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The billable hour is a persistent topic, arguably because it’s so central to the business of law and indeed the larger business community.
While there is strong case to suggest alternative fee arrangements (AFAs) have sustainable traction there’s also evidence that significant current trends in legal pricing are based in some part on the billable hour.
The billable hour persists, as Paul M. Barrett wrote in Bloomberg Business, because “It gives clients some basis for auditing how they’re being billed, and it rewards richly those attorneys who find ways to keep the meter running.”
There are plenty of cynics on AFAs and Mr. Barrett offers a view point the longevity of the billable hour – but what of its origins?
Sean Braswell, a senior writer for OZY, traces it to the U.S. Supreme Court case Goldfarb v. Virginia State Bar.
Throughout the 19th century, legal fees in the U.S. were largely capped by state law with the costs of litigation footed by the losing party. More adventuresome billing methods, including retainers and contingency fees, began to crop up in the early 20th century. But, as litigation, corporate transactions and other legal work grew more complicated and expensive, many lawyers found themselves working harder and longer for the same standardized fee and, perhaps more importantly, falling well behind the pay scales of fellow professionals such as doctors and dentists.
Mr. Braswell suggests it’s around this time the billable hour began to gain traction – and with striking parallels for today’s arguments for AFAs. He cites an ABA publication published in 1958 – The 1958 Lawyer and His 1938 Dollar – that he says attributes the economic woes of lawyers to poor business practices. The “minimum fee schedule was just good business” and lawyers that did not follow the schedule could face disciplinary action.
Yet the minimum fee structure stuck until it was challenged and struck in 1975 – the same year “Wheel of Fortune” debuted on TV – and paved the way for standardizing the billable hour:
In 1971, the Goldfarbs had contracted to purchase a home in Reston, Virginia, and as part of securing a mortgage, were required to hire a local attorney to conduct a title examination of the property. To their horror, and after calls to several dozen attorneys in Northern Virginia, the Goldfarbs discovered that the minimum-fee system made bargain hunting for legal services a rather pointless exercise.
Four years and no doubt substantial legal fees later, the U.S. Supreme Court agreed, ruling in Goldfarb v. Virginia State Bar that minimum-fee schedules violated federal antitrust law. Many law firms had heeded the ABA’s clarion call before Goldfarb and started billing by the hour (and keeping better records), but when the Supreme Court kicked the minimum fee crutch out from under the ailing profession, it was clear that the billable hour was the way forward, and by the end of the decade the system was firmly entrenched.
Invention and reinvention in business is as much a part of pricing as it is commercializing new products or services. Even a moment to think conjures up a dramatic evolution in related payment methods – coins, paper, credit, online payments, bitcoins – and fee structures – hourly rates, flat fees, contingencies, discounts, retainers, capped fees, and hybrids among others.
It’s useful to consider where the industry has been in the context of pondering its future. The entire story is worth reading for the context and detail: The Virginia Couple Who Gave Birth to the Billable Hour.
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Postscript 6/23/15: A reader pointed out another take on the origin of the billable hour — The (modern) father of the billable hour and timesheet — that proved to be an interesting read. One aspect seem consistent in both articles: the driving force in both AFAs and the 1975 SCOTUS decision, appears to be the buyer of legal services.
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Photo credit: Flickr, Ralf (CC BY-SA 2.0)