Hawkins Parnell Thackston & Young LLP ETHICAL AND PRACTICAL CONSIDERATION IN ALTERNATIVE FEE ARRANGEMENTS Susan E. Egeland Hawkins Parnell Thackston & Young LLP Atlanta Dallas Charleston Los Angeles San Francisco St. Louis

Hawkins Parnell Thackston & Young LLP History of the Billable Hour “A lawyer’s time is his stock in trade.” -Abraham Lincoln

Hawkins Parnell Thackston & Young LLP Leading to the Billable Hour State bars issue recommended/statutory minimum fee schedules 1960 – Bills for “services rendered” – and estimation of perceived value Mid 1960s to early 1970s – Anti-trust concerns, accountants and insurance carriers require more detailed information and a better way to track it. Thus the billable hour is popularized.

Hawkins Parnell Thackston & Young LLP Alternative Fee v. Billable Hour Perceived negatives of hourly billing: –Discourages attorney client communication –Discourages expedient resolution of cases –Based on work performed instead of value obtained –Creates a conflict between attorney and client –Slave to the clock – Bad for the Profession

Hawkins Parnell Thackston & Young LLP Can Alternative Fee Agreements Improve Attorney Client Communication?

Hawkins Parnell Thackston & Young LLP American Bar Association Model Rules of Professional Conduct Rule 1.4: Communication (a)A lawyer shall: (1) promptly inform the client of any decision or circumstance [requiring] the client’s informed consent… (2) reasonably consult with the client… (3) keep the client reasonably informed…

Hawkins Parnell Thackston & Young LLP AFAs and Attorney-Client Communication Process of creating AFA facilitates communication about expectations AFAs can set routine communication as part of an overall fee or pay as a line item Eliminate clock-watching by client Eliminate needless over-reporting

Hawkins Parnell Thackston & Young LLP Can AFAs be used to encourage attorneys to expedite litigation and other legal matters?

Hawkins Parnell Thackston & Young LLP American Bar Association Model Rules of Professional Conduct Rule 3.2: Expediting Litigation A lawyer shall make reasonable efforts to expedite litigation consistent with the interests of the client.

Hawkins Parnell Thackston & Young LLP Expediting Litigation AFAs can discourage boilerplate excess work AFAs can encourage attorneys to be efficient AFAs can expressly reward speedy resolutions

Hawkins Parnell Thackston & Young LLP How can AFAs be used to ensure that clients get value for the fees they spend?

Hawkins Parnell Thackston & Young LLP THE VALUE EQUATION VALUE = Result - Cost Value is realized when a client’s expectations are met (or exceeded) at what the client considers a reasonable price. It is a subjective assessment of the overall worth of a product or service.

Hawkins Parnell Thackston & Young LLP Work Performed and Value Obtained TaskTime Read opinion, report, and salient reliance materials; 6 hours Collect and review published literature with differing view; 12 hours Collect bias materials for cross;3 hours Depose witness in person with documents;12 hours Example #1: Attorney prepares to depose hazard communication expert

Hawkins Parnell Thackston & Young LLP Work Performed and Value Obtained TaskTime Read opinion, report, and identify new reliance materials; 2 hours Update opposing literature;.5 hours Depose witness by telephone;2 hours Example #2: Attorney deposes same witness second time

Hawkins Parnell Thackston & Young LLP AFAs Reward Value Obtained AFA might pay less than hourly rates in some instances AFAs should reward expertise and encourage development and use of institutional knowledge AFAs should encourage best staffing practices

Hawkins Parnell Thackston & Young LLP What do the rules of Professional Responsibility require when creating the terms of Alternative Fee Agreements?

Hawkins Parnell Thackston & Young LLP American Bar Association Model Rules of Professional Conduct Rule 1.5: Fees (a)A lawyer shall not make an agreement for, charge, or collect an unreasonable fee or an unreasonable amount for expenses. The factors to be considered in determining the reasonableness of a fee include the following:

Hawkins Parnell Thackston & Young LLP (1)The time and labor required, the novelty and difficulty of the questions involved, and the skill requisite to perform the legal service properly; (2)The amount involved and the results obtained; (3)The time limitations imposed by the client or the circumstances; (4)The nature and length of the professional relationship with the client; (5)Whether the fee is fixed or contingent.

Hawkins Parnell Thackston & Young LLP Creating Ethical AFA’s Time and Labor + Skill Required Consider the amount of work Consider the use of work product Consider the best staffing plan Consider the expertise of the team

Hawkins Parnell Thackston & Young LLP Creating Ethical AFA’s Amount involved + results obtained More risk = more reward Consider contingent component Consider bonuses for performance Consider refund for poor performance

Hawkins Parnell Thackston & Young LLP Creating Ethical AFA’s Whether the fee is fixed or contingent. Contingent fees can be created for any case Complete contingent fees based on results Contingent bonuses Hybrid – Hourly and Contingent fees

Hawkins Parnell Thackston & Young LLP Do AFAs increase or decrease potential conflicts of interest between Attorney and Client?

Hawkins Parnell Thackston & Young LLP Conflicts of Interest A conflict of interest is involved if there is a substantial risk that the lawyer's representation of the client would be materially and adversely affected by the lawyer’s own interests or by the lawyer’s duties to another current client, a former client, or a third person.

Hawkins Parnell Thackston & Young LLP Inherent Potential Conflict? Will Client seek lowest cost per service? Will Client press for more work than necessary under AFA? Will Attorney seek higher profit margin? Will Attorney seek to avoid work that would benefit client?

Hawkins Parnell Thackston & Young LLP ETHICAL ISSUES INHERENT IN THE TRIPARTITE RELATIONSHIP Insured may second guess AFA where the fees are paid by a carrier Motivation by attorney to trim unnecessary work may be seen by insured as a reduction in service AFAs more workable where insured has Self-Insured Retention

Hawkins Parnell Thackston & Young LLP What type of AFA will work best for the situation?

Hawkins Parnell Thackston & Young LLP Fixed or Flat Fee Price charged for defined services Shifts some of the risk of costs overrunning to the law firm A total fee or segments of the service Useful where the litigation is most predictable PRICE = BUDGETED VALUE

Hawkins Parnell Thackston & Young LLP Model for Determining Appropriate Flat Fee For Individual Matter Based on ABA codes Customized by inputting rates, likelihood of reaching certain phases and whether the firm has experience with similar cases Experience in the area and trust in the relationship is key

Hawkins Parnell Thackston & Young LLP Time and Talent Projection A detailed budget for tasks to be completed And the talent necessary to complete them Premised largely on the hourly rate system Provides predictability Can be separated by tasks Or based on a prediction of work

Hawkins Parnell Thackston & Young LLP “Prediction is difficult, especially about the future.” - Yogi Berra

Hawkins Parnell Thackston & Young LLP Budget With Risk Analysis

Hawkins Parnell Thackston & Young LLP Contingent Fee Depends on results achieved Price reflects different incentives for firm and client Useful where there is recovery of damages Useful where there is a quantifiable risk that all can agree to PRICE = RESULT x AGREED %

Hawkins Parnell Thackston & Young LLP Shared Risk Contingent Fee Claimed damage: $10,000,000 Client’s estimated adverse verdict: $ 1,500,000 Settlement: $ 500,000 Saved$ 1,000,000 Less fees charged to date$ 300,000 Net savings$ 700,000 Contingent bonus = 700,000 X 20% = $ 140,000

Hawkins Parnell Thackston & Young LLP Blended Hourly Rate One rate applies to all hours Rate usually negotiated by the client but can reflect weighted average of timekeepers rates Risk that firm may not use the high value/experienced attorneys - can be seen as reducing profit PRICE = TIME x AVG (all rates)

Hawkins Parnell Thackston & Young LLP WHAT ARE THE MAJOR ETHICAL RISKS OF ALTERNATIVE FEE AGREEMENTS?

Hawkins Parnell Thackston & Young LLP American Bar Association Model Rules of Professional Conduct Preamble – A Lawyer’s Duties [2]… As advocate, a lawyer zealously asserts the client’s position under the rules of the adversary system.

Hawkins Parnell Thackston & Young LLP Do AFAs make you less zealous? Should I file the motion for summary judgment? Should I travel to New York for the deposition? Should I settle the case sooner rather than later so I can stop working on it?

Hawkins Parnell Thackston & Young LLP “ The best way to predict the future is to invent it. ” - Immanuel Kant, 18 th Century Philosopher