Law Firm Billing on Trial

Thursday, February 12, 2009
E. Richard Ogrodowski

By E. Richard Ogrodowski and Frederick B. Goldsmith

Traditionally, civil lawyers, including those defending companies in maritime cases, charge by the hour, while plaintiff's lawyers – those representing the allegedly injured person – charge a "contingent fee."

This means the plaintiff's lawyer only gets paid if the plaintiff wins, either through a settlement or judgment.  The attorney's fee will be a percentage, typically between 33 and 40% of the recovery.  With the U.S. and the international economy in a recession though, and with attendant tight corporate budgets, even corporate clients accustomed to paying by the billable hour are exploring alternatives to the traditional hourly fee.

The billable hour is the most prevalent form of compensating outside defense counsel in civil litigation.  It's straightforward.  The law firm charges an hourly rate.  The client gets an invoice, usually monthly, based on the simple formula of hours x fees + expenses = what you owe the law firm.  Hourly fee arrangements are common (a) when a company is being sued and needs outside defense counsel (for example in a personal injury case); (b) for transactional matters (such as drafting contracts, revising by-laws, negotiating deals); or (c) in commercial litigation where a corporation is either the plaintiff or defendant (for example, when one company sues another for breach of contract, tortious interference with contract, antitrust, copyright or patent infringement, violating a noncompete agreement, theft of trade secrets, etc.).

As for what is a reasonable hourly rate, this is usually set by the law firm and sometimes the result of negotiations between the company (or its insurer or P&I Club) and the law firm.  Of interest to the maritime community is the recent case of Olson v. HMS Westpac Express, Inc., in which a federal magistrate judge in Indiana, in awarding attorney’s fees to the personal injury plaintiff for wrongful failure to pay maintenance and cure, determined $350 per hour was a reasonable rate for maritime plaintiff’s personal injury lawyer Dennis O’Bryan and $250 an hour a reasonable rate for his colleague, Howard Cohen.

Lawyers like O'Bryan and Cohen are among several around the country who represent seamen in maritime personal injury cases. They usually charge a contingent, versus hourly, fee.  Interestingly, though, more and more corporations are also (and prudently) considering contingent fee arrangements with outside counsel, particularly in commercial litigation where the company is the plaintiff and is suing another company, for breach of contract, tortious interference, etc., as outlined above.

Under this billing arrangement, of which our law firm is a proponent, the corporation may front litigation costs (such as deposition transcript and expert costs), but the law firm, like the personal injury plaintiff's firm, is not entitled to a fee unless and until there is a settlement or judgment in favor of the corporate client.  The beauty of a contingent fee arrangement in such cases is the interests of the corporation and the law firm are perfectly aligned.  The corporation and the law firm are both sharing the risks of winning or losing the lawsuit.  The law firm is particularly incentivized to win, and win in an efficient and cost-effective manner.

A blended fee is a hybrid of the billable hour and contingent fee.  One version of this fee structure is the law firm reduces its usual hourly rate and in exchange receives part of its fee, if at all, on a contingent/percentage basis.  Thus, the law firm receives on a regular, usually monthly, basis, fees, albeit not as much as normal, with which to pay its overhead, and also earns at the end of the litigation a contingent success fee if its client prevails, whether by settlement or judgment.

This is another fee arrangement our law firm embraces as, again, the interests of the corporate client and the law firm are aligned, there is mutual risk, and the law firm has a stake in seeing to an outcome that benefits the client.

The flat fee involves the least amount of guesswork of any billing arrangement.  The company and law firm agree in advance on a set price for handling the lawsuit, or, in non-litigation matters, preparing a charter party, drafting and negotiating a sales agreement, etc.  Particularly in litigation, though, flat fees can be problematic for the law firm, because there are many hard-to-predict variables: What will the other side's lawyer do that must be responded to?  What rulings will the trial judge make?  What will be uncovered in the discovery phase of the case that may require significant additional work?

Thus, unless the fee has a significant buffer built into it or the client is promising the same law firm a steady flow of similar cases, many law firms, including ours, are cautious about entering into flat fee arrangements.

When law firms such as ours are hired to defend the typical admiralty personal injury case, the billable hour may be difficult to avoid.  But, when a corporation is the plaintiff, such as in commercial litigation, the traditional tool of the plaintiff's personal injury lawyer – the contingent fee, or a blended fee – can be a cost-effective way to compensate outside counsel.  And while some firms are unwilling or unable to accept the risks inherent in contingent or blended fees, some law firms, particularly boutique, entrepreneurial firms like ours, are often very willing to consider this progressive approach.

Rich Ogrodowski and Fred Goldsmith practice admiralty & maritime, commercial, personal injury, and insurance coverage litigation with Pittsburgh-based Goldsmith & Ogrodowski, LLC.  Contact ero@golawllc.com, fbg@golawllc.com. Sign up for the Admiralty Update at www.golawllc.com.

  • Frederick B. Goldsmith

    Frederick B. Goldsmith

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