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Alternative billing arrangements for commercial litigations, once relatively rare, have become increasingly common. Smaller firms (and even solo practitioners) are particularly well-suited to enter into these alternative billing arrangements, which can appreciably improve a firm’s bottom line — and be a boon for clients as well. Traditionally, most firms considered taking on a potential commercial litigation based solely on the hourly-rate paradigm. Clients, too, were more likely to think in the conventional hourly-rate mode. While alternative billing arrangements in commercial litigation have always been employed, anecdotal evidence suggests that these arrangements have become more common in recent years. Two factors in particular have contributed to this development: Clients have become increasingly sensitive (and resistant) to legal fees, and lawyers have witnessed the extraordinary fees that class action and personal injury lawyers have garnered in noncommercial cases, and as a result have re-thought the hourly-rate convention. DIFFERENT ARRANGEMENTS Some of the principal ways in which law firms have structured alternative billing arrangements in commercial litigation are as follows. Pure Contingency. The ultimate form of an alternative billing arrangement is the pure contingency case, where the attorneys do not earn any fees whatsoever unless there is an actual recovery by way of settlement or judgment, in which event they share in an agreed-upon percentage of the recovery. The percentage paid to the attorneys as a fee can be a flat percent, or it can be a graduated amount depending upon the total amount of the recovery (and/or the stage in which a recovery is achieved). Even in the pure contingency case, disbursements can be treated in different ways: either paid on a current basis by the client (clearly preferable for the attorney),or paid on an ongoing basis by the attorney, with an agreement that the disbursements be reimbursed at the end of the case. (Under New York law, an attorney may not agree to be liable for the disbursements in the event that there is no recovery in the case; the client must be obligated to reimburse the attorney, although it is entirely permissible for the attorney to advance all disbursements until the end of the matter). The Reduced Rate. Another common alternative billing arrangement in commercial litigations is the use of a reduced hourly rate: The firm charges not its full hourly rates for lawyers, but some reduced amount (say 40 percent of its hourly rates), together with a percentage interest in any recovery in the litigation. The benefit for the law firm, of course, is that notwithstanding that a reduced hourly rate is being used, the client will continue to be obligated to pay fees at the reduced rate for the entirety of the case, even if the case becomes protracted and the amount of fees expended is more than anticipated. The amount of the percentage reduction in hourly rates, and the percentage interest in the recovery, can vary widely from case to case depending on a variety of factors: the degree of risk in the litigation; the amount in controversy in the case; the client’s wherewithal to pay for fees (even at a reduced rate), among other factors. The Cap. Another common alternative billing arrangement is one by which the attorney sets a cap for all attorneys’ fees in the case. Under this arrangement, once the cap is reached (typically at the attorneys’ usual hourly rates, although it can be at reduced rates as well), the client is liable for no more attorneys’ fees unless there is a recovery — in which event the attorney shares some percentage in the recovered amount. Flat Fee Per Stage. Another common billing arrangement is an agreed upon flat fee for each phase of the litigation. For example, assuming that the attorney and the client anticipate a motion to dismiss, the parties agree upon a flat fee for the motion to dismiss phase. Typically a flat fee would also be set for the discovery, summary judgment, and trial phases (and sometimes even appeal). Under the flat fee arrangement, the law firm is taking on the risk that the actual attorney time will exceed the flat fee amount agreed upon (and, indeed, often the agreed-upon flat fee is in fact an amount less than is thought likely to be incurred during each phase). Under a flat-fee-per-phase arrangement, the firm is typically entitled to a percentage interest in the outcome of the litigation to account for the risk that the fees will exceed the flat-fee amounts agreed upon by the firm and its client. The above alternative billing arrangements are certainly not the only ones employed by attorneys and clients. The creativity of lawyers and clients — and the peculiar characteristics of the particular litigation involved — often lead to hybrid arrangements that combine one or more of the above, and even other alternative billing methods. Moreover, the range of applicable percentage interests in the recovery can vary widely depending upon a variety of circumstances. All of these arrangements, however, share a common thread: The client is likely not going to pay the full amount of attorneys’ fees that would otherwise be incurred on a straight hourly-rate basis, and the lawyer has some contingent fee interest in the outcome of the case. A HEALTHY MIX Smaller firms and solos are particularly more suited to take on alternative billing arrangements than larger law firms. Smaller firms tend to be more flexible (and in some cases more entrepreneurial) than larger firms, and can more readily embrace a variation on the hourly-rate structure. In addition, smaller firms usually have lower hourly rates in the first place, thus permitting them to propose more competitive alternative billing arrangements. While some smaller firms and solos may subsist on an exclusive diet of alternative billing arrangements in commercial cases, the more typical — and preferable — course is to have a healthy mix of both hourly-rate cases and alternative billing arrangements. This way, at least some cash flow from the hourly-rate cases is consistently generated, avoiding stretches of time where the alternative billing arrangements impede the firm’s ability to generate positive cash flow for the partners, or even to meet monthly expenses. Such a mix requires that small firms and solos carefully choose cases to take on based upon an alternative billing arrangement. The small-firm and solo lawyer should realize that several alternative billing opportunities are likely to arise over the course of time, and one should not be too quick to grab the first opportunity through the door. If each alternative billing arrangement opportunity is being properly analyzed, the firm will inevitably pass on some of those opportunities. Some of the factors that are appropriately considered in determining to take on an alternative billing arrangement follow. Collectibility/Liability. For most alternative billing arrangements, especially where the firm is taking on a considerable risk of expending time without current payment by the client, there should be a strong likelihood of one or both of liability and collectibility. While it is preferable for both factors to be present, to the extent one of those factors has serious issues, the other factor ought to have a high probability of achievement. Sufficient Upside. The key to evaluating alternative billing arrangements is to determine whether the case has a sufficient upside for the firm or solo practitioner. An attorney must make an educated estimate as to the amount of time that will likely be uncompensated on a current basis during the course of the litigation. Based upon an assessment of the merits of the case and collectibility, the upside should be several times the likely uncompensated amount of time that will be expended on the case — thereby rewarding the firm for the risk of nonpayment that it undertakes at the outset of the matter. The appropriate multiple of the estimated uncompensated time can vary from case to case: At the low end, the potential reward should be at least two to three times the estimated uncompensated time, and many lawyers assert that it should be more in the range of four to five times (or more) of the estimated uncompensated time. For most firms, undertaking a complex commercial case (defined as, say, one involving at least dozens of boxes of documents, a dozen or more depositions, and substantial motion practice) is difficult to do under most alternative billing arrangements unless the amount in controversy is in excess (for some firms, materially in excess) of $1 million. Unfortunately for clients, an alternative billing arrangement in a complex commercial case is very difficult, if not impossible, for most firms to handle where the amount in controversy is substantially below $1 million. Relation to Other Work. Whether a firm should be open to an alternative billing arrangement in a particular commercial case is also dictated by the level of other work (both straight hourly rate and alternative billing arrangements) that the firm currently handles. Many firms are more inclined to take on an alternative billing case (and tolerate a lower upside) where the firm’s other workload is light, and promises to be light in the foreseeable future. By contrast, when a firm’s workload is heavy, and promises to be so for the foreseeable future, the firm should be hesitant to take on an additional alternative billing case unless that case shows extraordinary promise (or the firm can expand its work force in short order). FINDING OPPORTUNITIES Of course, the key is finding attractive alternative billing arrangement opportunities. While the opportunities can arise under a variety of circumstances, they tend to recur in the following circumstances. The Weary Deep-Pocket Client. Even a deep-pocket potential client can grow weary of spending attorneys’ fees, and hence look for an alternative billing arrangement. A bank lending group, a supplier to a shaky customer, creditors considering pursuit of guarantors or collateral — these are some potential clients who might have an interest in an alternative billing arrangement. The Client Who Cannot Afford Hourly-Rate Fees. Potential clients with good claims, but without the financial wherewithal to pursue them, also present excellent opportunities for the alternative billing arrangement. These kinds of clients in particular may be inclined to enter an arrangement favorable to the attorney since their alternative is not to pursue the claim at all. The Bankruptcy Area. The bankruptcy area presents myriad opportunities for alternative billing arrangements in commercial litigation. Trustees in bankruptcy, creditors committees, and litigation trusts all are impelled to conserve the estate’s assets, and often have an inventory of commercial litigation claims: actions against directors and officers; accountant malpractice; fraudulent transfers; preferences; and a whole array of garden variety commercial claims. The bankruptcy field is a fertile ground for attorneys seeking an alternative billing arrangement opportunity. The obvious benefit for the small firm and solo practitioner in undertaking an alternative billing arrangement in a commercial litigation, where such cases are mixed in with the typical hourly-rate regimen of matters, is that profits can be amply improved when such a case is successful. The advantage of mixing these cases with hourly-rate cases is that, in the event the case is lost, the firm’s income is not devastated — it takes a hit as a result of the loss, but the firm is still generating a positive cash flow for its partners. Moreover, the entrepreneurial thrill of taking “a piece of the action” in a case cannot be underestimated. While lawyers are required to zealously pursue their clients’ cases whether based on an hourly rate or an alternative billing arrangement, the practice of law takes on a new dimension when the attorney stands to gain monetarily by the outcome of the litigation. Howard B. Levi is a member of Levi Lubarsky & Feigenbaum, a commercial litigation firm.

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