February 1999

Ethics And The Law

Billing Ethics

by Barrie Althoff, WSBA Chief Disciplinary Counsel

In three recent lawyer disciplinary opinions, the Washington State Supreme Court has provided important guidance to lawyers about the ethics of fees and billing: In re Discipline of Dann, 136 Wn.2d 67 (1998); In re Discipline of Haskell, 136 Wn.2d 300 (1998); and In re Discipline of Heard, 136 Wn.2d 405 (1998). This article first reviews provisions of the Rules of Professional Conduct (RPCs) that relate to billing and fees,¹ and then looks at those three opinions.

RPC Provisions Relating to Fees/Billing

Fees Must be Reasonable

The RPCs set out several requirements relating to fees and billing. The most directly relevant is RPC 1.5. RPC 1.5(a) requires fees to be reasonable and states that the factors to be considered in determining whether a fee is reasonable include: (1) the time and labor required, the novelty and difficulty of the questions involved, and the skill requisite to perform the legal service properly and the terms of the fee agreement between the lawyer and client; (2) the likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the lawyer; (3) the fee customarily charged in the locality for similar legal services; (4) the amount involved in the matter on which legal services are rendered and the results obtained; (5) the time limitations imposed by the client or by the circumstances; (6) the nature and length of the professional relationship with the client; (7) the experience, reputation and ability of the lawyer or lawyers performing the services; and (8) whether the fee agreement or confirming writing demonstrates that the client had received a reasonable and fair disclosure of material elements of the fee agreement and of the lawyer's billing practices. It is also unreasonable for a lawyer to charge lawyer rates for performing services that could equally well be performed by a nonlawyer staff member with a lower billing rate.²

Communication of Fee Basis and Practices

RPC 1.5(b) requires us to communicate to new clients and, if our fee arrangement is now different from what we have used in the past with a client, to that past client, "the basis or rate of the fee or factors involved in determining the charges for legal services and the lawyer's billing practices." This basically elaborates on our RPC 1.4 duty to explain a matter to the extent reasonably necessary to permit the client to make informed decisions regarding the representation. RPC 1.5(b) also requires that on request of a client we must communicate with them in writing the basis or rate of the fee.

Honesty in Billing

Billing clients is another form of communication with a client. When we bill our clients, we must be honest with them and not lie to them. This is required by RPC 8.4(c) which provides that "[i]t is professional misconduct for a lawyer to: . . . (c) Engage in conduct involving dishonesty, fraud, deceit or misrepresentation."

Contingent Fees Permissible

RPC 1.5(c) generally permits contingent fee agreements, except those prohibited by RPC 1.5(d), namely, in criminal cases and in certain domestic relations cases. RPC 1.5(c)(1) requires contingent fee agreements to be in writing and to "state the method by which the fee is to be determined, including the percentage or percentages that shall accrue to the lawyer in the event of settlement, trial or appeal, litigation and other expenses to be deducted from the recovery, and whether such expenses are to be deducted before or after the contingent fee is calculated." RPC 1.5(c)(1) also requires that upon conclusion of a contingent fee matter, we must provide our client with "a written statement stating the outcome of the matter and, if there is a recovery, showing the remittance to the client and the method of its determination." RPC 1.5(c)(2) requires that a "contingent fee consisting of a percentage of the monetary amount recovered for a claimant, in which all or part of the recovery is to be paid in the future, shall be paid only (i) by applying the percentage to the amounts recovered as they are received by the client or (ii) by applying the percentage to the actual cost of the settlement or award to the defendant."

Division of Fees between Lawyers

RPC 1.5(e) prohibits the division of fees between lawyers who are not in the same firm (other than with an authorized lawyer referral service), unless the division is in proportion to the services provided by each lawyer, or, if the client agrees in writing, each lawyer assumes joint responsibility for the representation, the client is advised of and does not object to the participation of all the lawyers involved, and the total fee is reasonable.

Sharing Fees with Nonlawyers Prohibited

RPC 5.4(a) prohibits a lawyer from sharing legal fees with nonlawyers. In certain cases, fees may be shared with the estate or designees of a deceased lawyer, and may be shared with nonlawyer staff of a law firm through the firm's compensation and retirement plans.

Preserving Client Property

RPC 1.14 requires lawyers to preserve the identity of client funds and property, including as-yet-unearned legal fees, by maintaining them in trust accounts.

Possible Refund of Advance Fees on Withdrawal

RPC 1.15(d) requires that when a lawyer withdraws from a representation the lawyer must take steps to protect the client's interests, including "refunding any advance payment of fee that has not been earned." Thus, the lawyer must evaluate his or her performance and determine if he or she has or has not earned the fee, and if not, refund the unearned portion.

Recent Supreme Court Decisions

The Dann Case

In In re Discipline of Dann, the Court unanimously suspended a lawyer from the practice of law for one year for misrepresentations in billing statements to his clients. The lawyer billed clients on an hourly basis. Lawyers and staff members recorded their time spent on client matters, with those entries then being collected in periodic work-in-progress (WIP) statements, which listed each person's time, billing rate, service rendered and client identification. Final billings were then prepared from these.

The lawyer in this case switched initials on a number of the work-in-progress statements, giving one person credit for work performed by another. The result was that a client reading the final bill would be misled as to who did the work for the client. If the billing rates differed between the person identified as doing the work and the person who actually did the work, the client might also be paying more or less for the work than the client should have paid.

Although the lawyer had also been specifically directed by the client, and agreed, not to use a particular support person on the lawyer's staff for the client's work, the lawyer used that person. The lawyer then switched the staff person's initials on the work-in-progress statement so that the client would not know the unauthorized person was doing the work. Another client had directed the lawyer, and the lawyer had agreed, to use a particular support person on his work. The lawyer instead used another support person and switched initials on the work-in-progress statements so that the client mistakenly believed the designated person was doing his work, when in fact another person was doing it. In other cases, work was done by a lower-paid associate in the lawyer's firm for a particular client, but the lawyer switched the lawyer's own initials (and higher billing rate) for those of the associate, such that the final bill gave the impression that the lawyer, and not the associate, was doing the client's work.

The lawyer, while keeping track of time he spent on client matters, did not keep records contemporaneously. Instead, "[he] would often write billing information on pieces of paper and then put them in his time book so that he could later remember what work he had done. At the end of the month . . . [the lawyer] would reconstruct the time that he had worked from these pieces of paper and dictate it for entry into the WIP format. He would also jog his memory concerning his billable hours by reviewing the WIPs for his associates."³

The hearing officer found the lawyer had engaged in conduct involving dishonesty, fraud, deceit or misrepresentation in violation of RPC 8.4(c). Or, as Justice Alexander, writing for the Court, stated, "Simply put, the question is whether the attorney lied. No ethical duty could be plainer. However, [the lawyer's] . . . argument talks around the fact that he lied to clients about who was doing their legal work. He does not deny initial-switching. Rather, he offers various explanations as to why this lying occurred. That goes to mitigation and not to the truth of the underlying charges."⁴ 

The Court rejected the lawyer's attempts to justify the misrepresentations on the basis of belated billing or non-contemporaneous recordkeeping. The Court quoted approvingly,⁵ several federal court opinions: "The Tenth Circuit has written that 'we believe that reconstructed records generally represent an overstatement or understatement of time actually expended.' [Cite omitted.] The Second Circuit has noted that '[t]here is no excuse for an established law firm to rely on estimates made on the eve of payment and almost entirely unsupported by daily records.' [Cite omitted.]" The Court went on to cite several Washington Supreme Court opinions to the effect that the attorney-client relationship is a fiduciary one and thus the lawyer owes the highest duty to the client, but that in this case the lawyer's "actions are not in keeping with the high responsibility that rests with attorneys. Lying to client is an assault upon the most fundamental tenets of attorney-client relations."⁶ The Court concluded its opinion by citing one of its own previous opinions to the effect that "[t]he duty of this court is to protect the public from dishonest, deceitful lawyering."⁷

The Haskell Case

The Washington Supreme Court continued its examination of honesty in lawyer billings in In re Discipline of Haskell, with another opinion by Justice Alexander. In this case the Court suspended a lawyer from practice for two years for initial- switching, making false representations on travel expenses and billing clients for personal expenses.

The lawyer revised draft bills similar to the work-in-progress statements of Dann, switched initials of lower-paid associates to his own, and then sent his clients bills indicating he had done work actually done by others in his firm. The hearing officer found that the lawyer did this not for financial gain but to retain his clients, since his clients had expected the lawyer personally to do the work.

Although the lawyer was directed by a client to fly coach class rather than the more expensive first class, the lawyer in fact flew first class. He then billed his client for the higher fare, misrepresenting it as the fare for coach-class ticket. He documented this by securing a false travel voucher indicating that the travel was for coach-class but reflecting the higher first-class fare. He then obtained reimbursement for his actual expenses which were greater than the amounts to which he was entitled to receive. The lawyer also billed the client for other higher-priced tickets than those he actually used, and used the excess reimbursements he received to pay for personal travel expenses of himself and his wife. The lawyer also billed personal telephone calls to his client. The hearing officer found these acts constituted ethical violations under, among other things, RPC 1.4(b) (communication with client), 1.5 (unreasonable fee), and 8.4(c) (dishonesty). The hearing officer and the Disciplinary Board (by a vote of 10-1) recommended that the lawyer be disbarred. The Supreme Court instead suspended the lawyer for two years, citing its recent Dann decision as a basis for its lower sanction.

The Court's opinions in the Dann and Haskell cases should lead to some records-searching, if not soul-searching, by lawyers as to their own honesty in billing their clients. If you bill clients on a time-spent basis, you clearly may not switch initials of who performed the work, even if the switch does not result in additional fees to clients. Nor may you bill your clients for personal expenses. Nor may you bill your clients for expenditures at a rate higher than you actually incur. If your client has told you to limit the expenditures, you may not bill the client for amounts in excess of that limitation even if you actually incur those added expenses.

Equally important, the Dann and Haskell cases also make it clear that, unless you have your client's specific permission, you may not "value bill" your client by adjusting upward the amount billed to reflect your special expertise, an especially favorable result or your efficiency. If you or your firm, for example, have performed a particular legal service in the past so that now, with the use of your in-house forms and procedures, you can accomplish it in, say, one hour, whereas most other attorneys would take four hours, you may not bill your client for any more time than you actually and reasonably expend on the project. Or, if your partner, associate, secretary or paralegal perform services for your client, for example, you may not instead simply put their time under your own initials, even if you reduce the amount of time reflected so that there is no overbilling in amount. Instead, you need to reflect their work for your client honestly and openly with your client.

The Court's opinion in Dann also makes it clear that if you bill on a time-spent basis, you must keep contemporaneous and accurate time records. It is not acceptable to attempt to reconstruct your actual time by relying on memory, on miscellaneous unorganized scraps of paper, on comparisons to the time expended by others working on the project, or by evaluating the complexity or extent of the work-product ("I usually take one-half hour to write a letter," or "this is an excellent brief, it must have taken me at least eight hours to write") to jog your memory. This need for accurate and contemporaneous records may be most important to lawyers who traditionally bill on a time-spent basis, but it can also be important to others. For example, lawyers who enter a contingent-fee agreement with clients may find that, for whatever reason, they do not complete the representation, yet believe they are entitled to some compensation. If they seek compensation it will likely be on a quantum meruit basis and they will likely need to be able to prove the time they actually spent on the matter. Unless they have kept accurate contemporaneous time records, they are unlikely to be able to do so.

The Heard Case

The third of the Court's recent fee-related lawyer disciplinary opinions is In re Discipline of Heard, wherein the Court suspended a lawyer for two years from the practice of law. Unlike Dann and Haskell, which were primarily fee/billing cases, Heard involved both a lawyer's mishandling of a client's personal injury settlement and his contingent fee, as well as the sexual exploitation of that client, an issue not relevant in this discussion. The Court's opinion, by Justice Talmadge, as it related to the financial issues, was concurred in by six other justices, with two justices (Sanders and Dolliver) dissenting. The sex-with-client aspect of the case divided the Court 6-3, with Justice Johnson joining the dissent.

In Heard, a lawyer represented a 23-year-old woman seriously head-injured as a passenger in a motorcycle accident, as a result of which she was comatose for a week and remained hospitalized for several weeks thereafter. The lawyer entered a written 1/3 contingent fee agreement with the woman's mother to represent the woman. The lawyer sought and obtained from insurers $50,000 in payments. By way of a lawsuit he also recovered various other assets, substantially all of which were of highly questionable value, which he valued at $100,000. He then took all $50,000 of the cash insurance proceeds as his 1/3 fee, leaving the other questionable assets for his client. The lawyer never obtained his client's consent for this arrangement, nor did he ever provide her an accounting of the settlement proceeds.

A disciplinary complaint charged the lawyer with, as it related to the financial aspects, violating RPC 1.5(a) (unreasonable fee and fee contrary to fee agreement); RPC 1.5(c) (failure to provide written accounting); RPC 1.1 (incompetence, basically by advising client to sign the settlement agreement without determining whether the settlement in fact had any value); and RPC 1.4 (failure to communicate with client regarding settlement). The hearing officer dismissed the case for lack of proof. The Disciplinary Board rejected the hearing officer's findings, and instead found substantially all of the violations charged and recommended a two-year suspension.

The Supreme Court upheld the Disciplinary Board's determination and ordered the lawyer to pay restitution, stating that the lawyer "put his own interests ahead of those of his client. He negotiated a settlement of . . .[his client's] personal injury claims that largely reserved the tangible, cash benefits of the settlement to himself. The inflated or illusory settlement assets were . . . [the client's]. [The lawyer] . . . neither explained the implications of the settlement to the client before recommending she agree to it nor accounted to her for his decisions regarding the disposition of the settlement proceeds. [The lawyer] . . . violated the RPC by such conduct."⁸ 

Conclusion

The lawyers in Heard, Dann and Haskell each mishandled their billings and fees. They owed their clients a duty to treat them fairly, but instead took advantage of them. The Court has made clear that a lawyer may not do so. In each case the lawyers failed to properly communicate with their clients, either by affirmatively lying and making misrepresentations to the clients, or by failing to communicate material information needed by the client for the client to make informed decisions.

Billing, as a form of communication with clients, needs to be open and honest. Most lawyers remember when they are billing their clients that they have a fiduciary duty to be honest with them. These three cases remind us that not all lawyers do so, and that the Supreme Court will take action to protect the public from dishonest, deceitful lawyering.

Notes

1 See also the following discussions of lawyer fees: Joy McLean, "Practical Suggestions to Avoid Problems with Fees," Washington State Bar News, January 1997, p. 40 and February 1997, p. 48; Anne Seidel, "Nonrefundable Retainers and Advanced-Fee Deposits," Washington State Bar News, September 1996, p. 39; Anne Seidel, "Billing Practices," Washington State Bar News, October 1996, p. 40; and Anne Seidel, "Determining, Dividing and Collecting Fees," Washington State Bar News, November 1996, p. 47.