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 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
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.