Different Methods of Billing: Fixed Rate

The NEO ACCA presenters offered a number of examples of new arrangements for billing. I have categorized them into three categories, none of which should be surprising. They are fixed rate, contingency and fixed rate-contingency. Another hybrid is the addition of hourly billing as a part of the models.

One of the fixed rate models was an agreement to handle all the cases that rose in a certain geographic area in a particular category, such as product liability for a given period.

Like any contract one had to define whether the geographic area meant where the case was filled, the location of facility where the product was made, the headquarters of the operational group or where the injury occurred. Similar issues arise in multiple causes of action cases. None of these issues were discussed and presumably had been addressed so that no controversy occurred.

The law firm covered all out of pocket expenses, such a deposition fees, travel etc. except trial was handled on an hourly basis and expert fees were billed directly to the client. The rationale for the distinction in the trial and expert fees was that inability to accurately predict these expenses. The trial exception makes some sense to me because they would be rare. I am not that sure why expert fees were excluded particularly if the product claims involved the same of similar products, but the issue was never fully explored.

The presenters claimed that this arrangement resulted in constant legal fees over a 5 year period while product input costs went up 178% and the number of cases rose as well. The constant nature of the legal fees is attractive if for no other than budgeting reasons. Because of extreme commodity inflation, the apparent savings would seem exaggerated. Comparison of legal fee inflation in the industry using data complied by a legal consulting firm survey might be a better reference.

One note they made, apparently thinking it was another indicator of success was that during the same period the litigation rate increased. It was an alarm bell to me because the one problem with fixed fee arrangements is that it creates an incentive for firms to under lawyer a case; nothing is perfect. When I raised this question they said that there was method of measuring the company’s liability, or somehow sharing the risk of that liability in the agreement. I am sorry but my notes don’t contain a description of what they said. It does, appear however, that the increase in the litigation rate was also attributed to some acquisitions, but I wonder why that would not have resulted in a revision to the contract price.

Bottom line, this is not a new idea and the prior renditions of this form of legal structure, some quite grand in nature involving all the legal work of a very large company, do not have appeared to stand the test of time.

That does not mean it won’t work. Success, however, seems to require that the purchaser must focus clearly on what their prime objective is—for this arrangement budgetary consistency may be worth other trade offs. What are they? One is probably less active control of the case since it is a lot of their dollars being spent. An incentive of the firm is to under lawyer a case—that may result in more costly future litigation exposure, not merely to save money under the present contract, but to create demand under the next.

And there is always that potential that you may under up over paying—a fixed price is not often the least expensive. In economic terms this looks a lot like buying legal services in an insurance agreement without the indemnification and, at least at present without a liquid market for price reference. If savings is the objective a better method of gauging that needs to be developed, and will likely have to be adapted to unique circumstances of every buyer.

Developing a method and data base, sort of a market approximation, might be one project to evolve from the ACC Value Challenge. Sorry Fred, I hate to suggest more projects for you.

-Larry Salibra
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