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.
In a typical example, CLP was invited to submit a pitch for a litigation involving a foreign multinational electronics company. Our competition was hourly firms, some larger, some known for discounted hours, all of whom provided attorney bios along with hourly rates and rough estimates of the costs of litigation. CLP’s veteran team measured up to any team proposed by the other IP litigation suitors, but instead of the hourly rates and a vague estimate of fees through trial, CLP presented a hard price, by month, of all attorney fees through trial, success-based incentives, and a detailed estimate of costs. Furthermore, the flat fee tracked a monthly case plan, describing, for example, how many experts, depositions, and motions would be used.
Not surprisingly, CLP’s flat fee bid was significantly lower than that of the hourly competitors. By putting partner level talent at every aspect of the case, flat fee litigation firms are more efficient and cut the deadweight of hourly billing practices. See Jay Shepherd’s post In-house help: how to save 20% on your outside-counsel.
But what transpired was that the in-house counsel played on the current willingness of hourly firms to discount prices in order to get the business. The prospect used CLP’s bid to leverage hourly price concessions and capped fees from the other firms. With our bid and case plan before them, the other firms lowered their estimates to match our price, thereby allowing the prospects’ corporate counsel to remain on the perceived safe path of selecting a traditional hourly billing firm and avoiding the seemingly novel leap into a flat fee structure for IP litigation
This story did not end well for the prospective client- the hourly firm chosen by the prospect exceeded its estimate and the case was staffed by unmotivated midlevel associates and junior partners while star litigators were placed on matters with high profit margins. Of course, these revelations came long after the prospect chose the traditional hourly firm over CLP. So the question remains:
How can a flat fee litigation firm win these projects without becoming a stalking horse?
CLP, like other AFA firms, provides a price up front. It’s what we do- the set price plus success incentives drives counsel to achieve the desired result in the most cost effective fashion possible. Consequently, there is no way to completely remove the risk that an AFA firm will not be used as a stalking horse.
Nonetheless, this risk is greatly reduced by first convincing the prospective client that “these guys are great lawyers!” before we give the price. Here’s what we do at CLP to accomplish that, in roughly this order:
- Answer the question “What is the ROI?” free of charge: What matters to the client is whether and to what extent legal services are going to mitigate risk, protect a current business strategy, or generate wealth. In other words, what is the return on their investment (ROI) in legal services. Free-of-charge, we thoroughly investigate the technology-at-issue, industry, prospect company, and, if the case is already filed, we make observations on opposing counsel, the presiding judge, the case schedule, the asserted claims and the other defendants. We use all this research, combined with a database of prior cases, as the basis of our development of the strategy laid out in the case plan.
- Deliver case plan implementing client goals: Each prospective client, before CLP ever negotiates a fee agreement, is presented with and walked through a detailed case plan, broken out by phase and month, explaining what activities are likely to occur during each period. We identify timelines for settlement or pre-trial victories. We invite feedback on the strategy for victory.
- Introduce CLP litigation team and vendors customized to case plan: Because CLP is not constrained by firm walls, forced to scavenge through employee attorneys for those with relevant skill sets and free time, CLP has the abiity to tap into a national network of expertise and select talent perfectly suited to the case. Our teams distinguish CLP anytime we present a team to a prospect. Most hourly firms build a team with a lead litigator, who gets involved as trial nears, a senior associate/junior partner who runs the case, a midlevel with technology experience, and a bevy of junior associates who will do most of the heavy lifting. CLP, on the other hand, puts partner level attorneys at each position. A recent pitch, for example, teamed a 25 year former equity partner litigator with dozens of trial victories, with a 14 year former equity partner EE with multiple trial victories and 11 years in the relevant industry, and a former equity partner EE with 20 years experience prosecuting patents. Finally, CLP brings their recommended e-discovery vendors on board and to the table to help present a discovery strategy and cost estimate.
- Teach the benefits of an AFA model: We believe our prospective clients need a strong appreciation that lower costs are the by-product of practicing law in a superior way; that flat fee litigation just offers better value: more up front due diligence, better case strategy, more experienced lawyers at every aspect of the case, incentivized attorneys performing as effectively and efficiently as possible, more and earlier opportunities for settlement, lower disbursement costs from E-discovery vendors, etc. To convey this, we often provide prospects with a brochure that captures how clients use us, the benefits of AFA compared to hourly, and case studies illustrating how we would protect or monetize their IP. We also keep a detailed FAQ on our website that captures the AFA advantage and answers the typical questions that a company new to flat fee litigation tends to have.
- In-person meeting to discuss price and approach: Hopefully, by this time in the process, the client loves us on paper, so we next seek to make sure they love us in person. We therefore strongly encourage clients to allow us to make an in-person presentation on our proposed strategy and fee structure as well as estimated costs broken out consistently with the case plan. The in-person meeting affords the benefit of allowing us to immediately resolve questions the client may have regarding the proposed fee. In addition, a disbursement worksheet proves an invaluable tool allowing the client to anticipate costs and participate in an educated conversation with us about modifying the strategy to meet their budget (when you know in the beginning what you need to do to win, you realize that many litigation activities are luxuries, but not necessary). If our price is not an accurate reflection of the value of our services to the prospect, the pitch is not going anywhere and we need to go back to the drawing board.
The dynamic driving this approach is that prospective clients who are not familiar with AFA models may fall into the trap of associating lower price with lesser service. If the client thinks the AFA firm is merely a discount provider, the AFA is merely a price metric and is not given serious consideration for the new matter. Conversely, if the client is sold on the strategy and team, and appreciates how the AFA model delivers superior value (efficiency, effectiveness, satisfaction), at a lower price, then the AFA becomes a serious contender for the business.
Thus, as you can see, CLP’s answer to avoiding the stalking horse conundrum has focused on communicating value before we propose a flat fee price that might be leveraged by prospective clients to drive down the prices of competing law firms. The information above takes significant nonbillable time to assemble, but the extra work expresses our value proposition in a way that we hope engages the prospect and educates them about a superior product. In this way, we hope to communicate that our flat fee firm offers advantages in terms of the quality of our service in addition to the lower price that is the natural consequence of our flat fee approach. If the client understands the full scope of our value-add, then we are not going to be used as a stalking horse.