Following is an interesting history of how billable hours came about, if you are interested! Remember, none of the bonus material is required or tested. It is here in case you need or want more on the subject matter from the section being studied.
THE HOURS
The short, unhappy history of how lawyers bill their clients.
By Niki Kuckes
Law firms bent on making as much money as possible treat associates "very much as a manufacturer would treat a purchaser of one hundred tons of scrap metal," Chief Justice William Rehnquist observed in the mid-1980s. He explained the firms' attitude like this: "If you use anything less than the one hundred tons you paid for, you are simply not running an efficient business."
The chief justice understood that the modern law firm, once revered as a brotherhood, is now in many ways indistinguishable from the corporate clients it serves. Monthly financial reports, profit targets—these are the fodder of partnership meetings at most large firms. Collegial discussions of cases in progress and debates about the good sense of one legal strategy versus another are largely reduced to hasty e-mails written from the airport.
The product that these law corporations make—and the source of the notion that attorneys are as interchangeable as widgets—is the "billable hour." Both partners and associates are routinely required to bill clients a high number of hours; the current range at most large firms is between 1,800 and 2,000 a year. The benefits of seniority rarely include the opportunity to work less—only the most successful rainmakers are exempt from the pressure to bill time. As one associate puts it, "It's like a pie-eating contest where first prize is all the pie you can eat."
The relentless pressure to turn time into money has robbed the legal practice of many of its joys and satisfactions—those that come from giving good advice, avoiding a lawsuit, preventing a corporate bankruptcy, sparing a client prison time, or negotiating a successful deal. These are the landmarks that lawyers recall when they review their careers, but their value isn't reflected in the way lawyers bill. With good reason, lawyers come to feel that what matters isn't how they do their work but how much work they do. "The billable hour is fundamentally about quantity over quality, repetition over creativity," Robert E. Hirshon, the president of the American Bar Association, recently observed.
Why has the billable hour, uncommon only 50 years ago, become so entrenched and powerful? The answer begins with the corporatization of law practice. As law firms expand or merge, they must search for measures to predict income, expenses, and budget. Billable hours present a ready standard because they can easily be measured, compared, and reduced to "realization rates" (which compare hours worked with the fees collected on those hours). They can be translated into precise expectations that can be used to guide lawyers' performance. It's no wonder, then, that attorneys complain of feeling like piecemeal workers in a factory.
The billable hour's appeal as a management tool is also its greatest threat. Treating legal services as a commodity that can be measured in units of time diminishes the importance of both the quality of the work produced and the results achieved. Few other industries would thrive if they measured productivity by the time their workers spent without regard to what those workers created. The standard invites inefficiency, not to mention fraud. The potential for conflicts of interest is obvious—it's in the firm's financial interest for lawyers to spend as many hours as possible, while the client's interest is best served by limiting the time spent.
Most firms break billable hours into pieces, typically charging clients for each six-minute increment expended by a lawyer or paralegal. This method of billing requires a degree of precision that is virtually impossible to achieve. Still, the conscientious lawyer strives to record, in his or her daily diary, each telephone call, meeting, letter, memo, draft agreement, research project, and document review. The result is relentless time-keeping from arrival to departure each day, and often at home again at night.
Firms' reliance on the hour as their billing currency emerged in the 1950s. In the country's early history, state law strictly limited legal fees, which were generally paid by the losing side in a case. Lawyers supplemented their income with bonuses from satisfied clients—like tips for a waiter—or with annual retainers. As economic regulation fell out of political favor in the 19th century, however, such maximum-fee laws were repealed. By the early 20th century, lawyers used a combination of billing methods: set fees for particular tasks, annual retainers, a discretionary "eyeball" method, and contingency fees, which the ABA approved as ethical in 1908. They rarely billed by the hour.
In the late 1930s and 1940s, state bar associations eager to hike legal fees started publishing minimum fee schedules that set standard prices for different services. The schedules would "suggest" one fee for handling a contested divorce, for example, and another for drafting a will. While nominally voluntary, schedules were enforced by the threat of disciplinary action against a lawyer whose fees were regarded as too low. The Virginia State Bar, for example, warned that attorneys who "habitually" charged less than the suggested fees would be presumed guilty of misconduct. The ABA's model ethical code, which was in effect until 1969, said that it was unethical for an attorney to "undervalue" his legal services.
But as time passed and the practice of law became more complex, fee schedules and other flat-fee arrangements, like re-tainers, proved increasingly unworkable. The reform of the federal rules of civil procedure in 1938, which were later copied by the states, dramatically expanded lawyers' workloads before civil trials by extensively reworking the pretrial discovery rules. These changes have been credited with transforming "trial lawyers" into "litigators," who spend a lot more time pre-paring cases and exchanging motions with the other side than they do appearing in court. As the work involved in any given case became unpredictable—and subject to vagaries beyond the lawyer's control—it became difficult to set a reasonable flat fee in advance. Over the next few decades, regulation of business activities increased dramatically, which meant that transactional work also increased in complexity and became harder to price.
The Supreme Court killed set fee schedules entirely in 1975, declaring that they were a "classic illustration of price fixing" that violated federal antitrust laws. Meanwhile, clients had grown impatient with "eyeball" techniques of legal billing, which left them unsure how a lawyer arrived at his gross fee. Against this backdrop, hourly billing appealed to clients and lawyers as a more transparent way to value legal services.
Hourly billing allowed clients to "correlate the 'product' that they were buying to the products that they themselves produced and sold," one commentator observes, and fit in well with the move toward business accounting methods. In the process, noted Geoffrey Hazard, a professor of legal ethics at the University of Pennsylvania, "a subtle transformation occurred: The time sheet—created as a control on 'inventory'—now became the 'inventory' itself."
It didn't take the profession long to figure out that the billable hour could be used to turn the practice of law into a more profitable business. In 1958, an ABA committee put out a pamphlet called "The 1958 Lawyer and His 1938 Dollar." The pamphlet lamented the "economic plight" of lawyers and their failure to keep pace with the earnings of other professions, particularly (and gallingly) the income of doctors and dentists. By devoting themselves unduly to the high ideal of "devotion to public interest," the committee concluded, lawyers were flopping as businessmen. The ABA urged them to take a businesslike look at their work habits—beginning with time records, the lawyer's "sole expendable asset."
For the next decade, the bar mounted a nationwide campaign to "preach the gospel that the lawyer who keeps time records makes more money," as one ABA speaker put it. Initially, hourly fees were used as a baseline, and adjusted to account for other factors like a project's success. By the late 1970s, however, pure hourly billing came to prevail. Eventually, it became the standard for nearly every variety of legal work. There have been sporadic efforts to encourage the use of alternative methods like "value" billing (focusing on the value of work performed rather than time spent). But the billable hour has been surprisingly resistant to reform.
To improve productivity, law firms began adopting policies requiring attorneys to bill a certain number of minimum hours each year. It seemed like a harmless enough step—until the number of those hours began to rise steadily beginning in the '80s. Firms raised their hours requirements to maximize the profits of partners and, most recently, to pay for a dramatic increase in associate salaries fueled by the fear of losing young lawyers to the dot-com boom. By 2001, large Washington, D.C., law firms typically asked associates to bill between 1,950 and 2,000 billable hours a year—and in other cities nationwide, most firms reporting minimums required almost as many hours a year.
These standards exert serious pressure, whether they are openly described as "quotas" or euphemistically referred to as "targets." Often, they are enforced with financial incentives or penalties. Associate bonuses are routinely tied to billing a specific number of hours, which means that when a bonus kicks in at 2,000 billable hours, few associates will end the year with less. Partners are also often required to bill a set number of hours, usually slightly lower than those expected of associates. Even where that's not the case, a partner's hourly output still matters for important firm decisions like compensation, hiring needs, and, in a firm with several offices, evaluation of the overall performance of the office where a lawyer works.
It's striking to compare today's expectations to a lawyer's reasonable workday in 1958. In that year, the ABA announced that unless a lawyer worked overtime, there were "only approximately 1,300 fee-earning hours per year." This assumed a five-day workweek plus half-days on Saturday. At that time, the ABA set a "realistic" goal of five or six billable hours a day. Today, a billable hour target of 1,300 billable hours a year would amount to a civilized part-time schedule—the equivalent of a three-day, part-time workweek in most large firms.
Billing 2,000 hours a year may not seem onerous. The total can be reached in just over eight billable hours a day, setting aside four weeks of the year for vacation and national holidays. But studies consistently show that a lawyer must spend three hours in the office for every two hours of billable work. Lawyers can't simply bill time. They have to read and respond to mail and firm memos, go to meetings, read legal publications, and eat lunch—not to mention kib-bitz with colleagues, if not friends.
To do all of this and make the 2,000-hours target, a lawyer must spend the equivalent of 12 hours in the office for each working day. Since the day hasn't gotten longer since 1958, the honest lawyer who commits to working "full-time"—to a schedule of 2,000 billable and thus 3,000 total hours—is giving his life to the firm. This is the "tyranny of the billable hour," as Hirshon of the ABA puts it. Lawyers who have left private practice speak of the relief and pleasure of not having to record their time. The pressure is particularly acute when a case is in hiatus, or when a firm goes through a downturn in business. However little work the attorney may have to do, the billable-hour statistics continue to be compiled by the firm, day after day.
The loss of collegiality that lawyers bemoan isn't the only casualty of the time pressure. The opportunity to do free work for poor clients or chosen causes—for many lawyers, the most satisfying work of their legal career—gets eaten away. Instead, tedious but hour-consuming tasks like travel, document review, and proofreading corporate reports become valued assignments. An associate who wants to see his kids must pass on taking a course in trial advocacy or running for a position on a bar committee. He also can't find time to write articles or have lunch with business contacts that could help him become a partner. Partners are similarly reluctant to spend time working with associates to help them sharpen their skills, or taking on other non-billable tasks like serving on firm committees dealing with pro bono cases.
The need to bill 2,000 hours a year also means that "there are bound to be temptations to exaggerate the hours actually put in," as Chief Justice Rehnquist said. The possibilities for fraud abound, though fraud is often hard to detect. Lawyers can cheat by writing down hours they didn't work or by exaggerating the hours they did. They can credit themselves for hours worked by paralegals and secretaries. They can bill one client for work already paid for by another, or double-bill two clients for the same hours. The ABA said in 1993 that it's unethical to bill one client for travel time and a second client for work performed en route, but surveys show that the practice has not been eliminated.
Academics tend to see fraudulent billing as endemic; practitioners tend to see it as the exception rather than the rule. The reported cases suggest that most of the lawyers whom the bar disciplines for questionable billing are solo or small-firm practitioners. In many of these cases, the dispute is about such issues as whether a $1,000 fee should have been $500. Recently and notoriously, however, senior partners in major law firms have padded their bills, forcing clients to pay them millions of unearned dollars. When Webster Hubbell, the former high-ranking Clinton Justice Department official, pleaded guilty to defrauding the Rose Law Firm and its clients of $500,000, the charges against him included bill inflation. Billing chicanery has also led to the disbarment or resignation from the bar of partners at such nationally known firms as McDermott, Will & Emery, Latham & Watkins, Mayer, Brown & Platt, and Hunton & Williams.
Some lawyers who have left private practice point to the billable hour as a central motivation for their departure. Patrick Schiltz is a law professor who, along with his wife, left a firm. He gave up a stake in the very large fees earned by his firm from the Exxon Valdez oil-spill litigation. He tells his students that they are entering a profession that is "one of the most unhappy and unhealthy on the face of the earth—and, in the view of many, one of the most unethical." Much of the blame, he has concluded, lies with "the hours." "You should not underestimate the likelihood that you will practice law unethically," Schiltz advises new lawyers. The problem, he warns, will "begin with your time sheets."
The organized bar, which so enthusiastically urged the billable hour on the legal profession 50 years ago, has developed its own doubts in more recent years. In 2001, the ABA assembled a Commission on Billable Hours, and this August it conceded that "required hourly minimums . . . can lead to questionable billing practices ranging from logging hours for doing unnecessary research to outright padding of hours." The commission expressed concern, as well, that the billable hour "penalizes the efficient and productive lawyer" and causes a host of harms, including damage to firm culture, loss of time for pro bono work, duplication of effort, and a disconnect between the value of projects and the legal fees generated.
Still, the commission issued a report that is more pragmatic than crusading. While expressing concern about the weaknesses of reliance on billable hours, the committee bowed to the reality that "many, perhaps most, firms continue to believe in minimum hourly requirements." In contrast to its 1958 conclusion that billing 1,300 hours a year is a reasonable full-time job, the report endorses advising associates that 1,900 hours of billable client work is the amount "sufficient for evaluation and compensation purposes." The commission also recommends making plain to associates that on top of those 1,900 hours, they should generally expect to put in 100 hours of firm service, 100 hours of pro bono work, 75 hours of client development, 75 hours of training and professional development, and 50 hours of service to the profession. That's 2,300 hours a year—many long days and weekends.
What's the alternative? Lisa G. Lerman of Catholic Law School has suggested that the practice of imposing billable-hour requirements be "abandoned." If the ABA Committee considered that idea, it apparently concluded that scrapping the billable hour strays too far from the realities of running a law firm as a business. While the report's model policy for firms ostensibly espouses "no set hard-and-fast minimum levels" of billing, it sends a mixed message, simultaneously giving associates "guidance" about the typical level of effort that the firm "expects in order to meet its revenue and profitability goals." While decrying practices that rigidly tie compensation to billable hours, the report also recognizes the "imperative of rewarding productivity—often measured in billable hours."
Ultimately, the ABA recommends warning associates that deliberate inflation of time will not be tolerated—an important step, but one that puts the onus on associates to put in the time and to do so honestly, without addressing the weariness and dissatisfaction that comes with the billable hour (or the billing practices of law firm partners). The ABA also promotes alternative billing methods, such as fixed fees, contingency fees, and bonus arrangements.
For the foreseeable future, though, the billable hour is likely to remain the bane of a lawyer's work life. It's also likely to provide a shorthand for much of what ails the legal profession. Perhaps the best hope for restoring satisfaction to lawyers in practice, ironically, is that corporate clients will insist on changing the prevailing method of pricing legal services—something that law firms seem to have neither the ability nor the will to do.Source: http://www.legalaffairs.org/issues/September-October-2002/review_kuckes_sepoct2002.msp