Flat Fee IP : Flat Fee Intellectual Property Lawyers & Attorneys : Confluence Law Partners : Set Cost Litigation & Controlling Client Costs

HInt: it's not how many hours they bill; in fact, we've studiously avoided setting a target number of billable hours.

Another Hint: it's not following the sage advice (for associate survival in BigLaw) given to me by one of my hardened BigFirm associate cronies: "Don't Panic and Assume Nothing"

Instead, to quote from the memo we gave our new attorney on our expectations (and then sat down with them to discuss):

Your success, like that of every other person at Confluence, is judged on your contribution to increasing the firm’s net profits over the cost of producing high quality legal services.

Check out the memo in its entirety after the jump:

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A safety valve in a flat fee litigation agreement that puts off for a later date the negotiation of fees for late phase activities such as trial should probably include at least a default hourly fee pending the re-bargaining of a new flat rate.  (Yes, notwithstanding my strong bias in favor of flat fee pricing, I'm suggesting a possible, limited application of an hourly-based fee.)

My flat fee engagements for litigation services tend not to cover trial or the 60-90 day run-up to trial but instead propose to negotiate a mutually acceptable terms if and when the matter reaches this stage.  This "safety valve" protects against a situation where the time required to provide effective representation increases dramatically due to circumstances not reasonably foreseeable at the outset of the engagement.

There are very good reasons for  building in such a safety valve.  The legal services provided in connection with trying a case are shaped by a myriad of strategic decisions that are made by client relatively close in time to the commencement of trial and these decisions in turn are heavily influenced by case developments occurring over many months if not years.  It often is too difficult at the outset of the engagement to gauge pricing for trial with any precision.

While the presumption is that budgets and workplans should be “sticky,” no client wants an honest firm working at such a deficit such that the lawyers involved are incented to look at how they can cut corners or complete the matter more quickly than advisable. Thus, it is necessary for value-based fee arrangements to consider what kinds of “safety valves” can be triggered in the event the time required for effective representation increases dramatically due to unforeseen circumstances.

“Navigating Professional Ethics Issues in the Changing Legal Service Paradigm,”  discussion draft from Susan Hackett at the Association for Corporate Counsel (available to Legal OnRamp Members here.)

Inserting the safety valve is rarely a deal killer in eyes of the client, who, at the outset of a matter, are focused on reducing the cycle to resolution or achieving a favorable outcome in the near term - trial, in their minds, is far off in the future and easily left for another day.  And why should trial counsel seek to disabuse them of this attitude where the great, great majority of litigations are resolved prior to trial?

However, leaving the re-bargaining of trial services for another day has it's own issues, as explained (and solved) after the jump.

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Quora, the hot new Q&A site, has people asking whether it is "the biggest blogging innovation in 10 years?"  the "Next Red-Hot Web Start-Up"  or could be "Bigger than Twitter"  ("[i]t's smart. Really Smart"). 

We couldn't resist seeing whether the Quora community had tackled the subject of hourly  vs. flat fee pricing of legal fees.  Literally the first search response was: "If a lawyer says that $30k has been charged up on the clock, how much are they typically prepared to write off?"

While there is some thoughtful discussion (realization rates, size of the client portfolio and so on), far more important and compelling is the premise underlying the question, namely: if your lawyer is charging you "on the clock" you will want to "cut fees" at the back end of the project.

What consumers of legal services intuitively get is that hourly-based pricing of legal services incents behavior that is not aligned with their interests (hence the assumed need to haggle down the fee at the end of a project).  They know that the behavior they get with hourly pricing is more time billed to their matter and by more people, longer cycle to resolution, and people trying to do everything as opposed to what they are truly good at.

The far more compelling question for the connected, tech savvy and knowledgeable Quora community is why the relevant consumers continue to accept hourly-pricing as the standard pricing model for legal services?  What has to happen to tip the model in favor of flat fee or other efficiency-based pricing?

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There's no question that prospective clients of non-hourly priced legal services can't find the "new normal" firms offering these services unless the firms are doing some shouting online, see our Nov. 30 post.  It's equally as clear that the shouting can be done ethically, see our Dec. 18 post. 

But is Google AdWords, one of the most widely used online marketing tools, worth the cost? 

According to Google's snappy tutorials, the answer is yes so long as the revenue earned on each click on the lawyer's ad is greater than the cost incurred by the lawyer in generating that click.  However, good luck reaching agreement within your firm on revenue resulting from a specific prospect clicking on your ad and being directed to your website.

The better approach, it seems to us, is to ask what happens when a client prospect types in the "key words" most relevant to the lawyer's practice.   If the lawyer's website does not appear on the first page of the search results, then it's probably worth the cost to use AdWords to help get you there.

As explained in Agency San Francisco's recent tract Guerrilla Marketing for Attorneys:

Getting on Page 1 of Google when people type in your law firm's "key words" is by far the most critical Internet marketing that your law practice can do. Most of your potential clients that use search engines will never go beyond the first page.

The case for using the appearance on Google Page 1 as the test whether to pay for AdWords after the jump.

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Online advertising by attorneys via pay-per-click* is an effective and most likely necessary means of reaching many of the prospective consumers of new normal legal services, as discussed in our previous post on "shouting." 

But before jumping in, what is the regulatory environment?  Simply put, is this allowed?

More than a few of our lawyer colleagues think so because they are already doing it.  Googling "commercial litigation lawyer" returns a slew of attorney  ads along the right side of the search results page, including, for example:

Fletcher Business Law

Supporting Bay Area Businesses
Call for Consultation: 510-709-5435
San Francisco-Oakland-San Jose, CA

www.fletcherlp.com

So far so good, but most of us are going to want better information on the applicable regulations.

The answer is that pay-per-click online services are not prohibited and instead enjoy the same limited First Amendment protection of commercial speech that is afforded other forms of attorney advertising.  However, the regulatory environment is far from settled, as discussed after the jump.

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The shift in the balance of power towards consumers means less “shouting” (marketing) about your product or service, according to Jeff Bezos, Amazon founder.

"Before if you were making a product, the right business strategy was to put 70% of your attention, energy, and dollars into shouting about a product, and 30% into making a great product. So you could win with a mediocre product, if you were a good enough marketer. That is getting harder to do. The balance of power is shifting toward consumers and away from companies...the individual is empowered... The right way to respond to this if you are a company is to put the vast majority of your energy, attention and dollars into building a great product or service and put a smaller amount into shouting about it, marketing it. If I build a great product or service, my customers will tell each other."

See the Bezos interview and transcript.

The legal services industry has seen a similar shift in power from lawyer to client and a correspondingly greater emphasis on providing better quality legal service for less money, as described, among other places, by author and lawyer Pat Lamb in Alternative Fee Arrangements: Value Fees and the Changing Legal Market.   This is the "new normal" to which most law firms must adapt or die.  But does this mean that the need for shouting by the new normal firm is significantly reduced?  For now at least, the answer is no.

Here's why.

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The Federal Circuit's recent decision affirming the patent jury verdict in Funai v. Daewoo effectively increases the money damages that can be recovered by millions if not tens of millions of dollars.  (Full disclosure: I tried the case and among other things was responsible for the damages evidence introduced at trial.)

Background: The Accounting Period for Patent Damages Does Not Compensate All Economic Harm

In situations where the patent owner sells a product that practices the patented invention and a competitor sells an infringing product, an economist pegs the beginning of the economic harm resulting from infringement (lost sales, reduced prices, etc.) to the date the infringing sales began.

However, the accounting period for patent infringement damages usually begins much later - not until notice is given in compliance with the patent marking statute, see 35 U.S.C. sec. 287(a).  Any and all economic harm that predates notice is excluded from recovery under the statute. 

More Background: The Earlier the Notice, the Earlier the Accounting Period Begins, the Much Larger the Damages

The earlier the statutory notice, the further back in time you can go to collect damages on infringing sales.  We've previously demonstrated in The Shifting Sands of Price Erosion that even slight adjustments in how early the accounting period begins can increase by tens of millions of dollars price erosion damages alone.

Funai Relaxes the Notice Requirements and Effectively Expands The Accounting Period to Capture Infringing Sales That Are Earlier In Time

More after the jump.

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Some recent posts highlight why it is inevitable that the ethical rule barring non-lawyers from investing in and managing US law firms will be lifted. See our 6/11 post.

Bruce MacEwen, in Adam Smith, Esq., characterizes as “managerial malpractice” the failure by lawyers to analyze data on such things as client spending patterns, and warns (“En garde,” he says) that "competitors will undoubtedly" be trying to exploit the ability to deliver legal services from a distributed platform (“cloud computing”).

Jordan Furlong, in Law21, says that law firms are in the “cross-hairs of numerous entities outside of the legal profession” who intend to kill law firms and take some or all of their market by exploiting, among other things, the “virtually zero” effort to develop real competitive intelligence on what it costs to deliver specific services, how much rivals charge and why, what knowledge people and systems collectively possess, and how to apply that knowledge in a systematic way.

The common thread running through these and many posts like them is that law firms’ survival, let alone competitive success, hinge on investing in and effectively employing new management techniques, processes and tactics.

This costs money, lots more money than law firms currently have available to invest, particularly in a market with shrinking gross revenues. Even assuming firms have money available to invest, the high likelihood is that they do not have the institutional incentive to direct the money to longer-term investments and away from the current payments to rainmakers or other senior lawyers who want their share of the pie now (and certainly don’t want the firm to make greater risk investments that might reduce the value of their current ownership interest in the firm).

Even assuming the firm has money and is farsighted enough to want to make long-term and uncertain investments for the good of the enterprise, the new legal services paradigm requires non-legal management expertise, services and systems that are beyond the ken of the great majority of the lawyers who currently manage their firms. As explained by the CFO of a major law firm surveyed by Jim Hassett (LegalBiz Development):

A large number of lawyers do not know how to manage. [In the past], the more hours that got charged, the more money [they] made, and so they’ve never really had to manage [costs].

The solution is outside capital, which not only would provide the money required to fund innovations to the legal delivery model, but also would force firms to bring in the global, nimble, multi-faceted and risk-taking managers without whom it would be impossible to achieve the desired innovations.

The impediment is US ethical rules that bar non-lawyers from owning, investing in or managing a law firm. However, as demonstrated by the above posts, the forces compelling the lifting of the bar grow ever stronger and the calls for this change are increasing.  Anthony Davis, in A New Approach to Law Firm Regulation, calls for replacement of the state-based professional regulatory system with a national, uniform set of regulations that “provid[es] the seamless, efficient and cost-effective service for which clients of every size and level of sophistication are crying out,” by allowing, among other things, lawyers to access outside capital and non-lawyer management expertise.  

The groundswell of support for non-lawyer investment and other regulatory changes hopefully will be reflected in the report of the ABA’s Ethics 20/20 Commission, which was appointed in 2009 and given the mandate of investigating ways to enable US practitioners to compete with legal providers in other countries while continuing to protect the public and core values of the profession. The report is expected sometime in 2011.

In the meantime, we and others continue to press for change.

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I’ve had the pleasure of speaking with Andrew Moore and Sam Sweet about using their company NCC Group as a neutral “escrow” site for producing highly confidential source code in IP litigations. Andrew and Sam made a good case for using NCC's services, which we'll get to after the jump.  First a more general insight:

The discussion highlighted how important it is for legal departments buying the services of “value pricing” litigation firms to ask a lot of questions about the firm's "subs" – referring to the bevy of independent subcontractors or "subs" that the lead trial firm, acting as a general contractor, engages on behalf of the client.  (Note-"value pricing" refers generally to restructuring the attorney-client relationship in a way that reduces costs, provides greater cost predictability, and cuts out the fat in the delivery of legal services.  The use of non-hourly based fees is viewed by many, yours truly included, as a necessary component of the restructuring effort.  Check out the ACC's blog for more and better background on this new business model.)

The subs which potentially could be used on a litigation encompass a large number of different types of service providers: lawyers, e.g., basic research, document review, specific technical expertise or other relevant patent expertise; non-lawyers, e.g., technical experts, e-discovery vendors, jury consultants, graphic artists, special document production vendors; and/or the vendors involved in legal process outsourcing (LPOs), a very hot topic of late.  Some of the subs don't cost very much, while a significant number of other subs can cost tens of thousands of dollars or more.  

The value pricing firm, due to its non-hourly fee structure, is far more incented to outsource both legal and non-legal services to outside vendors than is the firm billing by the hour. The former’s price is fixed and therefore it increases profit by lowering the cost of production. This is a good thing.  This places the burden of finding the most efficient and effective means of delivering a legal service on the persons best positioned to do so – lead trial counsel.  There is a lot of fat in the current delivery system and therefore a lot of room for the more enlightened firms to lower their price while still making a fair profit.  (Check out Pat Lamb's new book, "Value Fee Arrangements: Value Fees and the Changing Legal Market for his excellent presentation on these points.)

In other words, as a result of the changed behaviors incented by the new fee structures, the buyer of legal services is going to see both a wider variety and a larger number of outside service providers on their matters. Whether the buyer is going to get a good result, and whether the buyer’s law firm is operating from a sustainable platform (no buyer wants to be saddled with a law firm that is losing money providing services to that buyer), therefore depends much more on whether the lead trial firm is bringing the right subs to the matter.

The smart buyer should therefore ask up front:

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