Blended Rates What's in the Mix?
Hourly billing is the most common practice among attorneys. At large firms, though, the top partners may charge upwards of $1,000 per hour, which can seem pricey even to Fortune 500 companies. “Blended rate” billing came into being as an enticing alternative to simply billing the client at each attorney’s usual rate. The perceived advantage was in giving the client access to the high-priced attorney at a huge discount. It also was seen as a way to keep the total number of hours worked by all the attorneys down.
Blended-rate billing is supposed to work like this: Say a junior associate normally bills at $200 an hour, a mid-level attorney bills at $500 an hour, and the much-sought-after partner bills at $1,000 an hour. The blended rate for all three might be $566 (the average of the three rates). Or the blended rate might be even lower, perhaps $400 an hour, in recognition that the junior associate is likely to spend the most time on the “grunt work” for a given case. In the latter example, for every hour that the mid-level attorney works, the client gets a discount of $100. For every hour the $1,000-an-hour partner works, the client gets a $600 discount.
But lower billing rates do not always translate into better work product or even cost savings. By way of example, outside the big firm context: say one attorney offers services at only $175 an hour, while another attorney requires $400 an hour. It may turn out that the $175-an-hour attorney charges a minimum one-tenth of an hour for every single one-liner email he reads, while the $400-an-hour attorney doesn’t even charge for that sort of “work,” which may only take 30 seconds in reality and involve no lawyerly analytical skills.
A slew of $17.50 and $30 charges can make the $175-an-hour attorney more expensive than the $400-an-hour attorney to get the same job done. In fact, conceivably, the $175-an-hour attorney could charge $350 for what amounts to little more than 10 minutes’ time, a rate far exceeding that of the $1,000-an-hour attorney, for the “work” performed. If you have ever hired a supposedly cut-rate attorney and, after reviewing the invoice, wondered how the attorney found time to do anything but document his time, then you know that this is not necessarily an exaggeration.
Turning back to the blended rate model: Does the client seeking the $1,000-an-hour attorney’s expertise at a huge discount really get that benefit? There’s no guarantee. It really depends on a level of trust between the client and the attorney. The incentive, from a purely financial perspective, though, is for the $1,000 partner to have as much work as possible done by junior attorneys with less experience, less ability to do the work efficiently, and less-developed judgment. The partner has no immediate financial incentive to spend time on a case for which he is billed at $600 less than usual. Indeed, he may even be less inclined to assign the mid-level associate much of the work at the $100-an-hour discount, depending on the profitability metrics the firm uses when determining the partners’ compensation.
This aspect of blended-rate billing was highlighted in SEC v. Byers (2008). In Byers, the SEC had brought a case against alleged perpetrators of a Ponzi scheme involving Wextrust and affiliated companies. A receiver was appointed to run the companies and to try to recover assets for the benefit of the investors who had been defrauded. The receiver hired well-respected law firm Dewey LeBoeuf to perform legal services. Dewey partners ordinarily charged $850 to $950 an hour, but for this matter they offered to use a blended rate capped at $550 an hour. Alternatively, they offered to discount their usual rates by 20 percent or more. Nevertheless, somehow, within 20 days, the firm racked up $2,147,666 in fees.
In disapproving of Dewey’s request for $2 million-plus in fees, the Byers court noted that, in similar cases, firms had sought discounted fees of $300 to $525 for partners. Even with the discount Dewey claimed, Dewey was still seeking, for example, “ $605 for three associates—who billed more than 481 hours among them—who graduated from law school in 2002” (six years earlier).
Dewey also claimed that, although it offered a blended rate cap of $550 an hour, the total it actually sought amounted to $478 an hour as a blended rate. The Byers court was not impressed. Instead, it found: “The $478 rate … is illusory, as it includes time billed by summer associates, paralegals, and litigation support clerks. In fact, the $478 blended rate for legal work reflects no discount at all.”
None of this is to say that blended-rate arrangements are always or even all too commonly used to inflate the rates a firm can charge for less-experienced and less efficient junior associates. Since blended rates are usually only offered to high-volume clients with multiple matters, such sophisticated clients should be able to gauge whether they are getting the bargain they thought they were and whether the higher-priced attorneys are spending as much time on their matters as they had expected.