22. Flat fees
Next, to my own favorite type of fee arrangement — the flat fee. With this method of billing, the lawyer and client agree on a fee at the outset. Regardless of the time spent or the outcome, that is the fee that is paid for the scope of work that it covers. That scope of work may be the whole course of a matter, or it may be one component part.
Settling into the flat-fee mindset
The instant reaction to flat fees among many lawyers is something like: “Yikes. If I set the fee too low, I’ll end up working for nothing.”
Setting a flat fee at the right level is, indeed, tricky — but the lawyer will never end up working for “nothing.” Rather, the lawyer will always work for the flat fee that was agreed (assuming that the fee is paid — and I’ll come to that later).
“Working for nothing” anxiety only applies if the lawyer continues to think in terms of billable hours, even when not actually charging that way. Lawyers with that anxiety are mentally dividing the flat fee by an hourly rate and fearing that after a certain amount of time has been spent, everything else will be unpaid labor.
But with flat fees, one has to stop the clock as much as possible (keeping in mind that there may be circumstances when you do still need to keep some record of time spent — more on that later). The idea is to liberate the lawyer from the tyranny of six-minute increments. Enjoy the freedom. Don’t treat flat fees as an overlay to a rotten system. It is a replacement.
Clearly, the amount of time that will likely be spent will be a major factor in setting a flat fee. However, a variety of other factors should also enter into the analysis. These include:
-
•The difficulty and novelty of the work.
-
•The results that you feel you may be able to obtain, and what this is worth to the client.
-
•How interested you are in doing the work.
-
•The extent to which taking the case will preclude you from doing other work.
In other words, it’s not unlike the multi-prong analysis in the American Bar Association’s Model Rule 1.5 — discussed in Chapter 18 — that addresses whether a fee is “reasonable.”
The critical importance of defining the scope
An absolutely critical prerequisite to working with flat fees is that a lawyer be very precise in defining the scope of what’s covered.
An open-ended flat fee that covers any possible development can be a black hole that results in a lawyer feeling underpaid for the sheer amount of work undertaken when the matter involves unexpected tasks. And a dispute with a client about whether something is covered suggests that not enough time was spent at the outset thinking about, and defining in writing, what actually was to have been covered.
My own law practice is focused almost entirely on appeals. The course of an appeal is more predictable than litigation in a trial court, but appeals can still take unexpected twists and turns. Thus, in my fee agreements, I am very specific about what is and is not covered and about the point at which covered services terminate.
Defining the scope of work means putting a lot more time into drafting fee agreements than many lawyers are used to. Whereas hourly fee agreements are often templates with no customization other than the name of the client, my flat-rate ones are heavily tailored to the circumstances of each specific case.
Although preparing this type of fee agreement consumes a lot more time at the front end than heading up the hourly path, that is counter-balanced by the fact that — going forward — you won’t have to spend time recording your hours. And do not underestimate how time-consuming it is to record your time — at least, if you want to do it well.
Of course, you can — under some circumstances — have an all-embracing, no-exclusions flat fee. But that is likely to be priced higher than one with limitations concerning the scope.
As for work that may prove necessary and that isn’t covered by the scope of a flat fee, one option is something in the initial fee agreement to the effect that — if and when this occurs — you and the client will confer about an appropriate fee that will reflect the value of the additional services provided, as well as their complexity and the time involved.
If that sounds too uncertain, you can provide for hourly billing as the fallback unless the client and you agree to something else. The utility of the billable hour is as a universally applicable fallback solution in the absence of any other arrangement. And occasional resort to billing by the hour may provide a reminder of how good it is to have gotten away from it for the bulk of what you do.
The difficulty of setting fees in civil lawsuits
The major difficulty with flat fees occurs when one doesn’t really know in advance what services will be required. In that circumstance, it can be a tall order to set a flat fee for an entire course of representation that seems fair to both sides.
With civil litigation in trial courts, it is especially hard to quote a flat fee for an entire case at the outset. You don’t have control over the course and scope of what will ensue. For example, your opponent might drown you in work involving motions and discovery. You can do your best to make predictions, but it can be pretty hit or miss.
And although the vast majority of civil lawsuits do not make it all the way through to trial, some do. Thus, it would be reckless to base fees on the assumption that a case will settle or be dismissed, but probably mighty expensive for the client to work on the assumption that it will go all the way.
The flat-fee solution for civil lawsuits
So other than in relatively straightforward matters, I’m not sure that setting flat fees to cover entire civil lawsuits is practical.
However, don’t assume from this that you’re condemned to a life of billable hours as a civil litigator. There is a way to make flat fees work in this type of situation.
Rather than attempting to assign a flat fee to an entire lawsuit, one can apply fixed prices to its component parts as one goes along. This can be done in one of two ways: You can either quote a flat fee for a “phase” of a lawsuit — defined either temporally or by procedural status — or you can have a series of fixed fees for individual tasks within the lawsuit.
For example, you can charge a flat fee for drafting a complaint or, perhaps, to get a lawsuit past the pleadings stage. Motions of various types can be billed on a flat-rate basis. Routine court appearances for status conferences or hearings on motions certainly can be.
In some cases, these fixed fees for specific tasks can come off a menu of set charges, rather than being assessed on a case-by-case basis. Something as straightforward as a routine court appearance need not be quoted individually any more than a routine procedure by a dentist such as filling a cavity. Rather, one can have a “list price.”
In other cases, a custom fee probably does need to be assessed taking into account the circumstances and complexity of the case. For example, you could quote a fee for handling all of the depositions that your client will take in a lawsuit or for all of the written discovery it will be propounding. Likewise, although it would probably be somewhat arbitrary to set a list price in your practice for “any” type of motion for summary judgment, once you are familiar with a case, you could set a flat fee for such a motion in that matter in particular.
Under this type of task-based billing system, a fixed fee can also be applied to cover routine communications and other odds-and-ends work that might be too small to quote separately. Consider it as an overall “case handling charge,” if you will. To the extent that some significant work might be performed for which no fixed fee has been assigned, one can always agree that hourly billing will be applied as a fallback.
Flat fees outside civil trial courts
Compared with litigation in trial courts, arbitration can lend itself more easily to flat fees that cover an entire case, since the scope of discovery and motion work is generally considerably less. Hence, the scope of what will need to be done is more predictable.
Flat fees are also more practical — and very common — in criminal defense work. There, the scope of work is more predictable than in civil litigation. Again, the big difference is that discovery — that black hole in the world of civil litigation — is far more limited.
Likewise, with many business and real estate transactions, the course and scope of legal work is sufficiently predictable to make flat-fee billing viable. The same applies to services involving probate and estate planning.
By “predictable,” I’m not talking simply about the amount of time that will be spent, but also about the nature of the work that will be performed and the value of what will be delivered. As suggested earlier, setting flat fees should not be viewed simply as a matter of estimating hours.
Another type of engagement that works well for flat fees is one which, at least initially, involves giving the client an opinion, as opposed to embarking on a course of conduct. Here, the attorney is analyzing a set of facts that could lead to a lawsuit or a transaction — or to neither — and the client wants advice on what to do.
For the most part, this type of service can be provided for a flat fee. Even if the subsequent course of representation would be difficult to quote on a flat-fee basis, the initial advice should lend itself to that type of arrangement.
Retainers for areas of ongoing advice
One version of the flat fee is where a client pays a lawyer a monthly fixed retainer — or, maybe, a quarterly one — intended to cover routine consultations on matters that are expected to arise.
For example, an employer might have an arrangement with employment counsel that covered ongoing advice on the myriad of issues that routinely crop up in the workplace. If any issue blew up into something bigger, it would then be charged for separately. But the retainer would cover general counseling. Periodically, the size of the retainer could be reassessed in the light of the quantity and complexity of advice being provided.
Flat fees and refundability
Clients generally like flat fees. But sometimes, they will result in a lawyer receiving more than would have been paid under an hourly arrangement. This can occur if less work proves necessary than was envisaged at the outset.
That said, flat fees that are completely nonrefundable can run into ethical problems. In 2009, for example, California introduced a provision in its Rules of Professional Conduct making it unethical for a lawyer to charge a nonrefundable fee (except for a “true” retainer whose purpose is solely to reserve the lawyer’s availability). I suspect that some other jurisdictions have similar provisions.
This type of rule appears mainly targeted at iniquitous arrangements where a client changes his or her mind about wanting to proceed with a matter and cannot obtain a refund of a fee advance paid. In that scenario, the lawyer is being paid for work not performed. But this rule also implicates flat fees in situations where services are performed but a matter comes to a conclusion somewhat sooner than had been envisaged. There can be something of a gray area between a situation where a service was fully performed but involved less work or fewer steps than had been expected to reach a conclusion, and another where a representation was terminated prematurely meaning that the service was never fully performed.
Even before this rule change, my fee agreements provided for refunds if a case settled or otherwise terminated before a certain stage in the process. Among other things, that answers one of the criticisms of the flat fee, which is that it discourages settlement because the client may have no fee-based incentive to terminate the litigation early. Generally, my fee agreements provide that I am entitled to a “reasonable fee” for the services provided in the event of a case ending early and sets minimum and maximum percentages of the full flat fee to which I may be entitled depending on the stage in the case that was reached.
Flat fees and the lazy lawyer
A possible concern about flat fees is that a lawyer can have an incentive to do as little work as possible. Just as hourly billing rewards inefficiency and gives a lawyer an incentive to perform unnecessary work, so flat rates might tempt a lawyer to do only the minimum.
This is, potentially, a real problem. Advocates of flat-rate billing should not dismiss it. The best response is that clients who have that concern about a particular lawyer are probably looking at the wrong lawyer. A good lawyer will want to do the best job possible on every case — not just as a matter of professional ethics, but also because one’s reputation is ultimately of far greater importance than the money one makes on any given matter. In my practice, for example, there is no better method of getting new business than being able to list wins in matters already concluded or providing references from satisfied clients.
To put it another way, there are good lawyers and bad lawyers out there, whatever type of fee arrangement is in place. In selecting a lawyer, a client shouldn’t promote the type of fee arrangement ahead of the quality of the lawyering. That was a point I made in the introduction to this book.
Flat fees and the creative lawyer
With the right lawyer, by contrast, flat fees can result in useful work that might not have been done with hourly billing. This is because they enable the lawyer to develop legal theories in a creative way, without constantly worrying whether exploring certain avenues can be justified by the extra hourly charges. The lawyer billing by the hour might skip certain things that might prove worthwhile, reckoning that the client wouldn’t want to be billed extra or can’t be counted on to pay.
The challenge of setting flat fees
In order to quote a flat fee as a lawyer, you need to have a keen appreciation of the market in which you operate. Position it too high and you’ll drive business away. Position it too low and you may also drive business away — on the basis that you might look too “cheap” to be good.
Unlike the hourly billing lawyer who just makes one pricing decision — setting a rate — the lawyer who bills on flat rates makes numerous pricing decisions. Unless one’s practice involves a succession of tasks for different clients that are more or less the same, each matter has to be priced separately. For example, in my practice, I can’t just quote a single price for bringing or defending an appeal. I might be able to quote general ranges, but I need to look at each case individually before coming up with a specific price.
The ongoing need to come up with fee proposals is one reason why flat rate billing can be hard to implement in larger firms, even when minds are open to moving away from the billable hour. Whereas hourly billing provides a law firm’s management with easy control over pricing, flat rates can present a difficulty — they either require pricing decisions to be delegated to individual lawyers or workgroups or they require lawyers to get approvals from management each time they take on a new matter.
That said, the delegation of pricing decisions to the lawyers who will perform the work can have beneficial consequences. Potentially, it empowers workgroups and encourages them to be more entrepreneurial and client-focused in their pursuit of business.
Flat fees in other professional environments
Moreover, flat fees are used in comparable professional environments. For example, McKinsey & Company — a leading business consulting firm — generally charges flat fees. Its professional consultants don’t even have hourly rates (although they do have per-diem rates for internal job costing purposes).
There are, of course, conceptual differences between the type of work a firm like McKinsey does — which involves assigning teams to study complex but probably defined issues — and some of those that law firms do, which can often involve undefined or bits-and-pieces assignments. Nonetheless, the McKinsey example shows that flat-rate billing is not inherently impossible in a large professional-services firm. Moreover, the fact that McKinsey — a firm at the very top of the management consulting field — has adopted flat-rate billing for its own business model says something about the inherent benefits of that system.
Why flat-fee lawyers may still need to record time
In some circumstances, lawyers who charge flat rates may still want to — and, maybe, need to — record their time.
One reason is that it can help you to determine what fees to quote in the future if you know how much time you actually ended up spending on similar matters in the past. Even though the zen of flat rates means that you shouldn’t simply estimate what an hourly fee would have been, time is clearly one of a number of important factors.
Another reason to track time may be that you hope that the other side in litigation will end up paying your client’s attorney fees. Although the general rule in the United States is that each sides pays its own fees in litigation regardless of the outcome, parties often enter into contracts that contain a “loser-pays-fees” clause. Moreover, there are some statutes that provide for the loser to pay fees in particular types of lawsuits.
There is no intrinsic reason why fees in these circumstances need be calculated by multiplying hours spent by an hourly rate. The entitlement provided in contracts and statutes is generally to “reasonable” attorney fees — and, as the American Bar Association’s Model Rules indicate — a “reasonableness” analysis implicates a variety of factors besides time. However, as a practical matter, courts generally look to time spent as a starting point in their decision about how much fees to award.
Quite often, courts do mark down the requested fees if they feel that the hours are excessive for the work that needed to be done. Judges are often the biggest skeptics when it comes to billable hours and may adopt something resembling a value analysis when determining what is “reasonable.” However, they still generally want to know about time spent — and, the more detailed the information, the greater the chance the lawyer has of recovering the full amount requested.
Thus, a lawyer would risk compromising a claim to fees by walking into court saying: “Your honor, I have a flat-fee agreement with my client. I really don’t know how many hours I spent. But this is the flat fee that my client incurred.”
That said, the lawyer might get the requested amount by saying: “Your honor, I’m not sure exactly how many hours I spent, but I am certain that it was more than the number you get dividing my flat fee by a reasonable hourly rate.” Still, this might invite a response from the other side: “How can you be certain of that if you didn’t track your time?”
So the fact is that it is much safer to track your time if part of the end-game in litigation is getting the other side to pay your fees. I wish that weren’t so, but it is.
The need for the flat-rate lawyer to keep time records may be especially great if one is trying to obtain a fees award higher than that provided in the fee agreement with the client. In California, for example, that is legitimate — an award of “reasonable” attorney fees is not necessarily limited to the amount that the client has actually incurred in obligations to a lawyer. (Check your own jurisdiction to see whether that rule applies there, too.)
If this rule applies, and if you gave the client what turned out to be a rather sweet deal with a flat fee, you can still ask a court for more if what you request is “reasonable.” But part of what is needed will very likely be evidence about time. So don’t throw out the stopwatch.
Clients who take unfair advantage
One of the benefits of flat fees is that they encourage attorney-client communications. That is a good thing — up to a point. But the point is crossed if a client takes unfair advantage of a flat fee and expects to spend an inordinate amount of time engaging a lawyer in circular conversations going over ground that has been amply discussed already.
This type of client may have some type of emotional or psychological need to speak constantly with a lawyer, such that the conversations cease being about anything that is within the boundaries of a regular attorney-client relationship. And it can get quite ugly if one tries to truncate the communications.
Still, this is not an inherent drawback of flat-fee billing. This type of client would most likely prove to be a nightmare whichever billing method you employed. For example, you might find it difficult to get paid for the endless phone calls if you were charging on an hourly basis.
The fact is that just as there are lawyers whom wise clients should avoid hiring, so there are clients whom wise lawyers should avoid representing. The alarm bells should sound in the initial screening process.
That said, if your client screening system does let you down — as eventually it might — there are protective measures you can have in place. This involves careful drafting of fee agreements. In particular, I would advise including in the scope of work a “reasonable” amount of client communications. Do not commit yourself to talking with a client on an open-ended basis. You do not want to become a flat-rate amateur shrink.
Flat fees and the art of collection
Lawyers who charge by the hour may well often end up billing more than those who charge flat fees. However, billing is not the same as collecting. A benefit of flat-fee billing is that it substantially increases your chance of collecting every penny on the dollar.
There is far less scope for arguments about the bill. Moreover, when you quote flat fees, it’s much more practical to ask for the entire fee to be paid in advance.
With my standard fee agreement for new clients, I do ask for the entire fee to be paid upfront. This is then deposited in my client trust account. I don’t draw a penny until I file a brief on the client’s behalf. This arrangement provides comfort to both sides: I don’t get paid until I have performed; but I know that I’ll be paid when I do perform.
This type of arrangement may not work for everyone — in my case, it typically means that I don’t draw any revenue until I have worked on a case for about six months, often longer. But I find it fosters a general sense of mutual trust in the attorney-client relationship.
By contrast, it’s much harder to ask for the full fee to be paid in advance if you bill by the hour — not least because you don’t know what the full fee is going to be. And as the billable hours mount up (and especially if progress proves disappointing), collection can become increasingly problematic.
Do flat fees scare clients away?
One of the arguments I have heard against flat fees is that they scare clients away by putting too much focus on the “big number” at the outset. A flat fee of, say, $25,000 can sound more daunting than a request for a $3,000 advance against billable hours costing $350 a shot — even though the billable hours may well end up adding up to a whole lot more over time.
In other words, it may be easier to sign up a client by not focusing on the entire fee. Even if asked, one can fudge or offer the vaguest of nonbinding estimates. Once the client realizes how many hours are being racked up — some way into the representation — it may be impractical to change course. The client will, effectively, be locked in (so the theory goes).
If that strategy does hold, it is simply another example of how the billable-hour culture involves glossing over detail and keeping clients in the dark. But I am skeptical that the billable hour is a good bait with which to lure clients. Too many clients have been burnt too badly in the past. More and more are looking for something different.
In my experience, clients are willing to contemplate — and, indeed, advance — the “big number” if it’s fair and if they can lock in. And a client who is scared away by a flat fee may well be the type who would be a problem-payer when it comes to hourly bills anyway.
Entire contents © 2008 John Derrick