Poll: ‘Billing per hour a thing of the past’ suggest IP counsel

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In part one of Patent Strategy’s survey of more than 40 in-house counsel, most respondents said they wanted a fixed-fee and hourly-billing hybrid pricing model from external lawyers

A new poll from Patent Strategy shows that most businesses prefer a hybrid of fixed fees and hourly billing from their private practice counsel, indicating that IP law firms need to shift from their traditional hourly billing models.

The survey, which polled more than 40 respondents from different industry sectors and jurisdictions, asked in-house counsel about budgets, pricing preferences and the importance that the advertised cost of legal services plays when picking a law firm.

While price was considered be a key factor in choosing external counsel, most respondents said the talent of the partners and reputation of the firm were more important considerations.

Traditionally firms have charged hourly rates for litigation and casework; the advantage of an hourly rate for clients being that it allows for a transparent cost analysis between firms, so that companies can easily compare prices for the same service.

Businesses tell Patent Strategy, however, that while they appreciate this transparency, the hourly billing model can occasionally act as a motivation for firms to overcharge. New pricing systems have thus been introduced over the past few years, including capped fees and hybrid systems of capped fees and hourly rates.

Our survey found that only 19% of respondents preferred the traditional billable hour pricing plan over a hybrid system of capped fees or a single fixed rate. Most respondents who said they prefer an hourly rate came from the pharma and biotech sectors.

“We prefer billing per hour because we deal with a lot of litigation in our area of work,” says the senior IP counsel for a pharmaceuticals company “It is difficult to have something like a capped fee in our sector because litigation changes constantly.

“It would be great to have some stability in terms of what the case is going to cost, but the matters that go to litigation are very important for the company. We don’t want a situation where we hit the budget and people just stop working.

“That isn’t to say that we don’t dispute costs if lawyers overcharge for things.”

However, some sources argue that the introduction of fixed fees for litigation allows companies to better estimate their IP budgets for a given year and provides the psychological benefit of providing an element of stability in a situation with an unpredictable outcome.

Ryoichi Takaoka, patent attorney at chemicals company Kaneka in Brussels, tells Patent Strategy: “I prefer fixed fees for cases because the firm needs to be sure about the total costs and so we can know our budget.

“Of course, if costs go over, that’s OK. But they lawyers only go over budget when they have to because it is important. The cost is ultimately a secondary consideration. I would prefer a fixed fee structure in places such as the UK, however, where litigation is very expensive.”

A concern with hourly billing is that companies have a hard time gauging how much a case will cost, and firms have an added incentive to drag out a case so they can charge more hours. Kirupa Pushparaj, director of IP at Square in California, says: “If you ask the head of IP at any company who the most important person they report to is, it will always be the CFO.”

He says predictability helps keep costs in check, and that a fixed hourly rate is a win-win situation for both law firms and clients. “This is not about cutting anybody short, this works well for everyone because it is fairer to both sides.

“There are a lot of firms out there. If they want to be competitive, they need to think of alternative pricing models.”

Sources say that hybrid models of capped fees and hourly billing have become more popular (48% of respondents said they preferred such a system) because they enable companies to negotiate a fixed fee and then negotiate any costs that go over budget on an hourly billing basis.

The director of IP at an Italian  company says: “It is understandable why large law firms prefer hourly billing. But the point is that when we need to do our budget and decide to litigate or not, the decision makers decide based on a fixed fee. We want a price range.”

“Normally we try to add 20% to 30%. If lawyers work on a billing-per-hour model, they don’t think about what they will do if they encounter a problem to keep the budget down.”

Pushparaj at Square agrees, and says that companies should get creative when designing pricing plans. No one billing model works for everyone, and more flexibility allows companies to decide what works best for their business plan.

“Billing per hour is a thing of the past. There is nothing binary about using fixed fees, especially for litigation. But there are a lot of creative billing methods, for example success bonuses or a mixture of capped fees and hourly billing,” he says.

Budget trends

Survey takers were also asked how their company’s budget for external counsel has changed over the past five years. Almost half of respondents (48%) said their businesses had either decreased the IP budget for external counsel or kept it the same. The responses varied across sectors and were more influenced by the various growth stages of respondents’ companies.

The 2014 Alice decision from the US Supreme Court and the establishment of the Patent Trial and Appeal Board (PTAB) in the US made it more difficult for non-practicing entities to sue tech companies for infringement. The result, according to sources, is that many US tech companies have been less concerned with litigation, and thus not been as reliant on external counsel.

“When the America Invents Act came out, patent litigation was at an all-time high,” says one source.

“Two years ago, we hit the bottom of patent litigation. But now the more sophisticated trolls have figured out how to get past the PTAB.”

A significant portion of respondents, however, said they had seen an increase in their external counsel budgets.

One reason for this response is that respondents in the pharma sector rely on the protection of a few valuable patents, which makes enforcement very important to them. Another is that businesses are growing.

“Our litigation budget has increased, but that is because our company has grown from a one-man team,” says the senior IP counsel for an innovator drug maker. “The rise is also just because of the company, because we have more products in the pipeline.”

Companies in a different stage of growth, or with key patents at different stages in their life cycle, have less need for litigation. the director of IP says certain business units in his company are revaluating their litigation strategies and have allocated smaller amounts for their budgets.

“Our budget for litigation has gone down, but that is only because we have less need to litigate. We are in the process of rethinking our litigation, but it hasn’t made me more price conscious in the sense that we are looking to hire cheap counsel,” he says.

Even if companies are doing more litigation, they are also becoming more price sensitive. Almost half of our respondents reported that cost had become more of a deciding factor over the past five years.

The head of patents at a Germany-based pharma company says he has always been price conscious when it comes to litigation, but experience of working with firms and an increase in competition has made it easier for him to make price more of a deciding factor.

“We have always been price sensitive. If you have more experience litigating, it's easier to be more price sensitive because you know what to look for,” he says.

While price is important, good quality of work is essential. Respondents said they would be willing to pay more for a service that they knew would be good, rather than go with the cheapest quote.

“Developing a good working relationship with us is very important. If the firm proves they can do that while offering good quality of service, it means we might be more flexible with prices. If somebody is reliable and delivers on time, we might pick them even if they are more expensive,” says the senior IP counsel at a pharma company.

Pushparaj at Square agrees, and says that ultimately the quality of the work provided by the firm is more important than their price tag.

“We care about who the people are doing the work and their interest and skills. Enthusiasm for the work is what drives you. This doesn’t mean that if somebody comes along with all those qualities, I would necessarily hire them. It’s always a balance of cost and skill set,” he says.