ABA Connection

It’s Not Just About Money

Keeping Fee Disputes to a Minimum Can Be Key to Reducing Risks of Malpractice Claims and Disciplinary Complaints

Posted May 1, 2004 12:08 PM CDT
By Jill Schachner Chanen

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Debra Kelly thought she had all her bases covered.

Kelly, a lawyer in Trumbull, Conn., had followed every good business practice on fees she ever learned. Most important, she had the client sign a fee agreement and de­liver a hefty retainer at the beginning of the case.

But the pace of her client’s divorce and child custody dispute became dizzying. The numerous hearings quickly depleted the retainer and, although the client did occasionally restock the escrow account, Kelly soon found her­self falling into a deepening sinkhole filled with red ink.

Before she knew it, Kelly’s client owed her thousands of dollars in unpaid fees, and the case was too far along for her to withdraw. Kelly continued to represent the client right up until he and his wife reconciled.

The client couldn’t have been happier with the outcome. His thanks to her, however, was an unpaid bill for $6,000.

Fees are both the lifeblood and the bane of every lawyer’s existence. It’s wonderful to be paid for your work, of course, but at the end of some cases, lawyers might be wondering whether the fee was worth all the trouble. Dis­putes over fees can be the difference between a satisfied client who serves as a referral source and a bitter one who files a malpractice suit or disciplinary complaint.

Lisa G. Lerman, a law professor at The Catholic Uni­versity of America in Washington, D.C., cites studies suggesting that as many as two-thirds of all malpractice claims against lawyers originated as counterclaims in lawsuits brought by the lawyers seeking payment of fees.

Little good comes of it when lawyers decide to go after clients for fees, says Heather L. Rosing of San Diego, who defends other lawyers in professional liability cases. “I can’t tell you how many times I’ve seen a lawyer sue for $20,000 to $30,000 in fees and get smacked with a $2 million malpractice suit,” she says. “That is why I am a very big proponent of taking steps up front to prevent [fee disputes].”

Lawyers themselves may be the actual cause of most fee disputes, according to Jay Foonberg, a lawyer in Bev­erly Hills, Calif. He is the co-author, with J. Harris Mor­gan, of How to Draft Bills Clients Rush to Pay (2nd ed. 2003), published by the ABA Section of Law Practice Manage­ment.

The problem, says Foonberg, is that lawyers too often fail to give clients accurate assessments of the cost of han­dling legal matters. “The client has expectations based on what the lawyer said,” he points out. “Then, two months after the trial, the lawyer sends a bill for twice the amount of the estimate, and the client is shocked. Lawyers may have quoted a fee in good faith, but the client does not want to write a blank check. Clients want to know how much it is going to cost.”

But, as every lawyer knows, predicting the final fee can be a difficult proposition, given the number of variables in any legal case. Moreover, clients may be reluctant to pay a fee based on how much time it will take to handle a case.

For that reason, some lawyers are trying to structure fees that reflect the market value of their services rather than the amount of time spent on a case.

“Keeping track of time should be a measure of cost only, not value,” says Mark A. Rob­ertson of Oklahoma City, who co-edited, with fellow Oklahoma City attorney James A. Cal­loway, Winning Alternatives to the Billable Hour, published by the ABA Law Practice Manage­ment Section in 2002. “We only have so much time in the day, and measuring that time by hours makes sense. It is good to know the time we spend on a matter for what it costs the lawyer, but it does not necessarily equate to the value of the services you are delivering to the client.”

Robertson believes that a client will respond more positively to fees that bear some relation to his or her perception of the value of the services provided. One approach is to structure fees based on concepts that better relate to the client’s industry. In representing a real estate developer, for example, Robertson has broken down his work into discrete tasks and then calculated fees based on the square footage of the project. He also has charged flat fees for mandatory annual filings for small corporate clients.

“You are not selling a product,” says Rob­ertson. “You are selling advice and counsel, and the client has to perceive value in it.”

THE ETHICS FACTOR

Guidance offered by professional conduct rules for lawyers tends to be short on specifics. Rule 1.5 (Fees) of the ABA Model Rules of Professional Conduct, which serve as the basis for most state ethics rules for lawyers, mandates, “A lawyer shall not make an agreement for, charge, or collect an unreasonable fee or an unreasonable amount for expenses.”

Rule 1.5 also identifies some of the factors that can determine what is reasonable, including the time, skill and knowledge required to handle the matter; customary fees in the lawyer’s locality; the results obtained; and whether the fee is fixed or contingent. But what it boils down to, says Rosing, is that just about anything can affect whether a fee is or is not reason­able.

“You have to look at the circumstances, including the results obtained, whether the client was informed about how much the lawyer was going to put into the case and other factors,” Rosing maintains. “If you are the solo who takes on the typical personal injury case on a contingency basis, and then takes on a securities litigation matter and charges $500 per hour, that may be considered unconscionable.”

Courts generally have inherent authority to review the reasonableness of any fee, but cases are rare in which hourly fees have been questioned. The exception is cases in which fees are shifted to the losing party by statute, according to William G. Ross, a professor at Samford Uni­versity’s Cumberland School of Law in Birmingham, Ala.

Courts are more likely to scrutinize contingent fees, says Ross. He cites a comment in the Restatement (Third) of the Law Governing Lawyers. The comment states that courts will consider contingent fees to be unreasonable if “there was a high likelihood of substantial recovery by trial or settlement, so that the lawyer bore little risk of nonpayment,” or where “the client’s recovery was likely to be so large that the lawyer’s fee would clearly exceed the sum appropriate to pay for services performed and risks assumed.”

Time increments for which lawyers bill also have come under court scrutiny, says Ross. As billing by the tenth of an hour becomes standard, courts in two recent cases have been critical of the practice of billing in quarter-hour increments as too broad to accurately reflect the amount of time lawyers devote to work on behalf of clients. A ruling by the U.S. District Court for the District of Kansas stated that billing by the quarter-hour is “no longer an accepted practice.” Swisher v. United States, 262 F. Supp. 2d. 1203 (2003). An­other district court described quarter-hour billing in- crements as “inappropriate.” Cowan v. Codelia, 2001 WL 30501 (S.D.N.Y.).

In addition, courts and ethics panels are wary of provisions in fee agreements that ask clients to waive certain rights if they do not pay fees. (See “Choosing What to Keep,” April 2004 ABA Journal, page 34.)

Lawyers also need to be cautious about billing for work recycled from another client. The ABA issued an ethics opinion in 1993 condemning the practice, and some courts are in agreement.

GET IT IN WRITING

One cardinal rule for fees is that they be confirmed in writing. ABA Model Rule 1.5 states that fee information should be “communicated to the client, prefer­ably in writing,” but some states are more explicit in requiring written fee agreements.

But regardless of whether a particular jurisdiction requires written fee agreements, experts say a written fee or retainer agreement covering every new matter makes for good business and risk-management practice.

Rosing of San Diego says the most important thing a fee agreement should contain is a clear statement of the scope of the work that the lawyer is going to perform.

“This is a huge point for malpractice,” she says. “I cannot tell you how many [lawyers facing malpractice claims or disciplinary complaints] I’ve represented who say that they have a fee agreement, but when you look at it, it is not clear what the scope of the work was. The client claims the lawyer was supposed to do one thing, and the lawyer says he did not agree to do that. The language is too general. If you do not limit the scope of the engagement, you are, in my opinion, increasing your exposure.”

On the other hand, fee agreements should be as brief as possible, says Edward Poll of Venice, Calif. Agreements that run much longer than three pages can trigger client complaints that they are too confusing, says Poll, a member of the ABA Law Practice Management Section council and author of a book published by the section, titled Collecting Your Fee: Getting Paid from Intake to Invoice (2002).

Fee agreements also give lawyers a vehicle to screen out potentially problematic clients. Robert A. Zupkus of Denver recently lost a potential new client to another firm when he explained litigation costs that the individual would have to cover up front. The client balked and tried to play Zupkus off a competing lawyer. To Zupkus, the ploy was a clear sign of possible trouble down the road.

“We felt badly about it at the time, but it’s worse when you are $10,000 in the hole,” notes Zupkus, a council member for the ABA’s General Practice, Solo and Small Firm Section, and a member of the association’s Standing Committee on Solo and Small Firm Practitioners (as is Poll).

Darrell Stewart, a solo practitioner in San Antonio, says he still screens potential new clients in the same way he screened new custom­ers when he was a banker. He sees discussions about his retainer agreement as the perfect time to evaluate the client’s ability and willingness to pay for his services by listening to objections and concerns about paying up-front retainers and costs.

Connecticut lawyer Kelly tries to affirm a client’s commitment to hiring her by requiring the client to take the fee agreement home and review it again. Whether the client returns with a signed agreement and a retainer helps Kelly to better assess just how serious the client is about retaining—and paying—her.

SHOWING CLIENTS VALUE

While a written fee agreement can be crucial to avoiding misunderstandings between lawyer and client, it does not necessarily serve as a guarantee that the client will pay the fee. Law practice man­agement experts say that following established billing and collection practices goes a long way toward getting paid. But at many firms, they add, billing and collection systems are practically nonexistent.

“In my malpractice cases, I frequently see attorneys who send out sporadic bills or no bills at all,” notes Rosing.

Sending clients regular fee statements helps emphasize the importance of paying their legal bills. Moreover, frequent billing allows the lawyer to set forth a smaller amount in each statement, which may make it easier for the client to pay and give the client opportunities to ask questions about the fees and related matters more frequently.

Just as important as the frequency of billing, according to experts, is the content of each statement. Years ago, lawyers typically sent out periodic bills describing nothing more than “services rendered” and clients paid them, notes Marvin L. Karp of Cleveland, who chairs the ABA Stand­ing Committee on Ethics and Professional Respon­sibility. Consumers today are less likely to be tolerant of attorneys who use such a vague billing method, says Karp.

Furthermore, courts have disapproved of vague or lump-­sum billing for which little or no detail is provided. One U.S. district court, for instance, substantially reduced the amount of hours to be used as the basis for awarding attorney fees because the billing statements were too vague. Lintz v. American General Finance Inc., 87 F. Supp. 2d 1161 (D. Kan. 2000).

“Lawyers fail to understand that their bill is a marketing tool,” says Poll. “The more you can show the value you provided to the client, you are marketing yourself and what you did for the client. And the client will be happy to pay the bill.”

Poll advises lawyers to explain in plain English what they did for the client and, when possible, to frame the wording in a positive light. Even if a hotly contested child custody dispute was lost, for instance, the lawyer can still use the bill to identify any positive results that were obtained, such as negotiating a visitation schedule that allows the child to spend 53 percent of the time with the client.

Including details about the name of the court and the judge hearing the matter, or the name of opposing counsel with whom the lawyer met, helps the client feel more involved and, as a result, more inclined to pay the bill.

Bullivant Houser Bailey in Portland, Ore., has created an extranet so clients can log in each day to see daily billing details on their matters, says partner Douglas G. Houser. “Availability is key,” says Houser, a past chair of the ABA Section of Tort Trial and Insurance Practice. “Clients love it.”

Zupkus says he believes so strongly in the need to communicate with clients that he sends a cover letter with each bill to explain how a matter has progressed, or why it is in a holding pattern and what will be done to move it forward.

“When bills get sent out, it should not be just a naked bill like Al’s Auto Body,” says Zupkus. “The cover letter is a good communication tool. It lets clients know that we are progressive. And it gives them an opportunity to ask questions so that [the fee] does not build up to an explosion point.”

GET IT DOWN TO A SYSTEM

If the chore of sending out regular bills is problem­atic for many lawyers, then the task of trying to collect unpaid fees is likely to seem like pure torture. But law practice management experts say that, as with billing, collecting unpaid fees can become much easier by establishing and following clear procedures.

Those procedures often break down after lawyers send out bills, says James Calloway, practice management adviser for the Okla­homa Bar Association.

“If you do not set up some sort of objective neutral policy in advance,” says Calloway, “you will have what happens daily in law firms across the country: The billing clerk will tell you that a client did not pay and you will say to put [the bill] on your desk and you’ll call. Then you don’t.”

Keith B. McLennan of Collegeville, Pa., meets twice a month with his partners to review accounts receivable and plan collection actions. Typically, the process starts with a call to the client, says McLennan, who chairs the Busi­ness Law Group in the ABA’s General Practice Section. He personally calls his clients to remind them about unpaid fees.

Karp concurs that the unpleasant task of calling clients about unpaid fees is best performed by the lawyer. “It is more effective if the lawyer calls because if clients have some concerns about the work, they can talk about it,” he says.

Poll, however, disagrees and says the lawyer should be the last person at the firm to call the client about fees because it undermines the lawyer’s credibility as the client’s advocate.

Flexibility and compromise often can be helpful to law­yers in obtaining fee payments from recalcitrant clients, say experts and practitioners. Foonberg says that, rather than jumping to sue or simply writing off unpaid fees, he first contacts the client to learn whether the client can and will pay, and if so, how.

Foonberg says one client told him that he was paid every other month and was willing to pay his legal fees if he could do it on the same basis.

“Sometimes the monthly terms may be more important than the total payment,” notes Foonberg, “so if you sit down and work with the client on cash flow, that may work out better.”

Other lawyers are willing to discount fees as an incentive for payment. Zupkus says some of his institutional clients routinely demand a discount ranging from 10 percent to 15 percent if they pay their bills within 10 days. His firm has decided the guarantee of payment is worth the markdown.

PUT IT ON PLASTIC

The use of credit cards also is easing collection woes for lawyers. “With the way society works today,” says Calloway, “lawyers who do not accept credit cards may find themselves at a competitive disadvantage because many clients may not have $2,000 cash for a retainer, but they may have a $2,000 credit limit.”

While the practice has become widely accepted, some lawyers remain hesitant to accept credit cards because of ethics concerns about the fees associated with their use.

Typically, most banks take a percentage of the amount charged as a fee and deposit the rest in the vendor’s bank account. Lawyers, however, generally can make other arrangements with banks to ensure that credit card fees are not deducted directly from client funds. McLennan, who accepts credit card payments, says most banks under­stand lawyers’ ethics concerns about use of client funds and will work with them to deduct monthly fees from firm operating accounts rather than client escrow accounts.

No matter how flexible a lawyer tries to be in work­ing out fee arrangements with clients, fee disagreements with some clients are inevitable, and they don’t leave the lawyer with attractive options. One of those options is to withdraw from representation.

ABA Model Rule 1.16 (Declining or Terminating Rep­resentation) and state ethics rules generally allow a lawyer to withdraw from a case as long as the client is not prejudiced. Rule 1.16, for instance, states that grounds for withdrawal include instances in which “the client fails substantially to fulfill an obligation to the lawyer regarding the lawyer’s services” or if “the representation will result in an unreasonable financial burden on the lawyer.”

But withdrawal also raises questions, including whether the timing of the withdrawal fails to protect the client’s interest and whether the lawyer may retain papers relating to the client.

These tactics can be risky, warns Catholic University’s Lerman. “Any situation where the lawyer impairs the client’s ability to be represented is a real problem,” she says.

As for suing to recover fees, most experts see it as a risk not worth taking. “For every 10 times you sue a client for fees,” says Rosing, “seven will cross-complain for legal malpractice.”

And San Antonio’s Stewart, ever the former banker, says lawyers are better off just letting some fee disputes go and moving on to other matters. “The whole point is to get money,” he says, “so why spend time chasing dollars that are already gone?”

Jill Schachner Chanen, a lawyer, is a legal affairs writer for the ABA Journal.

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