Billable Hour: Adapted from the book, ‘Lawtalk’

[Adapted from Lawtalk: The Unknown Stories Behind Familiar Legal Expressions, by James E. Clapp, Elizabeh G. Thornburg, Marc Galanter, and Fred Shapiro (2011) (© 2011 Yale University, reprinted by permission)]

Few terms hold more importance for a law firm’s clients or its employees than billable hour–not a real hour, but sixty minutes of work that the lawyer can bill a client for. It is no accident that a popular lawyer joke on this subject made its first written appearance in a major federal case on attorneys’ fees. As recounted by a dissenting judge,

1. An immediately deceased lawyer arrived at the Pearly Gates to seek admittance from St. Peter. The Keeper of the Keys was surprisingly warm in his welcome: “We are so glad to see you, Mr. Smith. We are particularly happy to have you here, not only because we get so few lawyers up here, but because you lived to the wonderful age of 165.” Mr. Smith was a bit doubtful and hesitant. “Now, St. Peter, if there’s one place I don’t want to get into under false pretenses, it’s Heaven. I really died at age 78.” St. Peter looked perplexed, frowned, and consulted the scroll in his hand. “Ah, I see where we made our mistake as to your age. We just added up your time sheets!”

There it is in a nutshell–the public image of the lawyer as economic predator, billing more hours than there are in the day.

Lawyers didn’t always bill by the hour (and some still do not). Early twentieth century lawyers used various methods for billing clients. Some matters were billed at a flat rate, some on a percentage basis, and many used a method called value billing. Bills were sent only sporadically and were not itemized, billing only “for services rendered.” Many lawyers were effectively bound by the “suggested” minimum fee schedules published by local bar associations until the U.S. Supreme Court rejected them as antitrust violations.

Lawyers initially kept track of time (maybe by simply jotting notes inside client files) not in order to bill by the hour, but in order to help determine a reasonable fee. It also helped the firm analyze the productivity of individual lawyers, the profitability of various practice areas, and the appropriate work expectations for partners and associate. In 1940, Reginald Heber Smith wrote four articles for the American Bar Association Journal advocating a more organized approach to law firm management. Among other things, he recommended monitoring the work of  each lawyer, with productivity documented through “Daily Time Sheet” forms.

The American Bar Association (ABA) went on a crusade to promote hourly billing in 1958 with its pamphlet, The 1958 Lawyer and His 1938 Dollar, pointing out that lawyers who kept track of their time and billed clients accordingly made more money than those who did not. The problem, said the ABA, was that by concentrating on “devotion to public interest,” lawyers were failing as businessmen, and that they should start recording and charging for their time, their “sole expendable asset.” Billing by the hour gradually caught on, spreading from large firms to small ones. By the late 1970s, billable hours became the primary measure of client billing for most purposes.

The term billable hour seems to have crept into legal vocabulary as its adoption as a billing method became established. A 1968 case is the first to use billable hour with respect to lawyers, and it uses quotation marks and defines the term. It seems likely, though, that bar association meetings and publications were the earliest adopters of this lingo, and those sources (including a law student letter to the editor) routinely used billable hour without explanation by the early 1970s.  As recently as 1975, though, an article in Legal Economics felt the need to explain what “billable hour” meant.

The billable hour has some advantages as a management tool. Hourly bills are easy to prepare, and easy for clients to understand and review. Time-based billing also provides a method to measure the unmeasurable: the value of the service rendered by the lawyer. This is particularly helpful in contemporary legal matters that are extremely complex, unpredictable, and involve multiple lawyers from different sections of large firms. Billing by the hour can also be quite profitable for the law firm: some matters can easily generate hundreds of thousands of hours in attorney work. As ethics expert Deborah Rhode noted sardonically, “Why not leave no stone unturned if you are charging by the stone?”

From the perspective of both law firm and client, the billable hour has some perverse consequences. First, hourly billing discourages efficiency. The lawyer who takes two hours rather than one to complete a task gets paid more; the partner who assigns three rather than two associates to a project creates a bigger pool of billable hours; costly improvements in technology that increase productivity (like computerized legal research and legal forms) increase overhead and decrease revenues. Hourly billing also discourages communication between lawyer and client (billed at a minimum of .2 hour per phone call), shifts the cost of associate training and turnover to the client, and creates a potential conflict of interest between lawyer and client. The ABA now understands that hourly billing creates a host of unintended consequences, and in 2002 it tepidly recommended reform, defending hourly billing but identifying alternatives.

A 2007 survey showed a slight increase in alternative billing methods, and the protracted economic recession that began in December of that year encouraged further rethinking of billing practices, with the result that some large law firms reported using flat rate billing more often nowadays.  But the billable hour remains firmly entrenched. As one general counsel was quoted as saying in 2007, “alternative fees are like teenage sex. There are more people talking about it than doing it, and those that are doing it don’t know what they’re doing.”

A business model based on hourly billing leads to budgets based on expected billable hours, and those budgets include requirements that law firm employees produce a certain number of billable hours every year. As salaries and other costs increased in the 1980s, law firms needed to increase either the billing rates or the number of hours worked (or both) in order to meet their budgets. As the years passed, the billable hour expectations skyrocketed. In its 1958 study, the ABA concluded that unless a lawyer worked overtime there were “only approximately 1,300 fee-earning hours per year.” Today’s large firm associates would consider that part-time work, as official billable hour expectations range from 1800 to 2300 billable hours per year, and billing of 3,000 hours is not unusual. Small wonder that a persistent legend in law firm circles tells of an unknown associate who actually managed to bill more than twenty-four hours in one day by including work on a coast-to-coast flight across time zones.

In addition to maximizing legitimate billable hours, the pressure to meet quotas causes a few lawyers to blur ethical lines. Some “round up” their time to the next quarter hour, a practice approved by the ABA. Others “double bill”–charging multiple clients for the same time period, as when doing work for one client on an airplane while flying on a trip for another and billing both (the ABA declared this practice unethical but it still occurs with some frequency). Some lawyers actually fabricate hours, charging for time they never worked. Which brings us back to Lawyer Smith chatting with St. Peter–his birth certificate makes him 78 years old, his time sheets make him 165, and after spending a career billing over 2,000 annually he may feel like his time sheets are right.