The New Normal
Why it’s time to overhaul the Model Rule on fees to better serve clients
Posted Jun 26, 2014 8:30 AM CDT
By David Peer
Well-known litigator David Boies recently panned the billable hour as “a problem” that “creates a conflict of interest between the lawyer and the client.” And Ted Olson has said he negotiates a fixed fee for legal work whenever possible, so “then a client knows if it’s expensive.”
Eighty percent of law firm leaders who responded to Altman Weil’s 2013 Law Firms in Transition Flash Survey (PDF) indicated that they believe that "more nonhourly billing" is here to stay.
Yet while awareness of value-based fees appears to be at an all-time high, implementation has been slow to materialize.
According to Altman Weil, the same law firm leaders surveyed reported that only 29 percent of their firms had changed their strategic approach to pricing since the recession. Alternative fee arrangements accounted for a mere 10 percent of fees collected. And the majority of AFAs, two-thirds of them, were “provided in response to client requests,” as opposed to being offered proactively.
This should come as no surprise. Developing new pricing models and changing long-standing traditions can be costly. Lawyers need a reason, an incentive, to try value pricing if they’re going to abandon traditional billing methods. As Paul Lippe wrote in his introductory New Normal post, “change in the modern world is … messy” and often does not follow the “traditional lawyer model of change,” epitomized by rulemaking. This is undoubtedly true.
Yet, rulemaking may be exactly the sort of incentive that can encourage—or potentially force—attorneys to absorb the initial cost of change. Rulemaking can be a powerful tool for stimulating and guiding even the messiest of change, and we cannot ignore the fact that, as a self-regulated profession, making the rules of the game is both our privilege and our duty.
So here’s the question: Do we take initiative to craft rules that encourage the type of change we desire, or do we wait until the rules encumber the profession and must be changed?
While enrolled in a Legal Innovation course at the University of Southern California, I developed a proposal to amend the ABA Model Rules of Professional Conduct regarding fees to discourage attorneys from offering hourly billing as their default fee arrangement and reflect what I hope will be the profession’s renewed focus on providing value to clients through pricing mechanisms.
In my mind, there is no question that Model Rule 1.5 needs a makeover. Rule 1.5, “Fees,” lists eight factors to be considered in determining whether a fee is reasonable. Of these eight factors, only one accounts for the value of the legal service to the client. In contrast, at least three of the eight factors directly address the cost of the representation to the attorney, including preclusion from the attorney seeking other work, the time and labor required, and time limitations.
Consider for a moment the implication of these factors. The current rules imply that it is “reasonable” to charge a client an exorbitant fee for a relatively useless service, so long as the service is inconvenient for the attorney. While lawyers are obligated to disclose and avoid conflicts of interest in most dimensions of their work, few disclose the fundamental conflict of interest between the lawyers’ pursuit of income and the client’s desire for value. Furthermore, although the rules require that attorneys communicate the scope of the representation and the basis of the fee to their clients, the rules give no guidance on what such a conversation should include.
My proposal would make three significant changes to the current Model Rule 1.5. First, the “reasonable fee” analysis is restructured, placing greater emphasis on the value provided to the client while accounting for the distribution of financial risk between the client and the attorney in the representation. Second, the proposed rule requires that attorneys have a comprehensive discussion with their clients to understand what exactly the client hopes to accomplish through the representation as well as to decide whether the attorney is equipped to deliver results at a price that the client can afford. These conversations—which quality attorneys are already having—should give attorneys the information necessary to craft an effective fee agreement. Finally, and the most significant departure from the current rules, the proposal limits an attorney’s ability to offer hourly billing arrangements out of habit, ignorance, or laziness. However, the proposal explicitly sanctions hourly billing where:
(1) The client is a sophisticated user of legal services.
(2) The attorney has insufficient information to reasonably predict the amount of labor required in the matter.
(3) The client requests hourly billing and provides informed consent after the attorney makes certain disclosures regarding the conflict of interest created by billing as well as alternative fee arrangements.
Click here to see the full text of the proposed rule, along with the original ABA Model Rule 1.5.
This is, undoubtedly, a top-down approach to implementing change. However, there are advantages to such an approach. First, a proposed amendment may stimulate discussion among those with vested interests in the rules—attorneys in states that adopt the ABA Model Rules and the clients who hire them. And second, if the proposal is adopted, every law student will need to learn about AFAs and the conflicts of interest that can be created by fee arrangements in order to pass the Multistate Professional Responsibility Exam.
I readily acknowledge that, as a graduating law student, my experience with fee arrangements is minimal. However, my research and my conversations with practicing attorneys led me to believe that former ABA president Robert Hirshon was on the right track when he concluded in a 2002 ABA Commission on Billable Hours Report (PDF) that an overemphasis on billable hours was the source of “many of the legal profession’s contemporary woes.”
Although any member of the ABA may propose amendments to the Model Rules, passing a proposal through the ABA House of Delegates requires significant support. This proposal has yet to be formally presented to the ABA, but it has already received support from leaders in the profession. Mike Roster, former managing partner of Morrison & Foerster’s Los Angeles office and co-chair of the Association of Corporate Counsel’s Value Challenge Steering Committee, noted that, after showing the proposal to “key general counsel and others, they all had the same reaction. [The] proposal is so basic yet also innovative that in retrospect both the problem and the solution were in front of us all along … Billing by the hour should never have become the default.”
Changing the industry standard won’t be easy, but it will be worth it. Please take a moment to read the proposed amendments, offer feedback, and lend support.
David Peer was a law clerk with De Diego Law Group, where he advised clients on compliance with federal and international data sharing regulations. David recently graduated University of Southern California's Gould School of Law and will be joining Wilmer Cutler Pickering Hale and Dorr in the fall.
Updated at 12:37 p.m. to fix a link to the proposal.