An Introduction to Fees

With the advent of cost-based managerial accounting, hourly fees are commonplace today, but that was not always the case. While counting time is good for measuring internal efficiencies and provider productivity, especially in "big-law" firms, time spent does not always correlate to value delivered to the client. Consequently, this firm applies "alternative billing practices" whenever practical. This means under appropriate circumstances we are comfortable hailing back to a simpler age when flat fees and fixed periodic retainers were the norm. Granted, there are projects and situations, like litigation or commercial transactions, where the full scope of the work is so uncertain, or the transaction so complex, that hourly billing is the most practical and reasonable fee arrangement.

Contained here are descriptions and examples of various traditional and alternative billing methods employed by this and other law firms, as well as other factors to take into account when planning for legal matters. These include:

• Flat Fee
• Fixed Periodic Retainer
• Hourly Rate
• Performance-Related Compensation
• Contingent Fee
• Equity-Based Compensation
• Costs and Expenses
• Unbundled Services
• Inherent Costs of Dispute Resolution

For those of you that may be new purchasers of legal services, this information is provided to help you understand the billing practices and become a better informed consumer of legal services. For veteran legal service consumers, these may provide reminders of fee structures that may be worth considering. Some methods are better than others at ensuring that the interests of the attorney are aligned with the interests of the client. Not all billing methods described here are employed by this firm.

Flat Fee

The Flat Fee arrangement is commonly used when the services required are singular and routine in nature, but may require some minor or moderate customization. These arrangements are also useful with the work requires more customization but the scope of the work is known and bounded.

Examples of services provided by this firm that are well suited to Flat Fee arrangements include preparing and filing provisional patent applications, trademark and copyright applications, entity formation, implementing employee stock option plans, and basic executive estate planning using wills and trusts.

Fixed Periodic Retainer

Fixed Retainer arrangements are commonly used when the client's need for legal services is relatively consistent. It may be moderate to heavy, but falls short of justifying full-time legal counsel. These arrangements are also useful when the client demands a level of priority treatment and is willing to "buy the time" to ensure attorney availability on demand.

Fixed Retainer arrangements are not to be confused with "pre-paid legal services" that function in many respects like insurance. With those, you pay a small premium at regular intervals to avoid needing to pay a big lump sum at any particular time when an isolated legal situation occurs. However, even with pre-paid legal services, consumers sometimes find that the schedule of services covered by their premium payments is limited and face larger fees for their particular legal problems anyway.

With Fixed Retainer arrangements, it is generally assumed that you actually have an ongoing need for legal services and by committing to consume the services in various quantities you can negotiate better overall rates than by consuming on a purely Hourly Rate basis. This benefits both the firm and the client because the client can budget its legal spending requirements and the firm has the benefit of consistent work volume and increased familiarity with the client rarely achieved through one-off projects or crisis-based engagements.

Alternatively, a company may want to implement a Fixed Retainer arrangement with an attorney on a part-time or temporary basis when considering whether to hire in-house corporate counsel.

Examples of Fixed Retainer arrangements implemented by this firm include companies requiring general counsel services to relieve owners and management from the administration of far-flung litigation, or the execution of complex multi-national transactions involving local counsel on the ground in various jurisdictions, or simply the marshalling of specialized internal or external resources or professionals to accomplish certain mission critical projects or regulatory compliance initiatives. As contract general counsel, this firm may also be used to execute or manage the preparation, negotiation and enforcement of contracts routinely used by a business in dealing its suppliers, customers or other internal and external stakeholders, or to perform various corporate governance duties such as acting as corporate secretary.

Hourly Rate

The Hourly Rate billing arrangement has become the norm over the last several decades. Under this model, fees are paid like wages - a set amount per block of time. Though stated in terms of dollars per hour, most firms will charge in standard time increments of 1/4th of an hour (15 minutes), 1/6th of an hour (10 minutes) or 1/10th of an hour (6 minutes), or fraction thereof. In addition most firms will charge a minimum fee for any activity on a matter. This does not mean the client is only charged if the amount of time spent meets or exceeds the minimum fee increment. On the contrary, it means that regardless the amount of time spent on a matter or activity relating to a matter, the client will be charged no less than the minimum chargable increment. Common minimum charge increments are one or two tenths of an hour; however some firms set the minimum chargable increment at 1/2 hour or more.

This firm tracks time by tenths of hours (6-minute increments). By measuring in smaller blocks of time, we avoid the situation common in some "big-law" firms, where even the shortest file touch, call or email correspondence is charged at a minimum increment level of 1/2 hour or more.

Performance-Related Compensation

Performance based fees typically have either a flat fee component or an hourly fee component, combined with a performance bonus or penalty. These type of arrangements are well suited to situations where the target outcome is fairly well defined and variations from the target can be anticipated. The attorney and client involved may agree that if the target is met and exceeded a performance bonus will apply. Alternatively, the parties may agree that if the performance target is not achieved, the attorney will accept a discounted fee for the work performed. Such arrangements may be more common in long-standing relationships where attorneys and their clients use the method as a way to directly align the attorney's interests with those of the client, and to allow the attorney to have "skin in the game", in a manner of speaking.

Contingent Fees

Contingent fee arrangements are perhaps the most well-known performance based fee arrangements. Personal injury and medical malpractice claims are commonly handled on a contingent fee basis. Contingent fee arrangements are best when liability is established or a high probability, and the main issue to be determined is the amount of damages. In such cases law firms frequently have financing in place to fund the litigation, allowing the case to move forward with minimal or no fees or costs paid by the plaintiffs except out of the amount recovered in the case. The firms are willing to operate on a contingent fee basis because of their confidence in obtaining a satisfactory and profitable result. In some cases contingency fees are prohibited . Such prohibitions vary by state, but commonly apply to domestic relations and criminal matters.

Contingency fees are rarely if ever appropriate in general business matters.

Equity-Based Compensation

In some rare cases, firms may take an equity interest in a company or project. While such arrangements are permitted, they must be carefully considered in regard to legal ethics rules concerning conflicts of interest and attorney dealing with clients generally. Firms considering such arrangements will also be evaluating the opportunity presented by the client's business just as any sophisticated investor would, taking into account the management team, the business plan, operating history, and the intellectual property involved, among other factors.

Costs and Expenses

Professional fees are only one aspect of the complete cost of legal services. Other aspects include routine costs such as telephone, postage, computing (typically research database services) and photocopying charges. Other less common, but typically more significant expenses may include service of process fees, translation costs, transcription fees, court filing fees, travel expenses, etc. Some firms will require the client to pre-pay significant expenses, or to pay them directly to the third-party provider such as the deposition court reporter, the electronic discovery consultant, the expert witness or the associated local counsel.

Unbundled Services

This is not really a fee arrangement but rather a way of defining the scope of representation. In many jurisdictions, including Utah, a client may engage an attorney to perform just a portion of the legal work required in a larger matter - the court appearance at a particular hearing, for example, but not full representation in the entire case. This helps the client control costs but it requires a certain amount of confidence in the client that they can adequately represent themselves in matters not delegated to counsel. On the other hand, it is impaired by the frequent reluctance of attorneys to take on isolated segments of a case when the work product leading up to their participation may not be to the professional standard they are accustomed to working with. In addition, there is the prohibition in some jurisdictinos, including Utah, against companies representing themselves. Accordingly, such parties would require attorney representation throughout the pendency of a matter.

Inherent Cost of Dispute Resolution

While it is easy to place a value on the time billed or costs incurred, it is somewhat more difficult to measure the full cost of dispute resolution. Arbitration has been touted as being more economical than litigation, but each has its strengths and weaknesses. One can argue that mediation is cheaper than either one. But what must be remembered is that one cost inherent in all dispute resolution methods is the cost of lost time and productivity in your business. Time that you or your team could be spending managing your business, executing your plans, and improving your bottom line is instead diverted to meeting with attorneys, reviewing boxes of old files or gigabytes of email and electronic documents, or answering detailed questions about people and events you thought were old news. Plus, you can't dismiss the cost of sleepless nights as you and your team fret and ponder what the outcome may mean to the future of your business and the future of their jobs, or your company's market valuation or ability to attract and retain top talent under the burden of heavy litigation or a large adverse judgment.

These costs, though difficult to quantify, are real. They are one of the reasons this firm advocates a preventative practice model. Early and consistent consultation with a trusted legal adviser can help businesses avoid a plethora of pitfalls and reduce the cash expense and collateral damage of costly litigation.