By Joseph M. Schreiber
Alternative Fee Structures:
When Breaking the Mold Makes Sense
T
he goal of alternative fee structures1 in attorney engagement agreements is to give something to clients that they want, either a capped fee and cost certainty or a way to shift risk of loss to the attorney, while sharing some of the potential recovery. Most importantly, the goal of alternative fees is to align the incentives of the attorney and the client, while making legal fees affordable. Alternative fee structures are generally defined as anything other than a pure hourly fee or pure contingency fee. A pure hourly fee structure entails a set rate per hour for each attorney and/or paralegal. The use of hourly fees is typically attributed to insurance companies that wanted to take more control of their legal bills. Law firms typically set an hourly rate, like the MSRP on a car, that is higher than they actually collect. A large defendant (such as an insurance company or Fortune 500 defendant) with market power—because that defendant has lots of legal work—will negotiate down the list rate. Many times, the actual rate may
be well below the list rate. On the other hand, individuals and small clients end up paying at or near the list rate, which does not seem very fair. Law firms are willing to cut their hourly rates for large clients on the expectation of getting more work. These billing dynamics can create both distrust and resentment between attorney and client at the outset of the relationship. Large clients frequently negotiate their bills by attempting to audit and cut the bills for the attorney allegedly taking too much time on tasks. Alternatively, a large client may simply exert their leverage for cost savings. Thus, for an attorney to safeguard from aggressive discounts, there is incentive to pad the bills by creating additional work tasks and tracking every waking moment spent on a file. This way, the attorney has room to negotiate the bill down. In contrast, a pure contingency fee is where the attorney and client contract to pay the attorney a set percentage of the recovery if the case is resolved and paid prior to filing a lawsuit (at the demand and negotiation stage), a higher percentage if a lawsuit is filed, and a third higher rate if an appeal is filed. The attorney typically advances money for all expenses, which are paid back on recovery after the fee is calculated. If the case is lost, the attorney eats the costs. Contingency fee arrangements are most common for personal injury claims, where an injured client comes in the door, and there may be a police report from a car or truck wreck showing the potential defendant was at fault. For a contingency fee case to be viable for the attorney, the case requires three elements: (1) injury; (2) liability on the defendant, the clearer the better; and (3) a defendant with the ability to pay. If any of those elements is missing, a pure contingency fee is not viable for the attorney. Likewise, in business disputes, a contingency fee may be too expensive, risky, or time consuming. Alternatives to these traditional types of fee arrangements can thus be very attractive to give a worthy client access to the legal system.
