What is a “reasonable fee”?
Articulating a concise yet all-encompassing definition is much more difficult than relying on Supreme Court Justice Potter Stewart’s infamous quote, “I know it when I see it.” When it comes to attorney’s fees, this definition is clearly lacking.
The fact is, law firm realization and collection rates have been in steady decline for over a decade.
At the end of 2007, law firms maintained a 92% realization rate. According to a report issued by Georgetown University Law Center and Peer Monitor, realization rates have subsequently dropped to an average of around 84%.
The “Great Recession” of 2008 is pinpointed as the impetus for the decline. It served as a catalyst for clients to scrutinize hefty attorney’s fees in a way they hadn’t previously. But the scrutiny did not end with the Great Recession.
According to the Clio 2018 Legal Trends Report, 31% of clients feel that legal representation is overpriced. Worse than that, 35% of clients don’t think the results of legal action are worth the expense. The heightened levels of contention over what constitutes a “reasonable fee” is one of the major causes of reduced realization and collection rates.
The best defense against claims of “unreasonable fees” and “overbilling” is using reasonable billing practices. Some of the best evidence of reasonable billing practices are transparent invoices supported by data-driven decision-making.
The Elusive Reasonable Fee
There is no hard and fast redline when it comes to reasonableness. But, governing ethical guidelines don’t leave lawyers entirely twisting in the wind either.
When looking for guidance in the realm of reasonable fees, the first place to look is Rule 1.5 of the ABA Model Rules of Professional Conduct:
A lawyer shall not make an agreement for, charge, or collect an unreasonable fee or an unreasonable amount for expenses.
The Rule goes on to provide eight “factors to be considered in determining the reasonableness of a fee”:
- The time and labor required for the matter, the novelty and difficulty of the questions involved, and the skill necessary to handle the matter properly.
- The likelihood, if apparent to the client, that taking on this matter will preclude other employment by the lawyer.
- The fee customarily charged in the locality for similar legal services.
- The amount involved and the results obtained.
- Time limitations imposed by the client or by the circumstances of the case.
- The nature and length of the professional relationship with the client.
- The lawyer’s experience, reputation, and ability.
- Whether the fee is fixed or contingent.
Unfortunately, putting Rule 1.5 in front of a client is unlikely to assuage feelings of being overbilled. The reality of the situation is that fees don’t have to actually be unreasonable for a client to feel like they are.
However, adherence to Rule 1.5 provides cover in case legal action becomes necessary to collect unpaid bills from a client. Furthermore, suing a client for legal fees has a 40% chance of leading to a legal malpractice counterclaim. Ideally though, things would never get to that point in the first place.
Preventing non-payment is obviously preferable to compelling payment via litigation. How a law firm bills can be the source of decreasing realization and collection rates. Maintaining transparent and uniform billing practices is a large step in the right direction.
Unreasonable fees are not the only revenue stress point brought about by inefficient or inaccurate billing practices.
A recent survey by LexisNexis discovered that over 450 lawyers at various different firms said they miss out on as much as 40% of their billable time dealing with inconvenient billing and timekeeping systems.
The inefficiencies in the time entry process become a compounded problem when lawyers spend significant unbillable time to remove block billing and other practices clients have growingly found offensive. All of which is to say nothing of genuine human errors.
Existing automated billing applications present a potential solution to both of these issues. These applications are designed to use Artificial Intelligence (AI) and machine learning to speed up the billing and invoicing process by streamlining and standardizing time and expense entries, and flagging non-compliant and potentially objectionable entries in real time, greatly mitigating human error. Moreover, these automated billing applications also produce more detailed invoices which can help to cut down on good faith disputes from clients.
Using AI and machine learning in the billing process makes significant forward progress in curtailing the mechanical deficiencies of manual timekeeping. However, simply having billing software is not enough in and of itself. A firm’s billing practices must already be inherently reasonable. Otherwise, most billing programs will just automate those same bad practices.
Maintaining Best Billing Practices
The disconnect between attorneys and clients can be more problematic than the actual total amount due on the invoice.
Clients want to know they are getting their money’s worth.
Billing shorthand, rounding, and vagueness are no longer acceptable in the eyes of clients, even if they don’t directly contradict a client’s billing guidelines.
The American Bar Association offers these tips to serve as a solid billing and timekeeping foundation:
- Be descriptive – Clients want to know what they are paying for.
- Avoid block billing – If you went to the grocery store and got a receipt that only featured totals by department instead of itemizing each individual purchase, you’d have questions.
- Proofread time entries – Mistakes happen. Noticing and correcting them before a client sees them will save you a headache.
- Track and enter your time daily – The fallibility of human memory is well documented. Attempting to fill holes in that fallible memory can be a gateway to impropriety.
- Record all your time – Guessing or estimating time entries can rob you and your firm of valuable data on top of potentially charging the client the wrong amount.
These practices lead to more information than less thorough methods of timekeeping. With this influx of information, a superior system of organization becomes a near-necessity to avoid losing track of time and potentially undervaluing a lawyer’s work.
In addition, the Supreme Court of the United States among others has held that attorneys must exercise “billing judgment”, and “make a good-faith effort” to exclude charges and expenses “that are excessive, redundant, or otherwise unnecessary”. Therefore, lawyers are ethically bound to review and clean up their bills before submitting them to clients for payment.
Moreover, clients are no longer content to just accept what their periodic bill says they owe. The more complete, accurate, and organized your billing data, the easier it becomes to satisfactorily meet that need.
Better Billing Through Data Extrapolation
The additional information created by more refined billing practices has the additional benefit of allowing for more data-driven business decisions firmwide.
Billing data is commonly used to gauge staffing needs, and the general productivity of a firm’s timekeeper employees.
Lesser known is the ability to use that same data to monitor and ideally improve realization and collection rates. When law firms make decisions based on data, they are more likely to be correct.
In the 2018 Industry Outlook by Major, Lindsey & Africa, it’s noted that “more firms [are] using analytics to predict trends and measure practice development by applying advanced analytical tools to their own billing and financial information.” Many larger firms have commissioned the creation of software tailored specifically to their needs to do just that.
Conceivably, it would be too expensive for smaller firms to delve into such and undertaking. Fortunately for them, the advent of cloud computing has made such a drastic step unnecessary. Information can be shared and edited in real time without the need for additional equipment or dedicated in-house IT support.
This data can give firms a better idea of how much time tasks should take to complete, and even how much clients are willing to pay for specific tasks. Armed with that information attorneys can accordingly adjust their client acquisition practices and potentially alleviate billing issues before any work is done.
This is not a hypothetical. Patent-pending applications that use artificial intelligence and machine learning to serve this very purpose already exist in affordable packages to help bolster the realization and collection rates of both small and large firms alike.
At the end of the day, no one wants to feel cheated. Attorneys want their time to be properly valued and clients want to feel like their money isn’t being spent frivolously. Maintaining detailed, streamlined, and accurate billing practices keeps both attorney and client on the same page.
Automating those processes not only helps to easily maintain these billing standards, but it also does so in a fraction of the time and at a fraction of the cost. As automation helps to maintain the reasonableness of current billing practices, the information it creates and organizes helps to maintain and improve future billing and other decisions.
This article was first published in Lexology on 6/24/2019.