December 11, 2013 Articles

The Rise of Alternative Fee Arrangements

Law firms that adapt will thrive, and those that do not will perish.

By Darren VanPuymbrouck and Joshua Kurtzman – December 11, 2013

Alternative fee arrangements (AFAs) have been debated and used to some extent for decades but have become much more prevalent within the past five years. Earlier use of AFAs saw law firms grant larger institutional clients a volume discount or a smaller firm take a case on contingency. Both of these examples illustrate a mechanism for a client or a corporate legal department to avoid paying the lawyer or law firm’s hourly billing rate. The presence and prevalence of AFAs in the legal marketplace vastly increased during the economic downturn of 2008–2010.

The economic crisis forced legal departments of every size to evaluate their legal costs and look for ways to control these costs. The general counsel of Marriot International stated that AFAs became more widely used as “a reaction to the significant increases in billing rates over the last 10 years . . . and the rise of $1,000 per hour lawyer.” Catherine Ho, “Law Firms Look for an Alternative to the Billable Hour,” Wash. Post (Apr. 15, 2012). Xerox Corporation’s general counsel expressed his agreement and felt that while AFAs may have been a by-product of the economic downturn, they are “no longer a necessity just because of the recession . . . [;] [i]t’s now part of the normal process.” Jennifer Smith, “Watch Out, Billable Hour: Alternative Fee Arrangements Continue to Grow,” Wall St. J. (Apr. 9 2012). These cost-control efforts have led law firms and legal departments to become more and more creative with offering and evaluating alternative fee arrangements. As the economy gradually strengthens, alternative fee arrangements have remained prevalent.

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