Prepping a Value-Fee Engagement Letter? Consider These 13 Issues First
By Patrick J. Lamb
Nov 7, 2012, 10:02 am CDT
I routinely am asked for copies of our engagement letters by people who want to utilize an alternative fee arrangement with their client. To address these queries, I have boiled down the points to be covered. As I have said many times, Valorem is a litigation firm, so this list is most relevant to other litigators. Some of the points are applicable elsewhere, but a fulsome list of points to cover should be prepared for each specific area in which a value fee might be used. Without further ado, here is my list of issues to be addressed in an engagement letter using value fees:
1. Set a specific fee structure. You need to determine the nature of the fee structure—fixed fee, fixed fee with holdback, capped fee, capped fee with shared savings, and so forth. If there is any kind of holdback or bonus element, you need to specify that the Company will determine in its discretion if it is to be paid or the criteria that will be used to determine how much of the holdback will be paid.
2. Define staffing. Clients are concerned that firms may utilize less-experienced or less-qualified lawyers and staff once a fixed fee has been set. Avoid the problem. Define in writing which lawyers and paralegals will be utilized on a given matter and what their respective roles will be.
3. Specify amounts of payments, and when payments will be billed and paid. Most firms utilizing fixed fees identify advance payment, rather than payment in arrears, as a benefit. If your client pays bills on a 60-day or longer cycle, the benefit will be lost. The preferred approach is to determine the timing of payment at the outset. It also is important to specify whether fees will be billed monthly, by some other period (predetermined phases) or by work completed (this incentivizes firms to work faster). Amounts to be billed do not need to be equal, so specifying what amounts are to be billed and when, as well as when payments will be made, eliminates any potential misunderstanding.
4. Specify the assumptions on which the fee agreement is based. There are general assumptions built into every fee agreement, including the likely volume of documents, the issues (broadly defined, such as “no counterclaim”), the likely number of depositions, the time frame of events at issue, number of witnesses, time to trial and so forth. All assumptions underlying the fee structure should be specified.
5. Specify work to be performed and any work not to be performed. All work to be performed should be specified. For example, anticipated or possible motions should be defined as included or not. It is common to say that one discovery dispute is included, but not more than that since discovery disputes are frequently within the control of the client. It is equally important to define any work not included. For example, if the firm believes it will be doing significant document review and the client anticipates outsourcing such work, or such reviews were completed on an earlier case, the expectation that such work is not included in the fee agreement should be specified.
6. Identify the criteria for change order approval. If the outside firm believes circumstances have changed materially, it will submit a change order proposal. Not every change order needs to be approved: The client always has the right to accept the risk of not changing the scope of the engagement. But it is important to clarify the criteria that the client will use to determine if it agrees the work that is the subject of the change order is within the original scope of work. For example, was the issue or circumstance foreseeable or not? If it was foreseeable, the change order is not appropriate and the work should be performed under the previously agreed-to fee structure.
7. Require that the company approve any spending outside the fee agreement. The money being spent on fees and disbursements is the company’s. The company has the right to determine if, when and how, such money is to be spent. Thus, experts, vendors and other expenditures over an agreed-upon threshold should require advance approval.
8. Early case assessments are required and must be updated. For many companies, this is a condition of payment of any fee. The company wants to invest in the prosecution and defense of the right cases. This is a critical tool to deciding what cases are worthy of investment. This tool is so important that it is entirely reasonable to create a specific fixed fee for ECA investigation that will be followed by a more fulsome fee agreement once risk has been assessed and a strategy determined.
9. Basic “what-ifs” should be addressed. Certain things are foreseeable—a key member of the team leaving the firm, significant scheduling changes, interlocutory appeals, bankruptcy of your adversary, and so forth. It is helpful to note that if these things occur, the parties will discuss renegotiation of the fee, if necessary.
10. Specify whether local counsel fees are included or excluded. One rule of thumb is that local counsel fees should be included if primary counsel is responsible for selecting local counsel and has the power to replace them. This gives primary counsel the degree of control to ensure that local counsel fee budgets are followed. If the company chooses local counsel, it is likely primary counsel will propose that local counsel fees not be included in the fee agreement. Whichever way you go, the engagement letter should address the issue.
11. Specify whether expert fees are included or excluded. Some clients request “all in” numbers from their lawyers, while others anticipate that the expert fees will be the subject of a separate agreement at an appropriate time. There are merits and demerits to each position, but the engagement letter must address the issue
12. Be clear about whether fees for trial and trial preparation are included. Most cases settle, so if fees for trial are included in the overall fixed price, it will be terribly inflated. If you know a case is likely to be tried, you can build in the price of trial as a separate phase. It is often easier to estimate the cost of trial when you are to closer to trial since the factors influencing price are likely to be more certain. Either way, be clear about whether the price includes trial or not, and when the fee agreement ends.
13. Consider whether a general retainer agreement providing volume discount is in place. The company may have a general retainer agreement with some firms providing a volume discount based on the total amount of fees incurred in any given year or otherwise. In such a case, it should be specified whether the engagement governed by an alternative fee arrangement is to be included in the general retainer agreement providing a discount. It may be appropriate in some cases to specify how the alternative fee arrangement will be included in the general retainer agreement. Some portions or all portions of the fees could be included or excluded. For instance, the base fee could be included in the calculation of the volume discount provided for in the general retainer agreement while the bonus element may be excluded. All components of fees could be included or excluded. Again, effort should be made to eliminate any potential misunderstanding.
In a future piece, I will address overcoming objections to value fees.
Patrick Lamb is a founding member of Valorem Law Group, a litigation firm representing business interests. Valorem helps clients solve their business disputes and coping with pressures to reduce legal spend using nontraditional approaches, including use of nonhourly fee structures, coordination with LPOs or contract lawyers, joint-venturing with other firms and implementation of project management tools to handle lawsuits or portfolios of litigation.
Pat is the author of the the book Alternative Fee Arrangements: Value Fees and the Changing Legal Market. He also blogs at In Search Of Perfect Client Service.