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Non-practicing entities (NPEs), which hold patents but make no products, have profited from suing practicing entities. Trolls versus companies, you can think of it. The Economist, Aug. 20, 2011 at 58, has a chart (from which I eyeballed the metrics that follow) based on PricewaterhouseCoopers data that shows median damages awarded NPEs and practicing entities during two time periods. During 1995-2001 trolls’ median was $5 million; the companies’ median was $6 million. During 2002-2009, trolls doubled to $13 million while companies dropped to $4 million.

One could speculate on all kinds of reasons for this dramatic shift in outcomes. Trolls might have gained experience and figured out which lawsuits to bring and how hard to contest them in court. Perhaps settlements dropped as more companies stood up to trolls, taking some bigger hits at trial. Maybe companies with infringement claims against each other went all the way to trial less as they resorted more to license agreements or other resolutions. My final observation is that I have seen figures widely disseminated about patent cases brought to trial costing $2 million and up just in legal fees. If so, and if the median recover after trial was about $4 million, that expensive crap shoot would not be favored.

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Always curating my blog, I went back to early 2009 to see since then what this blog has about alternative fee arrangements. Almost three dozen came to light.

Of course, a number of the posts had to do with metrics (See my post of Sept. 13, 2006: percentage of matters handled under alternative fee arrangements; Dec. 7, 2009: 55% of survey respondents to Hildebrandt said they have used AFAs; June 14, 2010: data from France on AFAs; Aug. 5, 2010: data from Kerma Partners; and Oct. 22, 2010: survey data on AFAs.).

Arguments for and against alternative fee arrangements abound (See my post of Nov. 17, 2006: survey finds that predictability favors alternative fee arrangements; Jan. 13, 2008: delay saps attractiveness of alternative fee arrangements; Sept. 7, 2008: alternative fee arrangements and conflicts; May 6, 2009: you learn when you negotiate an AFA; Jan. 28, 2010: obstacle to AFAs is software and managerial supervision; March 16, 2010: Baer’s four objections to AFAs and my counters; March 24, 2010: alternative fees and transaction costs; April 6, 2010: less resistance in law departments, more perceived at firms; May 26, 2010: failure to pursue AFAs could be dereliction of GC’s duty; June 1, 2010: six boundary conditions; June 2, 2010: mindsets valuable for AFAs; June 9, 2010: three more mental concepts; Oct. 7, 2010: accounting has problems with AFAs; Dec. 21, 2010: scorn for AFAs; Dec. 26, 2010: law firms can profit more under AFAs, but your costs can go down; April 30, 2011: alternative firms over fees; and June 10, 2011: AFAs are not simply a budget;).

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Late in 2009, while the U.S. economy was in the tank and cost control was the cry of the day, The American Lawyer and the Association of Corporate Counsel surveyed approximately 587 general counsel regarding their use of alternative fee arrangements. Some of the results appear in Lit. Mgt. Mag., fall 2011 at 58.

Particularly intriguing to me were the findings surrounding who initiated the AFAs. 54 percent of the surveyed top legal officers claimed to have initiated the use of AFAs; 18 percent said that the initiatives were jointly initiated with outside counsel; and only three percent said their outside counsel “first raised the issue of AFAs to them.”

According to the co-authors, a law firm partner and the general counsel of Life Time Fitness, “Less than two years later, the climate seems to be the same.” The point has been made before on this blog: both sides point fingers at the other to blame them for passivity.

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A proponent of alternative fee arrangements summarized six “major benefits” of AFAs, one of which set me on the path to this post. The author does not define AFA, but seems to assume everyone knows it as fixed fees for a volume of legal services, primarily litigation. He writes that a major benefit is that AFAs “Reduce the average cycle time (age) of litigation resulting in potentially significant timesavings (sic) for attorneys and expense savings for companies.” Later in the article in Lit. Mgt. Mag., fall 2011 at 51, the author says that the insurance company (Selective Insurance) where he practices has more than 5,000 cases a year on fixed fees. To the point: “the average age of cases decreased by more than four months.”

The implication seems to be that before, firms didn’t mind stringing out a case because they could keep opening the cash register; now, under a fixed fee, speedier resolution earns them more (See my post of March 5, 2008: cycle time with 18 references; Nov. 29, 2008: part of AKS-Labs balanced scorecard; March 19, 2009: matter cycle time from matter management systems; April 9, 2009 #3: Takt time; and Dec. 30, 2009: no linear relationship between length and cost.). Whether settlements go up to enable those speedier resolutions the article doesn’t mention.

Logical, I agree, that shorter cases give les opportunity to charge time, but what about cases that languish because they are weak? Let sleeping dogs lie, perhaps, even if that ruins your average cycle time – and stick with medians. Perhaps too the extra effort, if it is required, to close a case quickly piles up more time – or more senior lawyer time – than a less rushed approach because cycle time was a target.

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Toward the end of 2009, American Lawyer and the Association of Corporate Counsel conducted a joint survey of approximately 587 general counsel regarding the use of alternative fee arrangements. Some of the findings are cited in Lit. Mgt. Mag., fall 2011 at 58.

One out of four of the respondents “reported having paid all of their firms by the billable hour.” Recall that 2009 saw the feverish discussions of cost control in the face of the economic collapse. Recall that replacements for the much-maligned billable hour had been talked about ad nauseum for years. Bear in mind that matter management systems were well established in hundreds of law departments as sources of data for fee arrangements. Consider that the respondents to the survey knew it was about AFA’s so they might have been more open to those arrangements than non-respondents. And, finally, take into account that even a single departure from hourly billing, over an unstated period of time backwards, would have reduced the one-quarter finding.

All that leaves me impressed that one-quarter completely relied on hourly bills. If this is evidence of a sea change, you have to wade in a long way to cover your ankles.

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A for/against feature in Lit. Mgt. Mag., fall 2011 at 52, presented one argument against fixed fees that is not often expressed. A claims manager for Merchants Insurance Group dislikes fixed fees for groups of matters because he wants to pay the right amount for each one: “Inherent in the AFA concept is the idea that we will over pay on some cases and under pay on others, but it will all work out in the end. Purposefully not trying to get it right on each individual case is unsettling.” [I do not think he meant a pun on settlement.]

I disagree. The goal is to pay an appropriate amount for good outcomes over the entire portfolio, which means you do not deal one by one with cases. No one is deliberately trying to be wrong on what is paid for litigation defense; they are trying to be economical with time and money and not sweat the small stuff.

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I have used the term in my consulting projects for those matters that will NOT be included in the bundle of matters a firm agrees to handle on a fixed fee. So, for instance, class action lawsuits are carved out of the portfolios of litigation, or matters that involve Canadian law are carved out, or cases that go to trial (See my post of Sept. 10, 2005: exclude trials in fixed fee.)

A second use of the term came to my attention in Lit. Mgt. Mag., fall 2011 at 51. This new publication from the Council on Litigation Management described an alternative fee arrangement where it was “understood that occasionally a case would change during the course of litigation requiring a transition from a fixed ‘phased’ litigation budget to straight time and expense billing. This ability to carve out specific cases was essential …” Here the carve out happens because a particular matter changes during the course of its prosecution to something not covered by the fixed fee. Instead of being carved out ahead of time, the passage of time unveils the carve-out.

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“New technology will naturally drive out the old, which it mimics in functionality and terminology, if the old is no longer available.” The quote comes from Henry Petroski, Success through Failure: the paradox of design (Princeton 2006) at 41. The opposite of Gresham’s Law, where debased coin drives out unalloyed full-weight coin, this housecleaning by better technology proved out when scanners sent fax machines packing; when PowerPoint replaced 35 mm slides; when spreadsheets made ledger books obsolete and photocopiers put carbon paper in the museums.

Attorneys and others in legal departments have seen their share of out-of-date technology banished by the brash newcomer: e-mail wiped out letterhead and envelopes; electronic billing savaged mailed invoices; online legal research rendered libraries – a venerable technology – inadequate; online portals dispatched physical deal rooms; cell phones left landlines gathering dust; iPads gobble up everything with apps.

Technologies are nothing if not Oedipal – the child supplants the parent.

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Someday we may find that better run companies – whatever that means and however that is measured – tend to have better run law departments – at least as evidenced by their comparative benchmarks. Among mature companies competing in mature industries, it seems likely that their well-honed HR practices, technology infrastructures, management training and disciplines, and physical facilities percolate through to the benefit of the legal team. Good companies to that degree are more likely to have good legal teams.

Much like successful professionals give too little credit to their firm, general counsel who are lauded for their management prowess may to a considerable degree be beneficiaries of the surrounding, taken-for-granted corporate strengths. Nor do their budges reflect fully the ambient advantages.

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It is a business commonplace that in the early days of an industry, the market teems with competitors, but equally common that their numbers thereafter shrink markedly. Combinations, withdrawals, failures, and acquisitions narrow the field. It has happened some with matter management systems for law departments but not to the dramatic degree that some industries have witnessed.

This pattern was brought to mind by Henry Petroski, Success through Failure: the paradox of design (Princeton 2006) at 26. Petroski notes that 34 companies offered slide projectors in 1979, the year of peak production, but only seven remained in 2000. For another instance, in the period 1978-1982, dozens of companies manufactured and sold early versions of personal computers but now only a few survive.

Matter management vendors have proved resilient. Some, however, have disappeared, such as CompInfo (founded in approximately 1980, ultimately acquired by Hummingbird and then discontinued), Corprasoft (acquired by Datacert a few years ago), INSLAW, TriPoint systems (acquired by Wolters Kluwer in 2005 and combined with TyMetrix), and LawManager (acquired by Bridgeway). There may well be other extinct systems.

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