Lawyers are expensive, some more than others. However, their fees vary greatly and their systems of charging fees vary as well, including: hourly fees, flat fees, contingency arrangements, and hybrids, or combinations of fee arrangements. Some firms and clients are now experimenting with success fees. None of these systems is perfect for either lawyers or clients. The good news, however, is that many attorneys and firms are moving towards arrangements that encourage efficiency and better match the interests of lawyers and their clients.
Let’s consider these various approaches to legal fees:
Many attorneys and law firms charge exclusively by the hour for their work. Often, the rates seem extremely high to clients. In some big firms, partner rates can top $600 an hour. Of course, a partner who, through experience and ability, can answer a question off the top of her head or provide invaluable counseling to a client will be much cheaper, at almost any rate, than a junior associate who must spend hours researching a topic or simply be unable to provide crucial advice.
The advantage of hourly rates is that the fees charged and paid reflect the actual amount of work completed. If a task can be completed quickly, the client doesn’t have to pay very much. If the matter proves to be complicated or take a long amount of time, the client must, naturally, pay more. The amount must reflect the actual work required to complete the legal task.
Problems with hourly fees abound. They create great uncertainty for the client who doesn’t know ahead of time what her costs will be. They encourage inefficiency, since the more time the law firm spends on a matter, the more it will be paid. Systems and decisions that would cut down the amount of lawyer time involved cut into the law firm’s bottom line.
Hourly fees also have some downsides for attorneys. They can only make more money by raising their hourly rates, which can make them less competitive in the marketplace, or by billing more hours, which is why many attorneys work too hard. Hourly charges can also lead to second-guessing by clients. Lawyers can’t always be as efficient as they would like to, and sometimes they may pursue a line of research or negotiation that proves to be a dead end. Clients may question paying for the work in these circumstances, which can feel like nitpicking or Monday morning quarterbacking to the attorney who carried out the work in good faith. Finally, hourly charges can discourage clients from communicating with their attorney, which can make effective representation more difficult.
Increasingly, law firms are moving towards charging flat fees. When the legal work to be accomplished is well-defined, flat fees can remove the uncertainty for both clients and attorneys. They encourage efficiency, since the law firm will make more money if it has systems in place that reduce its costs of production, or if it uses less expensive personnel, such as paralegals instead of attorneys.
With flat fees, clients won’t be charged extra for calling their attorney, which encourages communication. Several years ago, our firm moved from charging hourly for probate administration to flat fees because we found that lack of communication and clients hoping to save some money by taking on certain tasks themselves often led to snafus. Since we made the change, we’ve found that these matters have moved more smoothly for all concerned. (Of course, there are always a few clients who want to communicate every day, who we discourage a bit.)
Problems arise with flat fees when the matter becomes more complicated than anticipated. The fee agreement between client and attorney needs to define the contemplated work carefully, and include the proviso that the law firm and client will make adjustments if necessary tasks change from what was predicted.
Most personal injury and medical malpractice matters are handled on a contingency basis. This means that the attorney is only paid upon the successful completion of the case, often receiving between a third and 40 percent of the proceeds, depending on the type of case. These arrangements permit people who normally couldn’t afford to hire an attorney to be represented. The attorney and the client, for the most part, share the same goal—successful completion of the case. Although there are cases where an attorney is ready to settle but the client wants to roll the dice and go to trial, since the considerable work of preparing for trial costs nothing for the client.
The attorney’s fee may be a bit low in a small slip-and-fall matter or automobile accident that brings in $15,000, or a huge windfall in a multi-million dollar settlement where there is no question about liability. Clients often receive a smaller payout than attorneys from these cases, since they typically have to reimburse the law firm for out-of-pocket costs as well as pay off health insurance liens against the recovery.
Interestingly, while there is considerable lawyer advertising on billboards and cable television for personal injury cases—reflecting their profitability for law firms—no one seems to be competing on rates. For instance, a lawyer could offer to take on cases for a quarter of the recovery rather than a third. It seems that there is an opportunity here for an enterprising attorney or firm. In addition, a more complicated contingency arrangement has always seemed more fair to me. Attorneys should receive a larger percentage of smaller awards for cases that go to trial, and smaller shares of large settlements that resolve quickly. In addition, for many cases, it’s possible to assess their value at the outset. For instance, it may be possible to settle a case for $1 million relatively easily, but it may take considerable investigative work and strong legal arguments to resolve it for $1.5 million. It makes sense in such a case for the attorney to receive a smaller percentage of the first $1 million and a larger percentage of the next $500,000. Of course, making an exact assessment at the outset can be difficult.
Increasingly, attorneys and clients are entering into fee arrangements tailored to align their interests and aimed at sharing risk and success. These may include hourly fee agreements with a minimum and a maximum charge, or a lower contingency rate, with the client paying something towards the law firm’s fees. Some fee arrangements include success fees, which is in effect a bonus if the representation achieves the client’s goals. Clients negotiating a sale of their company to another, for instance, will likely be unhappy paying their lawyers a large fee if the sale falls through, but quite comfortable with sharing the wealth if it succeeds. The law firm may accept a lower hourly rate or an agreed upon flat fee if it has a potential upside upon success.
The good news is that attorneys and clients are becoming much more creative and flexible in determining fee arrangements that encourage lawyers and firms to be efficient and that marry their interests. This can make it more difficult for law firms that need to be more efficient than in the past, especially for younger attorneys. As firms strive for efficiency, they are hiring fewer lawyers, some even “off-shoring” legal and paralegal work to companies overseas. Since the recession began, the number of legal jobs has dropped by 50,000 and the number of prospective lawyers taking the LSATs has declined by a quarter. But that’s a topic for another blog post.