“It’s hard to say” is probably one of the more common answers in-house lawyers loathe to hear from us when they simply want to know how much an engagement is going to cost. Although there are many factors that drive how much time we must invest in a matter (especially in litigation), an experienced lawyer should almost always be able to place a cap on or provide a binding ballpark figure for fees (leaving open a carveout of course for truly extraordinary changes in circumstance).
Historically, lawyers charge per hour of work performed. Full stop. Much has been written about the billable hour, and nearly just as much has been recently said about “alternative fee arrangements,” but billing by the hour remains the most common way that we charge for our services. Sure, it incentivizes unnecessary work, drives CFOs nuts since it provides no sense of budgetary predictability, and often turns into a black hole of billing, but it’s just how most firms do it (and how most clients agree to compensate their attorneys). But if your firm is hesitant to depart from the reliability of billing for your time, bear in mind that your clients in-house will probably appreciate your willingness to place a cap on or present a flat fee option at the outset of the engagement. Why? Because like everything else in life, a consumer would like to know what they are buying and how much it’s going to cost.
Lawyers generally argue that it’s impossible to predict what any particular engagement is going to cost. And there’s some truth to that. In litigation, so much of what a lawyer does is respond to or act upon decisions made by the other side. On the transactional side, it’s tough to forecast what provisions might be hotly negotiated during the drafting process, or what business issues might emerge as the parties near a closing.
Through some careful active planning, however, we can – in many, but maybe not all matters – offer our clients flat fee or capped fee alternatives to traditional hourly billing. For example, our firm handles a substantial amount of trademark infringement cases. Understanding that no two cases are the same, it might initially seem difficult to tell a new client how much a litigation will cost. But if you’ve handled a certain type of case more than just a few times, you generally have a sense of what will occur procedurally and how a case might progress. And by outlining the discovery process ahead of time – what depositions need to be taken, which third parties should receive subpoenas – you’re not only increasing your ability to accurately project a fee, but you’re also helping your client by developing a concise strategy for the case. In trademark cases, we know what documents we are looking for, and generally know through our initial investigation what third parties might be critical to the litigation. Naturally, there will be things that come up during discovery that materially change the course of a case, but those things can be accounted for in any ultimate cap proposed. By and large, there should be a number at which you can confidently tell a client that your fees will not exceed.
That said, there will be times when we spend hours that would exceed the cap in a straight hourly engagement. In my view, that’s ok, because if you’ve done good work for your client (which matters most) and you’ve provided them with a predictable fee, the currency you’ve earned likely will earn you repeat business, which will probably outdo any perceived shortfall resulting from a cap or flat fee.
To make this thing come alive, here’s one way we’ve divided phases in order to flat fee a matter in a recent trademark dispute:
- Investigate, prepare, file, and serve Complaint for infringement: $X
- Pre-Discovery filings and hearings: $X
- Written discovery and exchange of ESI: $X
- Depositions: $X
- Motions for Summary Judgment: $X
How did we arrive at the proper numbers? We examined what similar trademark cases have cost our other clients in prior matters, focusing on the cases that have the most similar fact patterns, the jurisdictional peculiarities, and where our request for relief is the same or similar to the case at hand. We don’t generally flat fee out an infringement case where we are seeking preliminary injunctive relief (though we do offer caps on those cases as well) just as we don’t ordinarily flat fee out a trial (although we recently charged a client a flat fee per day of trial, which seems to have worked out well for everyone involved). But we’re always trying to provide our clients with a clear sense of what the case is going to cost because there’s a point in every case where it does not make economic sense any longer to pursue litigation. And our clients deserve to know that their case can be economically justified internally.
On the transactional side, we try to offer the same level of predictability. For early stage work, we have various flat fee packages relating to business formation, distribution of equity, governance matters, etc. We do so much of this work that we generally know what’s involved and we more or less have had success proposing a flat fee in these scenarios (client is happy with predictability, and we believe we’re fairly compensated).
For other transactional work, such as a M&A, joint venture agreement, or licensing arrangement, all of which are far more fact sensitive, we most often offer caps, which makes sense for both sides. If we, for example, draft an agreement for the other side’s review that goes largely untouched, then a flat fee might end up being unfair for the client because the lawyers may receive a perceived windfall. If we quote a modest flat fee and then spend an inordinate amount of time negotiating unforeseeable deal points or dealing with a sticky regulatory issue, then we may feel inadequately compensated. As a result, charging an hourly rate but capping the overall engagement provides a certain sense of predictability to the client, but also ensures that the arrangement is fair from a time perspective.
Let’s never forget that these relationships turn on trust. So if either party (lawyer or client) is getting the short end of the stick, the other party usually proposes some modification because both sides are interested in maintaining a long term relationship. On a recent asset purchase deal, 90% of the process was a breeze, until a highly unusual issue arose that required several rewrites for weeks on end. Although we had an agreement with the client on a cap for the overall engagement, they proposed (and we agreed) to increase that cap by 25% to account for this unanticipated but time-consuming issue. They wanted to make sure their lawyers felt fairly treated, most likely because each party wanted to continue developing the relationship.
Billing clients shouldn’t be a black hole. There are a number of reasons why hourly billing makes sense for lawyers. But in many cases there’s no reason why lawyers cannot use the data they’ve gathered over time on similar matters to provide more comfort and predictability to clients when it comes to fees. It may require more work on the front end, but that work is helpful in mapping out an overall legal strategy anyways, so it’s not wasted time.
In a world where strong legal skills are table stakes, providing a predictable fee structure is a way to differentiate from the crowd and also prove to your client that you’re interested in becoming truly aligned with their interests.
Next week, we’ll talk about the importance of communication (or even over-communicating) with your clients in-house.