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obsolete?

On his new weblog the [non]billable hour, Matthew Homann has raised some important issues concerning “value billing” and lawyer ethics, which I believe are by no means as clearcut as Matthew presumes. In “One good reason for value billing” (Jan. 28, 2004), he discusses a case where a firm “got in trouble by billing two clients tens of thousands of dollars (in hourly billing) for the same product.”

Matthew (who is trying to remove hourly billing from his practice) agrees that the particular conduct was dishonest, but asks, “should the second client have been charged significantly less because the documents were already ‘in the system’ and just needed to be revised?” He continues (emphasis added):

This is the dilemma many lawyers face when trying to bill hourly when they have become proficient at any given task. If my technology investment allows me to complete a task in one-third the time it took me last year, does that task become two-thirds less valuable to my client? Staying away from hourly billing should allow lawyers to maximize their revenue, capitalize upon their efficiencies, and keep their law licenses.

If I understand this approach correctly, there’s more than “one good reason for value billing” by the purely profit-seeking lawyer. Athough I’m sure Matthew has no intention of charging excessive fees himself, his position is basically saying that a lawyer, by avoiding hourly billing:

• doesn’t have to pass on to the client efficiency benefits from expertise and proficiency in an area, or from technological advances and investment
• can price-discriminate by extracting from each client the “value” of the services to the client
• can, therefore, potentially bring in more total fees while working less, and
• will avoid charges of charging excessive fees, because the client by definition never pays more than the value of the services to the client

I can see why this scenario might sound good to a lawyer, but I’m far from certain that it serves the client’s best interests or avoids ethics violations. First, the sophisticated business client may be able to put a “value” on a particular lawyer’s service, but it’s difficult to see how we can expect the everyday consumer of legal services to do so. What’s it worth to have the peace of mind of an estate plan, a clear property deed, a favorable plea bargain? What’s the value of being divorced to escape an ugly marriage? Like Matthew, I was a divorce mediator. How could a divorcing couple put a value on reaching an out-of-court, as-amicable-as-possible divorce agreement? What’s it “worth” to the spouse who most wants out of the marriage?

These are not questions we normally ask buyers of important or necessary services to make, except in the gross sense that they choose to totally forgo the service if the price being offered by the provider is utterly unaffordable or outrageous.

Medical Analogy: Should society permit a medical doctor to charge a fee based on the value of the cure or treatment to each patient (pity the professional soccer player with a foot injury), rather than on a combination of the physician’s skills and the difficulty and time needed to perform the treatment, tempered by some market discipline? A lot of patients would probably die while attempting to determine just what a cure is worth.

In our economy, we expect suppliers to produce additional output until price equals marginal cost (see Arnold Klingman). We also expect that competition will motivate suppliers to innovate in order to become more efficient, and thus reduce costs and price. Matthew appears to want to avoid the attorney’s marginal cost in the pricing process, and to avoid passing on the benefits of efficiency and competition to the consumer. The “special protection” offered the client in the attorney-client relationship would be protection from the forces of competition and innovation within the legal profession.

I don’t see how we can divorce the billing process from the ingrained historical notion that the reasonableness of a fee depends upon the amount of time spent performing a service and the expertise and skill of the lawyer and staff. Now, when a lawyer uses a fixed fee, that fee is presumed to mimic the total fee resulting from multiplying a fair hourly rate by the time the lawyer expects to take to perform the function, after assessing the overall complexity of the client’s situation. The reasonableness of that hourly fee takes into account the lawyer’s skill, human capital investment, overhead, and technological investment, etc. — tempered by comparison to what other’s are charging for similar services.

• If you say, “but that means technology may make many lawyer services very cheap to perform or even obsolete,” I say — from the consumer perspective, “ain’t that grand! let the competition begin!” The Good Olde Scriveners Guild didn’t much like the printing press, either.   I’m sure some scriveners found niche markets for scribe services, some became farmers, and others bought presses and started producing quicker and cheaper newspapers and books.  Once competition began in earnest among publishers (who by the way owed no professional nor fiduciary duties to their customers), they surely did not get away with saying to each consumer, “Tell me, what’s the value of this Bible to you?” The basic price depended on the costs of the inputs and quality of the product.
• Traditionally, “value” has meant “a good product at a good price,” and has always taken into account competitive market forces that tend to bring price down to the seller’s cost.  That’s why computers cost less today than a decade ago, although buyers “need” or “value” them more now, as they have become central in our business and personal lives.  We need to be suspicious of a new definition of value that is based on a buyer guessing in advance just how much a product is worth, without knowing the quality or quantity of the services to be performed or the actual results, and with no connection to what the service costs the seller to produce.

There are a lot of problems with the billable hours system, but most of them are the result of abuses rather than of the inherent nature of using hourly billing. In determining the reasonableness of a fee, therefore, the legal profession has attempted to avoid the worse distortions from hourly billing by not fully charging for hours spent “getting up to speed” in an unfamiliar area of law. The client rightfully expects expertise and needs to be informed by the ethical lawyer when he or she is not yet fully competent in a particular legal subject.

The client also rightfully expects to pay a fee that corresponds — at least roughly — to the amount of time spent by the lawyer. And, the honest fiduciary should let the client know approximately how much work is involved. Some sophisticated clients might want to experiment with or negotiate for some kind of value-related fee.  But, in a world where there are so many capable lawyers, no sophisticate would say “I know you’ll only spend a few minutes on this, but it’s worth millions to me, so here’s a seven-figure check.” Instead, the savvy client would negotiate for, or shop around for, a more competitive fee, no matter the “value” of the result.

Illinois, where Matthew practices, has adopted Model Rule 1.5 on fees, which clearly continues to focus on the amount of time spent and skill needed, along with the expertise of the lawyer and the fees charges by other lawyer’s in the community, when determining reasonableness. In its brochure on Fee Disputes Between Lawyers and Clients, the Illinois State Bar has this to say about the basis of a reasonable fee (emphasis added):

“Abraham Lincoln, himself a lawyer, once said, ‘A lawyer’s time and advice are his stock in trade.’ The basic ingredient is the amount of time spent.”

Fitting value billing into the reasonable fee rubric seems far more difficult than Matthew admits. Lawyers need to keep in mind that esquires were shield-carriers and horse-tenders, and not the knight on the steed, much less the lord of the manor. Lawyers are servants of their clients (and not their partners). They are, of course, presumed to be skilled servants, and that’s why they make a lot more than minimum wage for their services.

However, value billing in many ways turns the lawyer into a partner in the client’s venture. No wise entrepreneur takes in a partner without asking what contribution he or she brings to the enterprise. The “value” of that contribution to the entrepreneur depends greatly on how many others are capable and willing to provide the same investment, and not merely whether the project needs someone to provide the service or product.

I’m all for giving clients the benefits of many pricing options. However, clients must be given full information along with options (especially novel options like value billing) — information that includes the likely amount of attorney time involved to perform the service, along with a description of advantages the firm can offer due to expertise and technology. If the client is not allowed to make fully informed choices, the law firm is not fulfilling its ethical and fiduciary obligations. I plan to learn more about value billing as it might be applied by lawyers. Right now, call me skepticalEsq.

• As for Matthew’s original question — “should the second client have been charged significantly less because the documents were already ‘in the system'” — the answer is clearly less. However, it’s possible that the first client should also have been charged less, too — especially if the firm knew it had a very similar case in the pipeline, so that the hours could be split between the clients, rather than charged to each client.

further reading at this weblog: In our post “ethics aside” (April 8, 2005), we noted that f/k/a‘s editor emeritus ethicalEsq: is getting a little annoyed by the “ethics aside” approach of the gurus and evangelists of law firm branding, marketing and alternative or value pricing. They offer the easily-tempted lawyer a paradise of premium clients and fees, with increased profits, while never probing the ethical and fiduciary duties of the lawyer to insure that the client is fully informed, treated fairly (and without manipulation) and, in the end, charged a fee that is reasonable for competent and diligent services.

. . . . Those who are advocates of “modern” marketing and pricing methods for attorneys have a duty to put the ethical issues front and center. If they, and those who are so eager to follow them to higher profits, need a place to start, they might take a look at some of our prior posts — or read them again with our ethical duties in mind. For example:

– LexThink about higher fees (er, value billing)
– brand Lex (branding to permit premium pricing and reduce price elasticity)
– chronomentrophobia (hourly billing is not the problem)
– value billing or venal bilking? (what is value billing? what should it be?)
– fees and the lawyer-fiduciary
– jackal sequel (image-making rather than quality as the basis for higher fees)
– fee fie foe and fum (change values first)
– ron baker: sensitive guy? and Ron Baker and Price Sensitivity (a look at the goal of leveraging premium fees from the client, especially the Change Order)

It’s worth repeating what I said two days ago, after LexThink: “I am all for modernizing the law firm and the lawyer-client relationship — so long as it is a tool for better serving the client’s interests, rather than one that merely uses modern selling techniques and technology to artificially increase lawyer fees and profits and to stave off the democratizing effects in the legal services marketplace of the digital revolution.” [Ron Baker disagreed with our assessment of ethics and value billing, see our response and find the thread here.].

– updates: See our comprehensive post “broadening the hourly-billing debate” (Aug. 18, 2007) and linked materials; and commentary in smart clients care about . . . marketplace “value” (Nov.25, 2008).

And, for a list of the Red Flags that have caused us to worry about the ethical and fiduciary soundness of value billing, see “value billing by lawyers raises many ethical red flags” (Dec. 4, 2008).