IMPLEMENTING ALTERNATIVE FEE
ARRANGEMENTS – CHALLENGES AND
CONCERNS FOR CLIENTS & CARRIERS
The information included in this panel is strictly the opinion of this panel and the
individual panel members and does not necessarily reflect the beliefs of the DRI or the
beliefs of any panel member’s employer. It is not our intent to render legal advice. If
legal advice is needed, it should be obtained from your local legal counsel.
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P R E S E N T E D B Y:
DR I ' S L A W Y E R S ' P R O F E S S I ONALISM
A N D E T H I C S C O M M IT T E E
Edward M. Slaughter, Managing Partner, Dallas Office,
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Luanne Ellison, Director, Litigation Management
Resolute Management, Inc.
Ben Pellegrini, Assistant General Counsel
Rheem Manufacturing Company
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History of the Billable Hour
“A lawyer’s time is his stock in trade.”
-Abraham Lincoln
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Leading to the Billable Hour
• 1930 - State bars issue recommended/statutory
minimum fee schedules
• 1960 – Bills for “services rendered” – and
estimation of perceived value
• Mid 1960s to early 1970s – Anti-trust concerns,
accountants and insurance carriers require more
detailed information and a better way to track it –
Thus the billable hour is popularized
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Alternative Fee v. Billable Hour
Perceived negatives of hourly billing:
– Discourages attorney client communication
– Discourages expedient resolution of cases
– Based on work performed instead of value
obtained
– Creates a conflict between attorney and client
– Slave to the clock – Bad for the Profession
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"We can't solve
problems by using the
same kind of thinking
we used when we
created them."
- Albert Einstein
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Can Alternative Fee
Agreements Improve
Attorney Client
Communication?
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American Bar Association
Model Rules of Professional Conduct
Rule 1.4: Communication
(a) A lawyer shall:
(1) promptly inform the client of any decision
or circumstance [requiring] the client’s
informed consent…
(2) reasonably consult with the client…
(3) keep the client reasonably informed…
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AFAs and Attorney-Client
Communication
• Process of creating AFA facilitations
communication about expectations
• AFAs can set routine communication as
part of an overall fee or pay as a line item
• Eliminate clock watching by client
• Eliminate needless over-reporting
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Can AFAs be used to
encourage attorneys to expedite
litigation and other legal
matters?
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American Bar Association
Model Rules of Professional Conduct
Rule 3.2: Expediting Litigation
A lawyer shall make reasonable efforts to
expedite litigation consistent with the interests of
the client.
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Expediting Litigation
• AFAs can discourage boilerplate excess
work
• AFAs can encourage attorneys to be
efficient
• AFAs can expressly reward speedy
resolutions
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How can AFAs be used to
ensure that clients get value for
the fees they spend?
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THE VALUE EQUATION
VALUE
=
Result - Cost
Value is realized when a client’s expectations are met (or exceeded)
at what they consider a reasonable price. It is a subjective
assessment of the overall worth of a product or service.
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Work Performed and Value Obtained
Example #1: Attorney prepares to depose hazard
communicaton expert
Task
Read opinion, report, and salient reliance
materials;
Collect and review published literature with
differing view;
Collect bias materials for cross;
Time
6 hours
Depose witness in person with documents;
12 hours
12 hours
3 hours
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Work Performed and Value Obtained
Example #2: Attorney deposes same witness second time
Task
Read opinion, report, and identify new
reliance materials;
Update opposing literature;
Time
2 hours
Depose witness by telephone;
2 hours
.5 hours
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AFAs Reward Value Obtained
• AFA might pay less than hourly rates in
some instances
• AFAs should reward expertise and
encourage development and use of
institutional knowledge
• AFAs should encourage best staffing
practices
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What do the rules of
Professional Responsibility
require when creating the terms
of Alternative Fee Agreements?
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American Bar Association
Model Rules of Professional Conduct
Rule 1.5: Fees
(a) A lawyer shall not make an agreement for,
charge, or collect an unreasonable fee or an
unreasonable amount for expenses. The factors
to be considered in determining the
reasonableness of a fee include the following:
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(1) The time and labor required, the novelty and
difficulty of the questions involved, and the
skill requisite to perform the legal service
properly;
(2) The amount involved and the results
obtained;
(3) The time limitations imposed by the client or
the circumstances;
(4) The nature and length of the professional
relationship with the client;
(5) Whether the fee is fixed or contingent.
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Creating Ethical AFA’s
•
•
•
•
•
Time and Labor + Skill Required
Consider the amount of work
Consider the use of work product
Consider the best staffing plan
Consider the expertise of the team
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Creating Ethical AFA’s
•
•
•
•
•
Amount involved + results obtained
More risk = more reward
Consider contingent component
Consider bonuses for performance
Consider refund for poor performance
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Creating Ethical AFA’s
• Whether the fee is fixed or contingent.
• Contingent fees can be created for any
case
• Complete Contingent fees based on
results
• Contingent bonuses
• Hybrid – Hourly and Contingent fees
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Do AFAs increase or decrease
potential conflicts of interest
between Attorney and Client?
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Conflicts of Interest
A conflict of interest is involved if there is
a substantial risk that the lawyer's
representation of the client would be
materially and adversely affected by the
lawyer's own interests or by the lawyer's
duties to another current client, a former
client, or a third person.
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Inherent Potential Conflict?
• Will Client may seek lowest cost per
service?
• Will Client press for more work than
necessary under AFA?
• Will Attorney seek higher profit margin
• Will Attorney seek to avoid work that would
benefit client?
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ETHICAL ISSUES INHERENT
IN THE TRIPARTITE
RELATIONSHIP
• Insured may second guess AFA where the
fees are paid by a carrier
• Motivation by attorney to trim unnecessary
work may be seen by insured as a
reduction in service
• AFAs more workable where insured has
SIR
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What type of AFA will work best
for the situation?
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Fixed or Flat Fee
PRICE = BUDGETED VALUE
• Price charged for defined services
• Shifts some of the risk of cost overrun
to law firm
• A total fee or segments of the service
• Useful where there is litigation is most
predictable
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Model for Determining
Appropriate Flat Fee For Individual Matter
• Based on ABA codes
• Customized by inputting rates, likelihood of
reaching certain phases and whether the firm
has experience with similar cases
• Experience in the area and trust in the
relationship is key
www.hawkinsparnell/casetools/flatfeemodel
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Time and Talent Projection
• A detailed budget for tasks to be
completed
• And the talent necessary to complete them
• Premised largely on the hourly rate systme
• Provides predictability
• Can be separated by tasks
• Or based on a prediction of work
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“Prediction is difficult, especially about the future.”
- Yogi Berra
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Budget With Risk Analysis
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Contingent Fee
PRICE = RESULT X AGREED PERCENT
• Depends on Results Achieved
• Price reflects different incentives for firm
and client
• Useful where there is recovery of
damages
• Useful where there is a quantifiable risk
that all can agree to
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Shared Risk Contingent Fee
Claimed damage:
Client’s estimated adverse verdict:
$10,000,000
$ 1,500,000
Settlement:
Saved
Less fees charged to date
$
500,000
$ 1,000,000
$ 300,000
Net savings
$
700,000
Contingent bonus = 700,000 X 20% =
$
140,000
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Blended Hourly Rate
PRICE = TIME X AVG(ALL RATES)
• One rate applies to all hours
• Rate usually negotiated by the client but
can reflect weighted average of
timekeepers rates
• Risk that firm may not use the high
value/experienced attorneys - can be seen
as reducing profit
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WHAT ARE THE MAJOR
ETHICAL RISKS OF
ALTERNATIVE FEE
AGREEMENTS?
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American Bar Association
Model Rules of Professional Conduct
Preamble – A Lawyer’s Duties
[2]… As advocate, a lawyer zealously asserts the
client’s position under the rules of the adversary
system.
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Do AFAs make you less zealous?
• Should I file the motion for summary
judgment?
• Should I travel to New York for the
deposition?
• Should I settle the case sooner rather than
later so I can stop working on it?
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“The best way to predict
the future is to invent it.”
- Immanuel Kant, 18th Century Philosopher
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