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In an effort to pare down its legal bills, Silicon Valley giant Cisco Systems Inc. is seeking to replace hourly billing rates from outside counsel with more creative — and cheaper — fee arrangements. The days of “blank checks are over,” said Robert Barr, Cisco’s vice president of intellectual property and worldwide patent counsel. “We can’t afford to be surprised by the cost of litigation. We have to work within budget constraints, and we need litigation counsel to do the same.” Barr said Cisco would like to see fixed fees for a case and, where appropriate, variable incentive-based fees, such as $2 million if a firm loses a case and $4 million if it wins. While many firms offer their clients alternative fee arrangements for certain cases, the hourly billing structure remains the deeply entrenched standard. But Barr and others in the legal community say the current system is too difficult to predict and control. And as billing rates continue to spiral upward, both in-house lawyers and outside counsel have begun considering ways to ease cost pressures. Cisco has yet to make a formal plea to its outside counsel about billing rates. But the move by one of the tech industry’s leading players could prompt other companies to follow suit. Cisco could also push its outside counsel to shift more work off the clock. Otherwise, firms could face stiffer competition in future beauty contests for Cisco work. It’s unclear whether Cisco’s move will shake up its outside counsel. The company’s primary attorneys for patent litigation — Matthew Powers at Weil, Gotshal & Manges and William Anthony Jr. and G. Hopkins Guy III at Orrick, Herrington & Sutcliffe — could not be reached Friday. Fenwick & West Chairman Gordon Davidson, whose firm represents Cisco in M&A deals and other corporate work, said he could not comment on client billing arrangements. Likewise, Clifford Chance partner James Burns Jr., whose firm represents Cisco in securities litigation, said he could not discuss issues involving a client. But he said Clifford Chance is “certainly open to creating fee arrangements that are not tied to hourly rates.” Last year the American Bar Association’s Commission on Billable Hours released a report analyzing the pros and cons of the billable hours system and alternative billing methods. The commission concluded that over-reliance on billable hours has penalized efficient, productive lawyers, put the client at risk of paying for associate training and turnover and the padding of timesheets and helped push talented lawyers out of the profession. Some companies have already gotten their in-house counsel to modify their billing structure. Stephen Fox, associate general counsel and director of intellectual property at Hewlett-Packard Co., said his company has been paying alternative fees for litigation on an ad hoc basis for the past four years. Firms acknowledged the number of alternative fee arrangements has grown in the last several years. “A lot of clients really insist on them or want the flexibility to have alternative fee arrangements,” said James Elacqua, a patent litigator in Dewey Ballantine’s Palo Alto office. Elacqua said he’s worked on such cases for the past 20 years and now one of every three of his cases involves an alternative pay structure. In one case the client agreed to pay 85 percent of his rate and a multiple on the remaining 15 percent if he won the case. In another matter, his fee was tied to obtaining a successful result within six months. Townsend and Townsend and Crew Chairman James Gilliland Jr. said his firm has “sort of a goal of spending 10 percent of our litigation hours on alternative fee cases.” Townsend’s alternative pay ranges from pure contingency work representing inventors in patent disputes to charging 70 to 75 percent of its hourly rate in exchange for 10 to 15 percent of the recovery. At Cisco, executives are still discussing the proposals they’ll make to outside counsel. Barr said he’s been researching the issue and is preparing a presentation on managing outside counsel. The company has also been cutting costs by outsourcing discovery work — such as poring over e-mail — to non-law firms. “This has saved millions of dollars and reduced our dependence on any particular firms,” Barr said.

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