beyond the billable hour: how alternative & contingency fees are changing law firms

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How Alternative & Contingency Fees Are Changing Law Firms

A Clio WebinarJoshua Lenon - Clio

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Instructors

Joshua Lenon• Lawyer in Residence at Clio• Attorney Admitted in New

York• @JoshuaLenon

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Agenda

• Lessons on Alternative Fees (20 minutes)• Ethics Surrounding Alternative Fees (15

minutes)• Resources on Contingency & Alternative

Fees (20 minutes)• Questions (5 minutes)

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LESSONS ON ALTERNATIVE FEES

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Fees Over Time

• 1800’s – Capped “per service” per State Law

• 1908 – Contingency fees approved by American Bar Association

• 1940’s – Rise of State Bar Association’s minimum fee schedules

• 1975 - Goldfarb v. Virginia State Bar, 421 US 773 (1975)

Source:.“How.Billable.Hours.Changed.the.Legal.Profession,”.Bloomberg.Business,.12/4/14

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Laffey Matrix

$150

$255

$300

$370

$460

$520

$0 $100 $200 $300 $400 $500 $600

Rates

2014K2015

20+.years 11K19.years 8K10.years 4K7.years 1K3.years Paralegals.&.Law.Clerks

Source:.USAO.DC,.http://www.justice.gov/usaoKdc/civilKdivision

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Laffey Matrix

$110

$150

$185

$255

$225

$300

$280

$370

$345

$460

$390

$520

$0 $100 $200 $300 $400 $500 $600

2004

2015

2004K2005.vs..2014K2015


Source:.USAO.DC,.http://www.justice.gov/usaoKdc/civilKdivision

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Laffey Matrix vs. Corporate Rates

$150

$384

$255

$478

$300

$503

$370

$706

$460

$793

$520

$0 $100 $200 $300 $400 $500 $600 $700 $800 $900

CEB.M&A

2015


Source:.CEB.Inc.,.“The.2014.Real.Rate.Report”

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Rate Influencers

•The.most.important.determinant.of.a.lawyer’s.hourly.rate.is.the.size.of.thefirm.producing.the.work.Firm.Size

•Lawyers.billing.in.New.York.and.Washington,.DC,.have.the.most.predictive.power.on.lawyer.rate.compared.to.other.cities.and.follow.closely.after.only.law.firm.size.overall.Law.Firm.Office.Location

•Although.years.of.experience.is.a.statistically.significant.predictor.of.rates for.all.lawyers,.it.is.an.even.more.important.predictor.of.partner.rates.Lawyer.Experience

•Even.after.accounting.for.the.years.of.experience.a.lawyer.has.accrued,.whether.the.lawyer.is.a.partner.or.associate.is.the.fourth.most.important.predictor.of.hourly.rates.Timekeeper.Role

•The.statistical.importance.of.individual.practice.areas.varies,.but.finance.corporate,.patents,.and.mergers.and.acquisitions.work.are.among.the.most.meaningful.Practice.Area

•The.statistical.importance.of.individual.practice.areas.varies,.but.finance,corporate,.patents,.and.mergers.and.acquisitions.work.are.among.the.mostmeaningful.

Client.Industry

Source:.CEB.Inc.,.“The.2014.Real.Rate.Report”

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Complexity in predicting legal costs is driving demand for a better

alternative to the business hour.

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Client Preferred Pricing Strategies

• Transparent pricing - 37%• Guaranteed pricing - 27%• Value-based pricing - 26%• Lowest price - 10%

Source:.Altman.Weil.2014.Chief.Legal.Officer.Survey

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Alternative Fee Arrangements (AFAs)

Increase41%

Stay.the.Same57%

Decrease2%

EXPECTATIONS.OF.INCREASE.IN.AFA.USE

Source:.Norton.Rose.2015.Litigation.Trend.Survey

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Types of AFAs

• Blended Rate• Capped Fee• Conditional Fee• Contingent Fee

• Fixed Fee• Performance /

Rewards-based Fees

• Damages-based Agreements


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Effectiveness of AFAs

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Conditional.Fee

Fixed.Fee

Capped.Fee

Contingent.Fee

DamagesKbased.Agreements

Performance./.RewardsKbased.Fee

Blended.Rate

Effective Very.Effective


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Most Used AFAs

0% 10% 20% 30% 40% 50% 60% 70%

Fixed.Fee

Capped.Fee

Blended.Rate

Performance./.RewardsKbased.Fee

Contingent.Fee


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20% of General Counsels now require fixed fees for portfolio

services

Source:.ACC.Chief.Legal.Office.Survey.2015

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ETHICS SURROUNDING ALTERNATIVE FEES

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MRPC 1.5 Fees

(a) A lawyer shall not make an agreement for, charge, or collect an

unreasonable fee or an unreasonable amount for expenses.

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MRPC 1.5 Fees

8 Point Test1. the time and labor

required, the novelty and difficulty of the questions involved, and the skill requisite to perform the legal service properly;

2. the likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the lawyer;

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MRPC 1.5 Fees

3. the fee customarily charged in the locality for similar legal services;

4. the amount involved and the results obtained;

5. the time limitations imposed by the client or by the circumstances;

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MRPC 1.5 Fees

6. the nature and length of the professional relationship with the client;

7. the experience, reputation, and ability of the lawyer or lawyers performing the services; and

8. whether the fee is fixed or contingent.

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Disclosure Required

When a representation is based upon an hourly rate, the minimum unit of time for which a client will be billed should be apparent. See, Georgia Bar Formal Advisory Op. 01-1

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Get It in Writing

NYCRR §1215 Written Letter of Engagement

The letter of engagement shall address the following matters: 1. Explanation of the scope of the legal services to be

provided;2. Explanation of attorney's fees to be charged,

expenses and billing practices; and, where applicable, shall provide that the client may have a right to arbitrate fee disputes under Part 137 of the Rules of the Chief Administrator.

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Bookkeeping Necessary

MRPC 1.15 (c)

A lawyer shall deposit into a client trust account legal fees and expenses that have been paid in advance, to be withdrawn by the lawyer only as fees are earned or expenses incurred.

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Plan for Refunds

MRPC 1.16 (d)

Upon termination of representation, a lawyer shall take steps to the extent reasonably practicable to protect a client's interests, such as …refunding any advance payment of fee or expense that has not been earned or incurred.

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Limitations Exist

MRPC 1.5 (d)

A lawyer shall not enter into an arrangement for, charge, or collect:

(1) any fee in a domestic relations matter, the payment or amount of which is contingent upon the securing of a divorce or upon the amount of alimony or support, or property settlement in lieu thereof; or(2) a contingent fee for representing a defendant in a criminal case.

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More Limitations

Fees capped by statute:• Wisconsin 814.045(2)(a)– In any action in which compensatory damages

are awarded, the court shall presume that reasonable attorney fees do not exceed 3 times the amount of the compensatory damages awarded

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Even More Limitations

Regulatory Capped Fees• Social Security Claimant Representatives’

reasonable fee is up to 25 percent past-due benefits to the maximum of $6,000.

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Even with limitations imposed by ethical rules, statutes, and regulations – there exists room for creativity when it comes to legal fees.

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Lawyer Deal of the Day

• South Carolina Bar Ethics Advisory Opinion 11-05 (2011)

• New York State Bar Association Committee On Profionall Ethics Opinion No. 897 (Dec. 13, 2011)

1. Mind conflicts,2. Offer refunds on termination, and 3. (NY: Keep fee as a retainer if time period

expires)

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RESOURCES ON CONTINGENCY & ALTERNATIVE FEES

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http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=130438838

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Contingency Fees

“I provided the intelligence required to build the case, the expertise to find

precedents, and the oratory to convince the jury. Any a--hole could

fall down a manhole.”

Source:.jeff Rovin,.500.Great.lawyer jokes 40.(1992)

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Contingency Fee Workflow

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Blended Rate

Instead of using each lawyer’s standard, book, or rack rate, a common or “blended” number is used.

For example, if the standard hourly rates for lawyers on a matter are $800, $600, and $400 per hour, the negotiated blended rate may be $550 per hour.

Source:.“What.Is,.and.Is.Not,.an.Alternative.Fee.Arrangement?”.Law.Technology.Today.12/10/14

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Blended Rates

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Fixed Fee

A single sum for an engagement.

1. Portfolio of Cases2. Single Case3. Phase of Case4. Single Case by Time5. Multiple Cases by

Time

Source:.“What.Is,.and.Is.Not,.an.Alternative.Fee.Arrangement?”.Law.Technology.Today.12/10/14

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Fixed Fee Guidance

https://divorcediscourse.com/fees/

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Conditional Fee

Both parties (client and law firm) agree on the fee, then set an agreed-upon amount or percentage of the total fee that will be withheld until a milestone or result is achieved. Firms have incentive to perform.

Often called HoldBack Fees

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Capped Fee

As one of the budget-based options, Capped creates an upper limit on the amount the client will pay.

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Performance / Rewards-based Fees

Once a firm has submitted its final invoice—often based on Fixed or Hourly—the client decides if the firm has met and/or exceeded certain criteria, which would justify a bonus.

Source:.Patrick.Johansen,.CLM,.CPP,.“Patrick.on.Pricing,”.http://www.patrickonpricing.com/continuum

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Damages-based Agreements

Calculated as a percentage of the amount saved for the client who is a defendant in a lawsuit.

• ABA Comm. on Ethics & Prof’lResponsibilities, Formal Op. 93-373 at 2-3 (1993), “Contingent Fees in Civil Cases Based on the Amount of Money Saved for the Client”

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CONCLUSIONS

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Conclusions

While alternative fee arrangements have been common in many practice areas, their use is expanding into every practice area.

Firms need to implement flexible billing practices to allow clients to pick the billing method that works for them.

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QUESTIONS?

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Thank You

Joshua Lenon

[email protected]

@JoshuaLenon

Linkedin.com/in/joshualenon