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?
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.