Alternative Fee Arrangements Are Catching On, Even For Litigation

The Washington Post reports that law firms and in-house counsel are increasingly using alternative fee arrangements, such as flat fees, for litigation.  When the economic downturn prompted corporate clients to scale back their outside legal spending several years ago, law firms responded by experimenting with alternative fees.  Alternative fee arrangements can be anything that is not traditional hourly billing, including flat fees, success fees, and contingency fees.

Personal injury and other plaintiff’s litigation cases have used contingency fees for decades.   In the past, though, corporate clients typically paid their lawyers by the hour, for both transactional and litigation work.  Now, alternative fee arrangements have become fairly popular for transactional work, such as real estate deals.  Alternative fee arrangements have been slower to catch on for corporate litigation work, however, because of a perceived uncertainty and unpredictability in litigation.

But now, lawyers and in-house counsel are working out systems, and in some cases software programs, to help them price most litigation scenarios for alternative fee arrangements.  They are also negotiating carve outs in case unexpected events change the circumstances of the case.

In corporate litigation cases using alternative fee arrangements, the lawyer and the client typically agree to a payment system at the beginning of a case – often a flat fee with a success fee for certain scenarios, such as if the case is dismissed at an early stage of the lawsuit.  The overall payment system is based on estimates of how much the case is likely to cost in total.  Or, as in one example in the Washington Post article, the company may pay the law firm a pre-agreed flat fee for each phase of the litigation: investigation, discovery, trial preparation, trial, appeal, etc.

The Washington Post notes that this type of fee system is spreading throughout the legal community.  For example, entire practice groups within several large law firms now exclusively use alternative fee arrangements, having completely stopped billing by the hour.  The legal community’s perception of alternative fees has also changed: the Washington Post reports that in 2009, 28 percent of firm leaders believed alternative billing would be a permanent change in the legal industry.  By 2013, however, 80 percent of firm leaders believed non-hourly billing was here to stay.  Similarly, in a recent survey by the Association of Corporate Counsel of 1,200 general counsel, 37 percent of the chief legal officers expect the use of alternative fees to increase while only 4 percent expect it to decrease.

While large law firms are just beginning to adapt to alternative fee arrangements for litigation, small firms have been using them for years.  Small firms are often more flexible and are more open to working out unconventional and innovative fee systems to provide clients with the most bang for their buck.  In addition to flat fees, success fees, and contingency fees, when it meets the circumstances of the case, Mark Krudys also takes cases with blended fee arrangements, e.g., a low hourly fee blended with a lower percentage contingency fee.  If you’re interested in exploring alternative fee arrangements like these for corporate litigation matters, consider working with a small firm to develop a system that specifically matches your needs.

Broker-Dealer Faces Big Fine for Failure to Supervise

Last week, the Financial Industry Regulatory Authority (FINRA) fined LPL Financial LLC, one of the country’s largest networks of independent broker-dealers, $950,000 for its failure to supervise sales of alternative investment products, including non-traded real estate investment trusts (REITs), oil and gas partnerships, business development companies (BDCs), hedge funds, managed futures and other illiquid pass-through investments. FINRA also ordered LPL to conduct a comprehensive review of its policies, systems, procedures and training to correct the failures.  Many states set limits on the percentage of an investor’s overall portfolio that may be invested in these kinds of risky products.  Similarly, many alternative investments, like REITs, limit the concentration of alternative investments in their offering documents.  LPL, further, had set its own concentration guidelines for alternative investments.  But none of these safeguards is a substitute for appropriate supervision by the brokerage firm.

FINRA found that from January 1, 2008 to July 1, 2012, LPL failed to sufficiently supervise sales of alternative investment products that violated the various concentration limits.  During that time period, LPL had two different systems to oversee its alternative investment products.  First, it used a manual process to determine whether an investment met suitability requirements, but this system relied on information that was often outdated and inaccurate.  LPL then employed an automated system, but that database used flawed programming and was not timely updated with accurate suitability standards.  FINRA also found that LPL failed to train its supervisory staff to consider state suitability standards when reviewing alternative investments.  As a result, LPL exposed its customers to unacceptable risks by failing to tailor its supervisory system to the products it sold.

LPL agreed to pay the fine to settle the case against it, but it did not admit nor deny FINRA’s charges.

The Wall Street Journal reports that this is not the first time LPL has faced regulatory fines because of its sales of REITs.  In May 2013, Massachusetts regulators fined LPL $500,000 for violating a state regulation prohibiting an investor from investing more than ten percent of their liquid net worth in REITs.  In the same ruling, the Massachusetts regulators also ordered LPL to pay $4.8 million in restitution to clients.  That penalty was part of a larger action by Massachusetts regulators against firms that sold REITs.  In total, Massachusetts regulators collected more than $11 million in restitution and fines from six firms: LPL, Ameriprise Financial, Inc., Lincoln National Corp., Commonwealth Financial Network, Royal Alliance Associates, and Securities Americas.

If you are investing in alternative investments, especially non-traded REITS, you should check the concentration limits for these alternative investments in your offering documents and in your state.  If you believe your investments exceed the legal concentration limits, you should consider discussing your options with an attorney.