Are disciplinary authorities ready for fixed fees?

September 18th, 2009 | By Mike Downey

News reports are that law firms large and small should or are moving from time-based (hourly) billing to fixed fees. See, e.g., http://www.abajournal.com/weekly/mayer_brown_and_reed_smith_to_roll_out_fixed-fee_plan.  Such a change in billing methods will require a change in how the lawyer discipline system assesses the reasonableness of fees.

 

At present, if a representation ends early, the discipline system will often try to assess what portion of a fixed fee a lawyer earned (i.e., what is “reasonable”) by multiplying the number of hours worked by a reasonable hourly rate.  Thus, if a lawyer who regularly bills $200 per hour collects a $5000 fixed fee to prepare a will, but spends only two hours on the will, disciplinary authorities may try to force the lawyer to refund the additional $4600.

 

Fixed fees work, however, by estimating a “fair amount” for the work. Sometimes this amount benefits the lawyer compared to time-based (hourly) billing, and sometimes it benefits the client as compared to time-based billing. For example, if a the lawyer mentioned above collects a $5000 fixed fee to prepare the will, that lawyer is going to receive only the $5000, whether the will takes 10 hours ($2000 worth of time) or 100 hours ($20,000 worth of time). For the lawyer’s compensation to remain relatively steady, things must average out in the long run – some wills will take more than the break-even point (25 hours), and some less.

 

If disciplinary authorities continue to insist that a challenged fee will be assessed through the hourly billing prism, they will push for fixed fee engagements to be “lose-lose” engagements for the lawyer. The lawyer who charged $5000 but spent 100 hours will “lose” the equivalent of the $15,000 in time (100 hours x $200 per hour = $20,000 – $5000 fixed fee). Meanwhile, the lawyer who spent less time may have to refund the overage, here the $3000 (10 hours x $200 per hour = $2000 – $5000 fixed fee).

 

The limit on reasonableness of fees, commonly Model Rule 1.5, does not require such an outcome. Rather, Rule 1.5 states eight factors that should be considered in assessing the reasonableness of a fee, and only part of the first factor (I like to call it the first 1/3 of the first factor) expressly relates to time-based billing, “the time and labor required.”  Yet very few disciplinary authorities have recognized this reality, particularly when the lawyer is terminated before the matter is completed (i.e., where the 10 hours is only part of the work that would be required to complete the will).

 

Hopefully the legal ethics world will make this adjustment to accommodate fixed fees. Otherwise, a good idea whose time has likely come (again) will be impeded by the prior, troublesome fixation with time-based billing.

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