What is wrong with an Hourly Fee?

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The greatest reward for a client in working with a value priced fee is the certainty and transparency that occurs. If the fee does not sound right or fair, the client can walk away, or at least can consider the quoted fee to determine if there is enough value to the client to pursue the legal matter in exchange for the fees to be charged.

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. If the lawyer will not cap the total fee, the client is taking on the risks of trouble. And when the client has paid more than the case may have been worth to the client, and the case is not over, there are no good solutions. Dropping the case does not seem appropriate, after all the sunk costs, and then losing is a hard choice. But pushing on may make no sense either.

The legal matter will determine the number of hours invested by the lawyer, and paid for by the client. Drafting common documents or reviewing documents that have been prepared by another lawyer should be easily estimated. Negotiations on document is not easily estimated due to the nature some lawyer have of arguing every jot and tittle of a document. (One party to a transaction accused the lawyer of spending time grading each other’s documents – which I found in that matter to be pretty perceptive.)

The per hour fee is a measure of some worth, one that for the most part indicates the lawyer’s own sense of self-worth. I think too many lawyers suffer from a lack of self-worth for the real value they provide to clients, and will discuss that more in a future post. For some lawyers it is important to be the highest hourly fee in the community, for others it is critical to not be the highest priced. There are lawyers in our community that are worth more than the fee they currently charge, and others that are not worth the fees they charge. Calculating that on an hourly basis, rather than a case by case basis is not possible.

Is the work being done worth a premium price to the client? If a Yugo does the job for the client, then why should the client pay a Lexus price? But if the client is in a serious legal situation, whether business, estate planning or criminal, a Yugo value legal representation will not accomplish what is needed. And that is true of either a value priced fee or an hourly fee. To some extent, the value of the client’s services are a reflection of the client’s self worth as much as the attorney’s.

There are some good things about hourly fees. It is quoted in bite sized numbers. A three figure number is easier to hear than a four or five figure amount. It can be counted, whether in 3, 6 or 15 minute segments. The sticker shock of how much this problem will cost seems less, if only for a while. And if everything goes well in the case, the number will be smaller than if everything goes wrong in a case.

You may be able to get the lawyer to estimate the number of hours that her experience tells her that this kind of case has taken before. But when you do that, you in essence are asking about the cost of a value priced case.

On several occasions estimating a range of fees (rate x time anticipated for quick results or for slow) resulted in an angry client – when the fee was not the bottom figure quoted in the range. My description of the variables (if we don’t have to file a suit, if the prosecutor takes our offer,. . .) never stuck as firmly as the bottom number of a range of numbers. The client then blamed me for a higher fee, even when I had told him of the variables and put them in the engagement letter, I still seldom collected more than the lower fee. The anger over the fee turned the client from being on the same side as I was, to putting me on another side from my client over the fees. That is not where I want to be in relationship with my client.

If the lawyer is the professional, shouldn’t she show it by setting the fee at a price where the lawyer makes a good living, but the client can live too? More on this later.

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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.

The Importance of Legal Fees to the Client

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One of the bad ideas that lawyers suffer with is that clients do not want to pay their legal fees. The bad idea is reinforced by a large number of potential clients who act as if they are somehow entitled to the lawyer’s skills, experience and accomplishments without an exchange of fair value. Lawyers appreciate the potential clients who expect to pay fairly for the legal services the client is asking for. This is not a statement that fees are not negotiable, but fair fees are necessary.

The attorney-client relationship is a fiduciary relationship, which requires the lawyer to place the client’s interests paramount once the attorney-client relationship is established. That is a requirement of the Rules of Professional Conduct that apply to the lawyer. So the terms of the fee arrangement need to be established prior to the creation of the attorney-client relationship, while the person seeking legal assistance is a potential client. In order to do this, the lawyer needs to have a fair amount of information from the potential client before accepting the engagement. The information is needed to determine the scope of the engagement offering. The scope of the engagement has a great amount to do with the establishment of the legal fees expected to perform those tasks.

So why is this titled “the Importance of Legal Fees to the Client?” The fees a client pays engages the lawyer. As in most relationships, quality costs more than average, and quality legal relationships cost more than average legal relationships. While it is not a universal rule (there are lots of instances of clients paying top fees for poor quality services, or modest fees for quality legal services – a future post), there is some correlation between lawyers who study their fields, attend or teach at continuing legal education seminars and the quality of their work. Getting a fair dollar’s worth for the fees spent for legal services is important to our clients.

How does a client determine the fees are fair. The best way is to establish those fees up front. Clients often understand intuitively the likely fees for the complexity of the services they need. They may have a longstanding relationship with the lawyer or her firm. Just as a client know if they are in the market for a used car or a luxury sedan, they can choose to spend the amount needed for the services they are requiring. Potential clients know that an estate plan for a successful business owner will cost several thousand dollars, while the estate plan for a shift worker at the owner’s business will likely be several hundred dollars.

They know that the legal issue they are concerned about is worth more than the issue that they are pulled into unwillingly. Sometimes a potential client needs to do some comparison shopping. Compare the skills of the lawyers who handle their matters, the client service they and the law firm staff provide, and the experiences of prior clients. On the list of comparisons , but down that list is the fee that is charged.

Up front fees can produce sticker shock, but with a cap, based on the scope of services. Hourly fees result in a measurement of unimportant elements for the client. It is the result most clients are interested in, a successful conclusion to the legal issue. A prompt conclusion is usually more valuable to the client than a protracted exposure to legal concerns. A fee agreed to between the lawyer and potential client, before starting the work aligns the lawyer’s interests with the client’s. Clarity, certainty and agreement are reached early, and the focus can move to the issue to be resolved. It leaves the client in the position to establish control over the legal issue, whether it is having important legal documents prepared or engaging in litigation.

Discuss this issue with your lawyer. It will be uncomfortable, but important to have this discussion. If your lawyer is afraid to have the discussion, ask why. If the lawyer is afraid to establish the boundaries of your relationship, how will the same lawyer establish the terms of your legal interests in the matter you have? Feel free to call a lawyer who is not afraid of you as the prospective client.