December 2016 | Earn one hour of MCLE Credit in Legal Ethics
Ethical billing practices avoid problems collecting legal fees
If a client complains about your bills, and the dispute makes its way into a statutorily required mandatory fee arbitration, how is the arbitrator likely to view your bills?
Many common billing practices will be scrutinized in the event of a fee dispute. According to a recent advisory from the State Bar of California's Committee on Mandatory Fee Arbitration, the arbitrator may examine the process you used to prepare your bills and then review your bills to - among other things - compare the work performed to what was billed, analyze the staffing on the matter and consider the format and content of your bills.
If an engagement will cost more than $1,000 in fees, costs or both, a client is entitled to obtain an itemized bill within 10 days of the client's request. There is no exception for task-based, flat-fee, or fixed-fee engagements. Bills rendered by a lawyer to a client must "clearly state the basis thereof," including the amount, rate and basis for calculation. Otherwise, the fee agreement is voidable at the option of the client, and the lawyer is entitled to collect only a reasonable fee. See Business and Professions Code Section 6148.
Most fee arbitrators interpret the foregoing statutory language to require the bills to at least identify which lawyer or paralegal performed the itemized services by date and the hourly rate. See Arbitration Advisory 95-02, Standards for Attorney Fee Billing Statements. Consequently, the lack of specificity in the bills not only endangers the lawyer's ability to collect the contractually agreed upon fee, but it may also significantly impair their ability to subsequently demonstrate the reasonable value of the fees in a subsequent arbitration.
Initially, fee arbitrators may consider the manner in which the bills are prepared to ascertain the timeliness and accuracy of the bills. Generally, bills are more accurate and specific if the person who actually performed the task records it contemporaneously, rather than waiting to do so at a later date or relying on a billing clerk or secretary to record the task and create the bills. The significance of the passage of time between when a task is performed and actually recorded cannot be overstated. Arbitrators will closely scrutinize bills if the lawyer waited days to prepare a bill.
Irrespective of the manner or process a lawyer may use to bill the client, the arbitrator's focus will be on determining the accuracy of the bills. For example, if a lawyer or firm uses a pre-bill process in which time entries are edited and adjusted by a more senior lawyer or staff member, the arbitrator might analyze whether that process actually increases the accuracy of the bills. Arbitrators may closely scrutinize any upward adjustments, as well as any failure to verify the accuracy of the contents of the pre-bills or have them reviewed and verified by the lawyers or other timekeepers that actually performed the tasks before the bill is delivered to the client. See Arbitration Advisory 2016-02, Analysis of Potential Bill Padding and Other Billing Issues.
Staffing is also an important area in which the arbitrator's hindsight is applied to analyze bills in the context of fee arbitration. Staffing issues resulting in reduction of bills by an arbitrator can arise from billing time that is essentially training of less-experienced lawyers or billing time by a more senior lawyer whose experience is not necessary to the task. Revolving billers who join the case for a short time, then are replaced, may result in duplication of effort for which the client should not be billed.
Overstaffing can also result in a significant reduction in the recovery of fees upon review by an arbitrator. In Christian Research Institute v. Alnor, 165 Cal.App.4th 1315 (2008), a prevailing defendant in an anti-SLAPP suit sought recovery of his attorney's fees consisting of 638.6 hours on a motion to strike and appeal with 228.7 hours allocated to the motion and approximately 410 hours allocated to the appeal, which the court reduced to 71 hours. Among other problems with the fee request, the court mentioned overstaffing, indicating that, "the five attorneys Alnor deployed on the motion appear to have expended more time telephoning, conferencing and emailing each other than on identifiable legal research for the motion."
Comparison of the substance and quality of the work created to the cost of each item is also an area to which an arbitrator may direct his or her attention. For example, a motion to dismiss may be drafted by a new lawyer, revised by a senior associate and reviewed and signed by a partner. The arbitrator might consider whether part of the new lawyer's time involved training and whether the senior associate should have prepared the motion. Whether the motion necessitated an interim review or partner-level review might also be questioned. Of course, everything depends on the complexity of the matter, and such an approach might be perfectly appropriate. In Christian Research Institute, while counsel asserted that the motion was complex and novel, the court said several issues were "settled as hornbook law" and that "a close question based on the facts is not necessarily a complex or time consuming one." The same court also noted that despite 400 hours spent on the appeal, "counsel failed to uncover or cite the seminal cases applying the dispositive standard." In addition, the court said there was no evidence extensive time was devoted to investigation or discovery, nor did the legal research entries show that the pertinent issues were difficult.
The format and contents of the bills are also significant. Inaccuracy and overcharging can arise where time is billed in high minimum increments such as a minimum .25 hour. However, overcharging may result even when discrete tasks such as phone calls, emails or reviewing correspondence taking only a minute or two each are separately billed at .10 hours each. Thus, even where clients have agreed in writing to the minimum charge of .10 hours, recording such entries with "no charge" may be appropriate on occasion in order to avoid overbilling.
Accuracy is an important issue in billing. Round or large numbers on bills, such as 5.0 or 8.0 hours, may draw scrutiny, especially where a lawyer is not engaged in trial or other verifiable lengthy task. See Arbitration Advisory 2016-02 and In re Tom Carter Enterprises Inc., 55 B.R. 548, 550 (C.D. Cal. 1985). Irrespective of the task, such entries may be viewed more as an estimate than the actual time expended, particularly when the lawyer uses generalized descriptions like "research issues," "conduct discovery," "trial prep" or "review file." Ultimately, an arbitrator may require the lawyer to demonstrate the propriety of large whole number entries and generalized descriptions as well as the accuracy of the resulting claimed fee.
Another issue that regularly surfaces in fee arbitrations is the propriety and effect of "block billing." Block billing is the practice of assigning a one-time charge to multiple separate tasks. Many judges and arbitrators believe that block billing hides accountability and prevents a client and the fact finder from discerning which of the listed tasks may not be compensable. Where a lawyer handles several disparate tasks in the same day and bills one block of time to all of them, some cases indicate that this disguises non-compensable tasks. See, e.g., Bell v. Vista Unified School Dist., 82 Cal.App.4th 672, 687-689 (2000). Other judges and arbitrators consider the use of block billing a patent violation of the requirement that the bills "clearly state the basis thereof," enabling the client to void the fee agreement and put the burden of proving the reasonableness of the fees on the attorney months, if not years, after the tasks were performed.
Some case law indicates that a penalty is appropriate at the discretion of the trial court assigning a reasonable percentage to block-billed entries. See Heritage Park Financial v. Monroy, 215 Cal.App.4th 972 (2014). Billing multiple tasks with one entry may be appropriate "when those services are rendered in one time frame without interruption, but it is preferable when counsel interrupts research to make or receive a phone call, that the time spent on that phone call should be separately stated for the reasons set forth above." Different functions performed at different times of day should result in separate entries. See In re Tom Carter Enterprises Inc., 55 B.R. 548 (C.D. Cal. 1985).
Block billing, the practice of "assigning one time charge to multiple tasks," can also result in reduction of fees recoverable because it can inflate the actual time the lawyer takes to complete the tasks. See Arbitration Advisory 2016-02. Accordingly, both courts and arbitrators can scrutinize block-billed entries, place the burden on the lawyer regarding such entries, or even disregard them entirely. In Christian Research Institute, the court found that block billing, "while not objectionable per se in our view, exacerbated the vagueness of counsel's fee request."
Arbitrators also recognize that many lawyers simultaneously perform administrative, ministerial and secretarial tasks while representing a client. "Operating a law practice requires substantial efforts on the part of the lawyers wholly unrelated to representing clients. This includes dozens of administrative, managerial and ministerial tasks lawyers must perform every day. In the vast majority of cases, it is inappropriate to seek to charge a client for such non-legal tasks." See Arbitration Advisory 2016-02.
A lawyer may charge a client only for work actually done by the lawyer. Therefore, if a lawyer utilizes a recycled or standardized document, unless the client has consented to the contrary in writing in the fee agreement, the client may only be charged for the lawyer's revision of such documents. See ABA Formal Opinion 93-379.
Similarly, if a lawyer intends to bill multiple clients for the same tasks or time, the lawyer must first disclose the billing arrangement to each and every affected client, and obtain their consent in their corresponding written fee agreements. The billing arrangement must also be fair to each client and not constitute an unconscionable fee.
Issues concerning the use of contract attorneys are also adjudicated in fee disputes. Generally, whether contract attorneys may be utilized should be disclosed and explained in the written fee agreement. Also, and most importantly, absent a written agreement to the contrary, the client should only be charged the out-of-pocket cost of the contract attorney. Similarly, the use of a non-licensed paralegal or legal assistant should be disclosed in the written fee agreement. More importantly, the client should not be charged for any task performed by a paralegal or legal assistant that does not constitute substantial legal work under the direction and supervision of a lawyer, including case planning and management, legal research, interviewing clients, fact gathering, drafting and analyzing legal documents and similar activities. See Business and Professions Code Section 6450(a).
Careful management of billing will assure that attorneys' fees are collectible should your client pursue arbitration.
Carole Buckner is the dean of St. Francis School of Law in Newport Beach and member of the State Bar of California's Committee on Mandatory Fee Arbitration.
Nick Migliaccio practices in Southern California. He is the chairman of the State Bar of California's Committee on Mandatory Fee Arbitration, the bar's assistant presiding arbitrator, the co-chair of the Long Beach Bar Association's Mandatory Fee Arbitration program, as well as a fee arbitrator and mediator.