Welcome to Luca!globe
 The CPA Journal Online Current Issue!    Navigation Tips!
Main Menu
CPA Journal
Professional Libary
Professional Forums
Member Services
Nov 1994

What are reasonable fees and expenses for legal services? (CPA in Industry)

by Jude, Rebecca K.

    Abstract- The American Bar Association (ABA) has issued an ethics opinion that provides guidance on the reasonableness of fees and expenses that may be charged by lawyers. The report was released, in part, to counter widespread criticisms about unreasonable billing practices by lawyers. The ABA's landmark report could well change the way clients regard legal costs, if only because it provides detailed advice on how to determine the reasonableness of fees charged for legal services. In discussing the issue, the ABA report provides insights on how these fees could be influenced by factors such as time and labor involved, complexity of a case, and the customary level of fees for given localities. It also provides a protocol for disclosure at the beginning of an engagement of what charges a client should expect, and a second disclosure of what services and expenses the client is being charged for at the end of the engagement.

Although attorneys will, at least publicly, deny the practice, padding files has become a topic of professional humor and serious reporting. The Rodent, a self-styled underground newsletter printed by associate attorneys, describes and parodies abusive billing practices. Mainstream newspapers and magazines like The Wall Street Journal and Business Week regularly report about the inefficiency of lawyers and their questionable billing practices. Recently, the American Bar Association (ABA) acknowledged "that pressure on lawyers to bill a minimum number of hours and on law firms to maintain or improve profits" has led to a perception of unreasonable billing practices. In recognition of this problem, the ABA issued Formal Ethics Opinion 93-379 (the Opinion), Billing for Professional Fees, Disbursements and Other Expenses. The Opinion provides specific guidance about what ate reasonable fees and other expenses for legal services.

Prior to the Opinion, the billing guidance provided to the legal profession and its clients was vague and inadequate. The fees charged by an attorney were constrained only by a standard that "a lawyer's fee shall be reasonable"--Rule of Professional Conduct (RPC) 1.5. Vague factors such as the time and labor involved, complexity of the issue, the monetary amount involved, customary fees charged in the locality for similar services, and the length of the professional relationship between the attorney and client were used in determining the reasonableness of a fee. However, no standards of disclosure or basis for charges were included in RPC 1.5.

The Opinion now provides more guidance about what are reasonable fees and expenses for legal services. The prescriptions about disclosure and legal costs found in the Opinion may significantly influence how clients monitor and control legal costs. The Opinion establishes that clients have a meaningful option other than simply paying an invoice for legal fees as submitted. It also provides certain minimum standards to be considered when employing legal counsel, including disclosure requirements and prohibitions against problematic billing practices.

Disclosure Requirements

In the past, a client might have received a billing statement with no other information about the services provided than "For services rendered" and two dollar amounts--one for fees and the other for chargeable expenses. Although this billing practice is no longer common, the information provided to a client was often limited and frequently confusing. Even attorneys who charge reasonable fees may find that their clients are frustrated by arcane legalese and vaguely described charges. The Opinion now requires disclosure, commencing at the beginning and continuing to the end of an engagement. The ABA believes that initial written fee agreements and detailed disclosures in bills should foster improved attorney-client relations.

At the beginning of an engagement the attorney should specify the fees and charges, preferably in writing, which the client can expect to pay for legal services. If prospective counsel does not offer a written statement of expected fees and charges, one should be requested. Furthermore, the ABA recommends that attorneys break the charges down by type so that the fees and other costs can be understood. Although not stated explicitly in the Opinion, if a vague bill is submitted for payment, the client should request a detailed statement before payment.

Implicit in the notion of a written agreement is the opportunity to negotiate what services and expenses will be included. For example, the agreement may set a maximum number of hours per day for which a client will pay. It may establish what level of experience or skill will be assigned to given tasks. Routine services may be more cost effectively provided by paralegals or associate attorneys than by senior attorneys and partners. The agreement may also limit or exclude services such as interoffice conferences. Negotiating the terms of agreement allows the attorney and client, acting together, to tailor the legal services necessary for representation.

The ABA believes that disclosure improves prospects for accomplishing efficiency. While efficiency may not be guaranteed by detailed disclosure of fees and costs, it cannot be monitored and controlled without disclosure. Disclosure may also help avoid problematic billing practices.

Problematic Billing Practices

A legal invoice that, on its face, looks reasonable may include unreasonable costs. Unreasonable fees or "problematic billing practices" identified in the Opinion include 1) billing multiple clients for the same time and 2) billing for out-of-pocket costs as profit centers. Unreasonable charges are prohibited by the Opinion.

Billing Multiple Clients for the Same Time. As a matter of convenience, attorneys frequently schedule several clients' cases for the same day. If four cases are scheduled during a morning hearing and the fee arrangement is billing for services on an hourly basis, the attorney should not bill each client for the entire morning.

The ABA Opinion suggests that problematic billing practices may result from "fortuitous circumstances." Luck, however, has very little to do with the outcome. As a matter of convenience and profit, attorneys carefully plan court appearances. If a fee arrangement is for services billed on an hourly basis, attorneys are prohibited from billing each client for the entire morning.

A closely related problem is multiple-client billing for the same time spent on research. Research done for a client may coincidentally answer questions for other clients. The ABA Opinion prohibits billing clients for this kind of "recycled work product." The Opinion does, however, permit charges related to the time spent for revising and updating the work product.

Billing multiple clients for the same time can be accomplished in other ways. A lawyer flying cross-country to provide services for one client may spend flight-time drafting a motion for another client. The Opinion provides that the attorney should not bill flight-time to both clients. Attorneys should bill only for the actual time and services they provide for a client and not for "phantom hours." The same fundamental principle applies to additional charges and out-of-pocket costs: the attorney should charge for actual costs.

Additional Charges and Out-of-Pocket Costs. Attorneys have also increased income by adding a surcharge or premium to out-of-pocket charges incurred on the client's behalf. A copy machine, a fax machine, and a minimum-wage employee can be as profitable as the practice of law. It is not unusual to find that fax charges are billed at several dollars per page or that copies are $.25 or more per page. These charges clearly exceed the cost of providing the services. The Opinion includes guidance for what attorneys should charge for disbursements or additional charges.

The Opinion delineates what items are properly considered additional charges and how much should be charged for out-of-pocket costs and nonprofessional inhouse services. For example, absent an agreement to the contrary, overhead costs should be included in the charges for professional fees--in the hourly billing rate. Overhead costs include costs associated with malpractice insurance, maintaining a library, renting office space, and utilities.

Attorney charges for out-of-pocket costs are exemplified by fees paid for stenographers, expert witnesses, and travel expenses like airfare, meals, and hotel rooms. The Opinion provides that attorneys should bill only for the actual costs incurred and not include any surcharges, Specifically, if computer research costs $1.00 per minute, it should not be charged back to the client at $1.50 per minute. The ABA believes that "the lawyer's stock in trade is the sale of legal services, not photocopy paper, tuna fish sandwiches, computer time, or messenger services."

The ABA considers premiums added to the actual costs of inhouse services like photocopying, computer research, on-site meals, and deliveries to be the most problematic charges. While the Opinion states that charges for in-house services should be direct costs plus a reasonable allocation of overhead cost directly associated with the services, such a charge may be difficult to compute or monitor. The Opinion recommends advance agreement between attorney and client about charges for inhouse services. The problem may be solved to some extent by requiring the use of commercial services for other than routine copying or delivery.

Is This the Solution?

Will the ABA Opinion solve problematic billing practices? Senior members of law firms may claim that junior attorneys have been instructed on reasonable and appropriate billing practices--the fact remains that raises, promotions, and income are tied to productivity, which translates to time billed and money collected from clients. The vigilance of clients and their advisors, reinforced by ABA recommendations for disclosure and the billing of actual costs, may provide an opportunity to monitor and control costs of legal services.

The CPA Journal is broadly recognized as an outstanding, technical-refereed publication aimed at public practitioners, management, educators, and other accounting professionals. It is edited by CPAs for CPAs. Our goal is to provide CPAs and other accounting professionals with the information and news to enable them to be successful accountants, managers, and executives in today's practice environments.

©2009 The New York State Society of CPAs. Legal Notices

Visit the new cpajournal.com.