Seemingly unrelated, the WSJ’s discussion of antitrust claims challenging below-cost pricing (Antitrust Busters with Gavels, 4/26/2013) and the Internet tabloid Above the Law’s discussion of increased use of “suicide pricing” by Biglaw (Buying In: Suicide Pricing, 4/16/2013), have at least one thing in common; in each instance, the consequence of the irrationally low pricing is that the consumer gets screwed. At least antitrust laws recognize the problem as a matter of public policy and provide a remedy where this occurs in covered marketplace activities. With respect to legal services, there is no such remedy – caveat emptor, let the legal services buyer beware.

How these antitrust claims and below cost lawyer fees are connected after the break.


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Kudos to online retailer Newegg and its Chief Legal Officer Lee Cheng on the Federal Circuit decision handed down last week holding that three patents covering basic online checkout technology were invalid. [PDF] The decision reversed the judgment of the ED Texas trial court that the patents were not invalid and vacated the patent infringement judgment entered in favor of NPE Soverain and against Newegg by the trial court.

Check out Joe Mullin’s arstechnia post “How Newegg crushed the ‘shopping cart’ patent and saved online retail” for a full and insightful accounting of the litigation, which highlight’s Newegg’s commitment to never, ever settling with NPEs. CLO Cheng fleshed out the strategy to reporter Mullin:

We basically took a look at this situation and said, ‘This is bullshit,’ . . . We saw that if we paid off this patent holder, we’d have to pay off every patent holder this same amount. This is the first case we took all the way to trial. And now, nobody has to pay Soverain jack squat for these patents.

Without a doubt, Newegg and its counsel have achieved a very big legal victory. Soverain previously received a $40 million in settlement from Amazon, an additional undisclosed settlement from The Gap, and, while the Newegg appeal was pending, obtained a patent infringement jury verdict of $18 million from Avon and Victoria’s Secret. Due to the broad scope of online shopping technology allegedly covered by the asserted patents, InternetRetailer.com’s researcher Mark Brohan described Newegg’s decision to go to trial on Soverain’s claims (and after the other six online retailers named as defendants settled out) as creating “the mother of all patent battles.”

Yet even as we applaud both Newegg’s principled stand and the victory realized through the implementation of this strategy, we find ourselves asking whether the costs outweigh the benefits.


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This is something companies already know, but the Court has acknowledged it. The billing rates BigLaw charges for intellectual property litigation are too high.

Magistrate Judge Goldman recently found that Jones, Day’s rates in a discovery dispute to compel the production of documents were too high. In Etagz, Inc. v. Quicksilver, Inc., 10-00300-DOC, Central District of California, the Court ordered Etagz to pay “reasonable” costs and attorneys fees incurred by Defendant in bringing its motion for contempt and sanctions for Plaintiff’s failure to comply with an earlier order to produce documents.

The Defendant filed its statement of cost and attorney fees. In that statement, the Defendant asserted that it was entitled to $15,510.00 in attorney fees arising from 20 hours of work on its motion for sanctions. The Jones, Day attorneys listed their rates as $775/ hour and $675/hour. The Magistrate found 20 hours to be a reasonable amount of time for the motion. The Magistrate, however, said the rates Jones, Day charged were “excessive and unreasonable” and continued:

This Court is not aware of any case before it where
an attorney has sought that high an hourly rate for
an ordinary discovery dispute.

This case is another indication that BigLaw rates are not justifiable.


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A safety valve in a flat fee litigation agreement that puts off for a later date the negotiation of fees for late phase activities such as trial should probably include at least a default hourly fee pending the re-bargaining of a new flat rate.  (Yes, notwithstanding my strong bias in favor of flat fee pricing, I’m suggesting a possible, limited application of an hourly-based fee.)

My flat fee engagements for litigation services tend not to cover trial or the 60-90 day run-up to trial but instead propose to negotiate a mutually acceptable terms if and when the matter reaches this stage.  This "safety valve" protects against a situation where the time required to provide effective representation increases dramatically due to circumstances not reasonably foreseeable at the outset of the engagement.

There are very good reasons for  building in such a safety valve.  The legal services provided in connection with trying a case are shaped by a myriad of strategic decisions that are made by client relatively close in time to the commencement of trial and these decisions in turn are heavily influenced by case developments occurring over many months if not years.  It often is too difficult at the outset of the engagement to gauge pricing for trial with any precision.

While the presumption is that budgets and workplans should be “sticky,” no client wants an honest firm working at such a deficit such that the lawyers involved are incented to look at how they can cut corners or complete the matter more quickly than advisable. Thus, it is necessary for value-based fee arrangements to consider what kinds of “safety valves” can be triggered in the event the time required for effective representation increases dramatically due to unforeseen circumstances.

Navigating Professional Ethics Issues in the Changing Legal Service Paradigm,”  discussion draft from Susan Hackett at the Association for Corporate Counsel (available to Legal OnRamp Members here.)

Inserting the safety valve is rarely a deal killer in eyes of the client, who, at the outset of a matter, are focused on reducing the cycle to resolution or achieving a favorable outcome in the near term – trial, in their minds, is far off in the future and easily left for another day.  And why should trial counsel seek to disabuse them of this attitude where the great, great majority of litigations are resolved prior to trial?

However, leaving the re-bargaining of trial services for another day has it’s own issues, as explained (and solved) after the jump.


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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:


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Pat Lamb, in his very good book on value pricing Alternative Fee Arrangements: Value Fees and the Changing Legal Market, says that the fees and costs of a trial should never be built into the fixed fee proposed to a client.  "Never"? Really?

Really, says Pat.  Paraphrasing what he says in his book, virtually all cases settle, so including the cost of trial in the fixed fee is perceived by the client as overpayment, or could dissuade a client from accepting a settlement because they believe they have "already paid" for the trial.  Plus including expensive trial costs and fees might create sticker shock that scares away the client.  Pat also makes the compelling  point that it is not until you are close to trial that lawyer and client appreciate the real costs and risks of trial, such that the determination of the price for taking the case to trial is best left until then.   In other words, carve out trial from the price for your legal services, thereby allowing you to give the client a much lower price than you could if trial was included, and proceed under a fee structure that incents early settlement/resolution of the litigation (the earlier the resolution, the greater the profit made by the lawyer).

I’ve migrated from a first impression rejection of Pat’s recommendation to grudging acceptance of his logic. Check out my thinking process after the jump.


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JED

    [walking away] Numbers, Mrs. Landingham.

MRS. LANDINGHAM

    Excuse me?

JED

   If you want to convince me of something, show me numbers!

THE WEST WING "TWO CATHEDRALS" (2d season finale, 2001)

While clients agree with the criticism of hourly billing, the reality is they still have significant reservations about using an alternative fee agreement (AFA). Like fictional President Jed Barlit in The West Wing, clients aren’t going to tip and truly adopt AFAs until their lawyers can “show me numbers.”

Unfortunately, AFA firms don’t yet have the numbers.  The great bulk of pricing data currently available is based on inefficient hourly billing, and, consequently, is of limited value.   Furthermore, the tools necessary for outside counsel to collect, analyze and present meaningful cost and profit data on AFA cases across clients and markets still need to be developed.


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