While rumors of the demise of the billable hour may have been greatly exaggerated, law firms are increasingly offering a range of alternative fee arrangements for clients now more open to accepting them.
Apart from the traditional contingency fee agreement, the litigation department at Nixon Peabody has developed a portfolio of three basic types of alternative fee structures. According to department Chair W. Scott O’Connell, clients tend to be most interested in agreements that offer some predictability in terms of anticipated costs while retaining a performance-based component.
“Clients want to make sure that lawyers are efficient in all ways possible, and the straight billable hour does not provide the oversight that clients want,” O’Connell said. “When there is a success premium — a fee based on performance — that all of a sudden changes the dynamic, shifting the risks to the law firm in some measure.”
Alternative fee arrangements have been used by intellectual property lawyers for years, according to Sarah Anne Keefe, managing partner at Womble, Bond, Dickinson’s Boston office. An IP attorney herself, Keefe said over the years she’s seen a gradual increase in the number of companies entering into alternative fee agreements.
That said, not all clients are on board with the concept, according to Keefe.
“Almost every company is interested in the subject, wants to know [what a firm is] offering, and is pleased that there seems to be choices. But ultimately, over the years, the majority of companies haven’t chosen the alternative fee method,” Keefe said.
However, Keefe said the COVID crisis has had a clear impact on companies’ willingness to sign on to alternative fee arrangements.
“More companies are overcoming their reluctance to move to an alternative fee, or are facing pressures that finally caused them to take the necessary steps internally to move alternative fees forward,” Keefe said.
“More companies are overcoming their reluctance to move to an alternative fee.”
— Sarah Anne Keefe, Womble, Bond, Dickinson
But there are certain insurmountable limitations to the utility of alternative fee agreements, according to Providence attorney Michael M. Goldberg.
“In litigation especially, you can’t take that flat fee. You’ll get burnt because you don’t know how long the case is going to go,” Goldberg said.
Barry Needleman said his firm, McLane Middleton, has had a fair amount of experience with alternative billing arrangements.
“Some of them are very simple and straightforward, like flat fees for simple trust and estate matters,” said Needleman, managing director of the New Hampshire-based firm.
McLane Middleton has entered into other alternative fee agreements that are far more complicated, he said. For example, the firm recently executed a deal to do the permitting on a large energy project.
“We worked out a deal with a client giving a budget number for the various phases of the work,” Needleman said. “If we do better than the budget, we share in the [difference]. If we do worse, then we [bear a share in the difference] on the other side.”
Needleman said a fee agreement like that can work for both client and counsel.
“The client gets the predictability of that budget number,” Needleman said. “If we do better, then they’re happy. If we do worse, they’re not necessarily happy but at least they know we have skin in the game and we’re sharing in that [burden]. It aligns our interests in that way.”
“I don’t see the billable hour going away any time soon in favor of alternative billing, but I see lots of different alternative billing arrangements that, in the right circumstances, do work.”
— Barry Needleman, McLane Middleton
Still, Needleman said that while clients frequently inquire about alternative billing, getting both sides to agree on terms can be a different story.
“When we respond to [requests for proposals], we always see clients looking for suggestions with regard to alternative billing,” Needleman said. “But there always tends to be a gap in between us offering alternative billing and clients interested in pursuing it. So I don’t see the billable hour going away any time soon in favor of alternative billing, but I see lots of different alternative billing arrangements that, in the right circumstances, do work.”
While ordinarily not in favor of flat fees, Goldberg acknowledged that sometimes lawyers need to accommodate clients in the form of offering alternative fee arrangements.
“You have to find a way to work with clients because, frankly, a lot of them don’t have the money to give you,” Goldberg said.
Fixed fees and discounts
O’Connell — who works out of his firm’s offices in Boston and Manchester, New Hampshire — said Nixon Peabody’s litigation department routinely considers a wide variety of alternative fee arrangements that generally fall into three categories.
Agreements offering clients discounted hourly fees are the most prevalent, he said.
Increasingly, though, O’Connell said clients are requesting proposals involving fixed fees for certain kinds of litigation as well as alternative fees that feature a success-based component based on agreed-upon factors and guideposts achieved during the course of the litigation.
When negotiating a fixed-fee agreement, O’Connell said it’s important to have “circuit breakers” built into the terms of the contract in the event that the scope of the litigation goes beyond what was anticipated by the parties.
In addition to discounted hourly rates, Keefe said Womble also offers fee agreements with “blended rates.”
“In other words, a client would pay a certain hourly rate regardless of the seniority of the lawyer or timekeeper on the task,” Keefe said. “The client would be charged the same rate [if the work was performed] by a partner, associate or of counsel, [meaning] the client only concerns themselves with the number of hours invested in the project.”
According to Keefe, the benefit to clients of blended rates is that it incentivizes firms to push the work down to the most economical time-keeper/provider that can do the work while maintaining the quality of legal services.
Keefe said Womble also offers fee caps or project caps in which the client receives an estimate for the work, which the firm will not exceed.
In terms of litigation or larger acquisitions, Keefe said her firm offers “phase-based” billings, which involves the firm projecting spending based on the typical path a case would take.
“It allows the client to budget and pay for the case as it moves through the various stages,” Keefe said.
Finally, Keefe said Womble offers a “retainer model” in which the firm offers a fixed menu of services on an “all you can eat” basis for a monthly fee.
“While that is great for clients in terms of expectations and budgeting, what we find is that it gets clients thinking of us as embedded lawyers within their own legal department. They don’t hesitate to pick up the phone because they don’t see it as the [billable hour] clock has started ticking.”
In order to evaluate the appropriate terms for any alternative fee arrangement, O’Connell said that Nixon Peabody established an “underwriting group” in its litigation department that’s comprised of partners experienced in assessing the risks and costs of litigation.
“I turn to them and my business manager to make sure that we have set the fee agreement up for success, there’s clarity on what success means [to earn] a premium, we have the right staffing for fixed-fee matters, and we have a real good handle on what it is going to cost to deliver the product to the client,” O’Connell explained.
Keefe said Womble likewise has the systems in place necessary to capture and process the historical data required for assessing the suitability of an alternative fee arrangement for both the firm and the client. For example, she said, Womble uses artificial intelligence programs to predict the life span and “flow” of a typical case.
“Hopefully, more people will feel more comfortable with [alternative fees] as companies are looking for a solution to either a [missed revenue target], internal staffing or furlough issues, needed investment in technology, or whatever it is that’s bubbling to the surface causing them to be willing to bite the bullet,” Keefe said.
Apart from alternative fee agreements, O’Connell said clients frequently express interest in “straight up” contingency fee agreements.
“Clients really do appreciate when lawyers share the risk and burden of litigation, go shoulder to shoulder as partners, believe in their case, and work efficiently to get some type of reward,” he said.
When a client may not have the means to bear the burden of litigation and the firm decides it is not willing to take on the risk of a particular case on a straight contingency basis, O’Connell said more and more companies in the business of funding litigation are coming into play.
“Increasingly, we’re seeing funders with a lot of money on the sidelines and looking for ways to deploy it to earn returns for their investors,” he said. “There are very aggressive efforts by funders to have us talk with them about opportunities.”