Comparing Suicide Pricing by Lawyers and Antitrust Claims for Below-Cost Pricing

Seemingly unrelated, the WSJ’s discussion of antitrust claims challenging below-cost pricing (Antitrust Busters with Gavels, 4/26/2013) and the Internet tabloid Above the Law’s discussion of increased use of “suicide pricing” by Biglaw (Buying In: Suicide Pricing, 4/16/2013), have at least one thing in common; in each instance, the consequence of the irrationally low pricing is that the consumer gets screwed. At least antitrust laws recognize the problem as a matter of public policy and provide a remedy where this occurs in covered marketplace activities. With respect to legal services, there is no such remedy – caveat emptor, let the legal services buyer beware.

How these antitrust claims and below cost lawyer fees are connected after the break.

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Free Riding and Other Costs to Newegg of "Crushing" NPE Soverain

Kudos to online retailer Newegg and its Chief Legal Officer Lee Cheng on the Federal Circuit decision handed down last week holding that three patents covering basic online checkout technology were invalid. [PDF] The decision reversed the judgment of the ED Texas trial court that the patents were not invalid and vacated the patent infringement judgment entered in favor of NPE Soverain and against Newegg by the trial court.

Check out Joe Mullin's arstechnia post "How Newegg crushed the 'shopping cart' patent and saved online retail" for a full and insightful accounting of the litigation, which highlight’s Newegg’s commitment to never, ever settling with NPEs. CLO Cheng fleshed out the strategy to reporter Mullin:

 

We basically took a look at this situation and said, 'This is bullshit,' . . . We saw that if we paid off this patent holder, we'd have to pay off every patent holder this same amount. This is the first case we took all the way to trial. And now, nobody has to pay Soverain jack squat for these patents.

Without a doubt, Newegg and its counsel have achieved a very big legal victory. Soverain previously received a $40 million in settlement from Amazon, an additional undisclosed settlement from The Gap, and, while the Newegg appeal was pending, obtained a patent infringement jury verdict of $18 million from Avon and Victoria’s Secret. Due to the broad scope of online shopping technology allegedly covered by the asserted patents, InternetRetailer.com's researcher Mark Brohan described Newegg’s decision to go to trial on Soverain’s claims (and after the other six online retailers named as defendants settled out) as creating “the mother of all patent battles.”

Yet even as we applaud both Newegg’s principled stand and the victory realized through the implementation of this strategy, we find ourselves asking whether the costs outweigh the benefits.

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Court Recognizes BigLaw Rates Are Too High

This is something companies already know, but the Court has acknowledged it. The billing rates BigLaw charges for intellectual property litigation are too high.

Magistrate Judge Goldman recently found that Jones, Day’s rates in a discovery dispute to compel the production of documents were too high. In Etagz, Inc. v. Quicksilver, Inc., 10-00300-DOC, Central District of California, the Court ordered Etagz to pay “reasonable” costs and attorneys fees incurred by Defendant in bringing its motion for contempt and sanctions for Plaintiff’s failure to comply with an earlier order to produce documents.

The Defendant filed its statement of cost and attorney fees. In that statement, the Defendant asserted that it was entitled to $15,510.00 in attorney fees arising from 20 hours of work on its motion for sanctions. The Jones, Day attorneys listed their rates as $775/ hour and $675/hour. The Magistrate found 20 hours to be a reasonable amount of time for the motion. The Magistrate, however, said the rates Jones, Day charged were “excessive and unreasonable” and continued:

This Court is not aware of any case before it where
an attorney has sought that high an hourly rate for
an ordinary discovery dispute.

This case is another indication that BigLaw rates are not justifiable. 

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Hourly "Safety Valves" for Flat Fee Litigation

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: How to Cut (Hourly)Fees

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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Smart Buyers Ask if Subs are "For Real"

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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Don't Include Trial in the Price?

Pat Lamb, in his very good book on value pricing Alternative Fee Arrangements: Value Fees and the Changing Legal Market, says that the fees and costs of a trial should never be built into the fixed fee proposed to a client.  "Never"? Really?

Really, says Pat.  Paraphrasing what he says in his book, virtually all cases settle, so including the cost of trial in the fixed fee is perceived by the client as overpayment, or could dissuade a client from accepting a settlement because they believe they have "already paid" for the trial.  Plus including expensive trial costs and fees might create sticker shock that scares away the client.  Pat also makes the compelling  point that it is not until you are close to trial that lawyer and client appreciate the real costs and risks of trial, such that the determination of the price for taking the case to trial is best left until then.   In other words, carve out trial from the price for your legal services, thereby allowing you to give the client a much lower price than you could if trial was included, and proceed under a fee structure that incents early settlement/resolution of the litigation (the earlier the resolution, the greater the profit made by the lawyer).

I've migrated from a first impression rejection of Pat's recommendation to grudging acceptance of his logic. Check out my thinking process after the jump.

 

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Litigation Price: Flat Fee Used as a Stalking Horse.

The term stalking horse originally derived from the practice of hunters using a horse or other animal to cover their approach to fowl. In business, a stalking horse can be used to describe the practice of a company attracting multiple bids for acquisition by beginning negotiations with a potential purchaser with the intent to flesh out competing, hopefully superior, offers. Companies wishing to acquire a company also use a stalking horse third party to identify the risks in such a takeover while sheltering their reputation. Not surprisingly, “[t]he loser in the exercise appears to be the stalking horse. “
 


What we are finding, somewhat frustratingly, is that CLP’s practice of providing, up front, a firm price and developed litigation strategy, is sometimes used by potential clients as a stalking horse to extract better deals from hourly firms.

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Lack of Numbers Holds Up AFAs

JED

    [walking away] Numbers, Mrs. Landingham.

MRS. LANDINGHAM

    Excuse me?

JED

   If you want to convince me of something, show me numbers!

THE WEST WING "TWO CATHEDRALS" (2d season finale, 2001)

While clients agree with the criticism of hourly billing, the reality is they still have significant reservations about using an alternative fee agreement (AFA). Like fictional President Jed Barlit in The West Wing, clients aren’t going to tip and truly adopt AFAs until their lawyers can “show me numbers.”

Unfortunately, AFA firms don't yet have the numbers.  The great bulk of pricing data currently available is based on inefficient hourly billing, and, consequently, is of limited value.   Furthermore, the tools necessary for outside counsel to collect, analyze and present meaningful cost and profit data on AFA cases across clients and markets still need to be developed.

 

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Should a Flat Fee Include Post Trial Work?

Recently, a Japanese electronics manufacturer asked CLP to propose the fees and costs for a comprehensive patent license enforcement campaign aimed at improving revenue collection. CLP proposed an alternative fee arrangement that included both flat fee installments and a contingency on any recovery obtained (the “Alternative Fee Arrangement” or “flat fee agreement”). The proposed flat fee agreement covered legal services through, but not extending beyond, trial. During the negotiation of the agreement, the client raised an interesting question:


Should CLP’s "flat fee" include post-trial motions, appeals, new trials, and/or the enforcement of the judgment?


Initially, we felt that there were too many reasons that an alternative fee firm would want to avoid agreeing to a flat fee that covered post trial legal services at the outset of the litigation.



On reflection, however, the question of what activities should be included under the flat fee umbrella was not an easy one. For many reasons, a flat fee firm may want to negotiate up front for its fixed or contingency fees to cover post-trial work.


CLP ultimately decided to include some (post-trial motions), but not all (appeals, new trials, enforcing the judgment), post-trial work under its AFA, despite the risks. Why (or why not)?

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Willingness to Flat Fee is a Litmus Test

The negotiation of an alternative fee, even if unsuccessful, provides the client with valuable feedback on their case.  As discussed by Cisco litigation manager Neal Rubin on Legal OnRamp:

[C]ounsel’s willingness (or unwillingness) to share the risks and rewards of litigation can help the client assess the strengths and weaknesses of its case. . . . [A] firm’s willingness to accept risk provides a useful litmus test that can help instruct the client whether it has realistically assessed the strength of the case. The straight billable hour model provides no such feedback.

We find ourselves applying this litmus test to a potential IP enforcement matter.  The results suggest the client may not have the strong case it thought it did, and that the engagement will crater.  So how did we get to this point, and what good can come from the possibility that we may lose the engagement?

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Cutting Discovery Costs With Remote Foreign Custodian Interviews

As discussed in E-Discovery: Taiwan Collection on a Shoestring, CLP recently faced the challenges of cutting the discovery costs of a Taiwan based wireless communications device manufacturer with a popular new technology under dispute with a competitor.

For cost sensitive clients, containing discovery costs obviously requires reducing the overall volume of documents that will be collected, uploaded, processed and produced. If one looks at the Electronic Discovery Reference Model, ("EDRM”), the industry standard for approaching discovery,you will quickly realize that the most effective way to cut total costs along the discovery pipeline is to decrease the input during collection. 

 

 

With our client, we knew our end goal was to decrease the number of irrelevant documents we collected. The most cost effective way of limiting the collection, we decided, was to work with the person most knowledgeable about the documents on the custodian’s workstation--- the custodians themselves--- to make a targeted collection instead of a full replica of the hard drive.


The challenge, then, was how to effectively work with Taiwanese custodians when travel costs to Taiwan could be 3k an attorney.

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Trust your client's instincts

Adam Smith Esq. recently discussed a major obstacle to setting a fixed price for litigation: trust.

Sadly, for too many of us, clients don't trust us with their money and we don't trust them to reward us fairly.

The view from here in the trenches of flat fee IP litigation is that the trust issue is really about determining what a case is worth to a client.  In order to flat fee a project, you have to be willing to step off the cliff with your client.

The client is never going to agree to a flat fee unless it is convinced the amount invested in legal services (the flat fee) will generate an appropriate return on the investment.   The ROI determination, in turn, is based on the determination of what it is worth to the client to enforce its IP or defend claims brought by others seeking to enforce their IP.  This brings us to the trust issue, and our first  insight:

In our experience, the flat fee lawyer has no choice other than to

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E-Discovery: Taiwan Collection on a Shoestring

The lower costs and cost certainty attributable to flat fee IP litigation has, unexpectedly but not unsurprisingly, appealed not only to traditional consumers of IP litigation, but created a market of small, often foreign, high tech companies who never before could afford top quality IP legal services.

With that said, according to Dean Gonsowski of EWeek.com,

Pre-trial discovery expenses alone now represent 50 percent of litigation costs in an average case [and i]n situations where discovery is actively used, it could represent as much as 90 percent of litigation costs, approaching and perhaps exceeding $1 million on a single case.

So what we - at CLP - quickly discovered was that it was not enough to keep attorney fees in check, we needed to re-think the way law firms conduct discovery to cut the total costs drastically for clients.

Recently CLP represented a Taiwan based wireless broadband communications device company. The company had only 4 full time employees, but a promising technology that made it the target of an IP suit from a competitor. One of our early challenges, therefore, was to collect documents from work stations and peripheral devices of employees in Taiwan under a budget that would allow the cash poor company to defend itself and eventually realize its forecasted profitability.  Early estimates from vendors were around 9-12k.

We eventually figured out how to do it for 3k.

How?

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Setting a fixed price: focus on the short term

John Maynard Keynes' quote "in the long run we are all dead" rejected the notion that inflation would control itself absent government intervention in the short term.  It has equal application to flat fee pricing of litigation, where, for many clients, all that matters is what the lawyer is doing (and charging) “today,” because there is no “tomorrow.”

We do not dispute that "the fixed fee can be split into segments," (as stated most recently in Adam Smith, Esq.) but clearly some segments (the first!) are far more important than others.

Many early adopters of Confluence Law Partners, CLP’s flat fee IP litigation model are smaller sized technology companies that can’t afford the high cost of hiring hourly billing IP litigators.   These clients care little about the price of the entire litigation, not because their matters are expected to conclude any earlier or are easier to resolve than a typical IP litigation, but due to the limited amount of money available to spend on lawyers.

The client mindset is that it is OK to bail on the litigation, and that their lawyers should be ready at any time to help them implement this action - even if they've previously failed to share this strategy with counsel.

So what is the best approach to setting a fixed price?

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