Over the past few years I have gotten to know Ray, he has written several op-ed articles for us, and about once a year we catch up with him in an on the record interview. What prompted this interview was seeing an announcement that he and his firm are now offering flat fee defense representation in patent litigation matters. Ray Niro defending a patent infringement case? I have to admit I didn’t realize he did defense work, so I wanted to talk to him about this new business model. He agreed.
In order to discussing his defense activities, we also discussed the failure of patent reform, the inevitable future patent reform efforts that are now a permanent feature of political activity in Washington, DC, and the recent Supreme Court patent decisions from the October 2013 term.
Without further ado, here is part 1 of my 3 part interview with Ray Niro. To read our previous interviews please see IPWatchdog Interview with Ray Niro.
QUINN: Thanks for taking the time to chat with me, Ray. I really appreciate it. It’s always good to talk to you.
NIRO: You’re quite welcome, Gene.
QUINN: There are a lot of things I’d like to cover with you because we’re finding ourselves in a very interesting time in the patent industry now, with Judge Rader stepping down and the Supreme Court coming out with its patent decisions. But the thing that made me reach out to you was the fact that I see your firm is now going to be accepting some flat fee patent defense work. I want to talk to you about how you came up with the idea, why you’re doing it, and I have to admit I didn’t realize that you were doing much defense work. I know it’s a very open-ended question so you can just take it where you want to go.
NIRO: Well, I think we’re known for plaintiff patent work and that’s principally because we were early, very early in pioneering the use of the contingent fee in patent litigation. I have always believed, Gene, that the contingent fee best aligns the interests of the client and the lawyer. The reason is that any success of the lawyer results in success for the client and vice-versa. The billable rate doesn’t do that. I am sure you have heard the saying lawyers always win. The lawyer benefits whether the result is good or bad. And we found that a lot of small to intermediate companies and startup companies and entrepreneurial inventors needed the contingency approach in order to stay in the game. They couldn’t afford $4 million or $8 million in fees that the typical patent case requires if it goes through a trial. So a natural outgrowth of that frankly when you transfer it to the defense side is a reverse contingency. Could we figure out a way so that the interests of the client could be better aligned with the interests of the lawyer? And the fixed-fee defense was an approach that we thought would work. We used it with one very major client who had been locked into a lengthy and expensive litigation. It was in the Eastern District of Virginia as I recall. And the client was spending in the neighborhood of $500,000 a month in fees. It eventually concluded that, even if it was a big company, it simply couldn’t continue that cycle. So they asked us if we would consider a different arrangement and we agreed to do the case on a fixed fee. We set a budget and it was well below $500,000 a month. And we said we’ll do the case at that fee, win or lose, no matter how long it takes, whether it’s a short, quick resolution or a lengthy jury trial. And it turns out that we were able to turn that case around, win a critical summary judgment motion and then propel them into a very, very favorable settlement. Which was a fraction of what their liability was and a fraction of what the other side had been asking for. That client felt this fixed-fee defense was a fantastic model. They liked it. So we’ve decided to broaden the approach and offer that to more and more clients.
QUINN: Yes, I suspect it strikes some people as odd that you would do that or that you even could do that. At the very beginning of my career I spent time doing litigation. And we did a bunch of contingent fee litigation in general. And a thing I learned was if you really are honest about the cases that you’re bringing along you can realistically set a budget and have an idea of how much they’re going to cost and what is involved. Now sometimes you are wrong, but sometimes you get out of these things easier and quicker than you thought. So it seems if you’re honest with yourself it plays out as a wash. Is that your experience?
NIRO: Yes, yes. And in fact, there’s risk associated with a fixed fee. The risk is that the hourly rate time that you spend vastly exceeds the value that you’re going to get from the fixed fee. You have that same risk in a contingent fee case. You evaluate it. You say okay to the client. The client pays the expenses and we get 35% of any recoveries. But you don’t know whether you’re going to get any recoveries or the magnitude of those recoveries. And if you don’t get what you project, well, that’s a loser, right?
NIRO: It’s a loser for the law firm in the sense that it is not capturing the contingent fee. The other thing, Gene, that I have experienced, and I’ll bet you’ve seen it too, is that big firms are built on a pyramiding scheme. They have people at the top and then you graduate down in a triangular formation so that you oftentimes have to keep the people at the bottom, the junior-most people, very busy in order to feed the people at the top. That’s the pyramiding scheme as I see it. And that’s the technique that’s been used in law firms for years. The problem with that, especially in the defense arena, is I see these cases loaded up with lawyers piled on top of lawyers. I was talking to a young lawyer the other day who was number ten in the food chain in a case. Can you believe 10 lawyers? Insane.
QUINN: Oh, my goodness.
NIRO: And billing at a hefty rate. So you’ve got huge amounts of money being billed by junior lawyers that don’t do anything except sort documents. Our young lawyers, because of the contingent fee model that we had from the plaintiff’s end of it, have got lots of trial experience. So what we bring to the table, I believe, is an efficiency in handling cases that make the fixed fee doable. That is, we can estimate what we think it’s going to cost and we can do what’s necessary to win the case without loading it up with a bunch of lawyers that really don’t have the skill sets our young lawyers do yet, but bill like crazy. I mean if you look at some of the billing rates, it’s just unbelievable what these firms are charging.
QUINN: I know. I mean it’s amazing that they can get away with charging what they do charge. And I agree with you. I haven’t necessarily seen ten attorneys but you see and hear these conference calls where the other side has only one person talking and there’s five or six other attorneys just sitting there. And you’re wondering what is this call costing the client, like $6,000 an hour?
NIRO: Well, I’ve seen status conferences where you have eight lawyers on one side of the case. I mean you don’t need eight lawyers to report to the court what the status of the case is. So they’re padding it.
QUINN: Right. When I was practicing, the partners didn’t even go to status conferences. They would send the associates. All it is is scheduling and the judge is only going to give you like a week here, a week there, you know?
NIRO: Right. You don’t have to staff the case in an overkill mode. Now, why does it happen? Well, you have insecurity. Here’s assistant general counsel, general counsel of the company or patent counsel of a large company and if things go bad, management might say, hey, why did you use this upstart law firm? In-house counsel want to be in a position to say, well, we picked the biggest, most prestigious firm in the country, or one of them, so we did the best we could. There is a huge premium they’re paying for that. And the premium they’re paying is millions of dollars in excess fees that aren’t necessary to get the result that they should get. So you’re finding the more entrepreneurial general counsel. And there’s a lot of pressure on them to keep the budgets low. You’re finding more entrepreneurial in-house people saying we want a better handle on expenses and there is some pressure to move toward a fixed fee. We like it from the defense standpoint. We still like the contingent fee from the plaintiff standpoint. And in the right case you can have a reverse contingency. That gets a little trickier because you almost have to say well, what is the benchmark against which you apply the fee? In other words, if I win the case and you’re free to go sell your product, do I get a percentage of the sales of the product or do I get a percentage of what you would have paid if you lost? It’s a little more difficult and I think the fixed fee lends itself more to the defense end of it. Now, you’ve got to do some homework in advance to make this work.
QUINN: Have you gotten involved in any of those creative situations that you were just mentioning?
NIRO: I have. I have. I did a defense contingency, reverse contingency where we—and you’ve got to do it upfront—you have to have an agreement with the client upfront. And we had an agreement and it went something like this. If we’re successful in avoiding a preliminary injunction, we get paid X. If we’re successful in avoiding a permanent injunction, we get paid Y. If the damages are zero, we get paid Z. If the damages are a million, we get paid double Z, and so forth. So we had these benchmarks that were performance and result related. And then we picked, negotiated a number that our fee would be. Now, what that number was was a multiple of our hourly rate fees. For example, if we were successful in winning the case so the client didn’t have an injunction and paid zero damages, then we might get three times or four times our hourly rate fees. And that varied. So it was a matter of negotiating an acceptable approach. And we used that and it worked, it was good; everybody was happy. You can’t do it on the fly though. It has to be done in advance.
QUINN: Right, because, like so many things, people have to know what they’re getting. And I suspect in any deal it’s attractive to both parties as long as there’s uncertainty.
NIRO: Well, that’s right. It has to be done upfront. It has to be fair. Everybody has to say I’m okay with this. You know, I’ve had the experience in a contingent fee situation where we do the fee and, this is rare but I’ve had it, the stars align perfectly after the filing of a complaint and a minimal amount of work yields an enormous sum of money. And I’ve had clients come back and say well, gee, you made a lot of money for very little work. To which I say, well that’s true, no question. But that was our deal. And how would you feel if I came back to you and said—assume the case became extraordinarily complex and we had to spend three times our hourly rate time and that led to a result in which we lost a huge amount of money based upon our hourly billing rates. Would I be able to go back and say pay me more money? The answer to that is no, of course not. That wasn’t the deal. So you’re going to have what appear to be windfalls either way in a contingent arrangement. The lawyer might get more money than the hourly rate. The lawyer might get considerably less than the hourly rate. But that’s the risk that each side takes.
QUINN: Right. It seems like there really is a need for this because in the patent prosecution world for years there’s been a move towards flat fees and cost certainty. And that just hadn’t seemed to be the case in patent litigation. And I suspect that once clients see this, even if they do find themselves on the wrong end of a windfall like you described, from the corporate perspective, it gives them a lot of certainty going into these things. And I suspect also makes it easier for them to make the decision on the front end, which is where it absolutely has to be made, to fight what they believe to be frivolous cases.
NIRO: Right, right. I had a potential client come to me and it had spent $17 million in fees, this was on the plaintiff’s side, to get a recovery of $4 million.
QUINN: Oh, my god.
NIRO: And the potential client was very unhappy. “Why did I have to spend so much money?” And the short answer is you didn’t. You spent it because the case was over billed, over staffed, over tried. That’s a bad situation and I think the more efficient handling of cases is the way you want things to be. The proposal we have is designed to create efficiency and certainty for the client. Efficiency because the lawyers are going to be motivated to stay within the budgetary constraints but still get a good result because there’s going to be an integrity factor here. And two, certainty because the client knows in advance this is what I’m going to pay every month.
NIRO: I’m not going to pay one penny more or one penny less.
NIRO: So that’s why I think that this is an approach that’s attractive. And I think that just like the client I mentioned that was ecstatic about it, I think you’re going to find more and more people are really jumping on the bandwagon to do this. And we do and want to do defense work as well as plaintiff work.