What are the client incentives for a Value Priced fee?

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Potential clients need to know that lawyers have a variety of incentives to help clients with their legal problems. Among the incentives is the chance to make a living as a lawyer. Lawyers have college (four or more years) plus law school (three or more years) of education, study and postponement of their earning years invested in preparation to be available to help our clients, whatever the legal matter is.

The types of incentives can be the feelings of satisfaction in helping a person resolve a legal issue, or the improvement of a professional’s reputation in a case which gets the kind of notice that affects the reputation and esteem of the lawyer. Some lawyers are reported to enjoy getting paid for their efforts at helping clients. Lawyers who over a long period do not regularly get paid usually stop practicing law.

Clients also have incentives for engaging legal services. The client may have recently been sued, been involved in an accident, been charged with a crime, or may have decided to take control of a situation by obtaining business counseling or planning their estate. Whatever the triggering event, the lawyer will appreciate the call (if not, call someone else) as it allows the lawyer to show the skills and experiences she has worked for years to acquire to you as a potential client, and if hired to use those skills for your best interests.

To make all that come about the lawyer and client need to come to agreement on the compensation to be paid for the lawyer’s (or law firm’s) services. Lawyers operate under a rule on legal fees based on the American Bar Association’s Model Rules of Professional Conduct. All states, except California use the rules or some variation of them as their code of ethics. Rule 1.5 governs Legal Fees, and this is Indiana’s version. The primary factor in the rule is that a lawyer shall not charge a fee that “is unreasonable.” There are eight other factors listed, which cover 14 actual factors.

As long as the fee arrangement fits the Rule 1.5 guidelines (and several cases that interpret the Rule) the lawyer and client are permitted to enter into any fee agreement they can work out. The three syles of fee agreements are described in the link to an earlier post.

The structure of a fee agreement can shift the risks in the case from the client to the lawyer, so long as both parties understand what is happening. With a risk shift to the lawyer, there are possible rewards and penalties which follow to the lawyer. As the lawyer accepts risks, the risks to the client diminish. Most clients appreciate a reduction in the risks of legal work.

So, why are value priced fees appropriate for clients in so many types of cases, and why not in all cases? The risks for each side changes with an agreement for flat fees. for instance in a personal injury case, lawyers who skillfully choose their caseload will accept a percentage of the recovery as a fee. If there is no recovery (the legal outcome that fulfills the scope of services offered), the lawyer takes no fee. If the case settles promptly, the full fee will be taken by the lawyer, as agreed.

In these and other types of legal matters with a value priced flat fee the potential client gets the advantage of knowing the scope of services or outcome that will be provided, and the total fee to be paid. That means that when the scope of services is completed, the lawyer is done and gets paid or keeps the fee. It also means that if the scope of services changes in a manner not foreseen, or agreed to when setting the fees, the fees may change (properly with a Rule 1.8 explanation and opportunity). Finally, if the lawyer does not complete the scope of services, some or all the fee shall be refunded if prepaid.

The flat fee establishes that it is the lawyer’s incentive is to complete the services quickly for the benefit of the client, and also for the lawyer. The lawyer loses any improper reason to create or increase unnecessary conflict with the opponent or her lawyer, as it will not help to increase the profit for the lawyer, since time spent is not a variable in the fee equation. But the fee needs to be based on a proper value pricing analysis, since a lawyer who consistently quotes a fee that is inadequate for the scope of services finally provided will not stay in the profession too long.

The greatest reward for a client in working out a value priced flat fee is the transparency that occurs. If a legal representation is quoted at an hourly rate, the client will have little indication of what the final cost will be. In an hourly rate fee there are two components to the final fee, the rate times the time spent on the matter. There is no protection for the client from unnecessary expansion of the dispute in order to build hours to bill.

We can discuss the components of an hourly fee in an upcoming post. I look forward to your comments.

Risks to Clients from Value Priced Flat Fees

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Value pricing services, also called flat fees are the rage among lawyers’ posts these days. Not so much that a majority of  lawyers are offering flat fees to clients, yet. The last post “Rewards of Value Priced Flat Fees”  did a good job of defining value pricing and flat fees. “Value pricing”  means to price the services at a fixed price for the project and for the client, all  before providing the services to the client. The quoted price addresses the value of the service to the buyer of the service, or client, and the value of the service to the seller of the service, the lawyer.

A flat fee is not a guarantee that the fees for handling all of that type of case are the same — its not like all Big Macs® that are priced at $3.09 on the menu board. The value of a flat fee is shown in two ways: 1) the fee is quoted to the client before the engagement agreement is completed, for an agreed 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 or the case (change orders are used if that happens).  And if the lawyer does not complete the work, part or all of the fee must be refunded to the client.

The client’s risks are several. First, the risk of sticker shock to the client exists.  A fence fight with a neighbor seems like something that should be easily solved, but experienced law firms can tell potential clients that neighbors will often spend thousands of dollars protecting inches of grass when the neighbor’s yard is involved.  The shock of knowing that it may cost thousands to see if a court will require a neighbor to move a fence a foot or twenty may seem ridiculous.  But as a lawyer I do not want to handle a fence case, or any other types of cases that will cause me or my firm to lose money on the matter. Clients sometime react poorly to the best combination of lawyer skills and fees charged.

I also don’t want to have a client expect to resolve a fence case for a few hundred dollars from a “small retainer” offer, and then have the fee turn into tens of thousands of dollars. The lawyer assumes the risk that the client does not appreciate the time, effort or costs, and so does not hire the lawyer, choosing instead a less experienced, or skilled lawyer who cannot properly discern the needed efforts, legal research and skills needed to do a quality job. But, unless the client is fully informed of the possible  scope of the dispute, and the risks turned into a flat fee, the client may have a large fee balance due to the lawyer at the end of a case.

A second risk is that the client (or the lawyer) may have an unrealistic view of the scope of issues that may come about. As a result, the discussion that is needed to determine a fair fee may be different than expected.  Without the lawyer and the client devoting adequate time to discuss the client’s legal  matter, and each asking many questions about the legal and factual issues in that matter, the proper scope may be missed. That may result in a misquoted fee, too low or too high for the case.

A third risk is that the lawyer may have to do a preliminary research of the law (as well as a conflicts check and a study to determine the lawyer’s competence in the area of law) in order to decide whether to take the case. Taking time to decide the legal nature of the issues is in the long term better for all parties than for the lawyer and client to get deep in the case only to learn that a prior appellate case has ruled that the client’s facts do not support a verdict in your favor. The risk to the client is that some lawyers charge a consultation fee, and the fee may end up with a determination that the lawyer is not right for the case.

One risk that bothers some clients is that after settling on a fee, it may be that some of the actual issues settle quickly in the client’s favor, resulting in a fee for the lawyer in the case that took less time than the client or the lawyer expected.  Most clients accept that a prompt resolution is in the client’s benefit. Few people really want to live through  a legal battle that takes months or years, but when a lawyer succeeds in convincing the opposing party and its attorney that the client’s position is legally correct, there may be some regret that the battle was not “harder fought.”  This will occasionally cause problems.

The best resolution is to confirm that the client pays the fee for bringing the case to its outcome, not for the lawyer’s perceived effort.  Most clients want to hire a better attorney than the opponent has, and when she turns out to be the better attorney, the client should rejoice.

But, if the scope changes, the lawyer owes the client a change in the fees charged.  Using the dissolution example in the prior post, if the client is worried that a major custody fight is expected, and the fees address a dispute over that issue, and then the spouse offers to give up on the custody issue without any custody fight, the fees should be adjusted down, just as if the opposite situation had occurred. No custody fight expected, but a major battle ensues, the fees should be adjusted up.

The best way to avoid problems is to come to an agreement about what the risks are that are shared by the lawyer or law firm, and which are reduced from the traditional assignment of all risks to the client.  When that happens, a better outcome should happen for clients and for lawyers.  Cases may  be handled with more alignment in the interest of the client and the lawyer. More on that in the next post.