A recent Legal Intelligencer story, “Associates May Have Closer Eye on How They Are Billing Out,” reports that hourly rates can be a moving target as clients negotiate down firms' published rates, but in a ­low-demand era where lawyers need every dollar they can bring in, it seems associates are the ones troubled lately with how rates are set.

A recent lawsuit and a disciplinary action from last year both lifted the hood on how law firms price their talent and how it may differ internally from what the public and clients are told.

The question becomes whether clients and associates should have any say on law firms' profitability models.  Some firms and consultants have suggested not, but others have noted that any attorney whose compensation is in part tied to their billable rate should be aware of what they are charged out at and what a client actually pays.

For former Obermayer Rebmann Maxwell & Hippel associate Ryan Leonard, the difference ­between the rate he was charged to the client and the rate he was given credit for internally meant him missing out on bonuses that were largely tied to profitability, according to a lawsuit he filed against the firm.

In the suit, filed in the Philadelphia Court of Common Pleas, Leonard alleged the firm charged and collected from the client a flat, blended hourly rate for work performed by any of the firm's timekeepers.  But when the firm allocated that time into the system, it allegedly made associates' rates lower in some instances and made partners' rates higher.  The firm paid out bonuses based on the attorneys' hours times their hourly rate.  If that figure was two-and-a-half times more than their annual salary, a bonus was earned, Leonard alleged.  By reducing the hourly rate, the chances for bonuses were decreased for some associates and increased for some partners, he alleged.  He said this practice was not disclosed to the associates.

For its part, according to Leonard's ­complaint, Obermayer Rebmann management allegedly told Leonard that how it priced associates internally was the firm's business.  The firm is not commenting on the suit.

James Cotterman, a principal with Altman Weil who focuses on law firm compensation models, said law firms will often write down associate or paralegal time if the firm determines certain work shouldn't be charged to the client.  But he said it should be done for a reason and those reasons should be communicated to the lawyer as a teaching moment.

Cotterman further noted that if there is a write-down for whatever reason, the client should be the beneficiary by paying for fewer hours.  If a firm changes the rates after the fact rather than the hours, that wouldn't benefit the client, but only the partners, Cotterman said.

Such a scenario could be driven, in part, Cotterman noted, by an industrywide problem of partner overcapacity, as was shown in Altman Weil's Law Firms in Transition survey published this week.  As partners look to build up anemic hours and profitability, there may be more of a desire to find ways to do that.

"The partners know they are under more scrutiny now than they were 20 years ago," Cotterman said of the industry. "I think it's a significant issue, overcapacity."  But in some respects, the way firms charge rates comes down to the simple business proposition of charging more than your cost in order to make a profit, Cotterman noted.

Last year, a Drinker Biddle & Reath contract lawyer faced attorney discipline charges for padding the number of hours he worked.  While all agreed the activity was clearly improper, his filings with the ­disciplinary board gave some insight into how contract lawyers are paid out.

When Benjamin Hart Perkel worked at Drinker Biddle from 2011 through 2012, he was paid $40 an hour for document review work and charged out to a client at $245 an hour.  Some called that 513 percent markup "stratospheric," while others said, if the client agreed to it, then so be it.  The firm said it wasn't a markup, but rather, was representative of the overhead costs a large firm endures.

Tom Sager, the former general counsel of E.I. du Pont de Nemours & Co. who spearheaded the DuPont Legal Model, said last year that he tried to separate contract attorney work out from other portions of a matter because he wanted to avoid the markup.  And Chicago-based Patrick Lamb, a former Big Law attorney who became disenchanted with the large-firm business model and created his own firm, Valorem Law Group, said last year that the markup was "stratospheric."  He said contract lawyers should come at a pass-through rate with perhaps a small markup.  And other consultants said clients could quickly figure out they could get that type of work more cheaply.

As for the contract attorney's say in what he was charged out, Cotterman said it depends on how his contract with the firm was structured.  "I'm not sure he has a right to know what he is being charged to a client," Cotterman said, unless the lawyer's compensation is based on a percentage of the rate he charges.

But if the attorney agreed to work for a hourly rate, then the lawyer can only attempt to renegotiate with the firm, Cotterman said.  The lawyer could cite to the rate he is being charged out at and argue that his value is clearly higher than what he is being paid.  The lawyer then has the choice to leave if he feels he is being underpaid in that situation, Cotterman said.

Regardless of the scenario, if compensation is somehow tied to hourly rates, ­associates should be informed and have the ability to ask questions, Cotterman said.  "I think there will be more scrutiny," Cotterman said.

Lawyers at all levels, particularly in flat-fee situations, need to know the cost of doing business.  "If a compensation program is tied to metrics of raw dollars collected, the things that affect that are time, price and ­realization," Cotterman said.  Attorneys "need to know what is going on there."  If lawyers don't know what they are being charged out at, they can't know what their income potential could be, he said.