A Value-Based Method for Structuring Running Flat-Fees in Business Litigation
According to several surveys conducted last year, nearly 70% of in-house litigation counsel surveyed expressed their desire for fee structures to be transparent and predictable, and another 10% said that they wanted fees to reflect the value of the outcome achieved.
No one option checks all three boxes off, contingency fee arrangements come the closest. The fee structure is transparent (it is related to the benefit conferred); it is predictable in that there is nothing to pay until the successful ending, which even then usually comes out of the award and not out of the client’s pocket; and it is directly tied to the value of the outcome achieved. On the the other hand, hourly billing arrangements fall at the opposite end: there is little transparency into the true nature of billing (i.e., it has to be accepted on faith and trust); there is little-to-no predictability; and the fees are owed and paid for activity and not accomplishment.
While in-house litigation counsel have increasingly sought to get away from hourly billing arrangements for reasons that have been enumerated ad nausea. And many, if not most, cases do not lend themselves to contingency fee arrangements (for a variety of reasons we cannot get into here). The third alternative is flat fee arrangements. Flat fee arrangements come in many shapes and sizes, and are by no means a panacea. This article describes the main species of flat fees, and advocates for using one over the others when flat fee arrangements are being discussed.
The Main Species of Flat Fees
There are three primary species of flat fees: Up-Front Flat Fees, terminal fees, and Running Flat Fees. Up-Front Flat Fees are what most people think of when they hear the phrase “flat fee”. In essence, a fixed sum-certain is paid to the law firm up front for the work they are being asked to do. These can be decided for limited engagements, special projects, or tiered representation. Where they are most common, however, is in criminal defense matters and in deal-in-a-box transactional legal services.
The second type of flat fee is the terminal flat fee. The terminal flat fee is perhaps the oldest method of billing is rarely used. Old New York law firms used to infamously send their clients monthly bills “For Services Rendered.” A Gentleman’s invoice, if you will. This billing scheme is the oldest one–it predates hourly billing by a century.
The third type of flat fee is the running flat fee. In contrast to the first two species of flat fee, running flat fees are periodic, usually monthly, equal-amount of fees paid to the firm for the duration of the engagement, and end when the case ends.
The Key to Structuring Flat Fees: Why a Running Flat Fee Makes the Most Sense
The traditional flat fee structure is disadvantageous and suboptimal for several reasons. They are traditionally determined based upon a forecast of the amount of time the law firm intends to spend on the matter–which means the firm is apt to vastly over-estimate. At the same time, what if this planned multi-year matter settles in six months? Clients are rightly unwilling to take on the up-front expense only to watch their firms reap a windfall. Perhaps even more significant is that, unless the assignment is very short or discreet, it is human nature that one is less apt to work as hard for pay that one has already received. Perhaps the only advantage of a fixed fee like this is that the payment is made once, and the client incurs no more out of pocket expense or externalities of the litigation.
The predictability of the up-front flat fee or fixed fee can be gained without the downsides by adopting a running flat fee model. The running flat fee essentially works this way: client and lawyer agree on the value of the case, agree upon what percentage the fee ought to be, and divide by the expected life-cycle of the case as stated in months. That result is the monthly fee the client will pay either for the duration, or until there is a resetting of the fee, which under this model could be redone every six months to a year or so.
This arrangement is certainly no panacea. No fee scheme is. However, it does entail several advantages over other fee arrangements. The running flat fee provides immediate transparency into the fee scheme. It preserves the predictability and budgetability of legal fees that one often seeks, especially in a risky litigation matter. The law firm now takes on the risks of spikes in the workload and other contingencies. With flat fee pricing of this nature, in-house litigation counsel can use outside counsel supplementily and complementary to their own efforts without worrying about marginal costs and fees. Further, the running flat fee is directly tied to the value produced (albeit not necessarily the outcome) because it can be modified and adjusted as necessary and ends when the case ends. There is no real risk of a windfall fee to counsel. at the same time, counsel is not disincentivized to work the case because there is the promise of next month’s payment–i.e., they do not want a downward readjustment or termination of the legal relationship.
The legal market is still in a state of flux while it looks for efficient alternatives to hourly billing. Flat fees have been around for nearly two hundred years, but they have fallen out of favor. The advantages that in-house litigation case seek in pricing outside counsel’s services can best be gained by a contingent fee arrangement when possible. When it is not, which it often is not feasible, the running flat fee is arguably the most efficient pricing system, protecting the client’s interest in efficiency and predictability, while satiating the lawyer’s profit motive.
Need to Speak to a Commercial Litigation Expert?
If you are a decision maker looking at the best ways to structure pricing litigation counsel, or find yourself with questions about your litigation risk, do not hesitate to contact us. Our advice is always freely given–you only pay when you hire us to do something. Mr. Sbaiti’s direct line is (214) 432-2899.
Mr. Sbaiti is a Dallas commercial litigation attorney who focuses on trial-centered approaches to defending or prosecuting a case, and has litigated and tried cases in the USA and in Europe.