Still dominant

The billable hour bestrides the world of high-stakes litigation like a Colossus. Whatever its prospects,¹ today it continues to set the baseline for expectations about attorneys’ fees.

Big firms charge by the hour, class action lawyers detail “lodestars” in fee applications, flat fees aim to smooth out hypothetical hourly charges, and hybrid and contingent fees can trigger payment of a multiple of the lodestar. Though imperfect as a proxy for value, people use the billable hour — or hourly fee — for that purpose all the time.

Because we want to understand all the options that business clients have for paying lawyers, we need to understand the main traits of hourly (and all other) fees — control, risk, and upside — first. Let’s take a look.

Plusses and minuses — client perspective

Paying by the hour maximizes the control that the client has over its lawyers. Monthly invoices detail what the lawyers have done to earn a fee, and if the client doesn’t like what it sees, it can call for changes. Strategic choices may undergo a cost-benefit analysis by a client who is naturally skeptical of bold and expensive initiatives. Providing specifics to the client also enforces (some) discipline on the lawyers. And because the client doesn’t owe a fee that depends on the results of the engagement, the process of firing the law firm and replacing it with another one involves less difficulty.

But almost all of the risk — arising both from the merits and from the litigation process itself — remains with the client. A bad outcome on the merits generally won’t reduce the hourly fee that the client must pay the lawyers. And the out of pocket cost of discovery, expert witnesses, travel, trial preparation, and trial rests entirely on the client. Complexity, inefficiency, excessive discovery and motion practice, continuances, acts of God, and other slings and arrows of litigation come at the client’s sole expense.

The upside of litigating also stays with the client. It need not share with counsel the benefits of a quick or easy resolution of a case.

Plusses and minuses — lawyer’s view

A lawyer who works by the hour of course retains professional independence but submits to close monitoring by the client and cedes some control. The lawyer must justify every hourly fraction she bills for. She must overcome client skepticism about potentially risky or costly strategic and tactical choices. She may have to provide budgets and respond to auditor queries and nitpicking.

The low risk level that the lawyer faces compensates somewhat for her lack of control. Neither extraordinary expense of the process nor a surprisingly bad result affects the lawyer’s income. The lawyer’s risk consists mainly in the possibility of damage to reputation and the possibility that the client won’t or can’t pay what it owes.

The lawyer’s upside corresponds to her risk. She won’t reap the rewards of exceptionally favorable outcomes, either process-wise or merits-wise, and will benefit mainly from a reputational boost and from a greater likelihood that the client can and will pay the lawyer’s invoices.

The case for paying/working by the hour

The hourly fee represents the most conservative option for both clients and lawyers. It has the most appeal in situations where the client faces the potential for loss rather than a prospect of gain — where the client is a defendant.

That is because people will spend more to avoid loss than to secure gain. The typical defense client thus accepts the likelihood of high hourly fees for the sake of maximizing its ability to manage the downside risk of a loss on the merits, including harm to the client’s reputation.

Next time

I will explore in future posts the question of whether the extreme concentration of risk in the client makes sense or whether better alternatives exist. You will not be surprised to learn that I do believe better alternatives exist.

The next post will deal with one of them — an option that shares a modest amount of risk: flat fees.

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¹It may not last much longer. It may go the way of its forebears — “minimum fees”, which bar associations set in hopes of thwarting price competition, and “for services rendered” invoices, which reflected subjective, after-the-fact judgment about the legal services’ value. For more history, see Robert E. Hirshon, “The Billable Hour Is Dead. Long Live . . .“, GPSolo, Jan./Feb. 2013; “In the Beginning: Hourly fees are relatively new for lawyers“, Civilian’s Guide to Lawyers, Apr. 11, 2015.