A recent Law 360 article by Lourdes Fuentes, “Twitter Legal Fees Suit Offers Crash Course in Billing Ethics”, reports on ethical lessons from the recent Twitter fee dispute litigation case.  This article was posted with permission.  The article reads:

Corp.'s case against law firm Wachtell Lipton Rosen & Katz, filed over Twitter's legal bill in connection with Elon Musk's $44 billion acquisition of the company, highlights the importance of following proper billing practices, which are governed not only by contract law but also by the higher standards imposed on lawyers by the rules of professional conduct.  The claims in X Corp. v. Wachtell Lipton Rosen & Katz, filed in early July in California's San Francisco County Superior Court, include restitution (unjust enrichment), breach of fiduciary duty, aiding and abetting breach of fiduciary duty, and violation of California Business and Professions Code, Section 17200.

The pleading contains a litany of facts but recounts a concise timeline. From when Wachtell was retained on June 21, 2022, to the Oct. 13 party held to celebrate the month-end closing of the deal at the original $44 billion price, only 114 days had elapsed.  In that time, Twitter received two invoices.  These invoices were included as exhibits to the complaint.  A review of the invoices reveals blank time entries, vague descriptions, irrelevant references and block billing, among other issues.  The invoices amount to close to $18 million.

To compound these perceived improprieties, the final fee statement then added an extra $72 million dollars to that tab.  This was a "success fee" that was referenced in the closing day letter agreement drafted by Wachtell and signed by Twitter's then-chief legal officer, Vijaya Gadde, allegedly hours before the closing sale of Twitter on Oct. 27.  Significantly, the success fee had not been outlined in the engagement letter.

While the validity of the claims will be decided in court, the suit spotlights vital legal billing practices and ethical considerations for attorneys and clients alike.  Even if Wachtell defeats X, the suit has put the reputation of the firm's billing practices at risk.  Moreover, the suit has put the reputation and ethics of individual attorneys at risk by disclosing the invoices at issue, tying timekeeper names to time entries.

Further, the answer to whether the $90 million is fair pay or windfall may not be based on the amount itself, but on whether the parties followed the rules of professional conduct governing attorney-client relationships.  By reexamining billing approaches in light of the Twitter fees case, law firms and clients can take away important lessons on proper billing practices.

The Relevant Rules

Client and lawyer can maintain a positive partnership that is founded on transparency and trust by following an ethical road map.

The claims in the complaint provide us with a good starting point.  They are based on common law tort, contract law and the American Bar Association's Model Rules of Professional Conduct, which have been similarly adopted to varying degrees in other states' jurisdictions.  These are:

    Section 6147 of the California Business and Professions Code, which addresses contingency fees;

    Rule 1.5 of both the California and New York Rules of Professional Conduct, which prohibit unreasonable or unconscionable fees;[6] and

    Rule 1.8 of both the California and New York Rules of Professional Conduct, which prohibit soliciting gifts from clients.

By keeping these rules — or their equivalent from your jurisdiction — top of mind, practitioners can avoid the appearance of impropriety. Though not mentioned in the complaint, I would also add ABA Rule 1.4, which deals with attorney-client communications, to this list.

8 Crucial Steps for Success Fees

Fees based on the outcome of a case, like the success fee in the Twitter case, are permissible, but they still need to be reasonable.  While the ABA rules do not specifically mention success fees, they state that a fee may be contingent on the outcome of the matter for which the service is rendered.  The rules do, however, state that:

A contingent fee agreement shall be in a writing signed by the client and shall state the method by which the fee is to be determined.  Success fees are common in transactional matters, but these are typically negotiated as part of an engagement letter.  They are structured to incentivize the law firm to achieve the best possible outcome for the client.  However, the exact nature and amount of these fees can vary and are a subject of negotiation between the parties.  As a result, it is crucial for both parties to follow these steps.

Transparency and Disclosure

All terms related to the success fee should be clearly stated in the engagement letter or contract.  This includes how the fee is calculated, when it is to be paid, and under what conditions it may be modified or waived.

Reasonableness of the Fee

All fees must be reasonable.  Look for guidance in ABA Rule 1.5 for factors that can be considered to determine reasonableness of a success fee. These can include:

    The novelty and difficulty of the case;

    The skill required to properly provide legal services;

    Comparable rates in your area for like services;

    The amount at issue and the results obtained;

    Time limitations imposed by the client or by the circumstances;

    The reputation, experience and ability of the lawyers performing the services; and

    Whether the fee is fixed or contingent.

Proportionality

The success fee should be proportional to the value provided by the law firm.  This could be in relation to the deal size, the complexity of the transaction or the level of risk involved.

Incentive Alignment

Make sure that the fee structure selected aligns the firm's incentives with the client's goals.  Otherwise, it could be considered a conflict of interest, among other ethical pitfalls.

Regulatory Compliance

Understand your state-specific rules or regulations that might apply.  For example, California's Section 6147 speaks to contingency fee agreements.  Research your jurisdiction's rules and regulations.  Remember, as well, that some jurisdictions may cap or ban certain types of fees.

Dispute Resolution

Include a clause specifying how any disputes over the success fee will be resolved, whether through arbitration, mediation or court proceedings.

Periodic Review

It may be prudent to include provisions for reviewing the success fee arrangement at various stages of the transaction.

Client Consent

Explicit, informed consent from the client is crucial, especially if the success fee arrangement is unconventional or complex.  It is important to note that all fees must not only be reasonable but also adequately explained to clients.  Circumventing clear documentation enables end-runs around billing safeguards in violation of ABA Rule 1.5 and violates Rule 1.4.

While a lawyer and client may renegotiate a fee agreement during an ongoing relationship, the lawyer typically carries the burden of establishing fairness of the new arrangement if it is ever challenged.  Fee agreements entered during the attorney-client relationship will get heightened scrutiny to avoid the appearance of undue influence or impropriety.

In the case of Twitter, the success fee was agreed upon allegedly hours before the closing of the deal.  Although Twitter's old board agreed to the fees, the circumstances in which this transpired could be perceived as unethical and improper because of the lateness of the agreement made by the parties to include a success fee.  Hence, in addition to challenging the fee as unreasonable, the lawsuit claims that, based on the facts leading to the closing day letter agreement, the success fee should be considered a gift, and hence a violation of ABA Rule 1.8.

10 Proper Billing Practices

The controversy highlighted in the Twitter fee case provides a valuable reminder of the heightened scrutiny in attorney-client relationships due to its fiduciary nature and the rules of professional conduct.  In addition to the steps specific to success fees outlined above, it is important to keep these broader billing best practices in mind.

Engagement

Always formalize the fee arrangement in a written agreement.  This holds true whether you are dealing with an hourly rate, a contingency fee or some other type of fee structure.  Any modifications to the engagement terms or fee structure should also be put in writing.

Transparency

Clearly outline how legal fees will be calculated, any percentages that may accrue in the case of a contingency fee and any other expenses that will be deducted from the recovery.

Client Communication

Keep the client informed about any developments.

Alternative Fee Arrangements

There is nothing wrong with exploring creative billing options that can benefit both parties, but ensure they are in line with ethical guidelines and are clearly outlined in the agreement.

Data-Driven Metrics

Consider using data-driven methods to establish fees, especially for alternative fee arrangements.  This adds an element of fairness and can help align incentives between client and lawyer.  Notably, today we have the benefit of using artificial intelligence to come up with creative data-based alternative fee arrangements.

Review and Oversight

Periodically review the billing practices to ensure compliance with your client guidelines.  Train your timekeepers in proper billing practices and client-specific billing guidelines.  This training should be done annually and while onboarding new personnel.

Regulations

Understand the rules governing fees and conflicts of interest.  Train your lawyers in the rules of professional conduct.  This training should be done annually and while onboarding new personnel.

Fiduciary Duty

Always act in the best interest of the client, keeping in mind the fiduciary nature of the attorney-client relationship.

Avoid Surprises

Be proactive to avoid sticker shock.  Discuss potential scenarios and outcomes openly with the client, so they know what to expect in terms of fees.

For example, one fact alleged in the complaint is that:

[I]n the middle of the board's final October 27 meeting, former Twitter general counsel Sean Edgett sent the chart of fees that the Twitter board was meeting to approve.  Upon seeing the magnitude of the fees being presented for the board's approval, one former Twitter director immediately exclaimed in an email reply to Edgett: "O My Freaking God."

Regular Invoicing

Provide detailed invoices that outline the work done, the time spent and the costs incurred.  This not only aids transparency but will also help in resolving any disputes that may arise.  Also remember, your time entries should be treated with as much care as any work product; they should be clear, concise, descriptive and grammatically correct.

By following this ethical road map, the parties will reduce the likelihood of disputes and misunderstandings and, also, maintain a good working relationship.

Conclusion

Whether you are the client or the lawyer, beware falling asleep at the wheel when it comes to new engagements, modifications to billing and billing practices generally.  To do so may risk legal action and your reputation.

Lourdes Fuentes is a seasoned litigator, Founder & Chair of Karta Legal LLC, law firm partner and CEO.  She has a law degree from the University of Pennsylvania and is also a certified Legal Project Manager and Lean Six Sigma Black Belt.  With decades in the field, her expertise lies in optimizing legal operations and promoting ethical billing.  Lourdes founded Karta Legal to tackle these specific challenges, offering tailored solutions that include innovative technology adoption and process improvement.  Her firm caters to a diverse range of clients—from Fortune 100 companies to specialized boutique law firms—ensuring they adhere to transparent and ethical billing practices.

A recent Law 360 story by Aaron Keller, “Conn. Lawyer Says Colo. Companies Stiffed $107K Legal Bills”, reports that two Colorado companies, one of which purported to be working on a cryptocurrency exchange, stiffed a Connecticut attorney on legal bills and costs totaling nearly $107,000 in connection with representations in underlying securities lawsuits in Florida and Illinois, a new federal lawsuit alleges.

Edward Stone Law PC, a small Greenwich, Connecticut-based firm with a sophisticated niche practice in commercial litigation, insurance and pensions, says Net Savings Link Inc. and the China Food and Beverage Co. have both failed to pay legal fees and expenses connected with the two core matters.  The defendants share the same Boulder, Colorado, address, according to a breach of contract complaint filed in the U.S. District Court for the District of Connecticut, and they share James A. Tilton of Pennsylvania as president, according to several exhibits.

The complaint alleges that the two companies are jointly and severally liable for the sum in dispute.  "Case is simple," attorney Eddie Stone said when contacted by Law360.  "We provided legal services and despite numerous promises that our invoices would get paid — we got stiffed."

The first underlying matter dates back to April 27, 2021, in Florida, where the complaint says the Colorado companies racked up $25,530 in fees and costs.  The firm's hourly fees were between $375 and $550 per hour, according to a retainer agreement filed as an exhibit.  The retainer letter adds that the Florida dispute involved claims by Jake P. Noch and potentially by his company Pro Music Rights Inc.

The Florida matter referenced in the Connecticut complaint appears to be state court lawsuit, filed in Collier County on June 15, 2021. Noch sued Net Savings and Tilton for allegedly defaulting on a promissory note connected to an even earlier settlement of a $1.3 million dispute surrounding Noch's unpaid duties as the CEO of Net Savings.  Net Savings allegedly promised to trade shares of its common stock to settle the debt but did not follow through because of a depository trust company chill on the necessary shares.  Securities fraud was among the causes of action in Noch's Florida case.

The firm says its work included "drafting pleadings, participating in discovery, representing defendants at status conferences and representing defendants at mediation" before a federal magistrate judge.  The defendants incurred $51,855 in legal costs under the same hourly rates referenced in the Florida matter, according to Connecticut court papers.

That number ballooned to $81,409 because of a 1% monthly interest fee contained in the underlying agreement, Stone alleges.  The Connecticut complaint alleges two counts of breach of contract and an account stated claim that appears to have been pled in the alternative.  Tilton is not named in the Connecticut complaint and is not a named defendant; his name appears only in retainer and billing agreements attached as exhibits.  However, securities issues appear to have plagued him for quite some time.

A recent Law 360 story by Lauren Berg, “Quinn Emanuel Says LA County, Ex-Sheriff Owe Legal Bills”, reports that Quinn Emanuel Urquhart & Sullivan LLP has sued Los Angeles County, the Los Angeles County Sheriff's Department and former Sheriff Alex Villanueva in state court, saying they still haven't paid a 4-year-old bill for the firm's legal services.  After Quinn Emanuel provided legal services to the former sheriff in a lawsuit over his decision to rehire a deputy, the law firm claims the county blocked it from receiving a $280,075 payment for the "first few months of legal services," according to the complaint filed in Los Angeles County Superior Court.

"Quinn Emanuel proceeded to litigate on behalf of the sheriff and LASD, but defendants have failed to pay any amount of fees and costs to Quinn Emanuel even though Quinn Emanuel was retained pursuant to the [Los Angeles County Board of Supervisors'] and county counsel's authorization," the firm said.

The dispute stretches back to February 2019, when county counsel informed Villanueva that he would need to select independent counsel to represent him in a lawsuit filed by the Board of Supervisors over the former sheriff's decision to rehire Deputy Caren Carl Mandoyan after he had been fired over alleged personal and professional misconduct, according to the suit.

Villanueva then retained Quinn Emanuel, which drew up a written agreement effective March 4, 2019, the complaint states.  It included anticipated billing rates ranging from $695 per hour to $1,400 per hour, but also acknowledged that the Board of Supervisors had agreed to pay an unspecified amount of the sheriff's and LASD's legal bills, according to the suit.

After the county sought a temporary restraining order, Quinn Emanuel appeared at the hearing on March 6 on behalf of the sheriff and the LASD, the suit states.  While there, none of the county's attorneys objected to Quinn Emanuel's representation nor did they suggest that a contract between the Board of Supervisors and Quinn Emanuel was required, according to the complaint.  After litigating the case for about a month, the county's attorneys suddenly demanded that Quinn Emanuel enter into a contract with county counsel in order to be paid, the complaint states.

The county also threatened to withhold payment until Quinn Emanuel agreed to "unreasonable and unacceptable terms unilaterally imposed by the county," including that it could only represent Villanueva, not the LASD, and that Villanueva could have counsel for only two of the county's three causes of action, according to the complaint.  The proposed agreement fixed the hourly rate for all Quinn Emanuel partners and associates at a blended rate of $495 per hour, according to the suit.

A recent Law 360 story by Brian Steele, “Ex-Client Owes McCarter & English $1M For Bills, Jury Finds”, reports that McCarter & English LLP won a clean sweep of a multiparty verdict in Hartford federal court when a jury awarded the law firm more than $1 million in its suit against a former client, which failed to pay a batch of legal bills after an adverse outcome in a trade secrets case in Kentucky.

A 10-person jury found that the California-based dietary supplement company Jarrow Formulas Inc. breached its contract with the law firm when it withheld payment on five invoices after the Kentucky federal trial ended in 2019, along with unrelated bills for intellectual property work.  Jarrow countersued, claiming that the bills were improperly inflated by undisclosed rate hikes and that McCarter & English botched the trade secrets suit, but the jury rejected each of the counterclaims.

The firm, which has offices in Hartford and Stamford, Connecticut, also should be awarded prejudgment interest and does not have to pay Jarrow anything, the verdict said.  The jury determined that Jarrow's breach of contract was willful and malicious, while McCarter & English's billing practices were the product of fair dealing.  After the courtroom deputy polled the jury, U.S. District Judge Michael P. Shea praised jurors for their punctuality and attentiveness throughout the trial.  "I can't remember a better jury that I've had," the judge said.

Caudill Seed & Warehouse Co. Inc. sued Jarrow in Kentucky in 2013 for misappropriation of trade secrets, and Jarrow was ordered to pay $2.4 million for willful and malicious misappropriation in July 2019.  A judge later added more damages and attorney fees.  Company founder and namesake Jarrow Rogovin testified in the Hartford case that he decided to fire McCarter & English and refused to pay outstanding bills, for which the firm quickly sued in the District of Connecticut.  Jarrow's insurer declined to provide coverage for McCarter & English's bills in the Kentucky case.  The firm's second amended complaint alleged that Jarrow owed $2.04 million.

Judge Shea had already granted partial summary judgment to McCarter & English and nearly $1 million in damages based on disbursements and the original hourly attorney rates before they rose, but left open the possibility of Jarrow receiving a refund after trial.  That ruling in March 2021 noted that rates rose early on in the Kentucky case, but Jarrow paid the bills for six years.

The jury's verdict awarded McCarter & English another $1,057,173.93, and the judge asked the parties for briefs on the issues of prejudgment interest and punitive damages.  The jury found in favor of the firm on Jarrow's claim under the Connecticut Unfair Trade Practices Act and on its legal malpractice claim, which sprung from McCarter & English's decision not to call Rogovin to testify live during the trial in Kentucky.

Rogovin first hired McCarter & English partner Mark D. Giarratana when the attorney worked at a different firm in 1996, and they maintained a professional relationship and friendship for 23 years, according to trial testimony from each.  Giarratana said Rogovin paid all the Kentucky bills without complaint until after the verdict, while Rogovin said he did not read them thoroughly and failed to notice when the rates rose.

A recent Law.com article by Diana C. Manning, “Mid-Year Billing Tips: The Devil Is In The Details”, reports that the art of billing is an inevitable part of any law practice, so buckle up, because the devil is in the details.  This article was posted with permission.  The article reads:

In an earlier installment on effective and efficient billing practices, we covered the “lay of the land” on billing successfully for both seasoned practitioners and new attorneys.  This summer edition promises not to disappoint, covering such topics as billing guidelines and risk management.  The art of billing is an inevitable part of any law practice, so buckle up, because the devil is in the details.

Billing Guidelines

It is an essential practice to develop a written set of billing guidelines as part of the engagement agreement with a client. Apart from the obligations set out in the RPCs (see ABA Model Rules 1.4 & 1.5), attorneys have an interest in maintaining written billing standards agreed to by the client for transparency in collecting fees and for the defense of potential claims centered on the attorney’s bills.  As a matter of practice, most institutional clients require acceptance of and adherence to their own set of established billing guidelines as part of the retention.  These standards serve as the blueprint for billing throughout a given representation, and set out various requirements and prohibitions for getting paid.  At the outset, be sure to develop a familiarity with the billing guidelines for a given matter, which typically includes such details as timing of the client’s invoice, payment schedules, personnel rates, and task-specific guidelines.  Not being cued in on a client’s billing particulars can lead to swift phone calls from the client, rejected invoices, outright non-payment, and client dissatisfaction.

A common pitfall is overstaffing on routine or ordinary tasks that can yield duplicative charges. See J.E.V. v. K.V., 426 N.J. Super. 475, 494 (App. Div. 2012) (“deducting $5,625 from the counsel fees, stating that amount was unreasonable because the situation only warranted one attorney when two were present.”); Bell v. Prefix, 784 F. Supp. 2d 778, 787 (E.D. Mich. 2011) (finding it “not reasonable to consistently bill a party for two attorneys to do the same work/review each other’s work.”).  Root this out early on by designating a legal team with members who have clearly defined roles and can allay fears of overstaffing.  A cohesive legal team will also minimize inefficiencies that can strain the attorney-client relationship and be a detriment to billing success. See Universal Drilling v. Newpark Drilling Fluids, 2011 U.S. Dist. LEXIS 17203, at *8 (D. Colo. Feb. 22, 2011) (“The court lauds the economies that can be obtained by delegating the bulk of litigation responsibilities to associate attorneys, and recognizes that the limited oversight and guidance of more senior attorneys to provide supervision and review of such work may be appropriately billed as well.”).  When client satisfaction is paramount, lawyers should always strive to leave the positive impression of efficiency with a results-oriented billing practice.

Risk Management in Attorney Billing

Clarity is key when it comes to billing formats.  Regardless of the particular matter, the goal is to convey in a clear and articulable manner as much information as is reasonable, both for the client and the attorney’s benefit. See, e.g., Handschu v. Special Services Division, 727 F.Supp.2d 239, 242 (S.D.N.Y. 2010)(Attorneys seeking court-ordered compensation “must document the application with contemporaneous time records … that should specific, for each attorney, the date, the hours expended, and the nature of the work done.”); Bell v. Prefix, 784 F. Supp. 2d 778, 787 (E.D. Mich. 2011)(“Both attorneys frequently utilized non-descript ‘block-billing’ in their entries.  In other words, for many entries it is not possible for the Court to ascertain what the attorney was doing.”).  From a risk management standpoint, clarity in billing entries allows a client to better understand the what and why for each billed activity taken on the client’s behalf.  As the adage goes, it is quality rather than quantity that matters.  For attorney billing, this means being able to project the quality of representation in billing entries that are both clear and helpful to the client.

Another incentive for honing your billing practices is to reduce the likelihood of a potential fee dispute, or catalyst for a malpractice claim or disciplinary action.  Excessive billing can lead to disciplinary action. See In re Coffey’s Case, 152 N.H. 503, 511-12 (2005)(finding violation of RPCs, including “charging his client a clearly excessive fee” where attorney “billed 225 hours to write a brief”).  State disciplinary authorities routinely conduct audits of the books and records of attorneys and law firms that engage in the private practice of law within a given jurisdiction.  A discussion on the topic of audit compliance programs may well be reserved for a future publication, but suffice it to say for present purposes that ethical billing is critical to the integrity of the legal profession, and falling short of ethical standards in this regard can jeopardize a practitioner’s law license.  Apart from state disciplinary arms, law firms will conduct audits of legal fees and expenses for risk management purposes.  The rise in unique and client-specific billing guidelines often requires law firms to employ personnel whose responsibilities include compliance with billing guidelines.

The Bottom Line

Throughout the attorney-client relationship, lawyers and law firms should keep an open dialogue with the client when it comes to billing expectations.  Communication is key.  Practitioners will also want to master the billing guidelines of clients early on and keep up-to-date with any changes.  The scrutiny over bills by clients (and ethics authorities) has only increased with advancements in technology.  The goal for practitioners should be to develop a system for billing that is both ethical and efficient.

Diana C. Manning is the managing principal at Bressler, Amery & Ross.

A recent Law 360 story by Caleb Symons, “Pillsbury Blasted for ‘Unreasonable’ Atty Fees in Cinema Row,” reports that Chinese cinema magnate Hui Qin has accused top attorneys at Pillsbury...

Read Full Post

A recent Law 360 story by Madeline Lyskawa, “Atty Trashed Time Records, Spa Says in $1.15 Fee Fight,” reports that an Atlanta-based airport travel spa operator urged a Georgia appellate court to...

Read Full Post

A recent Law 360 by George Woolston, “NJ Firm Keeps Victory In Retainer Fee Billing Challenge,” reports that the New Jersey state appeals court has backed Arbus Maybruch & Goode LLC's win in...

Read Full Post

A recent Law 360 by Emily Sawicki, “Co. Held in Contempt For Failing To Pay $1M Atty Fee,” reports that a New Jersey federal judge has issued a contempt order against an India-based supplement...

Read Full Post