Common ethics and risk management issues arise from involuntary pro bono representations—otherwise known as collecting fees and avoiding complaints.
Starting Off Right—Manage Expectations and Avoid “Bad” Clients
All lawyers in private practice need to avoid bad clients, meaning the clients who say, “money is no object,” or the clients who actually say, “I’m not sure I can afford a lawyer.” Unfortunately, most clients—at least at the beginning—appear genuine in their goals and the facts they convey. They agree that they understand how you charge and that a divorce/custody dispute/paternity challenge may not be inexpensive. Clients hear you tell them that the fees will depend in part on how much the client assists in the representation and how obstinate the opposing party is. They hear all of that, but they either forget it or pretend to forget it during the representation.
The first tip to getting paid ethically is to trust your instincts—do not accept the sad-story client who just cannot come up with the initial retainer but promises to bring it in as soon as he gets paid in two weeks. This sounds heartless, but the first step is—choose which clients you are willing to represent pro bono . . . do not let clients impose this on you.
Practice Tip: Lawyers should pick their pro bono clients—they should not be involuntary.
Ethically it is appropriate, with client consent, to perform a credit check to assure the client has the capacity to pay fees. Require a significant retainer up front, to avoid the ever-slowing trickle of payments once you represent someone. Ask prospective clients the difficult questions about how they expect to pay for the matter and be candid with how much litigation costs—including experts and transcripts! Explain in person and in writing that the firm charges for telephone calls and reading emails (and text messages).
Practice Tip: Do NOT estimate a range of fees unless you are prepared to charge a flat fee. When a lawyer says, “trial may cost anywhere from $5,000 to $50,000,” the client only remembers that you said trial would just cost $5,000.
Be firm about receiving a retainer (advance fee deposit) at the beginning of the representation. Calculate the initial retainer to cover the average fees for that type of matter for at least the first three months (preferably six months). Review similar matters to see how much you billed in the first few months and make this your standard retainer requirement.
Advertising reduced rates and/or flat fees means those clients will expect no increases in fees—at all. Be careful about over-promising reasonable rates when the firm cannot afford them. Not only could such advertisements violate the ABA Rules of Professional Conduct (hereinafter also referred to as “the Rules” or “Ethical Rules”; also check the ethics rules in your licensing jurisdiction for variations), but they will lead to clients with unreasonable (aka, expensive) expectations.
What Should Be in Every Fee Agreement to Minimize Fee Disputes
No article on getting paid ethically can avoid discussing fee agreement requirements—even if just briefly summarized. For more detail on this subject, please refer to other articles in this edition. A quick reminder: While Rule of Professional Conduct 1.5 in your jurisdiction may not require a written fee agreement, every lawyer should use written—and signed—fee agreements.
Written fee agreements are a crucial component to framing the relationship the way the lawyer expects the relationship to work—and to manage client expectations. The Rules of Professional Conduct only necessitate discussing three topics in a fee agreement:
- who is the client;
- what is the scope of the representation; and
- how fees and costs will be calculated.
Another mandatory term is when someone other than the client is paying the legal fees (including parents, girlfriends, boyfriends, etc.), the fee agreement needs to discuss Ethical Rule 1.8(f)’s requirements that (a) information about the representation will remain confidential, (b) the client directs the representation, and (c) the client consents to the third-party payor. That third-party guarantor may sign the fee agreement but should not direct the representation and should not receive the detailed monthly invoices (because that may waive the attorney/client privilege and make the invoice available to the opposing party). Also, specify that if a refund is due, who will receive the refund—the client or the third-party payor.
Use the written fee agreement to manage client expectations and include provisions beyond those simply required by the Rules. In addition to the very few “mandatory” clauses for a written fee agreement, written agreements also should discuss the following topics: communication, termination, client obligations, arbitration clause (mandatory in some states, permissive in others), and data/file retention.
Practice Tip: Check the firm’s liability policy to confirm whether there is a requirement for signed written fee agreements for all new clients and new client matters.
Bill Monthly—and Correctly! Use This as a Communication Tool
Another article in this edition discusses billing in more detail, but to get paid—ethically—it is important to remember that monthly invoices are a communication tool, not just to get paid but to keep the client informed about everything the firm has done for them in the past month. Train all timekeepers in the firm to record time each day. Studies of time tracking show that a firm may lose as much as 200 hours per year for timekeepers who fail to record time each day—that is a lot of money. Yes, this is difficult in every firm, especially solo practices, where much of the day may be spent on administrative tasks—but this is part of each lawyer’s ethical and financial obligation. Training all timekeepers to record daily time is essential. Also train timekeepers how to write a billing entry—and explain that even if the entry might need to be redacted later for submission to a court, each entry should be a complete sentence.
View the invoice as a running chronology that should list for the client everything done on his or her behalf, with complete descriptions and entries for all communications (including emails), document review and preparation, research, and meetings/negotiations/hearings. In addition to keeping clients informed, regular (i.e., monthly) billing assures regular cash flow and managing clients who begin to have payment “problems.”
Demonstrate the value in your services by providing the client with complete explanations. For instance, instead of saying, “Witness prep—12 hours,” a more useful billing entry would state something like “Meeting with witness Jane on parenting issues, to review 400 exhibits including deposition testimony from six other witnesses and Jane’s prior declaration, and discussion of her involvement in the children’s school decisions—12 hours.” This reminds the client of the importance of Jane’s testimony as well as the amount of work that goes into preparing a fact witness for trial—all of which the client might not have seen.
Acronyms and cryptic time entries only cause confusion, not payment. For example, “Draft document,” “telephone call with RSS,” and “Research” are insufficient billing entries. Detailed sentences also help in the event that the client does not pay and the firm must ask a court or arbitrator to decide if the fee was reasonable for the services performed. Never assume that your understanding of an acronym will be the same as a client’s. Remember, for example, that “SOL” means statute of limitations to lawyers but may have another meaning for clients. . . .
How/Why Fee Disputes Arise
The most common reason for a fee dispute is when a client is “surprised” by the amount of fees generated during a short period of time. Two of the three reasons for this surprise are preventable by lawyers. The first reason is lack of regular billing. Clients are far more likely to pay modest monthly bills than to pay a large quarterly invoice. Explain the firm’s billing procedures at the beginning of the representation and stick to those procedures, including sending at least monthly bills. Remember that the invoices are a form of communication under ER 1.4 that should be used to chronicle all activity within a month.
The second reason for fee disputes is failing to discuss fees at the beginning of the representation. Not only is this a communication requirement, but it also manages the client’s expectations about the expense involved in a family law matter, including the fact that the firm charges for every call and email. The third reason for a fee dispute is the client’s simply trying to get something for free. Clients believe they can bargain out of or simply ignore lawyer invoices—and the lawyer will be stuck representing them. This is partially true if there is a trial date.
To avoid involuntary pro bono representations, stay on top of the firm’s receivables. When a client becomes a slow pay, talk to him or her—do not ignore it. If the client stops paying altogether, immediately consider withdrawing before there is a hearing/trial date that prohibits you from withdrawing. Note that the Ethical Rule pertaining to reasons to terminate a representation, ER 1.16, includes at least two permissive reasons for withdrawing when clients fail to pay: ER 1.16(b)(5) permits withdrawal when a client fails to fulfill an obligation and ER 1.16(b)(6) permits withdrawal if the representation will cause unreasonable financial burden on the lawyer.
Practice Tip: When withdrawing from a representation, cite to the Ethical Rule and DO NOT elaborate beyond that to explain why the firm must withdraw.
Fee Disputes as Malpractice Issues
Everyone knows that professional liability carriers discourage suing clients for overdue fees because such suits frequently generate counterclaims for malpractice—regardless of whether or not the counterclaim has merit. In fact, many carriers will ask firms how often they sue clients for fees and may refuse to renew a policy if a firm regularly sues clients.
Before filing suit against a former client for fees, lawyers should have a colleague review the fees charged and work performed for an objective assessment of whether it is financially and emotionally worth litigating the matter. If the lawyer decides that litigation is necessary, check with the firm’s carrier first to determine if the carrier can provide any assistance (and at least will be on notice). Lawyers should not litigate their own firm fee cases—hire a professional. This is important both because the lawyer will be a witness in the case so they may not be able to serve as trial counsel under ER 3.7, but also to afford some objectivity in the representation. Remember that when suing a client, a lawyer in most jurisdictions may disclose only the information necessary to establish the claim under ER 1.6—the confidentiality rule. This means lawyers may disclose the fee agreement, the invoices for work performed, and a statement about what scope of representation the client agreed to and was provided. A lawyer should not disclose ancillary confidential information—such as the client’s psychological evaluations or embarrassing facts irrelevant to proving the amount of fees earned.
If a client disputes the amount of fees a lawyer charged—before suit is filed—check the firm’s professional liability policy for whether such a dispute triggers a reporting obligation to the carrier. Reportable incidents generally involve any claims of misconduct, negligence, or excessive charges. As a risk management matter, it is always better to check with the carrier about whether a client’s objection/demand is a reportable situation.
Sometimes firms will attempt to negotiate a resolution with a client who baulks at the fees. Be careful in this circumstance to review Ethical Rule 1.8(h), which permits a lawyer to resolve a claim of malpractice/negligence but provides that lawyers shall not
(2) settle a claim or potential claim for such liability with an unrepresented client or former client unless that person is advised in writing of the desirability of seeking and is given a reasonable opportunity to seek the advice of independent legal counsel in connection therewith.
Negotiating resolution of a fee dispute with a client must be done in writing, and the client must be provided sufficient time to consult with another lawyer regarding the offer before signing a release and settlement agreement. Even if the client does not make a claim of malpractice, it is wise to provide settlement offers in writing and tell the client—again in writing—that they should consult independent counsel before agreeing to any compromise. This assures that the client understands that the lawyer is not acting as the client’s lawyer in the fee dispute.
Resolving a Dispute (Arbitration, Litigation, Mediation, Bar Association Programs)
Ideally, lawyers will not permit a receivable to get so large that the firm cannot walk away from the fees, but in reality lawyers actually stay in cases far longer than they financially should, thereby generating sizable amounts that need to be recovered. Once a fee dispute arises, a lawyer may be required to withdraw from the representation if that dispute will “materially limit” the lawyer’s “independent professional judgment” on behalf of the client. (ER 1.7.) To resolve the dispute, a lawyer may offer to reduce his or her fees or walk away from an amount due to avoid the aggravation of having to mediate, arbitrate, or litigate the fees. As long as the fees are “reasonable” for the services performed, according to the factors set forth in ER 1.5(a), the lawyer is not obligated to reduce or write off fees—but many do so just to avoid the time and frustration of pursuing them. If the dispute cannot be resolved informally, the firm most likely must withdraw under ER 1.16(a)(1) because the firm and the client now have a conflict of interest. A lawyer cannot sue or even go to fee arbitration while simultaneously representing the client in a family law (or any) matter.
Some states mandate that lawyers agree to bar fee arbitration, and other states provide that free bar-sponsored arbitrations are voluntary options (unless, of course, the lawyer included bar fee arbitration as a provision in the fee agreement—then it becomes mandatory).
After supervising the Arizona Fee Arbitration program for over a decade, and advising law firms in arbitrations for another dozen years, it is apparent that arbitration is an inexpensive method of providing clients with an opportunity to vent their opinions, and still get paid, as long as the lawyer is 99% positive their fees are reasonable for the work performed. Fee arbitration is not free in the sense that it takes the firm time and effort to put together its proof of work performed. Expert witnesses about the reasonableness of the fees charged are not required but frequently provide clients with a more objective perspective about what fees should have been charged for their matter.
Fee arbitrations are not always swiftly resolved because, of course, the programs rely on volunteer lawyers to provide their time to hear and resolve the disputes. Arbitration awards usually can be reduced to a judgment under state arbitration statutes, but that too is not a guarantee of ultimate payment by the client. Nor can voluntary bar arbitration programs mandate that a client participate in arbitration—even if it was a term in the fee agreement. There also is the risk that if a bar-sponsored arbitration finds that a lawyer’s fees should be reduced significantly (usually by half or more), the arbitrators (or administrator) may be obligated to report the excessive charges to bar regulators.
Lawyers should consider all of these pros and cons before including a fee arbitration provision in fee agreements . . . unless, of course, arbitration is mandatory in the jurisdiction.