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Economy Renews Billable Hour Debate

By Sherry L. Talton, Litigation News Associate Editor – July 1, 2009

The economic recession has renewed the debate about the billable hour as more litigation clients look for ways to reduce legal expenses. Litigators now are using alternative fee arrangements with varying degrees of success. The most popular seem to be blended hourly rates, contingency fees, and flat or fixed fees.

Litigators are also experimenting with other methods, such as task-based billing, retrospective fee based upon value, relative-value billing, and capped fees. Many litigators also combine one or more alternative fee arrangements to fashion hybrids that fit the particular needs of any given client.

In its 9th Annual Chief Legal Officer Survey, the Association of Corporate Counsel reported that 54 percent of respondents found economic conditions have affected their law departments.

Blended Rates
“Litigators are most open to using blended rates because it’s the easiest alternative to accommodate,” says Yuri Mikulka, Irvine, CA, cochair of the ABA Section of Litigation Corporate Counsel Committee.

However, some express concern that law firms might be motivated to delegate blended rate work to junior lawyers and staff who may not work as efficiently or have as much experience. A blended hourly rate is a single fixed hourly rate charged for a task regardless of whom in the firm does the work.

Contingency Fee Cases
Some attorneys say they have had success with contingency fee cases, even for commercial matters. “The key to using a contingency fee in a commercial case” is that “the client is unwilling or unable to take on the costs of litigation, but the attorney feels those costs would be workable and sensible,” explains Michele D. Hangley, Philadelphia, cochair of the Section’s Ethics and Professional Committee.

Fixed-Fee Representation
The fixed-fee arrangement—in which the lawyer undertakes representation for a total flat fee—was actually the norm in the legal profession up until about 40 years ago, notes David A. Soley, Portland, ME, cochair of the Section’s Trial Practice Committee.

“There are two big ethics concerns when you’re talking about any kind of alternative fee arrangement. First, of course, is the reasonableness of the fee. The second concern is communication—the client must really understand how the fees will be charged,” says Hangley.

Fee Segmentation
The recession has created a “second generation” of alternative fee arrangements in which litigators break down a lawsuit into its component parts—including filing or answering the lawsuit, discovery, pretrial, trial, and beyond—and “assess a flat fee for each segment of the case,” according to David S. Coale, Dallas, cochair of the Section’s Commercial and Business Litigation Committee.

This fee arrangement “allows law firms to forecast their revenues further out,” says Coale.

“The desire to break cases down may be coming at the right time with this kind of billing system,” he says.

Many litigators agree that the overwhelming disadvantage of the fixed fee system is that litigation, unlike transactional work, is so unpredictable that the risk to the lawyer is great.

Billing in the Future
“A wholesale adoption of alternative fee arrangements in the litigation world will take a unified effort of clients to motivate such a change,” opines Kenneth G. Crowley, Weehawken, NJ, executive director and deputy general counsel for UBS Financial Services, Inc.

But there may be no time like the present, as Mikukla explains. “If there is one positive thing that may come from this global financial crisis, it’s that the interests of outside counsel and inside counsel will become more aligned through the use of alternative fee arrangements,” she says.

Keywords: Economy, billable hour, alternative fee arrangements

  • July 9, 2009 – All of these shift the risk to the law firms. The overall costs for litigation today are enormous so bad pricing can mean a material hit to a firm's finances. The alternatives seem to work out pretty well if the clients and the lawyers either have, get, or share the data on the cost, time, fees for similar cases or transactions.

    It also helps if they have some trust in each other.

    It seems to me to be a tad tricky to try alternative fees in major white collar litigation ($50MM in Brocade), bet the company unfair competion ($100MM in Bratz), but probably doable for the kinds of deals that have been done before and for litigation that is of a type that we have been through.

    The other concern is how to shift the most efficient lawyers to work on these matters and to be sure they get the full benefit for their owrk when their metrics are studied at bonus/promotion time.


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