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Alternative Fee Arrangements

Alternative Fee Arrangements. ACC CLE Program by Alston & Bird LLP Dallas – February 19, 2009 Fort Worth – February 26, 2009. Panel. Dallas Panelists Michael Colvin, Highland Capital Management Stanton P. Eigenbrodt, Behringer Harvard Funds Jonathan Perkel, Travelocity

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Alternative Fee Arrangements

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  1. Alternative Fee Arrangements ACC CLE Program by Alston & Bird LLP Dallas – February 19, 2009 Fort Worth – February 26, 2009

  2. Panel • Dallas Panelists • Michael Colvin, Highland Capital Management • Stanton P. Eigenbrodt, Behringer Harvard Funds • Jonathan Perkel, Travelocity • Jill Witter, Novation • Fort Worth Panelists • Howard Herndon, First American Payment Systems, L.P. • Roger Nober, BNSF Railway Company • Bob Robinson, BancTec, Inc. • Elaine Whitbeck, Alcon Laboratories, Inc.

  3. Panel • Alston & Bird Attendees • Gustav Bahn • John Crews • Darren Hauck • Jon Shepherd • Alan Struble

  4. Overview • Why consider alternatives? • What are acceptable alternatives for you and your law firm? • Are there issues under the Texas Disciplinary Rules of Professional Conduct (“Rules”)?

  5. What’s wrong with the billable hour? • Mark Chandler (Cisco SVP/GC) speech from 2007 - “State of Technology in the Law” • “Put most bluntly, the most fundamental misalignment of interests is between clients who are driven to manage expenses, and law firms which are compensated by the hour.” • “Today there is little incentive for law firms to apply risk-reward logic to the amount of legal services provided. And General Counsel know that.”

  6. Step 1 – Collect Information • Are you getting value? • Consider – • What legal services do we need? • What is my budget and do other budgets come into play? • How do we control our spending? What are our objectives? • Do we track our spend? How?

  7. A bird in hand . . . • While far from perfect, the billable hour system may still work depending on your circumstances • Are you meeting internal expectations? • At least for now . . . • Fixed blended or discounted rates (when available) initially reduce costs • But still rely on billable hours as the sole measure of law firm value delivered

  8. Step 2 – Engage • Be candid with your law firm • State objectives • When feasible, give budget numbers • Be open to dialogue • Firms have volume of work necessary to change model • But both parties must adjust to new ways of thinking • Explore new business processes

  9. Step 3 - Options • Contingency engagements • Sliding rates dependent on success • Fixed fees • Entire projects • Per phase • Entire portfolios/budgets • Mix and match

  10. Contingency Arrangements • The “old fashion” alternative arrangement • Consider type of claims • Rule 1.04(d): • “A fee may be contingent on the outcome of the matter for which the service is rendered . . . A contingent fee agreement shall be in writing and shall state the method by which the fee is to be determined.”

  11. Sliding Rates/Work • Adjust law firm hourly rate recovery to reflect desired business outcome • M&A hourly fees might escalate up • Deep discount until Letter of Intent, modest discount until execution of agreement, and premium/top-up if deal closes • Litigation hourly fees might ramp down • Premiums for winning at motion to dismiss or summary judgment • Focus on value-added work

  12. Fixed Fees • Entire projects • If there is a sufficient flow of matters, set a fixed price using your average outside counsel cost • Exclude outliers in calculating averages • Consider assumptions to establish upside and downside protections • Consider pre-set adjustments in price to align incentives • Usually assumes multiple projects which may be used to “balance” amounts charged per project

  13. Fixed Fees • Types of matters • If project fixed fee pricing is not feasible, consider phased fixed fees • Flat fee per phase with potential for adjustments to align interests • Don’t have to use fixed fees across an entire project • Try to manage risks that most threaten your budget • Loss leader initial phase pricing

  14. Entire Portfolios • Set annual fixed fee for an entire line item on your budget • Base on averages and/or allocated budget • Easier to manage across multiple years • Consider downside/upside protections or otherwise how to align interests

  15. Mix and Match • Multiple work streams - for example - • Match award of low volume, big project work with high volume, commodity work • Aggressive fixed fee pricing on commodity work • More “market” based pricing on big projects

  16. Rules • Rule 1.04(a): • “A lawyer shall not enter into an arrangement for, charge, or collect an illegal fee or unconscionable fee. A fee is unconscionable if a competent lawyer could not form a reasonable belief that the fee is reasonable.” • Comment #3 to Rule 1.04: • “Commonly employed are percentage fees and contingent fees (which may vary in accordance with the amount at stake or recovered), hourly rates, and flat fee arrangements, or combinations thereof.”

  17. Rules • Rule 1.04(b) – factors when considering reasonableness: • “(1) the time and labor required, the novelty and difficulty of the questions involved, and the skill requisite to perform the legal service properly; • (2) the likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the lawyer; • (3) the fee customarily charged in the locality for similar legal services; • (4) the amount involved and the results obtained; • (5) the time limitations imposed by the client or by the circumstances; • (6) the nature and length of the professional relationship with the client; • (7) the experience, reputation, and ability of the lawyer or lawyers performing the services; and • (8) whether the fee is fixed or contingent on results obtained or uncertainty of collection before the legal services have been rendered.”

  18. Rules • If firm is proactive in dealing with alternative arrangements, then it is unlikely that any problems will be created • Document and communicate clearly • Be fair to both sides • Comment #6 to Rule 1.04: • “Once a fee arrangement is agreed to, a lawyer should not handle the matter so as to further the lawyers financial interests to the detriment of the client. For example, a lawyer should not abuse a fee arrangement based primarily on hourly charges by using wasteful procedures.”

  19. Alternative Fee Arrangements ACC CLE Program by: Alston & Bird LLP 2200 Ross Avenue Suite 3601 Dallas, Texas 75201-2708 214-922-3400

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