Lawyers’ fees vary greatly and their systems of charging fees vary as well. These can include hourly fees, flat fees, contingency arrangements, and or combinations of fee arrangements (hybrids). Some firms and clients are now experimenting with “success” fees (read on). 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 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 takes a long time, the client must pay more but this reflects the actual work of completing 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 reduce 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 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. Where 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, so they encourage communication. One firm we know moved from charging hourly for probate administration to flat fees because it found that lack of communication and clients hoping to save some money by taking on certain tasks themselves often led to problems. Since the firm made the change, it has 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 and need to be discouraged a bit.)
Problems arise with flat fees when the matter becomes more complicated than anticipated at the outset. The fee agreement between the client and the 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 they had in mind at the beginning.
Most personal injury and medical malpractice matters are handled on a contingency basis where the attorney is only paid on 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 of successful completion of the case. Of course, 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 the client nothing.
The attorney’s fee may be a bit low in a small slip-and-fall matter or automobile crash 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 offering to take on cases for a quarter of the recovery rather than a third.
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, 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 on 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.