Friday, 2 April 2010

Flexible fees: what's in it for small practices?

Writing last month for Insight, the online magazine of the UK's Intellectual Property Office, Campbell Forsyth (Forsyth Simpson) took a look into an increasingly-discussed scenario for the funding of IP litigation in his article "Flexible Fees". He writes:
"... Conditional fees

Up till 2001, you were barred from any arrangement other than paying your legal fees as you went. To improve access to justice after the removal of legal aid for civil cases, conditional fees were introduced.

For smaller types of claim, such as Personal Injury, the impact of "no win, no fee" was immediate. In more complex IP cases, it is taking longer to change the traditional basis on which disputes are conducted.

How it works

Once you find an IP litigator who is prepared to work on this basis, they will assess your chances of winning. On a patent dispute, it could mean them taking on one to two years’ of work before a conclusion to your case, so they will certainly want to see your odds as better than even.

In the strongest cases, they might agree to "eat what they kill". If you win, they will recover all their costs from the other side. If you lose, you have nothing to pay.

On claims that are closer to call, your lawyer might ask you to pay a proportion of their fees as the case develops and take a risk themselves on recovering the rest. The incentive for the law firm is that an uplift is applied to any order on costs. On borderline cases, they might get 100 per cent extra. When the prospects of winning are more certain, the uplift might be as low as ten per cent.

The other side will have to pay these extra costs, so you have to tell them in advance. It can work to your advantage if you would like to reach an out-of-court settlement. First, your opponent realises that your lawyer thinks you have a strong enough case to justify taking a risk on going to court. Second, they have to face the prospect of paying double any of the legal costs you incur.

Other risks

Broadly speaking, the costs of your own solicitor will amount to about 40 per cent of your total liability. If you take them out of the equation, it may well be the difference between defending or asserting your rights, or staying on the sidelines.

Other cost risks arise if you go to court. You might still have to pay the other side’s fees, as well as any damages. However, legal products have emerged to cover this exposure too.

Premiums on after-the-event (ATE) insurance are high, at between 30 and 50 per cent of your total liability. But in the latest policies, you do not have to pay anything upfront. If you win, the premium is paid by the other side. If you lose, your costs are met. Either way, you are covered.

Unlike legal practice in the US, your lawyer cannot tie their fees to any damages, although this is a developing area and may change over the next few years. But even now, other people can. In some IP cases, third-party investors are starting to see the business sense in covering legal costs in return for a proportion of damages that are awarded.

The development of these alternative techniques may be affected by the Government’s forthcoming review of judicial costs. The recently published Jackson Review of civil litigation costs has put much of the "no win, no fee" and ATE system under review, but is introducing further alternatives for funding cases. One planned reform to improve access to justice for smaller IP cases in future is the £50,000 cap on costs that can be reclaimed in the junior IP court, the Patents County Court in London.

For now, the combination of conditional fees, after-the-event insurance and third-party funding offers a genuine, if complicated, route to significantly lowering the costs of litigation for enterprises. For those who have a strong IP claim or defence to a claim, it is possible to come close to eliminating two main sources of risk: the legal fees, both yours and the other side’s.

You no longer have to worry as much about betting the business on proving your IP. Instead, you can focus on what really matters: making sure that you are free to operate in your market".
I was sure that this topic was going to attract some comment on this blog but, since it hasn't, I thought I'd invite some comment myself. Is this a golden opportunity for those running sole and small practices, or is it nothing but a poisoned chalice?


  1. CFA's have obvious advantages and do work very well in certain areas of litigation (like PI), but they are awkward for members of the bar to operate in classes of cases which are not particularly stereotypical. The fact that a brief may be returned between several counsel makes things more complicated - whether one is paid may depend on the competence of a completely different practitioner. Really well structured CFA's can deal with some of this, but one then ends up spending a disproportionate amount of time customising the CFA to a particular case.

    Having said that I have certainly been happy to take on CFA cases, but only where I can take the hit of not being paid and often where I am on good terms with the solicitor involved so if nothing else it has a marketing advantage. This might work for repeat clients of other kinds.

    I'd say that the more a class of cases can be approximated to a sausage factory (eg from stereotypical features) the safer it is to use CFA's.

    However, having said all that, the Jackson review - which seems to have a lot of support - will mean:

    * no recoverable ATE insurance
    * qualified one way costs redistribution (so mostly claimants benefit and defendants lose out)
    * no uplifts (so CFA's as we know them will be gone)
    * contigency fees now a possibility

    If this all happens, and it may well do so, we will see a completely different litigation environment with some big winners and big losers. My hunch is a huge shift in favour of claimants.

  2. I agree with you Francis that Jackson will help claimants a lot. Many times I see rights unenforced because the downside risk is too great for the small rights holder. Indeed for a small business the cash flow hit of becoming entangled in litgation is bad news.

    I also sympathis about the effort of crafting a suitable agreement. Basically I have found it simpler to do work as a gift. You can also say: If the trademark is registered or the patent granted you pay £X if not, not. It works.

    Frankly solo practitioners are not usually well placed to take gambles. On the other hand we dont have other partners to persuade to do something that we are interested in. You thrive or die on your own decisions.