Alternative fee arrangements and ethics

Law firms and their clients are increasingly seeking alternatives to the traditional hourly billing arrangement. Alternative fee arrangements (AFAs) are billing arrangements that allow the client and attorney to create a customizable billing framework to fit the unique goals and needs of the client, attorney and matter.

AFAs can also foster transparency and better communication with clients because all the costs are exposed at the beginning of the representation. Clients want more predictability and control in an economy where every penny counts; attorneys want more options to monetize the value added by their professional services.

One thing to keep in mind with regard to an AFA is to make sure everyone is talking about the same thing. For example, when asked for their preferred AFA, some clients will say a discounted hourly rate. On the other hand, many attorneys hear "alternative fee arrangement" and think "fixed fee."

For many clients and attorneys, AFAs can lead to more effective and efficient handling of matters, improved communication with clients, and a better understanding of the client's goals and objectives. This alignment of interests between counsel and the client may be a positive factor in favor of pursuing alternative fee discussions.

However, when attorney fees move beyond standard hourly rates, the ethics rules can get more complicated. In addition, the economic realities of alternative fee arrangements vary significantly based on the culture, size, location, type and history of a law practice. One size typically does not fit all.

AFA Types

There are various alternative fee arrangements available in the legal marketplace. Client-imposed guidelines that significantly limit the activities or costs for which attorneys can even bill may now constitute the most common alternative fee arrangement. In addition, there are fixed or flat fees on the entire matter, discrete tasks, or multiple matters.

Other examples of AFAs include the following:

Success fees: a result-oriented arrangement that contemplates additional fees in the event of a successful or desired result.

Contingency fees: fees are paid only if a certain result is achieved where client and counsel negotiate in advance the potential range of results and associated fees.

Value billing: a pre-set fee based on the "value" of the service as opposed to its quantitative measure (which is traditionally reflected in the number of hours or amount of work).

Blended rates: fees based on rates that are blended for all timekeepers, or one hourly rate for partners and one for associates.

Retrospective billing: fees adjusted at the end of the year based on the volume of assigned matters and fees billed.

Collar fees: periodic payments for a predetermined time period whereupon the fees are reviewed against a budgeted amount and adjustments are made if fees are more or less than the predetermined fee range.

Fixed profit billing: fees calculated by guaranteeing a level of profit after deducting fixed costs or expenses.

Project billing: fees based on a fixed amount for the completion of a project as opposed to a task.

Ethical Issues

Attorney fees, regardless of form, must be reasonable and may not be unconscionable. That is determined by several factors, including eleven identified in Rule 4-200(B) of the California Rules of Professional Conduct.

Importantly, AFAs cannot alter or operate to change the fundamental attorney-client relationship, even if the client agrees to do so. This typically means that AFAs cannot ethically limit an attorney's independent professional judgment; create a conflict of interest between the client's interests and any other interest, including the attorney's; or impair the client's absolute right to terminate the attorney-client relationship. Some jurisdictions have censured or suspended attorneys who have not followed these rules.

As a result, one way to ensure that attorneys act consistently with the rules is to ensure that the AFA provides that the client is entitled to terminate the agreement without penalty at any time for any reason. A quantum meruit approach, which allows attorneys to recover the fair and reasonable value of services if the relationship is terminated earlier than planned, protects attorneys from clients who terminate a representation before the attorney earns the full fee.

Still, the right of a client to terminate an attorney's representation has far-reaching implications for advance fees and certain retainer fees. In short, an attorney usually must return all unearned attorney fees when a representation is ended. Under various bar rules and the holdings of numerous courts, pre-paid attorney fees, even if characterized as a "retainer" or prepaid "advance fee," typically remain the property of the client until earned. It is the issue of when a fee is earned that can cause complications.

Attorneys have sought to address these challenges by including provisions in their agreements that deem all attorney fees paid as earned at the outset of the representation. But courts are not always receptive to this approach. Rule 3-700(D)(2) of the California Rules of Professional Conduct requires an attorney to return any portion of a legal fee that is unearned, though the provision is not applicable to a true retainer fee that is paid solely for the purpose of ensuring the availability of the member for the matter.

Like all billing arrangements, effective AFAs are reduced to writing. Due to the ethical implication of AFAs, they may be more appropriate for certain representations. Where an attorney has specific and certain knowledge of a client's needs, has experience in the type of matter being handled, and has the trust of the client, AFAs may make more sense.

Collaboration and communication with the client are keys to any AFA. Overall, when properly executed, alternative fee arrangements can be very beneficial to both parties, leading to improved client relationships.