In Response to David Giacalone’s Concerns about the Ethics of Value Billing

I’m doing some research on value billing for lawyers; I came across the one blog post which beats out the GAL web site on the issue on this issue of “value billing” on Google Search. David Giacalone over at the f/k/a blog posted back on December 03, 2008 that “Value Billing-Pricing by lawyer raises many ethical red flags”.  David notes that he has been raising red flags over ethical issues concerning value billing for some time, listing the following posts chronologically:

• “Value Billing and Lawyer Ethics” (Jan 28, 2004)
• “broadening the hourly billing debate” (Aug. 18, 2008)
• “smart clients care about . . . marketplace ‘value’” (Nov. 25, 2008)

It appears pretty clear that David has never engaged in value billing with his clients since his list of concerns don’t seem to bear any relationship to the reality of value billing.  For instance, David claims that value billing proponents supposedly make the following arguments.

David apparently believes that value billing attorneys believe that they should earn higher fees than they can charge using hourly billing.  Actually, value billing allows a client to receive more for less.  What David ignores is the fact that we are creatures of incentives.  Because hourly billing promises nothing to the client except an hourly bill valuing every moment of effort exactly the same as any other, lawyers often drift around legal projects performing tasks of no value to the client.  David is correct that most clients seek alternative billing price mechanisms in search of lower fees than generated by hourly billing.  In fact, value billing delivers much more to the client at a reduced cost, AND increases the profitability of law firms in most instances.  There is no great mystery here.  When a lawyer promises to deliver four particular items to a client at a certain fee, both the client and the lawyers win. 

David takes issue with the fact that value pricing should be divorced from the time and effort expended and other costs incurred in providing services to a client.  Actually, I don’t know anyone who engages in value billing who makes that argument.  The cost of delivering to a client and the effort expended are factors which help a lawyer and client arrive at an appropriate fee.  While value to the client is an important consideration in determining an appropriate fee, clients aren’t stupid.  Clients are not typically going to pay an attorney $100,000.00 to make a single phone call.  The exception would be if that single phone call were going to provide a return on investment tenfold.  In that case, the client is more than happy to pay for that kind of return on investment. 

David suggests that somehow value billing proponents seek to be immune from the ethics standards which govern billing.  Again, I don’t know who has ever made that argument.  Both hourly billing and value billing systems, as well as any other system, could be abused.  Ethical standards apply in each instance.  But to suggest that somehow billing a client by the hour is somehow more ethical than value billing is pretty ridiculous.  Clients don’t “guess” as to the value they’re receiving.  They agree to a fee because they’ve received enough information and performed a calculation to know that they are going to achieve the return on investment they are seeking.  When was the last time you heard an hourly billing attorney talk about return on investment or commit to cap the amount of the fee at the end of the matter?  David seems to believe that flat fees for entire cases are set at the outset.  Rarely is that the case.  Value billing attorneys typically engage in a phased approach to their projects.  Thus, each small component of a legal matter is broken up into small enough pieces so the client can decide whether or not it wants to spend the first $5,000.00 for a set of deliverables, one of which is always a risk/reward analysis, before moving on to the next phase. 

David seems to take issue with the approach of value billing firms when they receive information from the client about their goals, risks and expectations, and factor that into the fee charge.  Presumably, David is concerned that a client who calls who is desperate for a particular attorney to handle their matter will likely pay a higher fee because that client absolutely needs that single attorney to handle their matter.  I think they call that capitalism and market value.  That client has the choice to go to an hourly billing attorney, or some other attorney who specializes in the area for other fee options.  If a lawyer has the stature and ability to demand a flat fee for delivering exactly what the client has asked for, that is neither unethical nor inappropriate. 

Again, David seems to take issue with the fact that a client’s urgency level is an inappropriate factor for determining a fee.  When a lawyer has to drop all their other clients and matters in order to attend to an emergency for a particular client, that client ought to pay for the fact of that urgency which the client created.  These are the exact type of market forces which subject the legal profession to the very incentives which we should be encouraging.

David takes issue with the fact that lawyers should “discriminate” in favor of clients that can pay and, in fact, pay the most.  The last I checked, the legal ethics standards were not built on communism. There will be lawyers who can’t contract the highest paying clients and will offer appropriate level services for those clients at their market level.  David suggestion that somehow the best, brightest and most prominent attorneys should somehow be required to engage in a volume business makes little sense to me. 

David suggests that value billing was designed to somehow circumvent competitive market forces that prevent an increase in the hourly rate and avoid passing efficiency gains on to clients.  I don’t know what world David is living in.  I never met an hourly billing law firm that passed efficiency on to its clients.  Take email for instance.  Because of the drastic increase in communication between lawyers and clients, lawyers now have the ability to charge 0.3 hours for every email received.  Value billing attorneys still have to compete against each other.  To suggest that the price that they charge for a particular service is somehow immune from market forces is itself divorced from reality.  Take UDRP cybersquatting arbitration cases.  There are groups of lawyers around the world who typically handle such matters.  Because of the internet, clients can identify them incredibly easy; do a simple Google search.  There has never been a point of time where more information about lawyers and law firms was easily available as today.  We have to stop treating prospective clients as idiots and “vulnerable” as some sort of excuse to perpetuate an hourly billing system that is, by everyone’s account, anti-client.  The flat fee rate charged by lawyers for handling a UDRP matter is fairly uniform.  To the extent any particular lawyer charges a higher rate based on how large the potential corporate client is and the value of the domain name they are seeking to retrieve is subject to market forces.  That same prospective client can call around and see there are cheaper options.  What David fails to account for is that a client can make a completely rational decision to pick the higher priced attorney based on that client’s determination that they will receive a better quality service and more likely desirable outcome.  The fundamental flaw in most of David’s commentary is this notion that clients who contact attorneys to receive flat fee quotes for a set of deliverables are somehow stuck selecting that attorney.  There are no circumventing market forces in today’s highly connected and transparent legal market. 

David also takes issue with change orders as a way to charge “ultra-premium fees for any unexpected or added tasks.” Again, David’s obvious lack of understanding and prejudice against anything except the hourly billing method shows through.  In a value billing/defined deliverable environment, the client gets to choose whether or not to pay for a change.  The suggestion that value billing lawyers simply take the opportunity of a “change order” to extort more money from the client again ignores market realities.  Lawyers know that there is as much incentive to have the client come back for the next phase of the project and the next project altogether as any other factor in the overall lawyer-client relationship.  Besides, clients change lawyers all the time.  It is the rarest of circumstance where a client would be “stuck.”

David even takes issue with the money-back guarantee offered by most value billing attorneys.  This means the client actually receives all the deliverables, but can receive their entire fee back if they are not satisfied with what has been delivered.  We’ve only had this happen twice in four years.  In both instances, we freely offered the client’s fee back as soon as we determined that there was discontent.  In both cases, the firm made the decision it didn’t want to do business with these particular clients whose overall approach to every vendor was simply to beat down the bill.  I can see David and many other law firms being seriously affected by the concept of a money-back guarantee.  Could you imagine any hourly billing firm offering such a guarantee to its clients?  Like many aspects of value billing, the pro-consumer incentives are troubling indeed!

This is not to say that all attorneys engaging in value billing do it within the ethical standards.  I am most certain there are some bad apples out there, and perhaps even some evangelists who are pushing the wrong messages.  But it never ceases to amaze me how the legal establishment recoils at any suggestion of change.  After all, they’re making their money off a consistent and predictable tally of hours.  Why should they do anything to improve their client service or service offerings?  Why should they want market alternatives so that clients should be able to choose between an hourly billing attorney demanding a $5,000.00 retainer and making no promises about what they will do for the client over a value billing attorney who spells out the deliverables in detail and caps the price that the client will spend?

As always, thoughts appreciated.  BTW, I’ve always enjoyed David f/k/a blog despite my somewhat animated commentary above.  Nothing personal intended David!