Flat Fee Arrangements May Lead to Poorer Case Outcomes

Michael Simkovic, a law professor at Seton Hall University, recently posted a thought-provoking blog entry about the effectiveness of “fixed,” also commonly referred to as “flat” fee, arrangements.

The hourly model of billing entails an understanding that the client will pay the lawyer for time spent on the client’s legal matter at the lawyer’s hourly rate. As Professor Simkovic points out, this is the traditional way that lawyers bill for their time. The flat fee model involves no time component -- lawyer and client agree that client will pay a specified sum for legal services regardless of the amount of time it takes the lawyer to complete the task.

The justification for hourly billing is that it provides the client transparency and incentivizes hard work by the lawyer to achieve good results.

Flat fee arrangements, on the other hand, allow the lawyer and client to negotiate an amount for legal services and provide both parties certainty that legal fees will not be more or less than that amount.

Prospective clients may initially prefer the flat fee option because they perceive that hourly billing will lead to inefficient performance. The danger of the flat fee, however, is that if the lawyer does not set the fee high enough, the quality of legal services may be unacceptably reduced. This can especially be true if unforeseen obstacles arise during the case or the client or third parties act contrary to expectations or impose unanticipated demands on the lawyer’s time. If the flat fee is too high in relation to the amount of work the lawyer is required to perform, then the fee may be regarded as unconscionable.

According to Professor Simkovic, “[p]reliminary results from empirical research . . . suggest that a fixed-fee approach to compensating lawyers reduces lawyers’ efforts to assist clients and leads to worse outcomes for clients.” Simkin cites two preliminary studies (Benjamin Schwall, High-Powered Attorney Incentives: A Look at the New Indigent Defense System in South Carolina and Amanda Y. Agan, Matthew Freedman & Emily Owens, Counsel Quality and Client Match Effects) in the context of the criminal justice system which arrive at “substantially the same conclusions.”

The concern for defendants in criminal court proceedings, of course, is that their lawyers’ compensation not be so low as to prevent effective assistance of counsel.

Professor Simkovic suggests that the findings of these two studies may also be applicable to civil litigation or transactional practice. Not only is it possible that lawyers who are paid a flat fee will lack the same incentive for achieving case success as lawyers who are compensated by the hour, Professor Simkovic argues, but litigants may affirmatively choose a lawyer who uses a time-based billing structure in order to get a leg up on their party adversaries. Professor Simkovic observes that plaintiff lawyers retained on an hourly basis may be able to leverage better results for their clients because opposing counsel -- presumably working for a fixed fee -- may pressure their clients to settle quickly and on less favorable terms.

To my mind, Professor Simkovic’s analysis of fixed fee versus hourly fee arrangements has interesting implications not only for determining the relative superiority of one billing practice over the other -- a debate which remains largely unsettled in immigration circles -- but also invites further examination of the lawyer’s ethical responsibilities to the client when retained on either an hourly or fixed fee basis.