Fee Disputes

Fee disputes arise in a number of different contexts.  Below is some information about fee disputes; the types of fees; legal issues associated with fee disputes; and how Michael G. Watters can represent a party in fee disputes or act as an expert witness in fee disputes (arbitration or trial).

FROM THE ATTORNEY’S PERSPECTIVE

The classic fee dispute or billing dispute arises when the attorney has done the work but the client won’t pay. Sometimes the client is simply “slow pay.” Perhaps the attorney didn’t get a large enough retainer. Perhaps the attorney relied on the client’s continuing promises to pay. Maybe the client ran out of money, or maybe the client has rationalized or justified that he or she doesn’t or shouldn’t have to pay. See “The Client’s Curve of Gratitude” by Jay G. Foonberg. Maybe the client is angry at the outcome.

If the client stops paying during an ongoing civil case, the attorney may ask the client to take over the case (self-represent) and allow the attorney to withdraw. The attorney may also suggest the client go elsewhere. If the client refuses or ignores the suggestion, the attorney may file a motion with the court to withdraw as counsel of record. The motion is usually based on failure to meet financial obligations and/or breakdown in communications. The court may or may not grant the motion depending on a number of factors including how far away the trial date is.

In a non-litigation matter, the attorney may simply stop working on the assignment and/or return the matter to the client. However, the attorney is still required to protect his or her client’s interests in the interim.

Eventually the fee dispute may turn into litigation, i.e., the attorney may sue the client for his or her fees. In California, before an attorney can sue a client for fees, he or she must send out a “Notice of Client’s Right to Fee Arbitration” of the fee dispute. If the client elects to proceed with fee arbitration handled by the local bar association such as the Sonoma County Bar Association (SCBA), the arbitration award is non-binding on both the client and the attorney. Nor can the parties agree in advance to binding MFAA. However, once a fee dispute arises, the parties can then agree to a binding MFAA arbitration; B&P Code § 6204(a). If neither party rejects the arbitration award and requests for trial, the MFAA award becomes binding; B&P Code § 6203(b). The parties have 30 days after the notice of the arbitration aware to initiate a lawsuit; B&P Code § 6204(c). No attorney fees or costs are recoverable; B&P Code § 6203(c). Following a trial, the prevailing party may, in the court’s discretion, be awarded reasonable attorney’s fees and costs; B&P Code § 6204(d). This is a low cost way to promptly resolve smaller fee disputes.

FROM THE CLIENT’S PERSPECTIVE

Clients have all sorts of reasons (some legitimate, some not) for not paying their attorney. These include but are not limited to:

  1. The attorney did not do the work;
  2. The attorney was not authorized by the client to do the work;
  3. The attorney was inefficient as in he or she spent too much time on a given task(s);
  4. The attorney spent too little time on a given task;
  5. The attorney didn’t do the work in a timely manner;
  6. The attorney didn’t actually have the level of experience he or she claimed to have and thus, didn’t handle the matter competently;
  7. The quality of work was poor in relation to amount of time spent by the attorney;
  8. The attorney overcharged for the work;
  9. The attorney messed up the assignment and the client lost valuable rights;
  10. Legitimate billing mistakes such as time charged to the wrong client or file; and
  11. Etc.

Then there are the clients who are never happy no matter what the outcome or who rationalize and justify why they shouldn’t have to pay their attorney for work done even when excellent results have been obtained. (Attorneys are not allowed to guarantee outcomes.)

Although law is one of the true professions, law is also a business. In the law business, as in other important human endeavors, adequate preparation is the key to success. The 5 P’s: “Prior preparation prevents poor performance” apply. As Thomas Alva Edison said “Genius is one percent inspiration and ninety-nine percent perspiration. Accordingly, a ‘genius’ is often merely a talented person who has done all of his or her homework.” Some clients don’t appreciate just how much time it takes to get a case ready for trial. Some clients don’t understand the need for thorough preparation; some clients don’t want to pay for it, but still want the benefit of thorough preparation.

According to Abraham Lincoln, one of greatest U.S. presidents (also a “country lawyer”), “An attorney’s time and advice are his stock in trade.” America’s 16th president also said “If I had eight hours to chop down a tree, I would spend 6 hours preparing.”

There are only so many working hours in the day and an attorney has to be able to turn that time into money or he or she will soon be out of business. Charging by the hour is probably the most common billing methods attorneys use in most cases.

The traditional methods attorneys use for billing include: 1) hourly; 2) contingent fee; 3) hybrid (a cross between hourly and contingent fee); 4) flat fee; and 5) true retainer. There are also alternative billing arrangements.

“An attorney’s time and advice are his stock in trade.”
– Abraham Lincoln

Types of Attorney’s Fees

HOURLY FEES

The hourly rate method has two basic components: 1) the hourly rate; and 2) the hours spent on the task or expended in pursuit of the ultimate result. (Hourly rates are negotiable.)

CONTINGENCY FEES

In the contingent fee method, the attorney is not paid any fee until and unless there is a recovery by way of settlement or judgment after trial. This method of compensation is primarily used by attorneys representing plaintiffs in personal injury and wrongful death cases. Under that method, the attorney is paid a percentage of the gross recovery for personal injury and wrongful death cases. However, in medical malpractice case, the attorney receives a percentage, specified by law, of the net recovery. California Bus. & Prof. § 6147(a). Interestingly, there is no shortage of highly competent attorneys willing to handle contingent fee cases in personal injury or wrongful death cases where there is liability (legal responsibility) on the defendant and where the defendant has automobile liability or homeowners insurance with high policy limits.

In certain kinds of cases such as family law cases, contingent fee cases are not allowed or are disfavored.  See California Rules of Professional Conduct Rule 1.5(c).  In most commercial disputes, family disputes, etc., most attorneys will only agree to the hourly rate method of compensation.

COMMON CONTINGENCY FEE PERCENTAGES

Depending on the degree of effort and the status of the case when it settles (if it does so), common contingent fee rates in personal injury and wrongful death cases are 25%, (if the case settles before filing a complaint), 33.33% (if case settles prior to the settlement conference), and 40% (if the case goes to trial) and sometimes 50%, depending on the degree of risk associated with taking on the case in question. Contingent fee rates are also negotiable.

HYBRID FEES

A hybrid fee consists of a reduced hourly rate (designed to help cover some of the attorney’s overhead) and a lower contingent fee percentage of the gross recovery. This may be attractive to clients because of the lower hourly rate and the partial contingent fee may also provide some extra incentive to the attorney.

FLAT FEES

A flat fee is where a set amount is charged for a specific task regardless of how long it takes the attorney to do the specific task. This method of billing might include estate planning, preparation of a contract, preparation of a lease, a court appearance or the preparation of a motion, etc.

TRUE RETAINER

A true retainer is designed to ensure that a particular lawyer will always be available to help the client. This “true” retainer is earned upon payment to or receipt by the attorney regardless of whether any work is ever done by the attorney.  See California Rules of Professional Conduct Rule 1.5(d).

NO UNCONSCIONABLE FEES

Regardless of which type of fee agreement is entered into, an attorney may not charge an unconscionable fee, in other words, a fee that “shocks the conscience.” See California Rules of Professional Conduct Rule 1.5 (a). This rule lists various factors to be used in determining whether or not a fee is unconscionable. See California Rules of Professional Conduct Rule 1.5 (b). “The factors to be considered in determining the unconscionability of a fee include without limitation the following:”

  1. Whether the lawyer engaged in fraud or overreaching in negotiating or settling the fee;
  2. Whether the lawyer has failed to disclose material facts;
  3. The amount of the fee in proportion to the value of the services performed;
  4. The relative sophistication of the lawyer and the client;
  5. The novelty and difficulty of the questions involved, and the skill requisite to perform the legal service properly;
  6. The likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the lawyer;
  7. The amount involved and the results obtained;
  8. The time limitations imposed by the client or by the circumstances;
  9. The nature and length of the professional relationship with the client;
  10. The experience, reputation and ability of the lawyer or lawyers performing the services;
  11. Whether the fee is fixed or contingent;
  12. The time and labor required; and
  13. Whether the client gave informed consent to the fee.

THE LODESTAR

The courts, when evaluating fee applications, may also look to the above factors. That California Supreme Court case of Serrano v. Priest (Serrano III) (1977) 20 Cal.3d 25. refers to the role of the courts in determining the “lodestar” method in evaluating fee applications. The “lodestar” refers to the determination by the court of a reasonable hourly rate and a determination of the hours reasonably spent on a case. The court also has the power to multiply the lodestar under the right circumstances in ruling on the fee application. Per the Serrano case, the lodestar is determined based on the following factors:

  • The novelty and the complexity of the issues;
  • The skills displayed in presenting the issues;
  • Results obtained;
  • Contingent nature of the award;
  • The extent to which the case precluded the attorney from other employment;
  • Whether the fee award will be paid by the taxpayers;
  • The source of the funding of the attorneys;
  • Whether money would not go to the attorney but would go to some public interest party; and
  • Whether the law firms involved had shared equally in the efforts.

The multiplier, if any, is subject to the sound discretion of the trial court.

Other Attorney’s Fees Provisions

ATTORNEY’S LIEN

Sometimes written Legal Services Agreements contain a provision giving the attorney a lien on any sums or property recovered for the client. Such a provision is included to make sure that the attorney gets paid for his or her services in obtaining the recovery for the client.  See California Rules of Professional Conduct Rule 1.8.1. and California Civil Code Section 2881 and Gelfend, Greer, Popko & Miller v. Shivener (1973) 30 Cal. App. 3d 364, 371.

ATTORNEY TRUST ACCOUNTS

California attorneys, by law, are required to maintain “attorney trust accounts.” California Rules of Professional Conduct Rule 1.15. These trust accounts are used to hold advance deposits (non-true retainers) from clients until the fees are earned, to hold settlement proceeds, to hold client funds until there is an agreement between the parties or a court order, etc.

If the attorney and the client get into a fee dispute, the attorney is not allowed simply to take what the attorney claims is his share of the recovery from the attorney’s trust account. McKnight v. State Bar (1991) 53 Cal.3d 1025, 1037

INSURANCE COMPANY PAYMENTS

When personal injury cases or wrongful death cases are settled, if insurance carriers are payors, the carriers are required to advise the plaintiff of the disbursement of settlement proceeds. California Bus. & Prof. Code § 6149.5. This procedure is designed to put the plaintiff on notice that the settlement proceeds are en route. It is designed to help keep the attorneys honest as well. To the extent an attorney takes his or her client’s funds improperly, the attorney can be sued and is subject to discipline by the State Bar. The state bar also maintains a “Client Security Fund.” California Bus. & Prof. Code § 6140.5. This is also a very serious violation of the Rules of Professional Conduct.

POWERS OF ATTORNEY

Some attorneys include provisions for a power of attorney in their Legal Services Agreement. A Power of Attorney is a legal device that allows someone else (the agent known as “the attorney-in-fact”) to sign another person’s name (the principal) to legal documents or checks and the like; these are binding on the principal. Although the agent owes a fiduciary duty to his principal, caution should be used in deciding whether or not to sign such a fee agreement or to grant anyone a Power of Attorney. Generally speaking, this is not a good idea absent other important considerations. The danger is that the attorney (attorney-in-fact) can sign his or her client’s name on the settlement draft or check and could then cash the draft or check without paying anything to his or her client.

Many lawyers require their clients to sign off personally on the settlement draft. The attorney then signs off on the settlement draft or check which is then deposited into the attorney trust account. Disbursement of the funds from the attorney’s trust account will be made in accordance with the Legal Services Agreement and an accounting signed off on by both the client and attorney. This also helps ensure that the attorney will then be paid for his or her services out of the funds which the attorney helped obtain for his or her client.

Each side may need to hire an expert witness (an attorney expert), depending on the nature of and the amount in dispute, to review the case and the bills…

Fee Disputes

So what if there is a dispute with your attorney over fees? For example, what if a client doesn’t want to pay (or can’t pay) for the attorneys fees already incurred? What if the client claims that he or she was overcharged or that he or she didn’t receive a reasonable value for the fees being charged and so on?

In California, before an attorney can sue his or her client over fees, the attorney must go through a process which is known as the Mandatory Fee Arbitration based on the Mandatory Fee Arbitration Act. (“MFAA”) See Calif. Bus. & Prof. § 6200 and following. If an attorney has already filed a lawsuit against his or her client to collect fees, a demand for arbitration by the client “stays” that lawsuit pending resolution of the fee arbitration. See Calif. Bus. & Prof. § 6201(c).

The local bar association in each county usually operates a fee arbitration program set up to deal with these mandatory fee arbitrations. If not, the California State Bar has its own program. See www.calbar.ca.gov. Depending on the amount of the claim, the fee arbitrator will be a neutral attorney or a panel of two attorneys and a lay volunteer. The attorney and lay panelists undergo training for this voluntary public service.

Before an attorney should file a lawsuit to collect his or her fees from his or her client, the attorney must send out a “Notice of Client’s Right to Fee Arbitration.” Attached is a copy of the notice used by the Sonoma County Bar Association (“SCBA”). The client then has 30 days to demand arbitration through the local bar association. If the client fails to do so within the 30 days, then the attorney can proceed to file the lawsuit.

There are no “fee-shifting” rules regarding the mandatory fee arbitration program. In other words, each party bears his or her own attorneys fees and costs for the fee arbitration. Calif. Bus. & Prof. § 6203(a). This is in accord with “the American Rule.” California Code of Civ. Proc. § 1021.

If the client demands fee arbitration, the arbitration is mandatory but not binding on the client. The local bar association requires the client to pay a fee using a sliding scale based on the amount of fees in dispute.

FEE ARBITRATION HEARING

The neutral fee arbitrator (or the panel of three) will then schedule a hearing at which time each side is allowed to present evidence regarding the fee dispute.

Legal Services Agreements and the attorney’s bills are usually exhibits. Likewise, the attorney’s client or litigation files. Depending on the nature of the fee dispute and/or the amount in controversy, sometimes these hearings can go for a half a day or longer. A client and the attorney may need his or her own legal representation to present the case or provide a defense. Each side may need to hire an expert witness (an attorney expert), depending on the nature of and the amount in dispute, to review the case and the bills and then testify at the arbitration.

Following the hearing, the arbitrator (or panel) makes a written arbitration award (often on a pre-printed form). The award is non-binding on the client, but is binding on the attorney if the client doesn’t ask for a trial de novo. If the client doesn’t like the arbitration award, the client can reject the award (Bus. & Prof. Code § 6204(c)) by using appropriate California Judicial Council forms and filing them on a timely basis with the Court. Attached are copies. Litigation thus ensues. Bus. & Prof. Code § 6204(a)-(c) Attorney expert witnesses will likely be needed to be hired for the case.

PROFESSIONAL NEGLIGENCE CLAIMS

Although clients can assert malpractice claims as part of the fee arbitration, such claims are limited in scope and are only admissible to the extent that the alleged professional negligence adversely affected the value of the legal services rendered. However, there is no offset against fees for alleged legal malpractice. The mandatory fee arbitration is not the forum to try a claim for legal malpractice. Bus. & Prof. Code § 6203(b). In other words, if the alleged malpractice committed by the attorney has resulted in a “no value” service, it can be raised during the fee arbitration. If the attorney has lost a valuable right or claim of the client, that may be asserted as well.

Most professional liability insurance policies exclude indemnity for fee disputes.

If the client does not request fee arbitration or if the client has lost the fee arbitration and has properly (and timely rejected the fee award), litigation commences. Various Courts are available for this. For example, the client can be sued in small claims court. Small Claims Court deals with disputes up to $5,000. CCP § 116.220(a)(1). The defendant can file a cross-complaint seeking damages in excess of the maximum limit allowed, thus taking the case out of small claims court. (Attorneys cannot represent clients in Small Claim Court matters.) The loser in Small Claims Court can request a trial de novo, which would be heard by a panel of Superior Court Judges. See Judicial Council form SC-100 – SC101.

AMOUNT IN CONTROVERSY / COURTS

If the amount of fees in dispute is $25,000 or less, then the case would be one of limited jurisdiction in the California Superior Court. When the fees in dispute are over $25,000, the case would be filed as an unlimited case in the California Superior Court. In these cases, and in these courts, professional negligence claims can be heard and decided.

MEDIATION

Certain Legal Services Agreement may contain mediation provisions. These require that before the parties commence litigation, mediation must be conducted first (Cf., real estate purchase and sales agreements may have attorneys fees provisions which provide that unless the matter is mediated first, neither party is entitled to any attorneys fees if the case is then litigated).

Generally, lawsuits against attorneys have to be brought (filed) within one year. California Code of Civ. Proc. § 340.6(a); LEE v. HANLEY (2015) 61 Cal. 4th 1225, 1239.

BINDING ARBITRATION

Some Legal Services Agreements have binding arbitration clauses exclusive of the mandatory fee arbitration provisions. Under Schatz v. Allen (2009) 45 Cal.4th 557, after the mandatory fee arbitration is conducted, etc., depending on the outcome (or if the client doesn’t request the mandatory fee arbitration process), the fee dispute could then be arbitrated by binding arbitration. Again, usually each party will need an attorney expert witness to testify on whether or not the hourly rate was reasonable or whether or not the hours spent were reasonably necessary as well as to address the factors usually looked at by the courts in determining fee awards.

Thus, when hiring an attorney as an expert witness for a fee dispute, consideration should be given to an attorney who not only has expertise in fee disputes but who also has significant relevant legal experience in that kind of case.

Based on that expert opinion, a client can then decide whether to go into fee arbitration, work out a settlement, or proceed with litigation.

EXPERT’S REVIEW OF FILE AND BILLS

Before getting into a costly and possibly futile fee dispute with an attorney, a client may wish to hire an attorney expert witness to review the file as well as to review the bills in order to give the client a preliminary opinion on whether or not the fees were reasonable and necessary. Based on that expert opinion, a client can then decide whether to go into fee arbitration, work out a settlement, or proceed with litigation. The expert will then be available to testify on the client’s behalf as an expert witness at trial.

COLLECTION ACTION

A collection action by an attorney may generate a cross-complaint for legal malpractice, or, at least the client may threaten to file a cross-complaint if the attorney proceeds with a collection action. The attorney’s collection lawsuit may at least be met with an answer containing an affirmative defense of an offset or an actual cross-complaint for legal malpractice (whether justified or not). Such claims can be made in bad faith. Such claims often have no basis in fact, but the client has gotten in over his head and is looking for a potential easy way out. (Of course, there are some cases where there are legitimate disputes about the quality of legal services. An attorney expert witness on the subject of standard of care is required for that.)

The clients are also aware (or may be advised by counsel) that an attorney will have to report such a cross-complaint to his or her malpractice carrier and the insurance policy will likely have a deductible. Thus, the threat of a malpractice claim is designed to scare the attorney into giving up his or her claim for fees.

Of course, attorneys make mistakes from time to time (like everyone else) and that is why they have professional liability insurance. The highest percentage of claims made against attorneys is based on a failure to file legal papers such as a complaint or an answer on time (by the due date or deadline). When this happens, the client’s claim maybe lost (or be barred by the statute of limitations) or his default may be taken. The percentage of these types of claims is around 30%. Mallen, “Legal Malpractice” (1995 4th Ed.) §6.9, p. 417.

THE AMERICAN RULE

Under “the American Rule”, each side is required to bear his, her or its own attorneys fees. Trope v Katz (1995) 11 Cal.4th 274, 276. “The American Rule” is followed in California. California Code of Civil Procedure § 1021. See Press v. Lucky Stores, Inc. (1983) 34 Cal.3d 311. Notwithstanding the American Rule, the parties themselves may agree that in all disputes arising out of the contract, the “prevailing party” will be entitled to his or her attorney’s fees. See Calif. Civil Code § 1717. Be sure to check your legal services agreement for an attorney’s fees provision.

FEE SHIFTING STATUTES

There also may be laws which “shift the fees” to the other party, such as in family law (California Family Code §§ 2030, 271 or 1101), elder financial abuse (California Wel. & Inst. Code § 15657.5 – one-way in favor of successful plaintiffs, anti-SLAPP motions (CCP § 425.16), etc. There also may be attorney fees awards based on judicially recognized legal theories such as “private attorney general,” “common fund doctrine,” or “tort of another.”

WRITTEN FEE AGREEMENT

Under California law, if the attorneys fees are expected to exceed more than $1,000, there must be a written fee agreement. Bus. & Prof. Code § 6148. If there is no written legal services agreement, then the attorney’s fee recovery is limited to the reasonable value of his or her services also known by the Latin phrase “quantum meruit.” Such fees could result in an award less than the fees provided for in a written fee agreement.

MICHAEL G. WATTERS, ESQ.

Michael G. Watters, Esq. is available to represent a party in fee disputes themselves or act as an expert witness in a fee arbitration or at trial.

Watters has been the Head of the Litigation Department of his Santa Rosa based law firm since its founding in 1982. He has also been the firm’s Managing Partner for many years. Over his legal career, he has reviewed thousands of pre-bills in thousands of cases. He has also handled fee disputes up to and including mandatory fee arbitration. He has been an expert witness in a significant fee dispute. See attached redacted copy of her testimony in that case. He has handled collection actions as well as malpractice claims.

As an active civil litigator, he has also handled many different kinds of civil cases from “A-Z” and “soup to nuts.” He has extensive jury and court trial as well as appellate case experience. (He was in trial approximately 250 days between 2009-2015.)

He is also an expert in reviewing files and bills and is available for such expert witness assignments throughout California.

He has considerable experience in professional liability cases and is also a “standard of care expert” in legal malpractice cases. (See CACI 600 and following.) (Judicial Council of California, Civil Jury Instructions.)

CONTACT FOR MORE INFORMATION