<p>What I challenged was the myth that associates are not profitable to law firms: they certainly are and provide the partners with the bulk of their profits. </p>
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<p>I don’t disagree with that. The fee charged may have little relationship to the value of the benefits received by clients. This is a direct by-product of the billing by the hour model that has become the norm. For more detail on the specific advantages and disadvantage of the model you may want to read:" Billing Innovations: New Win-Win Ways To End Hourly Billing" by Richard Reed. </p>
<p>But to understand how we ended up there, you first need to understand how the hourly billing model developed and how successive courts screwed up the system.</p>
<p>The ABA Rules of Conduct state that 8 factors should be used in determining the reasonableness of a lawyer’s fee:</p>
<p><a href=“1”>quote</a> 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 likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the lawyer;
(3) the fee customarily charged in the locality for similar legal services;
(4) the amount involved and the results obtained;
(5) the time limitations imposed by the client or by the circumstances;
(6) the nature and length of the professional relationship with the client;
(7) the experience, reputation, and ability of the lawyer or lawyers performing the services; and
(8) whether the fee is fixed or contingent.
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<p>Interestingly, “the amount of the fee in proportion to the value of the services provided” is not one of the standard ABA factors, although it is in the California version of the Rules. </p>
<p>These are all a-priori reasonable factors. This should allow top lawyers to charge more than bad lawyers and to charge more for high value services than low value services. But that is NOT how courts, including the Supreme Court, have interpreted the rules. In a key case, Blum vs Stenson, in 1984, the Supreme Court determined that the proper first step in calculating a fee is to multiply the number of hours reasonably expended on the matter by a reasonable hourly rate. Virtually all of the ABA factors were subsumed into the hourly formula. Any upward adjustments in the fee are allowed only in rare and exceptional circumstances. This pretty much killed off value-based billing! Law firms were pretty much stuck with billing based on standard rates with the total fee independent of quality of work performed, but just based on quantity of work.</p>
<p>This mess has progressively led where we are today where hourly billing rules and clients often have no way to ascertain total amount of charges. No wonder they resist paying for the high cost of legal services. There are also downsides for the law firm which cannot charge a partner’s time at a higher rate for high-value or high-responsibility matters. </p>
<p>This is turn has led to the development of tiered associate-partner rates as a poor proxy for low value-high value services. Associates do the busy-work and the partners perform the complex tasks. It may very well be that the value/cost ratio for a new associate at $250/hour is low. Conversely, the value/cost ratio may be very high for an experienced attorney charging $500/hour in complex cases, simply because he cannot legally charge for value. The client often overpays for the associate and underpays for the partner under a model that makes nobody happy. </p>
<p>Reed has argued that straight hourly billing should be used as last resort, not as the default billing especially:</p>
<p>-When the client demands hourly billing and will not consider alternative billing methods.
-When there are variables that cannot be foreseen with reasonable accuracy.
-When no reasonably fair alternative method can be used.
-When the lawyer is willing to accept the representation but not willing to accept any risk.
-In situations requiring court approval of fees, where the court only recognizes hourly billing in approving fees.</p>
<p>I believe there is some hope on the horizon and the current economic downturn is helping to precipitate changes, especially variations to the straight hourly billing model:</p>
<p>More and more firms use a blended hourly billing model where one rate is applied whether an associate or attorney works on the case. This pattern works well when the work involves a pattern and it is known who will be doing the work. Patent, commercial contracts, financial closings, and tax work are increasingly billed that way. </p>
<p>Fixed plus hourly billing is also increasingly popular when most the legal services can be defined and a fixed fee quoted. The variable portion only is charged on an hourly basis. </p>
<p>Percentage fees, when reasonable, can also be used. Examples include a percentage of the amount of an estate being probated, or the amount of a real estate transaction, or the amount of a bond issue or an equity financing. Some of the most profitable law firms involved in M&A increasingly use that model and both clients and attorneys are typically happy with the arrangement. </p>
<p>Finally an arrangement I particularly like is the pure retainer or availability only retainer or “right to call retainer”. Under such a model I don’t even guarantee that any services will be performed for the retainer. Rather the retainer ensures that I will be available when requested and that I will not take on more than a agreed number of clients. My clients like it because they can reach me any time of day or night without worrying about being charged and the retainer is a fraction of the cost of a full time senior IP Counsel. I don’t have to worry about tracking hours or doing busy work. I can focus on maximizing value for my clients whether it takes me 5 minutes or 5 hours. </p>
<p>As more and more firms move away from hourly billing to hybrid, fixed fee, percentage or retainer models, the whole discussion of who charges for what becomes moot and invisible to the client. How associates are paid will change with salaries going up or down based on the type of work, experience, size of transaction and billing model…Some could end up making a lot more and others significantly less.</p>