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October 11, 2012 Articles

Valuing Litigation: Perspectives on AFAs and Collaboration

The economic downturn has changed the way companies look at legal fees.

By Alex Starkovich – October 11, 2012

In 2010, the Association of Corporate Counsel (ACC) and the American Bar Association (ABA) hosted a symposium where in-house and outside counsel met to explore a variety of value-based litigation solutions. The symposium was led by Laurie Miller, chair of Nixon Peabody LLP’s Corporate Integrity Practice, and Barb Dawson, cochair of Snell & Wilmer LLP’s Commercial Litigation Practice. A central theme that emerged from the symposium was that, despite a challenging economic backdrop, high-quality representation; communication; teamwork; and relationships with outside counsel were generally considered more important by corporate counsel than low costs.

Since the symposium in December 2010, the legal-services industry has experienced further pressure from the economic downturn. After an initial upswing, the overall demand for legal services in the U.S. declined considerably in the second half of 2011, according to the Hildebrandt Institute’s 2012 Client Advisory. Two notable casualties of the downturn include the large international law firms of Howrey, LLP, which dissolved in March 2011, and Dewey & Leboeuf, which filed for bankruptcy protection in May 2012.

Despite the difficult economic environment since the 2008 financial crisis, there are signs that the trend going forward may be more positive. According to one report, the average hourly rates for attorneys increased 4.3 percent in 2010 and 5.1 percent in 2011. Shreshta, Bibeka, Law360, “Biggest Rate Hikes Come From Top-Paid Attys, Report Says,” April 16, 2012. The June 2012 Federal Reserve Beige Book likewise indicates a “modest increase” in overall economic growth, a further indication that the economy is gradually improving.


A Permanent Shift in Fee Arrangements?
The conventional wisdom leading into the December 2010 ACC/ABA symposium was that the increasing use of alternative fee arrangements (AFAs) by law firms was in direct response to the shrinking demand for legal services and the increase in competition between firms for the remaining work. Likewise, participants in the symposium indicated that the conventional “billable hour” model, though still appropriate in some circumstances, did not address the desire by corporate counsel to more evenly distribute the risk of costs in litigation. A 2011 Altman Weil survey highlights the current ubiquity of AFAs, finding that 95 percent of all law firms (and 100 percent of law firms with 250 attorneys or more) use AFAs in some capacity.

An interesting question going forward is whether the prevalence of AFAs will be permanent, or if their use will recede as economic conditions and the demand for legal services improves. Respondents to the 2011 Altman Weil survey overwhelmingly believe the former, with 75 percent of respondents stating they believe there will be an increase in non-hourly billing in the future, and 90 percent stating they believe that increased price competition is a permanent market change. However, the Altman Weil survey also indicates that AFAs are generally less profitable than hourly billing for a large portion of law firms. For example, only 12 percent of firms reported that non-hourly projects are more profitable than hourly billing, while an additional 37 percent reported them to be about as profitable as projects billed on an hourly basis.

Nonetheless, over a year after the December 2010 ACC/ABA symposium, some participants felt that some form of AFAs were here to stay. One attendee of the symposium, Tom Nathan, senior deputy general counsel at Comcast Cable Communications, LLC, believes AFAs need to be beneficial for both the client and outside counsel. “An AFA needs to be flexible to achieve a win-win; the billable hour misaligns the interests of the client and the firm,” Nathan said. “We want firms who want to be our partner. AFAs help share the risks of inefficiency and unpredictability in litigation between ourselves and the firms we work with.”

Alex Grab, associate general counsel at Electronics for Imaging, Inc., began looking at AFAs shortly after the 2008 financial crisis. “We started looking at AFAs more closely as a way to drive more value from our spending on outside legal services,” Grab said. Julie Olszewski, Senior Attorney for John Deere, indicated that “while we haven’t implemented any [AFAs] in our traditional litigation matters as of yet, I think there are a lot of advantages in value-based fees.”

Relationships and Quality Remain Paramount
Participants in the 2010 ACC/ABA symposium found that while controlling costs is important, high-quality work and a strong relationship between inside and outside counsel is even more crucial. The participants agreed that a good relationship between inside and outside counsel must include trust, open communications, and strong teamwork. Over a year later, this sentiment is still embraced by many in-house counsel. Alex Grab, for example, looks at fee arrangements in the broader context of his relationship with outside counsel. “I look to build long-term relationships with outside counsel,” Grab said. “Any fee arrangement we use needs to be a good value, but it also needs to be fair to outside counsel. Otherwise, the relationship is not likely to last.”

For Chester Te, assistant general counsel at Silicon Valley Bank, communication with outside counsel is essential. “Communication is vitally important,” Te said. “Outside counsel must have the ability to provide high-quality advice in a clear and succinct manner.” Chester Te and Julie Olszewski both listed efficiency and competency as additional factors they found critical when seeking representation from outside counsel.

Whether or not AFAs remain popular as economic conditions improve is an open question. In any event, the participants from the ACC/ABA symposium reaffirm that the traditional mainstays of providing high-quality legal services and maintaining close, collaborative relationships are essential to preserving a strong, long-term bond between inside and outside counsel. As Tom Nathan states, “there is no magic AFA that will work perfectly in all circumstances.” Inside and outside counsel must work together to properly allocate risk and ensure that legal services are provided with a fee structure that gives value to inside counsel and in a manner economically sustainable to outside counsel.

Keywords: litigation, corporate counsel, alternative fee arrangement, financial crisis

Alex Starkovich is an associate with Snell & Wilmer in Phoenix, Arizona.