Small business owners face myriad legal challenges – they need a good lawyer. But, unlike bigger companies, small businesses often lack the resources to hire in house counsel, let alone maintain an entire legal division. Yet, legal questions abound.

  • How should you protect your intellectual property?
  • How do you comply with permit or licensing regulations?
  • What kind of contract should you use?
  • How do you make sure you’re following all the rules regarding your employees?
  • What if a dispute gets out of hand and you are forced to sue?

Of course, few small business owners have the money to hire big firm attorneys, especially in the early years of a venture. Economic crisis or no, entrepreneurs must spend their legal dollars wisely.

WHEN CONSIDERING LITIGATION, YOU HAVE OPTIONS
Fortunately, if you must sue – or many times even if you are sued – hiring an attorney who bills exclusively by the hour is not the only option. Small business owners in particular stand to benefit from hiring an attorney willing to share the risk, or at least to understand your business well enough to consider using some kind of alternative billing method. An increasing number of companies – including even huge ones like Pfizer and DuPont – are requiring alternative fee arrangements as frustration with the billable hour grows. Rather than paying in litigation for the time spent doing the work – or paying for effort – risk sharing arrangements offer small business owners the opportunity to tie the attorney’s financial interests to the business’s. While billing by the hour in the initial stages of a case may make sense (while the client and lawyer get to know one another, and the lawyer spends the time necessary to learn the client’s matter and needs), a well-structured alternative fee arrangement may be used to align the financial interests of both parties for the majority of the life of the case. One simple set-up is a mix of a sensible and modest monthly fee, which itself gets credited against a success or contingency fee. The success fee is directly linked to the value obtained by the small business owner, whether plaintiff or defendant. For instance, it might be some percentage of a recovery, if there is one, or other benchmarks such as winning a motion to dismiss, or settling the matter in a certain time and below a certain amount, or successfully completing a transaction.

This type of alternative fee system is gaining popularity not only with big corporations but also at several prominent law firms. As David Boies, the chairman of Boies, Schiller & Flexner, LLP notes, such fee arrangements are beneficial to firms since they result in “increased efficiency, more success in the practice of law, and client satisfaction.” Essentially, entering into a value-based agreement – rather than an effort-based one – ensures that counsel remains focused on business owners’ needs and success as opposed to billing more hours month after month.

By sharing the risk with their own attorneys, business owners’ fear of litigation is mitigated. Risk sharing allows an entrepreneur to establish a level of trust between herself and her counsel, since the client’s and the lawyer’s interests are essentially the same – to win in the case, whatever the client and lawyer jointly decide that “winning” means. Moreover, because risk sharing arrangements are generally entered into by attorneys at small firms, a level of familiarity between business owners and their legal counsel develops. Put frankly, such a relationship is unlikely to evolve when outside counsel is from a big firm. In a sense, then, counsel can become a part of the business rather than a costly (if necessary) burden.

FOCUSING ON VALUE IN NON-LITIGATION MATTERS
Even in the absence of litigation, small business owners must rely on legal counsel for more mundane but equally important issues such as tax, employment, and environmental regulation. In non-litigation matters, several alternatives to the billable hour still exist. For instance, the attorney can become invested in the business by receiving equity in the company (though the lawyer and client should be aware of potential ethical and malpractice insurance concerns in such circumstances). Alternatively, flat rate fees – paid in return for successfully completing a particular legal task – also incentivize both quality and productivity; the lawyer wants to get the job done quickly, and if he wants to get more business from the client, he had better do it well.

GET IT IN WRITING
After deciding on legal counsel, it is essential to confirm that the attorney and business owner are both fully informed. All components of the arrangement should be put in writing. The rules of court of many states require written retainer agreements; furthermore, having engagement terms in writing allows for an understanding of what services will be provided, how the retainer will be handled, what expenses should be covered, what the success fee entails, and so forth. The primary reason for having a sufficiently comprehensive engagement agreement is not as a matter of trust, but rather a matter of requiring mutual understanding.

By inviting counsel to be a part of a small and growing business – either on a project or ongoing basis – both client and lawyer have the opportunity to be entrepreneurial and creative. Now more than ever, small business owners have options: rather than deal with the stress and tension caused by exclusive reliance on the billable hour, entrepreneurs should seek sophisticated representation by counsel whose interests are aligned with their own.

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John G. Balestriere is an attorney at Balestriere Fariello, a trials and investigations law firm which represents business clients in risk sharing litigation. He can be reached at john.balestriere@balestriere.net and at +1-212-374-5401.

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