In-House Lawyers Say They Love Creative Fees, But Use Plateaus

Legal departments almost universally praise alternative fee arrangements, but they aren’t using them more, a new survey by Norton Rose Fulbright has found.

The 2017 Litigation Trends Annual Survey found that 96 percent of 318 corporate counsel in the United States and abroad were satisfied with the quality of work they were provided under AFAs. More than a third of respondents said they expect to increase their use of AFAs in the coming year.

However, the same proportion of in-house counsel said the same thing in Norton Rose’s 2016 survey, and yet, the use of AFAs — 56 percent of respondents said they use them — and the average spend under an AFA — 28 percent — has remained largely unchanged, the survey found.  

Saul Perloff, a Norton Rose partner who worked on the survey, said the use of AFAs has plateaued. The percentage of companies using AFAs has hovered just below 60 percent since 2011, according to past survey data. Many cases, he said, “simply don’t lend themselves to the use of an AFA.” Perloff said he does not believe there is any permanent ceiling on AFA use, however.

“It’ll simply become a matter of people beginning to experiment and using them in novel ways, and maybe then we’ll see that percentage pick up again,” said Perloff.

According to the survey, fixed fees and capped fees remain the most common types of AFAs, followed by blended rate arrangements. Contingency fee arrangements, which are typically used by plaintiffs attorneys, remain less prevalent.

Clients continue to be the driving force behind the use of alternative fee structures, which afford them greater efficiency, predictability, and risk sharing with law firms. Earlier this year, Microsoft announced a plan to shift 90 percent of its legal work to AFAs within two years, another indicator that there may still be growth in the use of AFAs.

“Firms which work less efficiently usually cost us more, even if their billing rates are lower,” corporate vice president and deputy general counsel David Howard wrote at the time. “Competing on the basis of a fixed fee or similar alternative fee permits a true apples-to-apples comparison.”

The Norton Rose survey results also indicate that fears of widespread outside counsel consolidation may be overblown. 26 percent of respondents said they are planning to increase the number of law firms they work with, versus 9 percent who said they plan to consolidate. 64 percent said they planned to keep their outside counsel usage the same.

“We’re not testing why that is, but I think that you certainly hit a theoretical limit, because of issues like conflicts and expertise,” said Perloff. “No matter how big the outside law firms get, probably no one firm will have true expertise in absolutely every area, and if they do, there might be conflicts.”

Additionally, although the volume of disputes has declined, survey respondents reported an increase in both team size and typical legal spend relative to revenue compared to 2016. 

Though companies reported having the highest number of disputes in the area of employment and contracts, they said they were most concerned about regulatory investigations, class actions, and environmental disputes.

A quick note on methodology: 89 percent of the 318 survey respondents were US-based, and 49 percent were general counsel, according to Norton Rose.

The survey participants came from a range of industries, including technology and innovation (22 percent); energy (21 percent); financial services (20 percent); life sciences and healthcare (16 percent); infrastructure, mining and commodities (13 percent); and transportation (7 percent). Over half of respondents represented companies with more than $1 billion in revenue, according to the survey.

 

Contact the reporter responsible for this story: Stephanie Russell-Kraft at srussellkraft@gmail.com.

Contact the editors responsible for this story: Casey Sullivan at csullivan@bloomberglaw.com and Tom Taylor at ttaylor@bna.com.