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In an effort to pare down its legal bills, Silicon Valley computer 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,” declares 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 says Cisco would like to see fixed fees for specific cases and, where appropriate, variable incentive-based fees for certain matters. Under this scenario, a firm might get paid $2 million, for example, if the case is lost but $4 million if the case succeeds. While many firms offer their clients alternative fee arrangements for some cases, the traditional hourly billing structure remains the deeply entrenched standard. The problem, says Barr, is that hourly billing 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 are Matthew Powers at Weil, Gotshal & Manges and William Anthony Jr. and G. Hopkins Guy III at Orrick, Herrington & Sutcliffe. Gordon Davidson, chairman at Fenwick & West, which represents Cisco in M&A deals and other corporate work, declined to comment on client billing arrangements. Likewise, Clifford Chance partner James Burns Jr., whose firm represents Cisco in securities litigation, says he cannot discuss issues involving a client. But he adds that Clifford Chance is “certainly open to creating fee arrangements that are not tied to hourly rates.” The American Bar Association’s Commission on Billable Hours released a report in 2002 that analyzed the pros and cons of the billable hour system and alternative billing methods. The commission concluded that over-reliance on billable hours has penalized efficient, productive lawyers, put clients at risk of paying for associate training and turnover, contributed to 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., says his company has been paying alternative fees for litigation on an ad hoc basis for the past four years. Lawyers at outside firms acknowledge that the number of alternative fee arrangements has grown in recent years. “A lot of clients really insist on them or want the flexibility to have alternative fee arrangements,” says James Elacqua, a patent litigator in Dewey Ballantine’s Palo Alto office. Elacqua says he’s worked on such cases for the past 20 years. Currently, about a third of his cases involve some kind of alternative payment scheme. A client in one matter agreed to pay 85 percent of Elacqua’s hourly rate and a multiple on the remaining 15 percent if he won the case. In another matter, the lawyer’s fee was tied to obtaining a successful result within six months. James Gilliland Jr., chairman of Townsend and Townsend and Crew, says 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 percent to 75 percent of its hourly rate in exchange for 10 percent to 15 percent of the recovery. At Cisco, executives are still discussing the proposals they’ll make to outside counsel. Barr says 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,” says Barr, “and has reduced our dependence on any particular firms.”

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