Making Alternative Fee Arrangements Work in Litigation

Published July 5, 2011

Lawyers and Clients Share the Risk

In the alternative billing philosophy that increasingly is embraced by Corporate America and its law firms, lawyers become partners along with their clients in the resolution of each specific matter. The sharing of the risk is based on the outcome. And that is based on communication right from the start, on appropriate early case assessment and budgeting. When this is approached successfully, lawyer and client have a mutual success goal. The risk for the lawyer is in not meeting the goal and possible impact on billing; the reward is in meeting or even exceeding the goal and perhaps a bonus billing.

Start with Case Assessment

Litigation provides a good framework for analysis, starting with case assessment. Corporate clients should have in mind how much money they want to spend to resolve a problem, just as they know what they want to spend on a piece of equipment. In either case, a higher initial cost may be acceptable if the long-term return on investment justifies it. Sometimes a legal problem is large enough that spending big sums on it is justified. Most issues, however, involve everyday costs of doing business. It makes no sense to budget spending $2 million to try a case if a $100,000 settlement will meet the client’s objectives.

Set Goals and Expectations

Budgeting presents a similar challenge. It begins, or should begin, by getting as much information as possible from the client about goals and expectations. Information should cover parties, claims, anticipated strategies and desired outcomes. “Winning” may not be one of them. A client may wish to delay the final outcome for political or financial reasons, believing that a continued threat of litigation may bring a settlement. Understanding the client’s objectives is the prerequisite of the budgeting process. The key is not just preparing the budget, but involving the client in the preparation. The client should also formally approve the final budget. Without client buy-in, the process is meaningless.

Establish Budget Milestones

When budgeting for the entire litigation in a risk-sharing arrangement, there should be different budget milestones tied to success. The budget can be for the entire case, or just to that point in the litigation where, if appropriate after a certain amount of discovery, it is decided that a motion for summary judgment has a good chance for success. The engagement goal is tied to that probability, as a success bonus can be if the firm has stayed within budget to get to that milestone. Different parameters define different success outcomes. Client and lawyer work as a team to achieve them and both parties benefit: for example, if the summary judgment motion is a success (even though the full case was budgeted), the client gets out of the lawsuit and the firm gets a success bonus. It is a win-win situation for both the client and the law firm.

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Audience type: Large Law Firms, Small Law Firms