Wisconsin Lawyer: Managing Risk Dear Client: Happy Holidays. Please Pay Your Bill.:

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    Managing Risk
    Dear Client: Happy Holidays. Please Pay Your Bill.

    Lawyers can sue clients for fees, but that option should be the last, not the first, in preventing and resolving disagreements about bills.

    Thomas J. Watson

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    IOU note from Santa

    It’s the holiday season. Good cheer and goodwill to all. Of course, it also means the end of the year is in sight, and you may be one of many lawyers looking to close the books on some unpaid legal fees.

    Matt Beier, claims attorney at Wisconsin Lawyers Mutual Insurance Co. (WILMIC), says fee collection, especially around the holidays, can be an unpleasant but necessary part of the job.

    “When I was a young associate in a medium-sized firm, I was largely removed from the business efforts of my firm’s accounts payable department. So, it seemed odd every December when our firm administrator would circulate sample letters for us to send to our clients asking them to come current on their legal bills.

    “As lawyers, we need no help earning the disdain of the public, and I remember feeling sheepish asking for money from clients during the holidays – especially when the sizable sums of legal bills often dwarfed most people’s budgets for holiday spending. Nonetheless, business is business, and our firm’s fiscal year ended with the calendar year. The December letter was that final push to drive up revenue for the year, taking advantage of a time when monetary gifts, work bonuses, and other cash may be more readily available to satisfy one’s obligations.”

    At WILMIC, we often field the following question from our insured attorneys: “Should I sue my client for fees?” The answer is always an unsatisfying one to them: it depends. Then they ask, “On what?”

    Thomas J. Watsoncom Tom.Watson wilmic Thomas J. Watson, Marquette 2002, is senior vice president and director of communications at Wisconsin Lawyers Mutual Insurance Co., Madison.

    Well, on each individual case, for starters. Suing for fees is not a “one-size-fits-all” proposition. Each case, and each client, is unique. How much money do they owe you? Is it enough to make it worth the time and trouble of a lawsuit? Did you have a good working relationship with that client? What type of case was it? Are you prepared for the possibility of a counterclaim malpractice suit?

    There are circumstances in which suing for fees makes sense, and lawyers certainly should be paid for the work they do. However, Beier says, “Conventional wisdom is that this is not a decision to be made lightly, and the repercussion of a counterclaim for legal malpractice is not an unusual client response when the lawyer pushes to collect a fee. Sometimes, there may be some practical alternatives to suit in order to collect fees.”

    Beier says that in his work as a claims attorney, the question from a lawyer is his cue to provide information regarding the hazards associated with suing for fees, including the increased likelihood of the client bringing a counterclaim alleging legal malpractice. Statistics vary, Beier says, but the risk is real. “An American Bar Association study found that 7 percent of all legal malpractice claims arose in connection with an attempt to collect an unpaid fee.”

    Legal malpractice defense attorneys estimate that at least 20-30 percent of all malpractice claims and counterclaims are directly or indirectly attributable to disputes over legal fees. Gawain Charlton-Perrin, How to Manage the Risks of Fee Disputes in a Tough Economy (2009).

    Stacie Rosenzweig, of Halling & Cayo in Milwaukee, represents lawyers involved in complaints filed with the Office of Lawyer Regulation (OLR). “Fee disputes often morph into an OLR complaint. Sometimes it’s simply a matter of a client being unhappy with the result, and it may have little to do with the actual fee itself. In my experience, fee disputes arise when the matter doesn’t go as the clients hoped – they lost at trial; their sale didn’t close; their matter took months longer than expected. So, managing expectations from the start is important.”

    Begin With the End In Mind

    The end, here, is getting paid for the hard work you’ve done. In any collections matter, Beier says, there is no substitute for effective communication at the outset of the relationship.

    “A comprehensive and thoughtful engagement letter, written fee agreement, or both are obviously important (required in most cases, see SCR 20:1.5). Potential malpractice claims and grievances can be avoided through the use of effective letters of engagement.”

    In addition, Rosenzweig says, “In most grievances, the OLR requests a copy of the fee agreement.”

    Discuss alternative payment arrangements or a settlement amount. Voluntary payment over time is better than a judgment to frame and put on your wall.

    Rosenzweig also says problems often arise because the client wasn’t clear on exactly how much the fees would be, or that the fees could go above the retainer amount. “Sticker shock happens – people get a bill they did not expect, and complain even though they don’t really take issue with the amount or quality of the work. Again, though, in addition to monthly invoices, advance communication is important – don’t promise a budget that you can’t deliver (unless you intend to cap your fees).  Disputes sometimes arise when costs are higher than expected.”

    Rosenzweig says a common misstep is not paying close attention to what you are communicating to the client when it comes to fees. “Lawyers should make sure from the outset that their fees are communicated in writing and in clear, easy-to-understand language. Sometimes we think that the language we’re using is clear and unambiguous (and it may be to a lawyer), but it may be overly legalistic and confusing to a lay reader.”

    Beier says a lawyer should first speak with the client and be as clear as possible about all the following:

    • The identity of the client (and the identities of those not represented, when appropriate) and the nature of the lawyer-client relationship;

    • The scope of representation and the nature of the legal services, including a statement about when the representation ends with no continuing obligation (for example, only through trial and not appeal);

    • That there is no guarantee of outcome;

    • The identities of the people who might work on the matter – lawyers, paralegals, experts, consultants, and other personnel;

    • Type and amount of fee – hourly rate, flat fee, reduced fee, contingent fee, or incentive arrangements, and so on (SCR 20:1.5(a)) – and expenses;

    • Billing practices (frequency, interest (SCR 20:1.5(b)(1)), withdrawal for nonpayment (SCR 20:1.15(b)(5)));

    • Confidentiality and lawyer-client privilege, including electronic communication expectations and the potential impact of the use of social media (SCR 20:1.4);

    • Conflicts of interest, if any;

    • Client responsibilities and cooperation; and

    • Termination of services (SCR 20:1.16).

    “This will help manage the client’s expectations and ensure that the client understands what the attorney bills for,” says Beier. “And, yes, that includes every phone call and every email and when the attorney expects to be paid. And, although it may not be the easiest conversation, this is also the best time to describe how future disputes will be handled. If the fee agreement requires the lawyer to agree to submit any billing disputes to arbitration, explain what that means to the client.”

    Good Practice Procedures

    Of course, one of the best ways to handle fee disputes is to be proactive; avoid them through the use of good procedures. This starts with vetting appropriate clients for your practice. Practice only within the areas of law that you know. Talk with potential clients about their goals and the probabilities of attaining them, as well as their ability to pay you for the work that needs to be done. Say no to a representation that is outside your parameters, including when your stomach tells you that taking on this client is a bad idea. Sometimes, good client service starts with good client selection.

    Follow Up

    Once you have explained your billing cycle to the client, Beier and Rosenzweig both strongly suggest you stick to it. “Regular bills can be anticipated by the client and he or she can be sure to set aside enough money to absorb those expenses,” Beier says.

    In addition to the billing, Beier says, “Be sure to follow up as soon as possible in the event of nonpayment. Again, although it is sometimes a difficult conversation, it is very important to use effective lines of communication.

    “A telephone call from the attorney offers the opportunity of explaining to the client the importance of staying current on legal bills. They can mount quickly. A letter may not always have the same effect. Such a conversation may also open the door to legitimate client complaints about time spent on a matter or alternative arrangements to have the bill paid. This can help avoid misunderstandings down the road.”

    Is It Worth It?

    Many lawyers believe filing a lawsuit should be the last resort in collecting from clients. It is now easier than ever for an unsatisfied client to publicize their view of a lawyer. Ample consideration ought to be given to the firm’s reputation and goodwill before escalating a matter to the level of a lawsuit to collect fees – especially if the amount of unpaid fees is insignificant in the overall financial success of the firm.

    If you are ever in a position in which you are contemplating whether to sue for fees, Beier encourages you to consider the following questions and tactics:

    • Is the amount at stake worth the risk?

    • If possible, have multiple people from the firm contact the client to inquire about the status of the unpaid fees. Sometimes, a different personality or “bedside manner” will result in a more effective conversation with the client.

    • Determine whether there is a reasonable justification for nonpayment. Does the client have a legitimate dispute? Are you comfortable that the work you provided was necessary, helpful to the client’s case, and appropriately priced?

    • Have you had an unrelated lawyer review your work to be sure that what you did was appropriate and above criticism?

    • Are you willing to spend the time and effort necessary to defend a counterclaim for legal malpractice, should that occur?

    • Have you communicated clearly with the client about the matter throughout the representation?

    • Discuss alternative payment arrangements or a settlement amount. Voluntary payment over time is better than a judgment to frame and put on your wall.

    • Review the file to be sure that there was full disclosure of the client’s risks and professional communication throughout the representation and that all required documentation exists. Consider this a good time to conduct an “audit” of sorts to review internal practices.

    Communication Is the Key

    Discussions of fees, and bills, are opportunities to communicate with clients. At the initial meeting, assess the cost of representation with the client, together with the client’s ability and willingness to pay.

    Being proactive at the outset in selecting clients, assessing client expectations for timelines and outcomes, and having a discussion and reaching agreement on the range of costs and a timetable for the work requested all contribute to prompt payment and a good working relationship between you and clients.

    Rosenzweig says the communication you do upfront with a client can make a difference down the road. “Some clients may not understand that a retainer payment may not even come close to the total cost of representation; that fact, as well as the fact that you may ask for a trust balance to be replenished if it falls below a certain threshold, if you do plan to do so, should be communicated up front.

    “Also, if you are charging by the hour, invoice monthly and try to describe your work with some specificity. Keeping the client well informed of developments, especially negative developments, can lessen the shock of unexpected time and expenses, and may prevent a later dispute about the fee agreement.”

    Check With Your Insurance Carrier

    Some insurance companies consider a firm’s history of suing for fees when looking at that firm’s insurability and the amount of premium. Joe McCarthy, vice president of claims and underwriting at WILMIC, says it’s a good idea for lawyers to check with their carrier. “Ask your carrier whether it impacts the premium you’re paying. Some carriers even consider dropping a policyholder, depending on the number of times a firm has sued for fees. It’s definitely worth asking about.”

    Conclusion

    As Beier says, “Lawyers are generally reluctant to sue for fees – with good reason. The risks are real, and include a potential counterclaim, and maybe extensive litigation, not to mention potential damage to the law firm’s reputation. There is no question lawyers should pursue their fees under the right circumstances, but the risks of doing so need to be carefully weighed against the value of any recovered fee.”