Seattle Intellectual Property Inn of Court – March 21, 2013

1. Alternative Fee Arrangements: Ethical and Practical Considerations Seattle Intellectual Property Inn of Court – March 21, 2013

2. Agenda and Contributors Types of alternative fee arrangements • Isabella Fu (Microsoft) • Ethical constraints • Bob Rohde (Rohde & Van Kampen) • Panel discussion of ethical and practical considerations • Parker Folse (Susman Godfrey), Mark Parris (Orrick), Bob Rohde, Isabella Fu Audience discussion Contributors: John Wilson (KL Gates), Elana Matt (T-Mobile), and David Binney (Law Office of David H. Binney)

3. Why Have Alternative Fee Arrangements? Traditional hourly billing model is not always viewed as aligning incentives • Ethically, lawyers must act in the client’s best interest • But hourly billing doesn’t necessarily incentivize lawyers to focus on the most efficient path to resolution, or control costs Traditional hourly billing not affordable for some clients

4. Or, as Warren puts it: “Price is what you pay. Value is what you get.” - Warren Buffett

5. Significance of AFAs Over half of the U.S. respondents to Fulbright general counsel survey say they use AFAs Up to 30% of money spent on outside counsel was billed via AFAs • 81% of large companies are satisfied with the work done using AFAs • Source: Fulbright’s 9th Annual Litigation Trends Survey Report, at http://fulbright.com/index.cfm?fuseaction=news.detail&site_id=286&article_id=10695

6. Types of AFAs Full Contingency • No charge (or only for costs) until resolution, and attorney receives percentage of recovery • Partial Contingency Fee • Reduced hourly rate combined with reduced contingency fee • Reverse contingency fee where client is defendant: discounted hourly rate plus some percentage amount “saved” from agreed risk • Capped Fee • Hourly rate up to a cap, often with caps for several litigation stages • Fixed Fee • Either for entire engagement (e.g., trademark application) or by stage of litigation (e.g., early stages, through Markman, through close of discovery, trial). Sometimes for bucket of several projects or cases, or all matters of XX type that arise during a specific time frame.

7. Types of AFAs (cont’d) Risk collar • Hourly based on agreed budget, but bonus for coming in under budget, and discounted rate if budget exceeded • Variables in all cases: • Who pays costs (or percentage shared) • Performance bonuses for non-contingency fee cases, particularly for caps or reduced rates

8. Ethics and AFAs

9. Ethics and AFAs “A lawyer’s time is his stock in trade.” Abraham Lincoln

10. Ethics and AFAs Both the Washington RPCs and the ABA Model Rules of Professional Conduct touch on fee arrangements. • RPC and ABA Model Rule 1.5 • All fee agreements must be “reasonable,” and a lawyer may not enter into an agreement for, charge, or collect an illegal or excessive fee • Specific requirements for contingent fees • For retainers • For flat fee • RPC and ABA Model Rules 1.7 and 1.8 • Lawyers are prohibited from any representation where there could be a conflict of interest.

11. RPC RULE 1.5 FEES All fee agreements must be “reasonable,” and a lawyer may not enter into an agreement for charge, or collect an illegal or excessive fee Time and labor required, novelty and difficulty for the questions involved, the skill requisite to perform the service properly • Whether the representation will preclude other employment by the lawyer • The customary fee for the locality • The amount involved and the results obtained • Any time limitations imposed • The nature and length of the relationship with the client • Experience, reputation and ability of the lawyer • Whether the fee is fixed or contingent • The terms of the fee agreement between lawyer and client

12. Ethics and AFAs AFAs may present ethical issues because the interests of the client (best result possible) and the lawyer (most efficient resolution possible) diverge. RPC 1.5 – Fee Arrangements Must Be Reasonable • Factors in determining reasonableness include time and labor required, difficulty of the matter, and whether fee is fixed or contingent. • Ethical Pitfalls: • Using unqualified lawyers: The reasonable fee rule should be seen as a prohibition against pushing work to a less experienced lawyer to maximize profitability under a fixed fee arrangement. Rule 1.1 requires a lawyer to always provide “competent” representation to a client. In certain cases this may prevent using less-experienced lawyers to maximize the benefit of an AFA. • Minimizing Time Spent: Attorney efficiency—less time spent on a matter—could work against the client if the client’s best result will require more time on the matter. There is an ethical violation if an attorney does not act at all times in the client’s best interest. • Curtailing Work: Once the cap in a capped fee is reached, an attorney cannot ethically curtail the work necessary to continue a matter. The comments to Rule 1.5 impose a high standard on the attorney, who cannot enter into any type of capped fee agreement that “might induce the lawyer improperly to curtail services for the client or perform them in a way contrary to the client’s interest.” RPC 1.5, cmt. 5.

13. Ethics and AFAs RPC 1.5 - Ethical Pitfalls (con’t): • Reverse Contingent Fees: These AFAs generally involve a client who has been sued for a sum certain. The AFA allows the defense lawyer to retain a portion of the difference between the amount originally claimed by the plaintiff and the amount the client is ultimately required to pay. • ABA Formal Opinion 93-373: When “reasonably determinable civil damages between private parties are at issue... there is no basis in public policy for prohibiting a fee arrangement based on the percentage of the amount saved a defendant, so long as the reasonableness and informed consent requirements of Rule 1.5 are satisfied.”

14. Ethics and AFAs • Rule 1.7 demands that lawyers avoid concurrent conflicts between their own interests and the interests of clients. RPC 1.7(a)(2) (“[A] concurrent conflict of interest exists if there is a significant risk that the representation of one or more clients will be materially limited by the lawyer’s responsibilities to another client, a former client or a third person or by a personal interest of the lawyer.”). • Further, the comments to this Rule state that a “lawyer’s own interest should not be permitted to have an adverse effect on representation of a client.” RPC 1.7, cmt. 10. RPC 1.7 – Fee Arrangements Must Avoid Conflicts of Interest

15. Ethics and AFAs • Paid in Full: An AFA may implicate a lawyer’s financial interests, through a fixed fee, cap or retainer. The fee may have been fully earned (lawyer is paid) but if work remains on the matter, working further on it means the lawyer performs for no or less compensation—leading to a direct conflict of interest between the attorney interests and the client interests. • Tripartite Representation: where an insurance carrier is covering defense costs, certain conflicts of interest may arise. • The insured may second-guess an AFA where the fees are paid by a carrier • Motivation by attorney to trim unnecessary work may be seen by insured as a reduction in service • Flat/Fixed Fees: The District of Columbia Court of Appeals has held that a flat or fixed fee is not earned upon receipt but upon the performance of legal services. Ethical Pitfalls:

16. What would Abe do? Attorney agrees to take case on contingency arrangement, and includes clause that says that if defendant makes settlement offer of X, client must pay fee of Y within 14 days. • Is this ethical?

17. What would Abe do? What about a provision that says that if defendant makes settlement offer of X, and client refuses it, attorney can withdraw?

18. What would Abe do? In multi-defendant patent infringement situation, is it ethical to represent two different defendants using different fee structures? Do you have to disclose to clients?

19. What would Warren do? Discussion: In your experience, do AFAs provide both clients and firms with “value”?

20. What would Warren do? What types of AFAs discourage alignment of interests between firms and clients?

21. What would Warren do? In your experience, what are the best mechanisms to ensure both lawyer and client get the intended benefits of an AFA, or both sides have skin in the game?