What is your lawyer worth, and who gets to decide that?

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The measure of a lawyer’s worth is decided by two folks. You as the client and the lawyer. The best way to make that determination is for the lawyer to make an offer to you, tell you the services she or he can offer and the price for those services, and then let you as the client make the call. Just like a new pair of jeans, you decide whether to hire the lawyer, because you know the price.

Generally it is when the client carefully decides which lawyers to consult that the first steps are made. A dartboard to the phone book is not the way to choose the lawyers you want to talk to, and a quick reaction to a fee quote is not the way to decide if that is the lawyer you want handling your legal matter. After the appointment, take the time to consider, in a calm way, the issues the lawyer describes for you. If it is a lawsuit, see if you agree with the early analysis. What attitude will the opposing party take, if you know. What is known about the opposing lawyer, if one is in the case? What experience does the lawyer have with this area of the law?

One question is whether you should research the lawyers you want to consult with. My answer is — of course. You have to be careful, since appellate cases are easy to find on Google Scholar and other sites. But beware, because some lawyers take lots of lost cases up on appeal, while other lawyers win in a manner that discourages appeals. Some lawyers do appellate work and you will see their names often, but are not to successful. Look for other signs of the lawyer’s professionalism. Generally you won’t see testimonials for lawyers in Indiana in advertising or on websites. The Rules prohibit lawyers from using testimonials in most cases.

Take the measure of the lawyers you want to consult with. Choose two or three, and tell the lawyers what you are doing. Compare and contrast the lawyers, make a decision based on the issues that are important to the case, and to you. Do you communicate easily, did the lawyer understand the issues? Did the description of the issues make sense to you? Do you think the lawyer can do a good job representing you?

Then consider the remaining issues before you make the decision. Is the fee of your better candidate in line with (not necessarily the least of) the other lawyer you have consulted with? Was the staff helpful and attentive? What is the lawyer’s reputation for timeliness and accuracy? Do your personalities compliment each other – high intensity clients often favor high intensity lawyers, while calm clients may not mesh with a scorched earth style lawyer.

While the high fee quote lawyer may not be your first choice, look at the offer without emotion or frustration. What does the offer mean? Is the fee capped? If so, what can cause it to change? If the fee is not obviously capped, then you need to decide if the lawyer is putting some risk of the case on the client. That can work, if the risk of savings is with the client as well as the risk of extended efforts and higher fees. Determine if there is a money back guarantee for any or all the issues. Can the case be broken into phases, leaving the client with some opportunities to stop the case?

The more options for the client, the easier to do the analysis to choose the lawyer for your legal matter. The first choice is the lawyer’s, the final choice is yours, as the client. Exercise it wisely. Don’t get caught up in sticker shock.

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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.

What are the lawyer’s incentives for Value Priced fees?

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Potential clients (and lawyers) need to know that lawyers change their incentives in flat fee cases. It happens because of the different type of relationship with the new client. The fee is fixed, the lawyer and client can focus on handling the case and do not have to worry about the fee relationship, beyond making payments if that is the agreement. The often awkward discussions about “did you need to spend time doing that” and “how much is this case going to cost me” are not going to occur.

The only way to get to a successful “flat fee” is to engage in serious discussions about the case, the issues of great concern to the client, and the lawyer’s ability to meet those needs. The lawyer will get to know more about the potential client early enough to allow it to make a rational decision to become partners in the case.

The design is that the lawyer should know that the client does not expect an inexpensive resolution to a complex problem, and the client with the complex case gives up hoping that the lawyer can easily produce an inexpensive miracle. Lawyers will have more walk away clients than before, due to the sticker-shock of realistic legal fees. But the walk away is better for the lawyer than a client who decides the lawyer has lied about the complexity or expense of the legal matter.

As a matter of fact, the lawyer and client can enjoy the miracle if it occurs. Say a client brings in a case of some complexity. The lawyer’s experience and knowledge, plus her understanding of the facts, the parties and the capacity of the client to deal with the matter allows the creation of a fair fee, offered before the engagement and accepted by the client. At that time neither the client or the lawyer know if the case will take weeks or years to get to a resolution.

Due to the lawyer’s exceptional handling of the case, a matter that might have taken years or at least months is resolved in a matter of weeks. The lawyer’s reputation of integrity, and ability to show the opposing party a means of successful settlement helps the client make a prompt resolution of the case. The client thinks this is a miracle, and the lawyer makes more than might be expected if the matter was billed on an hourly basis.

The client still gets the benefit of the bargain, in avoiding a protracted period involved with the case. The lawyer benefits with a fee that is earned by the above average skills put into the case.

Would the client have benefited by an hourly fee? Probably not. Without a reward for the prompt resolution, the case may not have had a priority among the many cases in the lawyer’s file cabinet. The value of a dollar settlement today is worth more than the value of that same amount of settlement several months from now. And in today’s economy, a check deposited and paid, even from an insurance company today is better than a promise to pay tomorrow. Insurance companies have died while people were waiting for their settlement checks.

This also can work the other way. A lawyer with an unrealistic expectation of her ability to close out a case may end up with a long case with lots of hearings and research and time spent. If the scope does not change, the flat fee protects the client from an unexpectedly (because that is the case the lawyer described) complex case.

An alignment of the interests of the lawyer and client is possible, and an Alternative Fee or Flat Fee arrangement is a better way to handle that. A good fee that works for the mutual benefit of the client and the lawyer is one mark of professionalism in a lawyer.

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.

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.

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