Lawyers have long billed by the hour. And clients have long complained about the unpredictable, huge bills they got.
But thanks to the recession, several L.A. law firms – including some big, prestigious ones – are changing the way they charge clients. They are billing flat fees for a defined project, charging less for an unsuccessful outcome or simply reducing rates.
In fact, several local firms recently formed alternative fee committees that work with corporate clients to figure different ways to charge for services. And they typically result in smaller bills.
For example, downtown L.A. firm Sheppard Mullin Richter & Hampton LLP set up an alternative fee arrangement earlier this year with a startup company. The firm charged a flat fee of $60,000 for legal services involved in raising $5 million in financing. By comparison, if the firm’s attorneys had charged their regular hourly rates, it would have cost the client about $78,000.
“In order to compete, this is something that the firm needs to do,” said David Sunkin, a partner at Sheppard Mullin who oversees alternative fee proposals from the attorneys in the firm’s corporate department.
Sunkin is one of four alternative fee czars on a committee that reviews alternative fee proposals.
Fram Virjee, a partner at O’Melveny & Myers LLP in downtown Los Angeles and chairman of his firm’s alternative fee committee, said clients quickly grasp the new approach. Clients generally like the idea of a defined fee at the outset of a case and dislike surprise bills at the end of the process.
“Many of our clients don’t charge by the hour. They sell products or services for a flat fee, and that resonates with them,” Virjee said.
O’Melveny’s alternative fee strategy was disclosed by legal blog Above the Law earlier this year. O’Melveny is L.A.’s biggest law firm.
In an annual survey of managing partners for the 200 largest U.S. law firms published this month by legal trade magazine American Lawyer, 93 percent of those surveyed said more law firms are willing to discuss changing their fee structure, and 86 percent said more clients are willing to discuss changes.
Among the alternatives, flat-fee arrangements have been the most used form of alternative fees this year.
Alternative fee deals could be structured as:
• Flat fees, meaning attorneys and clients agree on a fixed price for a specific task.
• Fee deferrals, meaning the firm doesn’t get full payment until the client concludes a transaction or until the conclusion of a case.
• Success fees, meaning that firms accept low base payments but get bonuses for good outcomes.
Bernard Gaffaney, president of the Association of Corporate Counsel’s Southern California chapter, said companies have been pushing for these changes.
“With budgets being tight, there is a heightened look at ways to do more with less,” said Gaffaney, who’s also senior corporate counsel at Pioneer North America Inc. in Long Beach.
Although the use of alternative fee arrangements is increasing, the billable hour is alive and reasonably well.
“The death of the billable hour has been grossly exaggerated, but there is no doubt that clients are turning to alternative fee arrangements because they look more attractive to the client,” said Virjee at O’Melveny.
“They are growing in use, and I think the downturn in the economy has driven a lot of that,” said Peter Zeughauser, a legal consultant in Newport Beach. “But I don’t think hourly rates will fade from the scene. For important work, the hourly rate is still the most popular fee arrangement out there.”
In the past, law firms have been willing to provide discounts to clients, most commonly by taking a percentage off the total bill or cutting hourly rates.
Such discounts and reduced rates are still occurring, but several pointed out that client companies are suspicious that law firms may simply bill more hours, resulting in a final bill that’s as big or bigger than if the firm had charged its standard rates.
Instead, discounts are being replaced by alternative fees. Smaller firms started employing alternative fees, and bigger firms took the cue.
Stuart Liner, managing partner of a smaller firm, Liner Grode Stein Yankelevitz Sunshine Regenstreif & Taylor LLP of Westwood, said his firm has been using alternative fee arrangements with clients for years. He was surprised recently to hear of larger firms getting into the game.
“We are having to compete on that stuff, which is unusual,” Liner said. “I’ve noticed a dramatic change.”
One larger law firm that’s been negotiating more alternative fee deals with its clients is Alston & Bird LLP. The Atlanta-based firm entered the L.A. legal market when it acquired downtown L.A. firm Weston Benshoof Rochefort Rubalcava & MacCuish LLP and its 83 attorneys last year.
“I think after many years of talking about it by both sides, alternative fee arrangements are becoming much more common,” said Tom Wingard, partner-in-charge of Alston’s downtown L.A. office. “And the trend is steeper and broader with respect to the types of matters covered.”
For example, Wingard said the firm has been charging flat rates to handle disclosures that publicly traded companies are routinely required to file with the Securities and Exchange Commission.
However, Alston wants to make sure its attorneys don’t get underpaid. So the firm charges standard hourly rates for work that arises unexpectedly, such as statements in response to nonroutine governmental or internal investigations, shareholder proposals or proxy contests.
Also, Wingard said the firm has been charging a fixed fee to get a client through the due diligence process of an acquisition. But if the deal moves forward, then the firm will start charging its standard hourly rates.
At O’Melveny, the firm negotiated a deal with a technology company for some of the company’s litigation work. O’Melveny drew up a budget for the litigation, and the client company agreed that it would pay 80 percent of the total budget. If the firm’s attorneys resolve the case within a specific time period, then the company has to pay the remaining 20 percent plus a premium, commonly known as a success fee. If it’s not resolved in the company’s favor, the client doesn’t pay the 20 percent.
Attorneys said they want to show clients that they have done a thorough analysis of their needs and potential costs before presenting an alternative fee, so no one thinks it’s a number pulled out of the air.
“What it’s really about is doing significant due diligence so that you and the client feel comfortable on the numbers you come up with,” Virjee said.
As part of the process, firms are using software programs to calculate how long a particular matter – whether it’s a merger or acquisition deal, a particular kind of litigation or routine corporate filing – should take to complete and how much it should cost.
Sheppard Mullin’s Sunkin said that the firm’s accounting staff is evaluating the alternative fee arrangements it has worked out this year with clients to determine whether the amounts should be revised for the future.
“We want to price it right,” he said. “We aren’t in the business of losing money and our clients aren’t in the business of losing money.”
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