My concerns about flat fee billing are well-documented. However, that doesn’t meant that hourly attorneys are without fault.
I’m going to talk about how hourly rate changes affect the cost of representation. To do so, I’ll need to explain how hourly-rate agreements work.
Retainer Agreements And Their Components
A retainer agreement is a written engagement agreement whereby a client hires an attorney to perform specific work. Provided the attorney bills by the hour (which we will assume for this post), the retainer agreement will always detail the following:
- Each professional’s hourly rate, including support staff;
- The amount of the firm’s retainer deposit (the initial payment to reserve a firm’s services);
- The type of retainer deposit (varies by jurisdiction, but certain types of retainers are preserved in a separate client trust account and remain the client’s individual property while other’s automatically become the firm’s property upon payment);
- The increments by which the firm will bill its hourly rate;
- What costs are passed through and what costs are absorbed by the firm;
- Whether the firm can change their rates for a client after they’ve been hired. If an agreement is silent on this matter, a rate change is not permitted.
As you might have guessed, we’ll be talking about the last bullet point today.
Why Does A Rate Change Matter?
Let’s make up a story about a fictional client to illustrate the dangers of mid-case rate changes. Our fictional client’s name is Calvin The Client.
Calvin needs a divorce attorney. Calvin makes a comfortable living and is able to set aside money for retirement and investments each month, but does not consider himself rich. Instead, Calvin is thinking about his children’s college tuition and his desire to retire in his late 50s. The money he’s set aside isn’t a slush fund; it’s already been earmarked for important things down the road.
After interviewing several attorneys, Calvin hires Divorce Firm A. The decision was in part based on finances. Divorce Firm A, unlike Divorce Firm B, has a lower hourly rate. The retainer deposits are the same and, to Calvin, the quality of the two firms is comparable. As such, Calvin’s retainer with Divorce Firm A will get him further and the total cost of his case will conceivably be lower. Firm B’s rate would eat away at Calvin’s ability to set aside money. However, he can afford Firm A’s rates at his current lifestyle.
Calvin’s case becomes slightly contested and there is more litigation and negotiation than expected. He’s frustrated that it can’t be over faster, but is happy with his choice of Firm A and is glad he’s paying a lower rate for the representation.
A few months into Calvin’s case, he’s contacted by Divorce Firm A and is notified that all professionals in the firm have undergone a rate increase. He is reminded that his retainer agreement permits the firm to change its hourly rates at any time. Firm A is now slightly more expensive than Firm B.
Calvin really has two choices: either he pays the higher rate or he doesn’t. The choices break down as follows:
- Fire Divorce Firm A and hire Divorce Firm B.
- The benefit is that Calvin has locked in the lower of the two rates by switching firms, although Firm B is still higher than Firm A’s initial rates.
- The downside is that Divorce Firm A knows the case and has developed a working relationship with Calvin. The change won’t irreparably harm Calvin, but it will slow down the case as the new attorneys get up to speed and there is no guarantee that he’ll be as happy with another firm’s work.
- Further, Firm B’s rates still prevent Calvin from setting aside as much money as he’d like. If given the opportunity to do it over again, Calvin very likely would have searched for another option or pursued more out-of-court options.
- Pay Firm A the higher rate.
- The benefit is continuity in representation and avoiding the transaction costs and burden of changing attorneys mid-case.
- The downside is that Calvin may have less money to save for his kids’ college tuition and to set aside for retirement. This is exactly the harm Calvin was looking to avoid when he hired Firm A.
Neither option is appealing. Each requires Calvin to break the budget he set up.
What could Calvin have done to avoid this outcome? He could have thoroughly read the retainer agreement.
Don’t Agree To Rate Changes
At least in Illinois, there is no requirement that a client must permit a firm to change its rates during representation. It is absolutely up to the client.
It’s hard for me to justify rate changes in the middle of a divorce case. We’re not talking about an ongoing relationship that will last for several years (it is very rare for a divorce to take more than 2 years, which is already on the long-end).
Rate changes in the middle of a case seem like a money-grab to me. I’m happy to be corrected on this point, but if I had to give advice to Calvin, it would be this: never sign a retainer agreement that permits a rate-change mid-case unless you are absolutely comfortable with that idea.