Rewards of Value Priced Flat Fees

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Value pricing services, also called flat fees are the rage among lawyers’ posts these days. But not so much that most lawyers are offering flat fees to clients, yet. First, let’s define value pricing and flat fees.”Value pricing”  means to price the services at a fixed price for the client, before the formalization of the engagement and the lawyer starts providing the services.

The price addresses the value of the service to the buyer of the service, the client, and the value of the service to the seller of the service, the legal professional. A flat fee is not a guarantee that all fees for handling a type of case is the same (like all Big Macs® are priced at $3.09). The value of a flat fee has two parts: 1) that the fee is quoted to the client before the engagement agreement is completed, for a specific scope of legal work to be performed for the client, whether the matter is a personal legal matter or a business matter; and 2) that the attorney does the work for that fee, so long as the scope of legal work is not changed by the client (change fee orders are used if that happens).

The “scope of legal work”  means that the lawyer does those legal services for the client to meet the client’s legal goals, for the fee quoted. To explain, I will use as an example a dissolution of marriage case, since the scope can and often changes, and most readers are likely to be familiar with dissolution cases, even if never involved in one. If a lawyer offers to handle “a dissolution” for the client for a specific fee, the client will get a dissolution of marriage, with proper documents in place and executed for the quoted price.

The lawyer and client have to work together to define the types of legal services that are needed in the potential client’s case before setting the terms of the scope. Are there property issues to resolve?  If the couple have children they need to determine if custody, child support, life insurance, college support, parenting time and issues including holidays is at issue.  Often the parents will have those issues resolved before they seek legal counsel, sometimes they do not.  An experienced pricing lawyer will discuss these issues, and others such as retirement benefits, parent gifts, debts, excessive spending, and family inheritances in order to determine the scope of issues that must be dealt with, and set the scope of the representation.  If the lawyer and the prospective client can agree on what is included in the scope, then the lawyer can offer a fixed price to handle all those services, whether fought over or not.

That means that the lawyer and potential client (who remains a potential client until the engagement agreement is complete and funded) fully discuss and disclose the issues during the engagement conferences. A lawyer committed to a value priced flat fee can weigh the likelihood of battles over various issues in the representation, and the extent of the battles over the issues. The lawyer may know the opposing lawyer and that lawyer’s reputation for causing extended litigation. Fee quotes for including the uncertain issues in the scope are discounted from potential fees for issues that will need to be handled  in a dispute, since there is a good chance that each and every issue will not be fought.

Experienced lawyers can calculate the risk that the parties will need to address potential and unresolved issues in the case, the likelihood of the issues causing difficulty and a fair fee to assume the risk of that issue.  If the custody of the children comes up as an issue the lawyer will handle it for the client, the fee has been negotiated and paid.  If the custody is resolved without a battle, the fee was earned as the lawyer agreed to resolve it for the client whether by battle or agreement. The client will have paid less to have the lawyer handle the uncertain issue than to wait until the issue is outside the scope of the services accepted.

Then comes the critical piece – the lawyer tells the client upfront what the fee will be for the scope of fees covered. The fee is written down, together with the scope of services, as a written fee offering. If the scope of issues at dispute changes, the lawyer will offer a written change order to add the additional issue.  If a certain issue falls off the scope of services (spouse decides that a dissolution degree is not the resolution to be sought) then the lawyer changes the scope by reducing and refunding part of the fees paid.

The potential client may then accept or reject the scope of services and the fee proposed to provide the representation offered by the lawyer.  A serious client will look at the fee and compare that with the scope of services offered.  The client may choose to perform certain functions to save fees (if the lawyer agrees), by taking on the responsibility to perform some functions, and releasing the lawyer from the responsibility in order to reduce fees. The client may choose to take an issue outside the scope of services, knowing that if the issue becomes a problem, the fee to handle it will be higher, but a client may choose to accept that risk.

Going “beyond the scope” of work means that the client’s simple and settled issue, like the dissolution of marriage action turns intosome kind of a battle, after the client’s assurance that the issues have been resolved by the parties at the time of engagement. Now it is time for a change order in the fee agreement.

Again, up front the lawyer tells the client what the fee will be, and then it is up to the client to accept or reject that fee. There may be some discussion or negotiation on the scope of services, i.e.  “yes the fees are designed for us to depose all the likely witnesses in the case, including all that we have discussed and several who are likely going to be important to the case that we will discover during discovery,” or “we will avoid the depositions of any but three most important witnesses to save fees.”

There may also  be some negotiations on how the client makes  payment of fees: all the fees due up front; 20% down with payments on a schedule; or any of many other potential arrangements.

Rewards of Flat Fees: 1) both the lawyer and the client are focused on the issues critical to the case, the law and the evidence, not the hours involved; 2) the lawyer’s interest is aligned with the client toward resolving the matter as efficiently and quickly as possible; and, 3)There is no rationale where creating conflict with the opponent is likely to increase the profit of the lawyer.

As a client recently told me, when I quoted a value priced flat fee:”You mean I don’t have to watch the hours you spend? Thank G*d.”

The Three Styles of Fees

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The Indiana Supreme Court finally gave some direction to the profession and the public about fees in the recent O’Farrell case. It is about time.

For years (since Kendall at least) the Court has punished lawyers for trying to collect “non-refundable retainers.” The idea that a client can pay a “retainer” and yet then forfeit the fees paid for the retainer without getting full value of the work performed is just not going to be allowed in Indiana. Thank goodness for that. So, it is time to remove the offending words, and more importantly the concept, from engagment agreements. If a client pays a fee and then the lawyer does not complete the legal work, for any reason, the client is entitled to some or all of the fees back.

That is not the rule is when the client agrees to a specific type of different arrangement, for other value received, under a “general retainer” which is most often (meaning only occasionally) used in business law matters. By definition a general retainer makes the lawyer unavailable to other clients in an area of law (could be business or family among others0, and creates an expectation of the lawyer becoming conversant in the legal issues for the client. A general retainer is considered “earned when paid” since the payment is not a payment for specific future efforts by the lawyer.

One example from the 1980s was legendary lawyer Joe Jamail, a litigator who was hired by a number of companies solely to assure the company that Jamail would not work for anyone who might be interested in engaging in a hostile acquisition. Jamail was able to command large annual fees due to his extraordinary success in hostile business acquistion cases. The client knew what it was paying for.

A second form of engagement is “advance fee” or a security fee. The client provides funds that must be placed in the law firm’s trust account. The purpose is to have a pool of funds available to pay fees to the lawyer as they are earned, or to be returned to the client. Most lawyers have had clients with a case that looks good until all the evidence is found. As the case weakens, the client’s desire to pay may wane as fast as the quality of the case fails. As Jay Foonberg says in Foonberg’s Third Rule “Cash Up Front”, because “The client who can’t or won’t pay at the beginning of the case is the same client who can’t or won’t pay at the end of the case.” The advance fee is the best protection against such a problem. The lawyer’s staff and landlord expect their payment, so the lawyer needs to protect herself from the fickle client.

The advance fee can be used with either a flat fee or an hourly fee, or some blend of the two fees. More on that later.

The third form of engagement is the flat fee. This is where the professional shows a high degree of professionalism to the client. This is evidence of experience, of confidence, and of mastery of the issue the client has. As a result it carries the most risk for both the lawyer and client. The risks are that the lawyer will underestimate the efforts needed to resolve the client’s concerns, and the risk that the lawyer will overestimate the efforts needed. In future posts we will discuss risks and rewards of flat fees, and the need to engage in the fee setting with integrity.