Come on by, if you’re looking for a politics-free zone. We promise you won’t find any new listings at e&hEsq dealing with election-related or party-related topics — at least until the summer (if ever again).
Come on by, if you’re looking for a politics-free zone. We promise you won’t find any new listings at e&hEsq dealing with election-related or party-related topics — at least until the summer (if ever again).
On his new weblog the [non]billable hour, Matthew Homann has raised some important issues concerning “value billing” and lawyer ethics, which I believe are by no means as clearcut as Matthew presumes. In “One good reason for value billing” (Jan. 28, 2004), he discusses a case where a firm “got in trouble by billing two clients tens of thousands of dollars (in hourly billing) for the same product.”
Matthew (who is trying to remove hourly billing from his practice) agrees that the particular conduct was dishonest, but asks, “should the second client have been charged significantly less because the documents were already ‘in the system’ and just needed to be revised?” He continues (emphasis added):
This is the dilemma many lawyers face when trying to bill hourly when they have become proficient at any given task. If my technology investment allows me to complete a task in one-third the time it took me last year, does that task become two-thirds less valuable to my client? Staying away from hourly billing should allow lawyers to maximize their revenue, capitalize upon their efficiencies, and keep their law licenses.
If I understand this approach correctly, there’s more than “one good reason for value billing” by the purely profit-seeking lawyer. Athough I’m sure Matthew has no intention of charging excessive fees himself, his position is basically saying that a lawyer, by avoiding hourly billing:
I can see why this scenario might sound good to a lawyer, but I’m far from certain that it serves the client’s best interests or avoids ethics violations. First, the sophisticated business client may be able to put a “value” on a particular lawyer’s service, but it’s difficult to see how we can expect the everyday consumer of legal services to do so. What’s it worth to have the peace of mind of an estate plan, a clear property deed, a favorable plea bargain? What’s the value of being divorced to escape an ugly marriage? Like Matthew, I was a divorce mediator. How could a divorcing couple put a value on reaching an out-of-court, as-amicable-as-possible divorce agreement? What’s it “worth” to the spouse who most wants out of the marriage?
These are not questions we normally ask buyers of important or necessary services to make, except in the gross sense that they choose to totally forgo the service if the price being offered by the provider is utterly unaffordable or outrageous.
Medical Analogy: Should society permit a medical doctor to charge a fee based on the value of the cure or treatment to each patient (pity the professional soccer player with a foot injury), rather than on a combination of the physician’s skills and the difficulty and time needed to perform the treatment, tempered by some market discipline? A lot of patients would probably die while attempting to determine just what a cure is worth.
In our economy, we expect suppliers to produce additional output until price equals marginal cost (see Arnold Klingman). We also expect that competition will motivate suppliers to innovate in order to become more efficient, and thus reduce costs and price. Matthew appears to want to avoid the attorney’s marginal cost in the pricing process, and to avoid passing on the benefits of efficiency and competition to the consumer. The “special protection” offered the client in the attorney-client relationship would be protection from the forces of competition and innovation within the legal profession.
I don’t see how we can divorce the billing process from the ingrained historical notion that the reasonableness of a fee depends upon the amount of time spent performing a service and the expertise and skill of the lawyer and staff. Now, when a lawyer uses a fixed fee, that fee is presumed to mimic the total fee resulting from multiplying a fair hourly rate by the time the lawyer expects to take to perform the function, after assessing the overall complexity of the client’s situation. The reasonableness of that hourly fee takes into account the lawyer’s skill, human capital investment, overhead, and technological investment, etc. — tempered by comparison to what other’s are charging for similar services.
There are a lot of problems with the billable hours system, but most of them are the result of abuses rather than of the inherent nature of using hourly billing. In determining the reasonableness of a fee, therefore, the legal profession has attempted to avoid the worse distortions from hourly billing by not fully charging for hours spent “getting up to speed” in an unfamiliar area of law. The client rightfully expects expertise and needs to be informed by the ethical lawyer when he or she is not yet fully competent in a particular legal subject.
The client also rightfully expects to pay a fee that corresponds — at least roughly — to the amount of time spent by the lawyer. And, the honest fiduciary should let the client know approximately how much work is involved. Some sophisticated clients might want to experiment with or negotiate for some kind of value-related fee. But, in a world where there are so many capable lawyers, no sophisticate would say “I know you’ll only spend a few minutes on this, but it’s worth millions to me, so here’s a seven-figure check.” Instead, the savvy client would negotiate for, or shop around for, a more competitive fee, no matter the “value” of the result.
Illinois, where Matthew practices, has adopted Model Rule 1.5 on fees, which clearly continues to focus on the amount of time spent and skill needed, along with the expertise of the lawyer and the fees charges by other lawyer’s in the community, when determining reasonableness. In its brochure on Fee Disputes Between Lawyers and Clients, the Illinois State Bar has this to say about the basis of a reasonable fee (emphasis added):
“Abraham Lincoln, himself a lawyer, once said, ‘A lawyer’s time and advice are his stock in trade.’ The basic ingredient is the amount of time spent.”
Fitting value billing into the reasonable fee rubric seems far more difficult than Matthew admits. Lawyers need to keep in mind that esquires were shield-carriers and horse-tenders, and not the knight on the steed, much less the lord of the manor. Lawyers are servants of their clients (and not their partners). They are, of course, presumed to be skilled servants, and that’s why they make a lot more than minimum wage for their services.
However, value billing in many ways turns the lawyer into a partner in the client’s venture. No wise entrepreneur takes in a partner without asking what contribution he or she brings to the enterprise. The “value” of that contribution to the entrepreneur depends greatly on how many others are capable and willing to provide the same investment, and not merely whether the project needs someone to provide the service or product.
I’m all for giving clients the benefits of many pricing options. However, clients must be given full information along with options (especially novel options like value billing) — information that includes the likely amount of attorney time involved to perform the service, along with a description of advantages the firm can offer due to expertise and technology. If the client is not allowed to make fully informed choices, the law firm is not fulfilling its ethical and fiduciary obligations. I plan to learn more about value billing as it might be applied by lawyers. Right now, call me skepticalEsq.
- As for Matthew’s original question — “should the second client have been charged significantly less because the documents were already ‘in the system’” — the answer is clearly less. However, it’s possible that the first client should also have been charged less, too — especially if the firm knew it had a very similar case in the pipeline, so that the hours could be split between the clients, rather than charged to each client.
further reading at this weblog: In our post “ethics aside” (April 8, 2005), we noted that f/k/a‘s editor emeritus ethicalEsq: is getting a little annoyed by the “ethics aside” approach of the gurus and evangelists of law firm branding, marketing and alternative or value pricing. They offer the easily-tempted lawyer a paradise of premium clients and fees, with increased profits, while never probing the ethical and fiduciary duties of the lawyer to insure that the client is fully informed, treated fairly (and without manipulation) and, in the end, charged a fee that is reasonable for competent and diligent services.
. . . . Those who are advocates of “modern” marketing and pricing methods for attorneys have a duty to put the ethical issues front and center. If they, and those who are so eager to follow them to higher profits, need a place to start, they might take a look at some of our prior posts — or read them again with our ethical duties in mind. For example:
- LexThink about higher fees (er, value billing)
- brand Lex (branding to permit premium pricing and reduce price elasticity)
- chronomentrophobia (hourly billing is not the problem)
- value billing or venal bilking? (what is value billing? what should it be?)
- fees and the lawyer-fiduciary
- jackal sequel (image-making rather than quality as the basis for higher fees)
- fee fie foe and fum (change values first)
- ron baker: sensitive guy? and Ron Baker and Price Sensitivity (a look at the goal of leveraging premium fees from the client, especially the Change Order)
It’s worth repeating what I said two days ago, after LexThink: “I am all for modernizing the law firm and the lawyer-client relationship — so long as it is a tool for better serving the client’s interests, rather than one that merely uses modern selling techniques and technology to artificially increase lawyer fees and profits and to stave off the democratizing effects in the legal services marketplace of the digital revolution.” [Ron Baker disagreed with our assessment of ethics and value billing, see our response and find the thread here.].
- updates: See our comprehensive post “broadening the hourly-billing debate” (Aug. 18, 2007) and linked materials; and commentary in smart clients care about . . . marketplace “value” (Nov.25, 2008).
And, for a list of the Red Flags that have caused us to worry about the ethical and fiduciary soundness of value billing, see “value billing by lawyers raises many ethical red flags” (Dec. 4, 2008).
Content-targetted ads are simply
too likely to hawk the services of competitors and/or unsavory types, and
too unlikely to bring in serious amounts of money
to be used on their weblogs or law firm websites. Using ads in general, even if un-associated, also appears to fall into the “too tacky” category.
Our initial posting garnered comments from Steve Minor of the SW Va Law Blog, CorpLawBlog‘s Mike O’Sulllivan, Carolyn Elefant of MyShingle.com, Jerry Lawson at NetLawBlog, Denise Howell at Baby & Baggage, Marcia Oddi of the Indiana Law Blog, Kevin J. Heller of Law Tech Advisor (the only commentor using weblog ads), Marty Schwimmer of the Trademark Blog, and B. Janell Grenier of BenefitsBlog.
p.s. Tiffany left this Comment today at Matt Welch’s site: “I want money, but the ads would ruin the aesthetics of my site. Wow, I can be superficial. (;” haikuEsq points out that seeking beauty should trump seeking bucks any day.
update (01/30/04): Matt Welch successfully nudged Glenn Reynolds this week to put BlogAds on his Instapundit website.
I resolve to move all of my practice away from the billable hour — no exceptions. I do not want to keep another timesheet as long as I live.
According to an article in the Las Vegas Sun, (AP, Nevada high court upholds jury trial right in small cases, by Brendan Riley, 01-23-04):
“[T]he Nevada Supreme Court held Friday it’s unconstitutional for the Las Vegas Township Justice Court to deny jury trials in civil cases involving $5,000 or less.
“The [5-1] split decision overturned lower court rulings in two cases that upheld the Justice Court policy adopted in 1999 as a way to “‘preserve judicial resources.’”
The decision did not address, but would appear to draw into question, the ability to preclude juries in “small claims” matters, which are also filed in Justice Court (using secial procedures), and may include claims up to $5000. Nevada’s attempts at increasing access and conserving judicial resources by making court procedures more user-friendly (especially through its self-help centers, which we discussed here) may also be in jeopardy.
The two cases in question involved auto accidents.
Some sectors of the Bar may rejoice at this turn of events, which will mean more work for lawyers, but it does not bode well for increasing accessibility to civil justice for the poor and middle-class consumer.
- What happens when you find that the mentors, experts and authorities you grow to rely on are not the people down the hall, in your offices, or even in your geographic area? With e-mail lists, this phenomenon is increasingly common.
- Do you best serve your clients by referring work to your partners when you have professional contacts clearly able to do a better job?
“Law firms think that they are in the profession of selling a process, such as counseling. While that clearly constitutes a significant component of what their invoices describe, in truth clients want to purchase something else. Clients want to receive, and pay for, a result. That result might be representation in a lawsuit. It might be the legal work necessary to close a business transaction. Their focus on process, however, causes lawyers to think of themselves as sellers of their time rather than their expertise (despite what they say in their brochures and other marketing materials). The result is legal fees calculated by multiplying time and rate.
If law firms view their output as a result, they can revisit the way in which they price their product. They should be able to apply more imagination and creativity to their pricing. This can enable them to address (and perhaps even anticipate!) clients’ concerns in that regard. Fees based on something other than an hourly rate multiplied by the number of hours devoted to a task (e.g., “alternative” fees) can be a basis for them to do so.
Like Dennis Kennedy’s issue of referring client matters to “virtual law firm” colleagues, Lauer’s focus on results (and information transfer) for clients asks the law firm to put the client’s interests first, despite a likely reduction in fees — at least in the context of any one project or case, and possibly overall.
The final article I want to mention is the next generation roundtable, “Looking to the Future: What Changes Do You See Coming in the Next Twenty Years?”, (LPT, January 2004, organized and edited by John Tredennick with assistance from Aman Bagga and Marisa Davies, and including law students from Stetson U. College of Law). The Questions about the likely future of the profession are important (e.g., role of billable hours, substituting software for lawyers, going global), and the editor says “Some of their answers might surprise you.”
However, I suggest you read the roundtable discussion mostly to spur your own responses. It seems, unfortunately, that today’s law students and newbie lawyers aren’t any more aware of the realities of law practice than they were in “my day.” (Am I kidding myself that we were more articulate than the current crop?) I won’t quote any of the less-then-edifying answers, to protect the “innocent”. However, Young Lawyer Division representative Aman Bagga, who surely had more opportunity for serious consideration of the issues than the students, had some insightful comments on the most important role changes we can expect for lawyers, due to new technology. For example:
Bagga: On the consumer side, software will change the function of a lawyer. Lawyers in the future will review documents after their clients first prepare a preliminary version. The work balance will shift from one where the lawyer does all the preparations to a model where customers do some of the groundwork and the lawyer reviews the document.
Already there are many legal programs that help the average person fill out legal documents using a “check-the-box” method. This is similar to taxes, which can be completed either by hand, by using software or by using a professional. Some legal documents will initially be created using software by selecting clauses that a person wants to include in the document. Lawyers will then earn their fee by reviewing the document for completeness and by offering advice to make sure all the issues are covered.
I’m happy to note that most young lawyers seem to get their sea legs, and smoother tongues, rather quickly once thrown into the real world of law practice. (See, e.g., Ms. Scheherazade.) Now, if we can just get them to be more interested in service over profits, they’ll soon be teaching the gray-beards (and those who cover their gray) some important lessons in professionalism and ethics.
Follow-up (01-27-04): See the “What Do Lawyers Sell” posting at the [non]billable hour.
“Call me a coward, but I’m not going to take Mr. Giacalone’s bait, at least not right now, except to say the contingency fee system isn’t broken and doesn’t need to be fixed. In the real world, injured people who need a voice to speak for them often don’t have the means to pay that voice by the hour. So some of them agree to pay when the case is over, happy to allow their lawyer (that is, me) to assume the risk that the case might yield nothing at all, in which case I’ll be paying the costs. All things considered, I usually charge a third, sometimes more, sometimes less. (With that said, I recognize the benefits of Mr. Giacalone’s weblog and his commentary on legal ethics, and look forward to reading it. However, I’m not going to direct my clients to his site, as he suggests in his post, before they sign with me. Sorry.)”
“It is widely accepted that contingency fees should vary depending on the riskiness and complexity of the individual case; indeed, that is what the ethical rules currently require (even though almost universally honored in the breach).” [emphases added]
As we then replied, decrying Public Citizen’s lack of action to help p/i clients (as opposed to p/i lawyers):
. . .
The meaning of Public Citizen’s admission is clear: Although the percentage rate of a contingency fee is ethically required to relate to the riskiness of each particular case, they “almost universally” do not. Since p/i lawyers customarily reject the most risky cases and almost always charge the maximum percentage allowed in their jurisdiction for the cases they do take, a large percentage of contingency fees are greater than can be justified by the risk taken by the lawyer of working without adequate compensation. Put another way, in a significant percentage of p/i cases, plaintiff’s lawyer is paid an excessive amount of the client’s award and the client is cheated out of a portion of his or her fair share. In those cases, the lawyers receive unreasonably high fees, in violation of their ethical obligations.
The entire plaintifff’s tort-p/i bar appears to be afraid to address those ethical issues directly. Evan uses much of the space at his weblog to defend p/i lawyers and the contingency fee system. Yet he claims that the ethics of contingency fees is not his focus. That is exactly what’s wrong with the way p/i lawyers use contingency fees: they want to automatically apply their percentages, without any concern for whether the results unfairly and unethically take money from their clients. I guess Denial runs Underground in the world of tort law.
P.S. Evan has wisely suggested this evening that we bring this tiff to an end. [I've done I all can to increase his page hits on a slow weekend.] I would sincerely like to hear his thoughts on the ethical issues raised concerning standard contingency fees. I also really wish that haikuEsq had been in residence today, to impose better priorities and more brevity on this humble weblog.
your kind of lawyer?
Evan Schaeffer at Notes from the (Legal) Underground shoots our Southwest-Airlines-as-law-firm metaphor out of the skies this morning (see yesterday’s post). He doesn’t think law firm clients would be “accepting of the warm-and-fuzzy-advocate” suggested by the successful airline’s approach to doing business. They would instead choose the air force image. I’m not at all sure that clients would prefer military-style discipline, cost-overruns, and collateral damage over a firm that gets the job done economically but enthusiastically, with morale high and customer satisfaction the first priority.
“x-skier” . . .
An article in the current issue of the ABA Journal takes a look at the inevitable, uneven and unpredictable state-by-state review that follows any major change in a Model Rule of legal ethics. The ABA adopted New Model Rule 5.5 in 2002 in the hope that multijurisdictional practice would be easier to accomplish and would take place under more uniform rules across the nation. (See our posting earlier this week, discussing rejection of changes to Rule 5.5 by the Connecticut Bar Association, which has links to ABA MJP resources.)
The Journal article notes that “In the 17 months since the ABA amended the Model Rules to ease restrictions against multijurisdictional practice, six states—Colorado, Delaware, Nevada, New Jersey, North Carolina and South Dakota—have enacted new rules that lower the barriers against temporary practice by out-of-state lawyers. . . . By late 2003, proposals to revise MJP rules were pending in at least 13 other jurisdictions.”
Nonetheless, Wayne J. Positan, the Roseland, N.J., lawyer who chaired the ABA Commission on Multijurisdictional Practice, “cautions that the entire review process could take up to 20 years.” And:
An even greater concern for proponents of easing rules on multijurisdictional practice, however, is that the states will not agree on uniform rules, leaving a patchwork of regulations imposing varying requirements on lawyers who seek to practice temporarily in outside jurisdictions.
There are apparently no clear trends yet, but the article takes a look at many of the variations that have already cropped up.
Drug and alcohol dependence affects law student’s health and their prospects for bar admission. Law schools and legal groups are working to raise awareness of the problem and develop solutions, but the task isn’t easy.
As we discussed in a posting last June, the numbers show that substance abuse is a major problem for both lawyers and law students. The article notes:
Judge Kaye’s numbers may be a bit high, as substance abuse is often an excuse given by lawyers who are trying to minimize their responsibility for unethical conduct, and gain sympathy. Still, it seems clear that the problem is big enough to warrant significant attention by those responsible for admission and discipline within the profession
The article says that “To encourage law school deans to take action on chemical dependency, the ABA outreach committee opened a hotline, printed stickers and advertisements, and is developing an informational kit.” Also, James Moore, chair of the New York State Lawyer Assistance Trust, advises schools to have a written policy to address alcohol and drug use, serve less alcohol at student functions, create relationships with the Lawyer Assistance Programs that now exist in every state, (in order to help students confidentially), warn students that an unaddressed problem may affect their ability to be admitted to practice, and enlist someone as a designated person for student assistance.
Naturally, the potential effect of recovery efforts on bar admission is crucial for many students. The article states:
For the bar application process, most states require disclosure of legal infractions related to substance abuse, such as drunk-driving arrests; others inquire into substance abuse or treatment. Some establish a period of probation or other conditions to admission; others do not.
Some law students say their colleagues avoid treatment because they fear that getting help would send the wrong signals to bar examiners and result in denial of bar admission, by putting them on a blacklist. The ABA Law Student Division is helping to research and promote a “best practices” standard on recovery and bar admission.
What role should substance abuse problems and attempts at recovery play in the bar admission process? I’m not sure and invite your comments. Given the obvious harm to clients from lawyer misconduct related to substance abuse (from missed deadlines to misappropriated funds), the topic seems highly relevant to the fitness of a candidate. Honesty on the topic should be demanded, of course, but a record of prior abuse problems should not be an automatic bar to admission. Serious, successful attempts to “dump old drinking and drugging habits in the pursuit of professionalism” should be commended, not penalized. Are probationary periods advisable and workable?
. . . .. Although substance abuse may no longer be stigmatized as a moral failing in our society, failing to get help and seriously work at recovery is an indication that an applicant to the bar, or a newly admitted member, is not taking his or her responsibility to clients, the courts or the bar seriously enough to warrant getting or keeping a license to practice law. A generation of students who believe that binge drinking is a normal part of social life needs to do some growing up and reality testing while in law school. I hope that the carrot of bar admission can be a sufficient incentive.
For the fourth year in a row, identity theft topped the list, accounting for 42 percent of the complaints lodged in the FTC’s Consumer Sentinel database. The FTC received more than half a million complaints in 2003, up from 404,000 in 2002, and Internet-related complaints accounted for 55 percent of all fraud reports, up from 45 percent in 2002.
Of the 516,740 complaints received in 2003, 301,835 were complaints about fraud and 214,905 were identity theft reports.
Identity theft reports represented 42 percent of all complaints, up from 40 percent in 2002.
“Howard Beales, Director of the FTC’s Bureau of Consumer Protection noted that in addition to the complaints consumers register directly with the FTC, other organizations, including the FBI’s Internet Crime Complaint Center, the U.S. Postal Inspection Service, The National Consumers League’s National Fraud Information Center, Canada’s Phonebusters, and Better Business Bureaus contribute complaint data to the FTC’s Consumer Sentinel database.
“More than 900 law enforcement agencies in the U.S., Canada, and Australia are using Consumer Sentinel, accessing one-and-a-half million consumer complaints through the Sentinel network,” Beales said. “They can coordinate actions, track down leads, and research other law enforcement tools. This model – one central source of consumer fraud data available to law enforcement, reflecting overall trends in fraud, ID theft, and emerging scams – is making our work more efficient for law enforcement and more effective for consumers.”
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