Flat Fee IP

Getting Interviewed by Client: Be Less Annoying

David Bohrer — Tue, 01 May 2012 05:30:55 -0800

Matt Homen ("Six Minutes on Client Service Design") suggests breaking down the client service experience to identify and deliver value on what “drives the client freakin’ crazy” about the experience. For example, waiting in an airport check-in line is part of the experience of going to the airport. By focusing on what the person in line is thinking and feeling you can identify what they value most at that particular point in time – “I want the line to move faster.”

I’ve recently helped a client retain outside counsel. Getting the chance to participate in this process from the client side of things revealed that retaining counsel is itself part of the client service experience. Even if the outside counsel pitching the work is not successful, if they’ve delivered on the value the client places on the experience, they create a relationship that likely will give rise to future work from this client or others with whom the client shares the experience.

Take that part of the retention process where the client is interviewing the short list of lawyer candidates. What does the client want in that moment? The answer, in the client’s voice, is that “I want to the interview to be more productive.”

How to deliver on this value? What must you do to make the interview more productive?

1. The client is interested in hiring you, not your associate or junior partner. The lead dog has to be visible and engaged. If it’s a meeting, sit at the head of the table. If there is a slide show, take the lead in presenting the slides. If there is a phone call, do all the talking for your team. The client wants to come away from the interview with a good feeling of what it will be like to get advice and strategy from you, not some underling. If your associate looks or sounds like the person who did all the legwork for the interview, assume the client is running away from you.

2. “Tell me something I don’t know.” More often than not the candidate defers saying anything substantive because “it’s too early in the case” or because “we have not had the chance to look at the documents.” True enough, but based on your knowledge of the local judge and/or such things as the local patent rules, you can reasonably predict when claim construction will occur, how long the judge will allot for the hearing, the likelihood you will be allowed to introduce expert testimony, and identify more recent District Court decisions on the relevant subject matter. This is a huge opportunity to demonstrate subject matter expertise. Even if the interview does not go anywhere, the client comes away feeling like they’ve learned something new which will help them do their job better.

3. Do not recite your full resume. LinkedIn, your website bio, etc has already been scoured. Instead, tell the client which specific parts of your education and job experience are relevant to the matter under consideration. This is concrete data that will assist the client in determining whether you are more likely than the competition to achieve a successful outcome.

4. Who does the client like to have a drink with after work? The client may not know you, but if there are persons in their social circle who do and who will speak favorably of you, then you’ve made it much easier for the client to trust you.

5. Who are judges, clients or other lawyers with (or against) whom you’ve obtained favorable results that are known and respected by the client? By association, you’ve given the client meaningful information on which to make a decision.

Finally, if you don’t get anything else right, know how much you cost. It was stunning how often my hourly billing colleagues DIDN’T KNOW THEIR HOURLY RATE! You are asking the client to pay, in their mind, a painfully high rate or fee. Your ignorance of your rate drives the client crazy and demonstrates you care so little about their business that you could not take the time to figure out the rates for you and your team in advance of the interview.

Tax and Accounting Practice Lags Behind New Normal Model

David Bohrer — Mon, 09 Apr 2012 07:27:23 -0800

Not unlike many of my colleagues, I'm spending what is turning out to be an amazingly beautiful Spring weekend in the Bay Area preparing tax returns due next week - most specifically those of my law business, Confluence Law Partners.

What I've discovered is that there are key components of Confluence's model that don't fit neatly within standard accounting practices, resulting in higher bookkeeping and tax preparation costs and exposing me and the firm to potentially higher tax liability.

While its going to take some time for the new normal shop to reduce bookkeeping and tax preparation costs, there are some things that can be done now to protect against inflated tax liability. Furthermore, on reflection, its not surprising that current bookkeeping practices are not easily applied to the new normal model's aggregation of outside legal and non-legal services; status quo bookkeeping practices are directed to serving insular status quo hourly law firms that don't rely on significant outside collaborations to deliver legal services and whose model dissuades its lawyers from using outside legal services. More after the jump.

So what are the components of the Confluence model that are creating problems in connection with bookkeeping and taxes?

Confluence, on a case-by-case basis, forms small teams of skilled trial lawyers drawn from BigFirm practices and bills aligned fees (i.e., flat fees or other non-hourly based fees which, unlike hourly based fees, are aligned with clients' economic interests). Typically, this means that myself/Confluence and a senior attorney from another firm (see our case studies) jointly enter into the engagement agreement with the client. The engagement agreement sets out an agreed flat fee and schedule for payments of the fee in installments over time. (Typically there also are success rewards if the client wins, but that is another discussion.) The engagement agreement also confirms that Confluence and its partner firm will each take a certain portion of the installment fee with the remainder to be allocated by agreement between counsel.

The client is clear on which throat to choke - we spell out in our engagement agreement who will serve as lead counsel; usually this is a function of whether it was my relationship or that of my colleague that brought in the work. Likewise, the client gets one bill for all fees and all disbursements from all counsel.

Finally, Confluence sets up an interest bearing money market account which receives all client payments of fees and disbursements pending distribution into Confluence operating accounts or transfer into the bank account of the collaborating firm.

So where is the tension with standard accounting practices and what is the solution?

There are several areas where the Confluence model and standard accounting don't mesh as well as they should. We've flagged a couple of these areas, plus laid out our solution:

Since the client gets one bill from Confluence, under standard practice, Confluence books as income 100% of the fees paid. Of course, not all fees go to Confluence; instead, a portion go to the associated counsel and their firms. The standard practice of Confluence booking 100% of fees, if not addressed, creates an unduly inflated net income and consequently an unduly high tax liability. Solution: Confluence nets out as an expense the transfers made to associated counsel for their share of fees.
Holding back a portion of each installment fee paid by the client (and held in a Confluence account) presents an additional challenge. By definition, the holdback portion is not immediately distributed, so that the solution of netting out as an expense the transfers made to associated counsel is not applicable. Again, so long as the holdback remains in a Confluence account, it results in an unduly inflated net income and consequently an unduly high tax liability. Solution: Confluence characterizes all client payments into it's dedicated client account as pre-paid or unearned monies pending their distribution out of the dedicated account to Confluence or other associated counsel.
Standard accounting practice is to book as part of lawyer income all invoiced disbursements that are reimbursed by the client. Likewise, standard accounting practice is to net out of income as an expense all specific payments made by Confluence to cover the disbursements. The theory is that the disbursement payments made by Confluence (booked as expenses) wash out the disbursement payments made by the client (booked as income) so that, at the end of the day, Confluence's taxable net income does not include any payments made by the client to reimburse disbursements. The problem is that not all of the disbursements that appear on the bill submitted by Confluence were incurred by Confluence - this is a consolidated bill that includes disbursements incurred by other firms on the team. Under standard practice, Confluence's income is credited with 100% of the reimbursed disbursements, but it nets out only the portion of those disbursements that it directly incurred, resulting in unduly high net income and therefore unduly high tax liability. Solution: Confluence nets out as an expense the transfers made to associated counsel for the disbursements that they incurred.

To be clear, none of these issues should be construed as criticism of the quality of Confluence's current vendors. To the contrary, Confluence uses the time and expense management tools provided by Sage Timeslips, virtual consulting on Accounts Receivable and Accounts Payable provided by by the numbers, and hands on bookkeeping from the great folks at Hock Company. They are state of the art. The point is that the state of the art reflects a current focus on serving status quo hourly firms that rarely outsource or otherwise collaborate with outside legal services providers as part of delivering legal services. To the contrary, the overarching incentive in the hourly firm is to keep all work in-house, even if done more efficiently and at a lower cost by persons outside the firm.

I don't have expertise in accounting, bookkeeping or tax laws. I cannot offer legal opinions interpreting their governing standards and laws. This said, I've counseled in-depth with such folks, not to mention that I'm responsible for paying their bills, and therefore have some immediate and direct experience regarding what is and is not working in the back rooms of law firms implementing new normal models for delivering legal services. I welcome any critique of standard accounting methods that I've identified as not accurately capturing Confluence's model, as well as any critique of the above suggested ways to make sure that the tension between accounting standards and delivery model do not end up unduly increasing tax liability.

Big Data and Legal Knowledge Engineers

David Bohrer — Mon, 13 Feb 2012 08:02:49 -0800

The NY Times' declaration that we have entered the Age of Big Data suggests we are ever closer to realizing author Richard Susskind's ("End of Lawyers?") predictions for lawyers.

What is Big Data? According to the NY Times:

A meme and a marketing term, for sure, but also shorthand for advancing trends in technology that open the door to a new approach to understanding the world and making decisions. There is a lot more data, all the time, growing at 50 percent a year, or more than doubling every two years, estimates IDC, a technology research firm. It’s not just more streams of data, but entirely new ones.

These developments create a huge need for persons who understand and can manage, analyze and apply the flood of data - including among other things posts, blogs, images and video on the Web and streams of sensor data from industrial equipment, automobiles, electrical meters, shipping crates, the environment and people (think sensors that measure and communicate location, movement, hear rate, vibration, temperature, humidity, even chemical changes in the air) - in meaningful ways:

A report last year by the McKinsey Global Institute, the research arm of the consulting firm, projected that the United States needs 140,000 to 190,000 more workers with “deep analytical” expertise and 1.5 million more data-literate managers, whether retrained or hired.

These developments suggest we are that much closer to realizing Mr. Susskind's "Five Types of Corporate Lawyers Predicted for the Future" (Law.com, 10/19/09), which describes how lawyers who embrace emerging technologies and novel ways of sourcing legal work will continue to be successful, while those unwilling to change will struggle to survive. Mr. Susskind predicts that there will be five types of lawyers in the future: expert trusted advisers and enhanced practitioners, who will look much like contemporary lawyers, to be joined by legal knowledge engineers, legal risk managers and legal hybrids.

Of the predicted categories, there will be far less need for lawyers in either of the first two categories and conversely a much greater need for "legal knowledge engineers," as stated by Mr. Susskind:

If I am right and legal service will increasingly be standardized and (in various ways) computerized, then people with great talent are going to be needed, in droves, to organize the large quantities of complex legal content and processes that will be need to be analyzed, distilled and then embodied in standard working practices and computer systems.

Legal knowledge engineering, in the 21st century, will not be a fringe show at the edge of the legal market. It will be a central occupation for tomorrow's lawyers.

Doesn't Mr. Susskind's 2009 essay on legal knowledge engineers sound like a specific application of Big Data in the legal services market? Are our law schools missing an opportunity to team with their engineering departments to develop this type of specialist? Have we even scratched the surface of thinking about the application of Big Data in the legal services area?

Low Cost Response to New Internet Naming Options

David Bohrer — Mon, 26 Sep 2011 06:00:00 -0800

Internet naming is going to get a lot more interesting now that generic Top Level Domains (gTLDs - the word to the right of the dot, as in “.com,” “.org,” or “.net”) are expanding from the 22 options currently available to domains ending in brands, products, hobbies, political causes and just about anything else.

Canon Inc., the camera and printer company, already plans to apply for ".canon." And Apple could go after not just ".apple," but also ".ipad" and ".iphone."

Groups have already formed to back ".sport" for sporting sites, and two conservationist groups separately are seeking the right to operate an ".eco" suffix. Trade groups for bankers and financial-services companies are jointly exploring applications for ".bank," ".insure" and ".invest" for their member companies.

The incentives to apply for a gTLD are compelling. Among others:

Protecting your brand name from a similar brand owned by a third party (e.g. Avery labels and Avery Outdoors);
Concern that competitors in your market may claim the gTLD for themselves (e.g. Plantronics competitor Blue Ant seeks “.headsets” or “.bluetooth”)
Channel management by combining a unique top level domain with second level domains (e.g. “personal.citi” and “business.citi”)

Unfortunately, as has been well-documented, see, e.g., WebTM, the barriers to applying may outweigh the benefits:

The application is voluminous (250 pages), takes nine months or more and requires expert vendor assistance (e.g. domain registration consultants and specialized counsel) of which there is limited supply;
Practically speaking, if you have not yet started to prepare for the first round applications due Jan. 2012, you are too late and will have to wait over a year until the next round;
The upfront application costs, all in, exceed $300K and there is a minimum 10 year commitment to operate the new domain adding additional costs exceeding $1M.

Assuming these barriers are too great for most companies, there is nonetheless a near term, low cost strategy that even these companies should consider.

First, the international agency responsible for administering the applications for the new domain names, ICANN, will, after the application period closes in April 2012, post on its website the names of the gTLDs applied for as well as the identity of the persons behind the applications. Plan now to monitor the ICANN website for this information. The monitoring cost is nominal and it will provide a timely opportunity to consider a variety of administrative and legal means available to you to challenge the application, which are summarized, among other places, in ICANN's FAQs on gTLDs.

Second, the ICANN's Applicant Guidebook ("Guidebook") creates a Trademark Clearinghouse for protectable trademarks. A trademark owner must apply for and be accepted for inclusion in the clearinghouse. By joining the Clearinghouse, the trademark owner creates a trip wire providing notice if someone is attempting to register their mark as a second level domain (such as “ToyotaPrius”) with a relevant suffix (such as “.eco,” creating “ToyotaPrius.eco.”) Furthermore, there is a “sunrise” registration period where members of the clearinghouse are given the first opportunity to register their mark (“ToyotaPrius”) in any top level domain (“.eco”). The estimated fees and costs for applying for membership in the Clearinghouse are $5,000 - $20,000, far less than the hundreds of thousands if not millions of dollars required to seek and operate a new suffix domain. Furthermore, this cost-effective administrative remedy may be pursued as a proactive response to the operation in the future of a new suffix domain in a manner that infringes trademark rights or constitutes unfair competition.

True enough, the Clearinghouse is still in the planning stages and Clearinghouse remedy is limited to protecting against infringement in second level domains - but you’ve got to start somewhere and this is something that you can commit to do now without placing significant resources at risk and with the reasonable expectation of timely identifying potentially harmful cybersquatting on your brand.

What Makes Associate Successful in a Flat Fee Firm?

David Bohrer — Sun, 21 Aug 2011 14:27:05 -0800

HInt: it's not how many hours they bill; in fact, we've studiously avoided setting a target number of billable hours.

Another Hint: it's not following the sage advice (for associate survival in BigLaw) given to me by one of my hardened BigFirm associate cronies: "Don't Panic and Assume Nothing"

Instead, to quote from the memo we gave our new attorney on our expectations (and then sat down with them to discuss):

Your success, like that of every other person at Confluence, is judged on your contribution to increasing the firm’s net profits over the cost of producing high quality legal services.

Check out the memo in its entirety after the jump:

MEMORANDUM

TO: [Our Great New Associate]

FROM: David Bohrer

RE: Expectations

DATE: August 16, 2011

Now that you’ve had a couple of days to begin to transition into our merry band, I hope you’ve begun to understand both the great opportunity and significant challenges presented by our model for delivering legal services. We love the fact that you’ve joined us. Because we want you to succeed, please allow me to share our current thinking on the key expectations related to your position as a Confluence attorney.

On a personal note, please understand that as Confluence’s founder I have made many mistakes in the course of developing our business model and no doubt will make many more. This comes with the territory. To rephrase and mash-up a couple old saws, there is much wisdom, and probably a few extra gray hairs, borne of this pain. But, more importantly, the experience has both validated my core vision that high quality legal service may be delivered in a way that better aligns the interests of counsel and client (while at the same time allowing counsel to receive fair compensation for these services), and greatly focused my understanding of the practical steps necessary to implement the vision.

Turning now to our expectations, the primary goal is as follows:

· Your success, like that of every other person at Confluence, is judged on your contribution to increasing the firm’s net profits over the cost of producing high quality legal services. We will mentor you as best we can about the connection or lack thereof between a particular activity and our financial goals, plus we will make the relevant metrics as transparent as we can.

Our additional expectations, each of which in our view contributes to achieving the primary goal:

Our clients must always be delighted with our services, yours included.
Demand of yourself the highest level of performance on every single thing you do. We like people who take great pride in whatever work they are asked to perform.
Make those around you better at what they do.
You must know and be able to effectively communicate the core features differentiating Confluence’s model from that of our competitors – better yet, your belief in what we are doing should ooze from every pore.
Play hard and play to win – our clients rightfully expect nothing less – but never, ever lie or misrepresent what you know to be the truth. Our profession is only as strong as our collective commitment to the highest ethical and professional standards. You are expected not just to know and comply with these standards but to exceed them.
Receive continuing legal education, at least once a quarter, on a subject matter that will contribute to your ability to handle your then existing case assignments more effectively. We are paying the fees and costs for such activities as described in your offer letter.
Prepare within 30 days a brief summary of proposed personal marketing goals and implementing steps. We will mutually revise and finalize the draft, which will be placed on file with the expectation that you will initiate a meeting on a quarterly basis to review your progress and update the plan accordingly.

Let’s sit down at your earliest convenience to discuss these expectations. If you have any questions, I want to address them as soon as possible. If you think changes need to be made, I’m open to anything that will increase net profit margins and/or lower operating costs.

Dave

Hourly "Safety Valves" for Flat Fee Litigation

David Bohrer — Fri, 29 Apr 2011 04:30:39 -0800

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.

So why not leave the negotiation of fees for trial-related services to "another day"?

Ethical issues: if outside counsel and client are unable to agree upon new terms, the next step is client discharge or lawyer withdrawal that, given the late and intense stage of the proceedings, might impose undue hardship on the client and also might raise questions whether outside counsel has satisfied its obligations to provide diligent and competent representation through completion of the assignment. Furthermore, negotiation leverage is decidedly skewed in favor of outside counsel where re-bargaining occurs in the midst of the representation, raising serious questions whether outside counsel has complied with its duty of loyalty and the client has been given a full and fair opportunity to evaluate and consent to the new engagement terms.
You may not be able to pull out even if you want to: many courts will not allow counsel to withdraw if it would affect a previously scheduled trial, forcing counsel to try the case with no fee agreement in place.
You may not have reasonable opportunity to re-negotiate: rarely is there a bright line indicating where pre-trial investigation and motions end and in-depth trial preparation begins (e.g., argument and ruling on a case-dispositive summary judgment motion remains pending and extends into the scheduled run-up of activities (e.g., identifying and marking trial exhibits) to the final pre-trial order); under the circumstances, both counsel and client are distracted and otherwise "under the gun" - this is hardly an environment conducive to mutually agreeing on how best to share the risk and otherwise align respective interests.
The uncertainty surrounding whether and to what extent counsel will represent the client through trial could unduly influence and prejudice the settlement outcome. For example,the client agrees to a less favorable settlement rather than face the uncertainty of an unresolved representation at trial. Likewise, counsel might be forced to bargain away otherwise reasonable terms for providing trial representation in return for the client "continuing to fight" as opposed to the client "caving in" and accepting a lower settlement payment that reduces counsel's contingency fee recovery.

The solution that we've begun to use is to build in a default hourly fee that will cover the trial period until and unless the parties agree otherwise. The engagement language generally reads something like:

If the case does not resolve during phases X through Y, we would of course continue to provide legal services during the next phase covering final pre-trial preparation, trial and post-trial tasks and commencing the earlier of the date after the completion of summary judgment hearings or 60 days before the scheduled final pre-trial conference. With respect to this phase, we will enter into a mutually acceptable fee arrangement, but pending any such agreement we would be compensated at [insert hourly rates] [ at our normal hourly rates less 10%] [etc]

Yes, you read this right, I'm suggesting an hourly fee. Yes the billable hour is perverse in its disincentives to lawyer efficiency, but given the need for a default safety valve fee, the billable hour shortcomings are outweighed by the positives of having something so simple in application and so easy to insert at the outset of the litigation.

Client and counsel remain motivated to agree upon a non-hourly fee arrangement for trial because it will far better align their interests. Plus their interaction over the course of the phases leading up to trial builds additional trust and solidifies the relationship, creating a fertile environment for agreement on alternative fees. In the meantime, the existing hourly default addresses the ethical and practical issues that otherwise would otherwise exist if the safety valve simply leaves open the question of fees going forward.

Quora: How to Cut (Hourly)Fees

David Bohrer — Mon, 21 Feb 2011 05:28:16 -0800

Quora, the hot new Q&A site, has people asking whether it is "the biggest blogging innovation in 10 years?" the "Next Red-Hot Web Start-Up" or could be "Bigger than Twitter" ("[i]t's smart. Really Smart").

We couldn't resist seeing whether the Quora community had tackled the subject of hourly vs. flat fee pricing of legal fees. Literally the first search response was: "If a lawyer says that $30k has been charged up on the clock, how much are they typically prepared to write off?"

While there is some thoughtful discussion (realization rates, size of the client portfolio and so on), far more important and compelling is the premise underlying the question, namely: if your lawyer is charging you "on the clock" you will want to "cut fees" at the back end of the project.

What consumers of legal services intuitively get is that hourly-based pricing of legal services incents behavior that is not aligned with their interests (hence the assumed need to haggle down the fee at the end of a project). They know that the behavior they get with hourly pricing is more time billed to their matter and by more people, longer cycle to resolution, and people trying to do everything as opposed to what they are truly good at.

The far more compelling question for the connected, tech savvy and knowledgeable Quora community is why the relevant consumers continue to accept hourly-pricing as the standard pricing model for legal services? What has to happen to tip the model in favor of flat fee or other efficiency-based pricing?

Should Lawyers Use Google AdWords?

David Bohrer — Mon, 31 Jan 2011 04:30:00 -0800

There's no question that prospective clients of non-hourly priced legal services can't find the "new normal" firms offering these services unless the firms are doing some shouting online, see our Nov. 30 post. It's equally as clear that the shouting can be done ethically, see our Dec. 18 post.

But is Google AdWords, one of the most widely used online marketing tools, worth the cost?

According to Google's snappy tutorials, the answer is yes so long as the revenue earned on each click on the lawyer's ad is greater than the cost incurred by the lawyer in generating that click. However, good luck reaching agreement within your firm on revenue resulting from a specific prospect clicking on your ad and being directed to your website.

The better approach, it seems to us, is to ask what happens when a client prospect types in the "key words" most relevant to the lawyer's practice. If the lawyer's website does not appear on the first page of the search results, then it's probably worth the cost to use AdWords to help get you there.

As explained in Agency San Francisco's recent tract Guerrilla Marketing for Attorneys:

Getting on Page 1 of Google when people type in your law firm's "key words" is by far the most critical Internet marketing that your law practice can do. Most of your potential clients that use search engines will never go beyond the first page.

The case for using the appearance on Google Page 1 as the test whether to pay for AdWords after the jump.

AdWords Requires Lawyers to Bid Against One Another for Ad Placement

Adwords is a pay-per-click service that requires the lawyer to pay a fee to Google each time an Internet user clicks on the lawyer's advertisement appearing on a Google search response page, Clicking on the ad directs the Internet user to the lawyer's website.

Here's the rub: Google effectively auctions off the most highly desired search terms (and consequently the likelihood of the ad appearing "higher up" on the search response pages) to the lawyers willing to pay the most for these terms - the more the lawyer is willing to pay for a click on their advertisement, the more likely is Google to feature the lawyer's ad in response to the relevant search term. Furthermore, not only do lawyers bid against one another, the bidding is highly competitive due to the relatively finite number of search terms most relevant to a particular law practice. Check out attorney Ben Glass's video on this point:

For example, Google's "traffic estimator" demonstrates that terms such as "patent litigation" or "intellectual property" are being searched on average tens if not hundreds of thousands of times per month. Who wants to get in a bidding war in such a highly competitive environment? Based on our preliminary review, the bid or cost per click the lawyer may need to pay for a higher profile appearance in response to the search of such high traffic terms is in the several hundreds of dollars a month. While the kids won't need to give up college, this is nonetheless a lot of money to spend where the return on the investment = the possibility of getting some subset of client prospects who view the ad to visit the lawyer's website + the more speculative possibility that some subset of prospects, having reached the site, might contact the lawyer to discuss a representation + the even more speculative possibility that some subset of prospects, having both gone to the site and then contacted the lawyer, decides to retain the lawyer.

Difficult if Not Impossible for Lawyers to Evaluate AdWords By Comparing Revenue vs. Cost Per Click

We have not found anything that might allow the lawyer to quantify in dollars and cents the return on investment in AdWords. Google does provides informative tutorials by Google economist Hal Varian on how to bid for AdWords, but these tutorials focus on websites selling products as opposed to services and their analyses ultimately require hard numbers on how many clicks into the website result in a sale (or in Google speak, a conversion).

When does a conversion occur in connection with a prospective client visiting the lawyer's website? Is it the visit itself? (We doubt it.) Is it the prospect taking the further step of contacting the lawyer? (Certainly of greater interest to the lawyer, but enough?) Is it the prospect's decision to engage the lawyer after running the Google search/lawyer website gauntlet. (Best, but how realistic?) Good luck monetizing these different results.

A Better Test for Whether to Use AdWords: "Are You on Page 1?"

Rather than get tied up in knots trying to quantify both click revenue and costs, the better focus it seems to us is whether the lawyer's website appears on Page 1 when a client googles the key words most relevant to the lawyer's practice. San Francisco attorney Brett Burilson expands on this point in his video:

Guerrilla Marketing lays out the case for why lawyers should get their websites on Page 1 and use AdWords to get them there:

So where are your potential clients? They're all online.

Google is the most popular search engine in the world. Google gets 65.4% of all searches.

What is "Page 1"? Page 1 is the first page you see when you type in your key words or search terms into Google's search engine. There are only 10 results or websites that Google presents on its "first page" for any search. The 10 sites allowed are always below Google's paid ads, which are at the top and the right of the Page, called Google "Adwords". These non-paid search "results" are called "organic" results since they're not paid ads

Most of your potential clients that use search engines will never go beyond the first page.

[L]et Google drive traffic to your site using their paid ads. Adwords is also Google-friendly and will help get your legal website to the top. Only use it for 4-6 weeks after the initial launch. By then your organic keywords will be optimized and put you in the top 10 search results

We've used these insights in evaluating whether our firm CLP should use AdWords. We've determined that regards the most important key words relevant to our model, namely, 'flat fee IP litigation," both our website and blog already enjoy Page 1 status. So no compelling need right now to incur the costs of AdWords.

This said, we've noticed the trend among thought leaders is to refer to "efficiency-based pricing" or "value pricing" (as compared to "hourly-based pricing"). It might be worth it for CLP to pay for some ads that drive us to Page 1 when these terms are searched.

Likewise, our model has proven attractive to companies defending NPE patent litigations, particularly with respect to the online gaming and online retail markets. Perhaps we should be using AdWords for Page 1 visibility relevant to this industry-specific litigation.

Hmmm.

Shouting Via Pay-Per-Click Advertising is OK

David Bohrer — Sat, 18 Dec 2010 05:00:29 -0800

Online advertising by attorneys via pay-per-click* is an effective and most likely necessary means of reaching many of the prospective consumers of new normal legal services, as discussed in our previous post on "shouting."

But before jumping in, what is the regulatory environment? Simply put, is this allowed?

More than a few of our lawyer colleagues think so because they are already doing it. Googling "commercial litigation lawyer" returns a slew of attorney ads along the right side of the search results page, including, for example:

Fletcher Business Law

Supporting Bay Area Businesses
Call for Consultation: 510-709-5435
San Francisco-Oakland-San Jose, CA

www.fletcherlp.com

So far so good, but most of us are going to want better information on the applicable regulations.

The answer is that pay-per-click online services are not prohibited and instead enjoy the same limited First Amendment protection of commercial speech that is afforded other forms of attorney advertising. However, the regulatory environment is far from settled, as discussed after the jump.

Currently PPC is Neither Prohibited Nor Specially Regulated

The United States Supreme Court gave its qualified approval of attorney advertising in Bates v. State Bar of Arizona, 433 U.S. 350 (1977). Truthful and non-deceptive attorney advertising is protected under the First Amendment; however, like other commercial speech, attorney advertising is subject to regulation by the states.

Attorneys seized the opportunity to promote themselves across traditional radio, television, direct mail and print media, and, like other states, California responded by adopting rules prohibiting false, misleading and deceptive advertising messages in both its Rules of Professional Conduct (section 1-400 (A)-(D)) and Business and Professions Code (sections 6157 to 6158.3).

More recently, in the not exactly complimentary words of the Ninth Circuit, "attorneys [began] trolling for clients on the internet," due to "sufficiently widespread use of the internet, within the past five or ten years, that makes internet advertising worthwhile." See Barton v. US Dist. Court, 410 F.3d 1104, 1109 (9th Cir. 2005).

State bar associations have attempted to address the real or perceived challenges of regulating Internet-based advertising. California's Board of Governors has adopted a revamped set of Rules of Professional Conduct that includes, in Article 7, revamped attorney advertising rules expressly addressing communications on "web pages and web sites," "electronic transmissions," "electronic media" and the "Internet." These new rules await the approval of the California Supreme Court. Florida enacted and has since stayed enforcement of a bizarre and unduly burdensome set of regulations directed to attorney advertising over the Internet. Consumer rights group Public Citizen has challenged not just the new regulations in Florida but also those in New York and Louisiana, as recounted in "Florida puts brakes on lawyer advertising rules."

The ABA Commission on Ethics 20/20 and its reporter Professor Andrew Perlman have also joined the issue, publishing on Sept. 20, 2010 a whitepaper "Concerning Lawyer's Use of Internet Based Client Development Tools" and soon thereafter a podcast on the same subject. The ABA solicits guidance among other things "on whether pay-per-click and pay-per-lead arrangements" might violate Model Rule 7.2 (Advertising).

The upshot is that, notwithstanding the high level of chatter, pay-per-click attorney advertising currently is neither prohibited nor specially restricted by state ethical regulations.

Greater Regulation of PPC in Future is Unlikely

Furthermore, reading the tea leaves, there won't be any special regulation of pay-per-click advertising in the future.

- not an impermissible payment for specific referral

In most jurisdictions, lawyers cannot pay or give "anything of value" to someone for referring a particular client or case. See Proposed Cal RPC 7.2(b); ABA Model Rule 7.2(b). Traditional advertising does not violate this rule because the advertisement is not targeted at a particular person with a specific legal problem and the advertising fee is paid regardless of whether anyone ever reads the ad or contacts the lawyer - the connection between the payment for the ad and the contact with the prospective client is attenuated at best.

But does pay-per-click advertising, where payment is made not for the posting of the ad but rather for someone clicking on the ad and consequently landing on the lawyer's website, rise to the level of impermissible payment for a specific referral? Not so, according to the lawyerist.com in "Pssst, Buddy - Wanna Buy a Client?

So, the lawyer pays for clicks. Sounds pretty close to paying for each referral. But Google has no idea whether the clicker needs legal services, is just curious, or is bored at the office. Nor does Google guarantee a certain number of clicks or that the clickers will actually turn into paying clients. In the end, it looks more like targeted advertising than paying for clients.

- does not fall within the categories of false, misleading or deceptive practices

In addition, the typical pay-per-click ad, like that above, does not fall within any of the categories of false, misleading or deceptive communications described by the California Board of Governors. It does not contain a guarantee, testimonial, dramatization, state "no fee without recovery," state that legal services can be provided in a language other than English, or state a range of fees lower than that actually charged. See Cal Rule 1-400 Standards 1-17; Cal RPC 7.2(b) Standards (1)-(6). Of course, a pay-per-click ad that crosses the line into one of these categories is not permitted, but this is no different from the restrictions on traditional advertising.

- is not a prohibited solicitation

The use of pay-per-click ads also comports with California State Bar Ethics Opinion No. 2001-155, which concluded that an attorney website is not an impermissible "solution" under Rule 1-400(B) even if it includes electronic mail facilities allowing direct communication to and from the attorney. The Opinion distinguished what it called "the static nature of an email message" from a direct, real-time communication made in person or by telephone. Unlike the latter, the email message "allows a potential client to reflect, re-read and analyze; the written form allows the potential client to share and discuss the communication with others and maintain a permanent record of its contents; and the mechanical steps involved in sending and receiving messages impose a measured pace on the interchange." Similarly, the pay-per-click ad allows reflection, sharing, and recording over a linear and measured progression of steps, and, therefore falls well outside the scope of impermissible solicitation.

Of course, the very nature of Internet communications brings the pay-per-click ad within the auspices of numerous, potentially inconsistent if not conflicting state bar regulatory schemes. The possibility always exists of an outlier jurisdiction finding that lawyer pay-per-click is an unauthorized practice of law, but not so far and probably not in the future.

Still to come:

We've proposed that lawyer shouting via online channels is necessary, and further proposed that pay-per-click is ethically permissible. In our last installment, Part III, we turn to whether the benefits of the pay-per-click service provided through the leading Google AdWords outweighs the expense.

*Pay-per-click advertising is a service for which a lawyer pays a fee to a third-party each time an Internet user clicks on an advertisement that directs the user to the lawyer's website. Google AdWords is one of the most well-known of these services.

Marketing New Normal Firm: Shouting Still Necessary

David Bohrer — Tue, 30 Nov 2010 05:30:00 -0800

The shift in the balance of power towards consumers means less “shouting” (marketing) about your product or service, according to Jeff Bezos, Amazon founder.

"Before if you were making a product, the right business strategy was to put 70% of your attention, energy, and dollars into shouting about a product, and 30% into making a great product. So you could win with a mediocre product, if you were a good enough marketer. That is getting harder to do. The balance of power is shifting toward consumers and away from companies...the individual is empowered... The right way to respond to this if you are a company is to put the vast majority of your energy, attention and dollars into building a great product or service and put a smaller amount into shouting about it, marketing it. If I build a great product or service, my customers will tell each other."

See the Bezos interview and transcript.

The legal services industry has seen a similar shift in power from lawyer to client and a correspondingly greater emphasis on providing better quality legal service for less money, as described, among other places, by author and lawyer Pat Lamb in Alternative Fee Arrangements: Value Fees and the Changing Legal Market. This is the "new normal" to which most law firms must adapt or die. But does this mean that the need for shouting by the new normal firm is significantly reduced? For now at least, the answer is no.

Here's why.

New Normal Firms Need Early Adopters

For new normal firms to continue to gain traction and thrive in the current market place, they need to expand the pipeline of work in their respective practice areas. The reality is that the group of clients who currently are most likely to hire these firms, i.e., the early adopters, tend to be less sophisticated consumers of legal services. Think emerging growth or early stage technology companies with no in-house legal department and a history of little or no litigation. Often for the first time, they are confronted with litigation challenging their ownership and use of the software, processes or other intellectual property the business needs to survive. Making matters worse is that the business-threatening litigation has been filed in a "plaintiff friendly" venue outside the client's home forum.

Early Adopters Need Help Finding New Normal Firms

With little or no experience hiring outside counsel and even more limited connections, the early adopters tend to fall back on subjective and anecdotal information provided by a limited group of non-lawyer engineers, scientists or early stage angel or VC investors whose knowledge is typically limited to "old normal" firms using hourly based fee structures. The old normal firms further confuse matters by proposing discounts on hourly rates or capped hourly fees and falsely describing them as "alternative" "value" or "client-focused" fees.

Not surprisingly, the early adopter clients tend to come to the new normal firm after first having been channeled through an hourly firm only to come to shocking realization, usually after a month or two of billings, that the old normal way of doing things is far too expensive - it does them no good to ultimately win on the merits where the cost incurred in obtaining this result have run the business into the ground. The slow trickle of early adopters that limp into the new normal firms in these circumstances is not of a sufficient rate to create a robust contribution to the overall pipeline of firm business.

On-line Shouting: Google AdWords

So shouting is necessary, but simply shouting through more traditional channels such as papering the market with carefully vetted (= too long and boring) white papers, being interviewed in the local legal publication, speaking at lawyer associations or playing golf with the in-house lawyers etc. won't work because this does not reach the target audience - it literally does not put new normal firms on the early adopter's screen.

Which brings us to Internet search. ALL early adopters use this resource, which means new normal firms may need to shout in this on-line space using pay-per-click (PPC) advertising such as Google AdWords. In its simplest form, with AdWords an advertiser (such as a lawyer) targets the words that prospective clients might search using Google (e.g., "IP litigation attorney"). When someone searches using these words, the lawyer's 4-line advertisement may show up above or to the right of the search results. The lawyer does not pay for the ad to appear but does pay when someone clicks on the lawyer's ad and then is whisked away to the lawyer's website.

Make no mistake, shouting is not the exclusive requirement for expanding the new normal firm's pipeline. A good case has been made for use of social and professional networking to reach interested clients. Also crucial is investing the money and effort necessary to achieve results that delight the client and create goodwill necessary to attract more business. Nonetheless, shouting is a necessary bow in the new normal firm's business generation quiver.

Still to Come:

Before we spend any more time on Google AdWords, is it even allowed under current professional ethics rules? See future installment Shouting (Part II).

Assuming it is allowed, is shouting through Google AdWords worth the time and money? See future installment Shouting (Part III).

Patent Marking Ruling Means Bigger Damages

David Bohrer — Thu, 07 Oct 2010 15:16:59 -0800

The Federal Circuit's recent decision affirming the patent jury verdict in Funai v. Daewoo effectively increases the money damages that can be recovered by millions if not tens of millions of dollars. (Full disclosure: I tried the case and among other things was responsible for the damages evidence introduced at trial.)

Background: The Accounting Period for Patent Damages Does Not Compensate All Economic Harm

In situations where the patent owner sells a product that practices the patented invention and a competitor sells an infringing product, an economist pegs the beginning of the economic harm resulting from infringement (lost sales, reduced prices, etc.) to the date the infringing sales began.

However, the accounting period for patent infringement damages usually begins much later - not until notice is given in compliance with the patent marking statute, see 35 U.S.C. sec. 287(a). Any and all economic harm that predates notice is excluded from recovery under the statute.

More Background: The Earlier the Notice, the Earlier the Accounting Period Begins, the Much Larger the Damages

The earlier the statutory notice, the further back in time you can go to collect damages on infringing sales. We've previously demonstrated in The Shifting Sands of Price Erosion that even slight adjustments in how early the accounting period begins can increase by tens of millions of dollars price erosion damages alone.

Funai Relaxes the Notice Requirements and Effectively Expands The Accounting Period to Capture Infringing Sales That Are Earlier In Time

More after the jump.

There are two types of statutory notice: actual and constructive. Actual notice is accomplished by sending a properly drafted cease and desist letter, or, in the absence of any such letter, by the filing of the lawsuit.

In comparison, constructive notice is accomplished by marking the product or its packaging with the patent number. Practically speaking, product marking occurs before, if not well before, service of a formal cease and desist letter or the filing of a lawsuit. Thus, the ability to establish constructive notice means the patent damages accounting period will begin earlier and capture a larger number of infringing sales.

The test for whether marking satisfies the statutory constructive notice requirement is that the marking of the products must be "substantially consistent and continuous." Am. Med. Sys., Inc. v. Med. Engineering Corp., 6 F.3d 1523, 1537 (Fed. Cir. 1993).

Prior to addressing the issue in Funai, the largest percentage of unmarked products allowed by the Federal Circuit was 5%. See Maxwell, 86 F.3d 1098, 1111 (Fed. Cir. 1996) (holding that marking requirement was satisfied even though 5% of the products sold by licensees were not marked). This spelled trouble for Funai, which sold 9-12% of its products to its OEM customers for resale who did not mark the product with Funai's patent number. Was the Federal Circuit willing to expand by 2X the percentage of unmarked products and still find "substantially consistent and continuous" marking? Fortunately for our client, Funai, and for the many other technology companies that distribute patented products through OEM channels, the answer was yes.

Also prior to addressing marking issues in Funai, the Federal Circuit had applied a "rule of reason" in situations where third-party licensees as opposed to the patentee handled the manufacturing and distribution of the patented products. See Maxwell, 86 F.3d at 1111-12 ("When the failure to mark is caused by someone other than the patentee, the court may consider whether the patentee made reasonable efforts to ensure compliance with the marking requirements.") This again raised some questions in the context of Funai's damage claims since Funai's sales were to third-party OEMs as distinguished from sales by third-party licensees under a patent. Would the Federal Circuit be willing to extend the "rule of reason" doctrine to this new group of third-party sales and affirm the district court's admission of Funai's testimony regarding its reasonable efforts to mark in the context of OEM sales? Again, fortunately for Funai and the many, similarly situated technology companies, the majority of Federal Circuit panel answered in the affirmative (over the objections raised by Judge Linn in his concurring opinion).

By allowing a greater percentage of unmarked products and expanding the application of the "rule of reason" doctrine, the Federal Circuit has effectively relaxed the requirements for accomplishing constructive notice and consequently expanded the accounting period for patent damages to include far more infringing sales. Trial counsel should modify their pre-trial discovery, expert testimony and trial presentation strategies accordingly.

Non-Lawyer Investment Will Happen: Follow-up

David Bohrer — Wed, 18 Aug 2010 14:19:42 -0800

Some recent posts highlight why it is inevitable that the ethical rule barring non-lawyers from investing in and managing US law firms will be lifted. See our 6/11 post.

Bruce MacEwen, in Adam Smith, Esq., characterizes as “managerial malpractice” the failure by lawyers to analyze data on such things as client spending patterns, and warns (“En garde,” he says) that "competitors will undoubtedly" be trying to exploit the ability to deliver legal services from a distributed platform (“cloud computing”).

Jordan Furlong, in Law21, says that law firms are in the “cross-hairs of numerous entities outside of the legal profession” who intend to kill law firms and take some or all of their market by exploiting, among other things, the “virtually zero” effort to develop real competitive intelligence on what it costs to deliver specific services, how much rivals charge and why, what knowledge people and systems collectively possess, and how to apply that knowledge in a systematic way.

The common thread running through these and many posts like them is that law firms’ survival, let alone competitive success, hinge on investing in and effectively employing new management techniques, processes and tactics.

This costs money, lots more money than law firms currently have available to invest, particularly in a market with shrinking gross revenues. Even assuming firms have money available to invest, the high likelihood is that they do not have the institutional incentive to direct the money to longer-term investments and away from the current payments to rainmakers or other senior lawyers who want their share of the pie now (and certainly don’t want the firm to make greater risk investments that might reduce the value of their current ownership interest in the firm).

Even assuming the firm has money and is farsighted enough to want to make long-term and uncertain investments for the good of the enterprise, the new legal services paradigm requires non-legal management expertise, services and systems that are beyond the ken of the great majority of the lawyers who currently manage their firms. As explained by the CFO of a major law firm surveyed by Jim Hassett (LegalBiz Development):

A large number of lawyers do not know how to manage. [In the past], the more hours that got charged, the more money [they] made, and so they’ve never really had to manage [costs].

The solution is outside capital, which not only would provide the money required to fund innovations to the legal delivery model, but also would force firms to bring in the global, nimble, multi-faceted and risk-taking managers without whom it would be impossible to achieve the desired innovations.

The impediment is US ethical rules that bar non-lawyers from owning, investing in or managing a law firm. However, as demonstrated by the above posts, the forces compelling the lifting of the bar grow ever stronger and the calls for this change are increasing. Anthony Davis, in A New Approach to Law Firm Regulation, calls for replacement of the state-based professional regulatory system with a national, uniform set of regulations that “provid[es] the seamless, efficient and cost-effective service for which clients of every size and level of sophistication are crying out,” by allowing, among other things, lawyers to access outside capital and non-lawyer management expertise.

The groundswell of support for non-lawyer investment and other regulatory changes hopefully will be reflected in the report of the ABA’s Ethics 20/20 Commission, which was appointed in 2009 and given the mandate of investigating ways to enable US practitioners to compete with legal providers in other countries while continuing to protect the public and core values of the profession. The report is expected sometime in 2011.

In the meantime, we and others continue to press for change.

Smart Buyers Ask if Subs are "For Real"

David Bohrer — Fri, 30 Jul 2010 05:30:00 -0800

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.

Don't Include Trial in the Price?

David Bohrer — Wed, 07 Jul 2010 21:30:00 -0800

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.

I'm a trial lawyer. It's absurd to suggest that I price my services without building into the price the costs incurred for providing the expertise that is at the very core of the legal services that I provide. Pat would describe this as "muscle memory" - I've spent 25 years viewing every new litigation project as one which "may" require a trial to resolve. Indeed, as a partner in BigFirm IP, I worked under an hourly regime that rewarded me for taking the case through trial. On reflection, that trial is both so rare and so expensive suggests that I may need to retrain these muscles.

Still, my litigation background is large patent litigations with multiple factual and legal issues that require significant development through discovery, claim construction, dispositive motions, trial and even post-trial motions. However, according to the seminal empirical research done by Prof. Moore on the trial of patent cases, Judges, Juries and Patent Cases - An Empirical Peek Inside the Black Box, the number patent cases that went to trial during the 17 year period 1983 through 1999 was 6.9%, ranging from an annual low of 3.3% to a high of 11.3% - a larger number than what is posited for business litigation generally, but still quite low overall. So maybe I can't get away with arguing that "well, that may be true for others, but not for me." As Pat might respond, yeah, and everyone in prison claims to be innocent.

Perhaps a better argument for building the cost of trial into the price is that in my experience pricing larger IP litigations, the client wants to know at the outset how much it will cost to take the matter through trial. But how is this different from any other commercial litigation client? And why can't we, as alternative fee lawyers, provide a well-reasoned estimate of what something might cost and at the same time defer building the estimate into a current price, particularly where the estimated cost of trial, and the strategic considerations whether to incur the costs of trial, are much better defined at or much closer in time to the trial itself.

We at CLP also have a number of clients whose early and eager adoption of a non-hourly fee structure manifests their inability to stomach the high costs of an hourly regime. For these folks, there is no life after the pretrial phase of litigation. If we can't develop a favorable resolution in this phase, game over. These folks can't afford to pay for a trial - even under a lower cost alternative fee - no matter how good their case is on the merits. Pat's recommended carve-out of trial costs, and the related focus on obtaining a favorable settlement/resolution prior to any trial, certainly resonates with this crowd.

Excluding trial costs from the price therefore is starting to make sense to me. Stay tuned as we try and work the concept into CLP's pending and new quotes.

Non-Lawyer Investment Will Happen

David Bohrer — Fri, 11 Jun 2010 17:10:00 -0800

Earlier this week, I was asked whether I had considered approaching venture capital firms to take a stake in my business [Confluence Law Partners (CLP)] large enough to cover our "burn rate" for a year or two. Apparently, what makes CLP an attractive investment is that we are, in VC-speak, "post-revenue," i.e., in addition to having a business model that conceptually makes a lot of sense, we have an actual business that is generating revenues, and we could significantly increase profit by using outside investment to increase the scale of our delivery system.

The key assumption made by the person asking the question (who is a non-lawyer investment fund manager) was that non-lawyers like themselves could invest in, own or manage a law firm. Of course, this is prohibited under US regulations known as professional ethics.

However, not only is non-lawyer investment allowed elsewhere in the world, as explained after the jump, this change is coming to the US.

Australia permits unrestricted incorporation for companies that provide legal services. In May, 2007, the Australian law firm of Slater & Gordon completed an initial public offering and became the first law firm to be listed on the Australian Stock Exchange.

Similarly, in the so-called "Tesco law" (the phrase comes from a supermarket chain of the same name and refers to the potential for commoditized legal services offered by entities such as banks and supermarkets) the UK has changed its rules to permit non-lawyer investment beginning in October, 2011.

The smart money says the US can't be far behind. "The ability of 'magic circle' law firms in London and their second tier competitors to structure arrangements and ventures with non-lawyers will give those firms individually, and the English legal profession collectively, a hitherto unimaginable competitive advantage," according Hinshaw attorney Anthony Davis in his December 2008 presentation to the Leading Legal Innovation conference sponsored by USC. "American lawyers and American based law firms must change the regulations or "be increasingly marginalized in the international marketplace."

This said, non-lawyer investment in the UK may be delayed. Just last week it was reported in the TimesOnline that the Tesco law may be headed for the "long grass." I'm neither a golfer nor an expert on the British slang, but I'm pretty sure the reporter is saying that England's new coalition government is looking for ways to block implementation of the law.

In addition, opposition forces make the very compelling case that non-lawyer investment conflicts with core ethical values of having lawyers exercise independent and unconflicted professional judgment and confidentiality. Drinker Biddle partner Larry Fox, an articulate and passionate leader of the oppostion, recently testified before the ABA Ethics 20/20 Commission:

LAWRENCE J. FOX: I'm here to tell you that I think it would be a sad day if the American Bar Association endorsed different forms of business organization that compromised the professional independence.

PROFESSOR CAROLE SILVER: But you're assuming that compromises.

LAWRENCE J. FOX: No, I'm not assuming that it compromises, because I'm in fact saying that we have an obligation to report to lawyers, not to nonlawyers who are not steeped in our values, not educated in our law schools, not subject to our discipline.

See 2/5/2010 Tr. at 148.

Mr. Fox has some compelling anecdotal evidence, courtesy of Arthur Anderson and Enron:

I always thought that the best argument against any change to [ABA Model Rule 5.4 prohibiting non-lawyer investment] was Arthur Anderson and Enron. We didn't have to go very far or wait very long to get the proof of what happens when you end up mixing up various functions within an enterprise and ending up eroding the core function. And in that situation the core function was auditing. In our situation the core function is the delivery of legal services. . . And in [non-lawyer owned or managed business structures] what we're stuck with is lawyers reporting, in effect reporting to nonlawyers who have no obligation to our rules of professional conduct and no dedication to those propositions.

See 2/5/2010 Tr. at 140-141.

Furthermore, the ABA is not yet ready to make any changes. Michael Traynor, the co-chair of the Commission, said "[W]e've not taken any positions on anything" and that "[W]e've just started." Id. at 149.

These arguments notwithstanding, economic forces ultimately will carry the day. Legal markets have so-far failed to innovate in ways that significantly reduce the cost of providing legal services or that produce global, nimble, multi-faceted and risk-taking lawyers capable of meeting the needs of a global, increasingly web-based, economy. For example, according to Susan Hackett, GC, Association of Corporate Counsel, there needs to be far better collection and mining of data across cases, clients and markets, far better training of lawyers to make business judgments, value-based (non-hourly) billing and the unbundling of traditional legal services and the outsourcing of services more effectively handled by other lawyers or non-lawyers. See The Slow Motion Riot-The Change Agenda for Legal Departments and Law Firms.

This innovation takes longer than the traditional annual cycle of the status quo AmLaw firm. Likewise, this innovation requires capital and business expertise that these firms simply don't have. You want innovation? You want me to create a sustainable and profitable firm based on change agenda principles? Then I will need the non-lawyer investors and managers necessary to make it happen. So will just about everyone else. The removal of the current regulatory shackles is inevitable under the circumstances.

For those who worry what a large unregulated legal market will look like, Legal OnRamp's Paul Lippe has it right - it already exists in the form of the modern legal department. The legal department aligns rewards with the performance of the business, substitutes non-lawyer service providers where they can more effectively and efficiently provide the required services, invests the time necessary to understand its client's business goals, and aggressively leverages technology in the delivery of legal services. Perhaps most significantly, the modern legal department perceives little or no benefit from the current system of regulation.

Under the circumstances, those in favor of changing regulations prohibiting non-lawyer investment have the better argument and voices of those supporting the argument will increasingly grow louder and garner greater support.

Litigation Price: Flat Fee Used as a Stalking Horse.

Michael Kallus — Mon, 29 Mar 2010 15:38:58 -0800

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.

We hope.

Lack of Numbers Holds Up AFAs

David Bohrer — Mon, 08 Mar 2010 04:00:00 -0800

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.

Numbers from Inefficient Hourly Models Not Good Enough

Like other AFA litigation firms, CLP believes that it is fully capable of setting a fair price for even larger IP litigations. As we and others tell our clients, this is far easier than most of the issues successfully resolved by our clients in the regular course of business. “We are not building an oil platform on the North Sea.”

However, AFA firms’ confidence in their price-setting capabilities, while well-intentioned, is based primarily, if not exclusively, on historical pricing data from inefficient hourly models. They are therefore relying on data of limited value.

(True enough, seasoned IP trial lawyers have a wealth of anecdotal pricing experience to fall back on, and while this impresses our colleagues, it falls short of delivering “the numbers” we need to convince our clients to use AFAs.)

Billable hour firms seeking to shift to an alternative fee structure “[o]bviously [] can’t rely on their billable information to date," according to CT TyMetrix President John Weber, “[i]t is that information that is at the root of their client’s dissatisfaction. Rather, they need benchmark information about what the same or similar cases cost when handled in the manner to which they aspire.”

Likewise, where historical data on hourly billing is used to price flat fee work, the tendency is to guess the number of hours a piece of litigation or other work will take, multiply by the hourly rates of people who will be doing the work, build in some desirable profit, and, you have a fixed fee. However, as noted by Valorem attorney Pat Lamb, under this calculation methodology, “none of the efficiency benefits [of a flat fee structure] are shared with the client.” Or to put it in the client’s voice, “I might end up paying even more!”

Accordingly, CLP limits its use of historical hourly billing data to providing a benchmark against which to contrast lower flat fee litigation prices. As we explain to our clients, the efficiencies realized under a flat fee model allow us to significantly reduce our price over hourly billing. For example, in a February 1, 2010 presentation to a software company looking to switch its patent litigation from hourly counsel to CLP, we came right out and said “take 20% off your current counsel’s estimate of fees and costs, . . . CLP will start there in developing price for pre-trial and trial strategy.”

(No decision yet on this one, but the February 16, 2010 post by blogger Jay Shepherd that “you can save 20% (or even 30%) by going with a firm that uses open pricing” provided additional support for our position.)

Nonetheless, the clients whom we seek to bring to AFAs continue to worry that they “may end up paying more,” “can’t be sure they are saving money with a fixed fee,” or that getting billed for “services rendered” leaves them open “to be taken for a ride.” That this is the current state of affairs compelled the recent observation in Adam Smith, Esq. regarding the current relationship between clients and lawyers generally: “clients don’t trust us with their money and we don’t trust them to reward us fairly.”

Numbers That AFA Counsel Should Have

So the transformation to alternative fee pricing depends upon not just “numbers,” but the right “numbers.” Per CT TyMetrix’s John Weber , the key to removing the barriers holding back the AFA conversation is “benchmark financial data about the costs and outcomes of similar [AFA] cases.”

To put an even finer point on John's great observation, what CLP and its AFA colleagues really need is:

data that demonstrate that AFAs lower the cost of delivery (allowing us to deliver the same high quality outside counsel legal service for lower price).
data that allows us to better measure and generate a profit at a lower price, and to more intelligently share with the client the risk of a bad result – to have skin in the game.
data that will allow clients and outside counsel to mutually and accurately assess a legal problem in affirmative terms, i.e., the value of mitigating the risk posed by a litigation or the value to the client of preserving a specific business model.
data that will enhance the ability of client and outside counsel to mutually agree on "how much this will cost."

There Are Ways to Get These Numbers . . .

The apparent solution: outside lawyers should use the ebilling and management tools offered by companies such as Serengeti Tracker, TyMetrix 360, and DataCert. These ebilling systems are hosted by the vendor through an encrypted Internet connection, meaning there is no hardware or software that must be installed or maintained by the client law department or their law firms. Not only is billing processed on-line, but these systems also track law firm budgets and law department financial forecasts. Ebilling systems can automatically present comparisons of spending versus budget for the project phase, fiscal year or project duration. With one system tracking both spending and results across cases, “law departments can move beyond hourly fee structures to create performance-based alternative fees,” according to in-house counsel Chris Marlin (Lennar) and Stuart Roth (Olin).

. . . But They Are Not Available to Outside AFA Counsel

Sign us up, right? AFA firms like CLP should be using these systems to track and measure financial performance data across its AFA cases. Better yet, while there are some companies currently using ebilling systems to generate data across the cases handled by its law firms, outside law firms could use ebilling systems to generate even broader data - information across the clients/industries to whom we provide legal services.

True enough, there are a number of client law departments, who, along with their outside counsel, already use ebilling systems. However, many of the early adopter clients of CLP’s flat fee pricing models have been smaller to mid-size technology companies with little or no in-house resources and, luckily for them, relatively few litigations of significant size. This type of client tends not to be using ebilling systems and consequently their legal service providers like CLP aren’t either. Again, time to change that.

So I called my Legal OnRamp colleague and CT TyMetrix President, John Weber. I was his dream customer, or so I thought, because I had convinced myself that my start-up AFA litigation firm cannot live without his product.

To my dismay, John pointed out that the ebilling products that I was interested in were sold exclusively into client law departments, and currently are not offered to outside law firms. John patiently explained how the market evolved away from outside law firms because they were not interested in picking up the expense of the systems and their clients justifiably were concerned that they’d get socked with yet another hidden cost. Meanwhile client law departments, particularly those with higher volume of legal matters, were highly incented to acquire systems that allowed them to effectively manage legal spend in much the same way they managed the rest of their business.

This needs to change. AFA firms are going to need more and better pricing data reflecting the experience across similar AFA cases in order to truly tip clients in favor of alternative pricing structures. According to John, help is on the way in the form of a solutions for outside lawyers currently under development. In our opinion, they can't come soon enough.

Fee Sharing With Foreign Lawyers

David Bohrer — Mon, 15 Feb 2010 05:00:00 -0800

A Japanese IP firm has expressed interest in sharing fees with CLP on US-based IP litigation, prompting us to ask ourselves whether this is ethically permissible.

We already knew that here in California or elsewhere around the country the rules of professional conduct permit fee sharing between US based lawyers who are not members of the same law firm. (Keeping in mind that local requirements can vary as discussed in the postscript below.)

The ABA’s 2009 paper, “Joint Responsibility: Sharing Legal Fees Between Lawyers Not in the Same Firm,” confirms the wide-spread acceptance of fee sharing and provides some good examples of the different state rules.

Fee sharing is part of CLP’s DNA because it allows us to scale with expert patent and IP transaction lawyers without bearing the incredibly high overhead of keeping all this great talent under one roof. We’ve had to become fluent on the applicable ethical rules. Prospective clients are less willing to hire CLP unless they are comfortable, in their words, “with how this [fee sharing] works.”

For example, a recent CLP pitch deck included the following slide explaining how the client enters into one engagement agreement signed by each of the fee sharing attorneys, as well as how the agreement discloses the fee arrangement and otherwise obtains the client’s informed consent in compliance with applicable ethical rules.

So CLP gets fee sharing. We use it successfully with other stateside lawyers and firms. Yet could we take it overseas? We were highly incented to do so based on the big-time benefits of fee sharing for all concerned: the client; the referring Japanese firm; and CLP.

The client, a Japanese technology company, would get cost-effective and expert patent trial counsel from CLP, and also would receive continuing advice, counsel and guidance from its trusted Japanese counsel (which, as any US lawyer who has litigated on behalf of an Asian client will tell you, is crucial to enjoying timely and effective communication between US lawyer and their Japanese clients).
The Japanese firm would retain a valued client relationship and would capture fee revenue that it otherwise would lose to other firms.
CLP would enlarge its pipeline of core IP patent litigation.

We therefore were delighted to learn that yes, we could share fees with our Japanese colleagues.

With respect to our investigation, the key question was whether our Japanese lawyer colleagues were “non-lawyers” with whom fee sharing is not allowed under Rule 1-310 of the California Rules of Professional Conduct (“Cal RPC”), or whether they are “lawyers” with whom fee sharing is allowed under Cal RPC 2-200(A).

California, like virtually every other jurisdiction that has examined the issue, allows its attorneys to divide fees with attorneys or law firms in other states assuming the out-of-state counsel’s ethical obligations are comparable to those of California lawyers. See Sims v. Charness, 103 Cal. Rptr. 619 (Cal. Ct. App. 2001); California Opinion 1986-88; see also ABA/BNA Lawyer’s Manual on Prof. Conduct 41:712 (2007).

Although we found no authority in California for extending the same conclusion to foreign lawyers, this has occurred in New York. The New York State Bar Opinion 806 (2007) states that a New York law could share fees with an Italian law firm in handling legal matters in New York referred by the foreign firm. The test, which was satisfied by the Italian firm, was whether “the foreign firm’s lawyers have professional education, training and ethical standards comparable to those of American lawyers and the firm.”

Better yet, the New York State Bar, in its Opinion 646 (1993) stated that Japanese lawyers pass muster:

A New York lawyer can form a partnership with Japanese Bengoshi, since the educational requirements for admission to practice law appear to be no less rigorous in Japan than in the United States and moreover, the standards of professional conduct and discipline in Japan appear to be sufficiently similar in relevant respects.

(New York has similarly blessed lawyers in Great Britain, Opinion 542 (1982) and Sweden, Opinion 658 (1994).)

CLP therefore has been able to pursue the opportunity with the Japanese firm. Even bigger picture: there is major blue sky regarding the mutually beneficial expansion of fee sharing between AFA firms and their like-minded foreign counterparts.

Postscript:

As mentioned above, fee sharing requirements vary across jurisdictions, e.g., some jurisdictions ban payment of referral fees (California does not), while others require lawyers to assume either joint financial or legal responsibility, or both, as if the fee sharing lawyers are part of the same partnership (again, California rules are not so stringent).

What if your foreign partner in fee sharing is owned in any part by non-lawyers? Might the ability to fee share under Cal RPC 2-200 provide a back door to partnering with non-lawyers otherwise prohibited by Cal RPC 1-310?

Should a Flat Fee Include Post Trial Work?

Michael Kallus — Tue, 26 Jan 2010 23:47:21 -0800

Recently, a Japanese electronics manufacturer asked CLP to propose the fees and costs for a comprehensive patent license enforcement campaign aimed at improving revenue collection. CLP proposed an alternative fee arrangement that included both flat fee installments and a contingency on any recovery obtained (the “Alternative Fee Arrangement” or “flat fee agreement”). The proposed flat fee agreement covered legal services through, but not extending beyond, trial. During the negotiation of the agreement, the client raised an interesting question:

Should CLP’s "flat fee" include post-trial motions, appeals, new trials, and/or the enforcement of the judgment?

Initially, we felt that there were too many reasons that an alternative fee firm would want to avoid agreeing to a flat fee that covered post trial legal services at the outset of the litigation.

On reflection, however, the question of what activities should be included under the flat fee umbrella was not an easy one. For many reasons, a flat fee firm may want to negotiate up front for its fixed or contingency fees to cover post-trial work.

CLP ultimately decided to include some (post-trial motions), but not all (appeals, new trials, enforcing the judgment), post-trial work under its AFA, despite the risks. Why (or why not)?

A flat fee should NOT cover post trial work:

Flat fees work because the aspects of a major litigation are predictable within certain parameters. There will be complaints/answers, discovery, x number of depositions, expert reports and replies, Markman hearing, motions for summary judgment etc. Because these can be reasonably anticipated by any experienced trial litigator, there is a manageable amount of risk being borne by an alternative fee firm in giving a single price for work through trial. Post-trial legal services, on the other hand, are far less predictable:

If the case is not successful, there is little incentive to commit up front to a fixed price for handling the difficult task of preparing post-trial motions that could cause the trial court to reverse the adverse judgment.
Similarly, you cannot predict the issues that will be the center of post-trial motions, and either side may request a review. Contesting a verdict might mean several rounds of briefing (reaching the same complexity and detail of a motion for summary judgment), hearings and other work. Often there is a voluminous trial record which must be synthesized and argued in the motions. All this could swell the scope of work for a flat fee firm significantly.
Appeal is similarly unpredictable and time consuming and may further result in remand and additional trial work; again, greatly increasing the scope of work and resources necessary.
Enforcement of the damage award might not be possible in the United States and may require a collection abroad. Proceeding in a foreign country will greatly increase transaction costs, require translations, and perhaps require local counsel and an understanding of a foreign jurisdiction legal rules and procedures.

A flat fee SHOULD cover post trial work:

Despite the above, there are many reasons why a flat fee firm would want to include post trial work in its fee:

Client relations: Simply put, few law firms would want their clients going elsewhere for legal advice on a matter they were handling.
Expertise: no one knows the issues involved in a post trial motion or appeal better than trial counsel.
Clients who are hiring a flat fee firm to help generate wealth by monetizing its IP, are pricing our cost and fees v. return on investment. To complete their analysis, these companies need to know all the costs and fees that will be incurred before money is brought in.
When there is a contingency portion to the fee agreement:
Assuming a successful result at trial, or a loss at trial for which there is a compelling appeal, a contingency lawyer is highly incented to help the client collect on the judgment.
Contingency payments are usually calculated as a percentage of recovery AFTER disbursements have been paid. A savvy client will argue that the cost and fees of any other firm providing legal services on post-trial matters should come out of the recovery before the contingency is calculated. Under the circumstances, the contingency lawyer may be better off handling these matters and thereby protecting against the reduction of the recovery.
Negotiating flat fees for enforcement work separately after trial reduces the flat fee attorney’s leverage where the client knows the firm needs to collect to receive its contingency.

Obviously, deciding whether to include post trial work is a matter of deciding what risks a firm feels comfortable taking on, and what the reward is for doing so. As described above, that calculus changes significantly depending on whether there is a contingency portion to the alternative fee arrangement and which post-trial services that agreement considers.

CLP ultimately decided the best approach is to follow the CA Bar recommendation in their sample non-hourly fee agreement where contingency fees are part of the arrangement:

“SCOPE OF SERVICES. . . . . If a court action is filed, Attorney will represent Client through trial and post-trial motions. This Agreement does not cover representation on appeal or in execution proceedings after judgment. Separate arrangements must be agreed to for those services. Services in any matter not described above will require a separate written agreement.”

(Emphasis added.)

That is to say, where there is a contingency portion to the fee agreement, the risk of post-trial work getting out of hand is acceptable so long as it is limited to post-trial motions. Appellate work, new trials, and enforcement proceedings, however, are sufficiently uncertain at the time of initiating the litigation, that CLP is not yet prepared to take the risk of committing to a fee up front, and we have decided for now it is in both ours and the client’s best interest to separately negotiate those fees after trial.

Willingness to Flat Fee is a Litmus Test

David Bohrer — Thu, 14 Jan 2010 13:00:00 -0800

The negotiation of an alternative fee, even if unsuccessful, provides the client with valuable feedback on their case. As discussed by Cisco litigation manager Neal Rubin on Legal OnRamp:

[C]ounsel’s willingness (or unwillingness) to share the risks and rewards of litigation can help the client assess the strengths and weaknesses of its case. . . . [A] firm’s willingness to accept risk provides a useful litmus test that can help instruct the client whether it has realistically assessed the strength of the case. The straight billable hour model provides no such feedback.

We find ourselves applying this litmus test to a potential IP enforcement matter. The results suggest the client may not have the strong case it thought it did, and that the engagement will crater. So how did we get to this point, and what good can come from the possibility that we may lose the engagement?

We've approached the matter from the perspective that developing a fixed price for litigation involves much more than simply multiplying the number of estimated hours by an hourly rate or rates, as discussed by Pat Lamb. Instead, the starting point is and always must be the client’s desired return on its investment in IP litigation and working backwards from there to develop an alternative fee proposal.

Our client wants to recover, net of legal fees and costs, an amount equal to a revenue stream generated by a typical license for its technology (of which there were several examples). Due to cash flow issues, the client also is asking us to take a lower flat fee up front with a larger contingency on the potential recovery.

We believe the calculation of a flat fee should be transparent to the client. As stated in an article from Corporate Counsel, while firms increasingly profess their willingness to work under an AFA, in order to impress the client "[Lawyers] have to explain exactly how they came up with their flat fee, and how they'll make money, something many can't do."

Accordingly, we've prepared and shared with the client:

our case plan and strategy
our estimate of the likely recovery at a hearing on the merits, discounted by the likelihood (or not) of overcoming the anticipated defenses
our estimates of the legal costs the client was likely to incur in addition to legal fees
alternate proposed flat fee and contingency fee structures
projections under both fee models of the net recovery by the client

After all this, the deal may crater. Based on our assessment that there may be significant defenses to the claims the client wants to bring, we are unwilling to risk the great majority of our fee compensation on the contingencies proposed by the client. Furthermore, even assuming success on the merits, we project a lower monetary recovery than previously estimated by the client. After adjusting for our proposed fees and the estimated costs, the client's estimated net recovery falls short of what is desired.

All this non-billable effort and the engagement may be DOA. Disaster, right? Wrong.

Whatever the client decides to do, it already has received free-of-charge an early, realistic assessment of the case. Maybe we won't get to represent the client on this matter, but we're betting that we've begun a relationship that will generate work in the future.