1. The Problem: High and Unbudgeted Fees

Most business ventures involve some risks which the law firm eliminates in the hourly engagement. The arrangement provides for payment regardless of result, or the relationship of fees to outcome, with the client obligated to pay for unexpected costs, delays, contentious parties and their counsel, new factual or legal issues, lengthy discovery, and other factors.  While this has been mitigated to some extent by budgets, negotiated rates, and consultation, significant problems continue for  the typical company.  

Consider an example. Smith Company has an unpaid bill of 80,000 and faces what it considers a spurious claim of product problem. A  large firm  undertakes the representation. To reduce costs, it provides  a 15% discount  and a case budget with  a recommendation for alternate dispute resolution. A detailed demand letter fails to provide the desired response, and the matter proceeds through discovery with depositions and document requests, and is resolved the day before trial for 42,500. The firm’s bi-monthly billings total 78,000, reflecting a final discount of 5,000, and a net negative of $35,500 to the client. Some observations,

Cost: The traditional methods of controlling costs: detailed budgets, consultation on objectives, hourly rate reduction, and scrutiny of invoices,  were insufficient to make the case economically viable, having generated a $35,000 net loss. Only a contingent or fixed fee (of less than the recovery) would have been sufficient to create a net economic benefit.    

Economics: The large firm handled the matter as best they could, but the case could not be economically handled based on its billing structure. The firm failed to provide real value for its experience or expertise.      

Prediction: One chief cause of unproductive litigation is unrealistic expectations. The hourly structure generated undue optimism with the notion that a letter would resolve matters or a defendant would embrace alternative resolution. Discussion of alternative billing tends to flesh out real positions and encourage candor, at least from the attorney. The likely unwillingness of the firm to utilize a contingent billing would reveal that it would be  unrealistic to expect an early settlement.              

Criterion for Success: Some cases are litigated to deter similar claims or other non-monetary reason. Corporate counsel needs to define objectives at the onset determining whether net economic benefit is the criterion, or something else. 

A recent study showed over 35% of law graduates looking for law-related work, and an oversupply of lawyers. One basis question is  why don’t large companies obtain legal services on a fixed or contingent based rather than the hourly arrangement customarily used. 

2. Historic Lack of Alternatives 

Traditionally  the large company found a number of firms eager to service it, but with all sharing the  same basic billing structure.  In commercial litigation, part of the reason was the length of these proceedings and the difficulty of predicting that time or the result. 

Cost structures in large firms are based upon hours billed, with yearly requirements standard. Even with  some variation in collectability, the hourly model provides predictability and structure. The contingent or fixed fee model entails unpredictability and unexpected costs, assuming  the attorney can adequately predict future events based upon a version provided by one side, and imposing substantial penalty in uncollectible time when the firm guesses wrong.      

It is undoubtedly easier to secure clients through favorable billing arrangements. Allowing alternative arrangements would mean partners could meet firm targets through these less profitable agreements. The large firm typically has a central committee making general policy. Having a confusing mélange of fee agreements and arrangements would make budgeting, case-handling, and compensation  difficult. Notwithstanding some pressure, many firms are doing reasonably well with their existing model and perceive their task as expanding it with specialization  and improved service. 24/7 customer service and increased familiarity with their client’s business are standard practices. The large firm is unlikely to embrace  fixed fee arrangements on a large scale soon.

3. Why things Will Change

Thus the  obvious question is why won’t things stay the same? The manner in which the typical large company creates its product  has dramatically changed. A quarter century ago, a typical Fortune 500 company would likely have had another large American company as its supplier. Today, the company may utilize a foreign supplier for goods, and another country’s staff for customer service to reduce costs. Achieving cost savings throughout the company has been the method that companies like Dell and Walmart have achieved success, searching for suppliers sometimes  10,000 miles away, and evaluating  costs to the penny with sophisticated computer models.      

To intensely limit costs throughout the corporation, but simply accept large unpredictable bills in the legal area makes little sense. Why would one assume that product quality and servicing customers are less important than the average legal project. Indeed a  number of large corporations have focused budgetary scrutiny on  their legal departments. Nelman (8). One cannot assume that companies will effectively estimate and control costs in everything but the legal department. 

The oversupply of  new  graduates creates the opportunity for firms to hire attorneys at lower salaries and translate the benefit to clients in not only lower rates, but arrangements which shift some of the risk to the law firm.  

4. New Partners for Provide Fixed Fees and Alternative Billing  

With the incentive and flexibility to offer different fee arrangements, small and medium sized firms can be expected to be the first ones to offer them. A single attorney may be able to make a determination in a small entity, and there may be no entrenched company policy. In a competitive legal market, smaller firms will offer competitive arrangements to secure new business. 

General counsel may have to search somewhat to locate these partners. Just as the large company in the 21st Century looked for supply partners in new areas to save costs, corporate  counsel may need to  search to locate the qualified firm that can offer cost-effective billing.       

5. Which Cases To Shift  to Alternative Billing 

Fixed fees will represent but a portion of a company’s legal work. Some cases have tremendous importance. When Toyota confronted claims of unexpected acceleration, and Merck a recall for a widely used drug, the companies chose the firms they considered the most skilled  in the area. In these high-profile cases, cost considerations occupy a subsidiary role, at least in the initial stages. But most cases are not like this. The typical company will deal with $50,000 contract disputes, employment discrimination cases expected to resolve themselves for five and low six figures amounts, and a wide range of smaller projects and pieces of litigation. Allowed these cases to proceed on a hourly basis may mean legal fees approach or exceed the amount in dispute. See Trachsel (1) (“The typical minimum cost of litigating through trial a case in federal court is $250,000, and figures of more than $1 million are common”). The first step for in-house counsel is making an assessment of the case’s importance and possible exposure.

It’s tempting to overestimate potential exposure or the benefit of a vigorous defense by a large firm. About 97% of cases settle, and one obvious figure for resolution is the defendant’s cost of defense. If an employment discrimination case presents itself on the day of trial, the judge or plaintiff’s attorney might estimate a cost in the 75,000 for the defendant to try the case. An aggressive settlement-oriented judge might suggest a settlement of 40-50,000 which provides a net saving, even leaving aside potential  exposure. However, if the company reached an agreement to try the case for a fixed fee of 20,000, that lower figure would enter negotiation, and also provide a deterrent for future litigation. The company’s ability and willingness to economically try cases provides a deterrent to future litigation.

The modern company will try to avoid paying twice: once for liability and legal fees. As a defendant, good cases should be acknowledge and resolved.  Weak cases should be defended and if necessary tried. Isolated large verdict should not mandate prohibitively costly defense. Instead the modern company will be able to aggressively defend mediocre claims at a reasonable cost. 

6. Creating the Alternative Fee Paradigm

Initially the company needs to select a group of cases or matters it believes are suitable for alternative or fixed billing. The next  step is to arrange for several meetings or other forms of communications to review potential representation. The company may not want to being with a particular price, but assess bids or proposals. Some work could be needed locating potential firms since the hourly fee remains the predominant arrangement. Just as firms in the last decade communicated with China to seek cost savings, the aggressive corporate counsel may seek out partners and suppliers to effect  savings for his company. On the other side, as the gates open, the small firm will want to seek opportunities for alternative fee arrangements.

In discussions, the company will see changes in approach. The prospective firm will realize that the complexity may overstate defense and understate the time needed to litigate a claim. The process will entail a healthy give and take, which will provide better information than the deference  seen in many  presentations.   

7.  Arguments Against Alternative Billing and Challenges

Various arguments are presented against alternative billing. One may suggest that law is a learned profession and fixed fee billing  antithetical to its basic structure. Yet physicians who deal with life and death issues now accept specified fees as a part of their profession. Consultants in other professional areas are increasing using fixed fees to meet their client’s needs.   

Other aver Lawyers thus have the opportunity to either overestimate the amount of work required or overestimate the value of the work to be completed. This creates a scenario in which “the temptation for lawyers to misrepresent and  deceive is greater in value billing than with hourly billing.” At the onset, the parties will be principally familiar with only the client’s position and his documents. The danger of omitted information is more likely the lawyer’s problem, as unfavorable information is disclosed after a fixed fee arrangement is concluded and the case found  more complex than initially thought. The widespread satisfaction with fixed price billing, and the reluctance of many law firms to embrace it would indicate the arrangement favors the client. 

Hourly billing has been  more of a problem with many finding unexpected costs. “Sometimes it is not until well into discovery, or worse, just before trial, that many lawyers begin to give the client a realistic  assessment of the case.“

The second argument is perhaps more problematic.    

Fixed fees can create an “incentive for [lawyers] to do too little work rather than too much.” Additionally, the individualized attention and nuanced presentation of legal matters clients expect may  also suffer-as a result of the economic premium they placed on their generic representation. Eggenberger (9)

The first protection against potential underwork is careful assessment of risk. The firm’s inside counsel will need to determine whether  the primary worry is exposure or disproportionate fees. In the 60,000 contract suit, whether defended or prosecuted, legal fees will be a chief concern, and the fixed fee or even contingent arrangement enables the claim to be economically litigated. Secondly, the attorney still maintains legal obligations of diligence and communication which are not altered by his fee arrangements. Finally, experience with the particular type of case and counsel will improve the firm’s skills. Indeed at the onset, company counsel may want to maintain detailed data to assess the result, extent of communication. Company counsel will want a mutually beneficial relationship where skilled lawyers seek to achieve a good result while limiting unnecessary time and paperwork.  

8. Challenges for the Attorney

In an hourly scenario, getting the client is the most important step. In fixed or contingent  arrangements, early case evaluation is critical:    

Before taking any new case on a contingency fee basis, the attorney must complete extensive due diligence concerning the likelihood of success (however the client defines it). A business lawsuit can last three years or more. During that time, the attorney will face many risky patches. These include legal risks, such as dispositive motions, loss at trial, or loss on appeal. They also include client-related risks, such as the revelation during discovery of critical and outcome-changing information, or a client’s change in goals. In light of these risks, it is important that the attorney be realistic about the potential outcome and structure the fee accordingly. As Justice Corrigan wrote in a recent concurring opinion, Contingency fee percentages express an attorney’s expectations of the case and the risks involved. (11)

Particularly for smaller companies many cases proposed on fixed fees  will  be rejected.  Even with the large entity, proposals may be rejected , at least renegotiated, and a careful analysis of prospective cases is needed.   In the hourly scenario, the client bears the cost of omitted facts, misplaced enthusiasm, or lengthy proceeding.  In the fixed fee case, those costs are born by counsel.    Having the prospective client overestimate the ease and simplicity of the case is a common scenario.  To facilitate accurate assessment, the lawyer  will want to review relevant documents and possibly  interview witnesses.  This illustrates one of the benefits of the alternative fee: it focuses attention on the practical issues at an early stage.  All too often, the hourly  attorney is focused on its role as advocate and the client may like  the lawyer’s enthusiasm and acceptance of its version of facts, only to be disappointed down the road.  

9. Methods of Assessing and Limiting risk for the law firm

The law firm must assess and attempt to limit risk.  Having a fixed fee for an entire case represents the riskiest method. Another way is to break down various tasks and assign a cost to each. The law firm might propose a fee for pre-case evaluation and investigation,  preparation of an initial motion,  discovery, legal and factual research,  trial, and for post-trial motions. Division of the job into tasks limits downside risk, and  the enumeration of tasks provides early information to the company. 

10. Changes for the General Counsel’s Office

If one large firm handles matters, case assignment is easy. As noted, there are high-profile or exposure cases in which large firm experience and specialization is needed and other matters in which their costs become prohibitive. Indeed, corporate counsel will assume an increasingly assertive role as they maintain the basic goals for their company while reducing costs.     

Conclusion

Alternative fee arrangements will assume a greater role in the next decade. Small and medium firms will begin to compete as they offer cost-savings the large firm cannot match. The modern company will divide tasks based upon the importance of cost and exposure, selecting the type of firm that can best meet its needs.     

A basic hourly agreement involves charges based upon the time expended without a specified limit or cap. A fixed fee arrangement involves a set charge for the entire case or specified parts, such as pre-suit negotiation, preparation of a motion to dismiss, or even trial. A budget is generally a non-binding estimation of costs, frequently  premised based upon certain assumptions or parameters. If added work is needed, the task falls to the lawyer to justify the added costs and bill them,  perhaps with a modest reduction. If a case budget is based upon two  depositions and the client request four as facts unfold, the lawyer may bill for the added work. 

In the fixed fee paradigm, after evaluating the claim and reaching agreement, the lawyer is generally obligated to charge the agreed upon cost regardless of unforeseen events. But see Meadow (7) (discussing client obligations to her attorney including possibly accuracy and candor). His position  Is no different than a supplier which discovered that transportation or raw materials costs rose after an specified price was reached. 

Contingent agreements base compensation on the attainment of specified goals or benchmarks, monetary or otherwise.  In the contingent personal injury agreement, payment is based upon the amount recovered, while in a defense agreement, compensation is upon dismissal or settlement within a stated range. From the client’s perspective, they connect  compensation with the ultimate result. The arrangements limit or eliminates fees when results are unsatisfactory, while rewarding success unlike the straight hourly agreement.  the discussion of expected outcomes provides valuable, early information to corporate counsel. Incentive arrangements likewise provide a bonus based upon specified criteria. Split agreements reflect combinations of the above. If a firm which normally charges 300 per hour, agrees to charge 150, with a 20,000 bonus if the claim is dismissed, that would be a split hourly with incentive. 

The term alternative billing encompasses fixed fee, contingent, partial contingency, incentive – virtually any agreement other than standard hourly. As corporate counsel recognize their economic leverage and the range of alternatives among counsel, such alternative fee agreements are expected to be more widely used.  

The basic model for representation is client-centered advocacy. Model Rule of Professional Responsibility 1.2 provides, a lawyer shall abide by a client’s decisions concerning the objectives of representation  and shall consult with the client as to the means by which they are to be pursued. Empowering the client melds well with the hourly arrangement, as the client bears the cost of undue optimism. It presents issues with fixed fee and alternative arrangements as a firm might spend unnecessary time in trying to meet unattainable goals.