Alternative Fee Arrangements
Dan Gresham
Andrew Crain
SRTTD – July 2010
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Traditional Fee Arrangement: Billable Hours
Alternative Fee Arrangements:
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Fixed or Flat Fees
Retainer Agreements
Phased Hourly Billing with Budgets; Capped Fees
Discounted Hourly Rates; Volume Discounts
Hybrid (Discounted Rates and/or Capped Fees with
additional incentives based on outcome)
• Contingent Fees
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TRADITONAL FEE ARRANGEMENT -- Billable Hours
Description:
Attorneys keep track of time spent on particular
matters and bill according to hourly rate for each
attorney.
Advantages:
Certainty that time spent on matter is compensated
at agreed-upon hourly rates, which are governed
by market forces. “A lawyer's time and advice
are his stock in trade” -- Abraham Lincoln
Disadvantages: For clients, uncertainty as to budgeting;
unfortunately, some attorneys and firms have
developed reputations for overstaffing cases
because they are billing by the hour.
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ALTERNATIVE FEE ARRANGEMENT -- Fixed or Flat Fees
Description:
Client engages attorney to perform specific service for a
fixed amount agreed to in advance.
Advantages:
No uncertainty as to amount of fee. Works best in context of legal
services involving tasks that attorneys perform repetitively so that
there is a reasonable expectation on both sides that the fixed fee
represents (1) a fair value for the service, and (2) that the time it
takes to perform the service can be estimated in advance with
reasonable accuracy based on past experience (e.g., wills,
confidentiality agreements, patent applications for similar
technologies).
Disadvantages:
Law firm assumes the risk of cost overruns. Does not work
particularly well in litigation due to adversarial nature of process,
which makes it difficult to estimate accurately the time it may take
to perform a service.
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ALTERNATIVE FEE ARRANGEMENT -- Retainer Agreements
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In the context of litigation, the term “Retainer Agreement” is often used in the
context of a standard hourly fee arrangement to refer to a prepayment by the
client that is credited against actual billings as the case proceeds.
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In the context of Alternative Fee Arrangements, a “Retainer Agreement” is
simply an agreement between a client and attorney on a set amount that the
client will pay to ensure the attorney’s availability to represent client during a
specific period of time. For example, a client may agree to pay an attorney
$5,000.00 per month for one year to handle all matters that arise for the client
during that time period.
Advantages:
Budget certainty for the client, cash flow certainty for the attorney.
Disadvantages: Difficulty in estimating accurately how much (or little) legal work
may be required during a specific time period. As with flat fee
arrangements, does not tend to work well for litigation due to
adversarial nature of process.
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ALTERNATIVE FEE ARRANGEMENT –
Phased Hourly Billing with Budgets; Capped Fees
Description:
Client and attorney agree for set amount to be budgeted
for each stage of a matter. The parties may further agree
that the budget amount will constitute a “cap” (i.e., a “not to
exceed” number) for that stage.
Advantages:
Up-front certainty for client. Can be adjusted for each
phase of a matter.
Disadvantages:
Adversarial nature of litigation makes it extremely difficult
to estimate accurately how much (or little) legal work may
be required during each specific phase of a litigation matter. Client may
be overpaying or underpaying for actual work done. Attorney’s focus on
staying within budget might be detrimental to necessary case preparation.
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ALTERNATIVE FEE ARRANGEMENT –
Discounted Hourly Rates; Volume Discounts
Description:
Attorney agrees to give client a discount on hourly rates based
on expectation or guarantee of repeat business or a certain
volume of work.
Advantages:
Client gets a discounted hourly rate. Attorney gets a
reasonable expectation of repeat business. Works well for
high volume, fairly predictable matters.
Disadvantages:
For litigation, this involves straight hourly billing (albeit at
discounted rates); attorneys may be encouraged to incur more
billable hours to offset discounted rates. Intellectual property
litigation is typically lengthy, complicated, and time consuming.
Client may not be inclined to engage in multiple repetitive
lawsuits.
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ALTERNATIVE FEE ARRANGEMENT –
Hybrid (Discounted Rates and/or Capped Fees with
additional incentives based on outcome)
Description:
Incentives based on outcome can be used to address concerns about
discounted rates or capped fees.
Advantages:
Due to the uncertainty inherent in intellectual property litigation, use of
incentives based on outcome may be appropriate. If client achieves a
substantial recovery, the additional incentives could be paid out of the
recovery. If the client does not achieve a substantial recovery, the
costs are capped. Potential additional compensation based on
outcome would be additional motivator for attorney.
Disadvantages:
Although the additional incentives mitigate the disadvantages
somewhat, the hybrid approach involves the same types of
disadvantages as the underlying arrangements without the additional
incentives.
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ALTERNATIVE FEE ARRANGEMENT –
Contingent Fees
Description:
Attorney’s compensation is contingent on results achieved.
Attorney is typically paid a predetermined percentage of the
client’s recovery. If client doesn’t win, the attorney does not get
paid. Percentage may escalate from initial lower rate to a higher
rate as case progresses toward trial and key events occur.
Advantages:
Limits economic impact of litigation on client. Typically, clients are
only responsible for out-of-pocket expenses (e.g., travel costs,
costs of depositions, court costs).
Disadvantages:
Attorney assumes almost all the risk. Attorney may be reluctant to
take marginal case, or even potentially strong case against
adversary with litigious reputation. Stigma attached to contingent
fee attorneys in popular culture.
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To mitigate disadvantage to attorney, client may sometimes agree to pay for law
firm’s initial investigation on hourly and/or flat fee basis (typically with a cap).
Attorney’s percentage of recovery may be negotiated depending on perceived
strength of case and assessment of potential recovery.