Law Firm Billing Practices - The Great Game And Why It Is That Way

Author Richard Solomon is a conflicts and crisis management lawyer with four decades of experience in business development, antitrust and franchise law, management counseling and dispute resolution including trials and crisis management.

People think that law firms have secret ways to enhance revenue streams through mysterious billing rituals, not unlike the oath of fidelity and silence that one makes upon becoming a Mafia made man. Sometimes that really is how it works. Mostly, however, what lawyers charge their business clients is now fairly straightforward, even though it does reflect a century of gamesmanship amongst lawyers, clients, insurance companies and courts that award/refuse to award attorney fees to winners of lawsuits in addition to damages and other relief.

I don't remember for sure whether it was Abe Lincoln or someone else who once said that "A lawyer's time is his stock in trade" when speaking of billing practices. Among commodity lawyers that is probably true. For lawyers whose capabilities are worth substantial commitments, selling time is often idiotic.

The public is accustomed to thinking of lawyer billing practices as expressions of hourly rates plus expenses. That is true for many clients, but how that works, the mechanics of it, is a story with many chapters.

People without great financial means would not be able to afford legal assistance, certainly not in dispute resolution, if fee structures were restricted to hourly billings plus expenses. In America we have contingent fee arrangements to enable adequate representation for those without deep pockets.

Contingent fee retention was/is thought of as a form of ethically questionable behavior because the lawyer actually acquires a proprietorship interest in the outcome. Champerty as it was called in the old days was regarded as unethical. The reasoning was that the lawyer tends more to look out for his fee expectations as the product of the scale of the result instead of being primarily concerned with the quality of justice that results. No one knows whether that was a sincere expression of concern or just some defendants' mantra in an effort to prevent victims from having access to meaningful redress of grievances. I believe it was more, much more, of protectionism for wrong doers than concern for protecting the quality of "justice". In law school a professor once scolded a student in class for answering a question and explaining the basis for his answer by reference to his decision being "a good way to achieve justice in the circumstances". The professor, a man I dearly loved, threw chalk at the student and loudly exclaimed "If you want to study justice, go to the divinity school. This is the law school."

To be sure, contingent legal fees have made it easier for injuries to be compensated by those who cause the injuries. It is also true that there is law suit abuse in the form of phony and inflated injury claims. I have sat at many a bar in the late afternoon listening to stories by contingent fee injury lawyers about arrangements with police and ambulance drivers to refer injury clients to his firm for $50 to $100 a pop. The same lawyers enjoy recounting crooked doctor stories about how certain doctors write medical reports with conclusions that a plaintiff's injuries are life/career threatening, seriously and permanently disabling the plaintiff as well as making the plaintiff unable (if it is a male) to enjoy sex or "satisfy" his wife. The wife would then also have a claim for lost consortium - the value of losing a grand sex live.

Doctors who decry lawsuit abuse when speaking of medical malpractice also include crooked doctors who bill for services not provided and prescribe unnecessary procedures and medications - often selling prescriptions for controlled substance pharmaceuticals knowing the patient is buying them solely so that he may resell them to addicts. Usually the insurance companies pay for these "meds", so the gross margin is often 100%.

There is a continuing conflict between law firms and insurance companies that pay them over how much work is required for each task. Often an insurance "adjustor" will call the billing attorney and say that no more than one hour will be paid for in connection with a court hearing where the attorney had to wait two hours in court waiting for his case to be called. These same people "adjust" billings on complex commercial litigation just as they do on personal injury defense coverage. Someone with absolutely no knowledge of securities law or antitrust law or products liability law will second guess and refuse to pay for research, investigation expenses on his own notion that too much time was spent on it or that the expense for outside help was unnecessary. Corporate in house attorneys who have never tried a case, examined a witness under oath or handled a trial will sometimes accuse trial counsel of going too far in defending or prosecuting a particular case and even announce - in extreme instances - that the company simply will not pay for expert witnesses or other resources that trial counsel decided was useful in obtaining a successful result for that client.

The best way to avoid/mitigate this and all other client choke points is effective before the fact client communication - here is what we are dealing with - how I propose to address it -what it will probably involve. This is always confirmed in writing. It is called "protecting the file". When later questions are put regarding attorney client relationship issues, having those emails in the file that can be used to remind the client of prior client approval is the best way to deal with it. Even when dealing with some insurance company adjustor, those emails are worth their weight in gold.

When I graduated from law school in 1963, it was customary for large corporations to receive monthly bills from large law firms that included no more specificity than "For professional services and expenses in August 1963 - $47,000." You can't get away with that anymore, no matter how big and "important" you think you are.

Those days are long gone for good. For the last 20 or so years it has been important for a prevailing party to be able to demonstrate to a court the amount of legal fees to be awarded on account of its victory. Sometimes this is due to statute, sometimes to contract provisions and sometimes to a court's determination of intentional wrongdoing or improper conduct during a case. In any event, the case law is plain. Attorney fees must be accounted for with great specificity or there will be no award. This means specific descriptions of everything done and time assessments that are in reality related to the time actually taken to perform a service/prepare to perform a service for which there will be compensation. That usually means tenths of an hour or sixths of an hour. It must also be contemporaneous billing, not reconstructed after the fact based upon recollection. Insurance companies now demand the same kind of specificity in billing statements. It is the reality of the present.

I have never had a fee request denied on grounds of lack of specificity, too much spent on performing whatever it is that is being placed on the bill or reconstructed billing. On occasion another firm working with me will have its fees disallowed while mine were awarded on just those standards. There is no excuse for failing to do it that way, and when that is the basis for disallowance of a fee award the attorney may expect nonpayment/refund demand by the client and a potential bar grievance if not handled correctly.

There is a fee technique called a flat fee or value billing. In that mode the lawyer and client decide what the anticipated work scope will be and come to an agreement on an actual flat fee, usually paid in front or in advance installments. Value billing is a situation in which a specialist is providing a service that would take a lot of work by someone else, but the specialist knows the answers because he has had a great deal of focused experience on just this kind of issue. He should discuss this with the client and come to an agreement on the gross amount of the charge (with/without expenses) (with or without additions for travel and dispute resolution proceedings). The agreement must absolutely make it clear what the discussion was and the disclosure made by the attorney in the course of being retained. The agreement should provide that no hourly billing records need be kept, but only a fool would fail to prepare statements just as though it were hourly plus expenses and had to be court approved. No matter what your agreement says, you may be called to account in a client dispute and if you don't have the specific backup records you should be prepared to be second guessed.

Flat fee and value billing fee agreements also need to account for a client's decision to fire the attorney or terminate the project before completion. If that is not dealt with the purpose of flat fee and value billing will probably be frustrated by mid project termination. That is best dealt with using a provision that says if the project or the relationship is terminated for any reason, the attorney will be compensated based upon a stated hourly rate plus expenses to the date of termination. Since advance payment should have been provided for, the attorney will pay himself and remit the unused balance to the client with the specifically recorded concurrent billings that have been kept for that contingency.

In closing, I tender some suggestions based upon my own experience. Never represent a celebrity without pre-payment. Celebrities believe you should feel honored to have been allowed to represent them and resist paying the bills. Many wealthy clients have reputations for nonpayment, especially at the end of a project. They also strongly resist retainers and pre-payment terms. A lawyer who will represent someone being sued for nonpayment by a creditor, who works without advance payments, is just a bloody fool. Have the courage to decline the retention if you cannot protect yourself from their predations. Many lawyers do that by overbilling. That sometimes works if you don't care about the ethical/professional reputation issues.

Lawyers who allow themselves to get into billing disputes are usually rather stupid. There is no upside in fighting with clients over fees and expenses. You are usually far better off to eat the bill and consider it a lesson learned. In most instances, a suit for fees produces counterclaims. It is the lawyer who is on trial rather than the nonpaying client. That is really stupid. Many firms do not insist upon prompt payment. Accepting tardy payment arrangements is your choice. Large firms do that as a matter of course. They have to have credit lines to finance their receivables. They very often give very large discounts to get paid at all. Small firms are at far greater financial risk when they stay with slow paying clients. If you teach the client to pay as per agreement, and specifically provide payment terms in the fee agreement, you will get more respect and better payment. Clients have to take you seriously or they will eat you alive.

Contingent fee arrangements in commercial representation usually does not work as intended. When the relief is injunctive without a lot of damages recovered, the lawyer is out of luck. Often, especially in mass business torts, the defendants know that they can usually get the plaintiff's lawyer to recommend a cheap settlement if the defendant pays the plaintiff's legal fees. Many courts have recognized that as a sellout situation, and clients often complain that it was all just about legal fees with no regard for their interests. Class action abuse in this manner keeps a lot of cases from being certified by courts to be class actions for just this reason. The courts see it as simply a suit for legal fees. There are many headlines about attorneys getting million dollar fees and class members getting $40 or less each in recoveries or relief in the form of credits against future purchases from the defendants.

Expert witness retention in fee dispute cases has given me good insight into how the legal profession actually gets itself compensated. In most instances, it is lawyer indolence and cowardice that produces the dispute. Clients know they can have their way most of the time in any dispute with their own lawyers. Be Advised!

With apologies for pointing out the obvious, it is not the intent of this article to address issues relating to retention in personal injury confrontations. In many states those retention agreements ae specifically regulated due to histories of lawyer abuse.