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Skin in the game

Cover Story
|Written By Jennifer Brown
Skin in the game

Complex litigation has traditionally been viewed as a team sport, largely waged by one external law firm’s roster of top litigators versus another. The battle was funded by the companies who engaged them and few asked many questions about how the job would get done. In some cases that’s still the way the game is played but over the last few years, especially at the banks and insurance companies, as the pressure has built to bring legal costs under control, corporate legal departments have been asking their external firms to come up with creative ideas to keep the bills more predictable. That means the team now involves the in-house counsel to a far greater degree and they are making more decisions around the rules of engagement and how the firms are ultimately compensated for the work they do and the playbooks they put forward.

The law group at RBC has been a major proponent of seeking creative ways to engage external counsel in a new conversation about managing complex litigation files, fueled in part by initiatives spearheaded by the Association of Corporate Counsel. “It depends what title you want to put on it — alternative arrangements or value billing — we have done it and believe it can be applied to any legal retainer,” says Peter Gutelius, the assistant general counsel who leads RBC’s legal team supporting its global commercial litigation. “Litigation comes in various shapes and sizes so where you have blocks of commodity work it lends itself to some types of value billing arrangements.”

Gutelius says there has always been a historical belief that while value billing is great for commodity work it couldn’t work on those large, “bet the company” type of complex cases like class actions. For that kind of work RBC maintains there is a way to do it with controls in place and a plan everyone is comfortable with. RBC asks the firms it works with to go through a rigorous request for proposal process unlike the “beauty contests” of years past. “Any new retainer where we anticipate legal fees to cross over a certain threshold we must run an RFP. Sometimes it’s a short form RFP because of the time limits in litigation. Often, we don’t have a lot more than the statement of claim,” says Gutelius.

But this path isn’t entirely smooth — rather it’s one that has required more direct instruction to the firms. “It has taken us some time with our external counsel to get them to realize we are serious about this,” says Gutelius. “If we put something in our instructions as an example of how we’d like to see it handled the firms have often just focused on the example we give. We have sent out the RFP and said ‘be imaginative’ and they weren’t.”

RBC recently went to its external firms with an RFP to determine who would handle a large class action lawsuit launched in November of 2012. It’s an

example of how firms are coming armed with more creative alternatives. With a statement of claim issued late last year and some background file material, RBC asked several large firms to bid on the work. The bank provided a case plan that split litigation into component phases and asked the firms to provide budget

numbers in each phase and set out all underlying assumptions.

RBC received four responses (a number of additional firms were conflicted out right away). The bank then provided feedback and invited three of the four to tweak their bids. In the end, RBC chose McCarthy Tétrault LLP to handle the file. The firm had provided three specific options to RBC. The first was a flat fee if the matter “disappeared” or settled by a certain stage. Another flat fee was outlined if it took until an additional stage to settle. “If it was an early exit, it would have been a big win on the fee side for McCarthys,” says Gutelius. “I don’t mind having compensation incentive fees for the firms but this one could have been too one sided and difficult to explain to the business.”

The second option outlined five phases with capped fees broken down for each phase. The third option involved a profit-and-risk model based on the amounts described in the capped fees. “We plotted out the litigation, we talked about steps; the various strategic options and the way we would defend it and then we committed to a target number for the first piece,” says Christine Lonsdale, a McCarthy Tétrault partner who is working with RBC on the class action file. “The agreement is if we come in under budget we split the savings and if I go over I’m only billing at 50 per cent of my rate.”

In combination with other things the firm pitched, RBC saw the third option as the most attractive. “I’ve had a lot of discussions with them and they think — and they’re not wrong — that it sets up a different incentive,” says Lonsdale. In fact Lonsdale welcomes the change in how large files like the one put forward by RBC are approached. “Litigation is a team sport and we have always talked about it as a team sport in the law firm but it’s a team sport with your client as well and it can foster better conversations about how they want the file to be handled. In the end they are much happier with the outcome,” she says.

Part of this arrangement isn’t necessarily about certainty in the cost but having more predictability of the cost, says Gutelius. “There’s no question a lot of this is about

trying to bring down the cost. It’s often viewed by our outside counsel as, ‘You’d like us to do everything we did before for less money.’ But that’s not what we want — what we’re saying is we want you to be a lot more efficient and focus in the right places and the net result should be less money. But they don’t usually understand or listen to the first part.”

Gutelius is not surprised that in 2013 this kind of creative approach is still not germane to the way most external firms think or operate. He feels the responsibility falls with in-house counsel who need to push the envelope and work alongside the external firms to make sure litigation cases are planned out strategically and not just handed over cold to the firms to defend — and bill — in the same way they have in the past. “I’m in the camp of people that say that until the companies with the large spend actually walk the walk there’s not all that much incentive for firms to change their model. We are trying to walk the walk and so there are other firms who are starting to realize this may be a good marketing tool and are coming forward with it. A lot of other firms entrenched with clients believe ‘this too shall pass.’”

He admits it takes a lot of work internally to do what RBC does and the bank has a sizeable internal team to help determine the right strategy and share the load. “As a company we have a large legal spend so that means the firms tend to care,” he says. “That is a huge advantage. If you’re a company only spending $1 million or $2 million on legal spend it’s hard to put the effort into any one individual file.”

Historically, firms provided litigation budgets to clients but often the in-house lawyer would receive an invoice and it was difficult to allocate invoiced items to the budget. “There might be four different docket entries all lumped into one hour, or they code things inconsistently,” says Gutelius. RBC insists firms use the standardized Uniform Task Based Management System codes and reduced the number of codes firms can use. For each phase of litigation they are budgeting to, they can only use one code. RBC did this because it holds the belief it would never get all outside counsel to accurately use all the UTBMS codes. “So when we get an invoice and it says X hours on discovery, whether it’s witness prep or document review, it has the same code so we know how they are doing against the budget. It makes a big difference in trying to manage the expense,” he says.

From the law firm’s perspective, it’s been an evolution many litigators have come to expect from their clients. “I think all of these things are good,” says Lonsdale. “We do budgets and more thinking about how to plan out the case, talking about the strategic options and strategy about budgeting. I’m also doing a lot of reporting to budget.” Lonsdale concedes that complex litigation files are large line items that businesses need to plan for and they need to have a solid understanding of the timing of the expenses. “We have to understand how we can best manage litigation for them and be efficient and outsource some labour-intensive processes when we can,” says Lonsdale. “Clients want us to say what is the best way to do this and yes, they don’t just want to focus on the hourly rate, they don’t just want to focus on the staffing profile — those are components of the conversation but a good outcome has to be broader than that in terms of the discussion.”

Risk-sharing arrangements like the one RBC arrived at — sometimes referred to as a “cap and collar” — are starting to emerge more often, says Jeremy Devereux, a partner with Norton Rose Canada LLP. “We are seeing these arrangements where if you quote the price for the given stage of the litigation and then go over that you only get 50 per cent of your fees for what you go over — there’s a pretty big incentive. If you get under, you get 50 per cent of the difference and that’s been used in the States more often but it’s coming into play here.”

Devereux says it’s not common in his practice, but it is something he has heard is being proposed more often. “For the simple reason that you can push lawyers on rates but pushing people on rates didn’t necessarily drive efficiency and in-house counsel came to recognize that and said, ‘What we need to do is something that is going to provide an incentive to our lawyers to be more efficient,’” he says.

Gutelius offers this advice to those who want to take on a creative strategy towards incentives, budgeting, and overall litigation planning: “Anybody contemplating doing this has to have the support internally. If your GC is not on board or business partners, especially in smaller organizations, that could be a problem. And if you’re not prepared to work with your outside counsel to create the efficiencies it won’t work.”

Case planning and preliminary strategy discussions have definitely become more involved, says Jim Sullivan, a litigation lawyer with Blake Cassels & Graydon LLP in Vancouver. Sullivan’s work is largely head office litigation for large corporations. He’s been doing major commercial and class action cases for the last decade and has seen the approach in how to handle files changing over time. “There’s no doubt there’s no longer the loyalty to a particular firm when it comes to major litigation and I think a lot of it is individual and personality driven,” says Sullivan. “I am known as an aggressive litigator; if you want to fight I will fight it in an aggressive style. I know some in-house counsel welcome that style and others don’t. You just have to say [what] my view is to be upfront and in-house need to know and understand your strategy and be on board.”

Like many law firm litigators these days, Sullivan says he finds it helpful to talk to the client about its own internal resources especially around the issue of document management. “Document management is the nightmare of modern litigation,” he says. “Someone told me the other day that e-mail stands for evidence mail. That sums it up perfectly.”

Lonsdale agrees. “There’s no question that in litigation document production is a huge driver of cost. I would say we have been very focused on that and we’re more disciplined about it now. Obviously we have to produce relevant documents in the litigation but you have to be careful and smarter in how you go about doing that and it has a huge impact on cost,” she says.

Blakes has worked closely with its in-house clients around document control as the companies often have their own document system. “Some of the most sophisticated clients we work with have developed their own document litigation management systems, which is incredibly helpful for us as counsel. It’s also very cost effective for the client,” he says.

John Landry, a partner with Davis LLP in Vancouver who handles complex commercial litigation and arbitration matters, says the document management issue is a tough one to explain to clients. “It’s really hard to tell a client it’s going to cost $100,000 to do document management but it saves an incredible amount of time, effort, and energy once it’s in the system. This is an area people are struggling mightily with right now. The in-house counsel often look at you like a deer in the headlights especially if you have a wide definition of relevancy,” he says.

Over the years, there has been a growing creativity both within the in-house counsel and litigation bars as to how to deal with these kinds of issues on big cases, says Sullivan. “I think as counsel it’s incumbent upon us to search out the actual resources available to in-house from clients and then it becomes a decision based on the client: ‘Do you want to use your own resources or talk about third-party providers?’”

There’s also the option of settling rather than going to court. Some companies are doing the cost-benefit analysis that insurance companies have done for some time. Formalized litigation management has been in place at insurance companies for many years. Eric Sigurdson, general attorney, TD Insurance, who manages the property and casualty division, recently co-chaired a panel for in-house counsel at Stikeman Elliott LLP on the issue of managing complex litigation better. The audience ranged from solo in-house counsel to bigger teams; all looking for solutions to help them manage cases better. “What I heard consistently at our session is that corporate counsel look to the external counsel for their expertise coupled with responsive communications and controlled litigation costs,” he says. “It sounds pretty easy, but it’s not.”

Many of those at the seminar talked about how long the discovery process takes, the uncertainty of motions and court processes, the challenges of trying to accurately predict litigation budgets, and the problems with trying to deal with budgets based solely on an hourly rate. What in-house really want to know is how external counsel is going to get them out of a case early with the least public exposure and cost, says Sigurdson.

Also speaking on the panel was Alan D’Silva, a senior partner with Stikeman Elliott and a veteran of big corporate litigation. “At the end of the day, the better way is to have budgets and partnerships with your counsel and an understanding from day one about how much things are going to cost. I just don’t think reducing an hourly rate alone is an answer.”

Much like what McCarthy Tétrault experienced with RBC on the class action, clients have become very sophisticated in their selection process, says D’Silva, and a lot is expected from counsel. On the issue of budgeting, he says it’s very hard to determine what a case will cost over a 10-year period. “On the big cases it’s easier to do on a stage-by-stage basis. I know some try to give budgets on the entire case because clients are asking for that but I think it’s destined to fail or not be ultimately reliable.”

Another issue for in-house counsel are the new summary judgment rules — which were expanded in 2011 — and allow for, even on large, big-dollar cases, the parties to have a summary judgment motion instead of a trial. It reduces cost substantially and reduces the time of litigation. “We did a fiduciary duty case where we avoided about a four-month trial by having a summary judgment motion and then a much shorter trial. That’s just another way the world has changed,” says D’Silva.

Creating a tool kit

Historically, Sigurdson says in-house counsel have also encountered problems due to lack of communication, files sitting around, lack of litigation file management, no set timelines, inappropriate staffing, and costs not in alignment with the matters at issue or the final result. Sigurdson notes those problems have been addressed at TD through the creation of a tool kit for approaching litigation and establishing an external counsel program.

The first tool in the kit, he says, is the RFP. In some cases that might mean the kind of RFP RBC conducted for the class action case while for others an RFP may be used to establish a preferred panel of counsel to be used over a number of years.

Next is to develop some external counsel litigation management guidelines to address communications, reporting, and timelines. “Whether you have 50 files or 1,000 a year, you still need this tool. After that, establish litigation protocols — how do you expect counsel to interact with your in-house lawyer?” says Sigurdson.

Then comes the budget, which involves understanding the level of complexity and establishing a preferred staffing model based on the level of complexity. “I also recommend some kind of invoice review such as e-billing. The system can review against the guidelines established,” he says, adding it can be used for performance management metrics. “If you don’t have metrics you really can’t advance,” says Sigurdson who likes to look at cost per case on a litigated file and level of complexity by law firm, by lawyer, and by region. “To not have a robust understanding of your litigation, I think you’re really hurting yourself. If you can’t measure it, you can’t manage it.”

Sigurdson concedes the insurance bar is quite advanced in this area because it’s a high commodity area of litigation. He says the class action bar thinks what they do is too specialized to do it but the big corporations don’t think that way. “Once you can understand and classify your litigations by level of complexity, you can then compare your law firms and see which ones are giving you quality legal services in an efficient manner. Those are the firms you want to partner with — the ones that will try and resolve a file efficiently and effectively for the client.”

He says the problem with the hourly rate is that it rewards inefficiency. “It’s not their fault; it’s their business model. It’s a lack of alignment. So if we know 98 per cent of litigated files settle (not including big class actions) you want to promote efficiencies and reduce a file’s shelf life.”

Arif Ahmad, vice president and general counsel of Re:Sound, a music licensing non-profit organization that handles matters before the Copyright Board, admits his matters are different than the usual commercial litigation but says his concerns are the same as his in-house colleagues who handle large litigation files. “We are much more involved in the proceedings than a lot of in-house counsel would be in that we are part of the litigation team. Our lawyers are like a senior associate or junior partners on the file,” he says. “When I first came here I thought it was a novel approach but I must say it works very well and our external counsel are good about understanding it’s a different level of input.”

Ahmad reports to his executive team about how matters will be handled and gets questioned about how it will impact other issues happening in the company. For him, cost is the number one challenge. Re:Sound works with a small number of firms and doesn’t currently conduct RFPs, but would consider that approach. “In-house counsel are looking for certainty and it’s when we have to go back to our executives and boards and explain why things haven’t gone according to plan where it gets difficult,” he says. “I find you get the most results when you can build a relationship with your external counsel. They get to know your business and what your goals are — it’s a more strategic perspective rather than just cranking out another piece of litigation.”

When it comes to fee arrangements — whether it’s blended rates, credits back, or discounts — he says all those options represent a shared responsibility between in-house and external counsel and they have some “skin in the game.”

However some firm lawyers still feel what they do is high-value work that shouldn’t be subject to budget formulas. For large cases, Landry of Davis LLP in Vancouver says the firm has had some arrangements where they bill at 80 per cent of standard rates and if successful they get full rate plus 20-per-cent bonus. “I’m not a big fan of contingencies because you become part of the play. I have no problem being incented but I’m not sure it’s the best way,” he says. “I pride myself on giving good quality, high-end legal advice. I’m not sure it’s a great idea to have me in the middle of that because all of a sudden you get skin in the game.”

Negotiating a settlement in real time

If external firms think going through the RFP process is tough, consider a client Jon-David Giacomelli of Cambridge LLP recently landed after an intensive bidding process against another firm.

He received a referral from a Chicago lawyer regarding a cross-border financial services litigation file involving fraudulent misrepresentation. He spent 20 hours going back and forth with a third-party lawyer who was “interviewing” Cambridge and another law firm in Canada on behalf of the company to determine who would get the file. “He was brokering between the two of us saying, ‘Why would you do that, this guy says he would do this.’ The person involved on behalf of the client was a sophisticated lawyer quarterback,” says Giacomelli.

In the end, Cambridge won the file but the case was settled before it went to trial based on the strategy discussed in the interview process. “We ended up resolving that case in negotiations over a two-day meeting. I absolutely didn’t enjoy that process at all but the bottom line is they were up front about that process,” he says. “It could have cost the company a lot of money.”

It’s just another indication of how companies are taking a more aggressive approach to getting litigation matters resolved quickly and for less cost.

 “When I started 20 years ago you didn’t quote anything — you just billed your hourly rate,” says Giacomelli. “In order to compete we’ve tried to be more competitive in fees. We’re not the bottom of the street but if you’re a boutique they’re already looking to you to save money and that used to be enough. My hourly rate used to be $100 to $200 less than my Seven Sisters brethren — now they look to us to shave fees.”


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