From the billable hour to fixed fee engagements, the history of legal billing in the United States shows there’s nothing new under the sun.  It is a tour de force of the fee methods deployed by law firms to this very day, displaying the one constant from which no fee method conversation can escape – law firms are for profit businesses that seek to protect their profit interests while advancing your business goals.  So let’s take a review.

Capped Fees

Back in the late 1800’s, the billable hour wasn’t at all predominant.  At that time, many, if not most, states capped legal fees (for those of you keeping score, that’s method 1) by law based on the service provided.  If you needed help buying some land you would only have to pay “up to” X.  And while lawyers no doubt faced competition to win the right to serve their clients, it was common for them to charge a fixed fee (that’s method 2) for their engagement – whether at or below the fee cap prescribed by law.

In this highly regulated environment, you’d think the capacity to profit would be limited.  And you’d be right.  Only lawyers being lawyers (and decent business people), some of them found a means to get around these rules.  For instance, they’d charge a success fee (method 3) if the matter ended with a positive result or they’d demand a retainer (method 4) before they’d take on the engagement.

The Rise of the Contingency Fee

By the early 1900’s the legal profession began to find its voice when it came to fees.  “Let us profit they cried.”  Actually we have no idea if there was any outcry.  But regardless, in the early 1900’s the American Bar Association declared that the contingency fee (really a variation of the “success fee” but we’ll still count it as method 5) was an ethical way for lawyers to bill clients.  The path to personal injury prosperity was born.

As is prone to happen with so many things in life, the proverbial pendulum of fee methods eventually swung completely to the other side.  Hence, by the 1930’s what had been a “capped” fee structure prescribed by law had become a “base” fee structure.  So instead of having laws that kept lawyers from charging more money, many state bars required lawyers to charge a base fee and would actually fine them if they charged less.  In fact, the ABA’s model code from the era stated that it was unethical for lawyers to charge too little.  Obviously this helped lawyers to profit.  But, at least in theory, this shift was grounded in ethical concerns.  You can debate the extent to which this was perverse logic, but the undertone presumably was the old flat fee system encouraged lawyers to do shoddy work.

Freed from the shackles of capped fees, lawyers naturally began to wonder where the limits of their profitability may end.  Actually, we doubt many of them thought this with much consciousness.  But who wouldn’t look down the street and think about whether they made as much money for their toil as their neighbor.  And so, it came to pass in the 1950’s and 60’s that the ABA began to suggest that lawyers keep track of their time with more diligence.  It may have taken about 70 years, but the open acknowledgement that time is money for service providers had arrived for attorneys.

Time Comes into Play

Irony of ironies, it was the U.S. Supreme Court who solidified the billable hour (that’s method 6) into its current position.  In 1975, they effectively ruled that setting fees by law for legal services was a form of price fixing that violated anti-trust laws.  The legally imposed fee cap and base fee systems of the past were now illegal.  Within a few years, almost all lawyers who weren’t already doing so were using the billable hour as their means of charging for services.

Not surprisingly, the pendulum began to swing back again as clients sought ways to assure law firms were incented not to abuse the billable hour method.  For instance, to assure those with more experience and higher rates were not incented to do basic tasks the blended rate billing method (that’s method 7) became more common.  And, not surprisingly, clients who represented a significant base of hours for a law firm demanded lower rates, often in the form of discounts to base rates (method 8), stepped fees (method 9) or fee collars (really a version of stepped fees) that provided rate relief once certain hour thresholds were passed.

Where does this leave us today?  It leaves us in the same place we’ve always been.  Over the years the arguments have changed, but the debate around rate methods has always been centered on one question – how are legal services best valued?

About the author – Dave Sampsell is a 20-year lawyer with extensive experience managing large, complex legal engagements throughout the world and overall corporate legal budgets.  He presently serves as General Counsel of a NASDAQ listed company and is a Founder and Principal of BanyanRFP.  BanyanRFP saves companies time and money through an easy-to-use, private and secure online application for the creation and processing of legal services RFPs.  For more information, visit www.BanyanRFP.com