For the half-year to 31 December 2014, the IPKat's regular team is supplemented by contributions from guest bloggers Rebecca Gulbul, Lucas Michels and Marie-Andrée Weiss.

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Friday, 14 January 2011

Retainer Fees and IP Practice: Questions, Questions, Everywhere


The Great Recession and the resulting pressures on the legal profession have brought, in their wake, calls for rethinking the way that law firms are structured and how clients are charged for legal services. As for the latter, these include calls to abolish or greatly diminish the hourly rate model in favour of making greater use of fixed fees for discrete projects. Less discussed is the use of the new/old method of reaching a retainer arrangement with a client, whereby a set fee is paid on a regular basis, be it monthly, quarterly, yearly or otherwise.

Thinking back on this Kat's encounters with retainer arrangements over the years, he has come to realize that retainers pose a special set of considerations for the IP practitioner. This is especially so when the IP practice is part of a larger general law office practice. As we enter the year 2011, this is a good opportunity to share some of his thoughts on retainers and IP practice.

What Does the Retainer Cover?--We assume that the client has entered into the retainer arrangement in order to achieve greater predictability about the amount paid and the payment schedule for ongoing legal services. These services usually fall within the corporate/commercial space and the client will usually have the expectation that as broad a scope as possible of legal services will be covered by the retainer. That said, except for litigation, which is invariably explicitly excluded from the retainer, speciality practices such as IP are often not directly included as part of the arrangement.

Because of this, the issues of whether IP is part of the retainer and, if so,
what kinds of IP-related legal services are included, can be complex. What about patent drafting and prosecution (more or less "no" I would imagine) or trade mark prosecution (more or less "yes")? What about giving advice about IP licences and other commercial agreements with a material IP component? What about giving an opinion about IP protectability or infringement; does it depend on which IP right is involved (patent infringement--"no"; trade mark and copyright infringment--perhaps "yes")? What about consultations on non-litigation IP subjects? What about oral IP consultations at the client's site? While this list could go on, the basic question remains the same: Is the IP service being given within or outside of the retainer?

How are IP Services Accounted For Within the Law Firm?--There is also the issue of how the law firm determines the profitability of the various IP services, especially when some services fall within the retainer, while others do not. A successful patent litigation practice is perhaps the most notable example, being a lucrative source of income for firms. It is reasonably simple to determine the profitability of a piece of patent litigation. Other IP-related activities may also be outside the retainer and their profitability can be similarly calculated. However, how does one measure the profitability of the IP component for those activities that are included within the retainer (especially if this measure serves as a basis for compensation)? Unless these determinations of profitability are carefully done, it may not be in the best interests of those IP lawyers whose work is primarily to provide retainer-covered services, even if the retainer arrangements may be in the best interests of the law firm.

Foreign IP Counsel-- Perhaps the most distinctive aspect of IP practice is its international component. While it is possible to maintain a solely domestic IP practice (again, IP litigation comes to mind), swathes of the IP practice involve multi-jursidictional matters. As a result, there will be a need to seek assistance of counsel in foreign jurisdictions.

From the point of view of a retainer, there is a double issue here. First, by the nature of things, the retainer client may not fully appreciate the extent to which it may have to engage additional IP legal counsel abroad. When the price tag comes in, there may be a sense of "sticker shock" for the client from these additional costs. This can create strains between the client and the law firm, especially where the fees of foreign, on the one hand, and the retainer, on the other hand, are viewed more like a zero-sum game than cumulative legal costs.

Secondly, when there is a need to engage foreign IP counsel, it is usually the retainer law firm that will seek out such foreign IP counsel. This puts the retainer law firm in a tricky position, because it may well have to negotiate the terms of engagement with foreign IP counsel on behalf of its client. Either the terms of the engagement are more "lucrative", at least for the short term, than the retainer terms themselves, or the negotiations may create a certain upleasantness between the two, retainer firm and foreign counsel, especially when the retainer firm seeks to negotiate downward the fee arrangements with foreign IP counsel.

Whether or not law firms will change the way that client services are priced, it is reasonable to assume that retainer arrangements will continue. As such, IP practitioners should pay particular attention to how such arrangements affect their own practice, against the backdrop of the broader retainer relationship between the law firm and the client.

2 comments:

Jackie Hutter, Intellectual Property and Patent Business Strategist and "Recovering Patent Lawyer" said...

Hi Neil

I am a big fan of retainers, and that is how I work with several clients in my consulting practice. The pushback to retainers in the "old days" was there was no accountability. Since then, we lawyers have been become slaves to the billable hour, and I dare say anyone a couple of years out of law school knows how much time they are spending on a matter, so I think it is fairly easy for value to be assessed on an ongoing basis today. My clients have been happy with this model: I provide them with the same type of advice they would get from a Chief IP Counsel (and often GC) at a fraction of the cost they would have to pay to have me on staff on an ongoing basis. I also get to work from home in my sweats and pick my kids up from the bus most every day after years of late nights and long commutes, so this works for me, too.

But, you are right--when a law firm is a business, it is impossible to put out a product (billable hours) without knowing exactly how much one will be paid for them. Also, there is a huge piece of trust associated with retainer over the accountability ad infinitum of the billable hour. (Imagine if Coca Cola sold its products on a retainer basis!) This trust is not only required between the client and the attorney, but within the attorneys of the firm. The more attorneys, the less likely trust will be maintained on an ongoing basis. So, again, retainers are not possible in a larger law firm business setting.

But, as I wrote extensively about a couple of years ago, lawyers have thought they are in the law firm business for a long time, but clients no doubt don't give a lick about law firms as a business. Clients hire lawyers for counseling. When lawyers move between law firms, chances are the client leaves too.

I think alternative fee arrangements are a bandaid that makes people think that something is being done to fix a big problem with legal services. It is clipping around the margins, and working within the same business model--the billable hour--when the problem IS the model.

The law profession needs disruptive innovation, and it needs it bad. Unfortunately, lawyers are the most conservative folks around (stare decisis anyone?), and it is highly unlikely that any change will happen from within. It will be up to clients to drive the change, and when this happens--watchout venerable law firms and their lawyers: your cheese will not only be moved, it will be shredded!

Nick White said...

Neil,

I think what your question(s) highlight is the problem of selecting a single billing form i.e. retainer and then trying to fit everything into that box.

It doesn’t work.

This is equally the case for the billable hour, which is an archaic and outmoded form of metric for billing clients and for measuring staff contribution/rewards.

In fact, as Jackie points out, the problem is focusing on the billing aspects. That’s the wrong focus.

Also, behind this issue is the “structure” and “modus operandi” of service providers such as law firms or patent attorney firms. The traditional partnership model with rewards focused on hours billed targets, which are an internal metric, as opposed to value delivered to clients, which is what they care about. With the billable hour approach there is a fundamental conflict of interest for service providers and clients know this only too well. I have been on both sides of the fence and the conventional model is dysfunctional from both perspectives. One solution is being worked through by Pfizer http://bit.ly/gUEYMM

Like Jackie I provide a different kind of service model; mine is called Quasi-IP Counsel. I also provide an “a la carte” billing model, as all clients are different. At least to me. Many service providers offer a one size fits all solution because they are focused internally on their needs and not the clients needs.

They key driver for change from many clients is not the nature of the billing model; the savvy ones don’t give a monkeys about this. No the savvy client focus, more fundamentally, is on the nature of the service itself and the modus operandi of the service provider. There is a massive disconnect between what clients want/need and what service providers deliver, largely due to the obsession with billing models/structure and client ignorance.

Some clients are driving the change, the savvy ones. But there are also disruptive service providers who are entering the market, pushing new models and educating the client base. Many traditional service providers do not have the capacity in terms of skills and expertise nor the desire/motivation to go with this trend. They have a vested interest in the status quo.

But there is another issue. Many clients are as conservative as their traditional service providers and/or ignorant as to their real needs and the relevance of what is actually being delivered, a very live issue in intellectual property services. So there may be some solace for the traditional service providers and their approach but not for long.

To refer to Jackie’s final observation, traditional service providers have to imagine a world where their cheese and its form is a complete irrelevance. What will matter is the quality and form of the client’s cheese. It will be that metric, which determines your survival.

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