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

We've approached the matter from the perspective that developing a fixed price for litigation involves much more than simply multiplying the number of estimated hours by an hourly rate or rates, as discussed by Pat Lamb. Instead, the starting point is and always must be the client’s desired return on its investment in IP litigation and working backwards from there to develop an alternative fee proposal.

Our client wants to recover, net of legal fees and costs, an amount equal to a revenue stream generated by a typical license for its technology (of which there were several examples). Due to cash flow issues, the client also is asking us to take a lower flat fee up front with a larger contingency on the potential recovery.

We believe the calculation of a flat fee should be transparent to the client.   As stated in an article from Corporate Counsel, while firms increasingly profess their willingness to work under an AFA, in order to impress the client "[Lawyers] have to explain exactly how they came up with their flat fee, and how they'll make money, something many can't do."

Accordingly, we've prepared and shared with the client:

• our case plan and strategy
• our estimate of the likely recovery at a hearing on the merits, discounted by the likelihood (or not) of overcoming the anticipated defenses
• our estimates of the legal costs the client was likely to incur in addition to legal fees
• alternate proposed flat fee and contingency fee structures
• projections under both fee models of the net recovery by the client

After all this, the deal may crater.  Based on our assessment that there may be significant defenses to the claims the client wants to bring, we are unwilling to risk  the great majority of our fee compensation on the contingencies proposed by the client.  Furthermore, even assuming success on the merits, we project a lower monetary recovery than previously estimated by the client.  After adjusting for our proposed fees and the estimated costs, the client's estimated net recovery falls short of what is desired.

All this non-billable effort and the engagement may be DOA.  Disaster, right?  Wrong.

Whatever the client decides to do, it already has received free-of-charge an early, realistic assessment of the case.  Maybe we won't get to represent the client on this matter, but we're betting that we've begun a relationship that will generate work in the future. 

place significant trust in the client's determination of what the case is worth.   There simply is no amount of reasonable due diligence that can be done at the front end that will answer the question, particularly where the dispute involves complex technical issues arising out of patent or trade secret infringement. 

For example, CLP recently worked with a client to evaluate the ROI on enforcing certain patent licenses.  The analysis focused on the increased royalty income our litigations would generate as compared to the client's R&D investment.  This was exactly the right discussion  for CLP to have with its client.

However, the discussion depended upon basic assumptions supplied by the client as to who the targets would be, additional income thrown off by pursuing these targets, and the comparison of the projected income to R&D.  We, CLP, could not verify these assumption without committing undue amounts of time and resources (even assuming the client was willing to wait around and see if we could get comfortable with the assumptions - which they would not want to do). Instead, we had to trust the client's analysis.

Our second insight on the trust issue, is that the flat fee lawyer should trust the client's instinct on what a matter is worth.  Why?

• Clients know their business:  not only does the client know far better than anyone, including its lawyers, what is novel and valuable about their products and services, the markets and channels of distribution, and the business forecasts and projections, but the client also has a much better grasp of the intangible factors that are key to a successful litigation result, e.g., the personalities of the principals on the other side, the parties' respective final resources and stomach for scorched earth litigation, and whether, at the end of the day, they can support their case with "good" witnesses and documents.  This is particularly true at the outset of the litigation when the effort is being made to arrive at a mutually acceptable fixed fee.

• Clients have skin in the game:  this is not an intellectual exercise for the client, but a business decision requiring the reallocation of scarce resources from other business ends.  For smaller to mid-size technology companies, the client may be staking most if not all of a business line on the decision.   Big or small, the client is highly incented to get the evaluation right.