Billing for Recycled Work: A Follow-up Exchange of Views

In a recent edition, Professor William G. Ross analyzed the professional ethics restrictions incumbent upon lawyers who want to bill by the hour for previously produced work product. (“The Ethics of Billing by the Hour for 'Recycled' Work,” August 2003.)

Attorney readers with file drawers full of valuable prior work product surely felt some dismay in reading these restrictions. Ed Poll – a prominent law firm consultant, ABA-published authority on improving law firm billing methods, and Board member of this newsletter – succinctly articulates this sentiment as “Damned if you do and damned if you don't!” Poll recognizes that inflating time reports when using recycled work product is “like a butcher putting a thumb on the scale”; but that illicit maneuver persists, he says, because lawyers have not had a practical alternative that reflects marketplace realities.

Ross responds: “As my article indicates, I agree with Mr. Poll that attorneys should receive the fair market value of recycled work – and that the use of value billing or flat fees to reflect the value of that work is often impracticable, since calculation of a price tag is not easy and so many clients continue to prefer time-based billing. I also agree that a client who is billed for time spent on another of an attorney's clients may actually receive the fair market value of the intellectual property that the attorney is providing to the second client. But since a time-based bill is a historical record of the time that a lawyer spent on a particular matter at a specific time, an attorney cannot ethically represent that he or she spent time for the second client if that time was in fact spent for a different client. An attorney who believes that she is not being properly compensated for her services must therefore find an honest way to obtain proper compensation for her services, however difficult that may be. Falsification of time records should not be an option.”

Poll comments similarly on the regeneration cases Ross cited. The courts say the attorney should have used previous knowledge, as opposed to running up their hourly billing by re-inventing the wheel. Ross agrees, likening needless work regeneration to “churning.” Moreover, Ross adds, the acquisition of valuable experience is precisely why a lawyer's hourly rate increases as he or she matures. But Poll counters that competition limits the lawyer's ability to raise hourly rates enough to make up for these imposed limitations on profit margin. Overall, Poll would prefer to see billing excesses discouraged by competitive market pressures rather than by professional regulation. “Price should be determined by the marketplace,” he says, “not by the bar.”

Value pricing, rather than hourly billing, would seem the obvious way out of these pricing dilemmas, but Ross himself observes that hourly billing persists largely because value pricing is so difficult. Poll elaborates on these difficulties. “What will be the definition of 'value'? And who determines the value – the usually unsophisticated client, the attorney, or an independent third party? And when should the value determination be made – at the time the work is performed, at the time of billing, or with 20/20 hindsight when the ultimate results are known?”

Ross and Poll both address a somewhat analogous question regarding hourly billing for work that can be expedited by improved office technology. Carrying the analogy further than Ross, Poll contends that it is inappropriate for the profession to force attorneys to keep current with technology, since that forced investment “would lead to fewer hours being billed and therefore lower revenue for the same client base. Increased cost for technology and lower revenue means lower profit and, ultimately, inability to stay in business. The only way out, under the profession's current rules, is for the lawyer to 'run faster,' get more clients in an already competitive market, and continue to pass technology cost savings on to the client without taking the benefit for him or herself.”

For the billing problem at least, both authors agree on a partial solution (which Ross recommended in the August article). In their engagement agreements, attorneys can list fixed fees for designated work products – interrogatories, certain contracts, etc. – that are based on the firm's established expertise. The engagement letter can further specify an additional hourly charge for customizing those prior work products.

[Ed. note: For an abundance of effective advice on improving the efficiency and effectiveness of law firm billing, refer to Poll's ABA-published books and other works cited on his Web site (www.lawbiz.com). For a fascinating long-term view of changing paradigms of lawyer compensation, see the introductory historical chapter of Ross's book The Honest Hour: The Ethics of Time-Based Billing by Attorneys (Carolina Academic Press, 1996). See the July 2003 edition of this newsletter for a review of Ross's recent book (with John W. Toothman), Legal Fees: Law and Management (Carolina Academic Press, April 2003).]

In a recent edition, Professor William G. Ross analyzed the professional ethics restrictions incumbent upon lawyers who want to bill by the hour for previously produced work product. (“The Ethics of Billing by the Hour for 'Recycled' Work,” August 2003.)

Attorney readers with file drawers full of valuable prior work product surely felt some dismay in reading these restrictions. Ed Poll – a prominent law firm consultant, ABA-published authority on improving law firm billing methods, and Board member of this newsletter – succinctly articulates this sentiment as “Damned if you do and damned if you don't!” Poll recognizes that inflating time reports when using recycled work product is “like a butcher putting a thumb on the scale”; but that illicit maneuver persists, he says, because lawyers have not had a practical alternative that reflects marketplace realities.

Ross responds: “As my article indicates, I agree with Mr. Poll that attorneys should receive the fair market value of recycled work – and that the use of value billing or flat fees to reflect the value of that work is often impracticable, since calculation of a price tag is not easy and so many clients continue to prefer time-based billing. I also agree that a client who is billed for time spent on another of an attorney's clients may actually receive the fair market value of the intellectual property that the attorney is providing to the second client. But since a time-based bill is a historical record of the time that a lawyer spent on a particular matter at a specific time, an attorney cannot ethically represent that he or she spent time for the second client if that time was in fact spent for a different client. An attorney who believes that she is not being properly compensated for her services must therefore find an honest way to obtain proper compensation for her services, however difficult that may be. Falsification of time records should not be an option.”

Poll comments similarly on the regeneration cases Ross cited. The courts say the attorney should have used previous knowledge, as opposed to running up their hourly billing by re-inventing the wheel. Ross agrees, likening needless work regeneration to “churning.” Moreover, Ross adds, the acquisition of valuable experience is precisely why a lawyer's hourly rate increases as he or she matures. But Poll counters that competition limits the lawyer's ability to raise hourly rates enough to make up for these imposed limitations on profit margin. Overall, Poll would prefer to see billing excesses discouraged by competitive market pressures rather than by professional regulation. “Price should be determined by the marketplace,” he says, “not by the bar.”

Value pricing, rather than hourly billing, would seem the obvious way out of these pricing dilemmas, but Ross himself observes that hourly billing persists largely because value pricing is so difficult. Poll elaborates on these difficulties. “What will be the definition of 'value'? And who determines the value – the usually unsophisticated client, the attorney, or an independent third party? And when should the value determination be made – at the time the work is performed, at the time of billing, or with 20/20 hindsight when the ultimate results are known?”

Ross and Poll both address a somewhat analogous question regarding hourly billing for work that can be expedited by improved office technology. Carrying the analogy further than Ross, Poll contends that it is inappropriate for the profession to force attorneys to keep current with technology, since that forced investment “would lead to fewer hours being billed and therefore lower revenue for the same client base. Increased cost for technology and lower revenue means lower profit and, ultimately, inability to stay in business. The only way out, under the profession's current rules, is for the lawyer to 'run faster,' get more clients in an already competitive market, and continue to pass technology cost savings on to the client without taking the benefit for him or herself.”

For the billing problem at least, both authors agree on a partial solution (which Ross recommended in the August article). In their engagement agreements, attorneys can list fixed fees for designated work products – interrogatories, certain contracts, etc. – that are based on the firm's established expertise. The engagement letter can further specify an additional hourly charge for customizing those prior work products.

[Ed. note: For an abundance of effective advice on improving the efficiency and effectiveness of law firm billing, refer to Poll's ABA-published books and other works cited on his Web site (www.lawbiz.com). For a fascinating long-term view of changing paradigms of lawyer compensation, see the introductory historical chapter of Ross's book The Honest Hour: The Ethics of Time-Based Billing by Attorneys (Carolina Academic Press, 1996). See the July 2003 edition of this newsletter for a review of Ross's recent book (with John W. Toothman), Legal Fees: Law and Management (Carolina Academic Press, April 2003).]