Alternative Fees May Lend Solutions

All parties should understand their priorities before entering into alternative fee arrangements
October 10, 2011
The Daily Report

Clients and attorneys increasingly have one thing on their minds—alternative fee arrangements. Clients want more predictability and control in an economy where every penny counts. Attorneys want more options to monetize the value added by their professional services. If only it were that easy. Unfortunately, it is not.

When attorney fees move beyond standard hourly rates, the ethics rules can get complicated (and controversial). In addition to ethics issues, the economic realities of alternative fee arrangements vary significantly based on the culture, size, geographic location, type and history of a law firm.

What are 'alternative fee arrangements'?

Alternative fee arrangements are fee agreements or billing arrangements customized to fit the goals and needs of a client and matter based on discussion between a client and its counsel as opposed to the standard hourly fee arrangement.

Of course, articles about alternative fee arrangements appear regularly in legal publications. All of them discuss alternative fee arrangements as fee options other than hourly billing. Yet, beyond that, these articles involve and discuss completely different kinds of fee arrangements between attorneys and clients. This divergence of options can make evaluation difficult.

As a result, the most important starting point for considering an alternative fee arrangement is to make sure that everyone is talking about the same thing. For example, when asked for their preferred "alternative fee arrangement," most clients say a "discounted hourly rate." On the other hand, most attorneys hear "alternative fee arrangement" and think "fixed fee."

Yet, both clients and attorneys agree on one thing. Alternative fee agreements can lead to more effective and efficient handling of matters by counsel, improved communication between counsel and client, and a better understanding by counsel of the client's goals and objectives. This alignment of interests between counsel and the
client often is seen by clients as the primary reason to engage in alternative fee discussions.

Today, there are a myriad of alternative fee arrangements available in the legal marketplace. Indeed, billing guidelines that significantly limit the activities or costs for which attorneys can even bill may now constitute the most common alternative fee arrangement.

In addition there are fixed or flat fees (on either the entire matter, discrete tasks, or multiple matters). Some other alternative fee arrangements include:

Success fees—a result-oriented arrangement that contemplates additional fees in the event of a successful or pre-defined result;

Budget billing—fees based on pre-agreed budgets for assigned legal
representations;

Discounted hourly plus contingency fees—fees that combine a discounted hourly rate with a contingency "kicker" if a contingency occurs;

Value billing—a pre-set fee based on the "value" of the service as opposed to its quantitative measure such as the number of hours or amount of work;

Blended rates—fees based on rates that are blended for all timekeepers or one hourly rate for partners and one for
associates;

Retrospective billing—fees adjusted at the end of the year based on the volume of assigned matters and fees billed;

Collar fees—periodic payments for a predetermined time period whereupon the fees are reviewed against a budgeted amount and adjustments are made if fees are more or less than the predetermined fee range;

Fixed profit billing—fees calculated by guaranteeing a level of profit after deducting fixed costs or expenses;

Project billing—fees based on a fixed amount for the completion of a project as opposed to a task.

What are the limits on alternative fee arrangements? Attorney fees, regardless of form, must be reasonable. In addition, alternative fee arrangements cannot alter or operate to change the fundamental attorney-client relationship, even if the client agrees. Typically, this means that alternative fee arrangements cannot ethically (i) limit an attorney's independent professional judgment; (ii) create a conflict of interest between the client's interests and any other interest (including the attorney's); or (iii) impair the client's absolute right to terminate the attorney-client relationship.

The most common mistake by attorneys is to assume that if the parties (the client and the attorney) agree, then their contract absolutely controls. Courts have repeatedly rejected this idea. For example, in AFLAC v. Williams, 264 Ga. 351, 444 S.E. 2d 314 (1994), the court said, "[t]o force all attorney-client agreements into the conventional status of commercial contracts ignores the special fiduciary relationship created when an attorney represents a client." The court then held that a long term attorney-client retainer contract that included an early termination penalty was unenforceable even though the client had agreed.

Worse yet, the consequences of an improper billing arrangement can extend well beyond just a fee forfeiture. For example, in In re Mance, 980 A.2d 1196 (D.C. App. 2009), the District of Columbia Court of Appeals publicly censured an attorney for a non-refundable "flat fee" for a criminal representation ($15,000 with an initial installment of $7,500 paid up-front). In another instance, the Colorado Supreme Court suspended an attorney for a $20,000 non-refundable "advance fee" for a civil case in In the Matter of Larry D. Sather, 3 P.3d 403 (Colo. 2000).

As a result, one of the most important provisions in an ethical and enforceable alternative fee arrangement provides that the client is entitled to terminate the agreement without penalty at any time
for any reason. Agreements should track this language.

Courts insist that a quantum meruit approach protects attorneys from clients who exercise the unfettered right to terminate a representation before the attorney earns the full fee. Under this approach, a discharged attorney can recover the fair and reasonable value of all services rendered prior to the termination.

What are the risks of retainers and flat/fixed fees paid in advance?
The absolute right of a client to terminate an attorney's representation has far-reaching implications for advance fees and certain retainer fees. Basically, an attorney must return all unearned attorney
fees when a representation is ended.

Under various bar rules, and the holdings of numerous courts, pre-paid attorney fees, even if characterized as a "retainer" or prepaid "advance fee," remain the property of the client until earned.

It is the issue of when a fee is earned that can cause complications.
Many attorneys have attempted to address these challenges by including provisions that deem all attorney fees paid as earned at the outset of the representation. Courts have not been receptive to this
approach. Basically, courts insist that attorneys earn fees by actually performing services, notwithstanding provisions in a fee contract to the contrary.

In some situations, it is a distinction without a difference. For example, a flat (or fixed) fee for a routine will or a divorce is usually less than one hour of attorney time. In those situations, the fee is effectively earned once the attorney starts work on the representation.

But, in most situations, it is an important distinction. The best approach for attorneys would appear to be to modify fee agreements to specifically address the "value" of the representation as opposed to
just the calculation of the fee.

Value involves both a qualitative and quantitative component. Qualitative value can include the value of the attorney's commitment to continued availability as well as the willingness to lend the attorney's
name and reputation to the representation. Quantitative value can include intermediate monetization of value based on milestones in the case or the completion of a part of the representation. In both cases, the assigned value must still be reasonable. But, when attorney and client agree up front on these values, the result is more likely to be a valid, ethical, and enforceable fee agreement.

Like all billing arrangements, alternative fee arrangements should be reduced to writing. It is important to thoroughly discuss any proposed alternative fee arrangement with the client to ensure that both the client and firm understand their respective obligations. The alternative fee agreement must also be reasonable.

When properly entered into, alternative fee arrangements can be very beneficial to both parties leading to improved client relationships. They can provide more certainty to the client, promote enhanced communications regarding expected results, and better align mutual interests. Basically, they become "win-win."

Reprinted with permission from the October 10, 2011 issue of the Daily Report© 2011 ALM Media Properties, LLC.  Further duplication without permission is prohibited.  All rights reserved.  

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