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Not yet a relic of history, hourly rates still prevalent

Rochester Business Journal
May 3, 2013

Lawyers have been contemplating alternative fee arrangements for years. Yet the hourly rate remains the most widely used method to charge a client, and that is unlikely to change.
 
"You keep hearing in the media that the hourly rate is a dinosaur and the wrong way to do things, but it's not the dinosaur yet," says Carolyn Nussbaum, managing partner of Nixon Peabody LLP's Rochester office.
 
Harold Kurland, partner at Ward Greenberg Heller & Reidy LLP, who has heard the buzz about billing arrangements as long as he has been in practice, notes that the hourly rate gives a client a benchmark.
 
"It reminds people that their decisions cost money," he says.
 
The hourly rate system replaced a fixed fee system in which lawyers simply set a dollar figure for the work to be performed, Kurland explains. That system is still in use at times today, particularly when the firm can determine its costs in a matter or a transaction ahead of time and be reasonably certain it will not encounter unforeseen obstacles.
 
In a market like Upstate New York, firms may not be able to get the hourly rate they want on a transaction, says Timothy Fitzgerald, member of Bond Schoeneck & King PLLC.
 
In fact, firms like Bond Schoeneck & King may charge a lower-than-customary hourly rate for the chance to establish a relationship with a new client.
 
"We do a fixed fee for clients in specific circumstances because it's easy for us to price," says Michael McEvoy, managing partner of Harter Secrest & Emery LLP.
 
Immigration work is an example of a job for which the firm can set a fixed fee. Securities and Exchange Commission filings and real estate closings are other tasks for which it is relatively easy to predict costs. Hourly rates and any other fee arrangements need to be discussed at the outset of representation and tailored to the client's needs.
 
"It's a topical question for most of our clients," Nussbaum says. "Our clients tell us they want value, predictability and accessibility. It's not so much about what the hourly rate is; it's as much about what's the bottom line."
 
Even though multiplying an hourly rate times hours worked remains the norm, law firms have to do more than send a bill. Clear communication with the client is essential.
 
"The biggest thing I'm hearing is 'I want to make sure what I'm buying is worth what I'm paying for,'" says Nixon Peabody partner James Bourdeau. "They want to make sure you are getting all the efficiency you can get out of your team."
 
That includes getting the most out of the client's staff as well when it can do some of the work.
 
"We tell them if you take some responsibility in house, it will be cheaper, and some clients are open to that," Nussbaum explains.
 
Getting together documents, locating witnesses and drafting some of the communication are examples of how clients can save money. It helps to get a firm involved early in a matter to identify tasks the client can do.
 
Sharing in the success or failure of a business transaction is an example of a non-traditional fee arrangement used by area law firms.
 
"Contingency fees don't really apply to business clients," says Fitzgerald, but success fees do.
 
If there is a favorable result from a business transaction such as a merger or acquisition, the firm gets to share in the success of a client acquiring property or buying another business.
 
"It gives the law firm the opportunity to be paid for perfection," Fitzgerald says.
 
McEvoy says his firm is interested in finding the next Google or the next high-tech company and helping with the startup process, and it understands that the business might not have a lot of money to develop a brand or protect its intellectual property in its infancy. In that case, if the law firm is impressed with the client's business plan, it might defer fees, take an investment in the company or partner with the business to obtain compensation.
 
Litigation is not an area that lends itself well to alternative billing arrangements. Unpredictable motions, lengthy discovery and delayed trial dates are commonplace in litigation, making alternative fee arrangements particularly difficult. While some motions, discovery and depositions can be estimated and priced, the job of an adversary is to make it unpredictable for opposing counsel.
 
"We can't guarantee what our opponents on the other side of the table are going to do," Nussbaum says.
 
Says Kurland: "Time is your enemy in most kinds of litigation." The longer the case takes to settle or decide, the higher the costs.
 
"Lawyers used to send out a bill at the end of every month, and that was the first time the lawyer and the client saw what was included that month," Bourdeau says.
 
But that is clearly not the case in today's cost-conscious business climate.
 
"Even in the hourly rate world, there is more constant reporting back. They want to know more frequently where we're at, what's going on, where are we with respect to our budget," Bourdeau explains.
 
Software such as Nixon Peabody's customized project management program lets lawyers and clients track fees on any given day.
 
Assigning the right attorney or even a paralegal to a task is a big part of establishing value and keeping the cost down for clients. Sophisticated business clients tend to know who needs to be doing what on their behalf.
 
"Generally, the fee assessment will always be tied to what level of sophisticated attorney do I need for this transaction," Fitzgerald says. "Do I need that senior partner in commercial real estate to get this transaction closed, or is it something we can do with a young associate?"
 
Astute clients do not tolerate improper assignment of legal work. Kurland says clients typically seek out a member of the firm they want for the work.
 
"(Partner) equity doesn't affect fee structure," Fitzgerald says. "What affects fee structure is the knowledge, experience and expertise of the lawyer performing the legal work."
 
All attorneys should put themselves in the client's shoes when making fee arrangements, Nussbaum says.
 
Though law firms are trying to be flexible, the hourly fee structure seems here to stay.
 
"I think you see firms trying to be flexible, but I don't think there are any big changes in fee structure coming," Fitzgerald says. "The flat billable hour is the most conventional fee structure in the legal community."

Todd Etshman is a Rochester-area freelance writer.5/3/13 (c) 2013 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email service@rbj.net.


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