Billable Hour Persists As Main Legal Tender

IBM wanted the best legal representation money could buy. So the company hired a big New York City law firm and provided its fancy-pants lawyers with an unlimited budget.

And they overspent it.

Such a joke might be as likely to cause a wince as a laugh for some corporate leaders.

As salaries for top corporate lawyers have increased over the years, many of the corporations they represent have attempted to lower legal bills by either expanding in-house counsel or seeking alternative billing methods from outside firms.

At the center of this issue has been the billable hour – the dominant billing method for most lawyers since the 1960s. At that time, many clients wanted a better way to track what their attorneys were charging them for and how much time was spent on a case.

The debate over the billable hour hasn’t been limited just to corporate clients seeking bargain prices for legal services.

A 2002 report by the American Bar Association states that the drive for more and more billable hours (enforced by the billable hour goals of many firms) has “had a negative effect not only on family and personal relationships, but on the public service role that lawyers traditionally have played in society. The elimination of discretionary time has taken a toll on pro bono work and our profession’s ability to be involved in our communities.”

The report examines and outlines several alternatives to the billable hour.

But some attorneys said despite the push against it – seemingly from both sides – the billable hour is largely an entrenched feature of the legal profession, and isn’t likely to disappear any time soon.

“As an institution, it’s going to be around a while,” said Lawrence Fox, a partner with Drinker Biddle & Reath LLP in Philadelphia who was also chairman of the ABA Standing Committee on Ethics and Professional Responsibility.

 Despite the pressure and initiatives, the billable hour “seems to have amazing staying power,” he said.

Corporate Counsel

In November 2007, Miguel R. Rivera Sr., associate general counsel for outside counsel management for Wal-Mart Stores Inc., sent a memo to several outside legal firms informing them that there would be a moratorium on across-the-board rate increases.

“Until further notice, we will only consider reasonable, individual requests for rate increases for those attorneys in your firm who are performing at an exceptional level and whose experience and knowledge is adding substantial value toward meeting Wal-Mart’s legal objectives,” the memo read.

Rising salaries for junior associates at some New York City law firms are in turn pushing up salaries of both senior associates and junior associates around the country, Rivera wrote.

In the memo, Rivera footnoted a Wall Street Journal story, which referred to impending $1,000 per hour legal fees as the possible “vomit point for clients.” Perhaps ironically, the Wal-Mart memo surfaced on the WSJ law blog.

But rising salaries are nothing new for those in the upper echelons of the professional world, especially those with in-demand talent and knowledge.

“[Rising salaries] fairly reflects the demand,” Fox said. “Top grads from top schools are in demand.”

And the demand isn’t just coming from law firms or even corporate legal divisions.

Fox, who also teaches at Harvard Law School and the University of Pennsylvania Law School, said there are only so many law school graduates each year, adding that several of his students have been wooed by big investment banks and consulting firms.

“It’s not that associates are being greedy, but that they’re being rewarded as a precious commodity,” he said.

According to the Bureau of Labor Statistics, there were 761,000 attorneys as of 2006, and by 2016, the agency projects there will be 844,000.

Many will work in salaried positions, “as businesses and all levels of government employ a growing number of staff attorneys. Most salaried positions are in urban areas where government agencies, law firms, and big corporations are concentrated,” the BLS states on its Web site.

The mean hourly wage for lawyers is $54.65, with a mean annual wage of $113,660.

“Employment of lawyers is expected to grow 11 percent during the 2006-2016 decade, about as fast as the average for all occupations,” although job competition is still expected to be intense.

Best Estimates

One type of billing variation many companies are asking outside law firms for is a budget, outlining how much the firm expects a case to cost, said Kevin Crass, a partner with Friday Eldredge & Clark’s Little Rock office.

“I would say, in my experience with corporate clients, the clients are less inclined to find alternatives to hourly billing, and are more likely to ask for a budget,” Crass said.

Corporate clients are “looking for some predictability on what they’re going to spend,” he said. Budgets – while not eliminating the billable hour – at least give those clients a way to compare costs on similar types of cases.

Creating an estimate for how much a case will cost from the moment of hiring to its conclusion is a difficult process because litigation is, by its very nature, unpredictable, he said.

The amount of research necessary for a case can vary as well, adding another layer of uncertainty to the budgeting process, Fox said.

“It appears more corporations are expecting law firms to work for a set fee rather than hourly billing,” said UA law professor Howard Brill.

“And ethically, it’s perfectly appropriate for corporations to do that.”

Despite being ethical, asking firms to work for a set fee hasn’t always been successful.

 “Wal-Mart went out for bids among the local bar for all their personal injury work,” said Jack Butt, managing partner at Davis Wright Clark Butt & Carithers PLC in Fayetteville. “They asked for firm bids and the local bar just laughed at them.”

The company’s effort fell flat because no attorney wanted to sign on to handle a case only to discover later that it would take far longer than initially expected.

“Nobody in their right mind is going to bid on a sack of who-knows- what,” Butt said.

Representatives from Wal-Mart did not respond to requests for comment.

For a flat fee system to work, a company would have to have a sufficient volume of cases, said George Rhoads, a partner with Matthews Campbell Rhoads McClure Thompson & Fryauf PA in Rogers.

There is little incentive for an attorney to take on a single case for a flat fee, because if the case ends up dragging out longer than expected, the attorney is essentially working for less money.

If a company had 50 cases a year, however, a flat fee might be more appealing because some cases would be settled more quickly than others and they all would likely average out, Rhoads said.

Another situation in which attorneys might work for a flat fee would be single cases that are more predictable or formulaic. This could include work such as real estate closings, Fox said.

The conundrum for many corporations is that if they expand their in-house legal teams and staff them with top-flight attorneys, internal expenses will increase, causing some in management to consider outsourcing legal work, Butt said, adding that this back-and-forth has been happening for years.

“It’s ongoing,” he said. “The tide comes in and the tide goes out.”

Attorneys are asked to keep track of their hours in increments of one-tenth of an hour.

“It’s almost impossible to measure your day in six-minute segments,” he said.

This can be somewhat easier during trial, but when a lawyer is working all day on several different cases, there’s a precision that might not be there.

The billable hour is advantageous because it reflects the difficulty in making predictions, gives clients details about what has been done, and provides a metric for what they’ll pay, Fox said.

Potential downsides, though, are that it sometimes rewards slowness and can create potential conflicts of interest.

“But we hope that’s overcome by the desire to please clients,” Fox said.