Shady Billing: Closing the Hall of Shame

Slaw.ca Legal Ethics Column, Jan. 30 2018

http://www.slaw.ca/2018/01/30/shady-billing-closing-the-hall-of-shame/

Only “fair and reasonable” fees and disbursements can be charged by lawyers to their clients. This rule is uncontroversial, and applies across the country. Nevertheless, the following billing practices are used by some Canadian firms, and not clearly forbidden by regulation:[1]

  • a retainer contract lists current hourly rates but also provides that the firm can increase those rates as much as it wants, at any point in the future without the client’s further consent
  • a retainer can also allow a firm to both charge for each hour docketed, and charge the client whatever bonus the firm decides is appropriate based on results obtained
  • a partner may perform a task personally, despite knowing that an associate or clerk within the firm with a lower hourly rate could do it just as well and just as quickly
  • disbursements create profit for some firms, because they are charged to clients at rates well in excess of cost (e.g. 25 or 50 cents per page of printing)

(Please add your own hall of shame billing practices in the comments, without naming names.)

Here, I will suggest that regulators should be much more specific about what is and is not fair and reasonable. Unethical billing undermines the reputation of all legal professionals, including the majority who abjure such practices. The ethical pitfalls of time-based billing are perhaps best known (see Woolley and  MacKenzie). However, contingency billing creates its own temptations (see e.g. Hutchinson, Farrow and Devlin & Heffernan).

A fair and reasonable legal fee isn’t necessarily a low fee or one that’s easy for the client to afford. But a fair and reasonable fee must be clearly comprehensible to the average client at the time the client retains the lawyer. It must also reflect the reasonable expectations of the client at the conclusion of the matter. A fair and reasonable fee must be consonant with legal professionals’ fiduciary obligation to not take advantage of superior knowledge to enrich themselves at clients’ expense.

The Rules we Need

Here are a few ideas for putting regulatory meat on the bones of “fair and reasonable:”

  • Every minute that a client pays for should actually have been worked on the client’s matter. Although the practice is common, from the client’s point of view rounding upall 2 minute emails to 0.1 hour dockets is hard to distinguish from a corner store rounding up $2 purchases to $5 charges. Regulation could require a one-minute billing increment, or allow increments of no more than six minutes but require tasks taking less than 3 minutes to be rounded down to 0.
  • Billable hour rates should not change during a retainer. At most, retainers lasting more than one year should entitle firms to small annual increases in the rates tied to the rate of inflation. Showing inexperienced clients a list of billable hour rates followed by small print giving the firm complete discretion to increase them is bait and switch.
  • Every decision or recommendation that costs a client money should be made with exclusive regard to the best interest of the client, and with no regard to the profitability of the firm.  Stating this explicitly in the rules would prohibit billable “churning” that produces no benefit for the client. However it would also deal with decisions that will or might provide a benefit to the client, but not a benefit likely to justify the cost. Examples include: (i) adding a second junior to a file that probably doesn’t need her, (ii) recommending that an expensive but tangential procedural motion be brought, and (iii) spending another 30 billable minutes polishing an already strong factum.
  • This “best interest of the client” rule would also apply in non-time-billed retainers. Some contingency and fixed-fee retainers entitle the firm to an increased percentage of recovery, or a new fixed fee, if a matter proceeds beyond a certain point. The prospect of an increased fee must play no role in the firm’s decisions and recommendations about whether the matter settles before such point.
  • Referrals should be made with exclusive reference to the best interest of the client, and no regard to the referral fee or other incentives available to the referring firm.
  • Disbursements charged to clients should never be a source of profit or other benefit for law firms. The word disbursement, by definition, refers to money that has actually been paid out. Charging the client an amount higher than what was actually paid out is difficult to distinguish from fraud.
  • Of course, it is not easy to calculate the cost to a firm of some disbursements (e.g. printing done in-house). For such charges, regulation should specify a tariff of permissible disbursements, set to reflect average typical costs. “Disbursement” charges to clients for fixed office costs such as internet, scanning, or local phone service should be forbidden.
  • In many provinces, Commentary in the Code says that “what is a fair and reasonable fee will depend on such factors” as “results obtained” and “whether special skill or service has been required and provided.” The Rules should stipulate that these factors do not mean that a bill can be increased beyond the amount explicitly authorized by the initial retainer. Similarly, if a retainer entitles a firm to bill for time spent but also to a success fee, the method of calculation for the success fee must be explicit.

Prohibiting billing practices that are clearly unfair and unreasonable would improve the trustworthiness of all legal professionals. It would also make legal services more affordable, at least for the unfortunate clients who are currently exposed to these practices.

An Ounce of Prevention is Better than a Pound of Cure

Retrospective fee assessment is the primary mechanism of fee regulation in Canada today. Assessors may well strike down the sort of egregious terms identified at the outset of this article, in those cases that reach them. However assessment is problematic for both firms and clients. Clients must typically complain about (or decline to pay) a bill in order to trigger the process. Assessment is unpredictable and time-consuming for both lawyer and client. Both sides would be better off with clear rules for firms to follow, and less reliance on retrospective assessment.

Reforms are being implemented by the Law Society of Ontario to protect contingency retainer clients. Many of the key ideas, including improved disclosure, more certainty, and model retainer agreements, should be adapted to protect other clients as well.

Reform should avoid foreclosing legitimate but unorthodox fee structures that are clearly understood and accepted by clients, especially sophisticated and experienced clients. However, without crossing this line, there is ample room for regulators to (i) implement a “best interests of the client rule, and (ii) explicitly prohibit unethical billing practices of the type described above.

There is a place for “principles-based or “outcomes-focused” regulation, in which the regulator avoids detailed prescription of what must and must not be done. Billing is not that place. Given the explicit conflict between the client’s interest (paying less money) and the lawyer’s interest (receiving more money), and given the information asymmetry that characterizes many lawyer-client relationships, this is a field in which regulators need to be more prescriptive.

________________

[1] Commentary to the Rules provides a list of factors to determine whether a given fee is fair and reasonable, but it provides no specific injunctions against these or other practices.