Are Lawyer Billing Rates Too High? Part 2
The costs related to legal services have ballooned in recent years. Last week we reviewed attorney fees, billing rates, and what Americans spend on legal services each year. As a brief review of some of the numbers:
- More than 50 U.S. law firms exceeded $1 billion in gross revenue in 2021, with the leading firm taking in more than $6 billion.
- Many attorneys currently bill more than $2,000 an hour.
- Regardless of firm size, location, or level of experience, the average attorney salary last year was over $148,000.
- In 2021, Americans and American businesses spent more than $320 billion in legal fees.
If attorneys continue to raise their rates—as expected—how high will salaries, firm revenue, and total expenditures in the legal market go? There must be a point when clients will say enough is enough and begin looking for alternatives—whether other persons to provide services at lower rates, or new pricing models that fit their budgets and make costs more reasonable.
So, what alternatives exist to keep spending for legal services in check?
Alternative Fee Arrangements
Alternative fee arrangements (AFAs) are increasing in popularity due to client demand, with many firms offering options to the traditional billable hour system. In fact, as of 2021, 84% of law firms use some form of AFA with clients.[i] Bear in mind, too, that AFAs benefit not only clients, but law firms as well. AFAs allow firms to improve their relations and images with clients, establish a consistent revenue stream, become more efficient in how they operate, and improve work conditions for their employees.[ii]
Some of the more common AFAs include:
- Fixed Fees. In this arrangement the service is billed, as the name suggests, at a predetermined price. Fixed fees let clients know what will be charged for specific services and “incentivize the firm to avoid ‘over lawyering’ the matter.”[iii]
- Capped Fees. Under a capped fee agreement, the client agrees to pay a negotiated billable rate up to but not more than a maximum budget number, or “cap.” In this situation, the law firm assumes the risk that legal fees may exceed the cap and may have to “work on its own dime.”[iv] (A cap is often paired with a minimum fee, which is referred to as a “collared” fee agreement.[v])
- Blended Rates. Here, the client and firm agree to a universal hourly rate that blends and averages the usual billing rate of all persons who may work on the matter, including senior partners, associates, and paralegals. Blended rates protect clients from high-billing partners taking on low-value work, though clients may miss out on the services of more experienced attorneys when they need them.[vi]
- Performance-Based Success Fees, or Holdbacks. In this arrangement, a portion of fees is “held back” and paid to the law firm if it achieves a “favorable predetermined result.”[vii] While lawyers are ethically bound to zealously advocate for their clients, fees based on their performance and success further incentivize them to achieve the best possible results[viii]—so clients either get top-notch representation or they save money by retaining the holdback amount.
- Sliding Scale Fees. These are based on a client’s ability to pay and account for factors like household size, household income, and unique family situations—like health situations with related medical bills—where families have had to prioritize their finances. Sliding scale fees vary for different clients based on their overall circumstances, and allow more people to have access to legal assistance.[ix]
- Contingency Fees. Most people are familiar with contingency fees in the context of personal injury or medical malpractice cases, where the lawyer receives a set percentage of a client’s award. This is beneficial for clients who may not be able to pay a lawyer up front, and protects clients in that they pay nothing and lawyers receive nothing if the matter is not resolved favorably.[x] Firms also use this in cases involving defendants in which the amount of damages avoided (or money saved) determines the amount of the contingency.[xi]
- Subscription Fees. Also called periodic fees and similar to retainers, subscription fees arise when clients pay fixed monthly or annual fees for set services. This arrangement gives clients regular, predictable access to a lawyer as matters arise,[xii] and law firms gain the benefit of consistent work and revenue.[xiii]
- Volume Discounts. As implied by the name, volume discounts may be offered by law firms for work beyond a predetermined dollar amount. For example, once a client meets a preset mark of, say, $100,000 in fees in a particular period, the firm may offer a discounted rate for any additional work through the remainder of that period.[xiv]
People and businesses in the U.S. pay attorneys a lot of money each year, and attorney billing rates continue to rise. While it’s unlikely that giant, multi-national corporations will stop paying top dollar to lawyers at top law firms—especially when “bet-the-company litigation” or billion-dollar deals are on the table[xv]—there are viable alternative fee arrangements for smaller businesses and individuals who want more predictability and reasonableness in what they pay for legal services.
[i] Brown, R. (2021, June 11). ANALYSIS: Flat Fee Billing Is Firms’ Top AFA Model, Survey Says. Bloomberg Law. https://news.bloomberglaw.com/bloomberg-law-analysis/analysis-flat-fee-billing-is-firms-top-afa-model-survey-says
[ii] Brown, ANALYSIS: Flat Fee Billing Is Firms’ Top AFA Model, Survey Says.
[iii] Reardon, J. (2017, April 27). Embrace Alternative Fee Arrangements; Kill the Billable Hour. 2Civility. https://www.2civility.org/alternative-fee-arrangements/
[iv] Miki, S. (2021, August 11). Alternative Fee Arrangements for Law Firms: 9 Examples. Clio. https://www.clio.com/blog/alternative-fee-arrangements/
[v] Reardon, Embrace Alternative Fee Arrangements; Kill the Billable Hour.
[vi] Chiaruain, A. (n.d.). Alternative Fee Arrangements Explained (Examples & Suggestions). Brightflag. https://brightflag.com/resources/alternative-fee-arrangements-examples/
[vii] Cook, K. and Crooms, D. (n.d.). Alternative Fee Arrangements. Bloomberg Law. https://pro.bloomberglaw.com/alternative-fee-arrangements-glossary/
[viii] Miki, Alternative Fee Arrangements for Law Firms: 9 Examples.
[xi] Chiaruain, Alternative Fee Arrangements Explained (Examples & Suggestions).
[xii] AltFee. (2022, May 24). A Complete Guide to Alternative Fee Arrangements. https://www.altfeeco.com/resources/alternative-fee-arrangements
[xiii] Miki, Alternative Fee Arrangements for Law Firms: 9 Examples.
[xiv] Chiaruain, Alternative Fee Arrangements Explained (Examples & Suggestions).
[xv] Strom, R. (2022, June 9). Big Law Rates Topping $2,000 Leave Value “In Eye of Beholder’. Bloomberg Law. https://news.bloomberglaw.com/business-and-practice/big-law-rates-topping-2-000-leave-value-in-eye-of-beholder