Once a small company having no in-house legal staff finds itself in litigation, it already has lost since the legal fees it pays may be large with respect to the company's size. In the U.S., losers do not have to pay the winner's legal fees, except in the case of frivolous suits, which are rare. Larger companies already have their own legal staff so the incremental cost of litigation for them may be small. Unfortunately, there is no pro bona program for companies that cannot afford legal defense. Small companies therefore must take actions to reduce potential legal costs. The follow steps can reduce legal costs substantially:

1. When at all possible, don't litigate - negotiate.

2. Put into contracts a clause requiring the losing party to pay the winning party's legal fees.

3. Put an arbitration clause into contracts. Note that arbitration is binding and enforceable in court whereas mediation is non-binding.

4. Purchase the broadest possible insurance policies in order to have the insurance company pay legal costs.

5. Whenever possible, specify in contracts that any litigation be in your own state. The costs of going to court are much higher away from home.

Two types of attorneys are litigation attorneys, who resolve disputes, and transactional attorneys, who structure transactions, for example, by writing contracts.

A significant portion of venture funding goes for advertising and legal fees. Lawyers usually make their money through hourly fees. Contingency may be used in litigation of collection cases and personal injury cases. Under contingency, lawyers may take 1/3 to 1/2 of the award; this amount is negotiable. More recently, especially in California, some attorneys have begun to accept equity as partial payment for their services.

Billing rates range from $100 to $500 per hour and are billed in 1/10 of an hour increments. So one phone call would result in a bill for at least six minutes of time. Billing rates are determined by:

1. Size of the law firm

2. Years of experience of the attorney

3. Degree of specialization of the attorney - more specialized attorneys have higher rates.

Usually, charges are added for copies, faxes, printing costs, etc.

There often is no fee for the initial consultation. The partner with whom one meet probably is not the one doing the work, so it might be a good idea to ask to meet the person who actually will be working on the case. Many large law firms ask for an up-front retainer of a few thousand dollars.

Sometimes, the attorney may not perform as well as expected. In such cases, there are two possible remedies:

1. Legal malpractice tort - lawyers should perform at a reasonable level as expected by the community. If the performance drops below the standard, the situation is one of malpractice, and monetary damages can be claimed.

2. File a complaint with the state Bar for violation of ethical standards. This option does not allow monetary damages to be collected.

Four ethical standards:

1. Conflict of interest - an attorney should not represent a client for which the representation would damage another client. If an attorney has an equity interest in a client company, there may be a conflict of interest since the attorney is a minority shareholder but represents the majority shareholders.

2. Confidentiality - attorney-client privilege protects disclosures that clients make to their attorneys in confidence. Attorneys usually do not sign non-disclosure agreements because they see so many different ideas.

3. Communications / counsel - all communications must go through attorneys. Attorneys should not contact another attorney's client.

4. Imputed disqualification - none of the lawyers in a law firm should represent a client that any one of them should not represent. For example, the legal opponent of one of the clients represented by a lawyer in the firm should not be represented by any other lawyer in the firm.

In this case, Simpson is an entrepreneur and Bold is his attorney who also invested in Simpson's business. The business failed and Bold sued Simpson for negligently managing the investment. Simpson filed a counterclaim against Bold claiming legal malpractice in advising the structuring of the company and violating his fiduciary duty as a director of the company. Bold claimed that he had told Simpson that he was not qualified to advise the company in securities law issues and that Simpson should find a qualified attorney, but Simpson claimed that Bold was representing him in all legal aspects. Simpson's countersuit won, and Simpson was award $325,000 for legal malpractice, but Bold appealed. In the appeal, the court vacated the award of $325,000.

One lesson from this case is the importance of knowing the scope of the engagement. Bold had not agreed to advise on security law. An engagement letter always should be written by the attorney.