Attempts by lawyers to pad hours can often be uncovered by a careful examination of billing statements
By Gerald F. Phillips
Gerald F. Phillips is a full-time mediator and arbitrator with offices in Century City. He was retained as an expert on billing procedures by the client in the lawsuit referred to in this article. The examples of bill padding are drawn from the actual billing statements submitted by the law firm involved in the dispute. Phillips is a member of the Los Angeles County Bar Association Professional Responsibility and Ethics Committee.
See Sidebar: Red Flags in Billing Statements, (you will need Acrobat Reader to view this file).
The fact that lawyers are held in very low esteem is without dispute. While the causes of this poor standing are varied and worth debating, it is clear that overbilling is partly responsible. Time padding and task padding are major reasons for the low image of lawyers. These practices improperly escalate the fees billed to clients and thus cause great consternation among the public. Those responsible for approving bills submitted by attorneys must be vigilant and recognize the red flags that may signal the presence of bill padding. Without appropriate attention and action, reputations can be irreparably harmed, clients lost, and, in the most egregious cases, licenses stripped away.
It is probably true, as Professor William G. Ross observes, that "most attorneys probably try to achieve honesty in billing, and that most excessive billing results from ignorance or insensitivity about ethical issues rather than deliberate deception."1 As Ross notes, "Just as one often hears the refrain 'where were the parents' when juveniles are caught in patterns of crime, one may well ask in amazement 'where were the clients' when attorneys were robbing the clients."2 While conceding that "the failure of all too many clients to question legal bills does not in any manner relieve unethical attorneys of their culpability," Ross concludes that "it does help to explain why so many attorneys are so brazen in their unethical billing practices."3 Nonetheless, unethical and fraudulent billing practices represent "a real crisis in the profession."4 Certainly early discussions with clients regarding the manner in which a firm will bill may help to prevent future controversies. More important, educating clients and lawyers about overbilling may help to end it and restore respect for members of the bar.
A recent lawsuit that called into question a law firm's billing practices is illustrative.5 In the underlying case, the law firm's client was sued by a former consultant who claimed that he had been orally promised a share of the client's profits. In defending the client against the consultant, the law firm billed $400,000 for its services. After paying the firm $300,000, the client refused to pay the remaining $100,000. The underlying lawsuit was tried in 1992, resulting in a $230,000 judgment for the consultant. The law firm then waited for the malpractice statute of limitations to expire before suing its former client to collect the remaining fee.
The client asserted that the law firm's bills were unconscionable and that the law firm violated rules of professional conduct. The client further alleged that the firm performed unnecessary legal work in order to increase the time that was charged. Based on current billing rates and the number of hours billed, the billing statements amounted to approximately $750,000. The client did not challenge the firm's billing rates.
By revealing the manner in which the law firm padded its bills, others will be forewarned and more able to intelligently review billing statements and uncover improper billing practices. In connection with the underlying case, the law firm violated various duties and responsibilities in billing its client—but some of the items in the billing statements could have alerted the client that the bills may have been padded. The examples gleaned from the subsequent lawsuit are not intended to bring further disgrace to the profession by airing dirty laundry in public or to give the impression that most attorneys are guilty of the violations that were committed by the law firm. Rather, the purpose is to warn that there are attorneys who betray the legal profession by inflating the number of hours billed.6 While most lawyers are ethical and their bills are proper, it cannot be denied that unethical billing is a real problem.
Time padding and task padding are the twin evils of unethical billing. Time padding occurs when the client is billed for time that was not actually expended on the client's matter. Task padding involves unnecessary tasks that were undertaken to run up the time billed. Commentators discussing studies of unethical and fraudulent billing reach different conclusions as to which evil predominates and is most responsible for fraudulent billing.7
Some task padding can be discovered by reviewing billing statements carefully. One clue may be the number of law firm personnel submitting bills, which may be evidence that a case may have been overstaffed. In the case under scrutiny, at least nine people were involved in working on the client's matter. On the first day of trial, seven people billed for the time that they spent working on the case, with three partners appearing in court. In another example of potential task padding, three people worked on preparing the questions to be asked at the plaintiff's deposition and two attorneys appeared at a deposition. However, whether the huge number of interrogatories propounded by the law firm was necessary or was the product of task padding cannot be discovered only by analyzing the bills. Bills do not reveal whether all the motions that were made were necessary. Time padding simply is easier to discern from a review of a law firm's bills than task padding.
In the underlying case, the law firm used three partners, three associates, and three or more paralegals and legal assistants. This fact was not readily disclosed in the billing statements, in which only the names of the partners and occasionally one associate appeared. If a firm assigns associates on a rotating basis to work on a case, the client should not be charged for the time that these associates take to review the file and learn the case. Ross notes that "too many firms transfer cases among so many attorneys that they create redundant activity. To the extent that such transfers could be avoided through better planning or efficiency, a firm may be unethical if it bills a client for redundant time."8
Reasonable Incremental Formulas
The attorney-client relationship is "a fiduciary relation of the very highest character."9 Thus it is well settled that fee agreements must be fair, reasonable, and fully explained to the client.10 Attorneys also have a "professional responsibility to make sure clients understand their billing procedures and rates."11 An attorney may not recover a fee in excess of what was explained to the client and to which the client consented.12
California Business and Professions Code Section 6148 provides that a written fee agreement (other than a contingency fee agreement) must contain "any basis for compensation including, but not limited to, hourly rates, statutory fees or flat fees, and other standard rates, fees, and charges applicable to the case."13 A promissory note purporting to set forth an alleged balance due for legal services and signed by the client with a caveat—"As noted, total is incorrect as it does not reflect reductions due to billing errors"—is not an attorney-client fee agreement within the meaning of Section 6148.14
With respect to billing, Business and Professions Code Section 6148(b) is explicit:
All bills rendered by an attorney to a client shall clearly state the basis thereof. Bills for the fee portion of the bill shall include the amount, rate, basis for calculation, or other method of determination of the attorney's fees and costs. Bills for the cost and expense portion of the bill shall clearly identify the costs and expenses incurred and the amount of the costs and expenses.
Failure to comply with any provision of Section 6148 "renders the [attorney fee] agreement voidable at the option of the client, and the attorney shall, upon the agreement being voided, be entitled to collect a reasonable fee."15
Rule 1.5(a) of the American Bar Association's Model Rules of Professional Conduct provides that "[a] lawyer's fee must be reasonable." The rule lists several factors to be considered in determining the reasonableness of a fee, including:
- The time and labor required.
- The novelty and difficulty of the questions presented.
- The skill needed to perform the service.
- The fee customarily charged in the locality for similar legal services.
- The amount of money involved.
- The results obtained.
- The experience, reputation, and ability of the attorney.
It is not reasonable for an attorney to bill the client in increments in excess of .10 (one-tenth) of an hour or to charge the client for a minimum amount of time without disclosing those practices to the client. In a 1985 bankruptcy case, In re Tom Carter Enterprises, Inc., the court stated, "Professional persons who charge their clients fees in excess of $80 dollars per hour, based upon time spent, cannot in all honesty and reasonableness, charge their clients for increments in excess of one-tenth of an hour."16
Charging for time not actually spent on a task is, by definition, unreasonable and unethical. When a bill lists .30 of an hour, clients should have every expectation that the attorney creating the bill actually spent 18 minutes on the client's matter. If, in truth, the attorney did not spend 18 minutes, the attorney violated Model Rules 7.1 and 8.4 (c) because the billing statement is false and dishonest. As State Bar of California Formal Opinion 1996-147 states, "An attorney may charge a client only for that work the attorney actually does for the client."17
The State Bar's opinion further declares that an attorney may not "double bill"—that is, bill more than one client for the same time period—unless 1) the attorney has disclosed this billing practice to the clients at the outset of the relationships, 2) the clients have consented to this practice, and 3) the fee charged to each client is not "unconscionable," as that term is defined in Rule 4-200 of the California Rules of Professional Conduct.18 Similarly, the opinion notes that "where the fee agreement contemplates an hourly billing arrangement, the attorney may not arbitrarily 'value bill.'" Value billing occurs when an attorney adds a bonus or premium above the hourly fee in recognition of work product that is subjectively worth more than what the hourly fee would generate if legitimately applied.19 Value billing may be acceptable if it is part of a carefully crafted agreement between the attorney and the client—but it also is a practice that can take the form of padded hours.
Law firms charging on an hourly basis—not those that base their fees on the result obtained, or charge on a contingent-fee basis, or utilize a flat fee—usually charge in increments of .10 of an hour. Some lawyers charge on a quarter-hour basis. Any incremental basis greater than .10 of an hour must certainly be discussed with the client and the approval to do so should be in writing.20 Insurance carriers often advise their counsel that minimum billing levels above .10 of an hour and the rounding of hours are not acceptable.
In the lawsuit, the senior partner of the law firm stated that the firm billed on a .10-of-an-hour basis. However, the billing statements disclosed that he billed in increments in excess of a quarter of an hour. Such incremental billing does not produce a reasonable fee. The senior partner used a billing formula that entailed the regular billing of .30 of an hour, .50 of an hour, .80 of an hour, and a full hour. The same formula was used even for time in excess of one or more hours. The billing statements of one of the contract associates disclosed that he billed on the basis of .50 of an hour. The distribution of the senior partner's time where he billed 8 or more hours shows that he applied his incremental formula 100 percent of the time. (See "Red Flags in Billing Statements," page 29.) To add insult to injury, this incremental billing was not communicated to the client.
With 20-20 hindsight it should have been obvious to the client that there was something wrong. On the first billing statement, the associate's time entries showed that he was billing on the basis of .50 of an hour and multiples thereof. The senior partner's time entries, starting from the first billing statement, followed his incremental formula of .30 of an hour, .50 of an hour, .80 of an hour, or a full hour. This billing practice does not produce a reasonable fee as required by the Model Rules.
Using these formulas, without advising the client, was a violation of the firm's duty to the client and a violation of the Model Rules. These formulas can easily inflate a bill by 15 percent to 30 percent, if not more, depending on how frequently and to what extent they are used. Using these formulas when billing in excess of 8 hours (for example, 8.30 hours, 8.50 hours, or 8.80 hours) results in an even greater overstatement of the time and consequently the fees.
The bills reveal that there were never any time entries for less than .30 of an hour and that in most cases the entries for .30 of an hour were for telephone calls or writing letters. As the court noted in Tom Carter Enterprises: "Very few telephone calls last more than one-tenth of an hour and…it rarely takes more than one-tenth of an hour to read an incoming letter or to write a short outgoing letter."21
When the senior partner, who billed $175 per hour, recorded a one-minute telephone call as 18 minutes, which he did when he billed a minimum of .30 of an hour, he billed the client $52.50 for work that should have cost only $3 if billed for the time actually spent. If billed on a minimum of .10 of an hour, the cost would have been $17.50. There was no discussion with the client that the firm would bill a minimum of .30 of an hour.
As this billing analysis shows, padding bills can be what Ross calls "a perfect crime.…[M]uch padding of hours is simply impossible to detect and can escape the attention of the most dedicated sleuth."22 Ross further notes, "The cumulative amount of such overcharges could be immense. The combination of large billing increments and liberal rounding techniques costs clients untold millions of dollars every year."23
Disclosing Timekeepers' Names and Rates
In billing the client, the law firm did not set forth in each bill or in any manner the billing rate for all of the timekeepers. An attorney has a duty to disclose the billing rate that will be charged not only at the beginning of the engagement but also in each billing statement, so that the client may reasonably understand what fee is being billed and how it was calculated. This obligation is expressed in Model Rule 1.4(b), which provides: "A lawyer shall explain a matter to the extent reasonably necessary to permit the client to make informed decisions regarding the representation."
Insurance carriers often, in their guidelines, require law firms to set forth a time summary and a billing rate for each attorney or paralegal who performs services for the carriers. Insurance carriers will not pay a bill that fails to disclose this information. Clients of attorneys, if not advised regarding the billing rate for each timekeeper, should immediately inquire what rates were used in determining the amount billed. In the example, the client did not have that information.
There were other aspects of the firm's bills that prevented the client from understanding them. The firm's attorneys engaged in "block billing," which means assigning one time charge to multiple tasks. Many attorneys engage in this practice even though it is universally disapproved. With block billing, a lawyer can claim compensation for a large time entry that includes small, minor tasks not truly compensable by the client if the tasks were reported individually. Block billing also prevents the determination of the costs for individual tasks because it is impossible to separate the various tasks lumped together in one entry.
Courts have questioned block billings, including the court in Tom Carter Enterprises:
I have noticed in reviewing the fee applications at bar that counsel have frequently "lumped" their time. This means that rather than breaking out the time spent on each function on a daily basis, counsel has one charge for each day and then indicates all the services rendered during that day.…[T]hat method is all right when those services are rendered in one time frame without interruption, but it is preferable when counsel interrupts research to make or receive a phone call, that the time spent on that phone call should be separately stated.…[I]f different functions are performed at different times of the day, they must be stated separately.24
If clients alerted their attorneys that they plan to scrutinize the bills, attorneys hopefully would not 1) engage in block billing, 2) charge in excess of .10 of an hour, or 3) list vague billing entries that do not inform clients whether the services rendered were reasonable or compensable. Once a client has shown an attorney that the client seeks to understand the attorney's bills, the attorney will no doubt be more careful in the manner in which he or she bills and will be more careful not to pad the bills.
In its bills, the law firm in the example concealed the name of the outside contract associates who worked on the case. An attorney has a duty to disclose the names of each attorney, paralegal, and legal assistant who worked on the case and for whose time a bill is submitted to the client. The senior partner at the law firm was unable to explain his unusual practice of using imprecise designations, such as AA1 for each of the contract associates, PL1 for each paralegal, and LA1 for each legal assistant. The practice of omitting the names or initials of the associates, paralegals, and legal assistants in the billing statements prevented the client from assessing who was performing the work and determining the efficiency of the timekeeper.
The senior partner went further in concealing the names of timekeepers when he used these designations and not the timekeepers' names when billing for time spent conferring with a timekeeper. When the senior partner was asked why he did not use the names or initials of the timekeepers, he said it was easier to use designations like AA1 than names or initials. In fact, the AA1 designation was used for three associates, and it was not obvious to the client that AA1 was a code and not the initials of an employee. The client was not advised and had no way of knowing that the three associates were not employees of the firm but were instead independent contract associates. The firm billed the client for the services of each of the contract attorneys and shared the fees received from the client with the associates.
Is this practice fee splitting, which is improper without client consent? Model Rule 1.5(e) provides: "A division of fees between lawyers who are not in the same firm may be made only if…(2) the client is advised of and does not object to the participation of all the lawyers involved.…"
Whether or not the associates working on a case are employees of the firm is an important consideration for clients. In the example, the associates received only about half the fee paid by the client for the time that they billed. This arrangement raises a question whether the contract associates have an incentive to overbill their hours in order to receive reasonable compensation. In addition, malpractice coverage issues may also arise.
Surcharges and Overhead
The firm in the example likewise failed to disclose that it did not employ any paralegals or legal assistants and had retained an outside vendor to perform computer work and other services. The firm then marked up the amount billed by this vendor. A law firm is retained to provide legal services and is not supposed to have a profit center for nonlegal services. In its Formal Opinion 93-397, the ABA queried whether it would be proper for a firm to assess a surcharge on disbursements over the actual amount incurred. The ABA reasoned that a client quite properly could view such a procedure as an attempt to create an additional profit. Certainly adding a surcharge for computer work, without disclosure to the client, is not proper. It was similarly inappropriate in the example for the firm to add a surcharge for work billed by PL1 and LA1 that was described as "photocopy and check set of produced documents for the partner to take on a trip," "number and stamp payroll journals," and "photocopy, check, and prepare set page of documents for partner." This type of work is part of the firm's overhead, and it is improper to charge the client for most overhead costs.
In Formal Opinion 93-379, the ABA raised three questions with respect to what it termed "Charges Other Than Professional Fees":
First, which items are properly subject to additional charges? Second, to what extent, if at all, may clients be charged for more than actual out-of-pocket disbursements? Third, on what basis may clients be charged for the provision of in-house services?
Law firms often improperly use photocopying as a profit center. In the example, the cost of photocopying was considerable, and there was no explanation as to how the cost was determined. Insurance carriers often advise their attorneys that charging more than $.10 per page for copying is unreasonable. Many firms charge $.25 per page but usually advise their clients, in a written retainer agreement, that they will do so.
If an outside vender performs the photocopying services, it would be improper for the law firm to add a surcharge to the vendor's bill for the client to pay. The ABA has opined that a lawyer is obliged to charge the client no more than the direct cost associated with the service (i.e., the actual cost of making a copy on the photocopy machine), plus a reasonable allocation of overhead expenses directly associated with the provision of the service (e.g., the salary of a photocopy machine operator).25
In the example, the client was not advised regarding the price per page for photocopying services. In addition, most of the photocopying charges were billed by the outside paralegals on an undisclosed basis. The billing statements showed indications that the paralegals were also charging for the time spent making copies. The statements were inconclusive as to whether the client was asked to pay for the photocopying operator as a separate charge and also as part of the per page charge.
The bills did reveal such improper overhead charges as "prepare labels and dividers," "refile pulled documents," "deliver and pick up documents," "photocopying," "file response and serve judge" (an expense billed by the associate), and "arrange service" (billed by the senior partner). These are all improper charges. Insurance carriers in their guidelines often expressly state that the attorney will not be compensated for such time and expenses as secretarial functions, "file creation," "file administration," and setting depositions.
The ABA noted wryly, in summing up its views on adding a surcharge: "The lawyer's stock in trade is the sale of legal services, not photography paper, tuna fish sandwiches, computer time, or messenger services." Costs should be charged without a markup, and most overhead charges are inappropriate.26
Citing ABA Formal Opinion 93-379, the State Bar Court reversed a hearing judge's ruling that an attorney's collection of estimated lump sum costs was an act involving moral turpitude.27 "Whether lawyers ethically may charge a flat periodic fee or lump sum to cover disbursements is a matter of some controversy," the State Bar Court acknowledged. However, "it would appear that such an arrangement is permissible in any particular case if it does not result in an unreasonable amount of compensation and if the client has given informed consent to the arrangement."
Excessive Hours and Revisions
In the example, the bills revealed an exorbitant number of very long days—even excluding trial days—that at times exceeded 11 hours. This aspect of the bill should have alerted the client that the law firm may have been padding the billing statements. Few of us can work 12 to 16 hours a day for several consecutive days. The senior partner tried to camouflage this by billing 8.30, 8.50, and 8.80 hours. In fact, the partner billed 53 times in excess of 1 hour, and 28 percent of these instances were for more than 8 hours.
In one reported State Bar Court decision, a California attorney, retained as Cumis counsel for insureds in malpractice actions filed against dentists, generated bills showing that he personally worked in excess of 24 hours on many days. On a substantial number of days he claimed to have worked in excess of 100 hours.28 The attorney produced no time records and testified that the time records were destroyed within 90 to 180 days following each billing because the insurance company had not complained. Incredibly, the attorney also testified that he had an employee in his office count the number of pages of documents pertaining to the Cumis matters that the attorney received and multiply that number by three minutes a page to determine the attorney's hours for billing purposes. "We take the repeated fraudulent billing, involving moral turpitude, to be a matter from which the public deserves substantial protection," the State Bar Court wrote. The court recommended that the attorney be disbarred.
Conferences may be worthwhile, but rarely are they necessary on a daily basis. Clients should query not only the necessity of excessive conferences but whether they actually took place. In the example, associates billed for conferences with partners. The senior partner's bill did not reflect these conferences. Often the bills did not reflect the length of a conference. When bills recite numerous conferences of unstated duration among undisclosed participants, there is reason to be suspicious.
Another typical method of bill padding is to frequently recite that the timekeeper "reviewed" and "revised" prior work. Excessive revisions by the senior partner is most suspect when the task is not difficult. A senior partner should not have to review and revise simple documents numerous times. If the senior partner must do so, the partner should not bill his or her full time or not bill in excess of the time that the task normally should take. In the example, the senior partner, in a one-month period, billed 12.90 hours partly for revising interrogatories.
Equally inappropriate is for the timekeeper simply to recycle work product from a different matter and charge the current client the time it took to generate the work for the prior client. Addressing the use of recycled work product, ABA Formal Opinion 93-379 is unequivocal:
A lawyer who is able to reuse old work product has not re-earned the hours previously billed and compensated when the work was first generated. Rather than looking to profit from the fortuity of coincidental scheduling…or the luck of being asked the identical question twice, the lawyer who has agreed to bill solely on the basis of time spent is obliged to pass the benefits of these economies to the client.
Unfortunately, it must be recognized that billing abuses are widespread and not confined to the few who have been prosecuted for fraudulent billing. Clients should no longer believe that they can always rely on the honesty of attorneys and not review bills. Attorneys must engage in a frank discussion with each new client regarding how the client will be billed. Likewise, clients should analyze bills carefully and question suspicious or unclear entries. A failure to ask questions about bills may be used against the client in the future. Of course, merely asking questions should not affect the attorney-client relationship, unless the attorney recognizes that the client has uncovered evidence of inexcusable bill padding.