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Demand for lower fees forces creativity

During the recession, when the battle over the bottom line forced companies to cut expenses, in-house legal department budgets were no exception. It has become increasingly common for large companies to send out an announcement for a request for proposal for legal services, terms and conditions.

While RFPs have been used for other vendors, negotiating prices for legal services is a relatively new practice. Hourly billing is still widely used, but forced competition due to RFPs has driven many law firms to get creative with alternative fee arrangements.

An alternative fee arrangement is a mutual agreement between a law firm and its client that doesn’t rely on strict hourly billing by the firm. AFAs can be beneficial for corporations because they provide predictability, cash flow management, cost-containment and increased efficiency. For law firms, the practice attracts or maintains clients, simplifies billing operations and increases billing realization.

The long-term benefit for both is that interests are aligned: Law firms have an incentive to work quickly, efficiently and streamline the process to increase profit margins, and clients win by having their cases solved as quickly as possible.

An ALM Legal Intelligence study last year surveyed 206 corporate law departments, 218 Am Law 200 firms and NLJ 250-size law firms about using alternative fee arrangements (AFAs). Some 82 percent of corporate respondents reported they used AFAs, and all but one of the law firms surveyed used alternatives to hourly billing.

And the use of AFAs is on the rise. Half of the legal department respondents had seen an increase in the volume from 2010 to 2011, with an average increase of nearly 30 percent. The change for law firms was even higher, with 62 percent of respondents seeing AFA matters increase in those two years.

“Some forwardly thinking firms are being creative about offering them and being proactive in an effort to attract new clients, but also to keep existing clients whose in-house counsels are inclined to go that way,” said Paul Burns, senior counsel at Procopio, Cory, Hargreaves & Savitch LLP.

An AFA can be as simple as offering a blended rate, a fixed hourly rate that applies to all lawyers working on a matter regardless of their seniority, which encourages firms to staff matters efficiently. Capped fee arrangements, often used with an hourly rate arrangement, limit the total cost of an agreed-upon amount of work and provide a greater degree of predictability over a straight hourly rate.

Fixed or flat fees, often used for transactional work, set an agreed-upon amount for a discrete amount of work. Flat-fee arrangements are particularly challenging for litigation matters, because the firm assumes the risks for cost overruns.

Immigration attorney Maricela Amezola, of Strickland & Amezola, uses only flat-fee agreements for immigration cases.

“It helps my client know their fees and balances at all times,” Amezola said.

Burns said fixed-fees are common with large deals, particularly sales or mergers, wherein the law firm receives a percentage of the transaction’s total amount. He said fixed fees are also commonly used in intellectual property cases to prepare and file patent applications, and in some cases, a firm will negotiate a fixed fee for a series of applications filed over a given period of time.

“It can be mutually beneficial because a firm gets to know a client’s technology and it results in efficiencies for applications that are improvements within the same technology,” Burns said.

Contingency arrangements, historically used in personal injury cases by plaintiffs’ counsels, have expanded to include class actions, and tort actions involving securities fraud and other types of tortious conduct, Burns said.

In a contingency arrangement, a firm is paid only if it achieves a financial recovery or other agreed-upon result for the client. Typically, the firm receives a percentage of a total recovery, which provides protection from a bad result for clients who are willing to forgo a large portion of a positive result.

Among the firms and legal departments surveyed in the ALM study, 89 percent of legal departments and 93 percent of firms used flat fees; 47 percent of legal departments and 89 percent of firms used a blended rate; and 57 percent of legal departments and 83 percent of firms used capped-fee arrangements.

Civil litigation attorney Renee Galente, of Galente Ganci APC, uses an hourly fee rider for some of her business cases.

“If someone decides to settle with a business resolution, which leaves the case with no recovery, I receive my hourly rate up to an agreed-upon cap,” she said.

According to the ALM study, 76 percent of legal departments expect an expansion of AFA use by 2016, and on the law firm side 82 percent foresee an increase.

“While this is being driven by the clients’ need for certainty and budgeting and reducing legal fees so they can increase their profits,” Burns said. “For lawyers who are willing to be flexible, creative and think out of the box, and willing to take some risks, there’s a lot of opportunity to expand their existing client base and be sure to keep existing clients by exploring alternative fee agreements.”

-James is an Encinitas-based freelance writer.

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