Reverse Auctions: Racing to the Bottom for Lawyers

A story in the August on-line ABA Journal* about “reverse auctions” in which a company will post a case online and then award the work to the lowest bidder gives yet another side to alternative fee agreements (AFA). The story line was about how law firms were chafing against the idea of having to engage in reverse auctions.

Reverse auctions are nothing new. I recall several years ago a big insurer engaged in reverse auctions for cases. Most defense attorneys found it to be rather unseemly. But the company nevertheless found any number of able defense attorneys who bid for the work.

That insurers or corporations would engage in reverse auctions points up to two facts of life. One is that many users of legal services are trying to find ways to staunch ever rising legal costs. Two is that the legal profession is such a crowded profession that, protests notwithstanding, there is usually no trouble at all finding any number of qualified lawyers willing to take on work at almost any cost.

But reverse auctions also serve to underscore the penultimate problem with most AFA which is that the clients and the lawyers have diametrically opposing reasons for entering into them. When lawyers bring up the subject of AFA, it is usually with the idea of possibly making more money than they could than by doing straight hourly billing. And when insurers bring up the subject of AFA, it is usually with the idea of possibly saving money.  While reverse auctions may help an insurer reach its goal, it does not at all help lawyers meet their goal.

My experience as an in-house litigation manager taught me that trying to set up a workable AFA is a difficult task at best.  (See sidebar comment on why AFA may not be working.)   But, one thing is very clear.   For any AFA – including flat fee agreements – to even have a chance of working out, it needs to be a win-win situation for both parties. In my view finding a true win-win situation does not start out with a race to the bottom.

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