We have entered a new era where the prevailing party in a patent litigation has much better odds of recovering their attorney fees. “Until recently, winning hasn’t felt much like winning, particularly for defendants.” (Judge Grewal in Site Update Solutions v Accor) All this changed last year when the Supreme Court established a more flexible standard in Octane Fitness for determining when a patent case is exceptional, the precondition to awarding fees under the applicable fee shifting statute. Now, an exceptional case is “simply one that stands out from others.”
District Courts have begun to implement the new standard and the results are noteworthy for a number or reasons, not the least of which is whether and how fees are awarded where the prevailing party has paid a flat fee to its counsel (a fixed or set amount via lump sum or installments) as opposed to hourly fees.
In one such case, Parallel Iron v NetApp, the Delaware District Court rejected the losing party’s argument that flat fees allegedly caused the winning party’s counsel to frontload unnecessary work. The Court’s instead observed that a flat fee structure incents counsel to postpone work as opposed to doing more work sooner. While the Court is correct, it’s reasoning does not capture the more fundamental behavior encouraged by a flat fee, which is the huge incentive to lower the cost of producing legal services.
Parallel Iron lost the patent case it brought against accused infringer NetApp. Well, OK, technically Parallel Iron did not “lose” because it dismissed its case with prejudice and gave NetApp a free license to the asserted patent before the court handed down what appears to have been an inevitable ruling against Parallel Iron on the merits.
NetApp, which paid flat fees to the lawyers who defended the case, moved for fees following entry of the dismissal order (which expressly reserved NetApp’ right to seek fees). The Court ultimately awarded $550,000. (April 15 2015 Order (550K Attn Fees).)
The Parallel Iron v NetApp decision touches upon a number of compelling issues, including whether to award fees under either the fee shifting statue or the Court’s inherent authority, identification and application of the lodestar method for calculating fees, whether to limit fees to the time incurred in responding to the specific misconduct justifying the award of fees, and the determination whether fees incurred in bring the motion for fees are recoverable, but they are left for another day – the focus for now is Parallel Iron’s objection that the flat fees paid to NetApp’s defense counsel were unreasonable.
Plaintiff argues that Defendant’s billing structure encouraged unnecessary work and caused Defendant’s counsel to frontload work during periods when the case was dormant. (D.I. 103 at pp. 4–5). Defendant entered into a fixed-fee arrangement under which it paid counsel a set amount each month, irrespective of the amount of work performed during that period, (Id. at p. 4). Plaintiff argues that the arrangement incentivized defense counsel to perform work earlier than necessary so that counsel “did not substantially exceed the cap on the payments it was to receive when the case started moving.” (Id. at p. 5). Plaintiff maintains that it should not have to pay for work that was ultimately rendered unnecessary because it entered into a license which disposed of the case. (Id.)
Parallel Iron v. NetApp, 2015 WL 1387582, at *4 (D. Del. Mar. 25, 2015).
The Court rejected Parallel Iron’s argument, stating that it did not believe NetApp’s counsel had performed unnecessary, frontloaded work.
As I previously held, responsible attorneys would not stand around and wait for months once their client has been accused of infringement and then rush to perform all their work once they get more specific information. (See D.I. 47 at 14). It is reasonable to begin investigating and preparing a defense once an infringement suit has been brought.
The Court also had a different view of the behavior encouraged by a flat fee, stating:
I also do not find the “incentivizing” argument at all persuasive. If a firm gets a flat fee for as long as the litigation lasts, I would think the financial incentive would be to postpone work that may never need to be done, since doing it is not going to increase the fees, and postponing it may result in it never being done. The advantage of the latter alternative is that, if it never needs to be done, the attorney can do other work and be paid for it.
Id. at n.4.
The Court has it right, namely, that a flat fee incents counsel to postpone work that does not need to be done, but postponing work is merely a manifestation of the more fundamental ideas behind flat fees.
Clients love flat fees because they provide budget certainty. Moreover, clients don’t agree to the amount of a flat fee unless, in the client’s mind, it is aligned with the client’s economic interests.
As for the lawyer, the flat fee provides a huge incentive to lower the cost of producing legal services. The lower the cost of production, the greater the profit made by the lawyer.
Of course, as discussed by my partner Pat Lamb in his book, “Alternative Fees For Litigators And Their Clients” (ABA 2014), there is nothing inherent in flat fees that result in lower total fees. However, the flat fee lawyer, having been incented to find ways to lower the cost of production (and assuming they have found a way to do so – which is not always the case), can offer a lower overall price to the client and still make a profit. Price competition encourages the flat fee lawyer to share these savings with the client in the form of a lower flat fee.
Sure, postponing work that does not need to be done is encouraged under a flat fee structure, but this is simply one consequence of the more fundamental motivation of the flat fee lawyer to lower the cost of production. The same motivation incents the lawyer to reduce the time cycle to an overall resolution, to use process mapping, checklists and other business tools necessary for the lawyer to be more efficient in delivering legal services, to reduce office overhead, and to staff leaner and with more experienced attorneys.
It’s crazy therefore for Parallel Iron to suggest the flat fee encourages frontloading unnecessary work. In short, this drives the cost of production up, not down.
Properly understood, the benefits and incentives surrounding flat fees are factors demonstrating that this type of fee arrangement is reasonable and therefore the fees paid under this structure should be awarded under the patent fee-shifting statute – particularly where, as in NetApp’s case (and we will address in our next post), the flat fee was less than the lodestar amount calculated by the Court.