legal-bill-auditing

What A Lawyer Must Do To Increase Hourly Billing Rates Or Modify A Fee Agreement

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Invariably, when a legal matter has continued for some time, there is an increase hourly billing rates over what was disclosed in the original Fee agreement. Sometimes, though, there are more substantive changes or modifications to the original Fee Agreement.

In this segment from my book, The Art Of Hiring The Right Lawyer & Negotiating A Fee Agreement That Will Save On Legal Costs, I discuss what lawyers must do to be able to increase their hourly billing rates or make any substantive change to the original Fee Agreement.

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Subsequent Modifications to the Fee Agreement

While discussing modifications to a proposed fee agreement, it is important to also discuss those modifications that are made to a fee agreement during the course of a representation.

Some modifications to an attorney fee agreement may be needed during the course of the representation because the objective (that is, the scope) of the representation has changed. Or perhaps costs have become a major concern and a less costly approach is needed. Or the modification could be for some other minor reasons related to something specifically stated in the agreement, such as the names of the attorneys involved in the matter. But whatever the reason for the modification, if it relates to an issue discussed in this book, a reference back to that issue as discussed should be made prior to agreeing to the modification.

Although some modifications to a fee agreement may be necessary, I have observed that most modifications made during the course of the representation occur for the attorney’s own benefit and usually because the attorney is trying to increase his compensation. For example, the attorney may want to convert an hourly fee agreement into a contingency fee agreement because the lawyer thinks he will be able to earn a larger fee that way. Or the change may involve increasing the percentage amount of a contingency fee. But for whatever reason, if an attorney is in any way seeking to modify the fee agreement for his benefit, the attorney needs to get the client’s permission to the modification.[1] That is, it cannot be a unilateral change. And to get the client’s permission to make a modification of a fee agreement enforceable to increase compensation, the lawyer must follow a strict process set out in RPC 1.8, which governs “business transactions” with a client.[2]  

One of the things that RPC 1.8 requires a lawyer to do is to advise the client in writing “of the desirability of seeking . . . the advice of independent legal counsel.”[3] Also, the lawyer must get the client’s “informed consent” to the proposed business transaction (that is, to the modification of the fee agreement to the lawyer’s benefit).[4] Getting “informed consent” from a client is an involved process that I will discuss in detail in Chapter 10. For now, I will simply say that getting a client’s informed consent is a big deal that attorneys do not at all like to go through.

Of course, it might be said that regular hourly fee increases that typically occur on an annual basis during the course of a representation are modifications to the original fee agreement to an attorney’s benefit. But, such increases are exempt from the application of RPC 1.8 so long as any increase is “reasonable,” and the client was notified prior to the increase taking effect.[5]

To address the issue of notification of fee rate increases, there is usually a sentence buried in the original attorney fee agreement notifying the client to the effect that “we may raise our hourly billing rates from time to time.” And some lawyers believe this language, along with the client’s signature at the bottom of the fee agreement, means that the client has given the lawyer blanket approval to increase hourly billing rates whenever the lawyer wants to do so without first notifying the client of the increase.

However, just informing the client that the lawyer may increase his hourly billing rates at some time in the future is not at all the same thing as notifying the client prior to actually raising the hourly billing rates or changing them from what was originally agreed on in the attorney fee agreement.

In my experience, though, despite whatever language there is or is not in a fee agreement about increasing hourly rates during the course of the representation, most lawyers do give clients notice and get their permission prior to implementing any rate increases. So, most of the time, this is not going to be an issue. But just to ensure that this does not become an issue, in Chapter 6 I included some recommended language to address this when discussing hourly billing rates.

[1] See ABA Annotated Model Rules of Professional Conduct (7th ed. 2011), Comments to RPC 1.5 at p. 80, Modification of Agreements (“Modification of a fee agreement to a lawyer’s benefit during a representation is generally impermissible as well as unenforceable.”).

[2] See ABA Annotated Model Rules of Professional Conduct (9th ed. 2019), Comments to RPC 1.8 at p. 170, Changing Fee Agreements (“Although Rule 1.8(a) does not apply to ordinary client–lawyer fee agreements, it has been applied to efforts to modify an agreement during the course of the representation.”) citing, inter alia, In re Curry, 16 So. 3d 1139 (La. 2009)(inserting more favorable terms into original agreement violated rule) and Restatement Third of the Law Governing Lawyers, §18(1)(a) (2000) (client may avoid modification unless lawyer shows modification fair and reasonable to client).

[3] See RPC 1.8(a)(2).

[4] See RPC 1.8(a)(3).

[5] See ABA Standing Committee on Ethics and Professional Responsibility Opinion 11-458 (2011) Changing Fee Arrangements during Representation at p. 3 (“[T]he client’s acceptance of a modified fee arrangement may be inferred from the circumstances. For example, many lawyers who bill for their services on an hourly basis routinely increase their “normal” or “regular” hourly billing rates incrementally from time to time.” citing Severson & Werson v. Bolinger, 235 Cal. App. 3d 1569, 1570 (1991) (law firm cannot raise its “regular hourly rates” without first notifying client)).

Why Weaponized ADR Clauses In Retainer Agreements Require “Informed Consent”

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I am a big supporter of using alternative dispute resolution (ADR) to resolve fee bill disputes when direct negotiation fails. Having been a registered mediator, I have seen firsthand how ADR can work to resolve not just fee bill disputes, but all kinds of disputes.

In my book, The Art Of Hiring The Right Attorney, I discuss the importance of a clause in the retainer agreement that calls for arbitration or mediation if a dispute arises over the legal services or the fee bills. Also in my book, The Definitive Guide To Resolving A Legal Fee Bill Dispute, I recommend arbitration or mediation over filing a suit or filing a disciplinary complaint if direct negotiations fail to resolve a fee bill dispute with the lawyer. I even provide a list of free or low-cost mediation or arbitration services available through state or local bar associations.

Most attorneys include ADR language in their retainer agreements because it makes good business sense, although many states and some malpractice insurers require it. Unfortunately, in some of the retainer agreements I have come across, some attorneys seem to be using an ADR clause not as a way to peacefully and economically resolve a dispute with a client, but more as a way to intimidate and discourage the client from actually using ADR. They do this by bypassing any state or local bar free or low-cost mediation or arbitration services for fee bill disputes and mandating that the ADR be binding arbitration through the American Arbitration Association (AAA).

Now, don’t get me wrong. I am not against the AAA. They provide good arbitration services. However, AAA arbitrations are expensive and sometimes are to be held in cities that are inconvenient for the client. Moreover, retainer agreement ADR clauses may provide that the loser has to pay all the winner’s costs including all of the AAA costs plus the law firm’s costs to prepare for and participate in the AAA arbitration.

In my view, lawyers who mandate binding AAA arbitration in their retainer agreements as the exclusive way to resolve disputes are really weaponizing their arbitration clauses against their clients. However, this weaponization of an ADR clause may not always work out as intended, at least according to the recent case of Dick-Ipsen v. Humphrey, Farrington & McClain, P.C., 2024 IL App (1st) 241043 (App. Ct. of Ill., First Dist., Second Div., Aug. 30, 2024).

The case involves a client who had filed suit against the law firm for malpractice in a matter the firm had handled for the client. But the firm sought to have the malpractice suit dismissed citing the arbitration clause in their retainer agreement. The clause provided for binding AAA arbitration (to be held in Kansas City, MO), as the exclusive remedy for any claims against the firm. The client, though, stated he did not understand the effect of binding arbitration and that the firm never explained it to him. The client also objected to the AAA arbitration being in Kansas City which was over 500 miles from the client’s home in Illinois (plus the client was disabled and unable to drive).

The trial court found for the client holding that the arbitration provision was “procedurally unconscionable.” The appellate court agreed that the firm had failed “to fully inform plaintiff about the meaning and consequences of the arbitration clause.” The court went on to state that “[a]ttorneys who have drafted a retainer agreement have the burden to show that the contracts are fair, reasonable, and fully known and understood by their clients” and that “[d]efendants’ failure to inform plaintiff [the client] about any of the potential effects of the arbitration provision constitutes an infirmity during the process of contract formation, such that plaintiff lacked the requisite knowledge to make a meaningful choice.” As authority, the court cited supporting case law, applicable Model Rules of Prof. Conduct (RPC), and ABA Formal Op. 02-425, Retainer Agreement Requiring the Arbitration of Fee Disputes and Malpractice Claims.

It is clear from the appellate court’s opinion as well as all other authorities on point that a lawyer needs to provide such information as is needed in order for a client to make a “meaningful choice” to agree to a mandatory and binding arbitration clause in a retainer agreement. But, and here’s the kicker for lawyers, the appellate court held that a client’s agreement must be based upon “informed consent” citing Castillo v. Arrieta, 2016-NMCA-040, 368 P.3d 1249 (N.M. Ct. of App., Feb. 2, 2016)(“we hold that the plain text of this unusually broad arbitration provision reasonably applies to Plaintiff’s malpractice claim, but that it is unenforceable if it was signed without Plaintiff’s informed consent.” emphasis supplied).

“Informed consent” is a discrete term that is set out in RPC 1.0(e) that inter alia requires a lawyer to provide “adequate information and explanation about the material risks of and reasonably available alternatives to the proposed course of action.” Requiring “informed consent” from a client is a big deal. So much so that if you ever mention to a lawyer that he needs to get informed consent from a client, he will usually sigh and roll his eyes. As it relates to binding arbitration, it would require an explanation of “reasonably available alternatives” such as free or low-cost bar or other types of arbitration or mediation services. To be on the safe side as I used to tell lawyers in my CLE ethics seminars, never leave anything out. Always give complete information on the pros and cons of anything that requires informed consent. If you leave anything out, you do so at your own peril.

Although it can be done orally, I believe it important that all the information conveyed about something that requires informed consent be in writing. I say this because guess who wins a swearing match between a lawyer who swears that he told the client everything there was to say about the effects of binding arbitration and a client who swears that the lawyer never told him about all the effects of binding arbitration (which is exactly what the client swore in the Illinois case).

Also, instead of trying to cram all there is to say about the pros and cons and the effects of binding arbitration into the retainer agreement, the information being conveyed to obtain the client’s informed consent should be in a separately signed writing (as is required by some RPC). It should also be reviewed by another attorney of the client’s choice.

Of course, one easy way to completely avoid the problems involved in obtaining a client’s informed consent for a clause mandating binding AAA arbitration as the exclusive remedy for claims against the attorney would be to not include it in the retainer agreement. Instead, include a more reasonable and fair ADR clause (to the client) that just calls for mediation or non-binding arbitration to be utilized before filing suit to try to resolve any dispute with the firm as to its services or its fees or with the client for non-payment of fees.

Unfortunately, for attorneys who seek to press for every advantage they can wring out of an individual client, other weaponized terms in the retainer agreement may also require “informed consent” such as requiring a client to pay for electronic research services such as Westlaw or LEXIS. See ABA Annotated Model RPC (9th ed. 2019) Comments to RPC 1.5 at p. 86, Expenses Chargeable To Client (“Access charges for electronic legal research are normally treated as overhead, but may be passed along to the client if the client has given informed consent.”). But that is all grist for another post.

On Using and Billing for “Re-cycled Work Product”

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“A lawyer who is able to reuse old work product has not re-earned the hours previously billed.”  ABA Standing Comm. on Ethics & Professional Responsibility Formal Op. 93-379 (1993)

In reviewing legal bills and speaking at CLE seminars to attorneys, I have found that too many attorneys lack a sufficient understanding of what is ethically permitted when it comes to billing for services.  And one of the things most commonly misunderstood is how to ethically bill for “re-cycled work product.”

Whether attorneys want to admit it or not, an awful lot of what any attorney does in any type of practice situation is especially suited to using forms or recycled work product.  Attorneys routinely use forms for appearances, initial and closing letters to clients, medical records requests, withdrawals, motions, orders, and even settlement documents.  Even more substantive documents such as briefs and appeals are often drafted in large part using recycled work product.

When it comes to billing for re-cycled work product, though, I often find attorneys engaging in what is called “value billing.”  That is, rather than billing for the actual time it took to modify the re-cycled document, they bill for what they believe to be the “value” of the re-cycled document.  The value is often determined as that time they think it would have taken had the document been drafted from scratch.

However, attorneys are not permitted ethically to bill re-cycled work product as if it was an original.  Rather, attorneys may only ethically bill for that amount of time it takes them to make changes in the original work product to make it fit the new matter.  For example, if an attorney took 4.0 hours to draft a brief in one case and only 0.5 hour to revise it to use in a subsequent case, the attorney can only ethically charge 0.5 hour in the subsequent case.

A related billing issue is the issue of attorneys using original work product when re-cycled work product could have been used.  Billing guidelines that I prepare for corporate clients always include a provision that obligates the attorney to use previously prepared work product wherever possible. For if you stop to think about it, requiring an attorney to use previously prepared work product where possible ties in with one of the main reasons you hired a particular attorney.  You hired that attorney because the attorney is experienced in handling the type of case you want handled. So it is more than reasonable for you to expect (and require) that the attorney use previously prepared work product successfully used in similar cases.

A statement by an attorney that all the work product billed for was originally prepared is a strong indication that the attorney is not attempting to use any previously prepared work product.  Even more troubling, it may also be a strong indication that the attorney is not much interested in helping control case costs.