The ABA’s ethics advisory on attorney billing creates understandable limits on billable-hour fees but adds potentially troubling limits on the alternative
It was only a matter of time before the American Bar Association (ABA) Standing Committee on Ethics and Professional Responsibility weighed in on the potential ethical issues related to generative AI (GenAI). By now, many practitioners have now read the ABA’s most significant contribution, Formal Opinion 512. (In fact, the Thomson Reuters Institute included some discussion of it in our annual Report on the State of the US Legal Market.)
In the opinion, the ABA addressed several potentially thorny ethical issues, including how GenAI impacts on lawyers’ duties of competence, confidentiality, communication, candor toward a tribunal, and supervisory responsibility. Indeed, most of the guidance in the opinion could probably be most easily paraphrased as: Don’t forget what it means to be an ethical lawyer, even if advanced technology is involved. This is all relatively straightforward.
More concerning in Formal Opinion 512, however, is the ABA’s discussion regarding lawyers’ fees.
What Formal Opinion 512 says about attorneys’ hourly fees
The ABA relies on a prior opinion that I’ve cited before in another context to give guidance to the current discussion. Formal Opinion 512 reads in part, that GenAI “tools may provide lawyers with a faster and more efficient way to render legal services to their clients, but lawyers who bill clients an hourly rate for time spent on a matter must bill for their actual time. ABA Formal Ethics Opinion 93-379 explained, ‘the lawyer who has agreed to bill on the basis of hours expended does not fulfill her ethical duty if she bills the client for more time than she has actually expended on the client’s behalf.’”
Formal Opinion 512 then goes on to explain that if a lawyer using GenAI only spends 15 minutes to draft a pleading, that lawyer may only charge for that 15-minute period, plus whatever time the lawyer spends reviewing the draft.
Many who have analyzed Formal Opinion 512 have gravitated toward this language: “The ‘goal should be solely to compensate the lawyer fully for time reasonably expended, an approach that if followed will not take advantage of the client.’” (Quoting Formal Opinion 93-379.) However, there is an important caveat. Formal Opinion 512 also contains the proviso that such a billing practice must be followed, “if a lawyer has agreed to charge the client on [an hourly] basis[.]” (Emphasis added, and again quoting Formal Opinion 93-379.)
The importance of that caveat should not be overlooked.
Leaving room for alternatives
That critical word “if” included in the ABA’s caveat clearly leaves room for the contemplation of alternative fee arrangements (AFAs). The Thomson Reuters Institute has written several times before about the strong likelihood of increased reliance on AFAs in an AI-driven legal future. We’ve even dedicated a podcast episode to the question.
There are, however, potential pitfalls in the ABA’s opinion. First, even when a lawyer and client have agreed at the outset of a legal matter to engage in a fixed-fee billing arrangement and have set an agreed-upon price as sophisticated, arms-length negotiators, the ABA still applies the requirement of “reasonableness.” Indeed, Formal Opinion 512 says: “if using a [GenAI] tool enables a lawyer to complete tasks much more quickly than without the tool, it may be unreasonable under Rule 1.5 for the lawyer to charge the same flat fee when using the [GenAI] tool as when not using it.”
This creates a potentially massive loophole and frankly, an opportunity for after-the-fact regrets.
Hidden in the ABA’s logic is the assumption that the original negotiation did not contemplate that GenAI would be used in the delivery of the legal service. This is, by no means, a safe assumption. By contrast, there should be a presumption that any lawyer who has access to GenAI or other advanced technology will use that technology in representing the client — some would argue that the lawyer even has an obligation to do so. To do otherwise, in fact, might risk placing the client at an unknowing disadvantage in an adversarial proceeding. It would be the equivalent of choosing to do manual legal research rather than using electronic research tools — an outcome the ABA would strongly discourage.
The language of Formal Opinion 512 reads as it does, however, and that leaves open the possibility that clients may experience a form of buyers’ remorse, seeking to amend what was previously viewed as a reasonable fixed fee for an otherwise favorable matter outcome simply because the lawyer met another of the client’s stated goals — a speedy resolution to the matter. Such an outcome would do grave injury to the current push in the legal marketplace toward further innovation.
The fallacy of the billable hour
Formal Opinion 512 also contains another subtle logical flaw. It presumes that the best benchmark for the “reasonableness” of the fees charged by a lawyer is the amount of time the lawyer took to complete the task. Indeed, it presumes that a task completed “more quickly” using GenAI might not be worth the same fixed fee as the same task completed without GenAI.
However, this statement perpetuates the belief that the key measure of a legal outcome’s worth is the time taken to get there rather than the inherent value of the outcome in its own right. To flip the paradigm on its head, the opinion’s logic would suggest that a lawyer who takes five times as long to complete a basic document, such as a will, by handwriting it would have a more reasonable claim to a much larger fee than a lawyer who completed an identical piece of work product but did so more quickly by leveraging the best technology available.
It seems dubious that this would be the outcome the Opinion intends; but if that is not the intended result, then lawyers could easily find themselves in a heads I win, tails you lose situation in which pricing and fees — as well as innovation and service delivery improvements — find themselves in a race to the bottom.
So, what can be done?
Formal Opinion 512 makes clear that the basis for a fee “must be communicated before… commencing the representation, preferably in writing… [B]efore charging the client for the use of the [GenAI] tools or services, the lawyer must explain the basis for the charge[.]”
Law firms that are moving toward adoption of GenAI technologies would do well to include in their engagements that the firm intends to use the most advanced technology available to the greatest extent the firm’s lawyers are competently able; and that clients should presume as much, unless the client specifically instructs the firm otherwise. This is in no way intended to be the actual language used, nor is it legal advice, but it is the path most clearly indicated by the language of Formal Opinion 512.
Lawyers and clients should also seek to be quite clear with each other about exactly what work is to be performed and, as clearly as practicable, how. This will avoid any potential misunderstandings that could call the reasonableness of an otherwise agreeable fee into question.
There is also a rising challenge carried within the words of Formal Opinion 512: The more closely the value of legal work remains tied to the amount of time it takes to produce, the longer it will be before the legal industry undergoes a needed shift toward favoring the client’s interests.
Today, value — as expressed by the reasonableness of the fee charged — lies not in how closely the outcome aligns with the interests of the client; rather, by the very terms of Formal Opinion 512, reasonableness is defined by how long a lawyer takes to accomplish a task. It’s time for that to change.
You can find out more about how GenAI is transforming the legal industry here
