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It is an age-old problem: How can in-house counsel have cost-effective litigation but still develop a partnering relationship with outside counsel that gets the job done and allows them to glean a bit of profit? This dilemma may seem more complex in today’s tight economic times, particularly when it involves law firms that cling to the billable hour.
At a recent Northeast Corporate Counsel Forum sponsored by HB Litigation Conferences and Veritext Legal Solutions, counsel from all walks shared ideas about how they work effectively together and how alternative fee arrangements can benefit all sides.
Getting It Right From the Start
Forthright communication is the key to building lasting, successful relationships, the experts agreed. “The first thing you want to ask the client is, ‘What do you want to achieve here?’” said Jordan Siev, co-head of U.S. commercial litigation practice at Reed Smith. This should be followed closely by, “What is going to be the best way, from your perspective to pay for this?”
Vaughn McKoy of PSEG agreed that establishing clear goals right off the bat is the priority. “Are we trying to position this case for a quick settlement? Or are we trying to send a message to the other side? Are we trying to get our story out to the judge?”
In some cases, in-house counsel desire cost certainty. In others, they demand only the lowest price, Siev said. If law firms and their corporate clients have good, open relationships, they can talk freely about costs throughout the course of a case.
On the manufacturing side, Jeffrey Bartolino of the general claims department at New Jersey Manufacturers, recalled what his boss told him years ago. “This would be a great job if you didn’t have to deal with people.” That’s a detriment. A benefit, he said, is that you build partnerships.
“So,” he said, “we’re dealing with people, and it’s the best part of my job and the most maddening part of my job.”
He said he wants to make sure that the law firms he deals with are not only are given clear direction, but that they understand the reasons for that direction and that their input is valued.
In-house and outside counsel also need to define a “win” for each case, Bartolino said. A win for outside counsel might be a few years of litigation, a ton of money and a last-minute settlement. For the insurer, it might be a quick settlement because of an effective early summary judgment motion.
“Most of the time, with outside counsel and your client, all those dynamics align with one another, but they can be far different, and everybody needs to be on the same page to fully understand exactly what a carrier wants and what we would consider to be a win, even if it’s not a win in the true sense of the word,” he said.
Law Firm Metrics
McKoy said that while cost is a factor when evaluating firms, it isn’t the primary motivating factor. It really is who can provide the best value for a service?
Frederick Paulmann of Counsel Management Group said all of this loops into the concept of what is changing. On the in-house side today, the finance department, procurement and even operations are asking questions about obtaining value or demonstrating metrics. Every division thinks it has a better way to show verified value.
“I think years ago, the answer was, ‘We’re on it. Trust us. We trust our firms, we have good
relationships, all is well,’” Paulmann said.
Looking at data and analysis and different fee structures to obtain more predictable spending is something that is growing, he said. But beyond the savings, there is the notion of how legal teams inside and out can point to efficiency and improved productivity.
Paulmann said very innovative law firms are saying, “I know you’re under the gun to answer questions from the finance perspective. Here's the toolkit that we bring to help show the incremental value that we deliver on this matter, and the incremental value from the relationship overall.”
This is a key distinguishing factor—law firms that do not just speak about cost effectiveness or efficiency, but show it with real case studies or aggregated data. “Delivering that is a bridge to the trust that’s so important in all of these relationships,” he said. And, of course, in-house counsel have a great advantage with incumbent clients because they know how they work and their track record, Paulmann said.
Jason Steinhart, responsible for managing all products liability and commercial litigation at Sanofi, said he recently consolidated the hiring of outside counsel from its five U.S. affiliates. Sanofi pared its 170 outside firms to 12 multinational firms with vast capabilities and placed them under one shared litigation department. The company guaranteed the firms 75 percent of its work and at least $10 million of work per year.
“What does that give me? I can go to any of these 12 firms without getting any permission from anybody, so that grants me a lot of freedom to work,” Steinhart said.
Of these 12 firms, he has four that are go-to firms for products liability and commercial liability. “They know me; I know them,” he said. There's trust, there's collaboration. They know my witnesses, they know my regulatory people, my medical people, my pharmacovigilance people. They know where to go before I even know where to go, which is great.”
Because of this relationship, it is easy to collaborate on alternative-fee arrangements. Steinhart does about 95 percent of his work under these arrangements. If the firm gets enough volume and loses on one alternative fee, they make it on another. They genuinely want to work and be collaborative.
“They’re the tip of my spear,” Steinhart said. “I mean, they’re the people that I want to do a good job, because it’s a reflection of me. I don’t want them being squeezed for money, so I want the system to work.”
Recently, in a very novel case, he negotiated a fixed fee for all of the initial pleadings, jurisdictional and motions to dismiss phases. This will take about a year. Then the budget for the next phase can be discussed.
In a recent case in which Siev’s client sought cost certainty, it was a given that parts of the case would go smoothly and others would go haywire. He said the client sought a proposal for a flat fee or each phase of the litigation, saying, “Some may work out better for you, some may work out better for us. I just need to know what it’s going to cost.”
When done well, alternative-fee arrangements are an opportunity, Paulmann said. “I, on the law firm side would say, ‘Yes, let me have some skin in the game. If I win more, produce better value, I get a higher stake, and that’s good for you, from a business standpoint, Client, because it’s economic value generated.’”
One of the most effective fee arrangements is an outcome-driven one, he said. In it, there is some shared definition of success. That is the target, and there is a shared understanding that if we can produce results above that target, we are winning, to a greater extent, or resolve it below that target. Based on the arrangement, the parties share somehow in that gain.
He also suggested negotiating a fee for a specific bucket of work. McKoy agreed. By breaking down the litigation, you know what it is going to cost at each point. Steinhart added that firms that do a great deal of volume know from experience what each stage is going to cost.
“I think breaking the litigation down or breaking whatever the action is down into bite-sized, manageable pieces can make people feel comfortable so that if it’s going well, everybody’s happy. If it’s not going well, you can reevaluate after a year and know where your budgets are,” McKoy said.
Steinhart said one law firm meets with him once a year and presents the team, their roles and what the costs for each will be. It is not presented as billable hours per person, just what it will cost for that person to work on the matter.
Steinhart said he also does a reverse contingency arrangement on commercial litigation. If the real value of a case is between $15 million and $45 million, and the firm gets us on the low side of it, the firm makes a reward fee of $3 million, he said. If it is on the high side of it, the reward may only be $500,000. This is in addition to a fixed fee to defend the case.
“You can think up all of these creative models,” he said. “It’s just a question of whether you have the trust with the outside firm, and whether they’re willing to do it and you’re willing to do it.”
Battling the Resistance
Law firms, Bartolino reminded, love to maintain the status quo. Change is not a good thing for them. They want to keep that billable hour; they want a certain volume of work, there’s almost an expectation. “The slightest changes—which is why it’s so important for us to communicate to them why we’re making changes—is often met with disbelief and almost as if we’ve hurt their feelings.”
When building relationships based on change, Paulmann said, it is beneficial to not only communicate goals at the beginning but to ask at the end, “How did we do here? Did this deliver not just the result that you wanted, but did this deliver the value? Will the people internally say, ‘You know what? That sounds like we got a good result and good value?’”
The views and opinions expressed in this article are those of the individual sources referenced and do not reflect the views, opinions or policies of the organizations the sources represent.