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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. This raises questions about the future of legal billing and if we are approaching a true paradigm shift from $$$ x time.

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).

Determining the reasonableness of fees

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.

On one hand, charging clients for attorney time when a significant portion of the work was AI-assisted is likely overcharging. On the other hand, compensating lawyers solely for the cost of using AI tools would undervalue their expertise in guiding, refining, and validating the AI’s output.

In one of the few ethical opinions that provide AI guidance to lawyers to date, the Florida Bar Ethics Opinion 24-1 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. If a lawyer is unable to determine the actual cost associated with a particular client’s matter, the lawyer may not ethically prorate the periodic charges of the generative AI and instead should account for those charges as overhead. Finally, while a lawyer may charge a client for the reasonable time spent for case-specific research and drafting when using generative AI, the lawyer should be careful not to charge for the time spent developing minimal competence in the use of generative AI.

The DC Bar provided additional guidance in its Ethics Opinion 388, “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. Shortly thereafter, a second client happens to ask the same legal question. 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. As discussed above, the reasonable expense of the GAI itself may be billed as an expense item if the lawyer’s agreement with the client permits the lawyer to bill for such expenses.

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.

Importantly, law firms and solo practitioners must communicate these practices with clients, preferably at the onset of representation.

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.

The death of the billable hour has been greatly exaggerated many times before. But as AI advances rapidly, we may be approaching a true inflection point. Law firms that acknowledge and pivot with this evolution are poised to set the standards for tomorrow’s legal industry and fee models.

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