Negotiating fee agreements

Negotiating fee agreements with outside counsel is a crucial responsibility for in-house counsel, requiring a balance between cost-effectiveness and securing high-quality legal representation appropriate for addressing the business risk. The evolution of non-hourly fee arrangements like contingent, flat fees, and hybrid models with success incentives, has broadened the options available to in-house counsel. Understanding the practical implications of these risk-sharing pricing models is essential to successfully manage any litigation. 

Contingent fee agreements generally don’t require the client to pay an hourly fee (but often do require the client to pay other litigation costs).  These agreements are structured to require the payment of percentage of litigation proceeds (or a percentage of saved expenses on the defense side), thereby aligning the interests of the client and counsel towards achieving a favorable outcome. Contingent fee arrangements necessitate a detailed understanding of the case's merits, potential recoveries, and associated risks.   

Flat fees offer predictability in billing but, like hourly fees, do not depend on the litigation outcome, promoting efficiency in counsel's work.  But these arrangements require careful risk evaluation by the counsel, as a case with misjudged or uncertain resource requirements may lead outside counsel to under-work the case relative to the client’s expectation. Thus, the flat fee option works best if the client and outside counsel understand and agree on business risk and required legal work to manage it.  

Hybrid models combine elements of these arrangements to balance incentives, risks, and rewards for both parties.  They generally involve a full or partial hourly component coupled with a “success fee” that’s defined by contract.  The hourly fee allows the client to not pay for more legal work than they receive, provide compensation for outside counsel’s time, and also align incentives to ensure that litigation tasks are identified and further executed in manner that maximizes their impact.  

Lastly, particularly when the needs of a litigation are uncertain, a pure hourly fee arrangement may work best.  This is because hourly fee arrangements do not necessitate an upfront evaluation of the case by counsel but they may require more active management of the case by in-house counsel, particularly earlier on in the litigation.  

Ultimately, the choice of arrangement should be guided by a thorough understanding of the case specifics, client goals, and financial considerations. Moreover, the agreement should address the scope of representation, potential for conflict, and arrangements for covering litigation expenses.  In-house counsel must navigate these considerations carefully, ensuring the chosen fee arrangement aligns with the client's interests, legal objectives, and budgetary constraints, promoting a beneficial relationship with outside counsel that contributes to successfully resolving the case.