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Despite the favorable press, value billing schemes (be they flat fees, fixed fees, minimum fees with change orders) may run into Rule 1.5(b) issues if not properly handled. The thing to remember is that not all forms of lump sum payments can be classified as non-refundable.
Non-refundable retainers (or engagement fees) are “paid, apart from any other compensation to ensure that a lawyer will be available for the client if required” (see: Restatement 3rd, The Law Governing Lawyers, sec. 34, Comment e). According to the Restatement, a fee can be non-refundable if and only if the attorney is to be additionally compensated for the actual work performed. The typical engagement fee should be designed to cover the reasonable costs needed to set up a client file and prepare for the particular matter. Basically an engagement fee is reasonable if it bears a reasonable relationship to the income sacrificed or expense incurred by the attorney’s accepting the client/client’s matter (e.g. cost of turning away other clients, hiring new associates, keeping up with the relevant law).
However, if the advanced payment is to cover the lawyer’s services to the client, making that payment non-refundable will be contrary to public policy because it will compromise the client’s ability to discharge the attorney and secure other counsel. Remember, the client can discharge an attorney at any time for any reason and the attorney is entitled only to the reasonable value of services performed.
When working with fixed fees, good practice would suggest that (a) the retainer agreement list landmarks and the portion of the fee that will be considered earned at those points in the matter and (b) the fee is deposited into the attorney’s trust account until it is earned.
If I understanding things correctly, the basic premise behind value billing is that the fee for a matter is determined by the outcome and/or type of services the client wants and the significance (value) of that outcome to the client. However, this does not mean that the client is completely free to dictate the fee received for services rendered. Rather it falls upon the attorney to educate the client as to the value provided (Ron Baker, Pricing Psychology). It is suggested that the attorney establish some measure of value. In Value Billing – What is it, and how is it done, Allison Shields suggests that the attorney:
[D]iscuss the client’s current pain or challenge – in other words, what is it costing the client to do nothing? What will it cost the client if the client delays taking action? What opportunities might the client miss? Or what would it mean to the client to reach their objective? How will the result achieved affect the client’s business or personal life?
Now, for a business to remain in business, income must be greater than or equal to expenditures. Setting an hourly rate is, in essence, a simple matter of estimating: the hours that can be billed to clients over the course of a year, the expenses incurred, and the desired profit (rate = (expenses + profit)/hours). I submit that the value billing attorney must perform a similar calculus when trying to establish value provided, after all there are a fixed number of “things” that can be accomplished in a year and a known amount of income that must be generated. Continue reading