Redwood Analytics

Last week I had the pleasure of being a presenter on a webinar held by the Center of Competitive Management that focused on the ethical considerations of alternative arrangements.  It is a topic that has not been given proper attention as AFAs continue to become the hottest topic of the year.   A portion of the presentation was focused on the ABA Model Rule 1.5 that focuses on the ethical considerations around the reasonableness of fees.  Now ask your average attorney about Rule 1.5 and they will likely return that question with a puzzled look.  Not many people have the ABA rules memorized and those rules vary by the state in which you are licensed.  In addition unless they are currently involved in an ongoing investigation around a bar complaint, the ABA rules are probably the furthest thing from attorneys' minds.

That said as alternative arrangements become more prevalent the external ethical implications need to be considered.  This economic climate has created an environment where many risky clients are being brought on.  Also clients that are under financial duress are looking to appropriate blame and their outside counsels have large targets on their backs.  These factors combined with poor habits in client communication result in a larger need for risk management.  Not that there isn't a need for that during good times as well, but clearly there is a larger focus during the more difficult times. 

Below is a matrix of detrimental behavioral patterns that can cause external ethic complaints.

Rule 1.5 states that a lawyer shall not make an agreement for, change, or collect an unreasonable fee or an unreasonable amount for expenses.  Plenty of factors play a role into the idea "reasonableness" although I will be the first to say that word is ambiguous.  Time, labor, quality, and fees typically charged by location all play a role in whether or not a fee is "reasonable."  In the world of alternative arrangements this brings into question two major hazards, especially with respect to fixed or contingent fees.

1. Hazard when fees are negotiated too low - quality could suffer and the attorney's duty of competent representation is brought into question - "cutting corners"
2. Hazard when fees are negotiated too high - "Reasonableness of fees" - unreasonable if the fixed fee is not commensurate with the effort needed to produce the work

The second hazard is alarming.  As someone who works with law firms to help them become more efficient I don't see why a client would be upset if the firm is profitable as long as the price and result were clearly documented from the beginning.  The fact that a firm becomes more efficient is a great thing and down the line could reduce pricing pressure which benefits the client.  Why punish a firm for doing what they should be doing while maintaining quality.  That said if the fee was priced too high and the firm knew that the time effort would be much less than the quoted price, then perhaps ethical considerations are at play.  This is the reason why we are seeing a lot of alternative arrangements with capped fees including a success kicker.

Every firm - whether they are well versed in alternative arrangements or not - should look to mitigate risk.  Here are four simple edicts to stand by:

1. Stay within your area of expertise
2. Don't overcharge or pad hours
3. Not every client is a good client
4. Efficiency is great, but don't cut corners

Finally, common risk management suggestions that all firms should look at to understand their internal structure around risk and if any changes need to be made are:

1. Communicate , communicate, then communicate some more

-Control client expectations

2. Have written agreements

-Agreements should clearly indicate what you are being paid to do and the scope of engagement

3. Document everything

4. Have the right individuals in charge of managing risk

-Hire them or outsource if need be
-There should be constant communication with the Managing Committee

5. Involve attorneys in the premise of risk management

-Make it cultural

6. Identify red flags for your firm

-Review pricing and credit for RFPs
-Record Billing Disputes
-Have past mortems on completed matters

7. Create a roadmap for the engagement

-Share it with your client as applicable

If both you and the client have a clear understanding of the engagement needs and price, and there is not any unethical cutting of corners or hoarding of work you should be fine.  It is a matter of taking the time up front so you won't be kicking yourself at the end.