How do you determine whether a fee is ‘reasonable?’
The November 6, 2006 issue of Law.com’s Small Firm Business carried an article entitled, “Bonus Brought Lawyer’s Hourly Rate to $1500,” from the Connecticut Tribune. The article discusses a grievance brought against a Connecticut matrimonial attorney for taking a $300,000 bonus as a result of a five day mediation. The claim is that the lawyer’s fee was ‘unreasonably excessive.’
It’s cases, and articles, like this one that make lawyers wary of changing from a billable hour model to a value billing model. Many lawyers say that they can’t use value billing because, in proceedings like this one, the courts determine the reasonableness of the fee by using criteria including time spent to achieve the result. Indeed, adding the lawyer’s bonus to his ‘hourly rate’ and then recalculating the rate points to the problem that lawyers and the courts place too much emphasis on hours, rather than on the value the client received.
One of the problems lawyers encounter when considering value billing arrangements is the understandable fear of grievances, magnified by disciplinary rules that base the reasonableness of fees on factors including time and labor involved in a particular matter.
According to the article, the matrimonial attorney in the story allegedly violated Rule 1.5 of the Connecticut Rules of Professional Conduct, which states in part that a lawyer may not charge or collect an ‘unreasonable’ fee, based on factors such as, “time and labor required, the novelty and difficulty of the questions involved, and the skill requisite to perform the legal service properly.”
I don’t know whether the fee in this case was actually unreasonable or not. But the case shouldn’t necessarily hinder lawyers from seeking to change from an hourly billing model. According to the article, the client was required to wire the $300,000 bonus to the lawyer toward the end of a very contentious divorce mediation, or the lawyer would walk out. (Notably, the lawyer claims this is not the case).
The lawyer claims that he earned the bonus because he was able to accomplish his client’s main goals in the divorce proceeding – namely, allowing the client to keep his $30 million business and retain ownership of the stock in that business. The lawyer also claims that his bonus was earned because this particular client, also a lawyer, was a very demanding client. The article also indicates that the client was aware that the result would have been much less favorable result if he were required to litigate the case.
The problem here may not be that the fee was unreasonable, but that the lawyer failed to manage the attorney-client relationship properly.
A review of the Disciplinary Rule reveals that, in addition to time, the difficulty of the questions involved and the skill required to obtain the result are also factors to be considered when determining the reasonableness of the fee. Further, the court only has the power to review the fee because the client was unhappy – it is only because a grievance was filed that the question is before the courts.
Could this situation have been avoided? There is no information in the article about the attorney’s fee agreement or about any discussions or writings between lawyer and client regarding fees and bonuses. Specifically, how were the client’s expectations managed at the outset? Was there any discussion about the scope of the lawyer’s services (i.e. that mediation/trial would be an additional charge?) Was the client aware of the bonus and how it would be calculated before the mediation commenced? Did the client agree to this arrangement? Was this agreement obtained in writing?
Was saving a $30 million business worth paying $300,000? How much was it worth to the client to avoid the trial – both in possible trial costs and in the ultimate outcome? Did the lawyer sit down and discuss with his client what circumstances would entitle the lawyer to a bonus? Was the client, at one time, willing to pay a premium for the result he wanted? If so, what changed?
Billing on anything except an hourly model requires the lawyer to be exceptionally careful in ascertaining the client’s wants and needs and managing their expectations up front. One of the biggest advocates of value billing, Ron Baker, sets forth the following structure for a value pricing arrangement for lawyers in his post, Hourly Billing: The Perfect Crime?:
- Ascertaining customer expectations up-front
- Agreeing to scope of work up-front
- Using Change Orders when that scope changes
- Agreeing to price up-front
We may never know whether this lawyer followed any of these steps in discussing his bonus with the client, although the article doesn’t mention any such agreements or provisions within the lawyer’s retainer agreement.