The Paradigm of Billing Time: How Lawyers Are Not Like Investors

Welcome back to the Big Law Business column on the changing legal marketplace written by me, Roy Strom. This week, we look at how the legal profession’s allegiance to the billable hour holds back lawyers who want to make investor-style returns by betting on risky cases. Sign up to receive this column in your inbox on Thursday mornings.

Earlier this week, I wrote about a $185 million fee request that Quinn Emanuel filed in a class-action for insurers slated to receive $3.7 billion from the federal government over scrapped Obamacare “risk corridor” payments. The Big Law firm’s big ask raised a question about whether lawyers in such cases should get paid based on the time they work or the value they provide.

In the context of Quinn Emanuel’s case, that question has a long and interesting backstory. But there is obviously a lot more to analyze about the question of how lawyers should be compensated.

One of Quinn Emanuel’s experts, Vanderbilt Law School professor Brian Fitzpatrick, has a lot to say about the “time vs. value” question. He advocates for lawyers to be paid based on the value they bring to a case.

Fitzpatrick makes that case in Quinn Emanuel’s fee request by comparing class action lawyers to investors and entrepreneurs. He also points out one key difference between the two groups: the public’s backlash to “windfall” attorneys’ fees.

“When other entrepreneurs and investors succeed in their ventures, no one asks them: How many hours did you spend on this venture? What effective hourly rate did you earn? Should we take some of it away from you because it is ‘too high’?” Fitzpatrick writes.

He continues: “Class action lawyers are investors just like any others; they just invest their time and resources for others (the class members) with no hope of payment unless they achieve some form of success for those others. In my opinion, courts should not bow to the pressure and ask these questions of class counsel, either. Rather, courts should only ask what is best for class counsel’s incentives vis-à-vis class members.”

Fitzpatrick’s lawyers-as-investors analogy is certain to get some attention. It’s easy to laugh at the idea of hedge fund managers being scolded for not spending enough time in the office. But it also is worth asking why we don’t have the same reaction to clients wanting their lawyers holed up in an office. The legal profession, it seems, remains stuck in the paradigm of selling time.

One problem is that it’s difficult to figure out the contours of a truly value-based approach to the work attorneys do.

For instance, how do you measure the value of one individual lawyer over their competitors in a specific case? It’s difficult to do in the real world. There aren’t multiple lawyers litigating the same case in different ways, with differing results to compare.

Class-action lawyers often use theirs or their firm’s credentials as a way to assign value to their work. They point to the cases they have previously won. That’s tricky, too. Aren’t lawyers—and investors— always reminding us that past performance isn’t indicative of future success?

One way to define value, of course, is to determine a price a customer would pay.

Investors have this part figured out. Private equity firms usually charge 2% of assets and 20% of profits. Investment advisors have a price, too, and it is often based on how much money their clients have in the bank.

Lawyers, in most cases, are still billing by the hour. It’s deeply ingrained in the psyche of lawyers, clients, and judges. And that is at least partly why their payments, even in class-action contingent-fee cases, are compared to an hourly rate.

“What judges do is look to the ways fees are charged in normal litigation, and there are two ways that is done in normal litigation: lawyers bill by the hour and they charge contingent fees,” said Geoffrey Miller, a New York University Law School professor whose research on class-action contingent fees is often cited in fee requests.

Some lawyers want the certainty that comes with the billable hour. Others are comfortable taking risks on contingent fees or other success-based fees. But lawyers would benefit from more work educating clients about how those models are different, and when and why they are appropriate.

The downside of poor communication about fee models is lawyers are vulnerable to clients who want to retroactively pick whichever model better suits them, Richard Burcher, managing director of legal pricing consultancy Validatum, pointed out.

“The profession has done itself a huge disservice. It has spent decades teaching clients we sell six-minute units of time,” Burcher told me.

“No client has ever walked into a law firm and said, ‘I’d like to purchase a whole bunch of six-minute units of your time.’ They buy outcomes, results, peace of mind. The profession has to get better at having conversations it is currently largely inept at having.”

Worth Your Time

On Big Law Hires: Davis Polk has made its first lateral hire of 2020, bringing on former Gibson Dunn antitrust partner D. Jarrett Arp. Pillsbury hired two insolvency and restructuring partners in New York, one from Morrison & Foerster and another from Troutman Pepper. And Crowell & Moring added a pair of False Claims Act partners in Washington.

On the Bar Exam: The American Bar Association asked states to scrap in-person bar exams due to Covid-19 until they become safer. Changing bar exam dates and formats in many states have sewn plenty of confusion and controversy since the pandemic began.

On the Big Four: EY has big plans for expanding its reach in the global legal services market, with a particular eye on the U.S.

On Lawyer Reputation: The billable hour may be widely reviled, but the U.S. Supreme Court is seeing an uptick in approval ratings. At 58%, the court’s rating is the highest since 2009.

That’s it for this week! Thanks for reading and please send me your thoughts, critiques, and tips.