawyer who is willing to work for
free (or for a substantial discount).
• A well-structured alternative agreement involves the
client providing other value to compensate the
attorney, and . . .
• The client hoping to have the opportunity to pay the
kicker:
– Because it is worth it.
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Must Be Win-Win To Succeed
• Client’s and attorney’s interests must be aligned.
• Ask this question: “Will I be happy if we win under
this agreement? Can I live with it if we lose?”
– If the answer to either question is no (for you or for me),
then it isn’t a good agreement.
• I win/you lose just does not work.
– It’s unethical.
– It’s dumb.
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Client’s Risk And Reward
You’ll pay for these.
You are willing to live with these
• Total Victory
• Defeat
• Liability
– As claimant
– As defendant
– Fees and expenses
– Substantive
counterclaim
• Partial Victory
• Accounting
Predictability
– No Cash Outlay
– Predictable Cash Outlay
• Strong Partnership
• Costs, if Client Bears
Costs
• Other Loss
– E.g. Patent Invalidity
• Resource Drain
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Attorney’s Risk And Reward
You’ll risk this:
You get this:
• Multiple of Time
Investment
– Full or partial.
• Unique Case
Opportunities
• Trust and Partnership
• Loss Of Time
Investment
• Loss of Cost Investment
• Time Value of Money
• Opportunity Cost
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Pitfalls
• “This case will settle before trial.”
– If you aren’t prepared to see the case through trial, you
are courting disaster.
• Failure to forecast fees, costs, efforts conservatively
and realistically.
– IT COSTS A LOT TO TRY A CASE – and the middle of the
stream is too late to figure out you aren’t riding a big
enough horse.
– Many good trial lawyers are not naturally given to
budgeting and project management.
• Does the law firm benchmark to past experience?
• Does the law firm have systems to manage the project and
budget?
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Pitfalls
• Someone has no skin in the game.
– “It costs me nothing to press on, so let’s press on.”
• Pure contingency, lawyer fronts costs.
• Client has overestimated value of a win.
– I want you to be thrilled to pay the kicker because it is worth it
to you.
– Ask this question before you sign up: How much would I pay
to get that result?
• Failure to identify an easy exit for the defense.
– “There is no way they can avoid this patent.”
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More Pitfalls
• Lawyer Has Not Diversified The Portfolio of
Alternative Fee Arrangements.
– You need to be able to cut bait.
• Lawyer Is Undercapitalized For Investment.
– Attrition is a real strategy.
• Lawyer And Client Have Not Reached
Agreement On Realistic Upside Potential,
Downside Risk, and Pivots Up Front.
– When do we fold? When do we raise?
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Practical Considerations: A Survey Of
Contingent Fee Patent Agreements
• Notwithstanding their length and complexity, the lawyers reported that
two specific provisions were frequently negotiated, and the remainder
was accepted as is. The two negotiated clauses were the contingent
percent, and whether the law firm advanced the costs of the litigation.
• Of the agreements using a flat fee reviewed for this Article, the mean rate
was 38.6% of the recovery.
• The graduated rates typically set milestones such as "through close of fact
discovery," "through trial," and "through appeal," and tied rates to
recovery dates. As the case continued, the lawyer’s percentage increased.
Of the agreements reviewed for this Article which used graduated rates,
the average percentage upon filing was 28% and the average through
appeal was 40.2%
THE RISE OF CONTINGENT FEE REPRESENTATION IN PATENT LITIGATION, David
L. Schwartz (draft for review)
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1990651
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Practical Considerations For The AFA
• Identify key team members up front?
– Who will stand up at trial?
– Who will run the case every day?
– Technical expertise?
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Practical Considerations: Costs
•
•
•
•
•
Experts
Travel: airfare, hotel
Court reporters
Local counsel, PTO counsel
Discovery
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Reproduction
Data hosting
Contract data review
Trial Support
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Practical Considerations
•
•
•
•
Authority to settle.
Firing your lawyers.
Refusing to follow the advice of your lawyers.
Non-cash resolutions.
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Specific Terms/Language
Fee is calculated and paid from total recovery
before costs are reimbursed.
If the law firm has advanced costs.
Costs are paid from total recovery before fee is
calculated.
If the client has advanced costs.
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Specific Terms/Language
• Handling of counterclaims/other litigation or
administrative proceedings.
– Law firm handles as part of contingency or hybrid.
– Client pays law firm under a separate agreement.
– Client pays a separate law firm (e.g. specialist)
under direction of AFA law firm.
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Specific Terms/Language
• Non-cash resolution, larger resolution:
– Parties attempt to agree on cash equivalent
valuation, else
• Arbitration (e.g. daytime baseball).
• Client pays multiple of actual fees.
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Specific Terms/Language
• True Up:
– If actual fees depart from the {fixed amount} {cap}
by n%, the parties agree to consider an
appropriate adjustment in good faith.
– The fee is based upon the expectation of a need
for the following tasks {list} during the time period
{date – date}; if the actual time period and/or the
actual scope of work departs substantially from
these expectations, the parties agree to consider
an appropriate adjustment in good faith.
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Specific Terms/Language
• Follow on successes:
– Contingent share of awards/settlements against
other parties.
• Identify all possible targets of an enforcement effort.
• Identify basis of compensation if there is a recovery
with no (or little) litigation.
– Entire success fee if law firm efforts generated the recovery.
– Reduced success fee.
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Specific Terms/Language
• Right to fire counsel:
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–
–
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Full success fee, if success has already been achieved.
Quantum meruit.
Multiple of actual fees.
Exceptions:
• Conflict within Law Firm’s control.
• Ethical issues not caused by Client.
– (But doesn’t apply if caused by client: If client refuses to follow
advice and lawyer must withdraw, no exception to fees.)
• Malpractice issue.
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Specific Terms/Language
• Law Firm withdraws:
– If caused by client (e.g. refusal to settle):
• Multiple of actual fees.
• Quantum meruit.
– If not caused by client (e.g. law firm declines to
continue):
• No fee.
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Specific Terms/Language
• Confidentiality and privilege over agreement:
– Particularly if it reveals strategy or valuation.
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Pick The Right Lawyer
• Track record.
• Sufficient contingent portfolio to be able to
take a loss.
• Sufficient financial strength to go through trial
and appeal.
• Fully evaluated the case before taking it.
• Is your attorney a good business partner?
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What Kind Of Firm Can Take Big
Contingent Risks?
• Must have a good relationship with your bankers or
a lot of money in the bank.
• Must have a culture that encourages intelligent risk
taking.
• Must have a good relationship with your partners.
• History and experience with contingent fee
litigation.
• One-off cases can be dangerous to your firm.
• Partner compensation structure.
– Must know how to compensate partners who might not produce
any income for several years.
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Robins, Kaplan, Miller & Ciresi, L.L.P.
• Patent Trial Group:
– 24 Partners, 48 Associates
– Total IP attorneys: ~100
• Firm: ~250 Attorneys
– Atlanta, Boston, LA, Minneapolis, Naples, NYC
• Contingent Fee Practice since 1938
– Patent Trial Practice since 1991
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Thank You!
Jake M. Holdreith
Robins, Kaplan, Miller & Ciresi L.L.P
612-349-8483.
jmholdreith@rkmc.com
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