Fees Lifeline of Law Practice

Fees are the lifeline of law practice. The relentless pressure of meeting overhead expenses and providing for a family's livelihood causes even the most reluctant lawyer to come to grips with the need to collect fees. A well-organized practice, however, does not wait for pressures to be felt. It organizes its fee and billing structure in such a way as to provide a continuing flow of cash into the firm's bank account to meet the needs of payrolls and monthly bills which must be paid regularly.

The process of setting the fee and getting the bill to the client, as well as the collection of amounts due, is haphazard in many a law office. Some fees are set without regard to the costs incurred by the firm. Fees may be set at the whim of the particular lawyer, rather than on any overall, firm-wide policy basis. Such practices result in different clients getting substantially different treatment without real justification in terms of result, quality of work, or cost.


The sole practitioner needs a sufficient billing policy to insure that services are properly rewarded monetarily and that his clients are treated equitably. The organized firm must add to the foregoing the need for sufficient internal communications to insure that various members of the organization are pursuing similar economic objectives, and also to be certain that there is no substantial disparity in the treatment received by the firm's various clients.

There are many kinds of legal fees, established in many ways. Most of the various fee arrangements are discussed herein. The client who rarely uses legal services will be unaware of the many methods of determining a lawyer's fee. The client often will not make a distinction between costs paid on his behalf to courts, county clerks, sheriffs, and like officials, and the fee charged by the lawyer himself. A careful explanation of the particular method of fee determination in a matter to be undertaken will add greatly to a lawyer's ability to collect a proper fee.

Types of Fees

Several approaches to the setting of fees are commonly used in the legal profession. In order to discuss the matter of fees generally, it is important first to understand the basic concepts of fee-charging, each of which is subject to considerable variation.

Contingent Fees

Contingent fees are paid only when a matter is successfully completed, and a recovery effected. Such arrangements are common in representing the plaintiff in tort cases, and in collections. If no recovery is made, there is generally no fee. The only prohibitions against contingent fees occur in the representation of defendants in criminal matters and in divorce litigation in some jurisdictions.

In many jurisdictions, contingent fee agreements must be reduced to writing, as suggested by Ethical Consideration 2-19 of the Code of Professional Responsibility.

The contingent amount generally ranges from 25to 50 percent of the total recovered. The costs of litigation, such as witness and filing fees, transcripts, and the like are subtracted from the gross recovery and are repaid to the attorney, who may have advanced them, before a division occurs.

It is common for different percentage divisions to be made, depending on whether a matter is tried in court or the case is not tried. For example, an attorney may charge 25 percent of recovery if the case is settled before trial, one-third of recovery if trial commences, and one-half if the case is appealed.

Some states have set limits on the amounts of contingent fees attorneys may charge. The New Jersey Supreme Court has ordered the following limits on contingent fees for attorneys: 33 1/3% of the first $250,000; 25% of the next $250,000; 20% of the next $500,000; and on all amounts recovered in excess of the above, by application for a reasonable fee. Where the amount recovered is for the benefit of a client who was an infant or incompetent when the contingent fee arrangement was made and the matter is settled without trial, the foregoing limits shall apply, except that the fee on any amount recovered shall not exceed 25%. At the outset of the matter, the attorney is required to advise the client that the fee can be paid under the contingent method or at an hourly rate.

New York has limited fees in medical malpractice cases only. They can get one-third of an award, exclusive of disbursements, or use a sliding scale method: 50% of the first $1,000, 40% of the next $2,000, 35% of the next $22,000, and 25% on amounts over $25,000. Delaware also has limited fees in medical malpractice cases only, with a scale of 35% on the first $100,000, 25% on the next $100,000, and 10% on the balance.

In some types of legal matters there may be a flat fee or time charge plus a contingency fee. For example, a firm may charge one-half of its usual hourly rate plus a percentage of recovery. In condemnation cases it is customary that the contingent amount be based on the additional recovery effected by the lawyer over and above that offered initially by the government or utility exercising the power of eminent domain.

Contingent fee problems sometimes arise where the attorney is discharged prior to settlement or litigation. There is a divergence of views on proper disposition of such matters, including the following: (1) that the attorney is entitled to his full fee upon recovery by the client, whether effected by the client alone or another attorney, or (2) that the attorney is entitled to a quantum merit recovery for his services, regardless of eventual case outcome. Some states are shifting from the former view to the latter.

Percentage Fees

A percentage schedule based on the amount involved in non-contingent matters may be the basis of the fee charge. This has been a traditional approach in the probating of estates, where there is normally a graduated scale calculated on the value of the assets handled through probate. In some jurisdictions the percentage to be charged varies, depending on the action required in the probate; e.g., changing ownership of records for land which is held by the entireties may be lower than that applied to the re-registration of securities. A similar percent age approach was almost universally used prior to 1975, by attorneys in the handling of real estate matters, where the fee was charged on a basis, of one-half, of one percent to one percent of the price of the property being transferred. This application of the percentage fee liable since the U.S. Supreme Court's decision in the Goldfarb case in 1975 but it is still used by some lawyers in some jurisdictions.

Fixed Fees

Most law firms have a number of services which are performed on a fixed-fee basis. Examples include uncontested divorce, adoption, simple will, formation of a small corporation, preparation of a profit-sharing plan, and similar relatively standard services.

A variation of fixed fees is item charges. For example, a patent attorney may charge a certain amount for each page of printed text required by a patent application. An insurance defense attorney may charge a fixed dollar amount for opening the file, preparation of a motion, attendance at interrogatories, appearance in court, and so forth.

Time Charges

Time spent for a client has been increasingly the primary consideration in the setting of fees. The time required by a matter is generally the first consideration in fee-setting where the client involved is a corporation or other business enterprise, a labor union, or a governmental body. In order to use time as a billing basis, however, a law firm must establish rates per hour which then can be used to convert the hours spent into dollars to be charged. The first step in this process is the calculation of the basic cost of keeping a lawyer working and earning a sufficient income to meet his needs. The rate determined to meet these primary needs is referred to as a "cost rate." Except for the fact that income needs reflect the lawyer's skill generally and his age, special expertise or effort in an assignment is not included in the cost rate.

One method for establishing hourly cost rates is to estimate the overhead expenses attributable to each attorney, to add his expected compensation to this overhead, and to divide the total by the available number of billable hours each individual will have in a year. Various surveys and studies of individual law firms have established that attorneys typically can expect to bill between 1,300 and 1,600 hours per year.

An attorney with an income expectation of $100,000, with attributable expenses, including secretarial support, of $50,000, and who expects to be able to bill a total of 1,400 hours, would need to charge $107.00 per hour in order to reach his income objective. The $100,000 income, of course, includes both the lawyer's take-home pay and his reserve for retirement, whether or not this is set up in a tax-sheltered plan.

The actual billing rate for an attorney's services may be greater or less than the cost-rate calculation. For example, a senior attorney with many years of experience in practice, who has spearheaded the growth of a law firm and who enjoys an excellent local reputation, may be worth more than $150,000 in annual income. He may not, however, be able to charge his clients at a cost rate of $175 per hour. In this type of situation, although his cost rate may be $175, his billing rate may be $120 per hour. Conversely, the young associate, who is receiving a salary of $35,000 and working hard to get ahead in the same firm, might have a cost base of less than $35 per hour. Part of the lower-than-cost rate of the senior lawyer is balanced by the fact that, in addition to covering the cost of employment and overhead, the associate is expected to produce a profit for his employer. His billing rate will be set above his cost, perhaps at $50 or $60 per hour.

The billing rate, therefore, is based on the cost rate, with such factors as skill, seniority, community custom, entrepreneurial risk, and the marketplace determining the final calculations that are used to prepare the bill.
Hourly rates are generally higher in the large firms, in major metropolitan centers, or in specialty firms than they are in suburban or small-town general-practice firms.

Hourly rates used by lawyers range from as little as $50 per hour for associates in small firms to over $300 per hour for some partners in major metropolitan law firms.

The advent of the legal assistant or paraprofessional, present in increasing numbers in law offices, has added a new dimension to the charging of fees on a time basis. Most law firms that employ non-lawyers to do some of the work formerly done by lawyers are having such individuals maintain time records and are charging clients for the work handled by paralegal employees. In establishing an hourly rate for such employees, as with associate lawyers, the firm adds a third factor to the compensation and direct overhead costs of the employee. This factor is profit. To compute an hourly rate for employees engaged in chargeable legal work one might follow this example:
 

• Direct compensation (including employer contributions to social security, pensions, benefits, etc.)40,000
• Direct overhead attributed to the position $10,000
• Position cost $50,000
• Profit $40,000
• Desired gross $90,000
• Divide desired gross by 1,500 billable hours $90,000 + 1,500 = $60.00 per hour

Improvement of systems and automation, particularly the use of better forms and word processing, have caused some firms to place less emphasis on time charges and to revert more often to standard fees. For example, one practitioner working in estate planning and taxation, after having carefully programmed documents for word processing, found that the required attorney time for producing high-quality and highly individualized documents had been substantially reduced. However, he continued to charge the same average amount as he had formerly charged on a time basis. The unbillable time invested in developing the word processing program was thus amortized over a period of time and with many clients, until, finally, increased profits resulted.

Retainers

"Retainer" is a word which has several meanings to lawyers and their clients. Three distinct uses of the word can be identified.

Case Retainers: A fee paid at the beginning of a specific matter, which is not returnable to the client, is called a "case retainer." This fee may constitute the whole fee or a payment of part of the fee. Case retainers are typical in criminal work, divorce, and other specific legal matters.

Some firms require case retainers in all instances. Having the client make a payment before the firm commits lawyers and time to the matter, not only assures payment of some of the fee but also indicates strongly that the client believes in his cause and is willing to make a financial commitment to back up his beliefs.

Retainers for General Representation: These are generally charged to business and other enterprises that require continuing legal services. Such retainers should be carefully established and committed to writing. General retainers are common also for counsel to municipalities, school boards, public authorities, and other governmental bodies which pay a flat annual amount for general representation, excluding such items as court litigation and fund-raising bond issues.
The rates for the excluded services may be specified in advance in the retainer agreement. Such rates may be higher or lower than rates generally charged to other clients, depending on the relationship with the client and the terms of the retainer agreement.

Lawyers who work on general retainers must be careful to maintain complete records of the time spent and the cost of service performed for the retainer client, so that the retainer amounts may be kept up to date. In firms where this is done, retainers have a decided advantage because they regularize the flow of cash into the firm and tie the client to the firm for a certain period of time. For the client, the retainer arrangement has an advantage in that he can predict most of the cost of legal services in his budget forecasting. He will also feel free to call upon his counsel in the early stages of a problem rather than after he has tried to handle it himself and failed.

In a general retainer representation situation there is always the danger that more services may be called for than anticipated, and that at the end of the retainer period the lawyer will find that he has rendered services far in excess of the amount he anticipated. Several contingent arrangements are available to guard against this possibility: for example, the retainer may be set as a minimum amount only, and time required over and above the minimum may be chargeable at hourly rates. Such supplemental billing may be done annually or at agreed-upon intervals during the retainer period.
When extra billing is not feasible, law firms must be careful constantly to review the cost of providing services to retainer clients, and to reset the retainer amount from year to year. It is very important to keep abreast of the increasing cost of doing business and to be aware of the clients' increased needs for service.

The continuing nature of a retainer relationship makes it more important that fees be fair to both client and lawyer than in any other fee-setting arrangement.

Pure Retainers: Retainers which bind the law firm to the client and maintain the availability of the firm during the period of the retainer are referred to as "pure retainers." Some clients believe that listing the name of a prestigious law firm as counsel has a business value which they are willing to pay for through a pure retainer. Although pure retainers are rare, they are not uncommon for firms located in New York, Washington, D.C., and for some firms located in state capitals. Generally, a pure retainer agreement provides that the law firm will not undertake any kind of adverse representation or, possibly, representation of a competitor of the client, and that the client will be kept informed of prospective changes in laws or regulations which may affect his interest.

Contract for Services: Some lawyers call a fee arrangement, common in contingent fee matters, a retainer. Whatever it is called, such an agreement should be in writing, and must be in language that the client can understand. Attorney John E. Norton of Belleville, Illinois, who prepared a book on management of a trial practice for the Association of Trial Lawyers of America, uses the Contract for Legal Services to insure that there is a full understanding of the fee arrangement by the client.

Case Advances

Closely akin to the case retainer is the advance against costs, collected before work is begun, usually in a litigation matter.
The distinction between an advance against costs or fee and a case retainer, which may be academic to the client, is, nevertheless, of importance to the attorney. A case retainer is an earned fee. It is not returnable to the client and need not be accounted for. An advance against costs or fee belongs to the client and is usually deposited in a client (or trust) account. Any earned portion or portion required to pay court costs is simply transferred to the fee account. The lawyer remains accountable for the funds to the client. All or a portion of the funds are returnable, if the case is aborted.

Court-Awarded Fees

Increasingly, legislators are vesting authority in the various courts for fee awards to attorneys representing prevailing parties in litigation under specific statutes. Generally, these provisions appear in public interest legislation where economic disparity exists between parties to litigation. Anti-trust, Civil Rights, and No Fault statutes are examples of areas in which court-awarded fees are statutorily mandated. The prevailing rationale in such instances is to provide potential plaintiffs with the financial wherewithal to pursue litigation in situations where contingent fees might be unfair or unfeasible, while discouraging frivolous claims where attorneys see little chance for recovery. Defendants (who are generally at a financial advantage in these situations) are exposed to an extra financial burden if litigation discloses they have violated the statutes involved.

Setting and Billing the Fee

The Model Rules of Professional Conduct of the American Bar Association, as adopted in 1983, contain specific rules dealing with fees charged to clients.

A lawyer's fee shall be reasonable. The factors to be considered in determining the reasonableness of a fee include the following:
 

• The time and labor required, the novelty and difficulty of the questions involved, and the skill requisite to perform the legal service properly
• The likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the lawyer
• The fee customarily charged in the locality for similar legal services
• The amount involved and the results obtained
• The time limitations imposed by the client or by the circumstances
• The nature and length of the professional relationship with the client
• The experience, reputation, and ability of the lawyer or lawyers performing the services; and whether the fee is fixed or contingent
• When the lawyer has not regularly represented the client, the basis or rate of the fee shall be communicated to the client, preferably in writing, before or within a reasonable time after commencing the representation

A fee may be contingent on the outcome of the matter for which the service is rendered, except in a matter in which a contingent fee is prohibited by paragraph (d) or other law. A contingent fee agreement shall be in writing and shall state the method by which the fee is to be determined, including the percentage or percentages that shall accrue to the lawyer in the event of settlement, trial or appeal, litigation and other expenses to be deducted from the recovery, and whether such expenses are to be deducted before or after the contingent fee is calculated. Upon conclusion of a contingent fee matter, the lawyer shall provide the client with a written statement stating the outcome of the matter and, if there is a recovery, showing the remittance to the client and the method of its determination.

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

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

A contingent fee for representing a defendant in a criminal case

A division of a fee between lawyers who are not in the same firm may be made only if:

The division is in proportion to the services performed by each lawyer or by written agreement with the client each lawyer assumes joint responsibility for the representation

The client is advised of and does not object to the participation of all the lawyers involved; and

The total fee is reasonable

Periodic Billing

Every lawyer who has set up a new practice knows how long it takes to achieve an adequate cash flow. This has traditionally been so because lawyers have tended to withhold much of their billing until a substantial amount of work has been done, or until the case has actually been completed. In the interim, many firms advance costs for their cases in addition to spending time on them. Law firms, in effect, make themselves bankers, lending interest-free money to clients for long periods of time.

General business practice is quite to the contrary. A building contractor or an architect receives progress payments when engaged in an extended project; medical practitioners and dentists bill their patients monthly; rents are payable twelve times a year, or more often; goods are billed on shipment or soon thereafter. Lawyers alone in the American economy have a penchant for delaying billing until their work has been done.

In recent years, however, many law firms have begun to realize that delayed billing is an uneconomic practice. Regular billings on a monthly or quarterly basis are becoming more common. Improved and increased time-keeping has played a part in this trend, enabling a law firm to arrive at a fee at any point during the handling of a matter, leaving an adjustment for final result to one billing at the completion of the case.

The slowest group to begin periodic billing has been the group of lawyers handling local litigation for insurance companies. No other group of attorneys is so dominated by its clients. Throughout the United States, countless law firms are financing the litigation of some of the largest corporations of the land.

Separation of Fee Billing from Cost Disbursements Billing

Another practice gaining acceptance is the billing of costs advanced on a regular schedule, even when the billing for the fee may be delayed until completion of the matter. This has the advantage not only of improving the cash flow for the firm, but also of taking the matter of billing for costs out of the lawyer's decision-making process and saving time. For example, a firm may adopt a policy of billing a client at the end of any month in which accumulated disbursements equal $25 or more. The minimum dollar amount may be tailored to meet the needs of the practice. A firm may determine that the minimum advance that will be carried for individuals will be $10, while they may use a $50 minimum for business or corporate clients.

A benefit directly apparent from separate billings for costs and fees is that bills for advancements can be prepared and mailed directly by the bookkeeping or accounting department without consultation with the attorney in charge of the matter. A special billing form, identifying the bill as one for money advanced only, should be used to prevent the client from assuming that he is being billed for a legal fee.

In-House Fee Schedules

A good many firms have found it useful to develop internal schedules of fees for standard services. Such schedules can be used, when appropriate, for routine matters and are a basic part of a firm's policy manual.

In these days of increasing client sophistication and fee shopping, firms cannot afford to have Lawyer A quoting $500 for an uncontested divorce and Lawyer B quoting $800. These schedules are generally not intended to be shown to clients.

The first step in preparing a firm fee schedule is to review the time records on a number of cases of a similar type to achieve a time norm for that type of activity. For example, reviewing the time records for eight or nine uncontested divorces, drawing an average of the time, and allocating an hourly rate to the service will yield a dollar figure. Repeat the operation with other services that are of a standard nature. A committee of partners can then evaluate each of the services and raise or lower the derived dollar amount on the basis of the type of service performed and the level of legal competence required. Tax matters, for example, which require substantial expertise, might be set higher; routine legal matters, such as uncontested divorces, might be set lower.

Any client to whom fees are quoted from in-house fee schedules must be advised, of course, that the stated charge is only applicable if the problem remains routine, and that legal fees may be higher if complications occur.

Internal fee schedules are highly useful in the training of young lawyers and in improving public relations to the community. Since clients often engage a particular firm because of work which one of its attorneys has performed for a friend, they often know how much was charged to the person referring them. It is disconcerting to have the client complain later that he or she was charged substantially more than the friend for whom the same routine service was performed.

Fee Reviews

In some small firms, each partner and perhaps even every associate may establish the fee and render the bill. Larger firms have generally learned to require some review.

Some firms make it mandatory that all fees be submitted to another partner or partners or be reviewed by a meeting of attorneys. Other firms follow a rule of management by exception. Such a rule would state that only substantial deviations from basic hourly rates are subject to review.

For example, a firm may establish a policy of giving partners discretion up to plus or minus 20 percent of time-dollar value (multiplication of hours by standard rates) in fees involving no more than ten hours of lawyer time. In practice this would mean a five-hour assignment with a time-dollar value of $500 could be billed at the billing partner's discretion at between $400 and $600. Any greater deviation would be subject to review and approval.

Many firms hold periodic meetings at which all bills, or many bills, are discussed. This requires lawyers to state the services performed on a case to a group of people who understand them, and to justify the amount of the fee proposed to be rendered. The experience of such review meetings has been that fees generally are set somewhat higher than when only the lawyer responsible for the client's matters sets the fees. Many firms have associate lawyers participate in billing meetings. Associate participation not only results in better fee determinations, but also acts as a training tool for future management decision.

How Corporate Clients View Fees

There has been a great deal of debate in the legal profession as to whether lawyers should base their bills on the results achieved and the responsibilities shouldered, or whether reasonable time required should be the governing factor in fee determination. Since the general counsel of corporations are probably the most sophisticated clients the private firms have, the views of general counsel could do a great deal to settle the controversy.

The information contained in this section is based on a mail survey of corporate general counsel.

The respondents to our study came down on the side of fees based on time, but by a rather small majority. Fifty-one percent indicated a preference to be billed "entirely on the basis of time." Forty percent checked "time and results combined." Only two percent favored billing "based on responsibility and results achieved," and seven percent had other opinions.

In view of this basic division among clients, lawyers in private practice must obviously be careful to discuss the method of fee-charging with the general counsel who employs them, in advance of billing.

Considerations in Approving Bills: Many of the survey participants offered comments on the subject of the lawyers' bills they review and must approve. Some of this material follows:

We make our own estimates of the amount of time devoted to a matter, where time is not specifically set forth in the billing, and evaluate the probable hourly charge that is appropriate for the lawyer or lawyers who participated in the matter, to arrive at our own estimate of an appropriate fee. In some instances, we give additional weight to the results achieved.

Several factors are considered in determining the appropriateness of the bills of outside counsel, namely, the complexity of the case, the amount at risk and the time spent by outside counsel. Normally we will consider a charge for time spent to be appropriate, but in situations where the total amount involved is relatively small in relation to the time charge, we expect outside counsel to take this fact into consideration in billing.

The propriety of charges of outside counsel is determined largely by analysis of time spent and work performed in our behalf. Informal comparisons with previous billing experience in similar situations are also considered on the presumption that our substantial contact with a number of firms provides a valid reference base against which to evaluate these charges.

Forms of Bills: "The form of bills desired by the general counsel was most often "generally descriptive of the work performed in moderate detail." Most inside counsel believe that they are sufficiently on top of the outside services to know what is going on. However, the substantial minority who want very detailed billing information feel quite strongly about it. Again, law firms should have an understanding with clients in advance of billing, and must, to some extent, accommodate to the client's wishes. On the other hand, general counsel must recognize that they will be charged with the professional time involved in the preparation of detailed bills.

Typical comments of survey participants on this subject

I like to receive the bills of outside counsel reasonably detailed as to service, date, and time spent. Each case or subject matter should be separately stated and the time spent upon each designated clearly. This facilitates determination of the appropriateness of the charge as well as an allocation of the charge to the proper internal accounts.

In view of our familiarity with the services rendered, since we follow the work done by outside counsel closely, we need only a bill covering a general description of the services rendered.

Disbursements: Private law firms often incur substantial adverse balances in funds advanced as costs for clients. Since there has been considerable discussion regarding how and how often to bill such disbursements, the survey participants were asked, "With respect to disbursements connected with matters handled by outside counsel, such as filing fees, printing costs, transcripts, do you prefer that these costs 1) be billed directly to you, 2) be paid by counsel and included in their bills 3) no preference as to this."

More than half (54 per cent) of the respondents prefer the second choice- that counsel pay for disbursements and in turn bill them with fees. But 41 percent indicate no preference and 5 percent prefer to pay for such costs directly as incurred. Thus, there seems to be an almost even division. Once again, the private practitioner should determine each client's attitude in establishing an arrangement.

A trend is developing, especially in larger corporations, to require that outside counsel prepare a detailed synopsis of the way in which a case will be handled, who will perform these services, and what the cost of each service will be. For a big case some corporations have held what has been nicknamed a "beauty contest" where three or four firms are asked to put on a presentation as to their qualifications for the work and what their fee will be. It is clear that lawyers have to be skilled in the art of estimating and charging fees in today's competitive legal marketplace.