Patterson Thuente IP has entered into alternative fee arrangements with litigation clients for years and has invested significant resources into many of our client’s matters. These arrangements are designed to accommodate clients with a desire for a fee structure other than traditional hourly billing. In return for investing a portion of our fees in the client’s matter, or for taking on unusual fee or collection risk, the firm earns an agreed-upon fee based on predefined criteria.
What are Alternative Fee Arrangements?
Alternative Fee Arrangements (AFAs) are agreements to provide legal services in exchange for compensation based on something other than hourly billing. Arrangements may take the form of contingency fees, fixed fees, success-based fees, or other alternatives appropriate under the circumstances. For example, an AFA might be a mixture in which the firm receives a percentage of its hourly rate, with the remainder contingent on the outcome achieved. Assuming a favorable outcome, the firm would receive a multiple of the fees it placed at risk as a “success kicker.” AFAs can also utilize flat fees, providing an agreed-upon cap for phases of a case or an entire case, with the amounts determined before representation begins.
Why Do Companies Want AFAs?
According to Inside Counsel’s 2010 Law Department Operations Survey, 3 in 10 clients have 25% or more of their legal fees under AFAs. If trends continue, in the not-too-distant future, AFAs will surpass hourly billing as the preferred method of handling legal matters. Why? The answer is simple. AFAs give clients the comfort of relative budgetary certainty and more predictable cash flows. Clients also recognize the inherent benefits in shifting some risk to law firms because shared risk more closely aligns the interests of the firm and the client.
More fundamentally, however, the willingness of a firm to provide fees on something other than an hourly basis demonstrates its willingness to take the time to understand a client’s business goals and work together to achieve both legal and business objectives. These efforts engender a more productive, long-term relationship. And shared risk strengthens client’s views of the law firm as one of trusted partner, not a mere vendor of legal services.
AFAs also provide a level of flexibility that hourly billing cannot. Let’s suppose, for example, that a client has a legal issue they want resolved in the current fiscal year for tax purposes. Thus, a “win” might be defined as a negotiated resolution within the year. An AFA can be tailored to provide a performance bonus to the firm if it is able to achieve “on time” results to meet the business objective. Because the firm knows that the client wants a specified result by a certain date, it is free to deviate from typical discovery and motion practice approaches to achieve the goals that are unique to that particular representation. This type of representation can be most effectively accomplished through the use of an AFA.
Patterson Thuente IP has enjoyed partnering with clients to provide them true value for their legal dollar and looks forward to continuing to provide our clients the flexibility to achieve their legal objectives. While AFAs are common to our litigation practice, they are not limited to this type of representation.