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Tort & Insurance Practice

How to Avoid a Fee Dispute with Your Client

James P. Schratz and Susan R. Brown

The subject of abusive billing practices by attorneys is receiving an increasing amount of attention. Unfortunately, how law firms respond to billing disputes is not helping their public image. Despite widespread publicity and numerous punitive damage awards, many law firms appear to treat fee disputes with cavalier indifference. They refuse to admit that the billing abuse occurred, thus further angering the wronged client and increasing public cynicism toward the profession. The following is a list of suggestions on how to eliminate client complaints about overbilling, or at least prevent them from exploding into a financial and public relations debacle.

Communicate. A simple concept, but so often ignored. Many fee disputes arise out of a client’s frustration at the attorney who doesn’t return phone calls. Return all calls the same day. If the attorney is in trial or too busy, a secretary or paralegal can call the client. If they are unable to resolve the issue, at least they let the client know the firm cares.

Develop twenty-four-hour online client access to the bills. Not only does such innovation eliminate surprises for the client, it has the side benefit of requiring attorneys to submit their time sheets daily.

To avoid client "invoice shock," provide a budget at the start of the case. Inform the client that the budget will be revised, if necessary, as the case develops. Make sure the budget is realistic; don’t low-ball just to make it look good. Review the account periodically to confirm that you are operating within the budget. Include with the initial budget a retainer letter that lists all of the items for which you do not charge. For example, absorb costs such as mileage and in-house photocopying into your overhead—most clients don’t like to feel they are being "nickel-and-dimed." The extra revenue is not worth losing the client’s goodwill.

Review all bills in detail for overcharges, typographical errors, and other mistakes. Next to not returning phone calls, this is a client’s biggest complaint.

Effective Management. Focus on the top suspects: the people who have bad reputations, prior complaints against them, or both.

Most firms reward, if not require, attorneys to bill a substantial number of hours with little recognition of the possible problems this pressure creates. Just as an attorney billing 1,000 hours annually may indicate underutilization, an attorney billing 3,000 hours may indicate a potential overbilling problem. Failure to periodically review these management reports to detect possible problems may be found to constitute gross negligence by the other law firm partners. High billing requirements can also result in the loss of potential clients.

As a safeguard against potential problems, keep your billing requirements reasonable and monitor the monthly billables for attorneys with 200-plus hours. Review the nature of the hours for these attorneys, e.g., were they in trial? If the workload does not support the hours billed, this should raise a red flag. Effective management will catch these developing patterns and correct them before a problem arises. These tasks should be delegated to a full-time person devoted to client service and law practice management. This person, acting as a client ombudsman, will ensure that the firm delivers quality service at a fair price.

There are many other ways in which a firm’s general counsel or managing partner, through effective management, can avoid potential fee disputes:

(1) Three-Step Invoice Review. In most firms, prebills are reviewed only by the supervising partner or the associate handling the file. In the Three-Step Method, the associate becomes responsible for his or her hours. The prebill is first reviewed by the handling associate, then the supervising partner, and, finally, the managing partner.

(2) Conduct In-House Spot Audits of Associates and Partners. Select two or three random files of a few associates and partners each month. Compare the work product with the prebill. Correspondence is the easiest area to check, and the most abused. Also, compare the start/stop times of a deposition to the time billed for attendance. And watch for patterns developed by an attorney. Has he or she arbitrarily created minimums?

(3) Create a System for Regular Budget Reviews. Nothing will discredit your billing faster than to end up overbudget within the first six months of the file.

(4) Create Billing Guidelines. Most insurance companies have billing guidelines that defense counsel must follow. Borrow from this concept. Include such things as nonbillable tasks (instruct that these should be itemized on the invoice, but listed as N/C); coding requirements specific to your billing system; and instructions for detailed entries (a client is less apt to question an entry that states "reviewed three boxes of homeowner documents for manifestation dates of defects," 6.70 hours, than "review documents," 6.70 hours). Do not list estimated times to complete certain tasks or task minimums. This type of "value billing" is rejected by most clients and raises ethical questions as to billing for time not actually expended on a file. Firms should not engage in this type of billing practice and should never encourage this type of billing via a written memo. Properly executed guidelines can go a long way to show due diligence, honesty, and integrity in your firm’s billing practices.

(5) Conduct Monthly Billing Seminars. Review the guidelines and discuss potential problems found in the prebills or recent client complaints.

Effective management also means preventive management. This can be accomplished by retaining an independent auditing firm to review billing procedures before a dispute develops. About 30-50 percent of legal bills are questionable. When a fee dispute ends up in litigation, the invoice is often reduced by this amount.

A firm’s failure to retain an expert legal auditor on its own behalf is especially surprising in light of the questionable credentials and methodology of some of the legal auditors that the clients are hiring. In these cases, if the law firm had retained its own expert who could have demonstrated serious questions about the opposing side’s expert, the firm could have fared much better in the fee dispute.

Many law firms dismiss client complaints of overbilling. When outside legal auditors, retained by the clients, produce concrete examples of overbilling, they are often dismissed as the handiwork of "hired guns." All client complaints and audit reports should be viewed as learning opportunities to correct potential problems before they develop.

There are many reasons why a law firm may not incorporate any or all of these suggestions. First is the extreme conservatism of most firms. It may take many more multimillion-dollar verdicts before many firms change their policies and the way they handle complaints. Second, as long as attorneys are compensated on an hourly basis, there is an inherent conflict between the attorney and the client with a corresponding disincentive to ensure that overbilling does not occur. Attorneys must realize that clients are becoming more sophisticated and willing to challenge their legal bills. These challenges must be taken seriously to avoid costly disputes and maintain good client and public relations.

James P. Schratz, an attorney, is president of a consulting firm, James Schratz and Associates in Santa Rosa, California, that provides advice to clients and law firms on proper billing practices. Susan R. Brown is audit counsel at Golden Eagle Insurance Company in San Diego, California.

This article is an abridged and edited version of one that originally appeared in The Brief, Winter 1997 .

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