2. How we got to where
we are today
The billable hour began to dominate the legal profession in the last few decades of the twentieth century. However, its roots extend back almost 100 years. Ironically, in view of the connotations of greed that surround it today, its inventor was someone more often remembered as the father of legal aid in America.
Mr. Smith starts the clock
Early in the twentieth century, a lawyer named Reginald Heber Smith took over the running of the Boston Legal Aid Society, a provider of legal services to the indigent. And, in 1919, he authored a seminal book titled Justice and the Poor. This was a study criticizing unequal justice based on wealth.
As former United States Supreme Court Justice Ruth Bader Ginsburg said in a lecture in 2001: “Smith exposed vast differences in the quality of justice available to the rich and the poor. His exposé led to endeavors to narrow the gap, including the establishment of the first national legal aid organization.... [He] galvanized a national movement to provide lawyers for those who could not afford to pay counsel.” (Lecture entitled “In Pursuit of the Public Good: Lawyers who Care.” Delivered at the University of the District of Columbia, David A. Clarke School of Law, April 9, 2001.)
But as Justice Ginsburg added: “[Smith] did not neglect the remunerative side of work in the law. Among his other distinctions, [he] is credited with inaugurating the practice of calculating lawyers’ fees by billable hours.”
The clock started in 1914, when Smith — who had graduated from Harvard Law School — asked the Harvard Business School to help him devise a system to track and manage the Boston Legal Aid Society’s finances.
Out of this arose the then-novel procedure that staff lawyers should begin keeping detailed records of their time spent on different cases. This was not for billing purposes — the Society’s services were provided free. Rather, it was a management tool to help ensure that resources were deployed effectively.
Later, Smith went into private practice and took with him the accounting system he had devised in his legal aid work. He became an evangelist for the recording of time, and influential in the subject of law practice management. Hence, daily time sheets found their way onto lawyers’ desks next to the blotters, pens, books, and other tools of the trade.
“The statement that a law office needs an accurate cost accounting system seems revolutionary,” Smith wrote in 1940, “but if every business concern has to know its costs, why should the law office be immune?” To him, the hour was the commodity: “The service the lawyer renders is his professional knowledge and skill, but the commodity he sells is time.”
Blazing the trail for billions of time entries that were to follow, he added: “We use the hour and the tenth of an hour because it facilitates not only addition but other calculations.... For convenience in figuring nothing surpasses the decimal system.”
Looking back many years later, Smith — who died in 1966 — wrote that while he thought “nothing could be simpler” than a form on which you recorded the client, the name of the matter, and the time you spent working on it, the lawyers at his firm hated the practice. Indeed, Smith wrote, it “seemed to them little better than a slave system.” (Quotations from Reginald Heber Smith in this paragraph and the two that precede were included in an article on law.com dated November 25, 2005 — The Billable Hour: Are Its Days Numbered? — by Douglas McCollam of American Lawyer magazine. The article did not cite the source. However, Smith wrote a book called Law Office Organization, which went through numerous editions published by the American Bar Association, all long out of print. The quoted remarks may well have come from one of those.)
Early timekeeping
Although formal timekeeping became routine in many law offices during the 1940s and 1950s, the practice of calculating bills simply by multiplying time by an hourly rate did not catch on immediately.
Rather, for most of the 20th century, lawyers sent out bills that attempted to assign value to the services that had been rendered. The amount of time spent in performing the services was always an important factor in setting the amounts. And, inspired by Smith and his disciples, law firms began tracking time in a more organized manner.
But timekeeping was, initially, more of an internal reporting procedure than something that directly controlled billing. Moreover, time tended to be recorded in something of an impressionistic manner.
The rise of the billable hour
Today, the bean-counters of the legal profession love hourly billing, whereas clients are often wary of it. At the outset, however, the roles were reversed.
Early pressure for time-based billing came from the client side of the relationship. This is because clients began to resent the mystery that lay behind the assignment of dollar amounts on lawyers’ bills at the end of descriptions of services rendered. Many began demanding answers to the question: “Well, how long did this actually take?”
In order to appear responsive, law firms began producing their time records to clients. Thus, information that previously had been maintained solely for internal management purposes was put on center stage in the billing process. Law firm consultants then discovered that by making bills a simple mathematical derivative of time, there was an opportunity to raise revenues.
As a result, by the start of the 1970s, most mid-sized and large firms had shifted to billing solely by the hour for the vast majority of their work. Small firms and solo practitioners for the most part followed along.
Hold-outs to the billable hour
The big exception to hourly billing was the “contingent fee” — the “no-win, no-fee” gamble that is common on the plaintiff side of the bar in personal injury, wrongful death, employment, and professional malpractice litigation.
However, for the most part, the contingent fee targets a very different segment of the legal services market from that tapped by the billable hour. It is generally used as a means of providing legal services for plaintiffs who would not otherwise be able to afford a particular type of lawsuit and where there is a reasonably good chance of significant monetary recovery. As shown later in this book, when one talks about “alternatives” to the billable hour, contingent fee billing (at least in its pure form) is not what one generally has in mind.
Another notable hold-out has been the criminal defense bar. Although a fair number of criminal defense lawyers do bill by the hour, flat-rate billing is far more common in their line of work than in civil litigation. I’ll be talking about this later in the book when I discuss the viability of flat-rate billing in litigation generally.
That said, these hold-outs should not obscure the billable hour’s ascendancy. They are the exceptions, not the rule.
How the U.S. Supreme Court boosted the billable hour
A United States Supreme Court decision in 1975 helped cement the billable hour’s position further. Until then, county bar associations in many parts of the country laid down minimum fee schedules for certain types of legal work. The idea was that it was “unlawyerly” to compete on price and that minimum prices had to be maintained in order to uphold professional standards.
Although these rates were — at least, for the most part — set as “minimums,” they became, in effect, the flat fees that all lawyers observed in the areas covered. And lawyers who didn’t observe the fee schedules risked disciplinary action by their state bar.
The Virginia State Bar, for example, warned that “evidence that an attorney habitually charges less than the suggested minimum fee schedule adopted by his local bar Association, raises a presumption that such lawyer is guilty of misconduct.” The American Bar Association’s model ethical code that was in effect until 1969 proclaimed that it was unethical for an attorney to “undervalue” legal services.
As much as I am a supporter of flat fees (as will become clear later in this book), I am not a believer in cartels. And officially mandated prices are about as bad a system of setting fees as I could possibly imagine.
Fortunately — although surprisingly late — the Supreme Court held in 1975 that the setting of minimum fees for legal services amounted to a form of price-fixing that was illegal under the Sherman Act. (Goldfarb v. Virginia State Bar, 421 U.S. 773 (1975).) Freed of the controls under which they had previously labored, many lawyers who had not yet switched over to hourly billing took the opportunity to do so.
It seemed at the time to be the modern alternative and the wave of the future. Back then, flat rates — which, today, are spoken of as a progressive alternative — seemed tainted. The free market beckoned with the billable hour.
Early doubts about the billable hour
It was not long, however, before some in the profession began to question whether hourly billing was good for the practice of law. In the late 1980s, the American Bar Association set up a task force to look into the prevalence of hourly billing and to examine alternatives.
This resulted in a study published in 1989 called Beyond The Billable Hour. The ABA study began by noting that “[c]lient dissatisfaction exists with respect to hourly billing.” The task force’s Chairman, Richard C. Reed, wrote in the foreword: “Perceptive lawyers have long realized that hourly billing often rewards the inefficient practitioner and penalizes the well-organized efficient lawyer.”
One of the study’s contributors was Mary Ann Altman, a lawyer who founded Altman Weil, a prominent consulting firm providing services to the legal profession. She wrote that she was “involved personally in the introduction of time records to the legal profession” 30 years earlier. However, she candidly admitted to the problems of billing by the hour, including the fact that “very few lawyers keep truly accurate time records.”
Billable hour inflation
In the last 10 years of the twentieth century, the billable hour came under further scrutiny. The cause was not simply concern that hourly billing was not a rational or efficient way of charging for legal services, but — rather — that it was having a bad effect on the way that law is practiced.
Lawyers were being motivated by the numbers of hours they could bill. Many, indeed, were becoming obsessed by maximizing hours in order to enhance their reputations among colleagues and bosses. Others were burning out, such that the profession was losing good people. Fewer were finding time for pro bono work.
These criticisms were fueled by sharp increases in the numbers of hours that law firms expected those on their payroll to bill, a consequence of salary wars that took place as top firms vied with one another to recruit the brightest and the best.
Concerns about the billable hour carried into the new millennium, with some very high-profile voices — including at least one member of the U.S. Supreme Court — beginning to speak out on the subject. In 2002, the American Bar Association published a further critical study.
I’ll be returning to this later, and quoting examples of the types of criticisms currently being voiced. I’ll show that the basis for much of the contemporary criticism is not that the concept of billing by the hour is, per se, misguided, but that the legal profession has begun to impose excessive expectations on itself as to how many hours lawyers should bill.
I agree that the billable hour has gotten out of control in that regard. But some of the emphasis on excessive numbers of billable hours misses the point that the concept is flawed at a more fundamental level.
How to critique the billable hour
So before talking about the billable hours explosion of recent years, I want to show why relying on timekeeping as a complete means of charging for legal services is intrinsically prone to create anomalous, arbitrary, and other undesirable results.
To do this, it is necessary to look at the detail of how lawyers actually account for their time — and the decisions they need to make every day in completing the electronic time records that are the successors to the time sheets invented by Reginald Heber Smith.
Only by looking at the detail can one understand the true nature of the problem. That’s what’s missing from the “big picture” analyses that focus only on the total numbers of billable hours, as opposed to the protocols by which those hours are measured.
In the end — as I will show — the two strands of the problem converge and feed on one another. However, they should still be examined separately in order to understand each of them.
Entire contents © 2008 John Derrick
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