Be Reasonable, People! AI’s Impact on Legal Fees
For decades, legal industry pundits have proclaimed the imminent demise of the billable hour. Yet despite numerous challenges and alternatives, it has stubbornly remained the dominant pricing model for most law firms. However, the rapid emergence of artificial intelligence (AI) and generative AI technologies is perhaps the most significant threat to the billable hour’s reign we have seen.
As these tools become integrated into legal practice, they have the potential to dramatically boost efficiency and productivity in ways that clash with traditional time-based billing. Let’s break down the key considerations and ethical implications of AI’s impact on legal fees.
The AI Efficiency Paradox
The “AI efficiency paradox” lies at the heart of this issue, i.e., as AI becomes better at automating legal tasks it becomes less justifiable to bill clients based on time spent.
Generative AI can now draft contracts, conduct legal research, analyze documents, and even generate entire memos or briefs significantly faster than a human lawyer. If an AI tool can produce a first draft of a 20-page contract in minutes, how can a firm justify billing dozens of associate hours for that same task?
This creates a conundrum for law firms. Adopting AI can boost efficiency and allow firms to take on more matters. However, this shift could potentially impact billable hours and revenue for firms that primarily use time-based charging models.
In addition, firms that cling too tightly to the billable hour may be disincentivized from fully leveraging AI, putting them at a competitive disadvantage. For example, clients may soon demand work product and outcomes at a cost that is set by firms using AI (more on this later).
Reasonableness Regardless of Fee or Expense Type
Integrating AI into legal work also raises ethical questions about billing practices. Illinois Rule of Professional Conduct (IRPC) 1.5(a) provides that “A lawyer shall not make an agreement for, charge, or collect an unreasonable fee or an unreasonable amount for expenses.” The Rule outlines eight factors lawyers should use to analyze the reasonableness of fees based on the facts and circumstances under which they incurred.
Even though the legal profession has used technology to increase efficiency for years, this IRPC Rule 1.5 analysis has primarily examined the reasonableness of human time spent on a task. For example, “Is 5.5 hours of associate-level work reasonable for this contract review and edits?”
But how do you determine the reasonableness of a fee when it is a hybrid of human expertise and AI machine-generated content? The crux of the matter lies in striking a balance that’s fair to the client and the attorney.
In one of the few ethical opinions that provide AI guidance to lawyers to date, the Florida Bar Ethics Opinion 24-1 (January, 2024) discusses costs and fees:
Regarding costs, a lawyer may only ethically charge a client for the actual costs incurred on the individual client’s behalf and must not duplicate charges that are already accounted for in the lawyer’s overhead. [cites omitted]
Regarding fees, a lawyer may not ethically engage in any billing practices that duplicate charges or that falsely inflate the lawyer’s billable hours. Though generative AI programs may make a lawyer’s work more efficient, this increase in efficiency must not result in falsely inflated claims of time. In the alternative, lawyers may want to consider adopting contingent fee arrangements or flat billing rates for specific services so that the benefits of increased efficiency accrue to the lawyer and client alike. …
In the context of generative AI, these standards require a lawyer to inform a client, preferably in writing, of the lawyer’s intent to charge a client the actual cost of using generative AI. In all instances, the lawyer must ensure that the charges are reasonable and are not duplicative…
The DC Bar provided additional guidance in its Ethics Opinion 388 (April, 2024), “Attorney’s Use of Generative Artificial Intelligence in Client Matters,” by making a comparison to the use and billing of reused work product:
A familiar variation of this issue occurs when a lawyer expends considerable time and effort to prepare a detailed legal research memo for one client and, to that first client, considerable expense based on the lawyer’s hourly rate. . . It will take far less time to adapt the first memorandum for the second client’s use than it took to create the memorandum in the first place. While the lawyer may believe it is not fair or reasonable to charge the second client only a fraction of what the first client paid for such a valuable piece of legal research, that is what is required if the lawyer’s billing arrangement with the second client is based exclusively on an hourly rate.
The same is true when the use of GAI reduces billable time and the lawyer’s fee agreement with the client is based exclusively on the time the lawyer spends working on the matter. No matter how good or valuable the GAI’s output is, absent a different fee arrangement, the lawyer can only bill for the time the lawyer spent…
Additionally, the last section of ABA’s Formal Opinion 512 (July, 2024) discusses legal fees when lawyers are using generative AI. It points out that the IRPC 1.5(a) factors apply equally when evaluating the reasonableness of charges for generative AI tools when the lawyer and client agree on a flat or contingent fee. Yet, that does not make it de facto reasonable: “A fee charged for which little or no work was performed [whether hourly-based or flat or contingent] is an unreasonable fee.” [citation omitted]
The Opinion goes on to examine the practice of charging the client for an expense due to using generative AI tools. The Opinion states lawyers may agree in advance with the client about the specific rates to be charged, just as it would agree in advance on its legal fees. Whether the expense should be considered a component of overhead or a specialized cost depends on the circumstances.
Balancing Client Expectations with Legal Expertise
Clients, particularly sophisticated corporate clients, are increasingly aware of AI’s potential to streamline legal work. Many are already pushing back against traditional billing practices, demanding that law firms pass on the efficiencies gained through technology. Some forward-thinking law firms are even developing their own AI tools, tailored to their services.
As we navigate this new terrain, law firms and solo practitioners must develop transparent billing practices that reflect the value of their services and use of AI. This may involve creating new billing categories, adjusting hourly rates for AI-assisted work, or developing hybrid billing models that account for human and machine contributions.
Ethical considerations demand that lawyers use AI tools cautiously and always in conjunction with their professional judgment. The “work product” generated by AI should never be accepted without careful review and validation against primary legal sources such as caselaw, statutes, and legislative materials. Importantly, law firms and solo practitioners must communicate these practices with clients, preferably at the onset of representation.
Conclusion
Generative AI tools are rapidly becoming part of a lawyer’s toolkit. However, their use must be accompanied by a thorough understanding of their capabilities, limitations, and ethical implications, particularly concerning confidentiality and billing practices. While these tools may enhance productivity, lawyers must ensure that any efficiency gains are transparently reflected in their billing to clients.
Billing practices should be adjusted to fairly reflect the reduced time and effort that may result from AI assistance, ensuring that clients benefit from the cost savings these tools can provide. Ultimately, the goal should be to leverage AI to increase efficiency and reduce client costs, while fairly compensating attorneys for their irreplaceable human judgment, experience, and accountability.