P R E S E N T E D B Y:

1. IMPLEMENTING ALTERNATIVE FEE ARRANGEMENTS – CHALLENGES AND CONCERNS FOR CLIENTS & CARRIERSThe information included in this panel is strictly the opinion of this panel and the individual panel members and does not necessarily reflect the beliefs of the DRI or the beliefs of any panel member’s employer. It is not our intent to render legal advice. If legal advice is needed, it should be obtained from your local legal counsel. Hawkins Parnell Thackston & Young LLP

2. P R E S E N T E D  B Y: DR I ' S  L A W Y E R S '  P R O F E S S I ONALISM   A N D  E T H I C S  C O M M IT T E E Edward M. Slaughter, Managing Partner, Dallas Office, Hawkins Parnell Thackston & Young LLPLuanne Ellison, Director, Litigation ManagementResolute Management, Inc.Ben Pellegrini, Assistant General CounselRheem Manufacturing Company Hawkins Parnell Thackston & Young LLP

3. History of the Billable Hour “A lawyer’s time is his stock in trade.” -Abraham Lincoln Hawkins Parnell Thackston & Young LLP

4. Leading to the Billable Hour • 1930 - State bars issue recommended/statutory minimum fee schedules • 1960 – Bills for “services rendered” – and estimation of perceived value • Mid 1960s to early 1970s – Anti-trust concerns, accountants and insurance carriers require more detailed information and a better way to track it – Thus the billable hour is popularized Hawkins Parnell Thackston & Young LLP

5. Alternative Fee v. Billable Hour Perceived negatives of hourly billing: • Discourages attorney client communication • Discourages expedient resolution of cases • Based on work performed instead of value obtained • Creates a conflict between attorney and client • Slave to the clock – Bad for the Profession Hawkins Parnell Thackston & Young LLP

6. "We can't solve problems by using the same kind of thinking we used when we created them." - Albert Einstein Hawkins Parnell Thackston & Young LLP

7. Can Alternative Fee Agreements Improve Attorney Client Communication? Hawkins Parnell Thackston & Young LLP

8. American Bar Association Model Rules of Professional Conduct Rule 1.4: Communication • A lawyer shall: (1) promptly inform the client of any decision or circumstance [requiring] the client’s informed consent… (2) reasonably consult with the client… (3) keep the client reasonably informed… Hawkins Parnell Thackston & Young LLP

9. AFAs and Attorney-Client Communication • Process of creating AFA facilitations communication about expectations • AFAs can set routine communication as part of an overall fee or pay as a line item • Eliminate clock watching by client • Eliminate needless over-reporting Hawkins Parnell Thackston & Young LLP

10. Can AFAs be used to encourage attorneys to expedite litigation and other legal matters? Hawkins Parnell Thackston & Young LLP

11. American Bar AssociationModel Rules of Professional Conduct Rule 3.2: Expediting Litigation A lawyer shall make reasonable efforts to expedite litigation consistent with the interests of the client. Hawkins Parnell Thackston & Young LLP

12. Expediting Litigation • AFAs can discourage boilerplate excess work • AFAs can encourage attorneys to be efficient • AFAs can expressly reward speedy resolutions Hawkins Parnell Thackston & Young LLP

13. How can AFAs be used to ensure that clients get value for the fees they spend? Hawkins Parnell Thackston & Young LLP

14. THE VALUE EQUATION = Result - Cost VALUE Value is realized when a client’s expectations are met (or exceeded) at what they consider a reasonable price. It is a subjective assessment of the overall worth of a product or service. Hawkins Parnell Thackston & Young LLP

15. Work Performed and Value Obtained Example #1: Attorney prepares to depose hazard communicaton expert Hawkins Parnell Thackston & Young LLP

16. Work Performed and Value Obtained Example #2: Attorney deposes same witness second time Hawkins Parnell Thackston & Young LLP

17. AFAs Reward Value Obtained • AFA might pay less than hourly rates in some instances • AFAs should reward expertise and encourage development and use of institutional knowledge • AFAs should encourage best staffing practices Hawkins Parnell Thackston & Young LLP

18. What do the rules of Professional Responsibility require when creating the terms of Alternative Fee Agreements? Hawkins Parnell Thackston & Young LLP

19. American Bar Association Model Rules of Professional Conduct Rule 1.5: Fees A lawyer shall not make an agreement for, charge, or collect an unreasonable fee or an unreasonable amount for expenses. The factors to be considered in determining the reasonableness of a fee include the following: Hawkins Parnell Thackston & Young LLP

20. The time and labor required, the novelty and difficulty of the questions involved, and the skill requisite to perform the legal service properly; • The amount involved and the results obtained; • The time limitations imposed by the client or the circumstances; • The nature and length of the professional relationship with the client; • Whether the fee is fixed or contingent. Hawkins Parnell Thackston & Young LLP

21. Creating Ethical AFA’s • Time and Labor + Skill Required • Consider the amount of work • Consider the use of work product • Consider the best staffing plan • Consider the expertise of the team Hawkins Parnell Thackston & Young LLP

22. Creating Ethical AFA’s • Amount involved + results obtained • More risk = more reward • Consider contingent component • Consider bonuses for performance • Consider refund for poor performance Hawkins Parnell Thackston & Young LLP

23. Creating Ethical AFA’s • Whether the fee is fixed or contingent. • Contingent fees can be created for any case • Complete Contingent fees based on results • Contingent bonuses • Hybrid – Hourly and Contingent fees Hawkins Parnell Thackston & Young LLP

24. Do AFAs increase or decrease potential conflicts of interest between Attorney and Client? Hawkins Parnell Thackston & Young LLP

25. Conflicts of Interest A conflict of interest is involved if there is a substantial risk that the lawyer's representation of the client would be materially and adversely affected by the lawyer's own interests or by the lawyer's duties to another current client, a former client, or a third person. Hawkins Parnell Thackston & Young LLP

26. Inherent Potential Conflict? • Will Client may seek lowest cost per service? • Will Client press for more work than necessary under AFA? • Will Attorney seek higher profit margin • Will Attorney seek to avoid work that would benefit client? Hawkins Parnell Thackston & Young LLP

27. ETHICAL ISSUES INHERENT IN THE TRIPARTITE RELATIONSHIP • Insured may second guess AFA where the fees are paid by a carrier • Motivation by attorney to trim unnecessary work may be seen by insured as a reduction in service • AFAs more workable where insured has SIR Hawkins Parnell Thackston & Young LLP

28. What type of AFA will work best for the situation? Hawkins Parnell Thackston & Young LLP

29. Fixed or Flat Fee PRICE = BUDGETED VALUE • Price charged for defined services • Shifts some of the risk of cost overrun to law firm • A total fee or segments of the service • Useful where there is litigation is most predictable Hawkins Parnell Thackston & Young LLP

30. Model for Determining Appropriate Flat Fee For Individual Matter • Based on ABA codes • Customized by inputting rates, likelihood of reaching certain phases and whether the firm has experience with similar cases • Experience in the area and trust in the relationship is key www.hawkinsparnell/casetools/flatfeemodel Hawkins Parnell Thackston & Young LLP

31. Time and Talent Projection • A detailed budget for tasks to be completed • And the talent necessary to complete them • Premised largely on the hourly rate systme • Provides predictability • Can be separated by tasks • Or based on a prediction of work Hawkins Parnell Thackston & Young LLP

32. “Prediction  is difficult, especially about the future.” - Yogi Berra Hawkins Parnell Thackston & Young LLP

33. Budget With Risk Analysis Hawkins Parnell Thackston & Young LLP

34. Contingent Fee PRICE = RESULT X AGREED PERCENT • Depends on Results Achieved • Price reflects different incentives for firm and client • Useful where there is recovery of damages • Useful where there is a quantifiable risk that all can agree to Hawkins Parnell Thackston & Young LLP

35. Shared Risk Contingent Fee Claimed damage: $10,000,000 Client’s estimated adverse verdict: $ 1,500,000 Settlement: $ 500,000 Saved $ 1,000,000 Less fees charged to date $ 300,000 Net savings $ 700,000 Contingent bonus = 700,000 X 20% = $ 140,000 Hawkins Parnell Thackston & Young LLP

36. Blended Hourly Rate PRICE = TIME X AVG(ALL RATES) • One rate applies to all hours • Rate usually negotiated by the client but can reflect weighted average of timekeepers rates • Risk that firm may not use the high value/experienced attorneys - can be seen as reducing profit Hawkins Parnell Thackston & Young LLP

37. WHAT ARE THE MAJOR ETHICAL RISKS OF ALTERNATIVE FEE AGREEMENTS? Hawkins Parnell Thackston & Young LLP

38. American Bar AssociationModel Rules of Professional Conduct Preamble – A Lawyer’s Duties [2]… As advocate, a lawyer zealously asserts the client’s position under the rules of the adversary system. Hawkins Parnell Thackston & Young LLP

39. Do AFAs make you less zealous? • Should I file the motion for summary judgment? • Should I travel to New York for the deposition? • Should I settle the case sooner rather than later so I can stop working on it? Hawkins Parnell Thackston & Young LLP

40. “The best way to predict the future is to invent it.”- Immanuel Kant, 18th Century Philosopher Hawkins Parnell Thackston & Young LLP