Alternative Fee Arrangements

Kevin Henderson

Alternative Fee Arrangements

Notes:

  • In addition to the legal ethics considerations listed in the table, see Texas Disciplinary Rules of Professional Conduct, Rule 1.04 regarding fees and Rule 5.04 regarding fee sharing.
  • Other than a true nonrefundable retainer agreement, which are relatively rare, any fees paid to an attorney in any of the following fee arrangements are refundable to the extent that they have not yet been earned by the provision of legal services and must remain in an IOLTA or trust account until earned. See ethics opinion 611.
  • Many of these can be combined, such as a Subscription Model with a Collared Fee or a reduced hourly fee with a contingency fee kicker, ensuring the fee remains reasonable and in compliance with all other rules and ethics opinions.
  • Disclaimer: This chart does not address all issues that should be contained in the fee agreement, such as billing or how expenses will be handled. It provides only a basic overview of various alternative fee arrangements and a starting point for sample explanatory language in an agreement.
AFA Type Pros Cons Sample Explanatory Language Legal Ethics Considerations

Fixed or Flat Fee

Legal service is billed at a set price.

Similarly, a Portfolio Fixed Fee can apply to a higher volume of needs (typically for larger entities)
  • Predictable costs for clients, which aids budgeting.
  • Encourages efficiency from lawyers and staff.
  • May not account for unexpected complications, hence better suited for predictable, repetitive offerings (e.g. Will, Trademark Application, etc.).
  • Lawyers may rush to minimize time spent.
 "Client agrees to pay a fixed fee of [amount] for [specific legal services], inclusive of all legal work related to [matter]. The fixed fee will be earned at the following benchmarks: [list benchmarks]."
  • See ethics opinion 679: A lawyer may renegotiate a flat fee after litigation starts if fair under the circumstances. Lawyer has burden to prove fairness, which depends on factors like the length of the lawyer-client relationship, if it could have been anticipated, and the client’s level of sophistication.
  • Ensure the fee is reasonable and clearly define the scope of services to prevent disputes.

Subscription Model

Legal services charged on a monthly, quarterly, or annual basis in exchange for a set of services.
  • Predictable legal expenses for select services.
  • Encourages ongoing legal support, collaboration, and advice.
  • Services covered can be limited with numerous exclusions that are subject to separate fees.
 "Client agrees to pay a monthly fee of [amount] for access to legal advice and services up to [limit] hours per month. Additional hours will be billed at [rate]."
  • Clearly define what services are included and how additional services will be billed.
  • *Consider, with review of ethics counsel, whether termination for convenience is appropriate.

Collared Fee

Legal service is provided for a specific fee, along with a percentage the lawyer must go over or under for that fee to change.
  • Encourages efficiency.
  • Predictable costs for clients, with the opportunity to share in any savings while also limiting the amount owed over the agreed upon fee to a certain percentage.
  • Time spent is still the determinant of total fee.
 "Client agrees to a collared fee arrangement wherein Client agrees to pay a specific fee in the amount of [amount] for [specific legal services], inclusive of all legal work related to [matter] with a [percentage] up and down collar. If the actual fee, as determined by the lawyer billing at an hourly rate of [rate], is within the collar of the specific fee amount, no additional fees are due to be paid or returned. If the actual fee is less than the specific fee by [percentage], Lawyer and Client agree to split the difference between the actual fee and down collar. If the actual fee exceeds the specific fee by [percentage], Client agrees to pay Lawyer 50% of the amount over the specific fee up collar.
  • Ensure the fee is reasonable and clearly define the scope
    of services to prevent disputes.

Contingency Fee

A set percentage received for legal services upon a successful outcome.
  • No upfront cost for clients, which provides broader access to legal services.
  • Motivates lawyers to achieve the best outcome, recognizing that pursuant to Rule 1.01 motivation to achieve what is best for the client should not vary.
  • Can result in high fees if the award is large.
  • Not suitable for all types of cases, and typically used in certain kinds of litigation.
 "Lawyer's fee shall be [percentage]% of the gross amount recovered, payable only if there is a recovery."
  • See ethics opinion 518 on contingency fee + hourly rate, ethics opinion 588 on contingency fee + DTPA claim, ethics opinion 660 on contingency fee in worker’s comp claim.
  • See also ethics opinion 576 regarding agreements with an external lender and ethics opinion 688 regarding lawyer withdraw from contingency fee agreement and fee sharing with new attorney.
  • Must comply with jurisdictional caps on contingency fees and ensure the client is fully informed of the fee structure and effect of termination before representation is complete.

Nonrefundable Retainer Fee

A nonrefundable retainer fee is paid to ensure availability of lawyer and compensate lawyer for foregoing other employment by agreeing to be available.

Not the same as a traditional retainer paid to perform legal services (hourly model, one-time, or evergreen such as on a monthly basis), which is always refundable regardless of how it is designated in the retainer agreement.
  • Guarantees lawyer availability to be hired to represent a client.
  • Has limited use:
    • Cannot agree to a nonrefundable fee for the provision of future legal services.
    • Only secures the availability of the lawyer’s future services.
    • Must be able to substantiate likely loss of other employment due to representation.
  • Additional costs can occur outside the retainer agreement
 "Client shall pay a monthly retainer of [amount] to secure [lawyer's/firm's] availability."
  • See ethics opinion 611 regarding “strict requirements” for use of a nonrefundable retainer.
  • Clarify how the retainer is applied to services and manage client expectations regarding unused retainer amounts.

Success Fee

Lawyer receives a bonus payment if previously agreed upon successful result is met (e.g. percentage above result).
  • Aligns lawyer and client interests towards a successful outcome, though again, Rule 1.01 requires all lawyers who accept representation to do so.
  • Can motivate extra effort, especially if traditional fee discounted absent success being achieved.
  • Can be expensive if success criteria are met.
  • Defining "success" can be complex
 "In addition to the base fee of [amount], a success fee of [percentage]% of [specified outcome] will be payable upon successful resolution of [matter]."
  • Clearly define "success" and ensure the total fees are reasonable. Disclose potential conflicts of interest.

Hourly Rate with a Cap

A Not To Exceed (NTE) arrangement where traditional hourly billing meets an agreed-upon maximum cost, or cap.
  • Provides some cost predictability.
  • Ensures payment for lawyer's time.
  • Caps can lead to rushed work as the limit approaches.
  • Might not cover all work if the cap is too low.
 "Lawyer will bill at an hourly rate of [rate] with a not-to-exceed cap of [total cap amount] for [specified legal services]."
  • Ensure the cap is reasonable and communicate with the client about approaching the cap.

Blended Rate

Lawyer charges one average hourly billing rate for all personnel.
  • Simplifies billing process.
  • Can reduce cost for clients.
  • May result in higher costs for tasks typically done by junior staff.
 "All legal services will be billed at a blended hourly rate of [rate], regardless of who performs the work."
  • Transparency about the blended rate and how it compares to standard rates is essential to ensure fairness.

Staged or Phased Fee

Lawyer is paid an amount for specified stages and accomplishment of scope of work.

May incorporate a holdback as well, or a percentage of fees only paid upon specified outcome.
  • Helps define and separate parts of matters that have a large cost while encouraging regular payments upon meeting of milestones
  • If a milestone is not reached or achieved, then payment may be disputed or delayed.
  • Might not cover unforeseen work
 "Services will be billed according to the following staged fee schedule: [list of tasks and fees]."
  • Ensure the client understands which tasks are included in each stage and how unforeseen tasks or stages will be billed.

Volume Discount

The cost of legal services is discounted upon achieving a certain volume of work.
  • Reduces cost for clients with large volumes of work.
  • Encourages long-term relationships.
  • Requires a significant volume of work to be beneficial.
  • Smaller clients may not qualify.
 "A discount of [percentage]% will be applied to our standard rates for clients providing more than [threshold] hours of billable work per year."
  • Ensure discounts are transparently communicated and do not undermine the quality or ethical standards of the services provided.

Unbundled Legal Services or Limited Scope Representation

Lawyer only provides certain services needed by client but not all tasks otherwise typical.
  • Only pay for what is needed and only get what is requested.
  • Things may be missed as the client may not fully understand the legal issue or what should be done when making the request.
 "Services will be billed according to the following task-based fee schedule: [list of tasks and fees]."
  • See ethics opinion 635: Lawyer can limit scope of services but cannot also require client to waive attorney-client relationship or represent both parties.
  • Ensure the client understands which tasks are included and how unforeseen tasks will be billed.
  • If the attorney later offers legal advice on matters beyond the limited scope, the lawyer may inadvertently extend the scope of representation. See Rule 1.02 and the Comment to the Rule regarding limited scope representation.