As part of my practice at JAMS, I mediate and arbitrate attorney fee disputes throughout California. Here are some of the more common issues I encounter:
- Charging for Copying the Client’s File
Issue: When the client asks for her file, the attorney will make a copy and give the client the original. Some attorneys, however, charge the client for administrative time and the cost to copy the file.
Answer: The file is the client’s property, so making a copy is an action being done solely for the attorney’s benefit. Rule 3-700(D)(1); Rose v. State Bar, 49 Cal.3d 646, 655 (1989); Weiss v. Marcus, 51 Cal.App.3d 590, 599 (1975).
As such, that cost has to be borne by the attorney. See Discussion to Rule 3-700(D) acknowledging that an attorney may “at the member’s own expense” make a copy of the file.
***In criminal cases, Penal Code section 1054.2(a)(1) precludes the attorney from disclosing the address and telephone number of a victim or witness in a case to the defendant (the client), their family and “anyone else”. So, the attorney could reasonably claim reimbursement for that copying cost. However, the number of pages with this type of information is likely to be immaterial, so the cost should be trivial.
- Charging for Preparing for the Fee Arbitration/Mediation
Issue: Some lawyers bill for preparing for the fee arbitration/mediation with their clients.
Answer: This is also an easy call. Bus & Prof Code section 6203(c) states: “Neither party to the arbitration may recover costs or attorney’s fees incurred in preparation for or in the course of the fee arbitration proceeding with the exception of the filing fee paid pursuant to subdivision (a) of this section.”
The statute trumps a clause in the fee agreement stating that costs and fees incurred to collect from the client are recoverable.
- Retainer vs. Deposit
Issue: It is still common for engagement letters to call deposits “retainers”. For example, one letter said: “You will be required to pay a retainer of $17,500…” It then calls the retainer a deposit: “The initial deposit is not an estimate of total fees and costs, but merely an advance for security.”
Answer: Stop using the word “retainer”. A retainer is paid to an attorney for the right to use the attorneys’ services, not for the services themselves. In my 15+ years of practice, I have not seen an actual retainer. Instead, we have moved to a world of deposits, which must be refunded if not earned.
- Nonrefundable Deposit
Issue: Some enterprising attorneys use the term nonrefundable deposit to mean a floor. Just like clients have implemented fee caps, lawyers have tried to come up with floors. Unfortunately for them, Rule 4-200 prohibits an unconscionable fee. So, they are going to have to justify their fee under the 11-factor unconscionability test. If almost no work was done on the matter, then a proportionate amount of the fee should be refunded.
Answer: Where possible, set flat fees for discrete portions of the work. That way, the attorney is guaranteed a certain level of income. For example on trademark and patent prosecutions, set a flat fee for the initial filing and hourly for calls with the examiner. If the client pulls out after the attorney has started work on the application, then the attorney will have good shot at keeping the flat fee.
- Failing to Send Regular Invoices
Issue: Some lawyers do not send monthly invoices. So, a client might get an invoice once a quarter or at unpredictable intervals. The failure to send regular invoices could be seen as a violation of an attorney’s duty to keep his client “reasonably informed” (Rule 3-500).
In most engagements, including contingency fee arrangements, the client is responsible for costs. Yet, contingency fee attorneys often do not send regular invoices or statements showing the costs incurred. Instead, they send an omnibus invoice at the end showing the total recovery, all of the costs and fees and the net recovery.
In one case, a wrongful death claimant who was not receiving regular invoices agreed to settle the underlying case for $1M without being told how much she would net. After she got a net settlement check for $400k, she learned that in addition to the $400k in attorneys’ fees, $200k had been deducted for costs. So, she challenged the costs deduction and claimed malpractice for failing to advise on the costs incurred so she could have included that in her demand in the underlying suit. The attorney said that he verbally relayed the costs information prior to the settlement, but the client disputed this.
Answer: In every period where the client has incurred any costs or fees, send an invoice. The invoice can include a note saying the amount isn’t due now, but the client should be kept aware of costs and fees incurred on her behalf.
- Deduct Costs from Gross or Net Recovery?
Issue: In many contingency fee agreements I’ve reviewed, it is unclear whether costs are deducted before or after the contingency fee is paid. This matters because if costs are deducted beforehand, then the attorney bears a percentage of those costs. That could be the difference between a $300k award and a $200k award.
Answer: If you want to split the costs, include the following language in your engagement letter:
Contingency Fees. Attorney will only be compensated for legal services rendered if a recovery is obtained for Client. If no recovery is obtained, Client will be obligated to pay only for costs, disbursements and expenses. The fee to be paid to Attorney will be _____ percent (__%) of the “net recovery”. The term “net recovery” means: (1) the total of all amounts received by settlement, arbitration award or judgment, including any award of attorneys’ fees, (2) minus all costs and disbursements. Net recovery shall also include the reasonable value of any non-monetary proceeds.
- Failing to Follow Up on Outstanding Invoices
Issue: Attorneys seem to have the impression that if their office sends an invoice, it has been received by the client and that client will pay it. Too often, the client never got the invoice and the attorney did not follow-up to see if the invoice was received.
In one case, the client had not received over a year’s worth of invoices and neither the client nor the attorney followed up.
Answer: For any invoices outstanding more than 30 or 60 days, confirm that the client has received the invoice and inquire on the reason for failure to pay timely.
- Charging an “Unconscionable Fee”
Issue: Under Rule of Professional Conduct 4-200(A), an attorney may not charge or collect “an illegal or unconscionable fee.” Section B then lists eleven factors to determine s. What is key here, however, is that unconscionability is measured at the time the parties entered the engagement, not after the fact.
This distinction regularly trips up clients. Clients often argue, after the matter is concluded, that the fee does not match what was actually recovered. So, even though the claim was for $100,000, they recovered $5,000 and the bill is for $50,000.
The only exception to the timing issue is when the parties agree that the fee will be affected by later events. Rule 4-200(B). For example, the parties could contract that the fee is dependent on the length of the engagement, the fight that the other side puts up and the amount of recovery.
Answer: Document the discussions at the start of the engagement and be up front that the attorneys’ fees could easily outstrip any recovery (assuming that’s a possibility). Even then, understand that the client may still challenge the fee.
- Abiding by the Client’s Cap
Issue: In some cases, though, clients are actively involved in monitoring and strategizing about the case. In one case I arbitrated, the client had weekly calls with her counsel and put a $50,000 hard cap on costs. As trial neared, counsel informed her that the cap had been reached and unless it was raised, he could not adequately prepare for trial. The client reluctantly increased it to $100,000.
The total costs were ultimately $150,000+ and the issue was who would pay for the excess. Because the client had expressly placed a hard costs cap in writing and there was no evidence of any authorization above that, the panel decided that the attorney bears those costs.
With cost caps, there is an inherent tension between an attorney’s duty to act competently (Rule 3-110(A)) and the attorney’s agency responsibility to fulfill the wishes of his principal. Unfortunately, what this usually means is that the attorney eats the excess costs.
Answer: Set a high costs cap or know that you will have to bear the excess costs.
- Estimate vs. Fixed Fee
Issue: Another common issue is whether an estimate counts as a fixed fee. In one case, an attorney verbally quoted $2k plus costs to prosecute a patent. The client, an unsophisticated individual, contended that the $2k was a do not exceed amount whereas the attorney said he gave an estimate of $2k-$5k. The engagement letter, however, was hourly with no express cap.
Answer: The engagement letter should expressly state that it is hourly or fixed fee.
- Nonresponsive Client
Issue: In one fee dispute, the client stopped responding to counsel because they were afraid of being charged for the call/email/letter. The invoices confirmed that they were billed for every single call and email.
Answer: Regardless, the attorney still has the duty to act competently, so he cannot stop work. But he then needs to terminate the engagement consistent with Rule 3-700 (plenty of notice to the client, return of the client’s property). It may also require approval from a third party (court, tribunal). Rule 3-700.