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Judge Cuts $100M in Fees in $3B Petrobras Securities Settlement

June 27, 2018

A recent Reuters story by Alison Frankel, “Judge in $3B Petrobras Securities Case Cuts Class Lawyers’ Fees by $100M,” reports that on the attorney fee award in the Petrobras securities class action settlement.  The views expressed in this post are not those of NALFA.  The article reads:

Jeremy Lieberman and his partners at the securities class action firm Pomerantz are about $171 million richer, after U.S. District Judge Jed Rakoff of Manhattan issued a decision granting final approval of a $3 billion securities class action settlement against the Brazilian energy company Petrobras and one of its auditors.  Pomerantz, one of three lead firms in the case, did the bulk of the work, so it’s receiving the lion’s share of the total $186.5 million Judge Rakoff awarded class counsel for obtaining an “exceptional” result in a risky case without a foreordained outcome.  You might expect Lieberman to be a very happy man today.  He’s not – and it’s not just because Judge Rakoff awarded Petrobras class counsel nearly $100 million less than the $284.4 million they requested.

Lieberman told me that what bothers him wasn’t so much the result as the process.  I’ll explain below how Judge Rakoff got to $186.5 million, but Lieberman’s complaint is that the judge did not honor Pomerantz’s fee agreement with its U.K. pension fund client, lead shareholder Universities Superannuation Scheme.  When USS retained Pomerantz, the fund rejected Pomerantz’s initial fee suggestion and instead, as class counsel recounted in their memo requesting $284.4 million in fees, brought in former U.S. pension fund official Keith Johnson of Reinhart Boerner Van Dueren to advise the U.K. fund on appropriate fees for its class action lawyers.  Their eventual sliding-scale deal, which granted Pomerantz a declining percentage of the recovery as the size of the settlement fund increased, would have netted lead counsel 9.4 percent of the $3 billion settlement, or $284.5 million.  Judge Rakoff took that pre-negotiated fee deal into account when he appointed USS a lead plaintiff in the Petrobras case.

The judge, as Pomerantz and the other lead counsel acknowledged in their fee petition, was not required to defer to USS’s fee agreement with Pomerantz.  Federal judges, after all, are supposed to look out for the interests of all class members, not just lead plaintiffs.  But Pomerantz and the other firms argued that Judge Rakoff should give considerable weight to the USS fee deal, especially because it was negotiated before the litigation began.

Pomerantz partners relied on the terms of their USS fee deal when they made decisions about how to litigate the case, the fee memo said.  To finance the expensive undertaking, they pledged their personal assets to assume a crushing debt load, “in large part informed by the ex ante fee agreement that was previously reviewed (and commended) by (Judge Rakoff).”

But when it actually came time to award fees, the judge said Pomerantz’s pre-negotiated fee deal was “at best just one factor” to consider in the tapestry of litigation events “that provide a much better indication of what was the value of the attorneys’ work to the class as a whole than any before-the-fact private agreement reached with an individual plaintiff.”

Instead, as I’ll explain, Judge Rakoff based his fee award on class counsel’s lodestar billings, boosted by a multiplier to reflect the excellent result they obtained.  Rakoff used the 1.78 multiplier Pomerantz, Labaton and Motley Rice had originally suggested, when they analyzed lodestar billings as a cross-check on their fee request for the 9.4 percent of the settlement, the percentage Pomerantz had negotiated with lead shareholder USS.

Lieberman told me he’s distressed at the short shrift Judge Rakoff gave to Pomerantz’s fee agreement with its client and believes that, in the long run, disregarding such agreements undermines the legitimacy of class actions.  Federal judges, as the class action bar is all too aware, are pushing for more transparency in these cases, pressing for details on relationships between lead plaintiff candidates and their firms, referral fees paid to firms that don’t have a role in the litigation, and dubious dismissals.  Lieberman said judges should similarly recognize that arms-length fee agreements between institutional investors and their lawyers enhance the professionalism of the class action bar.

“Fee awards can’t be random in high-stakes litigation.  It shows a lack of respect for the process, to just say, ‘Oh, I’ll figure it out afterwards,’” Lieberman said.  “If you want class action work to be taken as a serious industry, you have to have a systematic way to assure in advance how lawyers will be paid.  If we’re trying to clean up the business, let’s clean it up in all ways.  No more randomness at the end.”

Lieberman said he believes Judge Rakoff acted with good intentions.  He also acknowledged the inescapable truth of the judge’s point that he’s awarding a tremendous amount of money to plaintiffs’ firms.  (Rakoff’s exact words: “It is important to also remember that we are dealing here, not just with percentages, billable rates, and multipliers, but with very large amounts of money in absolute terms that plaintiffs’ counsel will be receiving under any analysis.”)

But he said – and this is a legitimate point – that disregarding lead plaintiffs’ pre-negotiated fee agreements can distort the way class counsel litigate a case.  “I was thinking for three years my fee agreement was going to be honored,” he said.  “The future of our firm was on the line.  We did that because we thought our agreement with the client would be honored.”

For a contrary take, I went to the Competitive Enterprise Institute, which filed a thought-provoking objection to the Petrobras settlement, protesting class counsel’s fee request, among other things.  In an email responding to Lieberman’s argument, CEI lawyer Anna St. John said it’s important to remember that USS isn’t the only client in this class action, which is being settled on behalf of all Petrobras shareholders.  USS, St. John wrote, “is just one of more than 1 million potential class members who are the clients that Pomerantz is supposed to represent,” she said in her email.  “That agreement also does not protect those absent class members, who like in this case, are taken advantage of when lawyers seek to recover windfall hourly rates.”

CEI’s objection urged Judge Rakoff not to defer to the USS fee agreement because the class as a whole didn’t negotiate the deal and wasn’t apprised of its terms.  “If it fails to preclude a windfall hourly rate, then it does not satisfactorily protect the class’s interests,” the filing said.  “Class counsel fear that there is no value to ex ante vetting if courts can ‘simply upend (agreements) by the subjective post hoc determinations.’ Not so; a negotiated fee can reasonably serve as a ceiling even if it is inappropriate to employ it as a floor.”

Judge Rakoff’s award of $186.5 million, as I mentioned, was based on lodestar billings by class counsel, but he used a very unusual process to review their bills.  Rather than appoint a special master – presumably at the expense of class members – to comb through the timekeeping records submitted by plaintiffs lawyers, the judge asked defense lawyers for Petrobras and its auditor to do it.  “The court took this step because of defendants’ intimate knowledge of various aspects of the case, and the court’s confidence was rewarded by the highly professional way in which defendants’ counsel undertook their court-directed task,” he wrote.

Defense lawyers found some hinky charges, like the seven days a contract attorney claimed to have spent reviewing the third amended complaint – after the complaint had been filed.  Class counsel voluntarily adjusted their lodestar report to eliminate some of the questionable hours uncovered by the defense firms but protested other supposedly inflated charges.

Judge Rakoff then waded into the time records himself.  He ended up focusing on class counsel’s $28 million in billing for foreign contract lawyers who cannot practice in New York and nearly $100 million in bills for contract lawyers.  He shifted the foreign lawyers’ bills to a reimbursable litigation cost (which means no multiplier) and cut contract lawyers’ fees by 20 percent. He also imposed an additional 50 percent cut on bills by contract lawyers acting as translators.  Those cuts brought the total lodestar down from $159.5 million to $104.8 million.  When the judge applied the 1.78 multiplier, the total came to the aforementioned $186.5 million.

Judge Rakoff said any more would be a “windfall” to plaintiffs lawyers who were already “highly incentivized to heavily litigate this huge case regardless of the expected fee award.”  Jeremy Lieberman begs to differ.

Opinion: The Trouble with Lodestar Fee Awards

May 30, 2018

A recent Reuters editorial by Alison Frankel, “The Trouble with Lodestar Fee Awards, Anthem Class Action Edition,” opines on the recent fee request in the Anthem data breach class action.  The editorial reads:

A special master appointed by U.S. District Judge Lucy Koh of San Jose to recommend a fair fee for class counsel in the $115 million Anthem data breach settlement succeeded in pleasing no one with a vested interest in the outcome, based on filings by lawyers for the class and the objector who first pushed for scrutiny of class counsel’s request for nearly $40 million in fees and expenses.

I’ll explain why both sides believe the special master, retired Santa Clara Superior Court Judge James Kleinberg, made critical mistakes in recommending a fee award of $28.6 million, based on a 10 percent chop off the top of class counsel’s adjusted hourly billings in the case.  But more fundamentally, I was struck as I read both sides’ objections to his recommendation that lodestar fee awards are a quagmire for judges.

As you know, most federal judges calculate class action fees as a percentage of the recovery lawyers obtain for the class, sometimes applying multipliers to reward plaintiffs’ lawyers for taking on particularly risky or strenuous cases.  Percentage-based fee awards have the advantage of incentivizing efficiency and aligning the interests of lawyers and their clients.  They predominate, although many judges also look at lodestar billings as a check on percentage-based fees.

But as I told you last year, there’s been a bit of a recent boom in California federal court for awarding fees based on class counsel’s hourly billings, mostly in mega-cases in which judges were worried that a percentage-based fee award, even of 10 or 15 percent, would be an unseemly windfall for plaintiffs’ lawyers.  Judge Koh, who is overseeing the Anthem case, has used lodestar billings to calculate fee awards in big anti-poaching class actions, 2015’s In re High-Tech Employee Antitrust Litigation and 2017’s Nitsch v. Deamworks Animation.  In both cases, lodestar billings resulted in a smaller award to class counsel than they would have received as a percentage of the recovery for class members.

The Anthem case is different.  The hourly fees class counsel said they generated far exceeded the percentage-based fees they could have expected, given that courts typically award fees of less than 20 percent in cases with recoveries of more than $100 million.  Plaintiffs’ lawyers said their lodestar fees and costs were nearly $40 million.  They requested fees of about $38 million, or 33 percent of the $115 million class recovery.  That was an ambitious request.  California’s benchmark is 25 percent, $28.8 million in the Anthem case, and judges seldom award even that high a percentage in megacases.

After plaintiffs’ lawyers submitted their fee request, a class member represented by the Competitive Enterprise Institute objected, contending (among other things) that class counsel overcharged for the services of contract lawyers and otherwise overbilled their clients for nearly $9 million in unnecessary or duplicative work.  In her order appointing a special master, Judge Koh said she was concerned that the sheer number of lawyers and law firms that billed time in the case – 331 billers across 53 plaintiffs’ firms – meant the class was overcharged “by virtue of the fact that so many billers needed to familiarize themselves with the case and keep abreast of case developments.”

Judge Koh ordered the special master to review the billing records of plaintiffs’ lawyers.  Judge Kleinberg said in his April 24 report that he did, along with explanations of the records from class counsel at Altshuler Berzon and Cohen Milstein Sellers & Toll.  But he also said he did not review every line item in the records because his goal was “a rough cross check, not auditing perfection.”

The special master decided class counsel had billed the time of contract lawyers at way too high an average rate.  He recommended slashing fees for their work from the $6 million lodestar class counsel claimed to $3 million, taking into account his conclusion that contract lawyers should be billed out at a paralegal rate of $156 per hour.  Judge Kleinberg said plaintiffs lawyers’ blended rate of $455 per hour was reasonable.  But he said class lawyers devoted an apparently unreasonable number of hours to deposition preparation, class certification briefing and settlement negotiations.  He blamed the “virtual army” of lawyers on the case.

“How could lead counsel possibly conduct effective oversight of this very large team of lawyers?” Kleinberg wrote.  “The special master is not accusing plaintiffs’ counsel of deliberate overbilling.  However, every time a new law firm was added to the group, those lawyers had to spend time learning the history, issues and facts being litigated.  Thus, the inevitable result of the 53 billing participants presents at least a strong probability of duplication and unreasonable hours.”

He offered three alternatives for determining fees: applying the 25 percent benchmark percentage (and subtracting certain costs) to award $26.75 million; awarding $33.9 million in lodestar fees after adjusting the lodestar for contract lawyers and shifting expenses from the class to their counsel; or lodestar fees of $28.6 million, reflecting Judge Kleinberg’s recommendation of a 10 percent trim for potential overbilling.  The special master said that was the maximum haircut he could apply, short discounting specific overcharges, under the 9th U.S. Circuit Court of Appeals’ ruling in 2008’s Moreno v. City of Sacramento.  Kleinberg recommended that Judge Koh pick the discounted lodestar option.

In their response to the special master’s recommendation, class counsel protested his recommended 10 percent haircut as unjustified.  Kleinberg himself said their blended rate was fair, plaintiffs lawyers said, which implicitly means class counsel did not overstaff the case with high-cost partners.  “Because the blended hourly rate is the total lodestar divided by the total number of hours expended, it reflects the cost of the average hour in the case and captures the extent to which the work was distributed among higher- and lower-cost professionals,” their filing said.  “When, as here, the blended hourly rate is well below the median, it shows that counsel distributed work among partners, associates, contract attorneys, and paralegals in an even more cost-effective manner than has been found reasonable in past cases in this district.”

They also repeated previous explanations for why they had to involve so many lawyers from different firms to maximize efficiency in a compressed time frame.  (The explanations included an accounting of the hours spent on depositions, class certification and settlement negotiation.)  Class counsel instructed other firms not to bill for acquainting themselves with the case and reviewed other firms’ time sheets, cutting hours that seemed duplicative or inefficient.  ‘The requested lodestar should be reduced only if the use of multiple firms actually resulted in duplication or inefficiency.  That did not occur here,” the filing said.  “The key assumption underlying the (special master’s) contrary conclusion is that ‘every time a new law firm was added to the group, those lawyers had to spend time learning the history, issues, and facts being litigated.’  This was incorrect.”

Consider Mandatory Arbitration to Resolve Fee Disputes

May 24, 2018

A recent Daily Report article by Shari Klevens and Alanna Clair, “Consider Mandatory Arbitration to Resolve Fee Disputes,” reports on the most effect manner to resolve attorney fee disputes.  This article was posted with permission.  The article reads:

Although many state bars recognize that attorney-client disputes may be resolved through arbitration, the use of mandatory arbitration clauses in engagement letters may be subject to federal law. The FAA (Federal Arbitration Act) governs requests for arbitration and, on its face, is supreme to state law on the issue.

Recently, the U.S. Court of Appeals for the Third Circuit reviewed the application of the FAA to a mandatory arbitration clause in an attorney engagement letter. Smith v. Lindemann, No. 16-3357 (3d Cir. 2017). In a nonprecedential opinion, the court concluded that, although a mandatory arbitration clause could be set aside on the basis of fraud, duress or unconscionability (which analysis may be governed by state law), federal law generally governs the application of such a provision. Indeed, the U.S. Supreme Court has indicated that state law may not prohibit the arbitration of any specific type of claim. AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 341 (2011).

Though the FAA may govern an arbitration clause absent any restriction by the parties, the state-level rules of professional conduct may still have some impact. Indeed, those rules bearing on a client’s right to be informed about the scope of the representation and the potential waiver of rights may impact whether an arbitration provision violates public policy.

Indeed, separate from the requirements of federal law, attorneys have certain duties to clients that can be reflected in the use of an arbitration provision in an engagement letter.

Consider the Advantages of Mandatory Arbitration

It is helpful for law firms and practitioners to give thought at the outset of a representation as to whether they would like any fee disputes or other claims to be resolved by private arbitration. Some firms adopt a mandatory arbitration clause in every engagement letter they use, while others may limit the use of an arbitration clause to address fee disputes only.

For some, there is an advantage to using arbitration to address fee disputes only. It is well-recognized that often, when an attorney sues a client for unpaid fees, the client will bring a counterclaim for legal malpractice. Some sources indicate that the likelihood of receiving such a counterclaim could be as high as 40 percent; others place it even higher.

Therefore, some firms elect to include in their engagement letters a provision that requires all fee disputes to be resolved by private arbitration. That can help attorneys pursue fee claims, which can be unpleasant in and of themselves and can allow them to carve out malpractice claims for separate resolution.

Other potential advantages of binding arbitration for fee disputes or malpractice claims include that arbitration can be faster than litigation. The procedure can be less formal than litigating in court, which some attorneys view as an advantage. Using arbitration can also help the parties keep the proceedings and the outcome confidential, which may be a great advantage to some law firms.

FAA May Apply Absent Restriction

Courts read the FAA expansively in interpreting arbitration clauses. The default understanding of a general demand for arbitration in an engagement letter or other form is usually that it is a demand being made consistent with the FAA.

Generally, if a law firm and client want a state’s arbitration statute to apply to any future dispute, they will take steps to ensure that the engagement letter specifically says as much. Otherwise, a general reference to arbitration in an engagement letter is understood to invoke the FAA and federal law, rather than state law.

Obtaining Informed Consent

If a law firm or lawyer has determined that they want to use a mandatory arbitration clause in the engagement letter, it is helpful at this point to consider the requirements of the Rules of Professional Conduct. Indeed, most attorneys considering a mandatory arbitration clause will consider additional language to help ensure that the client understands the differences between arbitration and litigation.

The engagement letter can detail many factors relating to the use of mandatory arbitration should a dispute arise between lawyer and client, including that proceeding to arbitration necessarily involves foregoing a jury trial. The engagement letter can also explain that there is typically a limited scope of any appeal of an arbitration. Others will consider the procedural issues, such as the speed of resolution, confidentiality (if applicable) and the potentially relaxed procedure.

Considering these issues is consistent with the guidance provided by the ABA in Formal Opinion 02-425. There, the ABA recognized that it is ethically permissible for attorneys to include mandatory arbitration provisions in their engagement letters. However, Formal Opinion 02-425 recommends ensuring that the client has been “fully apprised of the advantages and disadvantages of arbitration and has given her informed consent to the inclusion of the arbitration provision in the retainer agreement.”

Notably, in Smith v. Lindemann, the Third Circuit approved of a mandatory arbitration clause that did not detail all the risks and advantages of proceeding with an arbitration, but simply confirmed that agreeing to arbitration meant waiver of the right to have disputes heard by a jury.

Therefore, even if federal law governs the application of the arbitration clause generally, attorneys can anticipate the requirements of any applicable ethical rules to help ensure that the clause will not be stricken down as contrary to public policy or the attorney’s ethical duties.

Does the Bar Provide Help?

The State Bar of Georgia has a fee arbitration program that assists in the resolution of fee disputes between attorneys and clients. The hearing is conducted by a panel of three arbitrations: two Georgia attorneys and one nonlawyer. A client can elect to have a fee dispute arbitrated—even over the attorney’s objection—but the parties may seek to reference this program in an engagement letter.

Comment 9 to Rule 1.5 of the Georgia Rules of Professional Conduct recognizes that “[i]f a procedure has been established for resolution of fee disputes, such as an arbitration or mediation procedure established by the Bar, the lawyer should conscientiously consider submitting to it.”

Shari L. Klevens is a partner at Dentons US in Atlanta and Washington and serves on the firm’s U.S. board of directors. She represents and advises lawyers and insurers on complex claims and is co-chair of Dentons’ global insurance sector team.  Alanna Clair is a partner at Dentons US in Washington and focuses on professional liability and insurance defense. Shari and Alanna are co-authors of “The Lawyer’s Handbook: Ethics Compliance and Claim Avoidance” and the upcoming 2019 edition of “Georgia Legal Malpractice Law.”

Reducing Collection Actions Through Effective Billing Practices

April 13, 2018

A recent Connecticut Law Tribune article by Shari Klevens and Alanna Clair, “Reducing Collection Lawsuits Through Effective Billing Practices,” reports on strategies for collecting unpaid legal fees.  This article was posted with permission.  The article reads:

Many attorneys will put off the decision of whether to pursue a client for unpaid legal fees until the end of the calendar year. With the second quarter of the year just beginning, the issue of unpaid fees may not be an immediate priority. After all, many clients will pay outstanding bills throughout the year. And repeatedly requesting that a client pay his or her bills can be an uncomfortable conversation for attorneys, especially for those with long-standing client relationships.

If an invoice (or invoices) go unpaid for too long, however, an attorney and law firm may be left to accept the loss of unpaid fees or, alternatively, to file a suit against the client. Either decision can create risk for the attorney that worked hard on the matter.

Many attorneys find that taking proactive steps throughout the year reduces the need of having to make that difficult decision. Enacting these strategies can help ensure that an attorney is paid on time, reduce exposure, increase fee collection, as well as promote positive client relationships.

Bill on Time Attorneys that expect their clients to pay on time may see better results if they send out timely bills. Some attorneys will avoid the work associated with preparing and issuing bills because it is not as enjoyable as the legal work. But sending out bills regularly not only helps attorneys meet their administrative and ethical obligations, but can also provide clarity to clients on the amount of their legal fees.

Untimely or irregular billing is one of the most prevalent and preventable causes of fee disputes. Issues can arise when a client is confronted with a substantial invoice all at once at the end of the representation. Providing clients with steady, manageable bills can help condition them to paying their legal fees, as well as ensure any issues concerning the amount of fees are addressed before they spiral out of control.

Honest and Regular Communication Determining the reason that the client is not paying a bill is important because it can dictate the appropriate and most effective course for an attorney to take. Generally speaking, clients may not pay a bill for one of four reasons. First, a client may have never actually received the bill or simply forgot. These unintentional oversights, which happen, can easily be remedied by a reminder. Addressing this circumstance early can help reduce the risk of a client mistakenly believing they paid the bill or deciding to contest the bill at a later date.

Another common reason that clients will not pay their bills is that they are unhappy with the amount that was charged, whether because the attorney billed at too high a rate or for what they deem too many hours. Some clients will also require strict adherence to onerous billing procedures. Nevertheless, addressing and understanding these constraints early in the representation can help ensure both parties are on the same page, and that bills are paid.

Unfortunately, some clients will not have the financial resources to pay the bill. This news may be especially troubling for a firm because it may be an uphill battle to recover the value of the services it rendered. Also, it generally means an end to the client relationship. In these instances a firm will still have to make a number of important decisions, such as whether to withdraw from or amend the scope of the representation. Although difficult to address, it is easier sooner than later in the representation.

Dissatisfaction with the attorney’s work or the outcome of the representation is a final reason that clients will refuse to pay. Unlike the first three reasons for nonpayment, this decision by the client may require the attorney to take additional steps to protect against future claims, including by reporting the circumstances to the attorney’s insurer.

Making the Decision Whether to File Suit The decision to sue a client is not an easy one. According to some sources, when attorneys sue their clients for unpaid fees, a little less than half of those cases will result in a counterclaim by the client for legal malpractice. Thus, a claim for unpaid fees can result in the firm being forced to defend the entire representation, rather than simply document their owed fees. Further, litigation costs time and money, and may result in a negative stigma for the firm with other potential clients.

Because of these risks, some firms decide as a matter of policy never to sue a client, no matter the circumstances. But for other firms that option may not be feasible or reasonable. When making that decision, the law firm can try to take steps to minimize the risks of that outcome.

Prelitigation Measures In lieu of filing suit against a client, there are other steps attorneys can take to attempt to recover unpaid fees.

The first option to consider is attending informal meetings and negotiation. In addition to hopefully resolving the dispute, these presuit meetings can also assist a law firm in gaining more information about the client’s position that could be beneficial if the matter proceeds to litigation.

A second step to consider is a more formal meeting, such as a mediation. An unbiased third party may help the parties reach an agreement.

Finally, another popular option is to resolve the fee dispute with the client through arbitration. One advantage to agreeing in advance to arbitration focused on the narrow issue of a fee dispute is that it can eliminate the risk of a counterclaim for legal malpractice in that forum. Others prefer arbitration for the privacy benefits. On the other hand, some firms find that they collect more fees in a litigation with a client than in arbitration.

The Connecticut Bar has a free Resolution of Legal Fee Disputes Program that “allows lawyers and clients with a dispute over the fees incurred for legal services to find a solution to their problem through mediation and/or arbitration, rather than litigation.” The program provides for mediation, with a volunteer attorney as mediator, or arbitration, with a hearing panel composed of two attorneys and one nonattorney.

Alanna Clair is a partner at Dentons US in Washington, D.C., and focuses on professional liability defense. Shari L. Klevens is a partner at Dentons US in Atlanta and Washington, D.C., and serves on the firm’s U.S. board of directors. She represents and advises lawyers and insurers on complex claims and is co-chairwoman of Dentons’ global insurance sector team. Klevens and Clair are co-authors of “The Lawyer’s Handbook: Ethics Compliance and Claim Avoidance.”

Strategies for Collecting Fees from Clients

April 11, 2018

A recent Texas Lawyer article by Shari Klevens and Alanna Clair, “Strategies for Collecting Fees from Clients,” reports on strategies for collecting unpaid legal fees.  This article was posted with permission.  The article reads:

Collecting legal fees can be just as important to a law firm’s success as effectively handling client representations. Although attorneys spend years honing their legal skills and may excel at advocating for their clients, some may find discomfort when pursuing fee collection.

While some firms put off the decision on how to address clients with unpaid fees until the end of the calendar year, confronting the issue earlier often yields more positive results. And if the firm waits too long, the firm might find that its options are fairly limited.

Suing a client is not an easy decision. The decision necessarily entails extra-judicial risks, such as harmful media exposure, negative word of mouth reputation, and bringing to light otherwise private information about the firm’s business practices, including rates and fee arrangements. Moreover, there are time and financial costs in litigation, and almost half of all suits filed by attorneys for unpaid fees result in the client asserting a counterclaim for legal malpractice.

Taking into account all of these risks, some firms make the decision to never sue a client. Other attorneys will only sue a client as a last resort. Having a carefully considered and effectively implemented collection plan can limit the number of times a firm must make that difficult decision.

Consistent Billing Cycles

Many attorneys agree that billing is one of their least favorite aspects of the practice of law. In addition to taking up time they would otherwise spend on client matters, most attorneys are not trained business managers and the practice can be outside of their comfort zone. But consistent billing is important because it satisfies client expectations and increases the likelihood of being paid.

Some common fee disputes result from untimely billing. Clients may have a harder time reconciling a large bill for multiple months of legal services submitted at one time. Indeed, clients may experience “sticker shock,” especially if the representation did not unfold as they anticipated.

Issuing timely and regular bills may help ensure that the client is satisfied with the services, but also increases the likelihood that the client will pay the bill in a timely manner. And if a client is one who is difficult and never intended to pay, an attorney can identify the issue before spending too much time working on the matter.

Communicate About Bills

As noted above, attorneys may find it uncomfortable to have to confront a client about an unpaid bill. Instead of avoiding the issue, reaching out to a client to understand why he or she has not paid may help remedy the non-payment.

There are some different reasons why clients may fail to pay the bills. The lack of payment may be an honest oversight. It is possible the client did not receive a bill because of technological error or other mishap. They may have had the payment slip their mind. If this is the case, a gentle reminder may be all it takes to receive payment, as well as maintain a positive attorney-client relationship. On the other hand, if the non-payment is intentional, communication can bring clarity to the dispute.

A second reason clients may not pay a bill is that they are unhappy with the outcome of the legal services they received or the perceived value of the representation. This reason can be one of the most difficult to remedy and may give rise to other obligations for the attorney, such as reporting the dissatisfaction internally at the firm or to the firm’s insurer.

Next, sometimes a client may be dissatisfied with an administrative issue. A common example is when attorneys charge a rate that is higher than the client expected or intended for the representation. Other times an attorney may have spent more hours on the matter than the client deemed necessary. Again, understanding and communicating about these issues early in the representation can ensure they are resolved for the majority of the representation.

Finally, some clients will not have the funds to pay their legal bills. This situation can also especially uncomfortable. Nevertheless, if the law firm decides to withdraw due to a client’s inability to pay, it is usually easier to do so early in the representation.

Handling Fee Disputes Prior to Litigation

There are generally three strategies attorneys use to resolve disputes before litigation.

The first step is to host an informal meeting between the firm and client to discuss the issue. At this meeting it is usually helpful to include an attorney that was not directly involved in the representation.

If the client and law firm cannot resolve the dispute informally, they may find it is more productive to attend a mediation with a third-party. A mediation can help both sides save on costs and time.

Arbitration limited to just the issue of fee recovery is another option that many attorneys and clients will use to resolve a dispute. This method of resolving the dispute can help with privacy concerns and malpractice claims that arise from formal litigation. In Texas, Bar Opinion 586 suggests that while arbitration clauses are permissible, the attorney may have to explain the effects of arbitration clauses to clients in accordance with Rule 1.03(b). This may mean explaining the cost and time savings associated with arbitration, the potential relaxation of the rules of discovery and evidence, and the lack of jury trial or appellate rights.

Making The Decision Whether to File Suit

Ultimately, a law firm may be left with the decision to either file suit or take a financial loss. This decision involves weighing the pros and cons of both options, which include the amount of outstanding fees and the likelihood of a malpractice claim. Implementing a consistent billing cycle, communicating with clients about their fees, and attempting alternative methods can, however, help reduce the number of instances in which this decision must be made.

Shari L. Klevens is a partner at Dentons and serves on the firm’s US Board of Directors. She represents and advises lawyers and insurers on complex claims and is co-chair of Dentons’ global insurance sector team.  Alanna Clair is a partner at Dentons and focuses on professional liability defense.  Shari and Alanna are co-authors of “The Lawyer’s Handbook: Ethics Compliance and Claim Avoidance.” 

Two Key Provisions for Your Fee Agreement

February 27, 2018

A recent CEBblog article by Julie Brooks, “2 Key Provisions for Your Fee Agreement,” writes about two keep provisions in fee agreement.  This article was posted with permission.  The article...

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