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September 10, 2013

Alternative Fee Arrangements

by WSBA
alternative fee agreements
NWLawyer editor Michael Heatherly explains common alternative fee arrangements, with their pros and cons.

alternative fee agreementsDramatic shifts in the business of practicing law, some hastened by the Great Recession, have led some to believe that the conventional hourly billing system is going the way of the powdered wig and quill pen.  Attention has turned to AFF — alternative fee arrangements. If the term is unfamiliar, check out this primer from the American Bar Association, also available as a short podcast.

Meanwhile, here’s a glossary of the most common alternative fee arrangements, with their pros and cons:

Flat Fee

An agreed-upon fee, often paid up front, based on the typical scope of service required for a particular type of case regardless of the hours worked. It is often used in such areas as criminal defense and bankruptcy. The fee agreement may include adjustments to apply if significantly more or less work than anticipated is required. Specific Rules of Professional Conduct apply.

  • Pros: Certainty regarding the amount of fee; cash flow benefit to lawyer.
  • Cons: Client may not have cash to pay up front; may tempt lawyer to sign up more cases than he or she can handle.

Contingent Fee

The fee is based on the monetary outcome of a case. It is often used by plaintiffs’ tort/disability lawyers. In pure contingency, fee is percentage of settlement or judgment. Specific RPCs apply.

  • Pros: Allows clients to obtain counsel with no up-front expenditure (the “key to the courthouse”); gives both client and lawyer “skin” in the game, motivating them toward a prompt but appropriate resolution.
  • Cons: Risk to lawyer of receiving no fee, or receipt of fee being delayed by months or years until matter resolved; risk to client that lawyer will benefit disproportionately if large recovery obtained with minimal work.

Retainer

Under a retainer agreement, the client makes an agreed-upon up-front or monthly payment, in exchange for which the attorney promises to handle specified types of work that come up during a given period. Once common, popularity of the retainer declined but has enjoyed something of a revival.

  • Pro: Certainty in amount of fee to be paid in given period.
  • Cons: Requires careful definition of what work is covered by retainer; may require adjustments or renegotiations depending on type and amount of work required over time.

Capped Fee

The lawyer charges hourly, but agrees to a maximum total fee. The agreement also may include a “collar” guaranteeing a minimum fee.

  • Pro: Cost/fee certainty.
  • Con: Not appropriate for matters where scope of engagement is unpredictable (although, as with a flat fee, lawyer and client can agree up front to adjustments for unanticipated events).

Holdback/Reduced Hourly with Kicker

A holdback fee is effectively a flat-fee/contingency-fee hybrid in which the client pays a portion of an agreed-upon fee up front, with the balance payable only upon a successful outcome, which may be defined objectively or subjectively. In a reduced-fee-with-kicker arrangement, the lawyer agrees to a lower-than-usual hourly fee but receives what amounts to a bonus if the matter is resolved within a specified time frame.

  • Pros: More predictability regarding fee than in regular hourly practice or full contingent arrangement; incentive for lawyer to resolve case promptly; links client satisfaction to amount of fee. 
  • Con: May require complicated bookkeeping and lead to disagreement as to whether success was achieved.

Blended Rate

To temper the effect on clients of high-rate partners’ charges, in a blended rate arrangement a law firm agrees to charge a single specified hourly rate, regardless of the individual rates usually charged by the lawyers involved.

  • Pros: Provides service at lower overall cost to client; gives law firm incentive to delegate work to less expensive attorneys.
  • Con: Client bears risk arising from less experienced lawyers handling more of the work.

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