Culled from my 2000 Ll.M. thesis, which readers might find useful for legal research purposes:
Hourly Billing Method
Since the 1970s most American lawyers in private civil practice have based the computation of their professional fees almost entirely on the number of hours that they have expended on professional services for their clients because they believe that the hourly billing system is the most objective and efficient economic or financial method of pricing or quantifying the fair and reasonable market value of their professional services.
In many big US law firms it is common for each lawyer to make an annual billing of 2,000 hours.
It appears that for the foreseeable future the hourly billing system will remain as the primary means of billing by the US legal profession.
(See: William G. Ross, “The Ethics of Hourly Billing by Attorneys”, Rutgers Law Review, Vol. 44, No. 1, Fall 1991, pp. 1-99, at pages1-2, citing Kasting, “Are We Kidding Ourselves? 2,200 Billable Hours a Year?”, 15 B. Leader 37 [Winter 1988-89]).
Lately, there has been a movement in the US legal profession to review the propriety and fairness of the hourly billing system as the norm for the computation of professional fees on the basis of the arguments:
· that the hourly billing system tends to encourage inefficiency, excessive litigation, and fraud;
· that it diminishes incentives for expeditious work;
· that it rewards incompetence and inexperience;
· that it leads to the proliferation of burdensome and unnecessary discovery procedures in civil litigation; and
· that a large part of US lawyers perform unnecessary tasks and record time that is never expended on behalf of any client.
(See: Ross, supra, citing, inter alia, Reed, Beyond the Billable Hour: An Anthology of Alternative Billing Methods, 1989 ed., pp. 4-7; Hornstein, “Legal Therapeutics: The Salvage Factor in Counsel Fee Award”, 69 Harvard Law Review 658-661 [1956]; Reavley, “Rambo Litigators: Pitting Aggressive Tactics Against Legal Ethics”, 17 Pepperdine Law Review 637-639, No. 15 [1990]).
History of US Hourly Billing System
In mid-1800s, fee statutes, which fixed, controlled and regulated the pricing of professional fees of US lawyers were repealed, reflecting the triumph of market economics in quantifying the value or pricing of legal services and the growing hostility toward governmental regulation. (Ross, supra, citing Leubsdorf, “Toward a History of the American Rule on Attorney Fee Recovery”, 47 Law and Contemporary Problems 9-11 [1984]).
As a result of the repeal of fee schedules, law firms began to use time, as well as the difficulty of the work and the results achieved, in assessing client bills.
The repeal of the fee schedules also encouraged the use of contingent fees, a system which is popular with lawyers representing poor clients.
The American Bar Association (ABA) approved the use of contingent fees in 1908.
In the 1970s the hourly billing system became the primary and most predominant billing system in the US legal profession.
In the late 1960s management experts concluded that lawyers who kept time records earned more money than those who did not and that the hourly billing system appealed to clients because it was based on something tangible that they could understand rather than on a value of services concept. (Ross, supra, at page 11, citing Altman, “A Perspective B From Value Billing and Back to Value Billing” in Reed, Beyond the Billable Hour: An Anthology of Alternative Billing Methods, 1989).
Unethical Billing
There is no practical manner on the part of clients to verify the accuracy of most time records of their lawyers.
A lawyer who has billed time knows that time billing creates rich opportunities for fraudulent padding of time sheets. (Ross, supra, at page 12, citing Goldberg, “The Ethics of Billing: A Roundtable”, 77 American Bar Association (ABA) Journal 56-57, March 1991).
Pressured by their law firms to bill substantial numbers of hours, many lawyers especially associates at large law firms may be exaggerating the time that they spend on client business or doing unnecessary work.
The subject of fraudulent billing among otherwise respectable law firms has remained largely a taboo in polite circles. (id.).
A lawyer may resort to sharp tactics to increase billable hours as the resulting delays and additional activity: repeated requests, motions, protracted depositions, and trials mean more hours of attorney time. (id., at page 13, citing Judge Thomas M. Reavley of the US Court of Appeals for the Fifth Circuit, see Reavley, supra).
It is highly questionable whether the overwhelming majority of attorneys are able to bill significantly more than 2,000 hours per year without making very liberal allowances for the way in which time is recorded.
The credibility of billings in excess of 2,000 hours per year is particularly suspect if one assumes that an attorney normally must spend three hours in the office for every two billable hours. (Id., at page 14-15).
...Using this formula, an attorney who bills 2,200 hours (per year) would need to spend approximately 3,300 hours (per year) in the office: an average of more than nine hours per day for every day of the year. Since routine distractions and administrative tasks are likely to consume a relatively fixed amount of time, the percentage of productive time may well exceed two-thirds of an attorney’s time after he reaches about 1,500 hours...@ (id., at page 14, citing McMenamin, “Lawyers at Bay”, 31 Law Office Economics and Management 370-373 [1991]).
In a 1991 study, Prof. William G. Ross, supra, concluded that fraudulent billing occurs but remains the exception rather than the rule:
...Only 12.3% of the private practitioners and 15.2% of the corporate counsel who responded to the survey’s question about padding of hours stated that they believe that lawyers frequently pad their hours to deliberately bill clients for work which they never performed. But some 38% of the private practitioners and 40.7% of the corporate counsel stated that they believe that lawyers occasionally pad their hours. Only 42.4% of the private practitioners and 35.6% of the corporate counsel stated that they perceived that such padding rarely occurs, and only 7.3% of the former and 8.5% of the latter contended that it virtually never occurs. While 35% of the private practitioners and 39.7% of the corporate counsel stated that they lacked any specific knowledge of such padding, 58.9% of the private practitioners and 54% of the corporate counsel averred that they personally knew of at least some instances of padding. Some 5.6% of the private practitioners and 6.3% of the corporate counsel stated that they knew of many such instances.
These responses were consistent with more general questions included in the survey. Some 46.4% of the private practitioners and 45.8% of the corporate counsel stated that time-based billing provides not much incentive for fraudulent billing of clients, and 19% of the former and 9.7% of the latter responded that it does not at all encourage such fraud. Some 27.4% of the private practitioners and 37.5% of corporate counsel stated that time-based billing has a moderate tendency to encourage fraudulent billing. Only 5.6% of the private practitioners and 4.2% of the corporate counsel contended that time-based billing substantially encourages fraud and only 1.6% of the former and 2.8% of the latter contended that it very substantially encourages fraud.... (William G. Ross, “The Ethics of Hourly Billing by Attorneys”, Rutgers Law Review, Vol. 44, No. 1, Fall 1991, pp. 16-17).
A number of US lawyers in the 1991 Ross survey contended that the fierce competition of the market place forces them to keep billings at moderate levels.
Many of them believed that the time billed to clients generally is less than the actual time that is spent on behalf of the client.
The Ross survey concluded:
...Since most private practitioners seem relatively satisfied with time-based billing, changes in the billing procedures are likely to occur only if corporate counsel or clients demand them. The results of the survey suggest that corporate counsel are likely to continue to demand greater accountability as to the use of time, but that they are not likely to insist that outside counsel adopt alternative billing systems...
Even though many attorneys may be sanguine about the efficiency and honesty of time-based billing, there can be no doubt that hourly billing creates at least a temptation for lawyers to perform unnecessary legal work for their clients. The danger of excessive work probably is more pronounced among attorneys, because most attorneys especially attorneys in large firms where hourly billing is common have relatively few clients. Unlike most physicians, dentists, accountants, cobblers or grocers, lawyers in big firms receive little or no casual business, and the specialized character of the work of these lawyers does not permit the development of a substantial number or indiscriminate volume of clients... (id., at p. 19).
Excessive and unnecessary research, review of files and records, and internal attorney conferences, overstaffing of the legal team, duplication of internal work, padding of time sheets, prolonged combative litigation tactics, proliferation of unnecessary motions and interlocutory appeals, imposition of strict and huge billable-hours quota on new and young associates and junior partners, work overload and feelings of isolation, physical fatigue and work stress-induced emotional depression and health deterioration, alcoholism and drug addition, family breakdown, and other sad and anomalous situations and unprofessional conduct or malpractice can result from a blind, selfish and greedy observance of the traditional and profit-focused hourly billing system. (id., pp. 36-61).
ABA Code of Professional Responsibility
And Attorney’s Fees
The 1983 ABA Model Rules of Professional Conduct promulgated by the American Bar Association (ABA) gives a framework for a discussion of billing practices of US lawyers but the Rules do not specifically address billing.
It superseded the ABA Model Code of Professional Responsibility.
Since 1983 the new Rules has undergone various changes. [Ross, supra, at pp. 22-23].
Disciplinary Rule 2-106 (A) of the old Code had provided that a lawyer shall not enter into an agreement for, charge or collect an illegal or clearly excessive fee. (id.).
With the exception of sections in the 1983 Rules, as amended in 1989, restricting the division of fees among lawyers (Rule 1.5 [e]), and prohibiting contingent fees in divorce and criminal cases (Rule 1.5 [d]), the only provision of the Rules that directly addresses fees is Rule 1.5 [a], which provides that a lawyer’s fee shall be reasonable. (id.).
The new Rule 1.5 [a] lists eight factors which are considered in determining whether the fee is reasonable, including the time and labor required, the novelty and difficulty of the questions involved, the skill needed to perform the service, the fee customarily charged in the locality for similar legal services, the amount involved, the results obtained, and the experience, reputation, and ability of the attorney. (id.).
Additional factors are listed in the new Rule 1.5 [a] [1] to [8], i.e., the likelihood that the employment will preclude other employment by the lawyer, the time limitations imposed by the client or the circumstances, the nature and length of the professional relationship with the client, and whether the fee is fixed or contingent. (id.).
Other provisions of the new Rules implicitly affect ethical considerations regarding fees:
1. Rule 1.2 requires an attorney to abide by a client’s decisions concerning the objective of the representation. The ABA comment to this rule states that a lawyer should defer to the client regarding such questions as the expense to be incurred. (id., at pp. 24-26, 72).
2. Rule 1.4 [a] states that a lawyer shall keep a client reasonably informed about the status of the matter and promptly comply with reasonable requests for information.
This rule seems to require a lawyer to provide a client with information that will help the client decide whether the services received will be worth the price and whether the continuation of a legal matter will be worth the cost.
A lawyer must try to identify for his client the point at which any given project is likely to yield significantly diminishing returns. (id., pp. 24-26, p. 72-74).
3. Rule 1.7 [b] prohibits an attorney from representing a client if the representation may be materially limited by the lawyer’s responsibilities to another client or to a third person, or by the lawyer's own interests, unless: (a) the lawyer reasonably believes the representation will not be adversely affected; and (b) the client consents after consultation.
In this regard, it is worth noting that attorneys’ fees are a cost to the client but a benefit to the attorney and the interests of the attorney and the client in this respect are thus diametrically opposed. (id.).
4. Rule 1.3 provides that a lawyer shall act with reasonable diligence and promptness in representing a client.
It replaced Canon 7 of the old Code which provided that a lawyer should represent a client zealously within the bounds of the law.
Overzealous representation results in excessive and unnecessary hourly billings. Zealous representation, however, is a predominant (and ethical) norm of the US legal profession under the American adversarial model of litigation. (id.).
5. Rule 8.4, which was also found in the old Code’s Disciplinary Rule (DR) 1- 102 (A) (5), provides that it is professional misconduct for a lawyer to engage in conduct that is prejudicial to the administration of justice. (id.).
6. Rule 3.4 prohibits a lawyer from making frivolous discovery request or failing to make reasonably diligent efforts to comply with a legally proper discovery request by an opposing party. (id.).
7. Rule 3.2 states that a lawyer shall make reasonable efforts to expedite litigation consistent with the interests of the client. (id.).
8. Rule 1.5 [b] states that when a lawyer has not regularly represented the client, the basis or rate of the fee shall be communicated to the client, preferably in writing, before or within a reasonable time after commencing the representation.
Technically, it is sufficient to state that the basic rate is an hourly charge or a fixed amount or an estimated amount, or to identify the factors that my be taken into account in finally fixing the fee.
However, in fairness to the client, the lawyer should explain to the client how the law firm bills expenses, the procedure used in calculating hourly time, and similar details. (id.).
It is most pragmatic to document the lawyer-client relationship through a fee agreement or a retainer agreement (general or special).
Effects of Hourly Billing
on Public Responsibilities of Lawyers
The hourly billing system encourages zealous representation, which is an ethical duty of a lawyer to his client.
However, it may not necessarily be in the best interest of the public.
For instance, the refusal to settle a case until every conceivable source of potentially relevant evidence has been exhausted and the refusal to volunteer information that would help an adversary and expedite a case development fails to serve the interests of a system of dispute resolution whose stated objective is to secure the just, speedy and inexpensive termination of every action.
(Ross, supra, at page 78, citing Brazil, “Ethical Perspectives on Discovery Reform”, 3 Rev. Litigation 51-53 [1982]; Brazil, “The Adversary Character of Civil Discovery: A Critique and Proposals for Change”, 31 Vanderbilt Law Review 1295 [1978]; and Fed. R. Civ. P. 1).
To the extent that time-based billing encourages inefficiency, excessive litigation, and fraud, it also erodes public confidence in the legal profession, an erosion which ultimately breeds cynicism about the quality of justice in America...
...Moreover, hourly billing may retard professional growth by encouraging junior attorneys to focus their energies upon the quantity of their time rather than its quality...Many young lawyers may conclude that their only purpose is to generate more billable hours, a cynicism that produces a disrespect for the profession...
xxx.
Time-based billing may diminish attorneys= contributions to public activities by reducing the amount of time that attorneys have available for eleemosynary work and other activities that would serve the commonweal...
The withdrawal of attorneys from public service activities has eroded professional autonomy because it has deprived attorneys of an independent base of power and influence which emanates from the community rather than from the client...
...The use of a billing system that is not based almost solely upon time...would seem likely to encourage community service, for it would encourage more expeditious work and would free attorneys from the tyrannical notion that every spare hour is potentially a source of income.
xxx. (id., at pp. 81-82).
Ethical Aspects of Alternative Forms of Billing
1. The contingent-fee system seems to be the most obvious alternative to time-based billing.
The serious ethical risk in contingent-fee system, however, is that it tends to erode an attorney’s judgment.
When a lawyer in effect invests in a cause of action by taking his fee as a percentage of the recovery, it is easy for him to lose his detachment from his client’s interest and he often becomes more of a businessman concerned with his own financial well-being than a proper advisor to his client. (Ross, supra, at p. 83, citing Kuenzel, “Attorneys’ Fees in a Responsible Society”, 14 Stetson Law Review 283 [1985]).
In the USA the contingent-fee system generally applies to the cases of low-income individual clients or to the multi-million dollar class tort suits initiated in behalf of low-income and middle-income clients.
2. The fixed-fee system might create abuses that are opposite to the abuses of hourly billing -- an attorney might be tempted to neglect the work of a client if he were assured of receiving payment regardless of the number of hours worked and the result achieved.
A lawyer who agreed to a fixed fee and then found that the work took far more time than he had anticipated might be particularly tempted to slight the client’s work. (id, at pp. 83-84).
In the Philippines, this system is very common among solo practitioners and small to medium law firms -- fixed acceptance fee and fixed appearance fee per court hearing.
For large Philippine law firms, the prevalent system seems to be the traditional US hourly billing system.
The purely contingent-fee system is rarely used by the average Filipino lawyer because it requires him to invest heavily in the litigation of the case.
3. The English Rule of fee-shifting (where the losing party pays the lawyer’s fee and the litigation expenses) is possible only in litigation.
If a lawyer knows that the defendant will pay his bill, he will be tempted to drive the bill up by devoting needless hours to the case. (id., at pp. 84-85, citing Leubsdorf, “Recovering Attorney’s
Fees as Damages”, 38 Rutgers Law Review 439 [1986]).
In the Philippines, pursuant to the provisions on Torts and Damages of the New Civil Code, it is routine for lawyers to allege and pray for the award of attorney’s fees, litigation expenses, and costs of suit.
4. The adjusted hourly billing system, which appears to be the most viable alternative form of billing, is one in which hours are used as the basis for the bill, but are adjusted to reflect the quality of the work and other special circumstances.
US federal courts have increasingly moved to a calculation in which fees are based upon a loadstar consisting of the number of hours spent on the case multiplied by a reasonable hourly rate of compensation.
Using this loadstar as a starting point, some US courts have made adjustments, in light of the contingent nature of the case, reflecting the likelihood that hours were invested and expenses incurred without assurance of compensation and the quality of the work performed as evidenced by the work observed, the complexity of the issues, and the recovery obtained.
Many US lawyers already adjust their hours upward or downward to reflect quality and results.
It is argued that much of the present padding of hours may be an attempt by attorneys to recover what they believe to be the honest value of their labor.
At present, the prevailing and predominant billing system in the USA is the hourly billing system (based solely on billable hours) because of its perceived objectivity, measurability, simplicity and competitiveness. [id., at pp. 86-87].