Fixed Fee Billing and Other Legal Red Herrings

September 1st, 2009

There has been a great deal of talk this year about fixed fee billing as way to address problems in lawyer-client relationships, starting with major clients like Cisco and major firm leaders like Cravath Swain & Moore’s presiding partner Evan Chesler.  Richard Susskind also talk a lot about the idea that fixed fees align client and firm interests better by encouraging efficiency.

I have no doubt this may be true.  Flat fees can reduce double-billing, the multiple rounds of review that occur as documents are prepared by junior attorneys, then reviewed by mid-level ones and then senior partners.  Legal invoices generally don’t relate time spent to specific goals or deliverables either, so they can leave the reader/client confused about what has been accomplished in the time spent.  Flat fees could make that clearer.

Or, flat fees could simply be a way to throw a thicker blanket over firm billing practices.  I wish I could find again the cynical viewpoint I read recently about how large firms have gotten about as big as they can get and the lawyers physically can’t bill more hours in a year, so they have turned to fixed fees to continue to increase partner profitability.

I have never worked in a large firm, never mind managed one, so I won’t presume to know what drive’s any firm’s billing practices.  I will say, though, that there are not many clients sophisticated enough to know that XX transaction should cost $YY.  Most clients simply need to take the firm’s estimate at face value, or solicit multiple bids.  A firm that wished to could certainly estimate the likely cost of a matter, round up slightly, then streamline its internal resources in order to bill the fixed-fee equivalent of 10 hours for work that can be performed in 8.

The point here is not to accuse any person or firm of bilking clients, but merely to note that the discussion of billing practices *per se* is a red herring.  It is just as easy to obfuscate and pad a fixed-fee invoice as an hourly one.

So what, I was asked over the weekend, is my approach?

The Grand Scheme
The master plan includes initiatives like the ones Mark Chandler describes in the ILTA speech linked at the top of this post.  He talks about letting Cisco attorneys dive into outside-firm knowledge management systems directly, reverse auctioning patent prosecution matters and a service level agreement that requires Cisco to take back low value-add (but expensive at outside firm rates) matters from outside counsel.  My firm is developing technology that will let us collaborate more closely with our clients on many matters.

The Day to Day
In the meantime, there is the day-to-day process of meeting new clients, assessing their needs and getting the work done cost-effectively. Every client wants to know how much the work is going to cost so it can budget appropriately.  Here’s the simple, low-tech approach that works for me:

  • Listen carefully to what the client needs and ask a lot of questions
  • Be honest with the client and with myself about how much time a transaction will likely take
  • Communicate regularly about progress.  If something major happens that seems likely to increase the scope of a project, work through it as early as possible
  • Strive to show that each invoice shows value provided, whether the bill is broken down hourly or on a fixed-fee basis

In the end, it’s developing relationships of trust and mutual advantage with clients.  Billing practices are a means to the end, not the end itself.

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Lesson in Legal History and Negotiation – John Adams and Samuel Quincy

August 29th, 2009

Boston - Freedom Trail: Old State House
Image by wallyg via Flickr

I grew up outside Boston, though I have not been back there in a long time.  Last week at the tail end of a family vacation we stopped in Boston to follow the Freedom Trail and show my kids a slice of American history.

On the trip, we walked past Boston’s old State House, the site of the Boston Massacre in 1770.  Five civilians were shot by British troops following a riot and the event is cited as one of many that led to the American Revolution.

The soldiers were arrested and brought to trial.  I find it fascinating that the political environment was so charged that no lawyers could be found to represent the defendant soldiers.  Colonials were already bitterly divided between those loyal to England and Patriots seeking a higher degree of autonomy or outright independence and apparently even the Loyalists feared collateral damage to their careers if they took the case.

The solution was an elegant exercise in negotiating strategy.  John Adams, whose credentials as a lawyer and a Patriot were unimpeachable, represented the soldiers.  Loyalist Samuel Quincy, the colony’s Solicitor General, acted as prosecutor.

The legal history here is interesting.  The compromises required to get the case to trial are fascinating.  Adams the Patriot defended the British soldiers; Quincy the Loyalist worked to convict them.  The trial depended on both men putting their full efforts into pursuing cases that (on some level, at least) ran against their personal convictions.  I’m sure that must have been a tremendously difficult assignment for both sides.

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Reading Contracts: What am I Missing?

August 28th, 2009

One of the hardest things to do when reading a new contract is to figure out what is not covered.  It’s relatively easy to review an agreement and pick out things that are completely wrong or run contrary to one’s interests.  On the other hand, the sea of words can prevent readers from noticing, for example, that a license agreement provides a nonexclusive, worldwide, perpetual license, but doesn’t say clearly whether the license fee must be paid and once paid whether it must be periodically renewed.

The best way to be sure a contract contains all the terms one needs is to do the same type of transaction over and over until you know it cold.  Next best is to find someone else who has to rely on.  Those aren’t particularly helpful suggestions to someone in unfamiliar territory with a deal on the line, though, so here are some suggestions to help identify missing terms.

1) Make up a hit list.  Before you start reading, write down list of the important terms.  This step takes a surprising amount of mental discipline but it is incredibly important.  Avoid the temptation to dive straight in and “see what the contract says”.  Even if you think you know what terms you need, write them down before you start reading.

2)  Take the contract in sections.  This goes along with my piece on How to Read a License Agreement.  Instead of reading front-to-back, search the contract to find all the terms on your hit list.  Do they match your requirements?  Is anything from your list missing?  Bonus points for lining up your hit list in one column on a piece of paper and writing down the comparable terms in the contract in the next column.  I have only taken this extra step a handful of times, but found it very helpful when the deal was complex or I was having a hard time getting through the contract language.

3)  Put it Back Together.  Now that you have found the biggest points, you can read through and see how other terms flow around them.  Do all the defined terms match your understanding of what they should be?  Do any subparagraphs under one of the big points limit its applicability?

4)  Try to Break it.  It’s also easy to read a sentence, squint a bit and say “yeah, that basically covers it”.  Instead of trying to read the contract in a way that fits your needs, do the opposite.  How could a paragraph be read against you?  E.g. if you quit vs. being terminated by your employer, will you lose any vesting in your stock?

5)  Read with a Friend.  If the deal is important it merits more than one set of eyes.  I frequently find that useful points come out of discussion with a co-reader.

6)  Search for Exemplars.  I am putting this last because it’s really hard to find good examples of many types of agreements.  The SEC’s EDGAR database is a good source, but search is very limited unless you pay for advanced search capabilities.  Docstoc and Scribd have pretty good libraries but since there is no clear way to judge quality it is best to look for at least 3 samples of the type of agreement you need, then compare terms carefully before relying on any one contract.

I hope these ideas are helpful.  Reading carefully and catching everything is a genuinely hard task.  Practice very much makes perfect and these are some of my favorite practice tools.

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Thinking Out Loud About Contract Survival – Please Contribute

August 12th, 2009

I have recently come across a number of contracts with extensive survival provisions.  For the non lawyer-wonks out there, a survival clause says that when the contract is terminated certain provisions will continue to govern the parties’ behavior toward one another.

There is a part of me that hates the concept of these provisions- they turn the whole deal into a kind of roach motel that the parties can enter, but can’t fully leave for a long time.

The other part of me understands that survival clauses have value, but wants to find the right logic for using them.

Confidentiality – Yes
For example, parties to a deal may well learn a bunch of confidential information about one another.  Terminating the agreement might be used as a way to escape the need to keep that information confidential, so I commonly see language that says the parties will be required to keep information confidential for 3-5 years, and that the confidentiality language will continue to bind the parties after the agreement is terminated.

Indemnification – No
On the other side, I also see language that says one party’s indemnification obligations will continue after the deal ends.  Indemnification means that, in an agreement between A and B, if C sues both A and B because of something A did, then A will take charge of the litigation and cover all of B’s damages and legal costs.

I can certainly see why B might want this, but B is really saying there that it wants the ability to terminate the deal- ending A’s economic advantages- and still keep A on the hook for any downside issues that come up.  As lawyer for A, I push back on this idea.  If B wants out so be it, but B shouldn’t get to keep the economic advantages and push all the risk onto A.

In Search of a Rule
Is there a principle goverining which provisions should survive termination of an agreement?  I’ m not sure and this is the thinking out loud part.  Here are my ideas to date:

-> Leverage wins.  If one side to a deal has significantly greater negotiating leverage then it can probably dictate the type of risk-allocation point above.

-> When the parties are in equal positions, my idea is that “passive” activities can/should survive, but the parties should not be required to affirmatively do anything.  E.g. confidentiality doesn’t require anyone to step forward and take action, so it can survive.  Indemnity is an active obligation by one side to litigate and pay costs.  It should not survive.

Seeing this written down, I am not sure if this is the right way to think about it.  E.g. the parties may negotiate limitations of liability in a deal (e.g. in a dispute damages payable by A are limited to fees paid to A by B during the term of the deal).  Should one side be able to terminate the agreement and dump the liability cap or should both sides be held to the negotiated terms forever?

Comments Requested
Is there a rule here or is every deal a unique set of circumstances?  I’d love to hear your thoughts in the comments.

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Privacy and Employer-Owned Materials

August 3rd, 2009

I have probably generated 500 standard-form employee confidentiality/inventions agreements, and a good number of employee manuals, all of which say that basically anything an employee does on work time with employer-owned equipment (computers) belongs to the employer.

It is very useful to see the limits of these policies. A recent case from the New Jersey Appellate Division has some useful guidelines.  Here is my summary of the helpful considerations in under 500 words.

Case Facts
The CEO of a company got into a dispute with her employer.  The employer took back its computer when the CEO quit and found on it cached copies of emails the CEO had sent to her attorney from her personal Yahoo account.

The employer said that the emails belonged to it since *everything* on the computer belonged to it pursuant to the employer’s policies.  The CEO said that purely personal matters fell outside the scope of the policy.

Court Ruling
The appeals court said that it is not enough for a company to say it owns everything done on its computers- there has to be a need to reach out and take ownership of entirely personal matters.  Based on that, the court held that the emails were not the property of the employer and the employer had no right to hold and use them.

Useful Concepts
None of this is strictly relevant outside of New Jersey, of course, but the case brings up a few interesting ideas:

1) Personal vs. work email.  The CEO did not use her work email account to communicate with her lawyer.  This was an important point in establishing the CEO’s expectation that her emails would remain private.

2)  The court likens the employer’s actions to rifling “a folder containing an employee’s private papers” or examining “the contents of an employee’s pockets”.  To me, this is the most important point.  An employer can certainly *review* an employee’s file folders, but if it finds purely personal items it is obligated to return those to the employee.  Computers are no different- people may store personal information on them.  Employers need to be aware that they are not entitled to review or use these simply because the employer owns the computer.

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Winding Down a Co-Founder Equity Relationship

July 31st, 2009

I have had several questions about this topic recently from different angles, so here are the basic concepts when a co-founder or early employee leaves a company.  Note that there are overlapping employment, noncompetition and other issues here that I am not going to touch in this post.

The Setup

CloudWidget, Inc. has three co-founders.  They own equal 1/3 shares of the company and everything goes along swimmingly until Founder B moves away/gets a new job/has irreconcilable differences with Founders A&C.  Whatever the reason, B decides to exit CloudWidget and move on.

A&C come to me and ask questions that include:

-> Does B own his stock?
-> Can we get some or all of it back?
-> What should we do?

Threshold Questions

We start with the following key points:

1)  Does B own *stock* outright or stock options?  This is a critical point that many first-time entrepreneurs gloss over and that colors everything else that follows.

2)  Is there a vesting period attached to the stock/stock options?  If so, what is it?

Important Concept #1 – Earning into Equity

Every participant in a startup should earn into his/her shares over time so that if/when the person leaves s/he won’t get a free ride on the backs of the people still plugging away.  If B’s equity was stock options, then almost certainly the options are subject to vesting.  Leaving the company stops the vesting and B must exercise the option and pay the purchase price to get actual shares within 90 days (usually) or the option expires and all right to buy shares vanishes.

It is more common for co-founders to buy stock at the outset than to get stock options, though.  I encourage all my startup clients to put this founder stock on a vesting schedule as well.  This gives the company the right to buy the stock back at the price paid by the founder.  The right expires over time: typically 25% of the shares are owned outright and not subject to repurchase after 1 year, and the repurchase right lapses as to the remainder in monthly increments for another 3 years after that.

For some reason lots of people accept the idea of stock option vesting as a matter of course, but don’t put stock on a repurchase schedule.  Again, I highly advise that everyone do this.

Important Concept #2 – Getting the Stock Back

If B holds a stock option CloudWidget needs to do very little.  On termination the option automatically stops vesting.  Good employment practice dictates that CloudWidget give notice that any vested shares must be exercised within [90] days or will lapse, but that’s the extent of CloudWidget’s affirmative duties.

Let’s assume instead that B bought his stock outright, that it was subject to a repurchase right and that some, but not all of the right had lapsed.  CloudWidget needs to find B’s stock purchase agreement and read it carefully. Some agreements require that CloudWidget buy back the stock within a set period of time (90 days) and some say that the repurchase is automatic on termination.  It is important to know what B’s agreement says so that CloudWidget doesn’t blow its opportunity.

If procedures are followed and the agreement is written correctly, B agreed to the repurchase terms when he signed the agreement, so his consent is not required now.  CloudWidget merely needs to exercise the repurchase right, cancel his stock certificate (hopefully in escrow with CloudWidget or its attorneys) and send him a check along with a new certificate for the vested, un-repurchased shares.  If B had vested in 1/3 of his shares he will end up with 1/9th of CloudWidget; A&C each own 4/9ths going forward.

Important Concept #3 – Not Burning Bridges in the Process

This is frequently the hardest part of the whole situation.  Companies need to know what their rights are, and then exercise them judiciously.  Circumstances vary dramatically case by case, and I always let my clients now that the agreement is the baseline for ending a relationship but is not definitive- everyone is free to reach any other agreement that makes sense, and it is often worth trading a little cash or equity in order to maintain a friendly relationship where possible.

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Ideas Becoming Conversations on the Web

July 28th, 2009

I had a happy milestone this week, when Carolyn Elefant picked up on my recent post about free and low-cost legal services.  She looked at the concepts from the angle of solo and small firm practice.  Her post was then subjected to close scrutiny at AdamsDrafting before finally ending up on the ABA Journal’s web site.

This is clearly a topic of great interest to lawyers and I am thrilled to see it discussed.  It was also a first for me to see a meme posted in this blog picked up and analyzed by others from multiple viewpoints.  Thanks to Carolyn, Ken at AdamsDrafting and Sarah at the ABA Journal for adding your thoughts.  The discussion becomes a fluid, roving one and I learned a lot from your posts.

[In ~2 years of blogging I think this is my very first post *about* blogging.  I promise not to do it often.  I love to see ideas turn into conversations- as long as the conversations are about more than the blogs themselves]

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HUB Berkeley Fireside Chat on the Edge Between Nonprofit and for-Profits

July 28th, 2009

I attended a fascinating talk on social entrepreneurship at the brand new HUB Berkeley last night.  HUB is a shared workspace concept especially for socially innovative people.  They have facilities in 12 cities around the world, including the brand new, gorgeous David Brower Center in Berkeley, CA.  This event + last week’s Cleantech Open event at AutoDesk’s One Market gallery made for two LEED Platinum building visits for me in a week, which was a minor milestone for me.

The talk featured Matt Flannery from Kiva.org, Steve Newcomb from Virgance and Ben Rattray from Change.org.  Discussion was lively and instructive on a number of levels.  I was especially fascinated by the fact that all three businesses stand on the line between traditional nonprofits and for-profit businesses.  All three panelists spoke about why they chose one form over another.  If I understood them correctly, Kiva’s founders simply felt that non-profit status was the right fit; Virgance and Change.org both raised money from investors and that required them to use for-profit entities.

From the discussion, though, I got the impression that any of them could have gone either way with their businesses.  As Newcomb said, it is a great moment in history when people can be capitalists and activists at the same time.

The legal framework needed to build businesses at this balance point is not fully developed, but through the efforts of B corporation and others they are coming into shape quickly.  I love working in this space and look forward to its full development.

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On Commoditized Free and Low Cost Legal Work and the Future of Legal Services

July 24th, 2009

This post weaves together several threads for me: a speech by “legal futurist” Richard Susskind I just finished listening to on the future of legal services (he talks about a move toward commoditized, low-cost legal services), Orrick’s free library of basic corporate documents and the extraordinary amount of hand-wringing and teeth-gnashing I see around me in the legal industry these days.

Here’s the premise: legal services are mostly offered on an individualized, fully custom basis for each client. Attorney rules of professional conduct create a duty of care to clients that make it hard to give people forms and help them a little.  Firms can give away documents with disclaimers about making any changes, but the duty of care makes it hard (today) to create a high volume/low margin business of this.

Orrick has released a set of corporate forms that anyone can download and use; WSGR has a term sheet generator for venture financings that uses a detailed questionnaire to produce a term sheet based (presumably) on WSGR’s extensive expertise negotiating these types of arrangements.  D.C. Toedt’s Firstdrafter project works along the same lines, allowing anyone to find, fill in and use various contract forms.

These are great steps and very much in line with Susskind’s premise.  They aren’t quite the same thing, though.  First, they are freemium products intended to bring new clients in the door.  By giving away a teaser, the firms hope to sign up a bunch of new clients to customize and work through the transactions behind the documents.

I was fortunate to demo a product recently called FirstDocs that promises to change the landscape significantly. FirstDocs lets law firms use best-of-breed documents to create document templates with fill-in or multiple-choice sections for custom terms.  Things like names can be entered once and populated across multiple documents, saving a bunch of time.

More to the point of this post, a law firm could give clients access to this forms library so that the clients themselves can create documents, but with only limited ability to make changes (note: I haven’t talked to FirstDocs about this and I am not sure if their product currently allows exactly this ability).  Alteration of substantive terms would need to come back to the lawyer, which would help ensure that the documents are used only for their intended purposes.

I know there are firms and companies doing things like this today and I am sure FirstDocs is not the only company innovating in this area, but it was an eye-opener for me to see it in action.  It became immediately clear to me that this type of document preparation is the future of legal services.  So much of what we do is form and template-based already, but our habits and tools still require us to maintain substantial oversight of each project.  We need ways to generate careful, top-quality documents with less attorney input on each project.

As Susskind says, more and more legal services are going to slide across the spectrum from custom/high-cost to commoditized/low-cost.  Figuring out which ones, how to make it happen without sacrificing the duty of care to each client and how quickly it will all come about is the fun part.  VLP is developing organizational and technology structures that will let us work at the vanguard of this trend and it is exciting to be part of.

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On Not Making a Federal Case of Every Transaction

July 21st, 2009

Clients hire me for subject matter expertise and to help negotiate transactions. Having worked through a lot of deals in my 10 years as a lawyer, I have some sense of what works, what doesn’t, how to evaluate risk in a deal and how to draft an agreement that takes on just the right amount of risk.

The other side in the deal has an attorney doing the same thing, and once the deal is done we both step out and let the business principals begin the relationship that the agreement covers. In this process it is really easy for the lawyers to get hung up trying to perfectly craft every term in the agreement. This can drag out the negotiation and run up costs. If the negotiations are especially bruising it can also create a bit of tension for the principals at the start of the relationship.

How, then, can one avoid turning every contract into a major battle? Here are a few ideas:

1) Don’t get personal. Contract negotiation is not a battle of wills. It feels that way sometimes, especially when it seems like the other side is determined to throw out all of my suggestions and force its own terms on my client, but the focus needs to stay on reaching a deal that works, not a document I created.  Egos should be checked at the door so the parties can focus on the facts.

2) Work with those facts. I talk through scenarios with my client and the other side and use concrete examples as much as possible so that everyone can understand why a certain term is important.  Tit-for-tat negotiation where each side can only concede something if the other does can stay in the bazaar as far as I am concerned.  I talk through my client’s economics (without giving up confidential information, of course) so the other side can understand why prices are set where they are, why insurance provisions can’t change for this deal, etc.  When the other side understands the *reasons* they need to work much harder to counter my client’s proposals.

3) Listen actively. Asking questions and making a visible effort to understand the other side’s business requirements pays huge dividends. It might seem counterintuitive based on #2 above (if I ask the other side for its reasoning won’t it be harder for me to say no to them?), but it isn’t.  The acts of listening, acknowledging concerns and finding ways to help the other side cover those concerns encourages them to do the same with us.  When we all understand one another’s needs really well we can jointly work out collaborative solutions.

Every deal is different and some definitely go sideways despite everyone’s best efforts to keep things moving properly. Still, when I am able to approach a negotiation with these best practices in mind I find that the deal moves much more smoothly, quickly and with the best legal fees/contract value ratio.  My clients like that.

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