Prevent runaway legal fees with proper planning

Another article about alternative fee arrangements?

Actually, no.

About two years ago, a colleague and I went to pitch a client for work on a closely held business dispute. The competition was heavy and costs were a significant concern.

One of the representatives for the potential client looked directly at me and asked, “What are your rates?” They were high, and we were going to be compared to smaller firms with presumably lower rates. Before I could open my mouth, my partner answered, “It’s not our rates that are important; it’s your total cost of the case that matters.”

He was right, of course. But the trick to charging lower costs is not merely the lower cost itself, but how to manage the costs without sacrificing the quality of the work or the anticipated results. It is that elusive goal that has given rise to myriad alternative fee arrangements (so called AFAs, like risk collars, reverse contingency fees, fixed fees, etc.).

In the end, however, AFAs are window dressing, making it appear as though there is some scientific approach to achieving that goal.

While AFAs can — and frequently do — help, the core problem is not the fee structure. For example, using any of the various AFAs that are ultimately tied to hours, clients never really manage the total cost; they merely try to align more closely the lawyer’s incentives with their own. But so long as hours are on the table, the lawyer’s incentive is to bill more of them.

And even if the client chooses an AFA that establishes the total cost up front, there is still the problem of ensuring that the “right” work is not being sacrificed. A reduction of legal fees is no bargain if the end result is an adverse determination in the lawsuit.

So, what is the core problem? Lack of communication, both in timing and substance.

Frequently, the lawyer and client — unbeknownst to each other — have widely divergent views of the case and the associated cost. Sometimes their views differ with respect to the merits, but more frequently they differ regarding what to expect from the litigation or arbitration.

•           Plan thoroughly, early

Communication should start immediately. The earlier, the better. For example, rather than wait to call your lawyer after the employee has left the company with your trade secrets, talk to your attorney in advance about what can be done to protect your trade secrets.

Even if you cannot prevent the rogue employee from walking off with your crown jewels, you will be able to respond quickly and coherently, giving you a much better chance of securing the necessary relief in court at an overall cost that likely will be less if there had been advance planning.

Similarly, when you know that the other side is likely to claim a breach of contract, call your lawyer to determine what steps can be taken to put yourself in the best possible litigation position, or perhaps to avoid litigation altogether.

Early communication is also important to ascertain if there may be insurance to cover the dispute. A delay in discovering the coverage and notifying the insurer can be fatal to obtaining the coverage.

The communication should be clear. A client who has been told that the lawyer may be able to resolve the case through a “quick hearing” will be sorely disappointed to receive a bill not just for the hearing, but for the extensive briefing prepared in advance of the hearing.

The fact that the work was necessary, was performed quickly and efficiently, and accomplished its intended purpose will be lost. The sole issue will be the size of the bill.  And an after-the-fact explanation of the indisputable need for the work will be too late.

The initial conversation should include a thorough discussion of your objectives and expectations. Failing to have a clear understanding of everyone’s perspectives is a recipe for problems.

For example, you may be extremely angry with the opposing party because it breached some significant contractual or fiduciary obligation. Nevertheless, unless there are other business objectives at work, you generally do not want to spend more than is necessary to bring the case to a swift and favorable resolution.

But the lawyer may hear your anger and assume you want scorched-Earth litigation, or perhaps that is the attorney’s general approach. While that approach may be what some clients want, if it is not what you are expecting, you may find that the lawyer has engaged in extensive work that is unnecessary to succeeding on the merits and which has the deleterious effect of causing the other side to dig in its heels, rather than making the payment as part of an early settlement.

Not only will you be disappointed with the result, but you will be even less happy having to pay for it.

Accordingly, the lawyer needs to understand your goals and expectations in order to come up with a strategy that best accomplishes the client’s goals and that meets its expectations.

•           Plan transparently

Following the initial conversation, your lawyer should be willing to provide a preliminary budget for the case — or at least the foreseeable aspects of the case.

The budget should be transparent and provide a roadmap for the case, explaining what the likely phases will be and what they are expected to cost.

It should also be sufficiently detailed for you to understand the assumptions and possible places where things may change. For a complex matter, it frequently makes sense to engage experts at this stage to help determine the true value and best strategy for the case.

Staffing should also be part of this early conversation. Will there be a single associate assigned to work on the matter? Will there be several associates at different billing rates? Will there be more than one partner working on the matter at a given time? What are the firm’s policies on billing for multiple attorneys working simultaneously on the same project? What are your expectations?

Those are the kinds of questions that will foster a productive discussion that can help both the client and the lawyer understand each other’s expectations.

With a preliminary budget in hand, this would be the time to give serious consideration to AFAs. That is because once the budget is complete, you and the lawyer have reasonably equivalent information for purposes of assessing the wisdom of using fixed fees (i.e., pre-set prices), risk collars (in which both sides split the cost of overruns and share in the benefits of coming in under budget), or some other type of AFA.

•           Plan often

Even if the preliminary communications have been productive and crystal clear, litigation is fluid and follow-up is key. The most predictable thing about litigation is that it is unpredictable. Every case takes unexpected turns. Those changes need to be factored into the strategy and budget, and that needs to happen when they arise, not after you have been billed for them. Accordingly, while early planning is important, continued review is equally important.

To anticipate some of the potential twists and turns, it may be appropriate to use “decision tree budgeting,” i.e., budgets that have options based on the performance or exclusion of various tasks. Do you need to take the depositions of the CEO, CFO and chairperson? Or is that more for posturing, when really all you likely need is the vice president of contracting?

Similarly, with warehouses worth of information on people’s laptops, discovery tends to be the most intensive — and thus expensive — aspect of litigation. Worse, the unpredictability and potential enormity of the process are exacerbated by the fact that it is still a developing area of procedural law.

Accordingly, as discovery proceeds, the focus should be on obtaining the high-value information first. Once that is achieved, you can ask whether additional information is necessary. Perhaps you budgeted for it, but the information you have obtained can change the cost-benefit analysis of spending substantial amounts of time and money to obtain information that is likely to be of limited additional value. You need to be kept informed.

Also, do not underestimate the effect of the passage of time. It has a tendency to push up costs and to soften both sides to settlement. Oftentimes, however, while a settlement may be more costly in the early stages of litigation, when you factor in legal fees, the costs may be much closer and you can eliminate the risk and distraction.

Perhaps most importantly, you and your lawyer should be reviewing and updating the budget throughout the course of the case. Unless there are extenuating circumstances, the fees should be on track with the budget, and you should have advance notice of any possible substantial divergences.

As my former partner said, it is the total cost of the case that matters. Proper management can keep that cost under control.