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Last fall, when FMC Corp. decided to file a patent suit against another company, the old economy chemicals and machinery supplier went new economy in the way it decided to retain a law firm. The company hired eLawForum, a Washington, D.C., startup, to auction off the case on the Web. FMC posted a request for proposals through eLawForum’s site. Bids poured in from a handful of big firms and those big firms did something they don’t often do. They competed on price. “It was an amazing process,” says FMC associate general counsel Jeffrey Carr. “Some of the firms made dramatic downward revisions to their initial proposals.” The finalists came down to Washington, D.C.’s Howrey Simon Arnold & White and Houston’s Fulbright & Jaworski. At press time FMC hadn’t yet selected a firm or filed suit, but both firms have pledged to do the work for much less than the $1.5 million that such a case usually costs. (If the winning firm runs over its bid, the hourly billable rate drops.) “We’re very pleased,” says Carr. But nobody’s happier than John Henry II, eLawForum’s chief executive. The FMC auction is the best proof for his thesis that large firms will slash fees in order to land good work. “[It] was thrilling,” says Henry. “We hadn’t yet seen results so encouraging.” If FMC eventually hires Howrey Simon or Fulbright & Jaworski, Henry’s company will receive a fee from FMC equal to 2 percent of FMC’s legal bill. Leave it to Henry, a 52-year-old serial entrepreneur and onetime associate at New York’s Cadwalader, Wickersham & Taft, to try to profit from the inefficiencies of the practice of law. A decade ago, Henry noticed that utilities weren’t making efficient use of federally granted “pollution credits.” He started a company, Clean Air Capital Markets, that created a marketplace for companies to buy and sell them. The venture went out of business after six years of operation. But it gave Henry the confidence — or perhaps arrogance — to think that he could create a similar market for legal services. Never mind that firms are historically resistant to change; or that Henry hasn’t practiced law in more than 20 years; or that his business is long on theory but short on cash. Henry’s plowing forward. “The business model of eLawForum is extremely compelling,” says David Roll, the former chairman at Washington, D.C.’s Steptoe & Johnson. Roll switched to a part-time position at Steptoe so he could become eLawForum’s vice president. “I’m sure John’s a good business person, but I’m [at eLawForum] because the idea is so good.” eLawForum’s theory hangs on the simple notion that the billable hour encourages law firms to handle matters without regard for cost. Henry is hardly the first critic of hourly billing, but he’s one of the most ardent. “Charging by the hour takes all the risk away from the firm and gives it to the in-house counsel,” Henry says. “I mean, you’ve got brand-new associates pulling down $150,000,” Henry says. “Clients are paying for that.” Smarter corporate counsel are keeping more of their legal work in-house and pushing fixed-fee arrangements on some of the pricier firms. They are also farming more of their low-margin commodity work to cheaper firms. And that’s encouraging general counsel to look for better ways to select firms. For years, the so-called beauty contest has been the method of choice. But the competing firms sell themselves more than they bid against one another. “Beauty contests are time-consuming, expensive, and tend to focus on whether the relationship feels good,” says Sam Gillespie, one of eLawForum’s managing directors. “And a lot of the time, the process ends up avoiding any discussion of price.” Enter eLawForum. “eLawForum is a powerful tool because it puts price at the front and center,” Gillespie says, “which is something your average beauty contest really doesn’t do.” To date, eLawForum has conducted about 25 auctions. And Henry estimates it has driven prices down by an average of 30 percent. One satisfied customer is Liberty Mutual Insurance Co. It recently auctioned off workers’ compensation and ERISA work. Chris Mansfield, a senior vice president at Liberty Mutual, says that its internal measure of legal costs show double-digit percentage decreases on these assignments. International Paper Co. associate general counsel Peter Lieb won’t talk specifically about his auctions. But he uses the platform to find specialized lawyers in far-flung places like, say, Alaska. Lieb says that International Paper will realize savings in most of the assignments. “We were pleased with it,” he says. “We’ll probably use it again.” Close to 60 other companies have registered for the service, including Alcoa Inc., DaimlerChrysler Corp., Chevron Corp., Raytheon Co., and Oracle Corp. Not all of these companies have yet used the site. The site is not set up for break-the-company antitrust cases but for low-risk, “commoditized” work or, as International Paper used it, for locating counsel in the hinterlands. Says Liberty Mutual’s Mansfield: “A hostile takeover is not eLawForum stuff. For now, we’re using it for repetitive, homogeneous types of litigation matters.” For their most challenging legal problems, companies will still hire first and talk price later. “It’s probably not geared for the type of work we do,” says Robert Jaffe, the managing partner of New York’s Cravath, Swaine & Moore. The actual bidding process is fairly simple. After registering for the platform, an in-house department posts a request for proposals on eLawForum’s secure site. Then it tells eLawForum which law firms to invite to bid. The in-house department sets most of the rules. It can keep the bids secret. Or it can lift the veil and invite the firms to bid against one another. It can demand fixed-fee bids or leave the billing arrangement open-ended. It can ask the firms how they’ll staff the matter or whether the case is likely to end by settlement or trial. After winnowing the pool, the client meets “offline” with lawyers from the firms in order to measure “chemistry.” Finally, it makes a decision. “It’s a full-blown merit-based competition,” says Henry. “When all is said and done, the firms have competed on three levels: price, quality, and chemistry.” eLawForum’s management team boasts two former big firm chairmen (Steptoe’s Roll and Baker & McKenzie’s John Klotsche) and four former Fortune 100 in-house attorneys (Mobil Oil Corp.’s Gillespie and Kay Ellen Consolver, FMC’s Patrick Head, and Cordant Technologies Inc.’s Daniel Hapke). Henry has also put together a larger advisory board of lawyers from Pepsi Co.; Johnson & Johnson; Sears, Roebuck & Co.; ITT Industries; and Kraft Foods, Inc. Former White House counsel and Wilmer, Cutler & Pickering partner C. Boyden Gray advises the company. So too does Jack Fritts, the former managing partner of New York’s Cadwalader, Wickersham & Taft. “These names give us some instant credibility when we take our service to in-house departments across the country,” says Henry. Gray and Gillespie have also poured six-figure sums into the company. Gillespie first heard about eLawForum shortly before he retired last year. Initially, he was skeptical. But by early last year he was sold. He became one of eLawForum’s managing directors. “I really think we’re dealing with a tool that could change the entire nature of the American legal practice as we know it,” Gillespie says. “It’s a brilliant idea.” Gillespie’s compensation is all stock options and no cash — a reflection of the company’s tight financial situation. As of press time, the company had raised only $4 million, most from the company’s managers. While Henry says that he is in the process of landing some venture capital funding, so far nothing’s been inked. “It is a fairly small amount of money,” admits Steptoe’s Roll. “But John’s an experienced entrepreneur, and he’s positioned himself so that he can raise money without having to give away the company in equity.” Cadwalader’s Fritts also points out that the company is living within its means. “So far, John’s been able to do everything he set out to do,” Fritts says. “The technology works well, and the customers are coming in.” These supporters are betting on Henry and his ability to turn provocative ideas into businesses. After earning his law degree from Columbia University in 1978, Henry joined Cadwalader. He so disliked practicing law that he left for the busines world in less than a year. But before leaving, he befriended Fritts, who’s been Henry’s lawyer for more than two decades. In 1981 Henry launched his first company, a biotechnology venture that manufactured crop pesticides. Henry raised close to $25 million and took the company public in 1987. Henry cashed out a few years later to start Clean Air Capital Markets. The company made money until, ironically, other companies started competing with him. His profit margins fell, and his company ultimately ran out of steam. He liquidated it in 1996. Later that year he formed Power Navigator, an Internet venture that gave the deregulated electric utility industry a secure, Web-based place to swap information. He sold it three years later to a group of investors for an undisclosed amount. According to Henry, he got out solely so he could develop eLawForum. “John’s one of these people that shows an enthusiasm for so many things,” says Fritts, “and he pursues them all with an absolute, dedicated ferocity.” Early in his career, Henry set out to assemble the world’s largest collection of biographies on business titans. He traded that for a more conventional fascination with golf. His latest passion is for “pre-coin” African money. His office is adorned with African artifacts that were used as cash hundreds of years ago. For Henry to succeed, he must turn the traditional law firm-client relationship into a similar artifact. Some lawyers are starting to recognize that he may be onto something. “I’m sure there are a lot of lawyers that don’t like this idea,” adds Patrick Coyne, the head of the intellectual property group at Washington, D.C.’s Collier Shannon Scott, “but it’s reasonable for clients to look for the most effective result at the lowest cost.” Coyne expects the idea to take hold in patent litigation. “The patent bar has been immune from competitive pressure for a long time,” he says, “and, to be honest, patent work ends up costing clients more than it should.” Wilmer, Cutler’s Gray views it as a way to steal corporate transactional work away from big New York firms. “We don’t typically get access to many deals outside the Mid-Atlantic region,” he says. “But we have great attorneys that can do big, New York-based deals. eLawForum could give us more exposure in that area.” But attorneys aren’t unanimously enthusiastic. “Our lawyers haven’t seen much that’s enticed us to enter a bid,” says a spokesperson at Philadelphia’s Pepper Hamilton. It’s not exactly surprising. The platform targets corporations, not law firms. Corporations choose the firms they want to bid. Firms don’t select the auctions in which they want to participate. “If I have one fault [with] the platform, it’s that it puts too much control into the hands of in-house counsel,” says one eLawForum insider. Henry geared the platform toward the companies partly to avoid the appearance of unethical fee-sharing between law firms and nonlegal entities. “It’s not fee-sharing because the corporations pay the bill, not the law firms,” says Henry. (Wilmer Cutler wrote an advisory opinion giving the go-ahead for the arrangement.) eLawForum has other concerns to address. It’s about to face some heady competition. Legal consultant Altman Weil Inc. has already launched a similar service, iBidLaw.com. So has a company named FreeMarkets, Inc. A venture called Firmseek.com, Inc., also based in Washington, D.C., is linking firms and clients through the Web, using a slightly different model. Firmseek charges law firms to post marketing material on its Web site. It has also created a free network allowing in-house counsel to compare notes about firms. But Henry thinks he’s insulated his company from competition by applying for a patent on his business methods. Washington, D.C.’s Finnegan, Henderson, Farabow, Garrett & Dunner is prosecuting the application. In selecting Finnegan, Henderson, Henry did not practice what he profits from. He hired the firm based on its past work for him rather than as the winning bidder in an auction. Henry is also unlikely to ever bid out the work he now gives to Fritts, his counselor of two decades. Fritts actually hatched the eLawForum concept. A few years ago, Cadwalader placed bids on South American privatization work. Fritts was shocked when the firm was underbid by a large New York firm. “We thought we’d put together a really low offer,” he says. “But we got beat.” The incident stuck with him, and one day, while thinking about eBay and online auctions, he dreamed up the bidding-for-legal-services concept. He passed the idea along to Henry, who launched eLawForum in late 1999. Fritts has no official affiliation with the company. “I’m just looking to be John’s lawyer,” he says. Henry’s desires are less modest. He wants to open a European office early this year. And he hopes to conduct more than 400 domestic auctions by the end of 2001. “We want to be much more of a household name in the legal world by the end of this year,” Henry says. That could make him the most resented man within large firms — and the most popular with their clients.

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