One More Reason to Flat Fee: Getting Paid
Updated September 1, 2022
A recent decision by a New York court, rejecting a law firm’s breach of contract claim to recover $2.3 million in legal fees from a client highlights both the importance of a detailed written representation agreement and yet another reason to consider adopting flat fees.
According to the New York Law Journal, Kasowitz, Benson, Torres & Friedman were retained in July 2011 by a hedge fund manager and his company to file a discrimination suit against a New York coop for rejecting an application to purchase a new unit. A little more than a year and $3.2 million in legal fees later, the firm withdrew from representation, citing an unpaid balance of $2.3 million in fees.
Subsequently – and in a move that’s often the kiss of death for law firms – Kasowitz sued to recover the unpaid balance from its former client. Notwithstanding that a court referee found that the firm was entitled to the $2.3 million balance, Judge Anil Singh denied Kasowitz’s summary judgment motion to recover the full amount due, citing triable issues, in particular the firm’s compliance with New York’s rules on client engagement agreements.
Attorney Engagement Agreement Must Disclose Fees
Specifically, NYCRR §1215 requires an attorney engagement agreement to address the scope of legal services to be delivered, attorney’s fees and expenses and billing practices. Here, Judge Singh found that Kasowitz’s fee agreement fell short. The agreement identified only the adversary in the litigation but provided no other detail about the services to be provided. As to billing,
The Kasowitz firm’s engagement letter stated that bills were based on hourly time charges, disbursements were billed separately and bills were rendered monthly. It stated, “We require an initial retainer of $62,500” and “any unused portion of the retainer will be returned to you when the matter is complete.”
And while these stock provisions sound clear and certain to most lawyers, from the Judge’s perspective:
“The client is paying $62,500 as an initial retainer, the ‘unused portion of which shall be returned,’” Singh said, partly citing the engagement letter. “How does that evolve into a bill for over three million dollars?”
Ultimately, Judge Singh concluded that the Kasowitz retainer agreement failed to establish “objective meeting of the minds” required to sustain an enforceable contract, thus precluding a grant of summary judgment. Still, Kasowitz will get a second bite at the apple; Judge Singh ruled that the firm can recover in quantum meruit to the extent that the fair and reasonable value of legal services can be established.
How A Flat Fee Engagement Agreement Can Avoid Non-Payment
Of course, Kasowitz could have avoided this outcome with a flat fee agreement. A flat fee agreement contains a fixed price for a fixed scope of services and thus, provides the certainty that Judge Singh found absent from Kasowitz’s engagement agreement.
Still, most lawyers resist the flat fee, feeling that they’ll somehow underestimate the scope of work and be left working for the equivalent of pennies per hour. That risk can be mitigated by specifying not just a flat fee, but also a fixed scope of work. But even assuming that lawyers take a bath on flat fees in a couple of cases, how is Kasowitz’s hourly alternative – waiting 3+ years to collect a $2.3 million fee – any better?
Learn more about including Flat Fees in Your Lawyer-Client Engagement Agreement
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This case probably wasn’t a great example to make your point, it being a rather notorious one for many reasons. But since you chose to use it, it raises a question: Had Kasowitz taken on the case for a flat fee, would it have been the initial $62,500, the almost $1M it received or the $3.2M it claims to have earned, before moving to be relieved as one of the four law firms involved in the case?
And given that the bankruptcy trustee for Fletcher’s hedge fund is seeking to clawback the almost $1M paid, claiming Fletcher used client’s monies to pay for his personal litigation against the Dakota, what difference would it have made?
The question of fee is a good one. Since I don’t know the scope of work, it is hard to say what the appropriate fee would have been. Certainly not the $62,500 (though hard to figure out where that number came from) – maybe around 60% of what it claims was owed. Who knows – the client may have rejected the flat fee up front, but that’s the point – you put the information out there for an informed decision (and that is the problem of the flat fee for large cases – it’s so big that people don’t want to believe the case will cost as much so they go hourly) As to the second point (re: the clawback), true flat fee would not have avoided that but that doesn’t mean it can’t help reduce billing problems in other cases.
Most of my clients are fairly large companies; most of their in-house counsel have been in law firms; most of them prefer hourly billing. Even granting–which I think is the case–a high degree of trust between us, they know that unless the scope of work is completely predictable, I will have to build a pretty good size safety margin into the flat fee. (Even with circuit breakers at either extreme to allow a fee revision for something truly extraordinary.) This margin is not only protection against the engagement requiring the high end of my estimated level of effort, but, realistically, why would I want to offer a client a fee arrangement that would earn me less? And, for that matter, if I could scope the work with a high degree of accuracy, then I should be able to offer the client a very precise estimate. I really feel flat fees are just another way of offering discounts, in most cases.
I don’t know that I would say they are a way of offering discounts. Rather, I think flat fees can be a realignment between price and value. What the client thinks something is worth may not even be close to time spent times $500 (not to mention the inevitable padding, because hourly billing encourages inefficiency). Flat fees give you predictability, but they also force the lawyer to think about what something is really worth.
Paul, let me put it another way. If your clients were willing (without complaining) to pay–on time– your standard hourly rate, would you still offer a flat fee? If you did offer a flat fee, it seems to me you are either 1) set the fee high enough to collect what amounts to a premium on your hourly rate; or 2) set the fee at a level that results in you collecting an amount that is a discount from your hourly rate.
My clients quite frequently appreciate the predictability of a flat fee. If I set that fee at the time I expect to spend times my hourly rate, and they think that’s fair, then there’s no problem. That’s a classic case of a willing seller and a willing buyer. But you are drawing a connection between the legal service you are providing and the time it takes to perform that service, and that is not necessarily a valid connection. It’s a traditional connection that the industry has accepted without much critical thought for years, but is it really the most valid method of pricing?
Look at LLC operating agreements. They are fiendishly complex partnership agreements, but the market doesn’t value them that way. If you bill someone thousands of dollars on an operating agreement, you will get pushback. You will probably drive the client to reevaluate the relationship. Of course, you also shouldn’t be writing these things from scratch, unless you are completely new to corporate law and doing it for the first time. You put a few hours into writing up a good operating agreement up front, and then you sell it again and again at a market-driven flat rate. So the first time you sell one at $750, you are selling it at a loss, if you use the hours times hourly rate method of thinking. The second time or third time, you are breaking even. The tenth time, it’s pure profit. The customer is getting value for their dollar, and you are making a decent product. The time spent has nothing to do with it, because the second, third, tenth, 50th operating agreement you sell takes you all of 10 minutes to customize and print. Would you consider it fair to charge $17 for an operating agreement, because all you had to do (this time) was change the company name and a couple of dates?
Let’s look at a different area. Procter & Gamble spent millions of dollars and thousands upon thousands of dollars developing that tube of Crest toothpaste. That doesn’t mean they sell that tube for millions of dollars. They sell it for $3 and change, because that’s what the individual consumer will pay for it.
I love the flat fee. I find it very freeing to charge a single rate and not have to worry about tracking every penny and not having clients deterred from calling or contacting me. I don’t flat fee for everything but I do so for various phases of various proceedings. In some phases, I come out very far ahead, in others I make the equivalent to 15% less than I would have by hours but the reduced time and certainty of one payment makes it worthwhile.
I agree with Paul (I think 🙂 ) that relatively cookie cutter/document reuse/commodity work can be profitably priced on a flat fee basis. I still don’t see the benefit for most other types of work. I may just be spoiled–my clients are not that price sensitive, especially when I (slightly) reduced my hourly rate when I went solo.
I agree that, in this economy, flat-fees can be an attractive alternative to hourly billing — both for clients and lawyers. However, the use of flat-fees as a method to avoid accruing large, uncollectable hourly bills ignores the proverbial “elephant in the room.” When confronted with an hourly client who can’t — or won’t — pay, lawyers should simply withdraw from representation before a large balance due has accrued. Lawyers — not clients — should determine who will (and will not) be a recipient of the lawyers’ pro bono work.
Law360 has an article today (10/20/14) reporting on one of those in-house counsel forums. The GCs they quoted generally didn’t like flat fee arrangements, and were content (if not happy) with traditional billing arrangements. A small sample size, but certainly jibes with my own experience. From outside counsel’s perspective, if you have clients that can and will pay your hourly rates (and bills), I don’t think there is a better system out there, except perhaps for the scalable, repetitive matters Paul mentioned a couple of days ago. Both now (solo) and when I was at large firms, “alternative” almost always meant “discount,” in practice if not in intent.
Thanks for the link. I have wondered about clients’ views on flat fees. Seems that they would be more widespread if clients were pushing them harder
I think clients realize (at least corporate clients, who were likely at law firms at some point) that flat fees almost always are set well above the expected midpoint of the hourly rate estimate. No billing partner is going to willingly offer a flat fee that they expect to be less profitable than the expected hourly billings.
Jordan Furlong shared an interesting whitepaper this morning by an associate at Wachtell, Lipton, Rosen & Katz who argues in favor of the billable hour as a means for clients to “monitor their lawyers’ efforts, thereby mitigating the incentive problems that plague alternative fee arrangements.” It is well researched, and thought out and written in an easily digestible manner. You can read it here:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2504577
The paper isn’t available for download, but I don’t think the author’s thesis is valid. Sure, clients can look at hours being billed but what does it tell them? It tells them the lawyers are working on the project, but does it say that the lawyers are doing good work? Does it say the lawyers are being efficient? No, just looking at hours billed on a monthly invoice doesn’t tell the client anything meaningful about what is happening on its project. If all the client wants is to know that the lawyer is moving the project forward, that can be achieved through a weekly progress update, either via e-mail or phone call.
I think the type of client involved informs the issue and our discussion. In most cases, individual clients are not in a position to assess either the fairness of a flat fee or the reasonableness of hours being billed on a particular matter. Conversely, corporate clients with legal departments having law firm experience have at least a pretty good understanding of both approaches applied to specific matters. If the legal department has in-house lawyers with subject matter expertise, the understanding is often well beyond “pretty good.” I think it is telling that these corporate clients, who are usually pretty sophisticated consumers of legal services, report (in most articles) being relatively happy with hourly billing.
I think the real problem with hourly billing is that it is typically coupled with hourly billing requirements. So you have associates and partners in high-overhead law firms, looking at hourly billing targets of 2000 to 2500 per year. And that translates to actual hours worked of 2500 to 3500 per year. Those quotas create the incentives to work inefficiently and bill more, because the lawyer doesn’t want to get fired for lack of productivity. They aren’t working harder and smarter for the client, they are working longer and less efficiently to hit their internal quotas.
As you’ve probably discovered since going solo, you don’t have to bill 40 hours a week to make good money. Indeed, I can bill half that amount and make great money, because I have low overhead and get to keep everything I make.
I like that Bill is continuing to emphasize that he has sophisticated and well-resourced corporate clients. That’s completely different than flat fees for people that will only hire a lawyer once or twice in their life (e.g. the typical divorce, DUI, or bankruptcy client).