When most in-house counsel describe their job, the description usually includes language to the effect of: “No two days are alike and I never know the next surprise that will come across my desk.” There are, of course, nice surprises and unpleasant surprises. Of the unpleasant surprises, perhaps none is more unwelcome than a larger-than-expected legal bill. To minimize these surprises, corporate legal departments are increasingly using alternative fee arrangements (AFA).
The ABCs of AFAs
- Holdback. Under a holdback arrangement, the company agrees to pay the firm a specified percentage of the firm’s standard hourly rate. Based on agreed-upon criteria, at the end of the matter, the firm is entitled to receive anywhere from $0 to an amount exceeding the amount of the holdback. The basis for determining the additional fee can be subjective or objective. This approach links the law firm’s fee to the client’s satisfaction with the representation.
- Blended fees. Under a blended fee arrangement, the company pays the law firm a specified hourly rate, regardless of the individual lawyer’s hourly rate. This incentivizes the firm to appropriately delegate to less expensive attorneys rather than have its more expensive attorneys working at substantially reduced rates.
In addition to the categories above, in-house and outside counsel often work together to develop a hybrid fee arrangement that tweaks and combines elements from several types of AFAs to create a bespoke solution that meets their mutual concerns and interests for that particular engagement.
AFAs, friend or foe?