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The Importance of Fee Issues

Fees

Percentage of Americans who agree that lawyers are more interested in making money than in serving their clients: 69% Public Perception of Lawyers: Consumer Research Findings, Section of Litigation, American Bar Association 2002, p. 7, available online at http://www.abanet.org/litigation/lawyers/publicperceptions.pdf.

THE IMPORTANCE OF FEE ISSUES

Fee issues are commonly intertwined with legal malpractice claims. The same ABA report cited above notes that Of all of the criticisms that consumers raise about their personal experiences with lawyers, the greatest number of complaints arise around lawyers’ fees. Consumers say that lawyers charge too much for their services; are often not up front about their fees; and are unwilling to account for their charges or hours. Public Perception, p. 14. Clients often bring malpractice claims when they are angry, and fees are frequently the catalyst for such anger. When a client believes fees are unfair or excessive, one response may be to make a malpractice claim. Attempts to collect fees often prompt malpractice claims. In many jurisdictions, malpractice claims are mandatory counterclaims that must be made or forfeited when a fee suit is filed. E.g. French v. Gilbert, ___ S.W.3d___ (Tex. App.-Houston [1st] 2008 Tex. App. LEXIS 8884, November 26, 2008), Allen v. Martin, 203 P.3d 546 (Colo. 2008). Jurors in legal malpractice cases often become angry enough about legal fees that their perception of the facts is influenced by legal fee issues. Since jurors in malpractice cases are seldom lawyers, subtle or overt prejudice regarding the appropriateness of legal fees is high. Documentation of fees, or lack thereof, is often critical evidence of what work was performed by the lawyer, and for whom the lawyer worked. For example, in Kotzur v. Kelly, 791 S.W.2d 754 (Tex. App.- Corpus Christi 1990), a real estate closing statement showing payment of attorney’s fees was evidence of an attorney client relationship in the absence of a written agreement. This means that fee agreements and billings will be admitted as evidence in malpractice cases. Return of fees is an element of damages in many malpractice cases. Whether couched as a failure of consideration on a contract claim, a damage incurred in a tort action, or a penalty for breach of fiduciary duty, lawyers frequently have to return or waive fees in malpractice actions. Malpractice insurance generally does not cover return of legal fees as damages. This article will focus on critical aspects of fee agreements that can affect malpractice liability. Choice of clients, arbitration choice, and conflict disclosure and consent are other factors that can also be important in avoiding fee related malpractice claims, and are not discussed in this article.

CRITICAL ASPECTS OF FEE AGREEMENTS

Who is the client? Fee agreements and engagement letters present an excellent opportunity to document important aspects of the attorney client relationship other than just fee terms. Fee agreements should specify who the client is. It is not enough, however, to simply include this in the agreement: the lawyer must then act in accordance with the specification. Two particular situations often cause confusion as to the identity of the client, and can be addressed in the initial documentation of the attorney client relationship. Third parties paying the fees of the client present two issues. First, the third party should not be confused about whether they are the client or not.

Second, the lawyer must determine that the fact that the third party is paying will not affect the decisions regarding representation of the client. When a third party is paying the fees, the client must consent to the arrangement. ABA Model Rule 1.8(f). Clarifying language making clear that the third party paying fees is not the client and client consent to the fee arrangements are important terms that must be included when third parties fund representation. Third parties who might conceivably believe they are the client should be addressed in the fee agreement, and in supplementary documentation. If a client has family members or advisors who are working with the lawyer, it is appropriate to note in the fee agreement and in notices to these third parties that the lawyer represents only the client and that these third parties should obtain their own counsel.

When the client is an entity, the fee agreement may need to clarify that constituents of the entity are not the client. This is particularly true when the constituents will be working closely with the lawyer on the representation. Specific notice may need to be given to the non-client constituents of an entity in many circumstances. ABA Model Rule 1.13(f) states that a lawyer shall explain the identity of the client when the lawyer knows or reasonably should know that the organization’s interests are adverse to those of the constituents with whom the lawyer is dealing. Knowing in advance that a constituent may be adverse to the entity is not always easy-the best practice is to clarify the nature of the relationships at the outset.

SCOPE OF WORK TO BE PERFORMED

Fee agreements should be as specific as possible about the extent of work to be performed. As the scope of work to be performed increases, contract amendments should be executed. These do not necessarily have to be complete formal rehashes of prior terms-letter agreements acknowledging the nature of the change in scope may suffice. When other professionals, whether lawyers or not, will perform work on a matter, lawyers should incorporate language noting the work that will be performed by the other professionals. Accountants, engineers and other advisors may provide services critical to advancing the client’s goals, and failure to delineate the roles of these parties can lead to malpractice claims. For example, it is not uncommon for accountants to have to take actions in filing tax returns that build on corporate structures created by a lawyer. If the third party work is to be performed by other lawyers, the fee agreement should make clear the exact roles of the various lawyers and their areas of distinct responsibility. Contingent fee rules may require that if fees are to be shared among different lawyers not in the same firm, the lawyers who receive fees must either be compensated in relation to work performed or assume full responsibility for the matter. ABA Model Rule 1.5(e)(1). The client must consent to the fee arrangement and the fee agreement must be in writing ABA Model Rule 1.5(e)(2). If the decision is to accept full responsibility to avoid the need for detailed accounting regarding the work performed, this clearly has an impact on liability for subsequent malpractice claims. For this reason, it is not uncommon for lawyers sharing fees in contingent fee matters to form limited purpose entities with respect to a particular matter or groups of matters in which fees are shared. Once formed, the fees can be shared in a matter agreed to by the partners involved, while focusing the malpractice liability on the partners performing discrete tasks.

CLIENT RESPONSIBILITIES

Fee agreements and engagement letters also allow the lawyer to document tasks that the client must perform in order for the legal representation to provide the greatest opportunity for client satisfaction. Including such tasks in the initial documentation meets two goals: making sure the client understands their tasks, and avoiding claims when clients fail to perform those tasks. When a client fails to perform tasks, such as preparing discovery materials, they may face sanctions or lose the opportunity to allow the lawyer to present evidence. If the lawyer includes general descriptions of what clients must do, and follows up with warning letters when deadlines approach for client action, evidence exists to counter client claims that they were not informed of the need to perform tasks.

RETAINERS

To avoid credit concerns and the temptation to initiate collection actions, lawyers should consider requiring retainers that must be replenished as fees are charged. With a replenishable retainer, the lawyer stands a chance of discovering that the client is no longer able to continue paying for legal services, and can withdraw before a trial or before the client incurs a large account receivable. When not to follow the contract A fee established in a formal agreement, whether hourly or contingent, may be a “fair reasonable” fee in the sense that it is what other lawyers put in their contracts. That does not mean, however, that the fee will be fair and reasonable to a jury assessing all of the circumstances of representation. Lawyers should be prepared to discount fees in a number of situations in order to maintain client good will and to avoid client and jury anger in a malpractice suit. Consider the following situations which may justify discounting fees:

1.   High expenses in a contingent fee case create a situation where the lawyer receives more from a settlement than the client does. Some lawyers have a rule that they will never recover more than the client-a good practical rule.

2.   The client does not get a demonstrably favorable result from the representation. Sometimes lawyers do their best work by reducing a client’s liability. However, it is harder to convince a jury that the lawyer did a good job in such situations.

3.   The lawyer must spend a considerable amount of time “getting up to speed” on an issue that might be routine for other lawyers in the field. In both transactional and litigation situations, there are occasions where a lawyer faces a situation for the first time, but the issue is common for lawyers in the specialty where the lawyer is working.

4.   A lawyer bills more than 24 hours in a day. Without a doubt, billing a single client for 24 hours, or even slightly less, risks client anger. Even billing multiple clients a total of more than 24 hours runs some risk. In a recent case, a Texas court allowed discovery by the client of the total hours billed by lawyers in all their cases for selected days.

TRAVEL TIME AND RECYCLED WORK

Product ABA Formal Opinion 93-379 addresses a number of problems that can arise in charging multiple clients. The opinion indicates that billing more that one client for the same work is unacceptable. If an attorney is working on other client matters while traveling by plane, for example, the client for whom the lawyer is traveling should not be charged if the lawyer bills the other client. Recycled work product is also addressed by the opinion. The lawyer may contract to charge an amount for similar work in the future that reflects the work’s unique value. However, he or she cannot ethically bill for hours not actually worked if the agreement with the client is for an hourly fee.

EXPENSES

Fee agreements must address client responsibility for expenses. When the lawyer will incur expenses that the client must reimburse, the nature of the expenses and the reimbursement must be specified. Otherwise, the lawyer will often be responsible for the expenses. Handling of expenses can have a negative influence on a jury when lawyers fail to act transparently. ABA Formal Opinion 93-379 provides guidance on a number of frequently encountered expense considerations. Overhead is not to be charged to the client. Whether an item is overhead or not may depend upon the circumstances. For example, specialized software required to handle one matter might appropriately be included in overhead, whereas software that will be used with other clients is overhead. Surcharges and markup of expenses over actual cost must be disclosed, and must be reasonable. In-house services should not be thought of as profit centers, but should bear a reasonable relationship to actual costs. Per page copy prices significantly in excess of those most people would be used to seeing might well affect the jury’s perception of the lawyer’s fairness to the client.