Alternative fee arrangements grow
The Great Recession has ushered in an era of alternative fee arrangements, according to a recent article in GPSolo magazine. Every year, more clients and lawyers experiment with AFAs, and some skeptics become converts.
and lawyers experiment with AFAs, and some skeptics become converts.
A recent report by Altman Weil shows that in 2009 only about 20 percent of the lawyers surveyed thought that nonhourly billing had become a permanent trend within the profession. By 2012 that number had increased to 80 percent.
The report went on to observe that AFAs were being employed by almost all firms responding to the survey. Yet a substantial number of these firms also reported lower profitability when using AFAs. This suggests that law firms and clients have not yet figured out how to turn AFAs into win-win propositions. If they do not, for financial reasons alone, it is likely that firms will embrace AFAs only if required by clients.
In this economy, at least for the short term, it appears that law firms will be forced to agree to alternative fee arrangements if clients demand those arrangements. Indeed, because of client interest, almost half of the firms surveyed by Altman Weil reported a year-to-year increase in the amount of nonhourly billing, as measured as a percentage of revenues.
As a result of the change in dynamics, law firms and clients have created numerous alternatives to the billable hour when pricing legal services. The most common are outlined below:
- Contingent fees. This “old standby” has long been an alternative for hourly billing. A contingent fee is dependent on the results obtained. This obviously requires a clear understanding of what the results are. In personal injury cases, this determination is usually easy. It is a percentage of the amount recovered for the injuries sustained by the client. In other types of cases, however, defining successful results can be problematic.
- Reverse contingent fees. A reverse contingency allows for compensation based on an avoidance of exposure to liability. Although in some cases it may be difficult to determine the amount of exposure escaped, it is not impossible. Most lawyers know how to place a value on their cases, and defense counsel relying on both personal knowledge and public reports of damage awards in their jurisdiction have become adept at assessing the likelihood of both liability and the amount of damages.
- Fixed fees and flat fees. A fixed or flat fee is the price that a firm charges no matter how many hours its lawyers spend on a matter. A fixed fee may be the total fee for the engagement or may apply to discrete components of a matter, such as fixed fees for discovery, pretrial motion and the actual trial.
- Blended rates. Blended hourly rates apply to all hours billed on a matter. The blend includes the lower rates of associates and the higher rates of partners. Unlike capped fees or fixed fees, it does not provide the client with budgeting predictability.
- Percentage fees. A popular alternative fee arrangement is the percentage fee, either constant or graduated, and based on the amount of the transaction. Some courts allow fees to be determined by the value of the estate being probated. The fees for many bond issues are likewise determined by the percentage of the amount of bonds sold.
- Combined approaches. Many alternative fee arrangements combine various approaches. Some firms create fee schedules based on a low blended hourly rate plus a contingency. Other firms base their fees on all the factors set forth in the ABA Model Rule of Professional Conduct 1.5. Alternative fee arrangements may even include an amount retrospectively set, based on the value received by the client.
GP Solo is a publication of the Solo, Small Firm and General Practice Division.
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