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The rules governing an attorney's obligations in connection with the written fee agreement and fee statements are set forth in the Business and Professions Code, the Rules of Professional Conduct, as well as case law decisions. This article will examine an attorney's obligation in connection with the fee agreement, as well as obligations when rendering a fee statement.

A. THE WRITTEN FEE AGREEMENT

The requirements of a written fee agreement are set forth in Business and Professions Code Section 6147 and 6148.

Business and Professions Code Section 6147 regulates contingency fee contracts. The section requires an attorney provide the client with: a copy of the agreements; a statement of the contingency fee rate; a statement of how disbursement costs will affect the fee/recovery; a statement as to what extent, if any, the client could be required to pay other compensation or expenses; and a statement as to whether the attorney maintains errors and omissions insurance "applicable to the services to be rendered" and if so, whether the policy limits of that coverage are at least $100,000/$300,000.

--- Care should be taken to specifically include or exclude related services. A simple example includes representing the client in an appeal taken from the primary action. If counsel's agreement does not clearly exclude related actions, the attorney may be obligated to perform those actions without additional compensation.

Business and Professions Code Section 6147.5, added in 1990, sets forth the requirements for contingency fees in a commercial collection matter. This section recognizes that a written contract is generally not utilized in these matters. The Section applies only when there is no written agreement and specifies that the contract rate shall be the rate commonly charged by attorneys in the field.

Business and Professions Code Section 6148 applies to non-contingency cases in which is it foreseeable the total expenses to a client, including fees, will exceed $1,000. This section does not apply to contracts with corporations. It requires that a standard attorney service contract be in writing and contain:

-- The hourly rate or standard rates, fees, and charges applicable to the case

-- The general nature of legal services being provided

-- The existence of malpractice coverage and limits if less than $100,000 or $300,000

-- Respective responsibilities of the attorney and client.

This section requires that the retainer agreement "shall clearly state the basis" of all potential charges to the client. This includes the amount, rate, basis for calculation or any other method of determining the fees, costs and expenses charged. Franklin vs. Appel (1992) 8 Cal App 4th 875.

Affect of Noncompliance

It was initially believed that sections 6147 and 6148 cover all fee arrangements except those specifically excluded within the statute. Franklin V. Appel, (Supra).

Appel saved an attorney/client fee agreement that was otherwise deficient in a contingent real estate deal. It overruled Alderman vs. Hamilton, (1988) 205 Cal App 3rd 1033. There is proposed legislation to overturn Appel. The prudent practitioner should assume that 6147 and 6148 encompass all fee arrangements. The State Bar will provide you with sample fee agreements at a cost of $3.50 for each set. Mail your request to State Bar California, Fee Agreements, 251 Michelle Court, South San Francisco, CA 90408.

Failure to comply with the statutory requirements renders the contract voidable at the option of the client. The attorney may still collect a reasonable fee. Although the Business and Professions Code did not address an attorney's professional liability for failure to comply, ample sanctions are provided pursuant to the Standards for Attorney Sanctions for Professional Misconduct. These sections provide for disbarment or suspension for violation of the provisions of any unspecified Section of the Business and Professions Code, or for willful violation of any Rule of Professional Conduct not established by any other standard. Conroy vs. State Bar (1990) 53 Cal. 3rd 495.

B. ADEQUATE BILLING STATEMENTS

Once again, Business and Professions Code Section 6148 sets forth the primary responsibility of the attorney.

"(b) All bills for services rendered by an attorney to a client shall clearly state the basis thereof. Bills 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. Bills for the costs and expenses portion of the bill shall clearly identify the costs and expenses incurred and the amount of the costs and expenses."

This section dictates the minimum requirements for a billing statement. It is applicable to all bills, regardless of whether the bill is contingent or non-contingent. A closing statement on a contingency fee case must contain specific itemization as required by Section 6148 (b).

Subsequent Changes in Costs and Fees

At the time the attorney is negotiating his fees with the client, the lawyer may legitimately bargain with the prospective client and deal at arm's length. It is not, per se, improper for an attorney to receive a large fee, and such fees are not unethical or prohibited simply because they are substantial. However, once the attorney/client relationship is created, it is fiduciary in nature. An attorney may not unilaterally determine his own fee and withhold trust funds to satisfy it. Any change in the agreement which makes it easier for the attorney to obtain his fee (and costs) constitutes a change benefiting the fiduciary and will be scrutinized by the court. Baron vs. Nare 47 Cal. App. 3rd 304.

Itemization of Fees and Costs

It is not appropriate to "block bill." Block billing occurs when the invoice contains lengthy description into which are "bundled" multiple activities followed by a single time entry. This type of billing, commonly used, appears to violate Section 6148's requirement that all bills rendered to the client shall "clearly state the basis thereof." The client is unable to review the method of determination of the attorney's fees and costs as required by the Code. It is confusing and gives rise to an undue advantage in favor of the fiduciary.

Good practice dictates that each time entry reflect the date work was performed, the attorney or staff person performing the work, a brief statement of the work performed and time spent, and a specific fee for that time entry.

Costs and expenses passed on to the client must be clearly itemized, and receipts provided. Compare costs billed against any itemized costs and expenses originally projected in the fee agreement. They should be consistent. A common area of dispute involves attorneys who limit their practice to contingency fee cases and either failure to anticipate future costs in their original fee agreements, or fail to itemize those costs in their closing statements.

Frequency of Billing

When requested by a client, the attorney must provide a written bill within ten days, unless a prior bill was transmitted within the prior 31 days, in which case the next bill must be sent no later than 31 days after the prior bill.

The client may request statements on a 30 day cycle.

When the client requests a billing statement, the attorney must include data accurate to the date of the request or estimated to the date of request. Clearly indicate if you are using an estimate.

Affect of Failure to Comply

Failure to comply with any provision of Sections 6147 or 6148 renders the fee agreement voidable at the option of the client. The attorney will then be entitled to collect a reasonable fee (quantum meruit).

There are exceptions to this rule. (1) If services are rendered in an emergency to avoid foreseeable prejudice to the client; (2) a fee which can be implied by a client because the legal services are of the same general kind previously rendered and paid for by the client; or (3) the client knowingly states in writing, after full disclosure of the Section, that a written fee agreement is not required.

What is a Reasonable Fee?

ABA Modern Rules of Professional Conduct, Rule 1.5 sets forth eight factors to determine the reasonableness of a fee. Rule of Professional Conduct 4-200 sets forth 11 factors. These factors include:

-- Amount of the fee in proportion to the value of service.

-- Novelty and difficulty of the issues.

-- Skill requisite to perform the service.

-- Time and labor required.

A Valid Fee Agreement and a Valid Bill is not Conclusive

The golden rule of a attorney billing is that the fees charged to the client must not be unreasonable. This is a balancing test measuring the fees charged against benefits received by the client.

For illustrations of fees found to be unconscionable, please review:

Tarver vs. State Bar (1984) 37 Cal. 3d 122. This case involved an unconscionable fee, post-retainer negotiations with client, and utilization of trust funds that were in dispute (prohibited by current rule of professional conduct rule 4-200).

Bushman vs. State Bar (1974) 11 Cal. 3d 558. Custody issue involving a $5,000 retainer. Retainer payable $300 upon signing and the balance at $50 per month with 7% interest in the event of default, and waiver of the statute of limitations. Opposing counsel to Bushman was Gertrude Churn. Bushman advised that he required a minimum retainer of $5,000 without regard to time spent in any case where Churn was the opposing counsel.

The only substantive issue, custody, was resolved by stipulation. The court awarded Bushman a fee of $300, plus $60 in costs. Bushman did not advise the court of the $5,000 retainer. He claimed he spent over 100 hours on the case. The court found the value of Bushman's services in the action were limited to the $360 awarded by the lower court.

In upholding discipline, the court found "the fee charged by Bushman was so exorbitant and wholly disproportionate to the services rendered...as to shock the conscience." Bushman was unable to articulate any complex issue, extensive research or specialized skill, and the only documentation in the file was a one page "points and authorities."

Herscher vs. State Bar (1935) 4 Cal. 2d 399: This case should be read for an analysis of the contortions the court went through to avoid finding a fee to be unconscionable. The court found that the fee was excessive and probably would not be sustained in a civil action. However, enunciating the test to be whether the fee is "so exorbitant and wholly disproportionate to the services performed and to shock the conscience," (Goldstone vs. State Bar (1931) 214 Cal. 490) the court avoided imposition of sanctions against the then prominent Mr. Herscher. (See State Board of Law Examiners vs. Sheldon, 43 Wyo. 522 and State vs. Barto, 202 Wis. 329.)

Blair vs. State Bar (1989) 49 Cal. 3rd 762: The habitual disregard by an attorney of the interests of his client, particularly when combined with a failure to communicate with the client, may be found to constitute an act of moral turpitude justifying disbarment.

Standard of Review Where There is a Written Fee Agreement

-- The standard of review includes a combination of principles of contract law and Rule of Professional Conduct 4-200.

-- First, contract law is applied to determine whether there is a valid written contract. (Offer, acceptance, consideration.)

-- If there is a valid contract, the terms must be reviewed to determine whether the agreement is unconscionable, as that concept is discussed in rule 4-200.

-- If not unconscionable, the trier of fact must determine if the attorney's performance was reasonable.

C. FEE AGREEMENT PROVISIONS AND ISSUES

1. The Delinquent Client

Although there are no published opinions, it has been suggested that permitting a client to become significantly delinquent in the payment of outstanding charges, when it reasonably appears to the attorney that the client may be financially incapable of continued payment of attorney's fees, creates a conflict of interest and a question as to the attorney's fiduciary duties to the client.

2. Use of an Arbitration Clause

A provision in a fee agreement that provides that "in the event of a dispute between attorney and client, the dispute will be resolved by binding arbitration" may be unenforceable.

-- State Bar Opinion No. 1981-56 states that an attorney may not condition employment on a client's acceptance of binding arbitration in advance of a dispute arising over fees.

-- Business and Professions Code Section 6200(b) provides that arbitration shall be voluntary for a client and shall be mandatory for an attorney if commenced by a client.

-- Business and Professions Code Section 6204(a) provides that an attorney and client may agree in writing to be bound by the award of the arbitrators. However, the Committee on Professional Responsibility and Conduct (COPRC) believes that the agreements to arbitrate a fee dispute and waive judicial review may be made only after a fee dispute arises. This seems to be supported by State Bar Opinion 1981-56.

3. Malpractice Claims

-- COPRC initially took the position that a lawyer may not ethically condition employment by a client on the client's agreeing to arbitrate fee claims and malpractice, except where the client is fully advised as to the possible consequences of such an agreement and counsel advises the client that separate and independent counsel may be sought to explain the agreement. State Bar Opinion No. 1977-47 reasoned that an arbitration agreement for malpractice might violate the existing Rules of Professional Conduct, create a potential conflict of interest and might create the appearance of professional impropriety in violation of Canon 9 of the American Bar Association Code of Professional Conduct.

COPRC reconsidered State Bar Opinion No. 1977-47 and expressed the opinion that there is nothing ethically improper with including an arbitration provision in the initial attorney/client retainer agreement by which the attorney/client relationship is first established (Opinion No. 1986-116). COPRC further opined that once arbitration provision is negotiated between an attorney and an existing client, ethical considerations require that the attorney fully disclose the terms and consequences of the provision and the client knowingly consent to the provision. (I recommend the agreement contain strong explanatory language and a space for the client's initials.)

4. Rule 3-400 prohibits attorneys from limiting their liability to a client for professional malpractice.

5. Conflict of Interest

-- In every instance in which the fee is being paid by someone on behalf of the client, the conflict of interest issue must be considered. See Rule of Professional Conduct 3-310 regarding requirement of a specific waiver.

Generally, the client is considered to be the party for whom the work is to be performed, regardless of who paid the bill. (See San Diego Local Bar Ethics Opinion 1990-3.)

6. Dual Representation:

Clem vs. Superior Court (1977) 75 Cal. App. 3rd. 893. It is critical that the attorney

-- Make full disclosure of all facts and circumstances;

-- Specifically disclose areas of potential conflict;

-- Recommend seeking independent legal advice.

Pursuant to Clem, an attorney who omits this disclosure is liable to the client who suffers a loss caused by lack of disclosure. Thereafter, the State Bar will act accordingly.

For optimum protection, include a conflict clause in your fee agreement. An example of general language:

"Client has identified the following persons/entities who have or may have an adverse position or interest to the client in an effort to enable attorney to determine whether a conflict of interest may exist ____________. Client will advise attorney in writing, prior to requesting attorney's services in other matters, any other persons or entities who have or may have an adverse position or interest to client."

7. Fee Splitting

-- Division of fees with another lawyer is permissible subject to Rule of Professional Conduct 2-200. The rule requires disclosure and consent in writing. The total fee may not be increased by reason of the division.

-- Rules of Professional Conduct 2-200 and 1-300 prohibit compensation to a lawyer or lay person for a recommendation. Gifts are not prohibited, providing the gift was not offered in consideration of any promise or agreement relating to referrals. See also Rule of Professional Conduct 3-320.

8. Payment of Client Expenses

-- Rule of Professional Conduct 4-210 prohibits attorneys from paying business or personal expenses of a present or future client.

Exceptions:

-- With the client's consent, a lawyer may pay third parties from funds collected for the client.

-- After employment, it is permissible for counsel to lend money to the client on the client's promise to repay.

-- It is permissible for an attorney to advance costs of prosecuting a claim or action or promoting the client's interest, the repayment of which may be contingent upon the outcome. Any costs of this nature shall be limited to reasonable expenses of litigation.

9. Business Transactions with Client

Rule of Professional Conduct 3-300 regulates business transactions between a lawyer and a client and finds that such transactions are prohibited unless:

(a) The transaction must be fair and reasonable, and

(b) The transaction must be fully disclosed in writing, and

(c) Client must be advised in writing to seek independent counsel, and

(d) Client must be given the opportunity to seek that counsel, and

(e) After seeking independent counsel or declining in writing to do so, the client may consent in writing to the advancement of living expenses. (Ritter vs. State Bar) (1985) 40 Cal. 3rd 595).

10. Retaining Client's Property

Rule of Professional Conduct 3-700(D) requires an attorney whose employment has ended to promptly release the client, at the request of the client, all the client's paper and property and to promptly refund any part of the fee paid in advance that has not been earned (except a true retainer).

If there is a dispute as to the amount of money owed to the client, Rule of Professional Conduct 4-100(A)(2) requires that the disputed portion of trust funds not be withdrawn until the dispute is resolved. Note that the Rule also provides that in the case of funds belonging in part to a client and in part, presently or potentially to the member or law firm, the portion belonging to the member or law firm must be withdrawn at the earliest reasonable time after the member's interest in that portion becomes fixed.

Regardless of the nature of the dispute, the attorney must return to the client the client's papers and property including correspondence, pleadings, deposition transcripts, exhibits, physical evidence, expert reports, and other items reasonably necessary to the client's representation, whether the client has paid for them or not. The attorney may make copies provided this is done at the attorney's expense.

11. Interest, Finance Charges and Late Penalties

It is important to understand the difference in terminology. The term "interest" is defined Civil Code Section 1915 as "compensation allowed by law or fixed by the parties for the use, or forbearance, or retention of money." Interest is not a penalty or punishment for the delay or refusal to pay an obligation. Powell vs. Allen (1925) 70 Cal. App. 633.

"Finance charges" are defined in Civil Code Section 1802.10 (Unruh App.) as the amount one pays for the privilege of purchasing goods or services to be paid for in installments. Finance charges are usually associated with consumer purchases.

"Late Fees" are charges imposed as a result of the delay or default in performance of an obligation and come into effect only upon the default of an enforceable agreement. First American Tittle Insurance and Trust Company vs. Cook, (1970) 12 Cal. App. 3rd 592.

It is permissible for an attorney to charge a client interest as defined in Civil Code Section 1915. (Ethics Opinion No. 1980-53.) Having said that, what is the permissible interest?

Prior to 1990, Crestwood Lumber Company vs. Citizens Savings and Loan (1978) 83 Cal. App. 3rd 819 limited interest payments to 10% based upon a theory that a credit sale was a loan of money and subject to the usury laws. In 1990 the Supreme Court overruled Crestwood in Southwest Concrete Products vs. Gosh Construction Corporation (1990) 51 Cal. 3rd 701. Southwest Concrete leaves us with no answer to the question of permissible interest. It has been suggested that the maximum interest allowed is a function of the nature of the client. (I suggest that the court will utilize the unconscionability standard if the matter ever reaches appellate level.)

If the client is a consumer client (dissolution or criminal defense, for example) be aware of Title 18, as implemented by Regulation Z (Federal) and California Truth in Lending Laws (Civil Code Section 1801) which suggests that, absent full disclosure in the nature of a multiple page credit application, interest is limited to 10%.

I've just used a lot of words to suggest that you charge your consumer clients no more than 10%, and your business client no more than 18%. You should also avoid the terms "finance charge" and/or "late charges."

D. ISSUES COMMON TO CONTINGENCY FEE DISPUTES

The attorney's right to reasonable compensation in a contingency case accrues only when the contingency stated in the retainer has occurred. It follows that the attorney will be denied compensation if recovery is not obtained. Fracasse vs. Brent (1972) 6 Cal. 3d 784. What happens to the attorney who is terminated, or who is compelled to withdraw, or simply elects to withdraw?

Prior to Fracasse vs. Brent, the first attorney got everything. Fracasse held that this result is inconsistent with strong judicial and legislative policy in favor of a client's absolute right to discharge his attorney at any time.

The current rule is that the withdrawing attorney's right to fees depends on the reasons for withdrawal. A client's refusal to settle does not constitute a cause for withdrawal allowing the attorney to recover fees on a quantum meruit basis. However, where the attorney's withdrawal is viewed by the court as justified, and the attorney contributes to the recovery, the attorney will be allowed quantum meruit. State vs. Falco (1987) 188 Cal. App. 3rd 1004.

An attorney whose fee agreement clearly limits his representation to the trial court level does not forfeit fees for refusing to represent the client at the appellate level without an additional fee arrangement. Di Loreto, Inc. vs. O'Neill (1993) 1 Cal. App. 4th 149.

Where fees must be divided between successive attorneys, the fee allocation should be based on the value of the work of the respective attorneys. In Fracasse it is suggested that the focus of value turns on the attorney's role in obtaining the contingent result. Other cases suggest utilization of the time spent by the respective attorneys should control. Cazares vs. Saenz (1989) 208 Cal. App. 3d 279 confuses the issue even more by suggesting that it is the value of the work of the respective attorneys.

STANDARDS FOR REVIEW OF HOURLY RATE BILLING

The comments that follow will focus on the issues that an auditor, special master, arbitrator or reviewing court looks for when reviewing time-billed files and disputes.

The activities of an attorney, in order to justify a billing, should be authorized, appropriate and reasonable.

A. AUTHORIZED

Specific legal activities are authorized by the retainer agreement, initial evaluation, subsequent reports, or emergency. In the case of corporations, where there is no actual retainer agreement or the attorney is handling individual litigation pursuant to his placement on an approved list, work is authorized based upon the attorney's projection in an initial evaluation document, and his principals' acceptance of those recommendations. In a litigated case, it is not unreasonable to assume acceptance if there has been no reply to the evaluation authorization AND the client will be harmed by inaction. However, if the activity is disputed, reasonableness will be determined based upon the standards set forth in Rule of Professional Conduct 4-200 as well as the unconscionability "Golden Rule," as stated in Tarver vs. State Bar (1984) 37 Cal. 3d 122:

The fees charged must not be unreasonable when measured against the benefits to the client.

B. APPROPRIATE

Perhaps the key test to be utilized to determine whether specific billing activity was appropriate could be enunciated in the "my money rule":

If it were my money, would I do at this time and in this manner?

Timing of the Event

Was it necessary for the particular activity to have been undertaken at the point in time elected by the attorney? Was discovery rendered prematurely in relation to the likelihood of settlement? One must determine whether discovery was unnecessarily delayed or prolonged so as to render the process more tedious and expensive.

Method of Execution

Were there other options, involving less costs, that could have been utilized? Example: In an accident case with multiple witnesses, one might seek to determine whether it was necessary to depose all percipient witnesses rather than rely upon statements contained in a police report, or use outside investigation sources. Utilization of formal discovery procedures may be necessary to preserve testimony at trial. However, close scrutiny should be paid to accelerated or redundant use of formal discovery techniques, particularly where less formal options exist.

It is critical to examine the number of billing participants when determining whether a method of execution was appropriate. An auditor will examine supporting documents to determine whether attendance at deposition by multiple billing participants was authorized, and appropriate under the circumstances. A complex expert deposition may justify a paralegal note taker or even a second chair attorney. However, this team handling should have been subject to prior authorization and it should be incident specific. Conversely, an attorney might be accused of overcharging his client when multiple billing participants participate in a fairly routine discovery matter, or charge for office conferences. (In one case, multiple billing participants charged for a lengthy conference in which the attorney charged with the responsibility of trial presented his opening statement for review.)

Related to Resolution

Ninety-five percent of the cases litigated in Superior court are settled. The requirements of fast track, with the attendant discovery cut offs, tend to accelerate the frequency and number of discovery activities. An examination of whether the case is of a nature most likely to settle must be undertaken to determine whether specific discovery/investigation activities were reasonably related to a resolution of the case. If, early going, all parties have agreed that resolution will require trial, a more significant discovery/investigation expenditure may be anticipated, and should be authorized.

A similar analysis will be undertaken to determine whether the activity is reasonably related to the exposure of the case, whether measured by dollar value or reputation. If a case has an adverse verdict potential of $15,000, and was of a nature that resolution without trial was reasonably likely, attorney's fees which approach or exceed the adverse verdict potential will result in increased scrutiny.

Related to Unresolved Issues

An auditor will specifically examine discovery or investigation to determine whether the issue remained in controversy at the time of the expenditure.

C. REASONABLE

Multiple Billing Participants

Multiple billing participants generally produce increased charges. This may occur as a result of an understaffed law firm which is frequently handing the file off to other attorneys for individual appearances, or to accommodate law firm vacation schedules. When this occurs, excessive charging patterns result as the hand off attorneys are reviewing the file to prepare for the appearance. The issue is whether or not the client should be charged the review time necessary for the second attorney to become familiar with the case. The general answer, absent specific authorization, is no.

Multiple attorney activity frequently produces duplication, which will generally be disallowed in an audit or fee bill arbitration. An example occurs when the managing partner imposes a unit charge to open a file, only to have his work duplicated by the primarily assigned attorney. (In one review it was discovered that the managing partner reviewed the file upon referral and generated an initial responsive pleading and first set of discovery--only to have an amended pleading and supplemental discovery issued upon assignment to the primary handling attorney.)

Similarly, many firms rotate files across the desk of a senior attorney or partner for review. The issue to be determined is whether there is a value added benefit to the file. If there is no documentation or direction in the file which reflects that this activity produced meaningful direction to the litigation, the charge may be deemed excessive.

The audit flag which will cause a fee reviewer to focus on this issue will be the presence of multiple billing participants identified on the invoice.

Forms and Related Charging

The principal has the right to assume that it will not be subject to full fee charging to produce "can" work product. Generally, a corporation or individual retains an attorney because of that attorney's expertise in a particular field. As a result of that expertise, the attorney or firm will undoubtedly produced a brief bank and set of computerized forms for pleadings, discovery and transactions attendant to the litigation. Although extensive hours were undoubtedly spent in preparation of the original document and additional time for ongoing updates, if the client is charged on the hourly rate basis, and there is no disclosure as to the method of allocating charges for formulated documents, the principal has the right to expect that it will only be charged the actual time expended producing the particular product applicable to the case.

When utilizing forms, a rational method of passing the cost to the client is the use of approved flat charges.

An example of the form issue can be found in the personal injury defense practice. The responsive pleading and affirmative defenses are generally maintained within a computer system in a standardized format. However, it is not uncommon to review an initial billing only to discover a three hour charge to "prepare responsive pleading." It is likely that the time involved in preparation of this pleading was under 30 minutes due to the existence of a data base.

Extensive Legal Research

Projects exceeding two hours should be specifically authorized. Thereafter, an analysis of the fruits of the research should be provided to the client, and the research documentation maintained in the file. An auditor will observe the research charges on the bill and will search for the documentation within the file. Similarly, in a fee bill dispute, the arbitrator may ask to see the work product.

Block Billing

This phenomenon occurs when the invoice contains a lengthy description into which are bundled multiple activities followed by a single time entry. This type of billing clearly violates B&P Section 6148's requirement that all bills rendered to a client shall clearly state the basis thereof. The principal is unable to review the method of determination of attorney's fees and costs as required by the code. When auditing a blocked bill, an auditor will examine the verifiable information, attempt to determine the reasonable time allocations as to each item, and then review the remaining time allotments in an attempt to determine reasonableness.

By contrast, when an invoice contains individual itemization, the principal is able to review specific documents and activities to determine whether the charges are reasonable and accurate.

Unit Charging

Specific amounts of time are allocated to specific activities. These most frequently involve unit charges for standard discovery, response of pleadings, and correspondence. Because unit charges do not actually represent the time expended for the activity, a unit charging practice should be specifically authorized by the principal.

Paralegal Activity

A well trained and properly utilized paralegal (or junior attorney) is a resource capable of reducing legal expense to the principal. However, an untrained or improperly utilized paralegal drives up litigation costs and becomes a profit center, at the expense of the interests to the principal.

Litigation audits have revealed a few areas where paralegal activity creates excessive charging patterns, or unreasonable work activities. These include duplication, secretarial and overhead related charging, and unnecessary summarization of deposition transcripts.

(a) Duplication has occurred in the simple sense of different paralegals completing the same task (such as summarizing interrogatories or other discovery that has already been summarized by another paralegal or the assigned attorney). In some instances, potential duplication has occurred when paralegal prematurely index deposition transcripts.

It is a common practice for an attorney to create a deposition summary at the conclusion of discovery proceedings. An index is generally deferred until shortly before trial/arbitration because it is much more time consuming and, thereby, costly to the principal. The routine early indexing of transcripts, not authorized by the principal, may constitute an excessive charging pattern.

Paralegal billing should be subject to the same scrutiny when form pleading/motions are utilized, or when the paralegal attends a deposition or investigation with the attorney.

(b) Some firm(s) have utilized paralegals to conduct secretarial or overhead related activities. These have included the ordering of books or supplies, scheduling of depositions, site inspections or other discovery activity, or locating telephone numbers and directions. Utilization of paralegals to complete overhead related activities normally assigned to secretaries may be considered excessive and unreasonable.

Charging a paralegal activity at an attorney rate, without authorization by the principal, may be considered fraud.

Miscellaneous Charges

There exist a variety of charges that may or may not be reasonable under the circumstances of a particular business relationship. In reviewing these charges, particularly if they change over time, one must pay attention to the Business and Professions Code's requirement that clients be notified in advance when fees or costs are adjusted. The area of miscellaneous charges, including photocopies, outside expense, fax/phone and travel, constitutes a fertile area for misunderstanding.

-- Photocopy: the attorney who chooses to utilize his photocopy area as a profit center should actually ensure that the principal has approved the charging amount.

-- Travel: A specific method of charging travel should be determined in advance. If an attorney is charging portal to portal on an hourly basis, it is inappropriate for the attorney to work on another client's file during that travel and bill each client for the travel time.

-- Outside Expenses: These should possess a rational relationship to the case and should be accompanied by an invoice.

-- Minimum Billing Unit: If the law firm is using the minimum unit, such as one-tenth of an hour, that should be disclosed to the client.

Conclusion

The law firm that requires 1,800 billable hours requires that an attorney generate 36 billable hours per week, 7.2 hours per day. Contrast this with a firm that expects 2,200 billable hours. This creates a 44 hour week and, 8.8 hours of billable activity per day. Although the one-tenth billing hour creates certain flexibility, auditors will typically target for scrutiny the billing records of an attorney whose annual hours are unusually high. It has been suggested by ethics experts that the billable hour creates a conflict between attorney and client. Regardless of your opinion, it is wise to explore other billing methods, and essential to communicate billing methods with the client.

ALTERNATIVE METHODS OF BILLING

The billable hour is a standard of attorney timekeeping that has been in common usage for approximately 30 years. It is appropriate to recognize that it creates an inherent conflict of interest between the lawyer and the client. It is in the lawyer's financial interest to prolong the litigation and increase the hourly billing. It is unusual for the attorney to discuss this conflict with the client (see R.P.C. 3-310). However, some attorneys have been searching out different methods of billing. Some of them may be described as follows:

1. Fixed or flat fee: The price that will be charged for defined services. It may be the total fee for the engagement or may apply to segments of the total services. It may stand alone or be combined with an hourly fee or a contingent fee.

Advantages

-- Forces agreement between the lawyer and client as to what services will be required and furnished.

-- Requires you to know the cost of providing defined services.

-- Client knows in advance what the fee will be.

-- Defines marketplace competitiveness.

-- Useful in marketing purposes.

-- Non-dependent upon time and can be keyed to the benefits to the client.

2. Contingent fee: A charge that depends upon the results achieved. It requires a clear agreement of what the desired results will be.

Advantages

-- Client does not pay unless the result is achieved.

-- Clients who are otherwise unable to pay can obtain legal representation.

-- Attorney assumes the risk.

-- Potential for a lucrative fee.

-- Non-dependent upon time.

3. Hourly / contingency: Client and lawyer are sharing the risks within the limitations of the representation agreement. Since a portion of the fee will be hourly, attorney is guaranteed a minimum amount. As in straight contingency agreements, client and lawyer are both motivated to obtain the maximum results.

4. Percentage fee: Typically based on a schedule of fees related to the amount involved in the matter being handled. The amount determined. Example: percentage of the value of an estate under probate.

Advantages:

-- Easy to define.

-- Reflects exposure to liability/benefit.

-- Does not depend on time spent.

5. FACTOR BILLING: The amount of the fee is not known to either lawyer or client until the matter is concluded. The representation agreement sets forth the factors that are to be considered in setting the final fee. These factors can be found in the Model Rules of Professional Conduct. The amount may be combined with an hourly.

Advantages:

-- The fee is set when there are no longer uncertainties and contingencies.

-- Attempt to relate the fee charged to the value of services actually performed and rendered to the client.

-- Depends upon benefits. Not dependent upon time.

6. Availability of retainer: Sometimes called a "pure retainer" it is characterized by payment to the lawyer of a fee for which no direct services will necessarily be performed. In exchange for the fee, attorney makes a commitment to be available on demand and to refrain from representing either parties adverse to client or competitors within a specific time.

7. Retainer against future services: A technique to ensure that the client will pay for services to be rendered or for disbursements to be made. Funds must be placed in the client's trust account and withdrawn only after performing services or making disbursements. At the conclusion of representation, any balance must be returned.

Advantages:

-- Requires client to make financial commitment at the start of representation.

-- Minimizes collection problems.

8. Unit fee: The charging of a fixed amount rather than a time-based rate. Example, fixed charges for each letter, phone call, deposition, pleading. Normally combined with hourly billing for services not included in the unit charging agreement.

Advantages

-- Discloses charges for forms and related documents.

-- Reduces time loss from inadequate record keeping.

9. Lodestar method: An attempt to have an objective system that involves multiplying the hours spent by a reasonable billing rate per hour. Thereafter, that multiple, called the "Lodestar" is multiplied by a factor, such as 1.5, 3.2 or .03, to recognize factors other than time spent. Had its origination in Lindy Brothers Builders Inc vs. American Radiator and Standard Sanitary Corp. 487 F. 2d. 161 (3d Cirr. 1973). This is a confusing method of billing that provides virtually no advantage to the client. It is used only when required by the court.

10. VALUE BILLING: The relative value method of billing creates schedules that break down attorney services by subject matter and task and assign a value or multiplier to each. Each fee charger can be assigned a different basic rate or charge, which is factored into the equation. There are variations in this method as used by individual practitioners who have developed their own schedules. Value billing assumes the tasks performed by a lawyer differ in value. Hourly billing assumes that all time spent performing various tasks has equal value.

Advantages

-- May provide uniform or consistent billing statements.

-- Focuses upon value rather than amount of time spent.

11. TASK BILLING: Specific tasks or levels of service are charged at a flat rate.

For a full discussion of alternative billing methods, you are referred to "Win-Win Billing Strategies, Alternatives that satisfy your clients and you (American Bar Association Section of Law Practice Management). This may be ordered from ABA Order Fulfillment 511, 750 North Lakeshore Drive, 94, Chicago, Illinois 60611.

FINAL COMMENT:

Whatever method of billing we choose to utilize, it is imperative that we maintain a standard of fairness and a high level of communication to the client. If this is our objective, billing disputes should be relatively infrequent.