New Fee Models for the New Economy

For example, assume that inside counsel negotiates a fee for outside counsel to handle all the collection work in a regional area ' and those cases spiral into complicated, litigation cases. If the fee negotiated does not provide for this “contingency” (either because it is simply not anticipated or because it is believed by the inside counsel to be met by the fee), the inside counsel may find the outside counsel is not giving the cases their full attention. Another common problem is when inside counsel or the leasing company through an authorized representative negotiates a contingency fee, but refuses to accept a settlement offer that outside counsel believes to be in the client's best interest.

The third and sometimes unconsidered view is that of the business unit's representatives, including their analysis of the case or cases, and which fee arrangement best suits their specific needs. Internal regulators and cost initiatives, as well as policies, frequently dictate that either the managed asset department or the business unit that originated the lease will be assessed with the cost of legal fees and the potential loss from the case or cases. Therefore, both of these groups play a significant role in evaluating which law firm to hire based on their specialized area of practice, affordability for the services needed, and the types of fee arrangements both sides are willing to consider.

Another consideration for inside counsel when considering the engagement of outside counsel is the scope of the legal services sought by the inside leasing attorney or the business unit for inclusion in the fee arrangement. Because cost and scope of services are sometimes inversely proportional, this factor can limit the choice of outside counsel. For example, a more affordable outside firm may not be equipped to handle all the potential issues or jurisdictional challenges a matter may present.

From the leasing company's perspective, the best practice is to identify all three of these views to better anticipate, plan, and budget for the cost of legal fees. Ultimately, legal fees are a line item for a company that will directly affect shareholder or partner loss or profit. The consequences of poorly allocated legal fees illuminate the importance of selecting and negotiating the best AFAs for each situation.

AFA Options

There are different means of engaging counsel and different scenarios fit different types of engagements. The following alternative fee arrangements can be considered:

Flat Fee

When a series of tasks can be performed together and made more efficient by introducing a volume of cases so that a system can be employed. A case can also be divided into several flat fees for different stages of the matter. The advantage here is that the client knows what it is going to pay. The benefit for the law firm is that volume can lead to greater efficiency.

Contingency Fee

Best when the outcome is difficult to ascertain, but the defendant is financially solvent. The advantage for the client is that it does not have to throw good money after bad, and the advantage for the law firm is that if it collects, the fee usually amounts to a higher hourly rate with the possibility of a truly big recovery. However, a disadvantage is that the defendant may contest the matter or file counterclaims. In this instance, the case can switch to a standard hourly fee, but at a negotiated rate.

Hourly Fee

When the steps involved cannot be pre-determined and subject to budget review. Typically used for documentation and complex litigation where the balance is too high to refer on a contingency basis. These are usually not routine cases and do not fall into any kind of standard pleadings, so this is usually a customer case where everything is being done for the first time.

Success Fee

A success fee is used mostly for documentation deals, but is also for work-out and litigation. The premise is that the rate (typically hourly) is discounted and offset by a bonus fee if certain conditions are met, like the size of the recovery or the time period of the deal closing.

Blended Rate

A blended rate refers to when the attorneys working on a file are both partners and associates. The idea is that the blended rate encourages efficiency by forcing the law firm to properly evaluate whether an associate or partner is appropriate for each task.

Modified Contingency Fee

This is a reduced contingency rate with an upfront administrative fee. It is best used when the client feels the case may settle early on and does not want to pay the full contingency rate. The law firm gets compensated for the reduced rate by getting payment upfront.

Professional Courtesy

This is used with existing clients to show appreciation for a long-standing relationship. It is usually provided for short tasks and brief phone calls.

Outsourcing Model

This is a relatively new alternative fee model. Here, one or two outside law firms are selected to handle all the needs of the leasing company and the outsourcing law firm determines which other outside law firm or firms it will subcontract the legal work.

Creating a Value Proposition

The AFAs listed above primarily fit litigation and recovery scenarios, but flat fee, hourly fee, success fee and blended rate can also be applied to documentation situations. Regardless of the application, however, the overall purpose of AFAs from the outside counsel's perspective is to demonstrate a true partnership or value proposition with the leasing company to create a repeat business opportunity. To accomplish this goal there must be an understanding by the leasing company that the outside law firm is making certain concessions and that these concessions are being offered in exchange for the promise of establishing a long-term relationship with the leasing company.

Documentation Matters

In documentation scenarios, the in-house leasing attorney has different considerations than those in litigation and recovery. While an in-house attorney's job description is generally to prepare documentation, the in-house attorney's responsibility may be for a limited area of the company's documentation requirements. An in-house attorney's time commitments may also be overextended. In either case, the in-house attorney may find it prudent to engage outside counsel. Thus, the critical task is to select an attorney or a firm that has the requisite and unique experience that matches the deal profile. For example, the outside law firm engaged to review proposed modifications by a lessee may or may not be the same selected to draft a vendor program agreement.

The options available to the in-house leasing attorney are: hourly, flat fee, pre-determined range ($5,000-$8,000, for example), or a fixed fee for the documentation itself followed by a negotiated hourly rate in the event an attorney or business representative for the lessee complicates the matter by failing to execute the lease contract as drafted. If no such understanding exists and inside counsel chooses to negotiate one fee no matter what develops, this may drive away firms that have the foresight to recognize possible complications based on the subject matter, type of transaction, or the attorney or business representative representing the lessee. In these situations, especially where a deadline is in play, the inside leasing attorney may also be receptive to a higher hourly fee because the project may involve nights and weekends, or substituting other client priorities.

In very large transactions, the in-house leasing attorney might be able to negotiate a lower hourly rate and a success fee, if there are known risks that the deal is speculative and subject to outside variables. These variables would include the time of equipment delivery, or complex specifications to draft and manufacture the equipment, which also effect the deadlines for funding following multiple efforts to get a delivery and acceptance certificate signed. A success fee or bonus might be especially appropriate if funding goals and revenue is forecast for a particular quarter or year-end and outside counsel is able to draft, negotiate and close the deal by the period's end.

Flexibility Is Key

It is outside counsel's flexibility that sometimes provides the margin used by the lessee to select a particular funding source if legal fees are the expense of the lessee. When fees are inflexible, it becomes difficult for the leasing company to discount or waive any requirement for the lessee to absorb the legal fees. There must be a give and take by inside counsel so that when the need arises for the leasing company to ask the outside firm to discount its fees, the outside counsel is assured of a future deal at a profitable rate. When the outside attorney demonstrates flexibility on a case-by-case basis it is likely a sign of a mutually beneficial relationship and a value proposition for both parties.

The advantage of the AFA is the flexibility given to the leasing company through its ability to negotiate fees with its customers. It also creates a working relationship between the outside law firm and the in-house counsel so expectations are matched. This differentiates a one-time deal relationship from a client-attorney relationship because in the later there is enhanced communication and a better understanding of what one can expect from the other.

Litigation Matters

Alternative fee arrangements are complicated in litigation matters because of varying charges and the lack of predictable fees and expenses. When fees change from deal to deal, it is hard to make a workable budget. It is a real challenge to craft an arrangement that both properly motivates outside counsel and also gives inside counsel their desired cost certainty.

If in-house counsel negotiates a flat or a contingency fee and the case spirals into a trial setting, the outside firm may not be sufficiently motivated because the amount of work involved may be disproportionate to the possible fee. Additionally, if the litigation develops into a counter-claim against the leasing company, there is no recovery from which a contingency fee can be earned, and the legal services performed benefit only the leasing company. Further, if a flat fee arrangement is not broken down into stages with different fees, the outside firm can stand to spend a great deal of time without compensation.

Both the contingency and flat fee models must have modifications built in from the outset that anticipate these potential hurdles. The contingency fee model can be blended with an hourly fee if outside counsel's work shifts to benefit only the leasing company. Similarly, the contingency fee percentage can be increased to reflect additional work and time on a more complicated matter. A flat fee as additional compensation can also be added to the contingency fee percentage for certain events during litigation. The flat fee model can be set up with separate, compartmented fees for each litigation event (i.e., Answer, New Matter, Demurer/Preliminary Objections, Counter-claim, Discovery (Depositions), Motions for Summary Judgement, Pre-trial Motions and Pre-trial, Memorandum and Trial preparation and Trial) that singly or together best represent the time and work invested.

Outside Sourcing Model

A relatively new AFA, the outside sourcing firm model has one or two outside law firms selected to handle all the legal needs of the leasing company. The outsourcing firm then considers skill, expertise, and geographic location to determine which outside law firm to subcontract the legal work. Often, the outsourcing firm will do some of the work, such as making an initial demand or preparing a draft complaint for the local outside firm to adopt to its jurisdiction and file. The fee arrangement for this model can be an annual, one-time payment, or a per-case flat fee. Based upon the fee arrangement, it is up to the outsourcing firm to manage the case most efficiently to make a profit. Accordingly, it within the discretion of the outsourcing firm to negotiate a fee model with the outside firm.

This outsourcing firm model benefits the leasing company by not only securing cost certainty for legal fees, but also shifting the administrative burden of selecting and managing multiple firms for all of the leasing company's cases and handling all of the accounting work in paying these firms. This model benefits the outside law firm from the cash flow it provides.

Conclusion

The biggest obstacle to implementing an AFA program is developing the ability to properly gauge the amount of work that will be involved. When a leasing company can anticipate the amount of work likely to be required of outside counsel, an informed decision can be made to break the work into stages for payment, or take a different strategy. Similarly, one of the biggest obstacles for the outside law firm is estimating an AFA that keeps the client happy, but does not cost the firm money. This disconnect is usually attributable to a lack of communication and understanding regarding the scope of work anticipated by outside counsel and described by the leasing company. In this regard, the more detail in your communications, the better.

If the scope of work is finite and clear, it is much easier for the outside law firm to estimate its cost of providing services. For the alternative fee model to work, it is up to the leasing company to provide a very clear work proposal explaining what is covered by the agreement. In the event of unanticipated complications, the leasing company should be willing to modify the agreement for any work not clearly defined and considered to be outside the proposal. The ultimate goal is to create a value proposition for both sides: a partnership of sorts that aligns inside and outside counsel toward the common goal of efficiently resolving a matter that benefits the bottom line of both parties.

Anthony L. Lamm is a partner of The Lamm Group, which has offices in Philadelphia and Cherry Hill, NJ. He is the firm's managing partner and a member of this newsletter's Board of Editors. Reach him at [email protected].

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To remain competitive in the new economy, both inside and outside leasing counsel are exploring and utilizing various alternative fee arrangements (AFAs). Besides the obvious benefits, however, there are also a number of pitfalls to using AFAs that can potentially defeat their upside and turn what should be an arrangement of mutual benefit into a one-sided disaster. This article explores the use of AFAs by leasing counsel, and offers some insight into how they may be more effectively utilized.

Three Views to Consider

There are usually three views to evaluating legal AFAs: inside counsel, outside counsel and the corporate business unit. For leasing companies, the first two views typically involve the inside and outside counsel's perspective. The in-house perspective involves the art of negotiation and anticipating outside counsel's motivation with respect to the proposed alternative fee and the potential economic gain or loss that may be realized by outside counsel. Inside counsel must evaluate at what point the proposed AFA places all the risk on the outside counsel and the possibility of their economic loss in handling its cases, but also, the outside counsel becoming mired in endless, time-consuming litigation that involves the risk of a judgment against the leasing company. Outside counsel's perspective is generally the reverse of the inside counsel's point of view.

For example, assume that inside counsel negotiates a fee for outside counsel to handle all the collection work in a regional area ' and those cases spiral into complicated, litigation cases. If the fee negotiated does not provide for this “contingency” (either because it is simply not anticipated or because it is believed by the inside counsel to be met by the fee), the inside counsel may find the outside counsel is not giving the cases their full attention. Another common problem is when inside counsel or the leasing company through an authorized representative negotiates a contingency fee, but refuses to accept a settlement offer that outside counsel believes to be in the client's best interest.

The third and sometimes unconsidered view is that of the business unit's representatives, including their analysis of the case or cases, and which fee arrangement best suits their specific needs. Internal regulators and cost initiatives, as well as policies, frequently dictate that either the managed asset department or the business unit that originated the lease will be assessed with the cost of legal fees and the potential loss from the case or cases. Therefore, both of these groups play a significant role in evaluating which law firm to hire based on their specialized area of practice, affordability for the services needed, and the types of fee arrangements both sides are willing to consider.

Another consideration for inside counsel when considering the engagement of outside counsel is the scope of the legal services sought by the inside leasing attorney or the business unit for inclusion in the fee arrangement. Because cost and scope of services are sometimes inversely proportional, this factor can limit the choice of outside counsel. For example, a more affordable outside firm may not be equipped to handle all the potential issues or jurisdictional challenges a matter may present.

From the leasing company's perspective, the best practice is to identify all three of these views to better anticipate, plan, and budget for the cost of legal fees. Ultimately, legal fees are a line item for a company that will directly affect shareholder or partner loss or profit. The consequences of poorly allocated legal fees illuminate the importance of selecting and negotiating the best AFAs for each situation.

AFA Options

There are different means of engaging counsel and different scenarios fit different types of engagements. The following alternative fee arrangements can be considered:

Flat Fee

When a series of tasks can be performed together and made more efficient by introducing a volume of cases so that a system can be employed. A case can also be divided into several flat fees for different stages of the matter. The advantage here is that the client knows what it is going to pay. The benefit for the law firm is that volume can lead to greater efficiency.

Contingency Fee

Best when the outcome is difficult to ascertain, but the defendant is financially solvent. The advantage for the client is that it does not have to throw good money after bad, and the advantage for the law firm is that if it collects, the fee usually amounts to a higher hourly rate with the possibility of a truly big recovery. However, a disadvantage is that the defendant may contest the matter or file counterclaims. In this instance, the case can switch to a standard hourly fee, but at a negotiated rate.

Hourly Fee

When the steps involved cannot be pre-determined and subject to budget review. Typically used for documentation and complex litigation where the balance is too high to refer on a contingency basis. These are usually not routine cases and do not fall into any kind of standard pleadings, so this is usually a customer case where everything is being done for the first time.

Success Fee

A success fee is used mostly for documentation deals, but is also for work-out and litigation. The premise is that the rate (typically hourly) is discounted and offset by a bonus fee if certain conditions are met, like the size of the recovery or the time period of the deal closing.

Blended Rate

A blended rate refers to when the attorneys working on a file are both partners and associates. The idea is that the blended rate encourages efficiency by forcing the law firm to properly evaluate whether an associate or partner is appropriate for each task.

Modified Contingency Fee

This is a reduced contingency rate with an upfront administrative fee. It is best used when the client feels the case may settle early on and does not want to pay the full contingency rate. The law firm gets compensated for the reduced rate by getting payment upfront.

Professional Courtesy

This is used with existing clients to show appreciation for a long-standing relationship. It is usually provided for short tasks and brief phone calls.

Outsourcing Model

This is a relatively new alternative fee model. Here, one or two outside law firms are selected to handle all the needs of the leasing company and the outsourcing law firm determines which other outside law firm or firms it will subcontract the legal work.

Creating a Value Proposition

The AFAs listed above primarily fit litigation and recovery scenarios, but flat fee, hourly fee, success fee and blended rate can also be applied to documentation situations. Regardless of the application, however, the overall purpose of AFAs from the outside counsel's perspective is to demonstrate a true partnership or value proposition with the leasing company to create a repeat business opportunity. To accomplish this goal there must be an understanding by the leasing company that the outside law firm is making certain concessions and that these concessions are being offered in exchange for the promise of establishing a long-term relationship with the leasing company.

Documentation Matters

In documentation scenarios, the in-house leasing attorney has different considerations than those in litigation and recovery. While an in-house attorney's job description is generally to prepare documentation, the in-house attorney's responsibility may be for a limited area of the company's documentation requirements. An in-house attorney's time commitments may also be overextended. In either case, the in-house attorney may find it prudent to engage outside counsel. Thus, the critical task is to select an attorney or a firm that has the requisite and unique experience that matches the deal profile. For example, the outside law firm engaged to review proposed modifications by a lessee may or may not be the same selected to draft a vendor program agreement.

The options available to the in-house leasing attorney are: hourly, flat fee, pre-determined range ($5,000-$8,000, for example), or a fixed fee for the documentation itself followed by a negotiated hourly rate in the event an attorney or business representative for the lessee complicates the matter by failing to execute the lease contract as drafted. If no such understanding exists and inside counsel chooses to negotiate one fee no matter what develops, this may drive away firms that have the foresight to recognize possible complications based on the subject matter, type of transaction, or the attorney or business representative representing the lessee. In these situations, especially where a deadline is in play, the inside leasing attorney may also be receptive to a higher hourly fee because the project may involve nights and weekends, or substituting other client priorities.

In very large transactions, the in-house leasing attorney might be able to negotiate a lower hourly rate and a success fee, if there are known risks that the deal is speculative and subject to outside variables. These variables would include the time of equipment delivery, or complex specifications to draft and manufacture the equipment, which also effect the deadlines for funding following multiple efforts to get a delivery and acceptance certificate signed. A success fee or bonus might be especially appropriate if funding goals and revenue is forecast for a particular quarter or year-end and outside counsel is able to draft, negotiate and close the deal by the period's end.

Flexibility Is Key

It is outside counsel's flexibility that sometimes provides the margin used by the lessee to select a particular funding source if legal fees are the expense of the lessee. When fees are inflexible, it becomes difficult for the leasing company to discount or waive any requirement for the lessee to absorb the legal fees. There must be a give and take by inside counsel so that when the need arises for the leasing company to ask the outside firm to discount its fees, the outside counsel is assured of a future deal at a profitable rate. When the outside attorney demonstrates flexibility on a case-by-case basis it is likely a sign of a mutually beneficial relationship and a value proposition for both parties.

The advantage of the AFA is the flexibility given to the leasing company through its ability to negotiate fees with its customers. It also creates a working relationship between the outside law firm and the in-house counsel so expectations are matched. This differentiates a one-time deal relationship from a client-attorney relationship because in the later there is enhanced communication and a better understanding of what one can expect from the other.

Litigation Matters

Alternative fee arrangements are complicated in litigation matters because of varying charges and the lack of predictable fees and expenses. When fees change from deal to deal, it is hard to make a workable budget. It is a real challenge to craft an arrangement that both properly motivates outside counsel and also gives inside counsel their desired cost certainty.

If in-house counsel negotiates a flat or a contingency fee and the case spirals into a trial setting, the outside firm may not be sufficiently motivated because the amount of work involved may be disproportionate to the possible fee. Additionally, if the litigation develops into a counter-claim against the leasing company, there is no recovery from which a contingency fee can be earned, and the legal services performed benefit only the leasing company. Further, if a flat fee arrangement is not broken down into stages with different fees, the outside firm can stand to spend a great deal of time without compensation.

Both the contingency and flat fee models must have modifications built in from the outset that anticipate these potential hurdles. The contingency fee model can be blended with an hourly fee if outside counsel's work shifts to benefit only the leasing company. Similarly, the contingency fee percentage can be increased to reflect additional work and time on a more complicated matter. A flat fee as additional compensation can also be added to the contingency fee percentage for certain events during litigation. The flat fee model can be set up with separate, compartmented fees for each litigation event (i.e., Answer, New Matter, Demurer/Preliminary Objections, Counter-claim, Discovery (Depositions), Motions for Summary Judgement, Pre-trial Motions and Pre-trial, Memorandum and Trial preparation and Trial) that singly or together best represent the time and work invested.

Outside Sourcing Model

A relatively new AFA, the outside sourcing firm model has one or two outside law firms selected to handle all the legal needs of the leasing company. The outsourcing firm then considers skill, expertise, and geographic location to determine which outside law firm to subcontract the legal work. Often, the outsourcing firm will do some of the work, such as making an initial demand or preparing a draft complaint for the local outside firm to adopt to its jurisdiction and file. The fee arrangement for this model can be an annual, one-time payment, or a per-case flat fee. Based upon the fee arrangement, it is up to the outsourcing firm to manage the case most efficiently to make a profit. Accordingly, it within the discretion of the outsourcing firm to negotiate a fee model with the outside firm.

This outsourcing firm model benefits the leasing company by not only securing cost certainty for legal fees, but also shifting the administrative burden of selecting and managing multiple firms for all of the leasing company's cases and handling all of the accounting work in paying these firms. This model benefits the outside law firm from the cash flow it provides.

Conclusion

The biggest obstacle to implementing an AFA program is developing the ability to properly gauge the amount of work that will be involved. When a leasing company can anticipate the amount of work likely to be required of outside counsel, an informed decision can be made to break the work into stages for payment, or take a different strategy. Similarly, one of the biggest obstacles for the outside law firm is estimating an AFA that keeps the client happy, but does not cost the firm money. This disconnect is usually attributable to a lack of communication and understanding regarding the scope of work anticipated by outside counsel and described by the leasing company. In this regard, the more detail in your communications, the better.

If the scope of work is finite and clear, it is much easier for the outside law firm to estimate its cost of providing services. For the alternative fee model to work, it is up to the leasing company to provide a very clear work proposal explaining what is covered by the agreement. In the event of unanticipated complications, the leasing company should be willing to modify the agreement for any work not clearly defined and considered to be outside the proposal. The ultimate goal is to create a value proposition for both sides: a partnership of sorts that aligns inside and outside counsel toward the common goal of efficiently resolving a matter that benefits the bottom line of both parties.

Anthony L. Lamm is a partner of The Lamm Group, which has offices in Philadelphia and Cherry Hill, NJ. He is the firm's managing partner and a member of this newsletter's Board of Editors. Reach him at [email protected].

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