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Looking down the barrel of a threatening patent infringement action from Sanyo, Chinese cell phone battery maker BYD wanted the IP heavyweights at Howrey -- but not their heavy rates.

The Am Law 100 firm didn't walk away and it didn't just cut the price. Instead, Howrey offered to take the case at a discount -- with a bonus to be paid if a good verdict or settlement was reached.

With hourly rates continuing to skyrocket at big firms, clients are pushing alternative fees as a way to control costs -- and law firms say they are listening. While the billable hour is still the most common calculation, fixed fees for larger volumes of work or success-based arrangements, like Howrey's with BYD, are getting more attention, firms say.

"Both clients and law firms are becoming more creative in their fee arrangements -- both on the plaintiff side and the defense side," said Henry Bunsow, Howrey's Northern California managing partner.

Jami Wintz McKeon, who heads Morgan, Lewis & Bockius' commercial litigation practice, said she has seen more interest in alternative deals, such as the fixed-fee arrangement under which the firm does tech giant Cisco Systems' domestic commercial litigation.

"We have an increasing number of our most sophisticated clients, for whom we do a lot of work, who are exploring these kinds of arrangements," McKeon said. She estimated that 40 percent of the 1,300-lawyer firm's annual revenue now comes from alternative fee arrangements -- an unusually high number for a big firm.

Firms say some clients are talking about fixed fees for big loads of litigation or transactions to bring more predictability to legal costs. Others are talking about performance-based arrangements, like the so-called hybrid contingency used in the BYD case -- not a novelty for plaintiffs lawyers, but new to the defense bar. Blended rates, which fix the hourly rate a firm can charge for a matter, are also a topic of discussion.

But fans of axing the traditional billable hour worry that the increased talk by clients and firms, in most cases, is just that.

Jeffrey Carr, general counsel at FMC Technologies, said a friend told him alternative fees are like teenage sex. "There are more people talking about it than doing it," Carr explained, "and those that are doing it don't know what they're doing."

Some research bears him out. A 2006 survey of 169 in-house law departments found that 87 percent use standard hourly rates for most of their legal work -- a few percentage points higher than previous years. The survey, conducted by Serengeti Law and the Association of Corporate Counsel, found that only 10 percent of companies reported no resistance to alternative fees from the outside firms.

Law firms say that's because it's difficult to take into account all the contingencies that come with legal work -- and because alternative fees can sometimes be shorthand for deep discounts.

"It takes a real serious effort to fashion them, and they're not always mutually beneficial," said David Balabanian, who heads Bingham McCutchen's litigation practice.

Like many others, Balabanian said his firm is open to alternative fee arrangements and has used them in a small percentage of matters. Morrison & Foerster; Orrick Herrington & Sutcliffe; Cooley Godward Kronish; Fish & Richardson and other big firms said the same.

PAYING FOR RESULTS

Tying fees to performance, some say, is just a matter of putting your money where your mouth is.

Bunsow said Howrey was confident that it could get a favorable outcome defending BYD and felt comfortable agreeing to a hybrid contingency. The terms were that Howrey would charge a discount on its estimate for the trial and receive a bonus if either they prevailed in court or reached a low-cost settlement.

The decision paid off. In 2005, the case settled before going to trial for "less than the value of one day's production" at BYD's battery plant, Bunsow said. That earned the trial team a celebratory trip to China and a cool million-dollar bonus, which bumped the firm's revenue from the case 50 percent higher than it would've been with plain old billable hours, he said.

"We have a lot of confidence in our abilities -- we're happy to put that reputation on the line," Bunsow said, adding that around 10 percent of 630-lawyer Howrey's work is done on an alternative fee basis.

Even with the risk of losing out on the full hourly rate, hybrid contingencies can be used in defense work to help control costs and make clients feel that the firm has more of a stake, lawyers say. Oftentimes, a discount of about 20 percent is given on the billable hour, then a multiplier of the discount is paid for success in all or part of a dispute.

Anna Erickson White, one of MoFo's managing partners for operations, said some clients want to see a firm share its risks. "They want you to have a little bit of skin in the game."

WHOLESALE LEGAL WORK

For large volumes of legal work, fixed-fee arrangements, like the one between Cisco and Morgan Lewis, are a popular alternative to the billable hour. Managing staffing on these matters is a key factor in turning the fixed fees into a viable economic situation for the firm, Morgan Lewis' McKeon said.

"There may be people who equate alternative fee arrangements with commodity work," McKeon said. "We regard it as important, profitable work."

Fenwick & West is also contracted to do Cisco's transactional work -- corporate, securities and M&A -- for a fixed fee. Recently, another tech giant, Sun Microsystems, chose the firm as a preferred provider, in part because of its willingness to discuss alternative fees.

"We make about the same margins on our alternative fee work as our billable-hour work," said Gordon Davidson, chairman of 250-lawyer Fenwick. Davidson estimated that at any given time, 10 percent to 25 percent of the firm's work is done with alternative fee arrangements.

With Cisco, the firm negotiates a set price for a projected amount of transactions. The fixed fees have pushed the firm to be more efficient, Davidson said.

He points to the example of Fenwick associate Benjamin Longoria, who came up with a way to save time and money on M&A deals by creating a computer program that collates and filters all the information needed in IP due diligence. In part, he credited the innovation to alternative fee arrangements.

"That's the kind of thinking that it spawns, as opposed to what [Cisco General Counsel] Mark Chandler describes as the medieval guild system that critics would say encourages overbilling," he said.

While the agreements like the one with Cisco have made Fenwick more efficient, they also allow the firm to train associates on fixed-fee matters, without having clients pay extra for the learning curve, Davidson said.

OUTSTANDING PAYMENTS

Few lawyers believe that the future will bring the death of the billable hour -- especially because of unpredictable, bet-the-company litigation. In those cases, the billable hour allows the necessary flexibility to respond to all possibilities, lawyers say.

"If you had a crystal ball and could consider all the outcomes, it wouldn't be a problem," said Thomas Friel Jr., who heads Cooley Godward Kronish's IP litigation practice. "There's a reason why the hourly rate emerged in the first place, and there's reasons why it will continue to dominate and part of it is because other arrangements can lead to conflicts."

But as more big clients demand alternative arrangements, law firms could end up billing less by the hour. Already Cisco has thrown its $80 million annual legal budget behind the idea, and, now, Sun has said it will be an important factor in hiring firms.

"We clients want access to information and counseling and want to pay for value received," Cisco's Chandler said in a January address in San Diego at the Northwestern University School of Law's 34th Annual Securities Regulation Institute. "The most fundamental misalignment of interests is between clients who are driven to manage expenses and law firms, which are compensated by the hour."

FMC Technology's Carr, a committed foe of the billable hour, said his Houston-based energy-technology company doesn't even consider firms that won't agree to his performance-based fee system for both litigation and transactions.

"I had one firm that refused to adopt this," he said, "and we fired them."

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