What You Need to Know about Attorneys’ Fees
Knowing the types of attorney compensation arrangements may help you negotiate more favorable fees.
A continuous source of attorney-client frustration is the matter of attorneys’ fees. The purpose of this article is to provide the business person, or for that matter any person, fundamental knowledge based on the authors’ experiences regarding the types of basic arrangements for legal billing and costs, as well as some thoughts about how to select an attorney.
Before entering into any legal representation or fee arrangement, one should have a basic understanding of the types of attorney compensation arrangements. The first step in the process is to select an attorney, but keep in mind that part of the selection process relates to fees and costs. From the perspective of the client, it is imperative that one recognize that all forms of attorney compensation are negotiable.
There are three basic types of attorney compensation arrangements–contingency fee, hourly fee, and flat fee– but there are variations of each arrangement.
A contingency fee provides for compensation to the attorney for his or her legal services based on a percentage of the recovery. This type of arrangement is typically used for personal injury matters (negligence actions, such as car or slip-and-fall accidents), but it can be used for other types of matters as well. The fee range can be from 25 percent to 40 percent and may even differ from those figures. The typical fee is 33 1/3 percent of the gross amounts recovered.
The actual contingency fee is a matter of negotiation between the attorney and client. Usually, the fee is related to the likelihood of recovery and the amount of that recovery. Thus, if obtaining a favorable result will be difficult, the fee percentage will usually be higher. Likewise, if the recovery amount is going to be small, the fee percentage will also be higher. If the matter will require significant time and effort and the likely amount recoverable is small, the attorney will probably not undertake the representation.
Other important considerations in the contingency fee arrangement include the amount against which the percentage is determined. “Gross amounts” refers to all amounts that are received. If you have expenses that you want offset from the percentage of the recovery, you should spell those out in the agreement, or the agreement should include terms such as “after expenses are deducted.” Examples of such types of expenses that can be listed are such things as court costs, expert witness fees, copying costs, and investigation costs.
Modified Contingency Fee
Another way of using the contingency fee arrangement is called the modified contingency. In this situation, an hourly rate is used as well as a contingency fee. The hourly rate is greatly reduced and the percentage is also less, although there can be variations as well as offsets. The modified contingency provides the attorney and the client the opportunity to go forward with a case in which the probability of recovery is not great or the likely amount of recovery is limited. It can also be used when the case may take a substantial period of time to resolve. The attorney may favor this approach because of his or her particular situation. For example, it could be difficult for the attorney to carry the case for a long period of time without receiving compensation. A modified contingency arrangement can also be used as an incentive for the attorney to take a case that he or she might not otherwise take for any of a number of reasons.
The hourly rate that attorneys charge depends on a number of factors, including subject area of the case, years of experience of the attorney, complexity of the matter and general overhead of the attorney. It is crucial that the client understand that the hourly rate is negotiable. The more the attorney sees the benefit of handling the matter–whether that benefit takes the form of fee generation, potential client referrals or publicity–the more likely the hourly fee will be adjusted.
How does one determine an appropriate hourly rate? A good way to do so is to visit the attorney’s office. What kind of expenses would be associated with the type of overhead one would relate to that office’s location and its amenities, secretarial and staff support? Differences in cost between one attorney and another could be nothing more than overhead. It is not unusual for an attorney to budget 60 percent of his income for overhead.
Another important factor affecting hourly rates is the potential risk to both the client and the attorney. If the subject area of the case is one of high risk to the attorney, such as exposure to liability, then it is likely that the hourly fee will be greater. Examples of potential risk scenarios include securities, estate planning, tax, and real estate matters. An attorney’s liability insurance rates and the staff needs are greater in such cases.
At the other end of the spectrum of cases having serious implications are criminal cases. Generally, more discretion is provided to the attorney in criminal cases than in other types of legal matters. Thus, liability for error is usually more difficult to establish, and liability insurance–a substantial legal cost–is considerably less in criminal cases. As a consequence, legal fees in criminal cases are usually comparatively less than in other types of cases. Note, however, that there are numerous exceptions. Securities or tax work in the criminal area can be very costly in terms of hourly fees. One should ask whether the hourly fees are charged for travel time from the attorney’s office to court or to meetings. Another important question pertains to whether the attorney charges a minimum billing time. For example, some attorneys bill a minimum of 15 minutes for every task–whether it is making/receiving a telephone call or voicemail message, or sending/retrieving an email message–regardless of the actual time spent on the task.
As one might expect, there are refinements of the hourly rate fee arrangement. One that has particular significance is the equity arrangement. In this situation, the attorney receives a part of the equity in the transaction in exchange for his services. The refinement can also take the form of a reduced hourly fee with an equity interest. Such an arrangement is often utilized in establishing businesses. In such cases, the client wants to keep start-up costs to a minimum and yet requires attorney assistance.
The remaining standard type of fee arrangement is the flat fee. This type of fee is often used in criminal cases and is also used for standard types of representation, such as incorporation, an estate plan, or the drafting of a will. In the criminal case, the attorney makes a projection of what he thinks the representation will cost. He attempts to obtain a fee for that amount “up front.” Experience has shown that when clients are facing the horrific consequences of a criminal proceeding, they want representation and genuinely believe that they can afford it. However, what typically happens is that the client makes an initial payment and then does not pay the balance.
In small cases, it is not economically worthwhile for the attorney to pursue recovery of the small flat fee. Accordingly, most attorneys in small criminal cases will attempt to get as much of the flat fee upfront as they can, recognizing that they may not get paid anything else.
In the larger fee cases involving corporations or key executives, the collection issue is not as significant. In those situations the client usually pays a substantial retainer at the outset of the case and then is billed hourly for the continued representation. In other types of matters such as estate planning or formation of a corporation, the flat fee or some portion of it is paid at the time that the attorney/client relationship is formed, and the remaining balance is billed either monthly or at the time of completion of the work. It is important to note that in criminal cases, representation of a client may occur for only one incident, whereas in other matters, a long-term relationship in which the client needs continued support is likely. The problem of fee collection is thus a less significant problem in long-term relationships.
Knowing the basic types of fee arrangements, one must also remember that the cost and character of the legal fees are negotiable. Also negotiable, but not to the same extent, are costs incurred by the attorney during the representation. Such costs may include telephone calls, photocopying expenses, expert witness fees, investigator fees, and travel expenses.
Before the First Conference
So what should a person planning to retain a lawyer do?
- Before meeting with the attorney, gather and organize as much data as you can. Try to develop a clear understanding of the issue(s) or matter(s) for which you are seeking legal advice. Ask yourself, “What will the attorney need to know to determine whether to undertake representation?
- Organize the material; it saves time, and therefore reduces legal fees. Well organized documentation also makes the attorney more inclined to provide a reduced contingency, hourly rate, or flat fee because the attorney senses that you may be able to assist in the case preparation and that the case may therefore present less difficulty. A chronological approach to the facts helps the attorney to understand what has happened.
- If possible, speak to someone who has retained an attorney in a similar matter, and find out what his or her thoughts were about the representation, the legal fees and costs. Attorneys who receive referrals from other attorneys or clients usually do not want to embarrass their referral source. If it is an attorney who referred the case, the new counsel feels additional pressure to do well because it is possible that his or her work may be reviewed by the referring attorney.
If you have followed the previous suggestions, you have prepared for your initial conference with the attorney. What remains is to negotiate your arrangement with the attorney and have that agreement put in writing. In California, a written fee agreement is generally required if it is anticipated that the fees for the legal services will be $1,000 or more. The attorney should also provide the client with a duplicate copy of the fee agreement, and it should be signed by both parties. These are typical requirements of the State Bar Association. (For California, see Business and Professions Code Sections 6147 and 6148). The written agreement will set forth the fee arrangement and the scope of representation.
Read the agreement carefully. If you don’t understand something, ask for clarification. You can even inquire whether the attorney has liability insurance and whether there have been any claims filed against his practice. You can also check with the appropriate State Bar Association to determine whether there have been any complaints or disciplinary actions against the attorney.
Remember that the best way to get a lawyer is by referral from another attorney or from someone the attorney previously represented. Be aware that there may be financial considerations in the referral. Inquire whether there is a referral fee. Such a fee is allowed, but it cannot increase the client’s fee. In our experience, the best attorneys, unless they are contributing to the handling of the matter, generally do not ask for referral fees; they usually just want the referred client to be provided professional, competent services.
This article is intended to provide an overview of the attorney/client fee relationship. It is hoped that this information will provide the reader with new insights. The reader is encouraged to contact the State Bar Association of his or her state for further information and specific requirements in that jurisdiction.
About the Author(s)
Jeffrey Schieberl, JD, has several years of senior management experience. He has served as president/CEO of a California corporation, vice president of Law/Government Relations of another California corporation, gubernatorial appointee to an Interstate Energy Commission and as executive director of an industry association. Dr. Schieberl has been a member of the Pepperdine University practitioner faculty for more than fifteen years. He earned his BA degree at the University of Southern California, received his MBA degree from Pepperdine University, and was granted a JD degree by Southwestern University School of Law. For further information go to www.lsconsultancy.com. His consulting practice provides his expertise to clients relative to a variety of issues.