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Alternative Fee Arrangements: Identifying Value and Drafting Critical Terms Jake M. Holdreith Robins, Kaplan, Miller & Ciresi L.L.P 612-349-8483.

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Presentation on theme: "Alternative Fee Arrangements: Identifying Value and Drafting Critical Terms Jake M. Holdreith Robins, Kaplan, Miller & Ciresi L.L.P 612-349-8483."— Presentation transcript:

1 Alternative Fee Arrangements: Identifying Value and Drafting Critical Terms Jake M. Holdreith Robins, Kaplan, Miller & Ciresi L.L.P

2 Why Consider AFAs? “Objective” goals: Predictable cost: fixed fees, caps, timing arrangements. Ex-post valuation: contingent fees, kickers or success fees, hold-backs. Cash flow: contingent fees, cost financing, litigation financing, enforcement entities. Avoidance of bill reviews. Jake M. Holdreith, Robbins Kaplan Miller & Ciresi L.L.P. 2

3 Why Consider AFAs? “Subjective” goals: Shared risk leads to better decision-making. Motivation and focus. Partnership. Jake M. Holdreith, Robbins Kaplan Miller & Ciresi L.L.P. 3

4 Why It Can Be Hard To Price Legal Services: It can be very difficult for lawyer and for client to determine the value up front: How much will it cost the lawyer in time and expenses to get to the result? What will the result be? What will the result turn out to be worth to the client? Jake M. Holdreith, Robbins Kaplan Miller & Ciresi L.L.P. 4

5 Contingent Fees Allow Ex Post Valuation Fee is determined by outcome. Client is usually protected. Law firm needs to do a good risk assessment. Client needs to be assured law firm is structured for contingent fee risk: – Capitalization – Experience – Compensation Structure Jake M. Holdreith, Robbins Kaplan Miller & Ciresi L.L.P. 5

6 What Makes A Good AFA (Not Contingent) Opportunity? Trust Relationship, Good Faith Ability To Benchmark Cost Up Front Clear Value Of Outcome Sufficient Information To Assess Risk Jake M. Holdreith, Robbins Kaplan Miller & Ciresi L.L.P. 6

7 Pitfalls I win, you lose negotiation. – Every successful AFA I have been involved in comes from a joint effort to create mutual value. – Holding back information leads to problems. Failure to do sufficient diligence. – AFAs should be as data driven as possible. Use history, benchmarks. Consider mechanisms for mid-course corrections. Failure of clarity in the value of the outcome. Jake M. Holdreith, Robbins Kaplan Miller & Ciresi L.L.P. 7

8 Pitfalls Failure to identify and describe scope of work that falls within the AFA. Jake M. Holdreith, Robbins Kaplan Miller & Ciresi L.L.P. 8

9 Is The Billable Hour The Cockroach of Legal Services? Jake M. Holdreith, Robins, Kaplan, Miller & Ciresi L.L.P. 9

10 History Contingent fee arrangements and fixed fee arrangements substantially pre-date the billable hour. The Billable Hour came into currency after a 1958 pamphlet of the ABA recommended tracking time and keeping detailed records as a remedy to reform fee-for-service schedules. Jake M. Holdreith, Robins, Kaplan, Miller & Ciresi L.L.P. 10

11 Questions About The Billable Hour Is it a perverse incentive that divides the client’s interest and the lawyer’s interest? – Consider a great result in the early stages. – Consider a poor result in the late stages. Does time reflect value? How does a client judge whether the time was – Necessary – Valuable – Reasonable – Efficient Jake M. Holdreith, Robins, Kaplan, Miller & Ciresi L.L.P. 11

12 Benefits Of The AFA Aligning Lawyer And Client Interests Improves Partnership Skin In The Game Can Improve: – Motivation And Focus – Shared Decision making Fixed Portions Can Improve Budget Predictability Contingent Portions Can Protect Client Cash Jake M. Holdreith, Robins, Kaplan, Miller & Ciresi L.L.P. 12

13 Types Of Alternative Billing Arrangements Full contingency: – Client fronts costs. – Attorney fronts costs. Partial contingency: – Reduced billing rate. – Fixed billing amount. – Cap. Fixed Fee – Per case. – By Task. – With True-up. – Bundle or volume. Moving the claim to another entity: – Gets cash flow off the books. – Can insulate from counterclaims. – Can shift the fee risk. Tip: see Dupont’s overview: del.com/alternative-fees- for-litigation-improved- control-and-higher-value/ Jake M. Holdreith, Robins, Kaplan, Miller & Ciresi L.L.P. 13

14 Fixed Fee (Not Based On Time): Variations Flat fee: single sum or per time period to provide budget certainty. Fixed fee per portfolio. Fixed fee with contingent portion: – Success fee (reward only). – Shared risk (fee goes up or down). – Often works well for defense cases. Jake M. Holdreith, Robins, Kaplan, Miller & Ciresi L.L.P. 14

15 Hybrid Variations Blended rate with success fee. Reduced rate or cap with success fee. Full rates to get past some point, followed by a hybrid. Fixed rate for initial case period with settlement effort, followed by full rates (used by Marriott, for example). Budget with shared savings. Jake M. Holdreith, Robins, Kaplan, Miller & Ciresi L.L.P. 15

16 Client Experience “The alternative arrangement, particularly the contingent fee, causes the firm to use smaller teams. I think that is good for the client as well as the firm. It means that everyone on the case knows the case. My experience with the billable hour is that knowledge is diffused among too many lawyers. Thus, the contingent fee makes the handling of a case more effective as well as more efficient.” Jake M. Holdreith, Robins, Kaplan, Miller & Ciresi L.L.P. 16

17 Client Experience: “In litigation, there’s a phase for each step. We pay the law firm 80% of their fee, and the 20% goes into a success budget. At the end of the matter we’ve got this success budget, and we use a formula as to how the success bucket is divvied up. Firms on average get 107% of what they actually would have billed. It forces the law firm to be efficient and to make well-thought- out case assessments at the very beginning, because it will determine what the margin for the firm will be.” Daniel Harper, VP, GC and Secretary for Océ North America, a printing company for professionals. Source: Specific Tactics to Delight In-House Counsel by Larry Bodine. Jake M. Holdreith, Robins, Kaplan, Miller & Ciresi L.L.P. 17

18 Pick The Right Case What makes a good fixed + success fee opportunity? – Predictable costs. – Predictable timing. – Clear goals. – Client need for budget predictability. – Client desire to align interests without giving up too much of the upside. – Non-monetary objective (e.g. injunction, behavior modification). Jake M. Holdreith, Robins, Kaplan, Miller & Ciresi L.L.P. 18

19 Pick The Right Case What makes a good hybrid or contingent fee opportunity? – Client desire to avoid cash flow burden. – Desire to align interests. – Past damages sufficient to justify the investment or client willingness to pay for nonmonetary success. – Case is triable, merits are strong. Jake M. Holdreith, Robins, Kaplan, Miller & Ciresi L.L.P. 19

20 Pick the Right Case: Justify The Contingent Investment Minimum 3:1 Preferred: 10:1 Why? – Risk premium. – Lost opportunity cost. – Time value of money. Jake M. Holdreith, Robins, Kaplan, Miller & Ciresi L.L.P. 20

21 Cost To Try A Patent Case Real world examples: – $5-20 Million total Out-of-pocket expenses: $1-5 Million. Jake M. Holdreith, Robins, Kaplan, Miller & Ciresi L.L.P. 21

22 Justify The Investment: Continued The math: 3:1 return. Investment: $7M. Return needed: $21 M. Recovery needed with a 40% contingent fee: $52.5 M. Jake M. Holdreith, Robins, Kaplan, Miller & Ciresi L.L.P. 22

23 Properly Allocate Risk And Reward Jake M. Holdreith, Robins, Kaplan, Miller & Ciresi L.L.P. 23

24 Myth: The Contingent Lawyer Works For Free You don’t want a lawyer who is willing to work for free (or for a substantial discount). A well-structured alternative agreement involves the client providing other value to compensate the attorney, and... The client hoping to have the opportunity to pay the kicker: – Because it is worth it. Jake M. Holdreith, Robins, Kaplan, Miller & Ciresi L.L.P. 24

25 Must Be Win-Win To Succeed Client’s and attorney’s interests must be aligned. Ask this question: “Will I be happy if we win under this agreement? Can I live with it if we lose?” – If the answer to either question is no (for you or for me), then it isn’t a good agreement. I win/you lose just does not work. – It’s unethical. – It’s dumb. Jake M. Holdreith, Robins, Kaplan, Miller & Ciresi L.L.P. 25

26 Client’s Risk And Reward Total Victory – As claimant – As defendant Partial Victory Accounting Predictability – No Cash Outlay – Predictable Cash Outlay Strong Partnership Defeat Liability – Fees and expenses – Substantive counterclaim Costs, if Client Bears Costs Other Loss – E.g. Patent Invalidity Resource Drain You’ll pay for these.You are willing to live with these Jake M. Holdreith, Robins, Kaplan, Miller & Ciresi L.L.P. 26

27 Attorney’s Risk And Reward Multiple of Time Investment – Full or partial. Unique Case Opportunities Trust and Partnership Loss Of Time Investment Loss of Cost Investment Time Value of Money Opportunity Cost You get this:You’ll risk this: Jake M. Holdreith, Robins, Kaplan, Miller & Ciresi L.L.P. 27

28 Pitfalls “This case will settle before trial.” – If you aren’t prepared to see the case through trial, you are courting disaster. Failure to forecast fees, costs, efforts conservatively and realistically. – IT COSTS A LOT TO TRY A CASE – and the middle of the stream is too late to figure out you aren’t riding a big enough horse. – Many good trial lawyers are not naturally given to budgeting and project management. Does the law firm benchmark to past experience? Does the law firm have systems to manage the project and budget? Jake M. Holdreith, Robins, Kaplan, Miller & Ciresi L.L.P. 28

29 Pitfalls Someone has no skin in the game. – “It costs me nothing to press on, so let’s press on.” Pure contingency, lawyer fronts costs. Client has overestimated value of a win. – I want you to be thrilled to pay the kicker because it is worth it to you. – Ask this question before you sign up: How much would I pay to get that result? Failure to identify an easy exit for the defense. – “There is no way they can avoid this patent.” Jake M. Holdreith, Robins, Kaplan, Miller & Ciresi L.L.P. 29

30 More Pitfalls Lawyer Has Not Diversified The Portfolio of Alternative Fee Arrangements. – You need to be able to cut bait. Lawyer Is Undercapitalized For Investment. – Attrition is a real strategy. Lawyer And Client Have Not Reached Agreement On Realistic Upside Potential, Downside Risk, and Pivots Up Front. – When do we fold? When do we raise? Jake M. Holdreith, Robins, Kaplan, Miller & Ciresi L.L.P. 30

31 Practical Considerations: A Survey Of Contingent Fee Patent Agreements Notwithstanding their length and complexity, the lawyers reported that two specific provisions were frequently negotiated, and the remainder was accepted as is. The two negotiated clauses were the contingent percent, and whether the law firm advanced the costs of the litigation. Of the agreements using a flat fee reviewed for this Article, the mean rate was 38.6% of the recovery. The graduated rates typically set milestones such as "through close of fact discovery," "through trial," and "through appeal," and tied rates to recovery dates. As the case continued, the lawyer’s percentage increased. Of the agreements reviewed for this Article which used graduated rates, the average percentage upon filing was 28% and the average through appeal was 40.2% THE RISE OF CONTINGENT FEE REPRESENTATION IN PATENT LITIGATION, David L. Schwartz (draft for review) Jake M. Holdreith, Robins, Kaplan, Miller & Ciresi L.L.P. 31

32 Practical Considerations For The AFA Identify key team members up front? – Who will stand up at trial? – Who will run the case every day? – Technical expertise? Jake M. Holdreith, Robins, Kaplan, Miller & Ciresi L.L.P. 32

33 Practical Considerations: Costs Experts Travel: airfare, hotel Court reporters Local counsel, PTO counsel Discovery – Reproduction – Data hosting – Contract data review – Trial Support Jake M. Holdreith, Robins, Kaplan, Miller & Ciresi L.L.P. 33

34 Practical Considerations Authority to settle. Firing your lawyers. Refusing to follow the advice of your lawyers. Non-cash resolutions. Jake M. Holdreith, Robins, Kaplan, Miller & Ciresi L.L.P. 34

35 Specific Terms/Language Fee is calculated and paid from total recovery before costs are reimbursed. If the law firm has advanced costs. Costs are paid from total recovery before fee is calculated. If the client has advanced costs. Jake M. Holdreith, Robins, Kaplan, Miller & Ciresi L.L.P. 35

36 Specific Terms/Language Handling of counterclaims/other litigation or administrative proceedings. – Law firm handles as part of contingency or hybrid. – Client pays law firm under a separate agreement. – Client pays a separate law firm (e.g. specialist) under direction of AFA law firm. Jake M. Holdreith, Robins, Kaplan, Miller & Ciresi L.L.P. 36

37 Specific Terms/Language Non-cash resolution, larger resolution: – Parties attempt to agree on cash equivalent valuation, else Arbitration (e.g. daytime baseball). Client pays multiple of actual fees. Jake M. Holdreith, Robins, Kaplan, Miller & Ciresi L.L.P. 37

38 Specific Terms/Language True Up: – If actual fees depart from the {fixed amount} {cap} by n%, the parties agree to consider an appropriate adjustment in good faith. – The fee is based upon the expectation of a need for the following tasks {list} during the time period {date – date}; if the actual time period and/or the actual scope of work departs substantially from these expectations, the parties agree to consider an appropriate adjustment in good faith. Jake M. Holdreith, Robins, Kaplan, Miller & Ciresi L.L.P. 38

39 Specific Terms/Language Follow on successes: – Contingent share of awards/settlements against other parties. Identify all possible targets of an enforcement effort. Identify basis of compensation if there is a recovery with no (or little) litigation. – Entire success fee if law firm efforts generated the recovery. – Reduced success fee. Jake M. Holdreith, Robins, Kaplan, Miller & Ciresi L.L.P. 39

40 Specific Terms/Language Right to fire counsel: – Full success fee, if success has already been achieved. – Quantum meruit. – Multiple of actual fees. – Exceptions: Conflict within Law Firm’s control. Ethical issues not caused by Client. – (But doesn’t apply if caused by client: If client refuses to follow advice and lawyer must withdraw, no exception to fees.) Malpractice issue. Jake M. Holdreith, Robins, Kaplan, Miller & Ciresi L.L.P. 40

41 Specific Terms/Language Law Firm withdraws: – If caused by client (e.g. refusal to settle): Multiple of actual fees. Quantum meruit. – If not caused by client (e.g. law firm declines to continue): No fee. Jake M. Holdreith, Robins, Kaplan, Miller & Ciresi L.L.P. 41

42 Specific Terms/Language Confidentiality and privilege over agreement: – Particularly if it reveals strategy or valuation. Jake M. Holdreith, Robins, Kaplan, Miller & Ciresi L.L.P. 42

43 Pick The Right Lawyer Track record. Sufficient contingent portfolio to be able to take a loss. Sufficient financial strength to go through trial and appeal. Fully evaluated the case before taking it. Is your attorney a good business partner? Jake M. Holdreith, Robins, Kaplan, Miller & Ciresi L.L.P. 43

44 What Kind Of Firm Can Take Big Contingent Risks? Must have a good relationship with your bankers or a lot of money in the bank. Must have a culture that encourages intelligent risk taking. Must have a good relationship with your partners. History and experience with contingent fee litigation. One-off cases can be dangerous to your firm. Partner compensation structure. – Must know how to compensate partners who might not produce any income for several years. Jake M. Holdreith, Robins, Kaplan, Miller & Ciresi L.L.P. 44

45 Robins, Kaplan, Miller & Ciresi, L.L.P. Patent Trial Group: – 24 Partners, 48 Associates – Total IP attorneys: ~100 Firm: ~250 Attorneys – Atlanta, Boston, LA, Minneapolis, Naples, NYC Contingent Fee Practice since 1938 – Patent Trial Practice since 1991 Jake M. Holdreith, Robins, Kaplan, Miller & Ciresi L.L.P. 45

46 Thank You! Jake M. Holdreith Robins, Kaplan, Miller & Ciresi L.L.P


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