Alternative Fee Agreements

The traditional hourly billing arrangement has lost favor with many of today’s clients.  Unfortunately, the arrangement does not encourage efficiency, as the attorney stands to benefit financially the longer a case goes on.  Many articles and books have been written on the subject.  One of the best resources is “Alternative Fees for Litigators and their Clients” by Patrick Lamb.  In his book, Mr. Lamb describes the problems with hourly billing as it:

  • Does not encourage project or case planning
  • Provides no predictability of cost for the client
  • May not reflect value to the client
  • Penalizes the efficient and productive lawyer
  • Discourages communications between the lawyer and client
  • Fails to discourage excessive lawyering and duplication of effort
  • Fails to promote a risk/benefit analysis
  • Does not reward the lawyer for productive use of technology
  • Puts client’s interests in conflict with lawyer’s interests
  • Imposes on clients the risk of paying for:
    • The lawyer’s incompetence or inefficiency
    • Associate training and turnover
    • Adding of time sheets
  • Results in itemized bills that report mechanical functions, not value of progress
  • Results in lawyers competing based on hourly rates.1

Mr. Lamb then concludes that “Billable Hours is Bad for Everybody.”  I agree.  It is time for a change, and I believe that alterative fee agreements are the answer. 

However, not all alternative fee agreements are equal.  Some might appear as an “alternative fee agreements” but in actuality, they are simply an estimation of the number of hours the attorney believes it will take to resolve the matter multiplied by his hourly rate.  Unfortunately, that is nothing more than an hourly billing arrangement disguised as an alternative fee agreement. 

Instead a true alternative fee agreement should be one in which the client’s and attorney’s interests are truly aligned.  In other words, both have “skin in the game” and will benefit or suffer from the outcome of the case.  The traditional contingency fee arrangement is the best example of this arrangement.  In that scenario, the interests of the client and attorney are virtually identical.  They both want the greatest recovery as quickly as possible.  The arrangement is simple, straightforward, and clear.  Since the arrangement is agreed upon at the inception of the engagement, both parties should also understand the risks and benefits from the very beginning.

When defending a case, it is also important to create an arrangement in which the attorney’s interests are aligned with the client’s interests (i.e. the outcome of the case).  One way to do this is to provide for a fixed fee for certain phases of the litigation.  For instance, the attorney agrees to bill the client for a certain fixed amount for: (1) an early case assessment; (2) first phase of case; (3) second phase of the case.  The items included in each phases are specifically described in detail in the engagement agreement (i.e. phase one could include the initial answer and dispositive motions, written discovery and responses, and depositions). 

Once the items are clearly defined the attorney is encouraged to perform them as quickly and efficiently as possible, irrespective of the “hours” he might have otherwise billed for such tasks.  This encourages the attorney to use work-product which he has developed over the years that, in many cases, can be easily tailored and modified to the facts and issues at hand.  Although this already occurs in most attorney’s practices, the attorneys likely bill the client for “value received” based upon an estimate of how much time it took them to accomplish the task years ago from scratch.  Of course, this is usually only an estimate as the attorney probably did not keep his initial billing records for the task and does not refer to them when billing the client for the recent activity.  

An incentive, or hold-back, can also be included in the phases, which can be used to encourage prompt settlement if an early resolution is reached.  The hold-back also assures the client that the attorney will continue to be diligent even after he was initially paid.  Once again, this method encourages prompt and efficient resolution of the lawsuit for the defendant on terms that are acceptable to the defendant. 

[1] Lamb, Patrick, Alternative Fees for Litigators and their Clients, Figure 1.5, page 7, ABA Law Practice Division (2014).