Business Litigation Reporter

In recent years, increasing numbers of corporate legal departments have explored alternatives to the traditional hourly rate method of law firm billing in litigation matters. As a firm that has actively embraced such alternative fee arrangements (AFAs), Goodwin Procter has amassed both a substantial track record of using AFAs to help our litigation clients meet their goals and a team of professionals with extensive experience in fashioning and implementing AFAs.

Our experience teaches that there is no magic bullet that guarantees the success of an AFA engagement. Rather, there are a host of factors that work in concert to develop and execute an AFA engagement that meets both the client’s and the law firm’s objectives. An AFA, like the traditional billable hour arrangement, is just one aspect of the attorney-client relationship that is about more than just price. In the end, a successful AFA is about partnership, with the firm and the client working together transparently to achieve the client’s litigation objective through a multi-faceted approach.

Six Factors for Successful AFAs:

1. Trust – Trust is the cornerstone of a successful AFA engagement. Trust is essential during both the development and execution of AFAs to ensure a collaborative design process for a win-win arrangement that aligns the interests of both client and law firm, and results in value and predictability. Both sides take on risk in an AFA, so having a high degree of trust is critical for dealing with scope changes and ensuring fairness to both parties.
2. Strategic Alignment – Law firms that simply provide a long menu of AFA options to clients are not effectively listening to, or addressing, their clients’ specific business needs. AFAs should be the result of a thoughtfully crafted, comprehensive pricing solution that addresses not only the client’s goals but also their specific cost concerns. In litigation, an example of this could be an AFA that combines fixed fees and success fees to enable risk sharing and provide incentives for the law firm to achieve the best outcome in the most cost-effective manner possible. 
3. Accurate Scoping – The client must work hand in hand with the law firm to realistically scope the matter. Through this process, you jointly identify key risks and cost drivers, analyze strategic options and possible outcomes, and develop a work plan that will achieve key objectives. Once the scope is determined, the law firm can then develop an accurate budget covering the key tasks outlined in the work plan. Attempting to develop a budget before thoroughly scoping the matter can lead to inaccurate estimates and confusion as to the core strategy for handling the matter.
4. Tactical Staffing – As part of the collaborative design process, the client should discuss staffing with the law firm. Building a team with the right mix of skills to effectively execute on the case strategy drives both efficiency and results. Through numerous engagements, we’ve seen that the greatest efficiency is achieved by having a team with relevant experience and subject-matter expertise who will deliver results on time and on budget. 
5. Active Tracking and Matter Management – Once an AFA engagement is underway, it is critical that the case team carefully monitor progress against key milestones and deliverables. Clients should seek law firms with staff resources experienced in AFAs and the technology tools to ensure that projects remain on schedule and that potential scope changes are addressed immediately (especially if the change requires a reassessment of the terms of the AFA agreement). Having a law firm partner with dynamic, real-time reporting and monitoring systems helps make for an effective matter management process.
6. Consistent and Timely Communication – The importance of regular and open dialog between the law firm and client throughout the entire AFA lifecycle—from initial scoping through the end of the case—cannot be understated. Many AFA structures encourage frequent discussions about case progress and strategy. Case in point: Through a quarterly fixed-fee arrangement with one of our clients to handle several large litigation matters, we engage in regular discussions about the scope of work and any required changes to our case strategy based on the last quarter’s events. While this approach may not be right for all companies, it has been effective to help this client achieve a high degree of transparency and cost management.

Ultimately, each client should engage in open dialogue with their outside counsel to define and capture value in structuring their engagements.  While it takes hard work, investment, and patience to move litigation work to AFAs, we have found substantial rewards at the end of the road for both our clients and our firm.  In the end, a law firm that is receptive to AFAs and is experienced in successful AFAs as well as traditional fee arrangements can help clients find the formula that makes the most sense for their business.

Goodwin Procter’s Business Litigation Reporter provides timely summaries of key cases and other developments within dedicated Business Litigation sessions and related courts throughout the country – courts within which Goodwin Procter’s Business Litigation attorneys are continually litigating. In addition, each issue of the Business Litigation Reporter provides a more thorough discussion of one topic of particular importance to the business community. In this issue, we share the “Six Pillars of Engagement: What You Need to Know about Using AFAs in Litigation” and introduce Mike Caplan, Goodwin Procter’s new Chief Operating Officer, and his work leading the firm to the forefront of creative payment structures and alternative fee arrangements. We also provide an overview of our Pricing & Project Management Team and key professionals in this area.

California

Primary Jurisdiction Doctrine Calls for Stay Rather Than Dismissal of Case. In Skye Astiana, et al. v. The Hain Celestial Group, Inc., 2015 WL 1600205 (C.A.9 (Cal.) April 10, 2015), the Ninth Circuit reversed the district court’s order dismissing a complaint without prejudice under the primary jurisdiction doctrine. Plaintiffs filed a nationwide class action complaint challenging the “all natural” and/or “pure natural” labels on cosmetic products manufactured by the defendant. The district court granted the defendant’s motion to dismiss under the doctrine of primary jurisdiction, holding that the FDA was uniquely qualified to define the parameters of a “natural” label on cosmetic products and suggesting that the plaintiffs could re-file after the FDA had weighed in. The Ninth Circuit reversed in part, holding that the district court erred by dismissing the case rather than staying it while the parties (or the district court) sought guidance from the FDA. The Ninth Circuit reasoned that where “further judicial proceedings are contemplated, then jurisdiction should be retained by a stay in proceedings, not relinquished by a dismissal.”

No-Hire Clause in Settlement Agreement May Constitute Unlawful Restraint of Trade. In Golden v. California Emergency Physicians Medical Group, 2015 WL 1543049, No. 12–16514 (C.A.9 (Cal.) April 8, 2015), the Ninth Circuit held that a “no re-hire” provision in a settlement agreement could potentially constitute an unlawful restraint of trade under California law. Dr. Golden had previously entered into a settlement agreement with the California Emergency Physicians Medical Group (“CEP”) under which he agreed to “waive any and all rights to employment with CEP or at any facility that CEP may own or with which it may contract in the future.” The district court subsequently granted CEP’s motion to enforce the settlement over Dr. Golden’s objection, holding that Section 16600 prohibited only non-compete clauses (rather than no-hire clauses). On appeal, the Ninth Circuit applied a more expansive view of Section 16600, finding that it could invalidate any contractual provision that caused “any ‘restraint of a substantial character’ [on the ability to practice a vocation], no matter its form or scope.” The Ninth Circuit, however, did not invalidate the no-hire provision, but instead directed the district court to determine whether the clause imposed a restraint of a “substantial character” on Dr. Golden’s medical practice.

Lawsuit Dismissed Where Defendant Hulu Did Not “Knowingly” Disclose Personal Identifying Information. In In re: Hulu Privacy Litigation, 2015 WL 1503506 (N.D. Cal. March 31, 2015), the plaintiffs alleged that Hulu had violated the federal Video Privacy Protection Act (VPPA) by disclosing users’ personal identifiable information (“PII”) to a third party. Specifically, plaintiffs claimed that the Facebook “Like” button on Hulu.com pages caused both the user’s Facebook ID and video choices to be transmitted to Facebook in violation of the VPPA. However, to establish a violation of the VPPA, plaintiffs were required to present evidence that Hulu had actual knowledge that PII – which required disclosure of both the user’s identity and the video information – was being disclosed to Facebook. The court found there was no evidence that Hulu actually knew that Facebook might combine a user’s identity – which was transmitted via a cookie – with the user’s video choice information – which was separately transmitted via the watch page URL – in order to construct PII within the meaning of the VPPA.

Delaware

New Streamlined Arbitration Law for Business Disputes. The Delaware Rapid Arbitration Act (“DRAA”) was signed into law and made effective as of May 4, 2015. The DRAA is an innovative method for fast-track resolution of business disputes. It was adopted to avoid many of the problems with traditional arbitration, including expense, duration, disputes over arbitrability, and disputes over the final arbitration award. Arbitrations under the DRAA are generally to be completed within 120 days of the arbitrator’s appointment (with a maximum 60-day extension) and arbitrators who fail to timely issue a final award face reductions in their fees of between 25% and 100%. The DRAA is streamlined in other respects as well: it assigns threshold arbitrability determinations to the arbitrator, provides that an appeal of a final arbitration award is to be heard directly by the Delaware Supreme Court, and states that, absent an appeal, a final award is deemed confirmed by the Court of Chancery within a fixed period of time. The DRAA is limited to business disputes and requires the parties to agree in writing to arbitrate under the statute.

Spun-Off Subsidiary Not Bound By Former Parent’s Contractual Obligation. In Miramar Police Officers’ Retirement Plan v. Murdoch, C.A. No. 9860-CB (Del. Ch. Ct. Apr. 7, 2015), the Court of Chancery held that a corporation created in a spin-off transaction was not bound by provisions in a contract that its former parent corporation had previously entered into. In 2006, News Corporation had entered into a settlement agreement with a 20-year duration. In 2013, News Corporation transferred its newspaper and publishing business to a new subsidiary (“New News Corp.”) and then spun off New News Corp. to its shareholders. New News Corp. then took action allegedly contrary to the 2006 settlement agreement, and the plaintiff sued, claiming that the new company was bound by the settlement agreement. The Chancery Court disagreed and dismissed the suit. It held that although News Corp. (the parent entity) was still bound by the settlement agreement, the spun-off subsidiary was not, since it was not a party to that agreement, the settlement agreement by its terms did not bind asset recipients in a spin-off transaction, and the spin-off agreement itself did not assign or transfer News Corp.’s obligations under the settlement agreement to New News Corp.

Massachusetts

Insurer’s Duty to Defend Doesn’t Include Prosecuting Counterclaim. In Mount Vernon Fire Ins. Co. v. VisionAid, Inc., No. 13-12154 (D. Mass. Mar. 10, 2015), the court held that an employer’s liability insurer had no obligation to prosecute a counterclaim that the employer had brought against an ex-employee. The Court held that because the policy only covered claims asserted against the insured, forcing the insurer to fund the employer’s counterclaims “would fundamentally rewrite the Policy.” The Court distinguished the “in for one, in for all” rule adopted in Massachusetts, which requires insurers to defend all claims asserted against the insured, not just those covered by the policy. Finally, the Court rejected the employer’s arguments that the insurer had the obligation to pursue the counterclaim because it could defeat liability or was inextricably intertwined with the defense, finding that the counterclaim was not necessary to defeat the underlying discrimination claim and sought affirmative relief that went beyond simply defeating the claim.

Breach of Implied Covenant Requires Proof of Bad Faith. In Robert and Ardis James Foundation v. Meyers, No. 13-P-1169 (Mass. App. Ct. Feb. 12, 2015), the Appeals Court of Massachusetts held that a plaintiff claiming breach of an implied covenant must establish that the defendant acted in bad faith, not simply that the plaintiff’s good faith expectations had not been met. Under the parties’ agreements, the plaintiff provided funds for the defendant to purchase shares of stock in exchange for a right to participate in the proceeds of the sale of those shares, but the agreements did not provide when the shares would be sold. The plaintiff claimed that the defendant had breached an implied covenant of good faith and fair duty by refusing the plaintiff’s demand to sell the shares. The Appeals Court disagreed, noting that the scope of the implied covenant of good faith and fair dealing “is only as broad as the contract that governs the particular relationship.” The court concluded that the defendant’s decision not to immediately negotiate a termination of the agreements was not an effort to extract undue concessions. The court also emphasized that the plaintiff had to prove that the defendant had acted in bad faith, not just that the plaintiff had a good faith basis for its expectation as to how the defendants would act. [Disclosure: Goodwin Procter served as counsel for the defendant.]

Demand Futility Requires Allegations Showing Substantial Likelihood of Personal Liability. In Liang v. Berger, et al., Nos. 13-cv-12816-IT, 13-cv-13097-IT (D. Mass. Mar. 9, 2015), the District Court, applying Delaware law, granted a motion to dismiss a shareholder derivative suit on the grounds that plaintiff did not make a demand on the board of directors and did not adequately allege that demand would have been futile. Plaintiff alleged that the outside directors were interested because they faced personal liability, and therefore demand would have been futile. But the court noted that the threat of personal liability must be “substantial” to excuse demand. And the court held that the plaintiff “has not put forth sufficient particularized factual allegations demonstrating that the outside directors are subject to a substantial likelihood of liability … because they do not sufficiently plead that the outside directors either consciously ignored their duties under Caremark or acted with intent in authorizing the disclosure of materially false or misleading statements.” Instead, the plaintiff had only alleged that the outside directors had actual or constructive knowledge regarding the false or misleading statements by virtue of their membership on the Audit committee. The court held that “simply pleading that the director defendants ‘caused’ or ‘caused to be allowed’ the company to issue the certain statement is not sufficiently particularized to excuse demand.”

New York

Shareholder Derivative Action Alleging FCPA Violations Cannot Be Litigated in Federal Court. In Pritika v. Moore, 2015 U.S. Dist. LEXIS 31793 (S.D.N.Y. Mar. 16, 2015), the plaintiffs filed a shareholder derivative action in federal court asserting that Avon’s directors breached their fiduciary duties based on the company’s alleged violations of the Foreign Corrupt Practices Act (“FCPA”). The court dismissed for lack of subject-matter jurisdiction because the plaintiffs’ breach of fiduciary duty claim arose under state law. The plaintiffs argued that their claim necessarily raised issues of federal law involving the FCPA, but the court rejected that argument both (1) because the FCPA issues were not “significant to the federal system as a whole” and hence were not sufficient to create federal jurisdiction over a state-law claim, and (2) because exercising jurisdiction “would be tantamount to recognizing a private right of action under the FCPA, … an outcome directly contrary to Congress’ apparent intent.”

When Michael Caplan joined Goodwin Procter as Chief Operating Officer in August, 2014, he knew he’d be navigating the firm through changing tides in the legal industry. In fact, that was precisely why he was chosen. Caplan had served as the Global Chief Operating Officer of Marsh & McLennan Companies’ Corporate Legal, Risk and Compliance Department, which was recognized in 2013 by the Association for Corporate Counsel for its approach to creating value through technology and value-based fee arrangements. It was this kind of innovation and creativity that Goodwin Procter sought to meet the changing needs of its equally forward-leaning clients who were seeking value-driven engagements.

One of the things that drew Caplan to Goodwin Procter was its commitment to creating value for clients and willingness to try new approaches. He was impressed, for example, that it was one of the first AmLaw 100 firms to implement a dedicated, full-time pricing team. The team leverages sophisticated budgeting and project management tools and systems to design creative fee arrangements and assist with effectively managing Goodwin Procter’s work with clients. The team’s expertise derives from more than 25 years of combined experience in legal pricing and project management.

“Over the past few years, our clients’ business environment has changed, in some cases dramatically, due to changes in the economic and regulatory landscape,” Caplan remarked. “As a partner to our clients, the way we work with them must also change. Goodwin’s Pricing Team are 100% dedicated to collaborating with our attorneys and our clients to find new solutions that not only meet the clients where they are, but also to where they’re evolving.”

The Goodwin Procter Pricing and Project Management Team provides counsel and support to attorneys on pricing, budgeting, and all aspects of project management. The team also ensures that the firm’s attorneys have the necessary tools and support to efficiently and effectively budget and manage matters to provide maximum value to clients. Goodwin Procter uses a customized software program to help develop, track, modify, and research budgets and fee arrangements. The software allows for detailed tracking and reporting of work in progress which enables exceptional control over fee arrangements.

Goodwin Procter has extensive experience providing legal services under a variety of alternative fee arrangements, including fixed-fees and modular fixed-fees, hold-back/success fee arrangements, blended rates, busted-deal arrangements, and portfolio arrangements.

“With the decline of the billable hour, we’re literally changing a payment model that’s centuries old,” observed Caplan. “These are exciting times.”