A Flat Fee Future?
LACBA Update, January 2010
By James Ham and Ellen Pansky, partners of Pansky Markle Ham LLP, advisors to the legal profession. Ham is the chair of LACBA’s Professional Responsibility and Ethics Committee, and is a lecturer in law at USC’s Gould School of Law in legal ethics. Pansky is a former chair of the committee and former assistant general counsel to the State Bar. Their firm represents attorneys in litigation and in State Bar disciplinary matters, counsels attorneys on legal ethics compliance, and provides expert testimony on legal ethics and standard of care issues. The opinions expressed are their own.
All the recent brouhaha notwithstanding, calls to abolish the hourly rate and implement alternative billing arrangements are hardly new. There was great interest in the topic in the mid-to-late 1980s. At that time, the popular catchphrase was “value billing.” The general idea was that the lawyer would get a bonus for a job well done and “take a haircut” if the result was poor. Many of the proposed deals didn’t appear to have much of an upside potential. The popularity of the topic has ebbed and flowed for many decades.
Lawyers have considerable flexibility to negotiate alternative fee arrangements. Lawyers can charge hourly rates, flat fees, contingency fees, a blend of hourly and contingent fees, or agree to other alternatives. The initial negotiation of a fee agreement between an attorney and a client in California is, in general, an arm’s length transaction. See Ramirez v. Sturdevant, 21 Cal. App. 4th 904, 913-14 (1994); compare Bird, Marella, Boxer & Wolpert v. Superior Court, 106 Cal. App. 4th 419, 430-31 (2003) (fee agreements and billings must be fair, reasonable, and fully explained to the client). An ambiguous agreement is likely to be strictly construed against the attorney. See Alderman v. Hamilton, 205 Cal. App. 3d 1033, 1037 (1988). There are several basic rules to keep in mind when negotiating and structuring an alternative fee arrangement.
First, the basic limitation on all fee agreements is that the fee charged may not be unconscionable. It is settled California law that a fee is unconscionable when it is so exorbitant and wholly disproportionate to the services performed as to shock the conscience. See Tarver v. State Bar, 37 Cal. 3d 122, 134 (1984); Bushman v. State Bar, 11 Cal. 3d 558, 564 (1974); Herrscher v. State Bar, 4 Cal. 2d 399, 402-03 (1935); Goldstone v. State Bar, 214 Cal. 490, 499 (1931). Unconscionability is determined on the basis of a variety of factors, including those identified in Rule 4-200(B) of the California Rules of Professional Conduct. Rule 4-200(B) lists eleven factors, including the amount of the fee in proportion to the value of the services provided, the sophistication of the lawyer and client, the novelty and difficulty of the assignment, the amount involved and results obtained, time limits imposed by the client or circumstances, the experience and reputation of the attorney, and whether the fee is fixed or contingent.
In addition, there is no such thing as a non-refundable fee except in the case of a performed true retainer. A true retainer is paid by a client to secure an attorney’s availability over a given period of time and is earned when paid since the attorney is entitled to the fee regardless of whether services are performed.1 See Baranowski v. State Bar, 24 Cal. 3d 153, 164 n.4 (1979). Otherwise, Rule 3-700(D)(2) requires an attorney to return any portion of a legal fee that is unearned. This may be true even if the attorney charges a flat fee for legal services. For example, assume an attorney charges a flat fee to handle a criminal case up through and including the first trial, but the attorney is terminated by the client after the preliminary hearing. In that case, the attorney may not have earned the entire flat fee. At least a portion of the fee would be earned based on an evaluation of the value of the legal services provided by the attorney to the client before the termination. See, e.g., Fracasse v. Brent, 6 Cal. 3d 784, 790-91 (1972) (while a client may discharge an attorney at any time, the attorney is entitled to recover the reasonable value of the attorney’s services under a quantum meruit theory).
Finally, an attorney’s ability to renegotiate the terms of a pre-existing fee agreement may in some cases be limited by the attorney’s fiduciary duty to the client, may require the attorney to advise the client to seek independent legal counsel, or may trigger Rule 3-300, which regulates entering into a business transaction with a client or acquiring an ownership, possessory, security, or other pecuniary interest adverse to a client. Where an attorney acquires an ownership, possessory, security, or other pecuniary interest adverse to a client—such as a security interest in the client’s property to secure payment of the attorney’s fee—compliance with Rule 3-300 will normally be required. Rule 3-300 requires (a) that the transaction or acquisition and its terms be fair and reasonable to the client; (b) that the transaction or acquisition and its terms be fully disclosed in writing in a manner that reasonably should be understood by the client; (c) that the client be advised in writing of the right to seek the advice of an independent lawyer of the client’s choice and be given a reasonable opportunity to do so; and (d) that the client consent in writing to the terms of the transaction.
Alternative billing arrangements involving flat fees have been around for a long time. They are often used in criminal engagements, bankruptcy matters, and appellate work. Applying them to one-off, sophisticated litigation can be an entirely different and very risky matter. The State Bar has shown some hostility to the idea by expecting attorneys charging a flat fee to account for their services just as if the arrangement had been based on billing hourly rates. See, e.g., Dixon v. State Bar, 39 Cal. 3d 335, 344 (1985) (while an attorney need not submit contemporaneous time records to recover attorney fees, an attorney’s failure to keep books of account and other records may be a basis for imposing discipline); compare Glendora Community Redevelopment Agency v. Demeter, 155 Cal. App. 3d 465, 470-71, 478 (1984) (testimony of an attorney as to the number of hours worked on a particular case is sufficient evidence to support an award of attorney fees even in the absence of detailed time records); Martino v. Denevi, 182 Cal. App. 3d 553, 559-60 (1986) (insufficient evidence to support award of $40,000 flat attorney’s fee in the absence of time records, explanation of services performed, or testimony regarding the amount of work done). Thus, the promise of client satisfaction flowing from a freedom from the billable hour is somewhat illusory and is not a shield from a later claim that the fee was unconscionable or excessive.
There is a flat fee alternative, however, that has the potential to benefit both law firms and clients. That alternative is the purchase of block time. In a block time arrangement, the client purchases a block of hours from the law firm at a discounted and set price. A sophisticated client that knows its legal needs can budget the fixed price paid for that block of time and reasonably forecast its exhaustion and costs. The law firm, in exchange for a discounted price, can count on the work and can forecast its personnel needs and revenues, adding a layer of economic stability to its planning processes.
Of course, purchasing block time does not relieve the client or the law firm of the obligation to insure efficiency and provide value. Many clients purchasing block time may require commitments from the law firm concerning levels of staffing and minimum levels of experience, and they will (and certainly should) continue to conduct efficiency reviews to confirm that the hours being logged against their purchase of block time are reasonable given the effort that the firm has devoted to their legal matters. The purchase of block time also does not decrease the risk of inefficiency. It does, however, provide some predictability and, if carefully managed, can be a benefit to both law firms and clients.
The purchase of block time is not for every client and every lawyer. However, for clients that have a predictable and continuing flow of litigation or other legal needs, the ability to purchase hundreds or thousands of hours for a fixed, discounted price may be attractive. Firm management should appreciate the visibility these commitments give to their financial and personnel planning horizons.
1 Of course, even a true retainer may be subject to refund where, for example, the attorney becomes unable to perform (due, for example, to illness, suspension from practice, or other disability), or other circumstances intervene making it impossible for the attorney to be available as agreed.