Scott Turow on Billable Hours

In a cover story in the ABA Journal, Scott Turow offers a rather powerful critique of billable hours.  Of course, criticism of billable hours is nothing new; academics and practitioners have offered important critiques for years. 

But Turow reminded me of the argument, made elsewhere, that billable hours create a kind of conflict for many lawyers under Rule 1.7.  Namely, a lawyer may have a financial interest in billing more time, even though the client won't benefit from the extra lawyering. 

Of course, there are ways around the doctrinal point.  But the concept seems right to me: there is needless lawyering that takes place under a billable hour system.

The problem, inevitably, is developing a system that creates better incentives.  Contingency fees can create problematic incentives, as can other fee-generating structures. 

Increasingly, firms are experimenting with mixes of contingencies, flat fees, and other methods in specific matters.  Do any readers who are on the front lines have any thoughts as to what fee structures most effectively align the interests of lawyers and clients?

Comments

[Carolyn Elefant]

I blogged about this at Myshingle - http://www.myshingle.com/my_shingle/2007/07/the-problem-wit.html Though I'm not a fan of the billable hour, I don't buy that it creates a conflict between lawyer and client. By definition, a lawyer should ALWAYS be acting in the client's best interest, independent of his/her desire to maximize revenue. A lawyer who forces clients into a situation where a fee agreement or billing arrangement is not in the client's best interest is violating his/her fiduciary duty to the client. That's what's unethical, not the mechanism for billing.

[Andrew Perlman]

I agree that billable hours standing alone are not unethical. (As I said, the doctrinal point isn't terribly strong.) My concern, and I think Turow's, is that billable hours create incentives for lawyers that are not always in a client's interests.

In particular, I think billable hours put lawyers in the mindset of dotting every single i and crossing every t, even though that thoroughness may not be warranted in many cases. Put differently, my sense is that lawyers who bill by the hour tend to take the "don't leave any rock unturned" approach more than people who bill by other means. That doesn't mean that billable hours are unethical. It simply means that clients end up paying for work that they didn't really need.

And I don't think lawyers who bill by the hour are spending the extra time on matters just to make more money. I honestly think most lawyers who hourly bill think that they are doing the client a great service. But I think those same lawyers wouldn't view those extra tasks as a great service if they were suddenly charging a flat fee. The billable hour has a more pervasive and cultural effect than an explicit one, in my view.

[Monroe Freedman]

There is no lawyer-client fee (or pro bono) relationship that does not, necessarily, involve a conflict between the lawyer's interests and the client's. The fact that a lawyer SHOULD put the client's interests first does not remove the conflict; it simply defines it. This is one of those conflicts that we tolerate because there is no practical alternative.

[Andrew Perlman]

I completely agree with you, Monroe. Every fee arrangement creates some kind of conflict between the lawyer's personal interests and the client's interests.

That said, it does seem like some fee agreements produce a greater divide between those interests than others. In my mind, billable hours tend to be worse in this regard than other types of arrangements. I think that's Turow's basic point, and one that seems right to me.

[Monroe Freedman]

Ironically, the billable hour developed as a reform of value billing, under which the lawyer simply billed for "professional services," saying nothing more. That was defended against billable-hours reform on the ground that if the lawyer got a great result with only a few hours of work, that was worth a great deal more than the same result after 100 hours. In one case, when a client questioned a bill of Lincoln's, he sent a new bill -- for a substantially higher amount.
Let's face it -- no billing system (except an impractical one under which there is independent monitoring) is going to be more honest and reliable than the lawyers who employ it.

[Andrew Perlman]

The history of billable hours is interesting. Hourly billing is certainly better than simply sending a bill for "services rendered" without any further explanation.

Moreover, there's no doubt that a dishonest lawyer can take advantage of a client, no matter what the method of billing.

But I'm actually more interested in the effect of billing methods on *honest* lawyers. It seems to me that the method of billing has a rather dramatic effect on the type of lawyering that occurs. Lawyers who bill by the hour will generally engage in more "i dotting" than the contingency fee lawyer. In some cases, that will be to a client's benefit. In other cases, it won't.

So I think the question remains whether there is a system that can get it "right" more often than hourly billing. By "right," I mean that the lawyer engages in the optimal amount of work (and the client receives the most appropriate bill), given the needs and significance of the matter. It might be that billable hours are the best method in this regard, at least for certain types of cases. But I'm skeptical that hourly billing gets it right so often as to justify its current pervasive and widespread use.

[Roy Simon]

Figuring out which fee arrangement alligns the interests of lawyers and clients most often is a complex mathematical problem. In contingent fee cases, for example, it is often in the lawyer's best interest to devote a lot of time to a case so that the lawyer is in a strong position during settlement negotiations. But if settlement negotiations fail, the lawyer may have a strong incentive to spend relatively little additional time on the case in order to free up time for a new and different case in which the lawyer will work like heck to generate a high settlement. In other words, the curve of optimum hours from the lawyer's point of view in a contingent fee case is shaped like a parabola, where the vertical axis is effective hourly rate and the horizontal axis is number of hours.

In hourly billing, in contrast, the incentives are linear. The lawyer's basic incentive is to spend as many hours as possible for as long as possible, because every additional hour is at the same effective hourly rate (or higher, if the lawyer raises rates every year). The only limits on hourly rates are (1) some clients will not use the lawyer again if the bill is too high in relation to the results, and (2) some clients will not pay the bill (either because they cannot or because they recognize it represents too much t-crossing and i-dotting).

Much of the problem has to do with the different needs and abilities of clients. I once asked a friend in the banking business if his bank thought Sullivan & Cromwell's bills were too high. His response startled me: "I do bond issues involving tens or hundreds of millions of dollars," he said. "I need the right answer. The wrong answer will cost me a fortune. The legal bills are trivial compared to the cost of a wrong answer."

One other anecdote about the persistence of hourly billing. In the 1980s, when the ABA and others were urging lawyers to use more creative billing schemes, a highly intelligent and creative lawyer said to me, "I spent a lot of time devising a 'value billing' formula that would take into account the results, the number of hours, and other factors. I offered the arrangement to a number of corporate clients. The clients all said it was a very interesting formula, and a very thoughtful formula -- but they still wanted us to bill them by the hour because they understand hourly rate billing."

So, to answer Andy's question directly, I think the formula that would get it right most often would be a complex formula that would take into account the factors in ABA Model Rule 1.5(b). But clients don't trust lawyers to apply those factors fairly, and lawyers don't trust clients to negotiate about those factors fairly at the end of the matter, so we go with the devil we know (and understand), the reliable, linear, monolithic billable hour.

[Andrew Perlman]

Roy, that's an interesting analysis, and your ultimate conclusion seems right to me. There are better ways out there to bill clients, but neither lawyers nor clients seems particularly eager to explore those alternatives.

Aside from the "devil we know" phenomenon, there is another reason that law firms are probably not all that willing to explore alternatives. Presumably, no matter how firms spin it, they still have a revenue target that they'd like to meet. So if they move to value billing or some complicated formula, they're still going to make sure that the formula produces the revenue target that they need.

In short, lawyers are not likely to create a system that produces less revenue than they currently earn, and they can't create a system that produces more revenue or else they'll lose market share (i.e., they will be more expensive than their competitors). So why spend a lot of time on a new system that, as a practical matter, will likely be revenue neutral?

[Monroe Freedman]

So ultimately, it comes down to this. Honest lawyers will bill fairly regardless of the fee arrangement, and dishonest lawyers will take unfair advantage of clients regardless of the fee arrangement. And no system is capable of effective oversight. In short, getting rid of billable hours won't accomplish anything useful.

[Patrick S. O'Donnell]

This is now being discussed over at Concurring Opinions as well: http://www.concurringopinions.com/archives/2007/08/bye_bye_to_the.html#comments

[Andrew Perlman]

Monroe,

I agree that nothing useful would come for law firm revenues as a result of getting rid of billable hours. I also agree that changing the system won't necessarily align the interests of lawyers and clients more closely (though that's debatable).

But I do think that something useful can come from change. Namely, the lives of lawyers would improve. My sense is that, all other things being equal, lawyers who work through billable hours are somewhat less satisfied with their working lives than lawyers who bill by other means. So the one thing that could be useful is an uptick in lawyer satisfaction.

That's obviously an anecdotal claim, though, for which I have only weak empirical support.

[Monroe Freedman]

One of the advantages of being a VOP (Very Old Person) is that one can remember how it really was in the olden (never golden) days. Trust me, even under value billing, or whatever other alternative, associates were -- and will be -- exploited by partners.

[Monroe Freedman]

And, yes, some lawyers did -- and will -- continue to exploit clients.

[Andrew Perlman]

Monroe,

Thanks for the perspective. It's easy to think that the grass was greener many years ago, but as you note, lawyers may have had the same levels of satisfaction (or dissatisfaction) as they do today.

There must be some longitudinal studies about lawyer satisfaction out there? Do you know of any that might capture whether the method of billing correlates with lawyer satisfaction?

[Monroe Freedman]

I'm sorry, I don't, although I wrote two columns some time ago for the Legal Times arguing that the golden age, when lawyers were respectable and respected, is a myth.
There are values to hourly billing that haven't been noted.
For example, in a recent case, it was possible to demonstrate overbilling (to take one example) by determining that a $300 charge for a telephone conversation consisted of a call to the client, answered by his wife, who said she would give him the message, and then both parties hung up.
Also, it's possible to overcome a disqualification motion in a lateral transfer case by showing that the lawyer whose disqualification is sought did not bill any time to that client's matter.

[Plerlooreda]

Cool, good job, i like you site.
i am wishing you a new clients and be happy with your further projects.
Mark (ex-golden boy:-))