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Goodbye to billable hours?

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Billable hours. The lifeblood of a litigation law firm. The thorn in the side of young associates and clients alike. Ensconced in the tradition of law firms, generations of trial lawyers have used billable hours as the foundation of their revenue. While most lawyers at some point in their career question the irony of "the more you work on a matter, the more you make," very few have found a way to change this modus operandi.

However, with corporate America's budget for legal services shrinking and consumers looking for cost controls, finding an alternative to the billable hour is becoming a priority at some firms. Both lawyers and their clients have concerns about such alternatives, especially when charging clients for litigation services. The twist and turns of trial work can be unpredictable and many lawyers are concerned that setting a fixed fee could mean lost revenue. Clients worry that attorneys may be less motivated to litigate effectively and in the best interest of the client if a fee is set up front.

John Gartman, a principal with Fish & Richardson in San Diego, is leading his firm's efforts to offer litigation clients an alternative to the billable hour. According to Gartman, "Law firm clients are demanding new ways of addressing litigation fees ... attorneys must realize that structured fee arrangements can produce tremendously positive results for both the client and the law firm."

Structured fee or fixed fee arrangements are arrangements in which a client and a law firm agree upon a fixed price for services versus the law firm billing the client at an hourly rate. While transactional attorneys sometimes offer flat fees, very few firms have adopted structured fees for litigation.

An experienced trial lawyer, Gartman recently addressed the American Corporate Counsel - San Diego Chapter on the rewards of structured fee arrangements. Gartman is a pioneer in the area, having offered clients fix-fee billing options for several years. His national trial practice focuses on high-technology litigation with deep experience in telecommunications, semiconductors, software and sports equipment. Gartman has served on his firm's management committee and founded Fish & Richardson's San Diego office.

Gartman began the presentation with highlights of the American Corporate Counsel's survey of chief legal officers (CLO), which found a strong disconnect between the desire of CLOs to have structured arrangements with their law firms and the number that actually had in place such agreements. The survey also found that general counsel believed that structured arrangements would improve relationships with law firms but that some surveyed were skeptical that fixed fee billing could be integrated.

Throughout his detailed presentation, Gartman cited examples of how Fish & Richardson has successfully utilized fixed fees in litigation and encouraged the general counsels in the audience to explore similar arrangements with their law firms.

"Litigators say it's too complicated (to establish fixed fees) and have a long list of reasons why they can't do it," Gartman said. "With a little education and creativity, there is no reason not to do it."

Gartman debunked several myths regarding structured fee arrangements, including the common myth that lawyers working under fixed fees won't work as hard. He advised the audience that "counter balances can be added to the agreement to ensure that lawyers are economically incentivized to work just as hard if not harder on a fixed-fee case."

Gartman provided examples of how performance bonuses can be included in fixed-fee agreements as an incentive for attorneys to work quickly and efficiently and to generate winning results. Such bonuses could reward law firms for early settlement and favorable motions for summary judgment, as well as for trial wins. Gartman noted that the amount of the bonus should be based on multiple factors, including the pending exposure to the client if the litigation is not successful, the type of case and the geographic location of where the case will be tried.

The hour-long presentation included an overview of the various types of fixed-fee structures available to clients including monthly fixed fees, staggered fees, fees paid during certain phases of the litigation process and a combination of fixed fees for pre-trial work and an hourly rate at trial.

In addition to fixed fees being extremely beneficial to clients, Gartman noted several positive consequences to law firms as the byproduct of such agreements, including investment in software and workflow optimization that will increase efficiencies in the way trials are managed and costs are tracked. Gartman also believes that structured fees will make law firms more strategic in approaching litigation and will put an end to "aimless and sloppy delegation" of work product.

He predicts a shift in the structure of law firm staffing, with more firms moving away from pyramid-shaped staffing models toward diamond-shaped models. "With senior lawyers making quicker and better decisions, less work will be pushed down to lower levels," Gartman said.

When asked how this affects law firm hiring, Gartman noted that, perhaps counter-intuitively, law firms will "build the diamond over time by hiring a pyramid each year. Some attorneys will rise to a certain level and then taper off, so the way law firms currently hire won't necessarily be affected."

Lastly, Gartman foresees a "cultural redo" as the legal industry moves toward fixed-fee structures. "The focus will be on efficiency and organization," he said. "Law firms will still make money while driving down client costs. There is a huge opportunity for a win-win."

Warren is president of TW2 Marketing Inc. in San Diego.

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