ABEL: End in sight for 'pig in a poke' hourly billing by law firms

June 29, 2009

 Imagine replacing some equipment at your business, at a cost of six figures. You choose a machine and the manufacturer's rep says, "We don't know for sure what we'll charge. We'll hold it a couple of years and bill you every month for our costs plus 20 percent to 30 percent. Then we'll deliver it, but it might not work at all."

You mutter, "What kind of idiot does he think I am?" head for the golf course, and spend a long time at the 19th hole. Maybe it'll make sense in the morning.

The scenario's crazy, right? Would never happen in the real world? Think again.

That's often what happens when a business hires lawyers on an hourly basis. You don't know what you'll pay, and you don't know what you'll get.

Some corporate counsel, fed up with excessive fees, have decided to "stop the madness." They've begun asking lawyers for alternative billing.

Last fall, the Association of Corporate Counsel issued its Value Challenge, calling for clients and lawyers to discuss and agree on "value-based legal services." A "value" approach can be hourly, but often is not.

One might expect lawyers to respond to client preferences, but corporate counsel say most law firms don't. Aggressive competitors will likely fill the gap as corporate clients face greater cost-cutting pressures.

One alternative—contingencies—long has been a staple of personal injury lawyers. Some collection firms also accept a percentage of cash they recover, but may charge additional "suit fees."

The contingency approach works for a plaintiff who may recover cash, but not for a defendant. The lawyer and client share the risk of losing the suit or being unable to collect. The lawyer alone bears the risk of inefficient legal work.

Conversely, a lawyer who can keep costs down en route to a recovery will make a bigger profit on the case. However, some cases can resolve or settle so quickly that the client may regret the percentage agreed to because, in hindsight, hourly fees may have been lower.

Both client and lawyer also must avoid allowing "efficiency" to become an excuse to skip legal work that is necessary for a good result. Achieving a favorable outcome should be the common goal for both the lawyer and the client—and usually is because, if the client doesn't have a good outcome, neither will the lawyer.

Flat fees allow a lawyer and client to agree on a fixed price. Unlike a contingency, the fee doesn't depend on winning, so the risk of loss is solely the client's.

However, clients receive predictable costs that in some circumstances may be lower than under an hourly engagement or a contingency.

This arrangement works best when the legal dispute is routine, and costs and recoveries are predictable. Unlike a contingency, it also works for defendants.

Another alternative—lower hourly rates coupled with bonus fees for successful outcomes—combines the risk allocation of contingency and flat fee approaches.

"Success" can mean recovering more than an agreed amount or, for a defendant, reducing the payout. The lawyer has ongoing income, but ongoing fees are less burdensome to the client.

Under a fourth alternative, clients and lawyers agree to a single, blended hourly rate for all lawyers in a firm. However, clients may worry that most work will be done by junior lawyers at rates higher than their normal rates.

Alternative fees are sweeping the country; They've just been slow to catch on in Indiana, which has been an "hourly" state for quite some time. However, even here, movement toward alternative billing is inevitable because corporate counsel and clients insist on it. Law firms that continue to bury their heads in the sand when it comes to alternative fees could be putting themselves at risk over the long haul. Clients increasingly demand that their lawyers offer alternatives and explain the corresponding risks and benefits. Lawyers ignore those client demands at their peril.•

Abel is a partner at Cohen & Malad LLP. Views expressed here are the writer's.

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