In Defense of the Billable Hour: A Monitoring Theory of Law Firm Fees

Abstract

Critics deride the billable hour as oppressive and inefficient, incentivizing lawyers to waste time in order to inflate their fees. This Article presents a novel argument in the billable hour’s favor: clients use it to monitor their lawyers’ efforts, thereby mitigating the principal-agent problems that plague alternative fee arrangements. Prior literature has suggested that law firms bill by the hour because they cannot bear the risk of cost overruns. This Article argues that this perspective is both theoretically and empirically shaky, and demonstrates through an analysis of historical and contemporary practice that monitoring best explains the popularity of the billable hour.

Keywords: Billable hour, alternative fee arrangements, law firms, legal profession, agency theory, law & history, law & economics