The alternative fee arrangement continues to be a favorite tool of pinched corporate clients to drive down legal fees. According to Altman Weil’s 2014 Chief Legal Officer Survey , almost 60 per cent of corporate legal departments used AFAs last year to control costs.
On Tuesday, at a conversation hosted by the New York Intellectual Property Law Association between inside counsel, outside counsel, and a litigation financier, panelists argued that there are some less obvious pitfalls—like the temptation to overuse renegotiation clauses or, perhaps counter-intuitively, finishing work under budget—for firms engaged under an AFA.
Jeff Gold, lead R&D and patent counsel for Pfizer’s consumer healthcare division , suggested firms have a tightrope to walk when thinking of renegotiating for unanticipated costs. He compared law firms to home improvement contractors asking for costs to rewire an outdated electrical panel.
“You expect the contractor to anticipate extra costs,” Gold said. “When he asks for more money to finish the job, you can feel betrayed. If a firm betrays that trust, it can cause lasting issues.”
But Gold also said that since flat fee arrangements put pressure on firms to keep costs down, clients may be concerned a firm isn’t putting enough effort in. In other words, Gold might have said, the homeowner expects the contractor to anticipate that a panel would need rewiring, but once the problem’s discovered, he doesn’t want the contractor to put in cheap wiring, either.
Marla Butler, a partner in the New York office of Robins Kaplan , suggested that if corporate clients are preoccupied with keeping costs down, it can nevertheless be a mistake to finish legal work for less than was agreed to.
“Going under budget is far less of a problem,” Gold of Pfizer responded, drawing a couple of laughs, although he conceded that coming in under budget can be a mistake for a firm.
“You may come to a client and ask for a budget of $10 million,” Gold said. “But if last year you did it for eight, this year your budget may be eight.”
“If you budget $5 million for a litigation and it settles early after only $1 million in fees have been incurred, that can only be a good thing,” panelist James Batson, an investment manager with Bentham IMF , wrote Big Law Business in an email. “On the other hand, if the case runs its course and only needed $3 million in fees, the company unnecessarily held $2 million in reserves. That I could see as a problem.”
Despite the increasing popularity of AFAs, and the resulting financial pressures on law firms, the discussion was optimistic overall.
“Clients tend to think AFAs mean less in attorneys’ fees,” Butler said. “But I don’t see it that way.”
The panelists recalled the days when a corporate client would write a firm a blank check. Of course those days are long gone. The panelists agreed that as clients look to AFAs to lower legal costs, trustworthiness and a firm’s reputation matter more than ever.
“People talk,” Gold said.
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