Going flat

In the last post, I reviewed the plusses and minuses of the hourly fee, which I said still strides the world of high-stakes litigation like a Colossus.

But a distinctive trait of the hourly fee — its extreme concentration of risk on the client — limits its appeal and threatens its longevity. Almost all of the downside — including the potential for spiraling hourly charges — rests on the client.

I promised to talk this time about a better option — one that shifts a modest amount of the risk to the lawyer: flat fees. And so I will.

What does flat mean?

Let’s start with a definition of flat fee.

My firm spends between 15 and 20 percent of our hours on what we call “flat fee” matters, all of which involve high-stakes business disputes. And most of the biggest law departments in the U.S. say they pay “flat fees” to outside counsel for “entire matters”.

What makes a fee for big and risky matters a “flat” one?

A flat fee in that context generally means a specific dollar amount payable each month or quarter. As the trial or final hearing approaches and our efforts greatly intensify, the figure usually increases (doubles). Although I’ll talk about caps and other variations under the head of “hybrid” arrangements, for now let’s stick with the base case: a periodic payment that varies only between the pre-trial and trial phases of a lawsuit or arbitration. Again, we’ll speak in terms of control, downside risk, and upside and how those they differ in a flat fee deal versus an hourly one.

Plusses and minuses — client perspective

A flat fee tends to give the client a bit less control over the lawyers than an hourly arrangement does. Unlike their hourly brethren, flat-fee lawyers do not provide the monthly invoices that detail what they have done to earn the fee. That limits the client’s ability to fly spec the lawyers’ work. It also gives the lawyers more freedom. The challenge for the client may consist largely in assuring that the lawyers devote appropriate resources — personnel and hours — to the matter. As with the hourly fee, the fact that the client does not owe a bonus for good results makes replacing the lawyers less problematic and keeps the disengagement arrow handier in the client’s quiver.

The benefit to the client from ceding some control comes in the form of risk-sharing. In return for more liberty in deciding how to staff a case and implement strategy, the lawyers assume procedural risk — the danger that the litigation process will consume more resources than the lawyers expected.  While an adverse result bad outcome on the merits does not cut the flat fee, the additional hours and overhead that result from surprising difficulties in motion practice, discovery, trial preparation, and trial come partly out of the lawyers’ paycheck.

Some of the upside also moves the lawyers’ way. A case that proves far easier to handle than the client and lawyers expected may result in a premium on the lawyers’ time. Sharing risk produces an opportunity to earn a premium over the less risky hourly fee.

Plusses and minuses — lawyer’s view

A lawyer on a flat fee not only retains professional independence but also gains a measure of control. No longer must the lawyers report their hours to the client. The client may now welcome an aggressive strategy that she would have declined to pay an hourly lawyer for. The partial alignment of interests makes for a more trusting relationship.

The risk of outlandish demands on the lawyers’ resources now falls largely on the lawyers. The client pays a flat fee regardless of hours. The danger of a negative premium — a loss on the nominal value of the lawyers’ hours — may hover in the lawyers’ consciousness. Reputational and collection risks remain present but no greater than in an hourly scenario.

A flat fee also matches the lawyers’ upside to their somewhat higher risk. They now may earn more than the equivalent of their hourly fees by doing things efficiently, avoiding unnecessary fights, focusing on the essentials.

The case for going flat

The flat fee alternative reallocates procedural risk from clients to lawyers. It empowers the lawyers to use their experience and skills to manage the process in ways that avoid waste. The client benefits from the lawyers’ more efficient efforts. The ability to predict legal expenses provides an additional bonus to the client. And the lawyers capture some of the upside by putting themselves in a position to earn a premium by doing the necessary work with fewer resources.

What sorts of cases justify flat fee treatment? In general, they involve recurring situations that have produced enough data to allow reasonable predictions about cost. Some kinds of patent-infringement cases have produced enough cost information to permit reasonable estimates of how much an hourly engagement would run. Instances of bringing in counsel to replace existing law firms also present circumstances that allow comparisons. Both plaintiff-side and defense-side cases are suitable for flat-fee engagements.

Next time

I favor the flat fee over the hourly any day. The trade-off of risk amply justifies the prospect of a premium for the lawyers, in my view. And clients should welcome the opportunity to give their lawyers incentives to become more efficient.

I will wait to write about contingent fees until Thursday, July 2. The next post will focus on a new U.S. Supreme Court ruling — Kimble v. Marvel Entertainment, LLC, No. 13-720 (U.S. June 22, 2015) — that affects the value of patents, patent portfolios, and patent-infringement claims.