By: Brian D. Kaider, Esq.
Every business has legal needs that require the assistance of an attorney. Like other small businesses, most breweries and distilleries do not have the resources or the need to hire a full-time, in-house general counsel. But, with the high cost of legal services, many owners only contact an attorney as a last resort. A fractional general counsel arrangement offers a flexible solution.
What is a Fractional General Counsel?
In broad terms, a corporate attorney can be an in-house counsel, which is a full-time employee with a salary and benefits, or an outside counsel, which is an independent contractor. Outside counsel work under a variety of fee structures, such as an hourly rate, a flat fee, a retainer, or some combination thereof. Flat fee arrangements are typically used for a specific, defined project, to be completed at an agreed upon price, often paid in advance. Retainers are often a fee charged in advance by the attorney and held in an escrow account. As the attorney completes work, fees are transferred from the escrow account to the attorney. In some cases, when the retainer drops to a certain level, the client is billed to replenish the funds.
A fractional general counsel is slightly different. In this arrangement, the client pays a fixed fee for a certain amount of the attorney’s time, usually on a weekly or monthly basis. What happens if the attorney works more or less than the allotted time can vary significantly, as discussed, below.
Benefits of a Fractional General Counsel
The benefit of a fractional general counsel versus a full-time in-house counsel is obviously a lower cost both in terms of salary and associated benefits. But, it also has advantages over other forms of outside counsel. Typically, the fees are lower than the attorney’s standard hourly rate. More importantly, the arrangement gives the client a predictable cost it can include in its budget. This certainty benefits the attorney, as well, particularly for solo practitioners and members of small law firms. As legal workflow is often cyclical, the certainty of income associated with a fractional general counsel arrangement helps to balance slow periods in the practice.
Many small business owners only seek the advice of their attorneys when a situation is critical, because when working with an outside attorney on an hourly rate, they think about how much it will cost every time they pick up the phone. By contrast, when working with a fractional general counsel, a certain amount of the attorney’s time is already reserved to the client. This results in a much more collaborative relationship, in which the attorney becomes an integral member of the team and has a deeper understanding of the business. Over time, the attorney develops institutional knowledge about the company that fosters better legal advice.
Issues to Consider
Despite the many benefits of a fractional general counsel arrangement, there are several issues that should be considered before taking the leap. First, estimating how many hours of legal services per week/month are needed can be difficult and different attorneys handle overages and shortages of those hours in different ways. Some will roll over unused hours to the following term. That model is essentially an agreement for pre-paid legal services. Others take the view that the agreement requires the attorney to allocate a certain number of hours to be available to the client during that month, so the fee is earned whether the hours are used or not.
If the attorney works more than the allocated hours, they are often billed at an agreed hourly rate. Alternatively, there may be a built-in buffer of ten percent, for example. So, if the contract is for 20 hours per month, the fee would cover 18-22 hours of legal services. If fewer than 18 hours were used, they would roll over to the following month and if more than 22 hours were used, they would be billed at the attorney’s hourly rate. It is also a good idea to build into the agreement a periodic review of usage to determine whether it makes sense to increase or decrease the estimated need.
This raises another issue to consider when deciding whether a fractional general counsel arrangement is a good fit; they usually require a commitment to a minimum term, such as; 12 months, 6 months, or at least 3 months. This is because the purpose of the arrangement is to promote an attorney-client relationship that fosters a deeper understanding of the business. If the client’s goal is simply to lower the cost of legal services for a specific, short-term project, the better approach is to negotiate a flat fee with the attorney. Typically, if a client terminates a fractional general counsel arrangement before the minimum term, the fee structure will revert to the attorney’s standard hourly billing rate, which will become immediately due.
Regarding the types of legal services they will likely need under the fractional general counsel agreement, the client should carefully consider the expertise and experience of the attorney or firm. As the name suggests, a “general counsel” has broad knowledge of a wide variety of legal issues a business needs. But, there will likely be gaps that have to be filled with other attorneys. The agreement should be clear about the fractional general counsel’s role in managing these outside attorneys. Because of this issue, it may seem that a large firm would be the best candidate for the role, because with more attorneys there are likely to be fewer gaps. There is a risk, though, of losing one of the primary benefits of a fractional general counsel, which is having a single attorney with a deep understanding of the business. The bigger the firm involved, the more likely the attorney in charge of the representation will be out-of-touch with the actual work being performed by other, usually junior, attorneys.
Who Should Consider a Fractional General Counsel?
When is the right time for a brewery or distillery to consider a fractional general counsel? While most small businesses can benefit from these arrangements, there are two stages when they can be particularly useful; at start-up and before a planned growth. At the earliest stages of the business, there are a wide variety of legal needs, including; formation of the entity, creating operating agreements and other contracts, obtaining licenses and permits, registering trademarks, negotiating a lease or land purchase, etc. Having an attorney that can handle and/or manage all of these areas can alleviate stress and allow the owner to focus on the many other issues requiring attention. For first-time owners, there will also be many questions along the way. Having an attorney who is on the team allows those questions to be answered without having to worry about getting a bill every time they pick up the phone.
An established brewery or distillery that is entering a growth phase presents many of the same types of issues. They may need to restructure the company or negotiate new leases or land purchases. Changes will need to be made to their licenses and permits, etc.
Does this mean that companies falling in between start-up and expansion are not right for a fractional general counsel? Absolutely not. This is the stage when the deep understanding coming from a long-term relationship can really shine. An attorney who is familiar with the business can more accurately audit existing contracts to assess any legal exposure or where improvements can be made. If the business has registered trademarks, routine monitoring should be undertaken to ensure they are not being infringed by other companies. Internal regulatory compliance audits can identify vulnerabilities before action is taken by the government. In other words, the fractional general counsel can focus on more in-depth legal issues for the business once it is outside the frenetic start-up stage.
Conclusion
Eventually, some breweries and distilleries may need to hire a full-time in-house general counsel. Most will never get that big. But, having an attorney who is deeply familiar with the business and can handle most of the company’s legal needs is a tremendous benefit. Traditionally, outside attorneys are hired on an hourly or flat fee basis. But, the fractional general counsel arrangement offers several advantages, including, lower fees, predictability of legal costs, and development of institutional knowledge in the business.
Brian Kaider is the principal of KaiderLaw, a law firm with extensive experience in the craft beverage industry. He has represented clients from the smallest of start-up breweries to Fortune 500 corporations in the navigation of regulatory requirements, drafting and negotiating contracts, prosecuting trademark and patent applications, and complex commercial litigation.
