February 9, 2016
Determining a Reasonable Fee
There is a very real difference between spending money to obtain a professional’s time and spending money to obtain value produced by a professional for your business.
The Tennessee Rules of Professional Responsibility — specifically Rule 1.5, which deals with fees — provide somewhat ambiguous guidelines for what constitutes a “reasonable fee.” Rule 1.5 states, in relevant part:
“A lawyer shall not make an agreement for, charge, or collect an unreasonable fee or an unreasonable amount for expenses. The factors to be considered in determining the reasonableness of a fee include the following:
- the time and labor required, the novelty and difficulty of the questions involved, and the skill requisite to perform the legal service properly;
- the likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the lawyer;
- the fee customarily charged in the locality for similar legal services;
- the amount involved and the results obtained;
- the time limitations imposed by the client or by the circumstances;
- the nature and length of the professional relationship with the client;
- the experience, reputation, and ability of the lawyer or lawyers performing the services;
- whether the fee is fixed or contingent;
- prior advertisements or statements by the lawyer with respect to the fees the lawyer charges; and
- whether the fee agreement is in writing.”
“Question: Why do lawyers love multifactor tests? Answer: They generate uncertainty, which generates disputes, which in turn generate fees.”1 So, with ten factors to consider, what makes a fee reasonable? According to Publius Syrus, “Everything is worth what its purchaser will pay for it.” These days, it’s a little more complicated than that, I’m afraid.
I believe what makes a fee reasonable is that each person believes they are receiving something they value more than what they are giving up in order to get it. The client believes the services are more valuable than the money they are paying for them. The lawyer believes the money is more valuable than his time, skill, legal acumen, etc. Ultimately, both parties are made wealthier by trading than they would have been by not trading. Under such circumstances, the amount of the fee is always reasonable.
Don’t Be Afraid to Negotiate
I like to haggle. I got that from my grandfather, a savvy businessman who raised six children, put each of his kids through college, built an optometry practice and real estate business, and traveled the world. My Granddad did all this despite being on his own from age 15, when he started working in a sawmill. He worked hard, drove a cab to put himself through optometry school, and then went back to small-town West Virginia, where he started his family. Granddad loved the art of the deal, and deal-making is what made him a successful entrepreneur.
So, I love people that haggle. It’s in my blood. Don’t be afraid to negotiate, when it comes to legal fees. Haggle respectfully, though. Telling a service provider they need to cut their fee in half isn’t negotiating; it’s insulting. Service providers often have slimmer margins than providers of goods, because their labor costs are high.
In my opinion, negotiating within a margin of as much as one-third of the asking price for services is generally reasonable. If someone asked me to come off my prices by 33%, and if I decided to engage in some negotiation with them, they might end up with a 5%, 10% or even 15% discount, depending on the other terms and conditions of our agreement. They could pay full price, but receive some additional services at no additional charge (a “value add”). It all depends on the work, the availability of resources, and those ten factors listed above. Remember, (1) don’t be afraid, and (2) be respectful, not insulting.
Everything is worth what its purchaser will pay for it, and everything is negotiable.
- M. Todd Henderson, Justifying Jones, 77 U. Chi. L. Rev. 1032 (2010)
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