A recent Daily Journal article by Heather L. Rosing and David M. Majchrzak, “The Evolution of Fee Disputes: How To Protect Yourself in a New Day & Age” reports on avoiding attorney fee disputes in California. This article was posted with permission. The article reads:
While attorneys and clients have always disputed over fees, the number and severity of clashes appear to have risen in recent years, with notable consequences. We are a service industry, and what we are selling is our skill and our time, with only so many hours in the day. If an attorney is not paid, especially if that person is in a small firm or in solo practice, the situation can have a significant impact on the ability to continue operations and meet expenses. It is therefore critical for every practitioner to carefully examine ways of avoiding these disputes, which can also sometimes lead to counterclaims for legal malpractice.
The #1 best way for an attorney to achieve protection is to pay close attention in the case intake process. Many attorneys embroiled in fee disputes have bemoaned accepting the client in the first place. “Why didn’t I see the red flags? If I did anything wrong, it was accepting this client despite my gut feeling that it was a bad idea!”
When considering accepting a new client, the attorney should ask why the client needs legal services and what the goal is. Understanding what your client hopes to get out of the representation will allow you to assess what it will cost to provide the services. In turn, this allows you to formulate a rough budget, and discuss with the potential client whether that person has ability to fund the representation. A large number of fee disputes occur simply because the client is surprised by the cost of legal services and is not financially prepared for the situation.
Another critical inquiry is whether the client has had other attorneys assist with the same matter. Who came before you? Were they terminated? Does the client owe them money? Maybe there were several attorneys before you. What does this mean? Is it a red flag? If the potential client’s history of representation makes you uncomfortable, this may not be the right client for you.
Once you have decided to accept the representation, it is time to fashion the fee agreement, which requires a careful examination of Business and Professions Code Section 6147 for contingency fee matters and Business and Professions Code Section 6148 for hourly matters. Among other requirements, these statutes mandate that fee agreements must be signed by both the attorney and the client. The client must be provided with a copy. Critically, the failure to ensure that your fee agreement conforms to the statutory requirements of the Business and Professions Code could give the client having the option of voiding your fee agreement, leaving you with a quantum meruit claim, which is less preferable than a fee claim based on a contract.
But complying with the Business and Professions Code is not enough. The agreement should clearly state the scope of the representation, and, in certain circumstances, discuss what is not included. If neither you nor the client are clear on exactly what you are doing for the client, a fee dispute may ensue. The 1993 case of Nichols v. Keller, 15 Cal. App. 4th 1672, further describes the potential malpractice-related consequences of failing to clarify the scope of engagement and make referrals on issues related to your representation.
For hourly engagements, it is also important to determine whether an advance retainer is necessary and whether the client has the ability to make that payment. If, for example, you are going to represent someone in a business litigation matter, and you request a $10,000 retainer, and they balk, this is a good indicator that they will not be able to sustain your fees. Prudent practitioners often times require that the retainer be regularly replenished and that the client provide a special pretrial retainer in an amount necessary to try the case 60-90 days before trial.
While a properly drafted contingency fee agreement provides the attorney with a lien on the recovery, hourly arrangements do not automatically include a lien. If an hourly attorney is interested in securing a lien through the initial fee agreement, Rule of Professional Conduct 1.8.1 (Business Transactions with a Client and Pecuniary Interests Averse to the Client) and the 2004 case of Fletcher v. Davis, 33 Cal. 4th 61 should be studied. It is possible to obtain a valid charging lien in an hourly case with the proper documentation, and it is oftentimes prudent to get one if there is an expected recovery from a third party.
Another consideration is whether your arrangement is for a flat fee. Rule of Professional Conduct 1.5 not only discusses the concept of an unconscionable or illegal fee, but also, in subsection (e), sets forth the circumstances in which a flat fee is allowable. This must be read in conjunction with Rule of Professional Conduct 1.15(b), which describes the special language that must be included in the fee agreement in order to place a flat fee in your operating account. It is also important for an attorney to clearly differentiate between an advance retainer and a flat fee for the client, as unsophisticated consumers of legal services may not readily understand the difference.
The fee agreement should also discuss the issue of fee disputes up front. For example, you can include language that says that the client should bring any problems with any bill to your attention within 30 days of receipt, so that you can proactively address them. The agreement can also let the client know that, in the event of a fee dispute, the client has the option of participating in mandatory fee arbitration through the local bar association, pursuant to Business and Professions Code Section 6200 et seq. In the event that the dispute cannot be resolved through Bar Association arbitration, the fee agreement can mandate private arbitration, if that is your preference.
There are many resources for crafting the best fee agreement. The State Bar of California has form fee agreements at www.calbar.org, and some legal malpractice insurers provide sample language. It is important, though, to take the time to customize every fee agreement to the specific situation, so both the attorney and the client are clear on the terms of engagement from the outset.
The next step in avoiding fee disputes is to do upfront budgeting combined with the issuance of regular bills. There is no downside to letting the client know early and often what the matter will cost. In litigation, because the cost can vary significantly based on how the dispute evolves, it may be necessary to update the budget at regular intervals. Disputes are far less likely if the client is not surprised by a bill.
Business and Professions Code Section 6148 discusses certain requirements for billing fees: “All bills rendered by an attorney to a client shall clearly state the basis thereof. Bills for the fee portion of the bill shall include the amount, rate, basis for calculation, or other method of determination of the attorney’s fees and costs.” For costs, the statute requires that “[b]ills for the cost and expense portion of the bill shall clearly identify the costs and expenses incurred and the amount of the costs and expenses.” There also certain requirements about responding to a client request for a bill.
The State Bar of California also provides use full guidance to attorneys in the form of fee arbitration advisories, which can be found at http://www.calbar.ca.gov/Attorneys/Attorney-Regulation/Mandatory-Fee-Arbitration/Arbitration-Advisories. These advisories deal with a variety of common issues, such as bill padding, nonrefundable retainer provisions, determination of a reasonable fee, the form of proper billing, and much more. Knowing upfront what can cause a fee dispute puts you way ahead of the game.
Another key to avoiding fee disputes is clear communication. The Rules of Professional Conduct require that attorneys keep clients updated on significant developments. The proactive practitioner, however, will go far beyond this, frequently talking and emailing with the client about case status, strategy, goals, and budgeting.
Sometimes, however, despite clear and frequent communication about the matter and regular bills, the client simply lacks the cash flow to fund the continued representation. In that instance, the attorney should have a candid conversation with the client as soon as possible. It may be that the client is desirous of settlement in light of the situation. The client may choose to liquidate investments or seek the help of friends and family members to fund the representation. It may be that a payment plan is appropriate. It may be that the attorney is comfortable continuing with representation because the attorney has a valid lien that complies with the Rules of Professional Conduct. A failure to proactively address nonpayment, however, exacerbates the situation and increases the likelihood of a disintegration of the attorney-client relationship.
The consequences of allowing a full-blown fee dispute to emerge can be severe. Not only can the fee dispute affect the ability of the attorney to run his or her law firm, but fee disputes can lead to counter allegations of malpractice, true or not. It is well-known that lawsuits for fees invite cross-claims for malpractice. Then, the attorney has to fund an insurance deductible and faces the prospect of increased premiums (and potentially insurability issues) in the future. If the attorney is uninsured, this means that he or she must raise or reserve a substantial sum for the defense of the claim. Litigation over the malpractice issues also interrupts the attorney’s normal operations and can cause high levels of stress and anxiety. Finally, even an attorney goes through the whole process to secure a judgment for his or her fees, there may be issues with collectibility and bankruptcy. Most fee awards are dischargeable in a Chapter 7 proceeding.
The solution is straightforward and commonsensical — a thoughtful case intake procedure, a tightly crafted fee agreement, proactive budgeting, and regular billing and communications. These four steps will help you maximize your revenues, best serve the clients, and avoid unpleasant proceedings with client you once served.
Heather L. Rosing and David M. Majchrzak practice in the areas of legal ethics, risk management, and litigation of professional liability claims at Klinedinst PC in San Diego.