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:
- What are the significant services that will be outsourced to subs?
- Who are the subs that trial firm proposes to engage on buyer’s behalf?
- Does the trial firm’s price include the cost of the sub or is the cost passed through as a disbursement?
- If passed through to the client, what is the estimated cost of the sub?
- Is the sub "for real"?
How well or poorly the prospective new model firm answers these questions should play a significant role in the determination whether they get the work.
Which brings us back to Andrew, Sam and the NCC Group. How would I answer the above smart buyer’s questions as they relate to NCC’s services?
Certainly we are talking about a significant service. The ability to produce the client source code in compliance with court discovery rules while at the same time protecting confidentiality is of the highest importance to a client, and the cost of producing the service whether outsourced or not run in the tens of thousands of dollars.
Should we be outsourcing the service to a sub such as NCC? Absolutely. Trial lawyers simply don’t have the software and computer science skills necessary to effectively anticipate and protect against the disclosure of client source code. Even assuming that the trial firm could figure out what needed to be done, the cost of creating and implementing the necessary protocol – including the very real likelihood of reinventing the wheel – is unduly high. Full disclosure – in my BigFirm hourly days, we often kept this work in-house notwithstanding the expense. The hourly fee structure rewarded us for keeping the work even if we could not do it as efficiently and effectively as an outside provider.
Does my firm propose to include the cost of NCC in the price my firm is giving the client for the firm’s services? Most likely no. Creating an escrow agent to maintain and produce confidential source code is not part of typical firm overhead but rather is unique to certain IP litigations. There are subjective elements regarding the level of security provided, which, depending upon client preferences, can make a big difference in the cost. There also are a number of unknowns regarding potential downstream costs (e.g., what if the source code is more difficult to load than expected, what if there are client modifications and the escrow account needs to be supplemented, what if certain experts require that the code be produced in more expensive formats, and so on?) not unlike e-discovery generally. My firm strives as much as possible to give the client an "all in" price (see our costs policy), but most likely we would pass through the cost of NCC’s services as a disbursement to be paid by the client.
Can we nonetheless give the client some reasonable estimates of this specific disbursement? Yes, thanks to NCC’s straightforward escrow agreement and menu of prices, most of which are flat fee per project as opposed to hourly. In addition, my impression is that Andrew or Sam, without the meter running, would work with us to identify and present key assumptions and an estimated budget based on these assumptions.
But is NCC for real? What confidence does the client have that NCC is capable of protecting against the unintended disclosure or misappropriation of the client’s source code?
The gold standard is whether a trial firm can recommend the sub based on having previously worked with them on a similar matter. Of course, I don’t have any prior work experience with NCC on which to make such a recommendation. Nonetheless, there is compelling evidence that NCC would be a quality sub. Andrew and Steve were able to provide favorable testimonials from other patent trial lawyers and testifying experts. They also could demonstrate that the creation of secure escrow for source code was their core business. Theirs is a publicly traded, international company that has been in business a long time and obviously has the resources to stand behind even the highest exposure (to them) projects.
The point is that smart buyers of value pricing firms need to aggressively investigate the firms’ proposed subs. The better a value pricing firm can demonstrate that its proposed subs are "for real," the more compelling is the case for giving them the work.