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Excerpts from
STATEMENTS
OF PRINCIPLES
The
Task Force on Lawyer Business Ethics
Copyright
© 1996 by the American Bar Association; The Task Force on Lawyer Business
Ethics
[If
you wish a copy of the complete Statements of Principals,
please send us an e-mail for
instructions of how to get one from the ABA or call us at 1.800.669.6461]
INTRODUCTION
In the spring of 1993, the Chair-Elect of the American Bar Association
(ABA) Section of Business Law (Section) appointed a Task Force to consider
issues of ethical business conduct by business lawyers.
He recognized that standard legal ethics codes, including the ABA's Model
Code of Professional Responsibility (1969) (Model Code) and Model Rules of
Professional Conduct (1983) (Model Rules), deal only tangentially with matters
involving the business dealings between lawyers and clients and between lawyers
and those they seek to have as clients.
.
. .
With a principal focus on billing practices of lawyers--including billing
for legal services and disbursements and other charges--the Task Force
recognized that one of its important functions was to attempt to reconcile the
justified concerns of both clients (receiving cost-effective legal services),
and lawyers (providing legal services that are economically advantageous). . . .
In its deliberations, the Task Force addressed a number of issues
relating to ethical considerations implicated by the necessary and everyday
business dealings between lawyer and client.
The three areas chosen for this first report are: (i) Billing for Legal
Services; (ii) Billing for Disbursements and Other Charges; and (iii) Marketing
Legal Services. . . .
This Introduction presents a brief discussion of some of the issues
addressed. . . While the
Principles contained in the Statements .
. . are predicated upon an understanding between lawyer and client.
To be valid, such an understanding requires, at the least, a fully
informed client, whose information usually
comes from the lawyer seeking agreement. The
form, nature, and extent of the disclosure will depend on the sophistication and
knowledge of the client as to legal matters and business dealings with lawyers.
Thus, what might constitute acceptable disclosure to an in-house counsel
accustomed to negotiating with lawyers over engagement letters and fee
arrangements might be unacceptable when dealing with a business executive very
knowledgeable about technical aspects of the business, but relatively
inexperienced in dealing with lawyers over fee arrangements, the custom in the
community with respect thereto, or the availability of alternative fee
arrangements.
.
. .
In December 1993, the ABA's Standing Committee on Ethics and Professional
Responsibility (Standing Committee) issued Formal Opinion 93-379, "Billing
for Professional Fees, Disbursements and Other Expenses" (Opinion),
interpreting in great detail the meaning and limits imposed by Rule 1.5 of the
Model Rules on billing practices relating to both fees for legal services and
disbursements. . . . Because the
Standing Committee is the one designated by the ABA to speak on issues of
interpretation of the Model Rules, the Opinion is the definitive interpretation
of Model Rule 1.5 in the areas in which it speaks. The Task Force believes, however, that there are many
other criteria that go into the determination of a reasonable fee--even one
based on an hourly rate. .--and that its work product, the Statement of
Principles in Billing for Legal Services, should serve a constructive purpose in
applying the Opinion.
.
. .
BILLING
FOR LEGAL SERVICES
The black-letter law of the legal ethics codes requiring that a lawyer's
fee be reasonable, and setting forth some generalized criteria to be considered
in making that determination, is of little practical help to either the lawyer
or client in their negotiations of an appropriate fee for a specific task.
.
. .
The Task Force believes that it is in the best interest of both lawyer
and client for a written fee agreement to be in effect for all representations,
whether or not required by local ethical or court rules or statute. . . . Because
a writing is rarely required by applicable ethical rules, there is little
authority on the issues discussed here.
The best way to avoid misunderstandings between lawyer and client, and to
further their mutual interests, however, is to have full and frank discussions
and a writing memorializing the understanding.
the Task Force cannot overemphasize its recommendation that fee and other
engagement terms be reduced to a writing signed by lawyer and client
.. . .
DISBURSEMENTS
AND OTHER CHARGES
Even more so than with principles applicable to fees for legal services,
the ethics codes appear to provide no guidance at all with respect to which
services provided by the lawyer to the client should be charged as part of the
legal services and billed as such, and which may properly be separately billed
to the client, either for direct payment to the vendor or for reimbursement to
the lawyer or law firm. During
the 1980s, a trend toward the unbundling of services grew significantly. Items that just a few years before were considered by
both lawyer and client to be part of the overhead necessary to provide the legal
services expected by the client were billed in addition to fees for legal
services.
Some examples of services routinely charged or sought to be charged
separately and in addition to fees for legal services include word processing,
computerized research, in-office meals with or without client participation in
the meeting at which food is served, and secretarial overtime, meals, and
transportation. It seems
generally true that little attention has been paid by the bar as to what ethical
rules should or do apply in determining what charges beyond fees for legal
services are appropriately unbundled.
There is nothing inherently ethical or unethical either for a law firm to
unbundle costs into components, some of which it hopes to pass on to clients, or
for clients to agree to or reject such charges.
As clients become ever more cost sensitive, however, lawyers can expect
greater efforts to limit what is unbundled and how those unbundled charges are
determined.
,
, , The Standing Committee examined three issues: (i) what items of cost are
properly subject to additional charges; (ii) to what extent, if at all, may
clients be charged for more than actual out-of-pocket disbursements; and (iii)
on what basis may clients be charged for the provision of in-house services.
The Task Force concurs with the position of the Standing Committee that,
absent agreement to the contrary, ethical obligations of lawyers limit rather
significantly the latitude available for creative charging of clients for costs.
Because of the trend toward unbundling previously discussed, and in order
to provide flexibility and reason to the dealings between lawyers and their
clients, the Statement of Principles applicable to disbursements and other
charges puts the obligation on the lawyer to assure that the client understands
what will be charged for and how the charges will be determined. As with an
explanation of fees for legal services, what is required to meet the test of
client-understanding depends on the sophistication of the client.
. . . the basis for the charges not included in the fees for legal
services should be clearly understood by the client.
In many cases this is not an easy chore.
The Standing Committee recognized the difficulty in deciding what
constitutes "cost," passing the buck to "our colleagues in the
accounting profession." The
final warning in this regard set forth in the Opinion, and one that is of the
utmost importance to the practicing lawyer, is that "in the absence of an
agreement to the contrary, it is impermissible for a lawyer to create an
additional source of profit for the law firm beyond that which is contained in
the provision of professional services themselves." .
. . As part of its disclosure
to the client, the law firm should indicate how it determines which duplicating
jobs are sent to outside vendors, and for those that are, whether there is a
mark-up for the overhead expense associated with messengers, checkers, or
others. . . .
This is given as but one example of the issues that exist whenever
"cost" is stated to be the basis for charges to the client.
Others would include (i) allocation of taxes on telephone charges, (ii)
treatment of the non-deductible portion of business meals, (iii) allocation
among clients of volume discounts from vendors, where the discount is not the
result of the work charged to any specific client, but rather to all clients
charged and may not be known until well after the client has been billed, and
(iv) in-office food service in cases where the food may be purchased, but office
personnel are used to serve and clean up, or where the law firm has its own
in-house catering service. .
. .
.
. .
STATEMENT
OF PRINCIPLES IN BILLING FOR LEGAL SERVICES
. . .
DISCLOSURE
AND UNDERSTANDING
It is the obligation of the lawyer and law firm to assure that the client
fully understands and agrees to the basis for billing for legal services
rendered. The
client's agreement may be by express written or oral agreement, or by implied
agreement through knowing use of the lawyer's services after the lawyer's full
disclosure of the basis on which legal services will be billed to the client.
.
. .
COMMENTARY
TO STATEMENT OF PRINCIPLES IN BILLING FOR LEGAL SERVICES
.
. .
DISCLOSURE
AND UNDERSTANDING
The first guiding principle for the lawyer with respect to billing for
legal services should be an understanding with the client of the basis for such billing
arrangement through full disclosure by the lawyer.
. . . Such understanding between lawyer and client should include not
only the method to be used in calculating fees for legal services but also the
scope of the legal services to be performed (and charged for) to the extent that
an understanding with respect to the scope is expected to be an important factor
in the lawyer-client relationship. For
example, is the matter of such critical importance to the client that a
"leave-no-stone- unturned" approach is appropriate, or does the client
prefer to accept some risk in order to avoid some of the costs attendant to such
an approach? In addition, do
billable legal services include lawyer time spent in preparing bills?
As clients demand more detail and/or complexity in presentation of their
bills for legal services (such as task-based billing), the lawyer may wish to
consider billing for lawyer time spent in accommodating the special demands of
the client.
.
. .
LAWYER'S RESPONSIBILITY IN
PREPARATION OF INVOICES
.
. . The lawyer and law firm should make every reasonable effort to provide
clients with complete and accurate invoices describing the legal services
provided and the amounts charged for same.
The lawyer responsible for billing should review each invoice to confirm
that the invoice has been prepared in accordance with the billing arrangement
reached with the client at the beginning of the engagement and should also take
steps as necessary to ensure, prior to sending an invoice to a client, that the
invoice is reviewed for accuracy. Each
invoice should clearly identify the legal services provided in such specificity
as the client requests, the fees charged for such services, and the
disbursements and other charges relating to the period being billed. . . .
HOURLY
BILLING ARRANGEMENTS
.
. .
The agreement by a client to be billed for legal services on an hourly
basis does not justify the lawyer spending an unreasonable number of hours on a
particular matter or task. The
amount of time spent on a matter should be reasonable in relation to the
client's goals and expectations and must also be consistent with the lawyer's
professional ethical obligations. In
general, the lawyer should have an obligation to address the matter that is to
be billed on an hourly basis in a cost effective manner and to avoid
"churning" hours, whether due to the lawyer being under-worked and
therefore spending more time than is reasonable on the matter, the assignment of
the matter or task to a lawyer who is too inexperienced to perform it
competently and/or cost- effectively, or otherwise.
The lawyer is expected to use professional judgment in determining
whether the number of hours spent on a matter is reasonable under the
circumstances of the engagement.
.
. .
Travel
Time
Experience shows that, even among lawyers, there is a wide disparity of
viewpoints with respect to charging for travel time.
This points up the importance of a specific agreement with the client in
this area in order to avoid misunderstandings.
.[A]bsent some other arrangement with the client, travel time may be
billed at normal hourly rates to the client for whom the travel is being
conducted (unless the lawyer is working for
and billing another client while traveling. . .
Premium
Billing
. . . [An] example of opportunity cost would be a client who demands an
unreasonable turnaround time for certain work, thereby rendering it impossible
for the lawyer to attend to other business or personal matters in the normal
course. Such "rush"
demands may provide a reasonable basis for a surcharge or higher hourly rate.
If such a surcharge is to be implemented, however, it would require
advance disclosure to and agreement by the client.
Hourly
Billing Rates
When legal services to be performed are to be billed on an hourly basis,
the hourly rates or range of rates for lawyers involved (or expected to be
involved) in performing work for the client should be disclosed to the client..
. It is suggested that the understanding or agreement between the lawyer and the
client with respect to billing for legal services anticipate and expressly
address prospective future changes in hourly rates, as well as, if applicable,
the existence of multiple hourly billing rates for the same lawyer depending on
the type of service provided.
. . .
. The lawyer should
not have any affirmative duty to disclose the existence or amount of negotiated
non-standard rates for other clients when quoting rates to a client.
. . .
Minimum
Time Increments
.
. . Legitimate use of a minimum time increment may depend on how the lawyer
records the balance of the increment.
Two fifteen-minute charges for two five-minute calls within the same
fifteen-minute period seem inappropriate; some balancing should be used.
Maximum
Hours Per Day
Absent a specific agreement with the client, there is no specified
maximum number of hours in a single day that may be billed by the lawyer if
worked, except of course the obvious twenty-four.
The number of hours worked in a single day or over a period of several
days may, however, affect the lawyer's efficiency.
If the lawyer's efficiency has been materially impaired for reasons that
are unrelated to that particular client's demands on the lawyer's time, such
impairment should be taken into account in determining whether such client's
bill is reasonable. If, on the other hand, the excessive hours causing
impairment are due to that particular client's demands, a premium may be
appropriate.
Learning
Curve
Some clients have indicated that they do not wish to (or will not) pay
for the cost of training lawyers or bringing them up the learning curve with
respect to a particular substantive area of the law or a particular type of case
or transaction. Resolving
this issue requires communication with the client in order to ascertain the
nature of the concern.
Provision by the lawyer or law firm of cost-effective services to clients
requires that certain tasks be performed by less experienced lawyers whose
hourly billing rates are lower but who, in the judgment of the managing attorney
on the project, have sufficient expertise and experience to perform such task.
Lack of experience should be appropriately reflected in a lawyer's hourly
rate. . . .
While clients may request that only certain levels of lawyers work on
their account, if they do make such a request, the lawyer should explain that
such external control by the client may result in less cost-effective management
by the law firm of a particular matter.
The lawyer should also explain to the client that it may incur delays and
experience a staffing conflicts when the chosen senior individual or individuals
are not available.
If the primary purpose of participation in a meeting or project by a less
experienced lawyer in a law firm is to train such lawyer, then the lawyer's time
should not be billed to the client.
Staffing
Considerations
Staffing is related to the issues surrounding the "Learning
Curve" previously discussed, but is a distinct issue.
The touchstones for determining such issues as staffing should be
cost-effectiveness and quality of legal service to the client.
Staffing should be discussed with the client if the client has expressed
an interest in such information and must be disclosed if the lawyer has created
an expectation that the matter will be handled by a particular lawyer or one
with a certain experience level and such is not in fact the case.
. . .
.
. .
In recognition of the value of continuity of representation, law firms
should endeavor to staff a specific client matter with a relatively consistent
team of lawyers. If a change
must be made in a critical member of the
team (other than in response to a client request), and this change necessitates
any significant expenditure of time by the new member of the team in getting up
to speed, counsel should make appropriate downward adjustments to the fees
billed in such matter to avoid unreasonable charges to the client.
.
. .
STATEMENT
OF PRINCIPLES IN BILLING FOR DISBURSEMENTS AND OTHER CHARGES
. . .
Definitions: The term "disbursements" means, for purposes of
this Statement of Principles, expenses paid
by a law firm to third parties and incurred in furtherance of the client's work.
The term "other charges" means, for purposes of this Statement
of Principles, all charges, including in-house costs, proposed to be charged to
a client and not constituting either disbursements or fee for legal services.
DISCLOSURE
AND UNDERSTANDING
It is the obligation of the lawyer and law firm to assure that the client
fully understands and agrees to the basis for billing for disbursements and
other charges. . . .
.
. .
COMMENTARY
TO STATEMENT OF PRINCIPLES IN BILLING FOR DISBURSEMENTS AND OTHER CHARGES
DISCLOSURE
AND UNDERSTANDING
.
. . What constitutes
full disclosure in this area, though, can be problematic.
Firms now provide varying degrees of disclosure on policies for billing
disbursements and other charges, from no written policies to detailed standard
firm policies. While a lawyer may provide this disclosure orally, the
Section strongly encourages lawyers to provide this disclosure to clients in
writing.
The test of whether the disclosure provided to a specific client meets
the tests of the Statement of Principles turns on whether the client fully understands
the firm's policies. The
lawyer should take appropriate steps to ensure the client understands the
policies.
REASONABLENESS
With
regard to other charges incurred on behalf of a client, such as photocopying and
computer research, firms should charge its costs, unless an understanding with
the client specifies otherwise. "Costs"
as used in connection with other charges incurred on behalf of a client may
include indirect costs reasonably allocable to the service provided as well as
direct costs.
CLIENT
APPROVAL
.
. .
No agreement as to the basis of charges can justify knowingly incurring
or billing unnecessary or excessive charges.
The lawyer's invoice for disbursements and other charges billed to the
client should be consistent with what has been disclosed and agreed to by the
client.
A client may specifically agree to pay an otherwise disproportionate
share of a disbursement or other charge (e.g., all of the travel expenses of a
lawyer who devotes her/himself to other matters in connection with such travel),
but the lawyer has the burden of establishing that the client was fully aware of
the situation and specifically approved the arrangement.
SPECIFIC
ISSUES IN BILLING FOR DISBURSEMENTS AND OTHER CHARGES
Travel
A firm should develop guidelines that its lawyers will follow when
incurring travel expenses on behalf of clients.
Those guidelines may then become part of the disclosure to the client. The firm should consider the detail it should provide
to meet its obligation for full disclosure in such matters as type of
accommodations, class of air travel, car rental, use of taxicabs and limousines,
etc . . .
Business
Meals
A firm should state its policies as to the types of occasions on which
lawyers may charge meals to the client.
This may include disclosure of those instances the firm will charge the
client for food service related to (i) client meetings held in the firm's office
at which the client or its representative is present, (ii) such meetings at
which no representative of the client is present, (iii) restaurant meals
including the client, (iv) meals eaten while working on a client matter before
or after normal business hours or while traveling on behalf of the client, as
well as the basis of the rates for the food and drinks for which it will charge.
Computerized
Research
A firm should describe the basis of charges it makes to clients relating
to the use of computerized research (LEXIS and Westlaw).
For example, a firm may describe (i) whether the client receives credit
for any discount the firm receives based on usage and (ii) whether overhead
other than direct charges paid to the vendor are included.
Duplicating
Charges
A firm should expressly state its rates for duplicating services. It should consider describing as specifically as
practicable the situations when outside duplicating services would be used.
It should consider providing the client with a choice as to whether
outside services or in-house services will be used, particularly when large
quantities of duplicating are anticipated.
It also should consider disclosing whether any portion of the duplicating
charges include a charge for overhead allocations (e.g., copy center staff time,
rent on space). The Section
believes that a per page charge, if approved by the client, is appropriate.
Word
Processing/Special Printing
If a firm charges a client for word processing or other special printing
arrangements, it should describe clearly when it would expect to impose such
charge. It also should
consider stating the method by which it charges for word processing or other
special printing arrangements (i.e., fixed hourly rate, rate per document page).
Long
Distance Telephone Service
A firm should state the basis of the charges for long distance telephone
calls. If it has a policy of
not charging clients for de minimis amounts, it should consider stating that
fact.
Facsimile
Service
A firm should state the basis of the charges for sending and receiving
faxes. For instance, if the
rate is based on "cost" and a portion thereof includes overhead
allocation for depreciation of equipment or personnel charges in addition to
telephone expenses for the cost of a per-minute or per-page fax charge, it
should consider stating that basis. The
Section believes that a per page or per document charge, if approved by the
client, is appropriate.
Employee
Overtime
A firm should disclose the circumstances under which it expects to bill
the client for overtime pay to firm staff (including paralegals) and the basis
on which charges will be computed. Similarly,
if the firm expects to charge the client for meals eaten by such employees who
have or will work overtime that day for the client, the basis on which such
charges will be computed (e.g. actual restaurant charges, in-house catering
costs as otherwise disclosed, etc.) should be disclosed.
Messenger
Service
A firm should state the basis on which it will charge the client for
messenger service. It should
consider stating whether it expects to use its employees to provide messenger
service, and if so, the basis for charging therefor.
The nature of the disclosure discussed herein may vary considerably from
community to community (e.g., use of subway or other public transportation
versus use of firm or individual-provided automobile, taxicab, etc.).
Video
Conferencing, E-Mail and Electronic Transmittal of Documents
If a firm anticipates charging a client for video conferencing, E-Mail or
electronic transmittal of documents, it should disclose the basis for the rates
it will charge.
********
The Task Force on Lawyer Business Ethics was formed in April 1993. The members of the Task Force included William G. Paul, George W. Bermant, Charles E. McCallum, Micalyn S. Harris, Samuel S. Friedman, Ronald L. Fein, Daniel G. Kelly, Karol K. Denniston, Myron M. Sheinfeld, S. Allen Lackey, Mark S. Howard and Ann Yvonne Walker. George W. Bermant and William G. Paul were the Co-Chairs of the Task Force and Ms. Walker and Messrs. McCallum and Howard were Chairs of the drafting groups responsible for the three Statements of Principles.
[If
you wish a copy of the complete Statements of Principals,
please send us an e-mail for
instructions of how to get one from the ABA or call us at 1.800.669.6461]