The ABA’s approach set out in Formal Opinion 512, while rooted in traditional ethics, appears disconnected from some of the significant market realities facing law firms today, including the increasing departure from billable hour models and the financial implications of adopting AI technologies.

We also think it is inconsistent with the ABA's long-standing position on legal fees, particularly in relation to agreements between informed clients and law firms, reflects the notion that informed consent plays a key role in determining the reasonableness of fees.

According to the ABA's interpretation of Model Rule 1.5, if a fee arrangement is mutually agreed upon by both an informed client and an informed lawyer, and the client understands the nature and basis of the fee, it is generally presumed to be reasonable. This perspective allows flexibility for custom fee agreements, provided they align with the ethical standards of fairness and transparency, such as ensuring that fees are not excessive and are commensurate with the services rendered

The Move Away from Billable Hours

One of the key aspects of the ABA’s guidance is its insistence that lawyers must ensure their fees remain "reasonable" under Model Rule 1.5, even when AI tools expedite legal work.

For instance, if a generative AI tool completes document review or legal research in 15 minutes, when it previously would have taken hours, lawyers are ethically bound to bill only for the time actually spent. On the surface, this guidance promotes fairness by preventing clients from being charged for time that AI has effectively eliminated.

However, this perspective assumes that billable hours remain the dominant billing model, which is increasingly not the case. Many law firms are moving away from billable hours toward alternative fee arrangements (AFAs), such as flat fees, subscription services, or value-based pricing.

These models focus less on the time spent on a task and more on the value delivered to the client. By narrowly focusing on the billable hour standard, the ABA's guidance seems somewhat outdated and disconnected from the growing shift in legal pricing structures.

AFAs prioritize outcomes and client satisfaction rather than tracking every minute spent on a matter. Under these arrangements, the use of AI may still provide immense value, even if it reduces the time spent on a task. A flat fee arrangement, for example, reflects the service delivered, not the time expended.

The ABA’s insistence on only billing for time spent when using AI ignores this evolving market practice and risks discouraging the adoption of AI tools that could otherwise drive efficiency and innovation in legal services.

The Economic Realities of AI Investments

Another concern is the ABA’s stance on billing for AI-related costs. The guidance allows law firms to charge clients for AI-related disbursements, such as standalone tools for document review, but prohibits charging for general overhead costs like AI tools integrated into standard office software. The problem with this distinction is that it overlooks the significant investments that law firms are making in AI infrastructure.

Law firms must invest heavily in acquiring, developing, and maintaining AI tools as well as training users—investments that are often substantial. These tools are not simply add-ons; they are becoming integral parts of the legal workflow. The ABA’s guidance seems to ignore this reality, creating a tension between the need for firms to recover a return on their AI investments and the ethical restrictions on billing for these technologies.

The firm’s capital expenditures in AI should be recoverable through client fees, much like any other advanced technology that enhances the quality and speed of legal services.

By allowing firms to charge only for certain AI-related disbursements, the ABA risks undermining the incentives for firms to continue investing in cutting-edge technologies. If firms cannot recover their investment in AI, they may be less willing to adopt such tools, which ultimately hampers innovation in the legal industry.

Clients, too, benefit from AI’s increased accuracy and efficiency, and it seems only fair that firms be able to pass on some of these costs to the client—not in an abusive manner, but in recognition of the value added by these tools.

An Opportunity for Broader Engagement

While the ABA's position reflects important ethical concerns, it misses an opportunity to engage more meaningfully with the market dynamics shaping modern law practice. Rather than simply reinforcing traditional billing models, the ABA could have provided guidance on how AI use intersects with newer pricing models like AFAs, offering firms and clients clearer paths toward balancing technological advancement with ethical billing practices.

There is room for a more nuanced approach—one that recognizes the legitimacy of law firms’ needs to recover the costs of innovation while still protecting clients from excessive fees.

For example, the ABA could offer clearer guidelines on how firms can justify the value of AI-enhanced services to clients, beyond the outdated billable hour paradigm. By supporting a more flexible approach to billing, the ABA would encourage firms to embrace AI tools without compromising ethical standards.

Conclusion: Balancing Ethics with Innovation

The ABA’s guidance on generative AI is an important step in addressing the ethical implications of these emerging technologies in legal practice. However, it is crucial that this guidance evolves to reflect the realities of the modern legal marketplace, where alternative fee arrangements and significant investments in technology are becoming the norm.

The legal profession stands at the intersection of tradition and innovation. If AI is to enhance, rather than hinder, the practice of law, regulatory bodies like the ABA must provide guidance that allows firms to integrate these tools effectively, recover their investments, and continue delivering value to clients—all while upholding the core ethical principles that define the profession.

By adapting its stance to accommodate these realities, the ABA could foster a legal environment where technology and ethics coexist in a way that benefits both law firms and their clients.