Ineffective infrastructure and administrative hurdles prevent some firms from offering alternative billing arrangements, Collins said. “Most defense-oriented firms claim that they are open to alternative fee arrangements, but practically speaking, those firms are not set up to handle alternative modes of billing,” she said. “Many times, the accounting department does not have the right software to effectively handle the alternative fee arrangements on the front end or to track them on the back end.”
A fear of the unknown can be a challenge for other firms. “Many lawyers do not have enough experience with setting and abiding by alternative fee arrangements that would give them a comfort level in negotiating these arrangements with clients,” Collins said.
There are a variety of fee arrangements that can be used in litigation matters.
Flat Fees. A flat fee might be defined for each phase of litigation, for certain tasks or for the entire representation. “You can also do a combination of fixed or flat fees per task or per phase with an overall cap on fees for the entire representation,” Collins said.
One way to spread the risk between the client and the law firm is to agree to a “collar,” she said. “For example, in a case in which we knew we were going to have a lot of depositions, I agreed to flat fees for depositions,” Collins said. “We used a collar to hedge against the risk of underestimating on my part or overestimating on the company’s part. At the end of the discovery period, we were able to add it all up, and if we were over, we would bill 50 percent of the amount over. If we were under, we would give a refund of 50 percent of the amount by which we were under.
“If you can handle the matter more efficiently than you predicted, you can give your client a refund under this system, which always engenders good feelings on the client’s part,” she added.
Retainers. “This is sort of an old fee arrangement that is getting some recognition these days,” Collins said.
A retainer agreement for all routine litigation needs to specifically detail what is and is not routine litigation so there is absolute clarity on what falls under the retainer and what necessitates an hourly fee or some other arrangement, she said. “Additionally, when I’ve been involved with retainers, we kept track of our hours, and the retainer agreement was negotiated on an annual basis, with adjustments being made based on experience and anticipated usage.”
Contingency Fees. These fees can be useful in certain types of commercial litigation, Collins said. “When the firm works on a contingency fee basis and the client pays the costs as they are incurred, both the client and the firm have skin in the game and an incentive to stay focused on reaching a speedy and satisfactory result,” she said.
There are also mixed contingency fees. “Let’s face it: Most traditional defense firms have a hard time with the risk associated with the contingency fees,” she added. “But combining a reduced hourly rate, or a capped fee, with a reduced contingency fee for a successful resolution can alleviate the pressure the firm might feel while allowing the firm to enjoy the fruits of the success.”
Blended Rate. With a blended rate, you calculate the average rate for the time-keeper lawyers on the file and apply that rate across the board, whether the time spent is by a partner or an associate, Collins said. “For this to work to the firm’s maximum advantage, most of the work has to be handed down to the lower-rate time keepers,” she said.
Reduced Hourly Rate With Kicker. “For example, we have a deal with one client where the effective hourly rate is higher depending on how long we have the file before there is a satisfactory resolution,” Collins said. “In other words, we are paid a set reduced hourly rate, but we get an adjustment to that hourly rate for hours expended if we get the matter resolved within six months or 12 months. This assumes that it is costlier for a defendant the longer a case goes on, so the client is willing to pay more if there is an earlier resolution.”
Sound Advice is sponsored by the ABA Section of Litigation.
Keys to success with alternative fee arrangements
- Plan for how you will respond to clients seeking alternative fee arrangements ahead of time. “If you are well-informed about how you manage and bill for cases, that can help you when you are faced with an actual request to propose an alternative fee arrangement,” said Betsy Collins of Burr & Forman in Mobile, Ala., in an ABA Sound Advice podcast.
- Keep statistical information on all alternative fee arrangements for use in later situations.
- Study your closed matters to ascertain the benchmarks for what affects fees.Example: types of motion practice and discovery issues and how much was spent in fees and costs on those efforts, staffing, etc.
- Identify the client’s optimal objective in the matter. “Identify your staffing,” Collins said. “Outline a preliminary strategy for attaining the optimal result, and create a realistic budget for what is expected to transpire in the course of litigation.”
- Develop a transparent relationship with the client so that mutual respect and trust become central to it.
- Make sure both the client and the law firm have skin in the game. “For example, in large commercial litigation, some companies pay firms flat monthly fees based on the anticipated level of activity in the case, which includes a holdback to be paid if the matter is resolved satisfactorily,” Collins said.
- Offer the client more than one option for an alternative fee. “Develop a budget and a litigation plan so that you can show the client what the anticipated fees would be based on a traditional hourly rate as compared to a couple of alternatives,” Collins said.
- Bring the result in sooner rather than later.
- Consider whether to outsource some aspects of the matter, such as document review, to contract lawyers. “Be sure to negotiate this on the front end with the client and be transparent about how these contracted services will be billed to the client,” Collins said.
- Don’t lose sight of your budgeted activity levels. Some firms have invested in software that enables them to keep up with expenses and time expenditures in real time and to chart the progress of the case against the planned or budgeted activity.
- If you find the arrangement isn’t working out for the firm, don’t be afraid to revisit it with the client. Or if an arrangement isn’t working to the client’s benefit, offer to revisit it.