Left to right: Randy Evans and Shari Klevens, McKenna Long & Aldridge partners and Suzanne Badawi, Sheppard, Mullin, Richter & Hampton partner (Jason Doiy / The Recorder)
As another year passes in a sluggish economy, law practices are beginning to focus more on how to manage and collect receivables. Historically, firms have shied away from suing clients for legal fees, leaving them uncollected.
There are many reasons firms choose not to sue for legal fees, including unfavorable press, exposed business practices and increased costs. However, in recent years, firms have been more willing to take on these risks to get paid—including both big and small firms.
Just this year, a Silicon Valley-based firm, Mount Spelman & Fingerman, P.C., sued a corporate client over unpaid attorney’s fees, claiming it helped the company litigate a massive patent infringement lawsuit only to be terminated after summary judgment arguments.
This is an issue facing national firms as well. In the last year, large firms such as Patton Boggs, Williams & Connolly and DLA Piper have pursued legal fees from clients ranging from $200,000 to $2 million.
The challenge in collecting receivables is to avoid reaching the point when a suit for fees is the only option left. This involves following some simple but important steps.
Bill Early and Often
While billing may be one of the least enjoyable aspects of a law practice, it is one of the most important. For one, good billing practices benefit client relationships because most clients prefer to know early and often how much they owe and for what.
By far, the single most preventable basis for a fee dispute is untimely billing where sizable bills are sent late and perhaps even after the matter has been resolved, sometime unfavorably. Regularly billing—ideally every month—is easier to digest than one big bill at the end. Bills sent while there is a higher possibility of success are more palatable than those sent after a loss. As a result, the most effective method for collection begins with creating the receivable early and regularly.
Follow-up On Nonpayment
When clients pay bills, it is typically a sign that the relationship is solid. When clients do not pay bills, action must be taken. Nonpayment virtually never gets better with the passage of time. Instead, the outstanding fees inevitably take over every conversation and every meeting. Left unaddressed, nonpayment can evolve into claims.
Effective collection procedures involve using a diary system that provides routine reports on when payments are received, and equally importantly, when they are not. Any bill more than 60 days old requires attention and follow-up. Any bill more than 90 days old requires action.
Determining why a client has not paid a bill is an important step in the collection process. Typically, there are four reasons a client has not paid a bill. The first is an unintentional oversight, such as the bill getting lost in a stack of documents, the client reassigning the responsibility for accounts payable to a different person or a computer or system processing error. In these situations, the goal should be for a quick follow-up to remedy any minor issues to allow for payment.
Second, the client may have an administrative issue with the bill, such as where the rate charged or number of hours worked on a project are higher than the client and the firm agreed or the statements for services rendered do not comply with agreed billing procedures. More often than not, the problem is resolvable and may be addressed before creating an issue for future invoices.
Third, a client may have failed to pay because it simply does not have the money to do so. Needless to say, these billing issues are more difficult to address. Law firms confronted with this situation must evaluate the prospects for eventually getting paid, the impact of never getting paid and the significance of the relationship to the client. This evaluation involves far less risk when conducted before the receivable has grown from a manageable write-off to a potentially debilitating bad debt.
If the law firm decides that it cannot continue without payment, it needs to communicate that decision to the client promptly. If the client offers no acceptable alternatives, then the firm should withdraw if possible in accordance with the applicable rules and laws.
Finally, some clients have decided not to pay a firm because it is dissatisfied with the work performed or the value of the services billed. When that happens, attorneys and law firms have to consider the options for resolving the fee dispute.
Attempt to Resolve the Dispute
Generally, there are three ways to resolve a fee dispute short of litigation.
First, an informal meeting between the client and the firm can yield good results. It also can help to include an attorney other than the one whose services are at issue. Many larger firms separate the billing or relationship attorney from the primary working attorney for this reason. The challenge is to reduce the personal, emotional investment so that a business solution is possible. In the end, the firm should make a business decision that weighs the costs and risks against the likelihood and amount of recovery.
A collateral advantage of such a meeting is to identify problems and solve them early. In an action for fees, which may include a counterclaim for legal malpractice, it is best to learn pre-discovery and pre-litigation what the client’s legitimate complaints are rather than to learn of them during discovery.
Second, there is mediation. In some situations, discussions regarding outstanding fees are just too difficult for the law firm and the client to discuss in a productive way on their own. When those situations occur, mediators can bridge the communication gap and save both parties fees, expenses and time. Absent a client who is intent on bringing an action for legal malpractice, law firms should almost always propose mediation before filing an action for attorney’s fees.
Finally, there is arbitration. California has a Mandatory Fee Arbitration Code, under which the Mandatory Fee Arbitration Program (MFA) is administered to provide informal, confidential and relatively low-cost fee dispute arbitrations. MFA arbitration is mandatory for the lawyer if the client requests arbitration.
The biggest advantage of this service is that it does not involve a counterclaim for legal malpractice, although the arbitrator can reduce an award if he or she believes the malpractice reduced the value of the attorney’s services. The decision to pursue fee arbitration, whether binding or nonbinding, should be considered before bringing an action for attorney’s fees and could be addressed in the fee agreement.
Decide Whether to Pursue Litigation
Deciding whether to sue a client for fees and expenses is a daunting task. It requires a careful balance of risks and rewards. All of these are addressed more fully in a previous article in this series on suing clients for unpaid fees published in The Recorder on June 27.
In California, attorneys sometimes wait until after the statute of limitations for legal malpractice has expired to demand payment of unpaid fees because the time to sue for breach of contract is generally much longer than the time to sue for malpractice. Nonetheless, by following these simple steps in the collection process, firms may be able to avoid having to reach that decision.
Randy Evans and Shari Klevens are partners at McKenna Long & Aldridge, which has six offices throughout California. Suzanne Y. Badawi is special counsel at Sheppard Mullin Richter & Hampton. She is an appointed member of the California State Bar Committee on Professional Liability Insurance and represents insurance companies in courts throughout California. The authors defend attorneys and law firms and regularly speak and write on issues regarding the practice of law, including “The Lawyer’s Handbook: Ethics Compliance and Claim Avoidance” (ALM 2013), “Georgia Legal Malpractice Law” (ALM 2014), and “California Legal Malpractice Law” (ALM 2014).
This article is an excerpt from “California Legal Malpractice Law” which is available at: http://lawcatalog.com/ProductDetail/18034/California-Legal-Malpractice-Law.
In Practice articles inform readers on developments in substantive law. Contact James Cronin with submissions or questions at email@example.com.