ETHICAL AND PRACTICAL CONSIDERATION
IN ALTERNATIVE FEE ARRANGEMENTS
Susan E. Egeland
Hawkins Parnell Thackston & Young LLP
Atlanta Dallas Charleston Los Angeles San Francisco St. Louis
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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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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 facilitates
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 the client considers 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
communication 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 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
Self-Insured Retention
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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 costs
overrunning to the law firm
• A total fee or segments of the service
• Useful where the 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 system
• 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 %
• 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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