Twenty years ago this month, The Dallas Morning News published a front-page article quoting corporate general counsel and law firm leaders predicting the death of the billable hour charged by lawyers.
Legal industry leaders forecasted that alternative fee agreements – contingency fees, fixed and flat fees, fee collars, task-based fees and blended hourly rates – would be the predominate way businesses paid their lawyers.
I authored that article two decades ago. I wrote a follow-up in 2009 again citing top corporate lawyers who continued to believe that the demise of hourly billing was imminent.
“The death of the billable hour cannot happen soon enough,” then-AT&T General Counsel Wayne Watts told me. “I will do everything within my power to kill it. Billing by the hour gives lawyers the wrong incentives for doing their best work most efficiently.”
Watts retired in 2015, but all indications are that prognostications of the death of the billable hour were greatly exaggerated – despite the fact that the hourly rates that Texas business lawyers charge their clients have skyrocketed during the past few years.
“Hourly rates are not going away anytime soon, because it is the common language everyone speaks,” says MetroPCS Chief Counsel Chris Luna.
Surveys show that Texas companies expanded their use of alternative fee arraignments from 2004 to 2011, but that it has hit a ceiling ever since.
About 60 percent of Texas-based businesses utilized AFAs in 2016, according to Norton Rose Fulbright’s 2016 Litigation Trends, which is the same number reported in the survey in 2011.
But the Texas companies employing AFAs with their outside counsel are using them more often. The Norton Rose Fulbright study found that AFAs were used in 31 percent of their outside legal spend – up from 20 percent in 2011.
“The good ole hourly rate is still alive and well,” says Classic Industries General Counsel John Clement. “The key is to have some predictability on rates. I think that’s what it all comes down to for most companies.”
A new survey by The Texas Lawbook of 46 prominent corporate general counsel in Austin, Dallas and Houston found that:
- 28 percent of corporate legal departments aggressively seek alternative fee agreements with all their outside counsel on most or nearly all matters;
- 52 percent want to do AFAs on some assignments with outside counsel; and
- 19 percent have little to no interest in any agreements outside of the billable hour.
“I am not a big fan of alternative fee agreements,” Robert Hart, general counsel and executive vice president of Mark Cuban Companies, said in an interview with The Texas Lawbook in 2016.
“The lawyers are always the house and I feel that they are always going to win using our money, no matter how the agreement is structured,” Hart said. “I tell lawyers at the start of the matter to develop a budget. I am not looking for fee guarantees, but I want to see how they think and how they plan to staff and approach the matter.”
While Hart is on one side of the alterative fee agreement debate, John Torres, the chief legal officer at Dallas-based Lennox International, takes an alternative position.
Torres says he – like Hart – primarily focuses on “seeking value from our outside legal counsel.”
“Fixed fee arrangements can and should promote efficiency when they are done correctly,” he says. “I don’t like paying by the hour. I look at these factors: the level of effort and level of expertise required for each project and the value it brings to the company.”
For it to work, Torres says, “it requires good communication between corporate legal departments and outside counsel.”
“I want law firms to come to us with assumptions about the breadth and depth of a specific matter, including how many depositions are going to be required, how much research is required to do the briefs or to file successful motions for summary judgment,” he says. “I have found that outside counsel are extremely good at estimating the amount of legal work involved in our matters.”
Torres says that most law firms have “warmly embraced” his approach, though he admits, “I have had a few law firms turn down my business because I don’t want to pay by the hour.”
CEC Entertainment General Counsel Rudy Rodriguez says most businesses are facing mandates from CEOs and corporate boards to keep cost down and AFAs can help.
“We just completed a big process on a series of lawsuits in California,” he says. “We asked for alternative fee agreements and stated that simply offering reduced rates was unacceptable.
“We looked at task-based flat fees – specific fees for filing the answer, filing motions to dismiss, taking depositions and motions for summary judgment,” Rodriguez says. “I think paying a flat fee will save us significantly. It certainly provides us predictability. We may not do this in every case, but we are going to try to do it more moving forward.”
The majority of Texas GCs say they will continue to depend on the billable hour as a basis for setting fees, except in some specific circumstances.
Total General Counsel Elizabeth Matthews employs AFAs on select transactional matters. Carlos Hernandez, the chief legal officer at Fluor Corp., likes flat fee agreements in some specific engagements. AT&T GC David McAtee says he is employing more AFAs in patent litigation because, “We know what it costs to take a case from one aspect of a case to the next.”
“Alternative fees don’t make much sense for most of the legal work we have for firms,” says Yum! Brands Chief Legal Officer Marc Kesselman. “But we have set upfront prices for specific matters, such as appellate litigation.”
Many general counsel say that the billable hour gives them a way to monitor and control the work of outside counsel.
“It is easier to review and evaluate hourly time sheets,” Luna says. “I know how long it should take to handle certain matters and how many lawyers it takes to do the work.
“Time sheets used to be brief, but today the explanation are like min-novels,” Luna says. “It gives me a feel for what is going on.”
Several corporate general counsel say that law firms need to develop creative rate structures for companies during tough economic times.
“The billable hour is still the best measurement,” says Riverstone Holdings General Counsel and Partner Stephen Coats, whose New York-based private equity firm has invested billions of dollars in the Texas oil and gas sector.
“But I think we can still be creative regarding discounts and agreements that allow law firms to share in some of the risks, especially in more difficult times involving more risky M&A projects,” Coats says.
During the commodity price downturn of 2015 and 2016, Coats and other private equity firms asked their Texas lawyers to accept significantly reduced fees when working on projects that had a higher risk of not being completed. If the deals did close, the law firms would receive a bonus.
Halliburton General Counsel Robb Voyles says such arrangements are attractive to him.
“I rarely do alternative fee agreements,” he says. “Patent prosecution work is the one exception.
“I would like to see law firms come to us with more AFA proposals,” Voyles says. “I would like to see law firms offer to take more risks in return for the potential for more upside. I am not against the billable hour. I just want value.”