Trends in overbilling and the effect of new wages, The

Gunderson effect of billable mania: Trends in overbilling and the effect of new wages, The

Gharakhanian, Andre

INTRODUCTION

In John Grisham’s modern classic, The Firm, Avery Tolar advises the young lawyer Mitchell McDeere on how to charge clients. He explains that the client should be charged for “every minute you spend even thinking about a case.” It was this philosophy that got the Mafia’s legal team into trouble.1

Unethical billing practices do not only exist in legal novels like The Firm but have been a pervasive problem in law firms across the country. This Note will explore current developments in overbilling, especially in light of the recent salary increases for young associates.

The first section of this Note will look at the nature of the overbilling problem, in particular, the sources of the pressure to pad bills, the professional standards that govern client billing, and federal and state regulation of attorney fees. The second section will survey the new developments in overbilling and examine the increased prominence of billing guidelines, third-party audits, and the American Bar Association’s (ABA) and state bar associations’ reactions to these developments. The third section will discuss the salary phenomenon known as the “Gunderson Effect” and its potential impact on the pressure to pad bills. Finally, this Note will look into possible safeguards and institutional arrangements that could help ease the pressure to overbill.

I. OVERBILLING, GENERALLY

A. PADDING

Often ignored, the issue of overbilling has been gaining prominence, both in the mainstream media and in scholarly literature, over the last several years.2 There have been dramatic increases in disbarments and criminal prosecutions for billing fraud.3 Furthermore, notions about the appropriateness of certain practices such as double billing have been shifting.

Many critics blame a system which bills clients by the hour for the abuse,4 saying that it creates the pressure to overstate hours. “Time-based billing creates an inherent conflict of interest between the client’s interest in the efficient disposition of its business and the attorney’s interest in racking up hours.”5 After the jump in salaries in the mid- 1980’s, firms began increasing their billable hour requirements from around 1600 hours per year to nearly 2000 hours per year. The higher expectations resulted in a greater propensity to exaggerate time spent working on a matter, and thus, time billed to clients.6 With associates being evaluated in terms of the quantity of work done, rather than the quality thereof, they have become single-minded of purpose.7 Critic Adam Altman noted that this is quite possibly a “survival instinct.”8

The legal profession is once again at a crossroads. The new round of salary increases, known as the “Gunderson Effect,” has again driven many firms to increase their billable hour requirements for associates. The question remains whether new associates are feeling even more pressure to overstate their bills than their predecessors were.

B. REGULATING CLIENT BILLS

Model Rules 1.5(a) and 1.5(b) address attorney billing conduct. This rule holds that a “lawyer’s fees shall be reasonable” and reasonableness is determined by looking at the time expended in carrying out the task.9 Further, under Model Rule 7.1, an attorney must refrain from making a “false or misleading communication” concerning a fee.10 The Model Code of Professional Responsibility provides that fees are clearly excessive when “a lawyer of ordinary prudence” would believe that the fee is unreasonable.11 Although they delineate general principles, the Model Rules and Model Code do not clearly address hourly billing and some of the more specific issues.

In 1993, the ABA provided more targeted guidance. The Ethics Committee issued an opinion on issues relating to hourly billing. In particular, it prohibited the padding of time sheets, billing anew for recycled work, and charging above cost for non-legal services.12 Unfortunately, even the presence of these professional guidelines has not eradicated the problem of unethical billing practices. In William Ross’ exhaustive survey, over half of the attorneys surveyed believed that “at least five percent of the time billed by attorneys in this country is padded.”13 Elsewhere, Ross notes, “Since bill padding is so hard to prove, dishonest billing might be called `the perfect crime.'”14 Furthermore, the explanatory nature of the billing process leaves a great deal of room for subjective interpretation. Ross points out that because “there is no practical manner of verifying the accuracy of most time records, every attorney who has billed for time knows that time billing creates rich opportunities for fraud.”15

Many states have adopted Model Rule 1.5 to regulate attorneys’ fees. Some states have adopted the Model Rule, but with a few minor amendments. For example, Alabama Rule 1.5 includes the presence or absence of a written fee agreement signed by the client among the factors to consider in evaluating the reasonableness of a fee charged by an attorney. 16 Alaska requires a written fee agreement if legal fees exceed $500, and, in cases of litigation, an attorney must inform his client of costs, fees and other expenses for which the client may be liable if he does not prevail.17

Other states have departed more drastically from the Model Rules, drawing instead upon the Model Code of Professional Responsibility or adding additional considerations of their own. New York also prohibits excessive fees,18 using the Model Code s “lawyer of ordinary prudence” standard. 19 The New York Code lists eight factors to consider in determining the reasonableness of the fee, including the time a matter will take, its difficulty, the results obtained, the likelihood that other assignments will be precluded, the lawyer’s skill and experience, the usual rate charged for similar services in the area, the relationship between the lawyer and client, and whether the fee is fixed or contingent.20

California prohibits the charging of “unconscionable” fees.21 The California Rules of Professional Conduct state that a fee’s unconscionability “shall be determined on the basis of all the facts and circumstances existing at the time the agreement is entered into.”22 The rule lists the same factors as the New York rule, as well as three additional factors: the amount of the fee in proportion to the value of services rendered, the relative sophistication of the attorney and the client, and the client’s informed consent to the fee.23

Florida has set forth perhaps the most detailed guidelines for lawyers’ fees. The rules regulating the Florida Bar also employ the same factors in evaluating the reasonableness of a fee as New York,24 but they add that an ordinarily prudent attorney must find that “the fee exceeds a reasonable fee for services provided to such a degree as to constitute clear overreaching or an unconscionable demand by the attorney.”25 Florida also prohibits fees generated by advertising that contravenes the state rules26 and fees sought or secured by means of fraud or misrepresentation.27 The Florida rule makes clear that all of the listed factors should be considered in justifying a fee that is higher or lower than the fee that would normally result from application of time and rate factors alone.28 Florida also requires timely written communication of the fee to the client when the lawyer has not regularly represented the client.29 The comment to the rule emphasizes the importance of honest communication between attorneys and clients regarding fees, stating that when an attorney is representing a new client, “an understanding as to the fee should be promptly established. It is not necessary to recite all the factors that underlie the basis of the fee but only those that are directly involved in its computation.”30 This suggests that if a client knows how much a fee will be or how that fee will be calculated, the fee is less likely to be found unreasonable.

II. CURRENT DEVELOPMENTS

Overbilling remains a serious problem in the legal community. Over the last ten years, several high-profile attorneys have been disciplined for overcharging their clients.31 They have inflated hours spent on client matters, double billed and used client funds to pay for personal expenses. Firms and their clients have been trying to fight back using two different methods: billing guidelines and third-party audits. Communication between firms and clients and checks on dishonest billing practices have been increasing, and not always with the approval of the state bar associations and the courts.

A. RECENT CASES

Over the last few years, several cases involving unethical billing practices have come to the attention of the legal community. Many of these cases have resulted in disbarment and jail sentences. For example, a Florida attorney was recently disbarred for five years for overcharging a client by over $2 million.32 The defendant, James Dougherty, turned in padded bills for an insurance investigation that he conducted on behalf of London-based Lloyd’s of London. The Court found that Dougherty overbilled by $300,000 for his own work, by $1.2 million for the work of his associates, and by over $1.2 million for expenses. The court held that “[f]ederal felony convictions for wire fraud by over-billing [the] client … warranted disbarment for five years.”33

In an extensive study of overbilling by prominent attorneys, Lisa Lerman found thirty-six cases in which high profile lawyers had been caught bilking clients.34 Her research focused on sixteen specific cases, in which thirteen of the sixteen attorneys studied were disbarred. In one of the more highly publicized cases of billing fraud, Harvey Myerson of Myerson & Kuhn in New York was accused of billing for hours not worked, adding personal expenses such as jewelry and clothing to client bills, and directing his subordinates to pad their hours billed.35 Although he was accused of fifteen counts of billing fraud, he was found guilty of only three instances of fraudulent billing (among other things) and was sentenced to more than five years in prison.36

In the “Shearson Fraud,” Myerson directed “that the actual time reported on … timesheets be adjusted upward to meet Myerson’s desired billing levels. [His] secretary would first draft Shearson bills based on computer runs and then, at Myerson’s direction, he … would inflate attorney hours in order to hike the overall bills.”37 Myerson’s second scheme involved the ICN Corporation. Myerson not only inflated the hours billed, but he also billed ICN for pleasure trips and personal expenses. “According to government witnesses… during monthly lunch meetings at which billing targets were set for various clients, Cooper was told by Myerson to `get the bills for ICN to at least $300,000 per month.’ “38 Myerson’s final count stemmed from charges of overbilling the Home Insurance Company. Even though he personally never worked for the company, Myerson charged Home Insurance for thousands of dollars in personal expenses.39

The District Court sentenced Myerson to a term of sixty months and two concurrent terms of ten months to run consecutively to one another for the mail fraud counts, and to three concurrent terms of thirty-three months imprisonment for the tax fraud.40 The Court of Appeals upheld the decision. In addition to the criminal penalties he faced, Myerson was disbarred.41

William Duker of Duker, Barrett, Gravante & Markel defrauded clients out of nearly $1.4 million.42 He intentionally overbilled the federal government and destroyed and concealed the records of his illegal billing activities. All client bills were forwarded to the firm bookkeeper with instructions to increase the hours billed before reaching the clients. Upon investigation by the FDIC, Duker simply presented them with the older, unpadded records.43 The New York Court of Appeals upheld the disbarment, asserting that “federal convictions of [an] attorney for making false claims against and false statements to federal government were predicates for automatic disbarment.”44

Some of the overbilling cases have been more elaborate. Former Akin, Gump, Strauss, Hauer and Feld attorney Michael Morrell represented a French pharmaceutical company which had learned that extensive laboratory trials would be necessary to gain FDA approval for new products.45 Morrell asked the client to send the funds to his own dummy consulting firm, The Georgetown Group. His “consulting firm” would oversee the drug trials. Desperate to gain FDA approval, the client agreed. “The Georgetown Group was to be paid … for conducting the trials, but none of the money sent to the Georgetown Group was intended to compensate Morrell in any manner.” Nevertheless, Morrell funneled over $1 million for personal expenses. The court upheld his disbarment, citing several cases in which misappropriation from client funds resulted in removal from the bar.46

Attorney Edward Digges went so far as to enlist the help of his fellow partners’ wives in writing up false time sheets so that several different forms of handwriting would be present on the falsified bills.47 In upholding the sanctions imposed upon Digges, the Maryland District Court stressed that “a lawyer is a client’s fiduciary, and the submission of a false and fraudulent bill for professional services is a breach of fiduciary duty.”48

A recurrent theme in many of the cases documented by Lerman is the use of clients’ funds for attorneys’ personal expenses. From jewelry to personal vacation expenses, unethical lawyers have appropriated client money for their own personal ends.

Many of these cases also deal with the phenomenon of “double-billing.” This practice occurs when an attorney bills more than one client for the same work done or for the same hours. For instance, a lawyer working for two hours on a document that concerns two clients will bill each client for two hours of work done. Long accepted in practice,49 double billing has only recently begun to be viewed with disdain. The Webster Hubbell case50 helped to bring this issue into the spotlight.51 While working at the notorious Rose Law Firm, former Clinton aide Hubbell’s billing activities constituted over 400 instances of financial fraud. Hubbell moved $485,000 of client funds to his own pockets. He was sentenced to nearly two years in prison and served eighteen months of that sentence.52

Perhaps most importantly, these cases exemplify the potentially dangerous subjectivity of the billing process. As mentioned earlier, client billing involves explanation that results in subjective interpretation of what is being done and where the money is going. Creative individuals, especially those who are in charge of a matter or a firm, can develop intricate schemes to fleece hundreds of thousands of dollars from unwitting clients. The violations that are revealed are usually large-scale schemes. It would seem logical that many cases, particularly those on a smaller scale, perhaps involving only a few thousand dollars, slip through the cracks. Diligent and costly oversight might be the only solution to such instances of unethical billing practices.

B. COMBATING FRAUD: THIRD-PARTY AUDITS AND BILLING GUIDELINES

Clients in several industries, particularly the insurance industry, have responded to concerns about fraud and waste by sending attorneys’ bills to outside auditing firms.53 Fueled not only by fear of billing fraud by attorneys, but by a desire to keep legal costs down, this new industry has enjoyed great growth in the 1990’s and continues to thrive. The audits of lawyers’ bills vary from cursory to comprehensive and usually have one of two purposes.54 “A `fraud audit’ seeks to determine if the work was actually performed by the billing attorney.”55 Such audits often involve examination of billing documentation and interviews of law firm personnel. “Efficiency audits” try to uncover inefficiencies in work or billing that add to legal costs and might also include some elements of the fraud audit.56

In addition to audits, billing guidelines have been used more and more frequently by clients to keep costs down and reduce excessive attorney fees. Typical billing guidelines require attorneys to keep clients abreast of their work, facilitate frequent exchange of work product between lawyers and clients, prohibit attorneys from billing two different clients for the same work, and require detailed bills to be sent to clients. Some guidelines require attorneys to bill in six-minute increments and to limit the number of attorneys who can bill clients for specific tasks. Other guidelines require lawyers to obtain client approval prior to commencing tasks.37

Naturally, one would suspect that third-party audits and billing guidelines might wreak havoc with the concept of attorney-client privilege and the independence of the lawyer’s judgment, as well as raising the specter of conflicts of interest. The Model Rules of Professional Conduct do not specifically mention issues of disclosure to outside agencies such as auditors, but the Model Code of Professional Responsibility offers guidance on the subject, stating that such disclosure is permitted if the lawyer “exercises due care in the selection of the agency and warns the agency that the information must be kept confidential.”58 Client bills are subject to the duty of attorney-client confidentiality59 and thus may only be disclosed to outside agencies, including auditors, with the informed consent of the client after consultation.60 Disclosure of detailed bills to auditors could create conflicts of interest for insurance defense attorneys, in that the insured, the client whom the attorney represents, has an interest in keeping information regarding the representation confidential, while the insurer, who pays the attorney’s fees, wants audits in order to determine the reasonableness of the fees charged by the attorney.61 In addition to the danger that audits will reveal confidential information to the auditors, outside audits raise the possibility that submitting confidential information to outside auditors might waive the attorneyclient and work product privileges.62

U.S. v. Massachusetts Institute of Technology is the leading federal case concerning third-party audits. In that case, the Internal Revenue Service requested law firm billing documents from Massachusetts Institute of Technology (MIT) as a part of an investigation to reaffirm or deny the school’s tax exempt status. MIT refused to submit information that it had sent to its auditing agency, claiming they still retained attorney-client privilege. The First Circuit ruled that a client forfeits the evidentiary attorney-client privilege when turning bills over to an auditing agency.63

State bar associations have also sent a consistent message that an attorney may not provide outside auditors with detailed billing information without the client’s permission.64 At least twenty-three state bar associations have issued ethics opinions on the propriety of outside audits of attorneys’ bills, and the majority view is that an insurance defense attorney may not submit legal bills to outside auditors without the informed consent of the insured, after full disclosure.65 The Ohio state bar defines this informed consent as including “informing the client of the type of information required by the insurer in the billing invoice, the type of supporting documentation, if any, required by the audit, and that waiver of attorney-client privilege might be raised as a consequence.”66 In 1997, the Florida Bar Association issued an advisory opinion that declared that an “attorney cannot allow insurers to ‘audit’ and review case files of his . . . clients who are insured by these insurance companies without first obtaining permission from his . clients.”67 Some state bar associations have even gone so far as to prohibit or restrict the use of third-party audits.

The New York state bar is slightly more lenient toward outside auditing. According to the New York bar, legal bills containing only the identity of the client, fee, and general nature of services performed are outside the scope of the attorney-client privilege, but information that reveals the client’s motive in seeking representation, litigation strategy, or the specific services rendered would fall within the privilege.68 When an auditor requests such information, an attorney can supply it only if he gains the informed consent of the client, which the New York Bar says may vary between different cases and clients but that “the lawyer should at least discuss the nature of the information to be found in the billing records sought by the auditor as well as the relevant legal and nonlegal consequences of the client’s decision.”,69 Once the client has given informed consent, the state bar provides detailed guidelines for supplying confidential information to third-party auditors. In such a case, the attorney must minimize the confidences and secrets disclosed to the outside auditor, obtain specific consent for the disclosure of information that could result in a waiver of the attorneyclient privilege or embarrassment or detriment to the client, advise the client about the possibility of opposing the audit request and do so if the client so directs.70 This allows for auditing of non-privileged legal bills while preserving confidentiality where privileged matters are at issue.

Although concerned about confidentiality issues, state bar associations have also provided a more practical response-deleting confidential information from bills that could potentially be audited. The Wisconsin bar stated that lawyers who 11 are concerned that the transmission of their bills to others may breach client confidences should consider using drafting protocols that assure their billing narratives do not reveal client confidences.” Similar opinions have been given in New York, Maryland, Nebraska, and Utah.71 By rewording or simply redacting confidential information from client bills, attorneys may be able to have bills undergo third-party audits while still protecting client confidentiality and avoiding some of the realities of the post-MIT auditing climate.72

However, simple redaction of confidential information may not be enough. Lawyers should be careful to protect themselves in the face of an audit. They should attempt to examine the outside auditor by asking questions such as, “What is the methodology of the audit?,” “Is the auditor an attorney?,” and “How is the auditor compensated?”,73 This suggestion seems promising, as it forces a law firm to take a closer look at its billing practices, hopefully without compromising the attorney-client relationship.

Until late in the year 2000, the courts had been silent on the propriety of billing guidelines. In a recent case, however, the Supreme Court of Montana made its position quite clear when attorneys sought a declaratory judgment that an insurer imposed billing rules and procedures on them that violated the Montana Rules of Professional Conduct.74 The court held that

a contractual requirement of prior approval regarding billing and practice rules for defense counsel appointed by insurers to represent insureds, including approval before scheduling depositions, undertaking research, employing experts, or preparing motions, violated the Rules of Professional Conduct by fundamentally interfering with defense counsels’ exercise of their independent judgment and their duty to give undivided loyalty to insureds.75

The California Court of Appeals recently expressed concern over the reach of some billing guidelines.76 The court worried about the fact that certain billing guidelines “go so far as to call for the use of paralegals, rather than attorneys, to respond to routine discovery requests.”77 The court strongly urged that “under no circumstances can such guidelines be permitted to impede the attorneys’ own professional judgement about how best to represent [the client].”78

Many state bar associations have expressed their disapproval of billing guidelines altogether. The Washington State Bar Association held that:

a billing guideline that arbitrarily and unreasonably limits or restricts … counsel performing services which counsel considers necessary to adequate representation, such as periodic review of pleadings, conducting depositions, or in preparing or defending against a summary judgment motion, endeavors to direct or regulate the lawyer’s professional judgment in violation of [state professional responsibility standards].79

The Iowa State Bar agreed that such billing guidelines impede the independent professional judgment of attorneys: [I]t would be improper for an Iowa lawyer to agree to, accept or follow Guidelines which seek to direct, control or regulate the lawyer’s professional judgment or details of the lawyer’s performance; dictate the strategy or tactics to be employed; or limit the professional discretion and control of the lawyer.80

The State Bar Associations of Wisconsin and Tennessee have also expressed their disapproval of billing guidelines that hinder attorney judgment.81

III. THE GUNDERSoN EFFECT AND ITS IMPACT

Several legal scholars have expressed concern about the billable-hours mania. In late 1999 and early 2000, a new twist in this drama unfolded, as salaries for associates at law firms skyrocketed. This section examines whether these new higher salaries and the resulting increase in billable hours expectations have increased the pressure to overstate hours worked on matters billed to clients.

A. HISTORY BEHIND THE HIGH SALARIES

By the late 1990’s, new associates at law firms were well paid, but very few first year attorneys could boast six-figure salaries. In December 1999, however, a bold move by a small (90 attorney) Silicon Valley law firm set in motion a rapid chain reaction that would result in a 45% increase in associate compensation nationwide.82 The California firm of Gunderson, Dettmer, Stough, Villeneuve, Franklin & Hachigian announced that first-year associates would be paid $125,000, with a guaranteed bonus of $20,000. The firm increased associate salaries in an attempt to prevent attrition by young lawyers to rising dot-com companies in the booming economy of the late 1990s and early 2000.83 The move by Gunderson Dettmer created a chain reaction as firms across the country raised their salaries in response. The phenomenon became known as “The Gunderson Effect.”84

The Gunderson Effect is an expensive phenomenon; salary increases must be subsidized somehow.85 “The funds to underwrite the associate pay raises can come from any of several sources: increased billable hours (by partners and/or associates), increased hourly billable rates (by partners and/or associates), partner profits, a firm’s cash reserves, and even from cuts in personnel costs (hiring fewer associates and augmenting with contract attorneys).”86 This Note focuses on the increased billable hour requirements. The Legal Times estimated that associates could expect to bill 300 additional hours per year in the wake of the salary increase.87

Intuitively, it would seem likely that these new salaries could bring with them new pressures. Most firms have tied the raise (and the increased bonuses) to higher hourly billing requirements.88 In light of the inherent pressures of time-based billing, one must ask whether the Gunderson Effect will increase the pressure to overstate hours billed. Since the inception of this Note, a new development has emerged-the slowing of the national economy. While things may have been extremely busy during the Internet boom, firms now face the prospect of a slowdown in work as economic growth slows and stagnates and once emerging dot-com corporations have gone bankrupt. If a slowdown in the economy increases the pressure to overbill,89 do the new salaries, combined with the recent economic downturn, spell even more trouble in the field of unethical attorney billing practices?

IV. AN OUNCE OF PREVENTION

In light of the potential effect of these new, higher wages on overbilling, the legal community should at least consider some potential safeguards against fraud. William G. Ross, perhaps the foremost scholar in this field, feels that billing guidelines are the best methods of combating unethical billing practices. “[A] fee agreement helps to choke off many of the inevitable ethical ambiguities that inevitably arise in the context of time-based billing.”90 Other reforms suggested by scholars focus on alternatives to time-based billing. These alternatives include value billing, success-billing (contingent billing) and fixed-fee-billing.

Value billing is different from hourly billing in that it focuses on the results of the representation. It is “designed to resolve inefficiencies brought into play when an attorney bills at a constant rate while his skill and the concomitant results associated with specific tasks vary.”91 Two of the most common versions of value billing systems involve the use of “blended hourly rates” or “step-progression hourly rates.” The first version “averages the billing rates of those lawyers of varying degrees of expertise working on the case.” The second basis depends “on the lawyer’s own expertise and learning curve in areas of lesser aptitude.”92

The value billing method does not appear to resolve any of the problems of overbilling. The blended rates still utilize the problematic hourly billing system (although somewhat indirectly), while the step-progression method (billing based on a lawyer’s level of expertise) involves a great deal of room for subjective interpretation, and thus, room for fraudulent billing. Furthermore, this method of billing requires more time and attention from attorneys if it is to be carried out successfully. Attorneys must analyze their time carefully and must be in constant communication with the client.93

Success billing is another alternative method that does not seem to resolve the problem of unethical billing practices. This method involves providing a surcharge for beneficial results to the client.94 In other words, the attorney receives a slightly lower hourly rate but will be rewarded additional compensation if the client ultimately receives a favorable decision. This method has faced a great deal of criticism. Some critics say that this method adversely affects incentives, creating a situation in which top quality service depends upon whether the attorney’s utility is maximized by putting enough effort into a representation to earn a favorable result for the client. In other words, the system creates the potential for a situation in which lawyers can demand very high surcharges for successfully finishing the case.95 Further, hourly billing is still at the core of this method, so the systemic problems of the time-based approach remain.

The extreme version of this method is contingency fee billing, which provides that attorneys are not paid unless the outcome of the representation is successful. This method is already quite common in the personal injury field. Once again, contingency fee billing suffers the same drawbacks as other methods. The method can “create conflicts of interest between an attorney and a client by giving the attorney a direct financial stake in the outcome,” e.g., an attorney who would earn more money for the time spent on a representation by settling quickly may push a client to settle even though that client may wish to take the matter to court regardless of the time and cost involved and risk of losing.96

Fixed-fee billing provides yet another alternative to hourly billing. Under this system, a law firm will charge a set fee for a specific type of matter.97 Clients who prefer more consistency in their legal bills appreciate this method. This billing method not only provides a much more simplified arrangement; it also works to promote efficiency within a law firm. With the costs of a representation set in advance, firms face the pressure to reduce billing waste.98 Fixed-fee billing can therefore provide the kind of climate change that helps reduce the detrimental effects of “billable mania.”

Unfortunately, the fixed-fee method has come under fire from the Model Rules of Professional Conduct, as it may be possible that the fixed fee method violates ABA Model Rule 1.8(e), which states:

A lawyer shall not provide financial assistance to a client in connection with contemplated or pending litigation, except that: (1) a lawyer may advance court costs and the expenses of litigation, the repayment of which may be contingent on the outcome of the matter; and (2) a lawyer representing an indigent may pay court costs and expenses of litigation on behalf of the client.99

Critics argue that fixed-fee arrangements can lead law firms to forego their fees and actually subsidize their clients in cases in which the costs of litigation are extremely high.100 On a more basic level, it seems clear that all “similar types of matters” are really not all that similar. This method could result in profit losses for law firms. The fixed fee system could create incentives that are harmful to certain clients, particularly those who retain attorney representation in matters that are more costly than other matters of the same type. Therefore, this method, which does seem to provide a positive alternative to the time-based model, faces different ethical hurdles.

In the meantime, corporations have decided to take steps toward more efficient billing by their attorneys. “Some corporations have established guidelines regarding the number of attorneys that a firm can send to court or to depositions without prior client approval. Others have insisted that the firm obtain client approval before undertaking any staffing change.”101 Corporations have also begun to require more detailed bills from their attorneys, no longer accepting “summary bills” with only cursory sketches of work performed by the attorneys.102

In many jurisdictions, due diligence regarding bills within a law firm is not only an ideal, but an expectation. Model Rule 8.3 holds that “a lawyer having knowledge that another lawyer has committed a violation of the rules of professional conduct that raises a substantial question as to that lawyer’s honesty, trustworthiness, or fitness as a lawyer in other respects shall inform the appropriate authorities.”103 Thus, attorneys are obliged to report other attorneys who charge excessive fees. Once again, however, questions of interpretation prevail. What constitutes an excessive fee? Furthermore, how can attorneys detect the small-scale instances of overbilling?

David Waxse argues that “ethical lawyers don’t have … problems with hourly billing. .. and unethical lawyers will have problems no matter what kind of billing system is used.”104 Nevertheless, many scholars, even Waxse, recognize the ethical problems with the hourly billing model.105 In seeking the best billing alternative, law firms should look to find methods that reduce the incentive to pad bills, yet at the same time promote firm efficiency, guarantee quality service, and fall within ethical norms. Equally important, new methods of billing should strive to allow attorneys to use their own independent professional judgment. As indicated before, almost every state bar will reject a system that constrains attorney decision-making. Ross urges a solid flow of communication between attorneys and their clients.106 This might be an effective suggestion, as it facilitates more intensive diligence on both sides of the attorney-client relationship although it is somewhat vague. Although the solution has not yet been reached, the ongoing dialogue on the subject of attorney billing is a positive sign. Both law firms and their clients have recognized the inherent ethical problems of hourly billing and are seeking to find solutions.

CONCLUSION

Overbilling is an ongoing ethical problem in the legal community. The past decade has seen a dramatic rise in attorney timesheet “creativity.” Both law firms and clients have tried to stop overbilling through internal policing, billing guidelines, third-party audits, and alternative fee structures. In the end, however, the billable hours paradigm faces its own internal difficulties. It allows an uncomfortable amount of subjective interpretation and a genuine opportunity for padding time billed. The safeguards may help, but Ross sums up best when he says that:

No rules, however, can adequately anticipate the myriad ethical situations in which an attorney might herself face in billing time. Much better than codes and rules are common sense and a good conscience. But even the most honest lawyers can find ways to justify ethically dubious practices and reasonable attorneys can differ about what constitutes ethical behavior. 107

With the confluence of the new, higher salaries at law firms and the recent economic slowdown, one might conclude that the pressure to overstate hours would grow even stronger. In the face of higher employee costs, law firms are demanding higher output from associates. It is quite possible that many lawyers could respond by padding time. Nevertheless, it is comforting to know that in the face of law firms’ increased expectations, the dialogue on unethical billing practices remains a robust source of conversation.

ANDRE GHARAKHANIAN AND YVONNE KRYWYJ*

* J. D. Georgetown University Law Center (expected May 2002); staff members of the Georgetown Journal of Legal Ethics. The authors wish to thank Professor Samuel Dash at Georgetown University Law Center along with the editors and staff of the Georgetown Journal of Legal Ethics. Ms. Krywyj would also like to thank her mother, Denise Zola, without whose love and support she would not be here, and the rest of her family and friends.

Copyright Georgetown University Law Center Summer 2001

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