Thanks for all the wonderful feedback on my first newsletter, How to Choose a Law Firm. Your feedback was helpful and encouraging.
This month I am going to discuss alternative billing practices. Businesses and individuals are often motivated to seek alternatives to traditional hourly billing in order to increase the predictability of their legal fees. It is perfectly understandable to want to know what representation is going to cost before hand. After all, how else can you budget for the legal matter, or compare the fee rates among firms? Getting a handle on legal fees is an inherently difficult task. Legal fees for highly qualified practitioners in all areas of law, can literally range from $200 per hour to $1,000 per hour. Couple this with the difficulty assessing the quality and efficiency of services beforehand, and it is no wonder that clients want predictability and efficiency.
The sad truth is that almost anyone that has ever hired an attorney, regardless of the hourly rate, knows the shock of a runaway legal bill. Attorneys, well meaning or not, seem to always significantly surpass their initial fee estimates. It's Murphy's Law in action. Couple that with the fact that the cost of legal fees have risen incrementally every year for the past 20 years, and you have clients well motivated to closely manage legal costs and seek alternatives to the hourly rate.
Essentially, alternative fee arrangements are a move away from the billable hour, or fraction of an hour. It also pretty much comes down to a new understanding of how the risk is going to be shared between the law firm and the client. There are many ways to skin a cat. For example, you can approach an alternative fee agreement with fixed fees, phased fees, milestone fees, bonus fees, volume arrangements, contingency fees, or a disaggregation of services.
Alternative fee arrangements sound great but they don't work in many cases, and only about half of companies and law firms recently surveyed have embraced them. The problem is that practice of law isn't always predictable. Variables exist in both litigation and commercial transactions that are difficult to foresee at the outset of the representation. Opposing counsel may be out of control forcing your counsel to take actions he or she otherwise would not.
Do alternative billing practices really save clients money? Like "diversity", the concept sounds good, but does it really offer the client any benefit? The short answer is that depending on the type of representation, successful alternative billing arrangements can be crafted that meet both client and law firm needs. Moreover, given the downturn in the economy, law firms are now more willing to take more risks with alternatives to the traditional hourly billing arrangement in order to attract new long term clients. Clients can save money if they negotiate a sensible arrangement.
So, this month let's take a quick look at some of the most popular alternative billing practices that law firms are offering, or accepting, when asked.
How to Choose a Law Firm in 2011:
Part II - Alternative Billing Practices
Flat- or "fixed"-fee arrangements offer businesses predictability and shift the risk of cost overruns and inefficiency to the law firm. Flat fees provide additional incentive for attorney's to work efficiently because the correlation between time expended and profit is removed. Some flat fee arrangements provide for a single fee for the entire representation. Firms are unlikely, however, to agree to an overall flat fee unless the course of representation is very predictable. More commonly, a firm will break up a representation into phases and flat fee each phase with some exceptions for unexpected events. This helps a client budget and follows the usual way estimates are crafted by firms. Flat-fee arrangements work especially well for routine matters like loan closings, leases, registrations, boilerplate agreements and collection cases. These matters often involve a well-defined scope of work and limited complexity, and may be handled in volume.
Establishing a flat rate for litigation is more difficult and many firms are reticent. While a set fee can be established for sending a demand letter, filing an initial complaint or for certain responsive pleadings, no one can predict the number of motions that will be filed by opposing counsel. A firm might be willing to set a flat fee per deposition, but it is usually impossible to tell how many depositions will be needed or where they will take place. Law firms cannot be expected to take on these risks and variable expenses. Many firms will set a flat fee for different phases of litigation, but expect such arrangements to be hedged and maybe complimented with an added success fee. Expect to carefully negotiate the terms and conditions of any flat-fee arrangement.
Hybrid arrangements provide flexibility and creativity in
establishing a fee. They may encompass any combination of billing methods. Here are some examples to consider:
(1) A flat fee arrangement that including an hourly component for contingencies not anticipated in the flat rate.
(2) An hourly or flat-rate agreement which includes a results-oriented or time-oriented contingent success fee.
(3) An hourly arrangement for the entire representation or for specific tasks with a cap.
(4) A staffing arrangement that sets the number of hours certain partners and associates will work on the case, and/or sets the specific tasks that partners will work on.
(5) A monthly burn rate cap regardless of hours spent by the firm.
Blended hourly rate arrangements are often touted as an alternative fee arrangement. In this arrangement, a single hourly rate is set for all attorneys regardless of experience. Unless a staffing agreement is used to set out the specific lawyers assigned to a matter and the specific work, or type of work, each would perform, there is not enough accountability. I would avoid this type of arrangement. Better to just specify or limit the number of hours your chosen partners will work on a matter, and agree that associates will perform the rest of the work.
Fixed monthly retainers or subscription arrangements are often used for business clients that have well identified repetitive day to day legal services needs. I often act as a part time general counsel for my business clients. Many times, I will work on a monthly retainer basis and handle an agreed upon set of routine legal needs. In such cases I am trading a much lower hourly fee for a level of monthly invoice security. This often works well for both parties.
The contingent fee arrangement is hardly new, but in reality it is an alternative fee arrangement to hourly billing. Contingent fee arrangements have typically been used for personal injury and collection cases, and they are viable arrangements in any case where a plaintiff stands to collect a significant sum of money. Attorneys have a tendency to cherry pick these cases so if you are turned down more than once you can be pretty sure your case is weak or overly-complicated. Consider such an arrangement if you have little capital to pay legal fees as you go but digest the fact that you will be giving up 30% or more of your winnings to your hired gun.
Unbundled services arrangement works for those more sophisticated clients that like to do part of the legal work themselves. It also works for companies that have a wealth of template agreements that they have used for years and don't need assistance with negotiating business terms. The idea behind unbundled services is simple: the tasks are split between the client and the attorney and the client pays on an a la carte basis. Unbundled services generally work best for "assisted pro se" matters, where the client needs a lawyer for the hard parts (pleadings, briefs, coaching, etc.), but can otherwise do the work.
In conclusion, alternative fees make sense whenever time is a poor measure of the value of the work performed. They also make sense where the result is what matters most to the client.
Consider alternative fee arrangements every time you have a need. Don't hesitate to suggest an alternative to the hourly rate in your initial discussions with either a new firm or your existing firm. Law firms are not shy about telling you when they don't think an alternative arrangement makes sense. Remember, firms are most comfortable agreeing to flat fees and other alternative arrangements when they are familiar with the matters and issues you are bringing to them. Firms that specialize in a particular area, are generally more comfortable with alternative arrangements. Moreover, they are likely to have a robust - and constantly improving - set of documents to work from.
Do your homework. Sophisticated clients typically know what a matter is worth to them to a large degree depending on the type of case and they don't need to be beholden to the firm to tell them what it's going to cost. For example, a company faced with an infringement lawsuit will have to balance the cost of uncertain litigation against the cost of a licensing settlement. In a case like that, where what you are willing to spend is limited, it makes sense to proactively seek an alternative arrangement that will effectively cap your legal fees on a phased basis.
The bottom line is that a good relationship with your attorney, regardless of fee arrangement, is based on a high level of trust. Many folks who are uncomfortable with the hourly rate believe that their lawyers are not motivated to be efficient because it is against their interest. Clearly, there are unethical and dishonest attorneys to be avoided who simply churn work to increase the bill. If you suspect that your counsel would intentionally be inefficient and would not be focused on achieving a great result, then shame on you for having retained them. The best lawyers I know are far more focused on the long-term relationship with their clients than the short-term revenues on any particular matter.
Next Month I will be discussing how to manage your legal counsel, and how to monitor your legal invoices. Find out if you are being treated fairly, and how to keep your counsel efficient and on their toes. Learn how to watch out for common billing mistakes.
Welcome to the Law Firm of Mark Garfinkel, Esq.
We are a boutique business law firm that proudly serves both international and domestic clients. Our office is located in an old Victorian in downtown Berkeley Springs, W.V., which is about an hour outside of the WDC metro area.
The founding partner, Mark Garfinkel is admitted to practice in the District of Colombia, Maryland, Pennsylvania and West Virgina. Prior to founding the firm, Mark was the General Counsel of OPIC in WDC (www.OPIC.gov
Prior to founding his law firm, Mark was the VP and General Counsel of OPIC in WDC where he was responsible for closing hundreds of overseas projects.
Mark is an experienced business and corporate attorney with both domestic and international clients.
He is also a commercial mediator who relishes solving business disputes without legal fighting.
See his website at www.garfinkellaw.com
to find out more about his practice areas.