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, 2016 1pm 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 emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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Negotiating Alternative Fee Arrangements for Litigation: Structuring and Implementing Non-Hourly Billing Nicole Auerbach – Valorem Law Group nicole.auerbach@valoremlaw.com @ValoremNic Paul A. Williams – Shook, Hardy & Bacon, L.L.P. pwilliams@shb.com Sonia Miller-Van Oort – Sapientia Law Group soniamv@sapientialaw.com 5
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
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
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
Under hourly engagement, first question asked? “How many people can I put on this matter?” 9
Under hourly engagement, last question asked (if asked at all)? “What are your goals with this matter?” 10
Use Of Alternative Fees Are At An All Time High 11
That’s Because AFAs Save Money 12
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
Trending • Reverse Auctions – Caveat Emptor • Capped Fees – One-sided approach • “One Size Fits All” – Inflexible 14
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
Fee Structures Must Promote Client Priorities. Budget Certainty None of these are accomplished Reduce Legal Spend using billable Reduce Time To hour system Resolution 16
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
Debates about what is NOT an AFA • Blended Rates • Discounted Rates • Capped Fees or collars 18
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
Fixed Fees with Holdback Portion of monthly fee withheld Agreed Monthly Fee Amount of monthly fee actually paid 20
Month 1--January Fee Paid Holdback Total 21
Month 3--March The incentive to perform grows each month. Fee Paid Holdback Total 22
Risk Collars* • Billing by the Hour, BUT… • Shared Risk/Reward • Incentive for Counsel to Be Cost-Effective • More Budget Certainty than Traditional Billing 23
50/50 Risk Collar Model Client (time billed hourly) 50% savings to client on overage if Law Firm projected budget 50% bonus to firm exceeded on savings if performance better than projected budget 24
Fixed Fee Plus Bonus Model Client (variable monthly contribution to bucket) (fixed monthly payment) ???? Law Firm (0-2x bucket amount based on result) 25
Hybrid “Contingency” Model Client total recovery (low, fixed monthly or lump sum payment) ???? Law Firm (lower percentage of the recovery than full contingency) 26
Contingency Model Client (single initial payment) Law Firm (outcome) (contingency fee of 30%) 27
Portfolio Model Client Agreed Upon or (Fixed monthly payment Discretionary Bonus for all work of certain type; expectations defined up front) Law Firm 28
“Share the Savings” Model Client (low, fixed monthly payment) % of savings Law Firm 29
Why skin in the game? 30
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
Important Factors in Structuring the AFA • What is success to the • Is there an alignment of client? company & firm interests? ● Closing of a deal? ● Time? ● Settlement Authority ● Winning a motion? ● Balance Spend & Risk ● Recovering damages? ● Minimizing damages? • Staffing/Leverage Plan • What are your material ● Expertise needed assumptions about the ● Efficiency allocations ● Costs for providing services substantive case? (people/technology) ● Claims/counterclaims ● Discovery plan, including anticipated ESI burden ● Experts ● Opportunity for dispositive motion/early resolution 32
Important Factors in Structuring the AFA • How do you define the • What historical litigation scope of work? data and client ● What tasks are included? information do you have? ● Is trial part of scope? ● Case Volume & Spend ● Expenses (in or out?) ● Cycle Time? ● Venue considerations? • Maximize Upside (performance bonus) • Profitability Model (fees & expenses) • Minimize Downside (kick-outs/ • Fixed fee or discount (not collars/renegotiation) both) 33
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
The Very Best Alternative Fee? a simple one 35
Elements for AFA Success- Pricing • Scope/price work to support objectives • Establish and manage to budget • Define success 36
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