MCLE Self Study
Edited by Barbara Kate Repa
Ethics: Ethical Billing Practices
By Michael R. Brown
Disputes between attorneys and clients result from misunderstandings over a broad range of things, but a review of the monthly lawyer disciplinary reports reveals that one of the most common grounds for discipline is improper lawyer billing practices. In addition to the stigma of formal discipline, billing disputes also bring the possibility that an attorney's accounting records will go under the surgical knife of a legal-fee auditor performing a line-item audit. All of these disagreeable circumstances can easily be avoided by understanding the legal controls on billing and following some of the guidelines offered here.
Statutory and Ethics Mandates
California Business and Professions Code (§§ 6146-6149.5) and California Rules of Professional Conduct (Rule 4-200) govern the billing requirements for attorneys. The purpose of these statutes is "to protect clients and to ensure that fee agreements are fair and understood by clients." (Alderman v. Hamilton, 205 Cal. App. 3d 1033, 1037 (1988).) All fee arrangements must be contained in a signed writing. And you must provide a duplicate copy of the signed contract to the client when it is entered. (Cal. Bus. & Prof. Code ?6148(a).)
Under section 6148(b), if the services rendered are more than $1,000, all bills shall clearly state the basis and "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 instance, "hourly billings are sufficient if they disclose which attorneys performed the services, their billing rate, and the total fees." (Paul W. Vapneck et al., Cal. Prac. Guide: Prof. Resp. ?5:919 (2005).) Though the statutes do not prescribe the form or type of writing required, lawyers most commonly use either a letter agreement or formal written attorney fee contract. (Cal. Prac. Guide: Prof. Resp. at ?5:602.) Sample fee agreement forms and alternative clauses, along with instructions and comments for their use, are available from the State Bar. The forms are useful in adopting hourly-rate and contingency-fee models, but, of course, should be customized to the individual client and matter.
Exceptions to the Rule
There are four exceptions to the writing requirement of section 6148. First, a writing is not required when you must render services "in an emergency to avoid foreseeable prejudice to the rights or interests of the client or when a writing is otherwise impractical." (Cal. Bus. & Prof. Code ?6148(d)(1).) In such circumstances, you are still well advised to follow up with a writing. Second, there is a "prior dealings" exception: Section 6148 requirements do not apply to fee arrangements "implied by the fact that the attorney's services are of the same general kind as previously rendered to and paid for by the client." (Cal. Bus. & Prof. Code ?6148(d)(2).) Third, the requirements of section 6148 can be waived, provided that "the client knowingly states in writing, after full disclosure of this section, that a writing concerning fees is not required." (Cal. Bus. & Prof. Code ?6148(d)(3).) And fourth, section 6148 does not apply when the client is a corporation. (Cal. Bus. & Prof. Code ?6148(d)(4).)
Notwithstanding these exceptions, a fee agreement is always highly advisable, as it will usually clear up misunderstandings that may arise.
Signposts of Validity
Aside from the procedural requirements of a fee agreement, an overarching substantive concern is entering into a valid fee agreement. California Rules of Professional Conduct, rule 4-200, provides that an attorney "shall not enter into an agreement for, charge, or collect an illegal or unconscionable fee." An unconscionable fee has been defined as "so exorbitant and wholly disproportionate to the services performed as to shock the conscience." (See, Bushman v. State Bar, 11 Cal. 3d 558, 563 (1974); Tarver v. State Bar, 37 Cal. 3d 122, 134 (1984).)
Also, the validity of the fee is determined by examining the eleven exhaustive factors enumerated in the rule. Equally important to bear in mind, however, is the fact that discipline may result for merely attempting to charge an unconscionable fee. (Dixon v. State Bar, 39 Cal. 3d 335, 339-340 (1985) (after being discharged, attorney sent proposal that would allow him to keep prepaid fees although work not performed).)
Failure to comply with any of the above statutory requirements could render the fee agreement "voidable" at the client's option. You are then limited to only a "reasonable fee." (Cal. Bus. & Prof. Code §§ 6147(b), 6148(c); Flannery v. Prentice, 26 Cal. 4th 572, 589 (2001).) However, failure to comply with the requirements of sections 6147 and 6148, by itself, is not cause for discipline. (Matter of Harney, 3 Cal. State Bar Ct. Rptr. 266, 279-80 (Rev. Dep't 1995).) But a violation of the statutes could result in a violation of other ethics rules such as collection of an illegal fee (rule 4-200(A)) and failure to act competently (rule 3-110; Matter of Harney, 3 Cal. State Bar Ct. Rptr. at 279-80.)
To further mitigate any misunderstandings, you must explain the nature of the representation. Pursuant to section 6148(a)(2), the agreement must define the scope of the engagement by identifying the "general nature of the legal services" to be provided. Any limitation, however, must be clearly explained. That is, despite the statute's requirement of only a statement of the "general nature" of the work to be done, any limitation on the work should be stated explicitly and completely. (Joseph E. Di Loreto, Inc. v. O'Neill, 1 Cal. App. 4th 149, 158 (1991) (upholding limitation in fee agreement that the attorney would oppose motion for new trial if judgment received, but would not handle appeal without further fee agreement).)
Furthermore, in explaining the nature of the undertaking, avoid guaranteeing any results. An attorney "communication" to a client or prospective client containing "guarantees, warranties, or predictions" regarding results to be obtained from the representation is presumed to violate California Rules of Professional Conduct, rule 1-400 (prohibiting attorney "advertising and solicitation" guaranteeing an outcome). Equally significant is the fact that a disgruntled client may brew up a potential malpractice claim in which the result differs from his or her expectations.
The Most Common Pitfall: Padding
As is commonly known, improper billing practices may result in civil liability and criminal penalties. (Cal. Penal Code §§ 484, 487, 488, 503 (grand theft, petty theft, embezzlement).) The most common improper billing practice is padding hourly billings.
Directly on point is the Berg case, in which an attorney was disbarred for fraudulent billing practices. (In Matter of Berg, 3 Cal. State Bar Ct. Rptr. 725, 738-739 (Rev. Dep't 1997).) There, attorney Berg worked as cumis counsel on 41 separate matters and had an oral agreement to be paid an hourly rate of $150 an hour-an arrangement he unilaterally raised to $175 an hour without notifying the client. It was not until after the insurance company paid Berg for the invoices he submitted that it audited the bill and discovered the overbilling. Indeed, the record showed that on many days Berg "represented on bills that he personally worked in excess of 24 hours and that on a substantial number of days respondent represented he had personally worked in excess of 100 hours." (3 Cal. State Bar Ct. Rptr. at 738.) The court found this-and the fact that Berg refused to acknowledge the wrongdoing-to be aggravating circumstances justifying disbarment.
The Berg decision is in accord with ABA Formal Opinion 93-379 (1993), which provides that "the lawyer who has agreed to bill on the basis of hours expended does not fulfill her ethical duty if she bills the client for more time than she actually spent on the client's behalf." A California State Bar Opinion takes the ABA opinion one step further, stating, "Even if the lawyer is particularly efficient in accomplishing the work, it is not permissible for a lawyer who has agreed to charge the client on an hourly basis to charge the client for more hours than were actually expended on the matter." (Cal. State Bar Form. Opn. 1996-147.)
More tellingly, by way of illustration, ABA Formal Opinion 93-379 (1993), specifies: "A lawyer who spends four hours of time on behalf of three clients has not earned twelve billable hours. A lawyer who flies for six hours for one client, while working for five hours on behalf of another, has not earned eleven billable hours. A lawyer who is able to reuse old work product has not re-earned the hours previously billed and compensated when the work product was first generated. Rather than looking to profit from the fortuity of coincidental scheduling, the desire to get work done rather than watch a movie, or the luck of being asked the identical question twice, the lawyer who has agreed to bill solely on the basis of time spent is obliged to pass the benefits of these economies on to the client." (See also, Cal. State Bar Form. Opn. 1996-147.)
Assuring Compliance with the Laws
The dos and don'ts discussed below will help you comply with the copious statutory and ethical mandates on billing.
Explain your billing practices to your clients-thoroughly.
For example, though "block" billing-billing multiple tasks in a single entry-is generally acceptable, at least one court has cautioned that attorneys must adequately explain the services rendered. (Severson & Werson v. Bolinger, 235 Cal. App. 3d 1569, 1573 (1991) ("Attorneys have always had a professional responsibility to make sure clients understand their billing procedures and rates").) Bills should be as accurate and complete as possible to lessen the chances of any misunderstandings-and to help maintain good relationships with clients from the outset.
Provide clients with periodic billing statements.
The law requires that an attorney must provide a bill within 10 days following a client's request unless the bill was sent within the preceding 31 days-in which case the new bill may be sent within 31 days after the earlier billing. You may use billing data that is currently effective on the date of the client's request in responding to client requests for billing information. And if any fees or costs as of that date cannot be accurately determined, you must describe and estimate those fees and costs. (Cal. Bus. & Prof. Code ?6148(b).)
This again is an area in which controversies commonly arise, but they can be avoided by simply keeping the client apprised of the legal fees. If you provide periodic billing statements, your clients will be informed of the developments in their cases and be more likely to pay happily and promptly.
Don't pad your costs or expenses.
As mentioned earlier, padding hours for work previously done for other clients may raise validity issues if it has not been discussed. It is well known that attorneys who prepare standardized documents for clients-such as wills and partnership agreements-often keep forms of those documents on their computers to use as templates that can be revised and customized to suit each client. (Paul W. Vapneck, et al., Cal. Prac. Guide: Prof. Resp. ?5:945 (2005).) But at least one county bar association opinion cautions, "Absent clear disclosure to the client, attorneys billing on an hourly basis cannot properly add additional hours to a client's bill when revising such an 'in-house' form to reflect the time spent preparing the original (template) form." (Orange County Bar Ass'n Form. Opn. 99-001).) It is safest to disclose to all clients involved any practice of billing more than one client simultaneously. (See also, Vapneck, Cal. Prac. Guide: Prof. Resp. ?5:966.)
In addition, with respect to costs and expenses, you can charge a reasonable interest rate so long as you communicate that to the client. That is, charging interest and imposing late charges on past-due fees and costs is permitted so long as you obtain the client's informed consent and comply with applicable law. (Cal. State Bar Form. Opn. 1980-53; ABA Form. Opn. 388 (1974); Los Angeles Bar Ass'n Form. Opns. 370 (1978) & 374 (1978) & 499 (1999) (interest on costs); Bar Ass'n of San Francisco Form. Opn. 1970-1; San Diego Bar Ass'n Form. Opn. 1983-1.)
The applicable law includes rule 4-200(A), which provides that the interest or late penalty cannot be "unconscionable." The Truth-in-Lending Act laws may also apply, as discussed below.
On a brighter note, however, you may include a reasonable allocation for overhead expenses directly associated with providing the service, such as a photocopy machine operator's salary. ABA Formal Opinion 93-379 and ABA Model Rule 1.5(a) make clear that an attorney may charge for in-house expenses such as copying, provided such charges are reasonable and agreed to by the client in advance or reasonably reflect the cost incurred by the lawyer. By the same token, you are best advised to pass along to the client any discount from a third-party vendor.
Moreover, an attorney who is thinking about extending credit to a client for paying fees or expenses must assure compliance with the additional laws. For example, if the credit extended to the family is for "personal, family, or household" purposes and, by written agreement, is payable in more than four installments, or if interest is charged, you may be required to comply with the federal truth-in-lending laws, regulation Z. (See, 12 C.F.R. ?226.2(a).) Under regulation Z, for example, the client must be furnished with a written statement detailing the interest rate, the dollar cost of credit provided, a payment schedule, an itemization of interest, and late charges. Failure to comply with regulation Z is grounds for civil and criminal penalties as well as potential disciplinary penalties. (See, 15 U.S.C. §§ 1640, 1611; Cal. Rules of Prof. Conduct, rule 4-200(A).)
Don't unilaterally raise your hourly or contingency rate.
A lawyer or law firm quoting specific hourly rates in a fee agreement must notify a client of any rate increase before billing at the higher rate. (Severson & Werson v. Bolinger, 235 Cal. App. 3d 1569, 1573 (1991) (agreement to pay attorney's "regular hourly rates" did not obligate clients to later pay increases in rates without notice to clients); see also, ABA Model Rule 1.5(b) ("Any changes in the basis or rate of the fee or expenses shall also be communicated to the client").
Michael R. Brown, a partner with the Los Angeles firm of Kabateck Brown Kellner, specializes in business litigation. He has been retained more than 300 times as an expert witness in legal fee disputes and legal malpractice claims.