San Diego Business Lawyer Blog

Part One of this article discussed the general concept of flat fee litigation, and the associated relative risk shared by attorneys and their clients. Part Two explores potential flat fee litigation schemes further. The greatest challenge in devising a flat fee litigation scheme is making reasonable estimates of the attorney time necessary to effectively litigate any given case. Experienced litigators can distill the facts and the law in advance and make reasonable estimates of the time necessary, and they routinely offer estimates to prospective clients in the billable hour context. Unfortunately, lawyers' estimates are often understated and clients end up paying significantly higher fees than originally expected. This is likely because attorneys are loath to give worse case scenarios and risk turning clients away.

So long as clients are willing to absorb a share of the risk (see Part One) in exchange for certainty in billing, attorneys can and should offer their clients a flat fee option for most litigation matters. In order to reduce the risk to clients of over paying for matters that may resolve in the early stages of litigation, attorneys can offer flat rates for the different stages of litigation. A flat fee litigation scheme may look something like the following: a flat fee for pre-filing negotiation; a flat fee for post-filing/pre-trial litigation; and a flat fee for trial preparation and trial. The pre-trial litigation phase could be broken up further into a flat fee for post-filing/pre-discovery work and a flat fee for all remaining pre-trial litigation including discovery.

The difficulty of course arises in deciding how to calculate the flat fee. Litigation is a complex process mired in factual, legal and procedural uncertainty, and it's the attorney's job to navigate the maze for the client. Nonetheless, experienced litigators have the skills required to make reasonable estimates. They can estimate the number of witnesses to be deposed, the volume of documents to review, the potential discovery burden, the extent of expert discovery and an average time for expected motion work. In some cases, they'll be able to include the skill and determination of opposing counsel in the equation. They will not get it right in every case. In fact, the estimates may be off more often than not. Whatever accuracy is achieved, they can at least assign risk value to the estimates. The goal is to present a marketable alternative to the inefficient and client unfriendly "billable hour" practice.

It's important to note that setting a flat rate for attorney fees doesn't eliminate all uncertainty for clients. Litigation costs can vary considerably and attorneys should provide their best estimates of those costs while explaining the inherent unpredictability.

Compared to the entrenched "billable hour" practice, the flat fee approach is an attractive prospect to the San Diego law firm looking at creative billing practices to lure new clients and keep existing clients who are increasingly more frustrated with the status quo.

Attorneys and law firms have visited the issue of flat fee litigation in the past, and there are San Diego litigation attorneys today that offer some of their business clients the option under limited circumstances. However, there can be little doubt that the overwhelming consensus amongst legal professionals is that flat fee litigation simply isn't practical. In part, this view stems from the difficulties in predicting actual attorney hours necessary to litigate any given case. Even if a law firm could adequately estimate the number of hours necessary to complete a case, it is virtually impossible to know whether the matter might resolve informally long before significant attorney hours are expended. In fact, a good attorney will strive for this beneficial result for his or her client. Avoiding long drawn out litigation is always a healthy result. Apart from the monetary costs, the emotional and time consuming roller coaster ride takes a toll on business owners.

Business owners would like some certainty as to the final cost of litigation. Attorneys are concerned with compensation for the actual work performed. Under standard billing practices, attorneys do their best to provide estimates, explain the process and most often stress the inherent uncertainty that comes with any litigation. Unfortunately no matter how well explained, clients rarely anticipate the actual costs ahead. Moreover, although attorneys are bound by ethical considerations, the reality is that there is little incentive for efficiency. Nor is there a desire to scare off clients with worse case scenarios. Yet, worse case scenarios are common in litigation, and the result is an ever increasing dissatisfaction with litigation and the legal profession in general.

The question then turns to one of sharing risk. From the litigation attorney perspective, agreeing to take on a litigation case for a flat fee comes with great risk. They know the potential for a long drawn out process consuming unanticipated attorney hours. At best, underestimating attorney time results in reduced average hourly rates. At worst, the attorney finds himself or herself overwhelmed by a single case at the expense of others. For clients, knowing what attorney fees will be in advance makes it possible to evaluate whether anticipated litigation is an economically feasible alternative to informal resolution. However, in exchange for certainty in billing, they risk overpaying for their attorneys' time, and the overpayment can be significant if the case resolves in the early stages. Paying an attorney for an anticipated 80 hours that resolves after 5 hours of work can be just as dissatisfying as expensive ongoing litigation. It's clear, nonetheless, that consumers are looking for alternatives.

Continue reading "Managing Business Litigation Costs - Is Flat Fee Litigation Possible?" »

Avoiding Litigation - Part One sets forth three pre-conflict practices useful in reducing your business' risk of litigation. Of course, avoiding all conflict is virtually impossible. However, conflict does not inevitably lead to litigation. In fact, more than 90% of all conflict is resolved before reaching the courthouse steps. Below are three practices useful in avoiding litigation after conflict has arisen:

Act Fast. The worse thing anyone can do is ignore a potential conflict. If you receive a letter, phone call or personal visit from an unhappy customer, vendor or client, respond immediately. In most cases, the problem will not go away because you chose to ignore it. The problem will more likely get worse. Communication is a powerful tool that can diffuse even the most heated dispute. The faster you act, the more easily the problem will be to resolve. Being responsive often puts the other side off guard. They are poised for a battle and when you call to offer a solution, they're not quite sure how to respond. If you are behind on a debt, offer a payment solution that is workable for you. Offering a payment solution you can't ultimately adhere to is worse than ignoring the problem. If you cannot fully perform, offer creative alternatives. Whatever your response, it will be better received if it provides options. If there is disagreement about your rights and obligations under an agreement, offer to sit down and discuss the issue. Don't be rigid. Explain your beliefs politely but be sure to leave the door open for a compromise. Conflict and anger breed more conflict and more anger. In the end, you don't have to agree to anything. However, open and conciliatory communication opens the door to a wider range of potential resolutions. Acting fast is no less important where you are seeking redress. If you are owed a past due debt, don't rest on your laurels. The fact that there is no doubt about the debt doesn't guarantee payment, especially without litigation. It remains costly for you to sue. Instead, contact the debtor and ask whether there is a problem. Offer to work with them to resolve the debt as quickly and as efficiently as possible. They will appreciate your offer, and likely never forget it. If it appears your efforts at informal resolution are ignored, try asking an attorney to write the other side a letter. A litigation attorney can concisely set forth the legal realities for the other side and can usually do this at a relatively low cost. Be sure your attorney understands your commitment to resolving the matter without the need for litigation.

Be Willing To Compromise. No matter the strength of your bargaining position, litigation is expensive. For new and growing businesses, it is prohibitive. Large businesses and corporations can more readily afford a legal battle, but there is little benefit to litigating a matter that could have been informally resolved at a much lower cost to the company. Even where larger concerns are at issue such as fear of opening the floodgates to repetitive litigation, looking to a compromise may help avoid worst case scenarios. Think about the prospect of litigation. What will it cost you in terms of aggravation, time, money and goodwill? Take a hard look at the matter before you and consider alternatives that might be acceptable to you - weigh the costs of the compromise against the aggravation, time, money and goodwill you will exhaust during a court battle. These costs cannot be overstated. Compromise may be the single most important practice in avoiding litigation. It is also the hardest practice for most businesses to swallow.

Continue reading "Avoiding Litigation - Part Two" »

Litigation!  The word has many connotations, most of which are pejorative.  The "litigation happy" label is ubiquitous.  In the business world, "litigation" has a much more pragmatic import.  It remains a useful tool for San Diego business seeking legitimate recourse but simultaneously is the source of unease.  While a full proof method of avoiding litigation may be impossible, there are six simple practices businesses of all sizes can follow to reduce the risk of litigation.  The first three pre-conflict practices are set forth below.  The remaining three post-conflict practices are set forth in Avoiding Litigation - Part Two of this article.  

Get It In Writing.  Ideally a contract attorney will assist with the drafting and negotiation of all contracts.  However, this may not be practical for many businesses, especially for new and growing businesses or those that routinely contract with vendors and customers.  If an attorney is cost prohibitive, drafting basic instruments yourself to memorialize your agreements is a pragmatic alternative.  The internet provides a wealth of helpful instruction, sample contracts and anecdotal information from other business owners.  The paramount concern is mutual understanding.  Although you may not recognize all the legal complexities of contracting, a writing that memorializes your agreement at the very least reminds each side of the representations made.  Be sure that everything discussed orally is in writing.  Don't take anything for granted.  If the person you are contracting with is resistant to a detailed agreement, there is reason for concern (see "Use Common Sense" below).  Faced with a written agreement, even the most difficult of parties will often concede critical points.  Getting it in writing without the assistance of an attorney can be a pragmatic alternative which is better than no writing at all.  However, consultation with a contract attorney remains the best way to ensure that an enforceable contract is in place to protect your business' interests.  

Use Common Sense.  Learn to recognize repeat problem areas either with customers or vendors.  If a vendor is repeatedly late with deliveries or a customer owes you money or either is constantly complaining, it's generally a sign that those types of problems will continue.  Don't ignore obvious perils.  When your gut tells you something is fishy, it's probably not worth the frustration to go forward no matter how appealing a customer's business or how economical a vendor's products or services may be.  These are the folks that are more likely to create conflict with you and others.  If you offer a service or invite customers into your place of business, don't be oblivious to hazards.  No matter how busy you are, immediately address anything that might cause even the slightest mishap.  There is no substitute for common sense.  There is no rule book for you to follow.  Your job is to be aware.    

Treat Everyone With Respect.  This is difficult for some people.  Entrepreneurs and successful business men and women are generally driven focused people with a clear vision.  They are intelligent, savvy and direct with little patience for distraction, excuse or delay.  Unfortunately, this personality trait is not always conducive to building strong enduring relationships.  Your customers, vendors and clients are part of a diverse population comprising varying degrees of motivation, intellect, knowledge and patience.  Some communicate better than others, and some are simply nicer than others.  They all have one thing in common - they consider the deal between you and them to be very important.  Whatever the personality trait, treating even the most difficult people with respect reduces the likelihood that they will go back to their office or home complaining about how they were treated.  This in turn reduces the likelihood of conflict.  It's the difficult people that will most likely lead to conflict, so for this very reason they are the ones you should be most careful with.  In colloquial terms, "suck it up".  Stay polite and considerate, and be apologetic (not apathetic) when you cannot accommodate them.  It won't cure every potential conflict, but it will reduce their occurrence.  If you think you are incapable of this type of patience, insulate yourself using management and staff who have these skills.  The ultimate reward is the goodwill respect garners over time - a priceless commodity for your business.  

These seemingly obvious rules are too often overlooked.  A little common sense and respect go a long way even for the largest corporations.  And don't forget - get it in writing.  Avoiding Litigation - Part Two sets forth the three post-conflict practices that are conducive to reducing your business' risk of litigation.

Most San Diego businesses, regardless of their size, try not to think about the potential for litigation.  They cross their fingers and move forward concentrating on day to day operations and marketing.  They are aware of possible contract disputes and potential liabilities but put their faith in the good nature of their customers, clients and business associates.  The prospect of litigation scares them and for good reason.  Past experience has taught them that anything involving an attorney is excessively expensive, and inevitably leaves them feeling frustrated and dissatisfied.  Attorneys have proven unresponsive to their needs, difficult to communicate with and often apathetic leaving them with little confidence that they are being billed fairly or that their case is being handled economically.  Instead, they walk away believing, without really understanding why, that attorney hours and costs are inflated and that their case has probably been drawn out longer than necessary with little or no effort towards early resolution.

Today, skyrocketing legal costs have even the largest corporate executives second guessing themselves.  While the billable hour has been under attack as of late, it is still pervasive.  This is because in a large number of scenarios it seems the only practical way to bill clients for attorney time.  Yet the practice is fraught with inefficiencies and disincentives (see our article on the "billable hour" setting forth just some of the reasons why this is so).  The solution for those faced with the inevitable hourly billing that comes with litigation is twofold.  First, a frank and open discussion with your attorney about the firm's billing practices (including how costs are incurred) minimizes any misunderstandings and ensures that your expectations are realistic.  If a law firm is resistant to this type of discussion, it's a clue that the firm is likely wedded to the "billable hour" freight train.  This article distinguishes between the typical "billable hour" mentality and a litigation attorney's practical need to charge by the hour.  The former is part of a firm culture that rates attorney performance by the number of hours billed while the later looks to client satisfaction.  Second, once a clear understanding regarding billing is reached, monitor your attorney's bills with close scrutiny.  While it is almost impossible to recognize every inefficiency, close scrutiny of billing provides a general impression that is valuable to you as the client.  This includes looking at costs.  Your law firm will recognize your attentiveness, and will be forced to pay better attention to attorney hours and costs incurred (i.e. consider reducing attorney hours charged for a new associate's work on a motion that could have been finished faster by a more experienced lawyer or consider three or four star accommodations the next time they travel for a deposition).

This may be second nature to smaller businesses concerned with escalating legal costs.  It should be of greater concern to larger businesses and corporations who seem to accept skyrocketing legal costs as the cost of doing business.   Businesses of all sizes should not be afraid to put their current law firm on notice that it expects efficient and cost effective representation.  Nor should they be afraid to take their business elsewhere should closer scrutiny of billing evidence a pattern of inefficiencies and excessive costs.  Your power rests in your ability to hire another litigation firm if you are unsatisfied.

San Diego businesses should be asking themselves how the "billable hour" law firm culture affects their bottom line. A recent article about a patent holder's defense of a patent infringement action focused on the business's desire not to cave into the demands of what it believed was a patent pirate despite the knowledge in advance that the legal fees would exceed the $400,000 licensing fee sought. Although the battle itself was inspiring, one can't help but be awed by the last paragraph telling the story of the corporation's victory and it's new battle to recover over one million dollars in attorneys' fees.

One million dollars in attorneys' fees! Presumably, this is independent of costs necessary to defend the case. A sole practitioner has to shake his head at the staggering amount. Even experienced litigators prosecuting or defending multimillion dollar cases involving multiple parties and hundreds of attorney hours have to wonder. Law firms will undoubtedly counter that their rates are competitive and that a patent infringement case can easily reach into the 1000 hour range or higher. This is is not unheard of.  Five weeks of deposition, five weeks in a document review, law and motion practice, other discovery and a six week trial can easily exceed 1000 hours.  A six week trial with multiple attorneys working on the case could alone involve more than 500 attorney hours.  Undoubtedly, the stakes are high and corporations are willing to pay big dollars for the right legal representation.  Some may feel there is no substitute for the big firm experience.  But one million dollars?

Each case is different of course and will have varying levels of complexity.  At the heart of this discussion rests two key components: efficiency and incentive.  The two components are interdependent.  Law firms typically hire young associates who are first and foremost expected to bill a minimum number of hours per year (billable hours).  The "billable hour" is the benchmark by which their performance is rated.  They are most often raw inexperienced  practitioners with little or no practical understanding of the complexities of the cases assigned to them, the procedural time lines important to litigation or the ultimate evidentiary effect of their decisions.  Combine this inexperience with the "billable hour" and you have a recipe for inefficiency.  Inexperience or not, minimizing attorneys' fees for the client and maximizing billable hours in the real world are mutually exclusive.
 

Continue reading "Billable Hours - San Diego Businesses Should Ask How Much Is Too Much?" »

On December 22, 2008, the California Supreme Court ruled in Patel V. Liebermensch that the parties had entered into an enforceable option contract for the sale of real property despite the absence of terms specifying the time and manner of payment. The controversial decision was widely reported by the media and in attorney blogs and the moral of the story appeared to be that parties could forego the inclusion of contract terms setting forth the time and manner of payment (at least for the purchase of real property in California). Although the decision is important, businesses entering into contracts should not be lulled into thinking exclusion of such terms is acceptable simply because their exclusion does not render a California contract unenforceable. Time and manner of payment is an important detail in any contractual relationship, and prudent business owners do not enter into contracts (for the sale of real property or otherwise) without knowing when and how they will be compensated.

The purpose of entering into a contract is set forth clearly and concisely the material terms agreed to by the parties and to affect a means of enforcing those terms should there be a dispute. A good attorney or other negotiator will ensure that all material terms are agreed to and that important factors such as the time and manner of payment are included in the contract regardless of any law or court decision that may appear to minimize their importance. Having a clear understanding of the contractual relationship is the best way to minimize potential misunderstandings and avoid future disputes. Whether a court will ultimately enforce the contract has little benefit to parties embroiled in a battle over when and how each side is to be compensated. The object of a good contract is to avoid these kinds of disputes in the first place. Such disputes are costly to businesses even with the long term prospect of prevailing in court. A business' goodwill, reputation and bottom line all may suffer by the dispute's mere existence. Too often, businesses and their lawyers lose sight of these practical aspects.

Of course, the Patel decision will impact the enforceability of many existing California contracts, particularly those executed by unsophisticated parties without the benefit of a contract attorney. In fact, the contract at issue in Patel was a short contract in the form of a proposal sent by fax. The point of this article is that while Patel may be the law of the land for California, San Diego businesses shouldn't rely on it and similar decisions in place of common sense and sound contractual negotiation.