July 2016 - Interview With Mandatory Fee Arbitration Committee Co-Chairs

by Eric S. Blum and David J. Hesseltine

Ethically Speaking invited the Orange County Bar Association’s (OCBA) Mandatory Fee Arbitration Committee Co-Chairs Eric S. Blum and David J. Hesseltine to provide their insights into the OCBA’s Mandatory Fee Arbitration program.

Q: What is the work of the Mandatory Fee Arbitration Committee?

The Mandatory Fee Arbitration Committee is the OCBA’s largest committee, and operates under the authority conferred upon it by the Mandatory Fee Arbitration Act (Cal. Bus. & Prof. Code § 6200, et seq. (West 2016)). Its mission is to hear and resolve attorney-client fee disputes through a relatively inexpensive process that is easily accessible for both clients and attorneys. Fee arbitration is voluntary for the client, but mandatory for the attorney if the client requests arbitration. An arbitration award is nonbinding unless both the client and the attorney agree to binding arbitration after a fee dispute arises. A nonbinding award, however, becomes binding if neither side requests a trial de novo within thirty days after the award is served. Our data shows the vast majority of nonbinding awards become binding because the parties do not seek a trial de novo.

Q: Who serves as fee arbitrators?

Our panel of arbitrators consists of both attorneys and non-attorney members of the public. Attorney arbitrators must be OCBA members who have practiced for at least four years. Non-attorney arbitrators must not have been admitted to practice law in any jurisdiction, must never have worked regularly for a court or law practice in any capacity, and must never have attended law school. Depending on the amount in dispute and the parties’ request, fee arbitrations are heard by either a single attorney arbitrator or a three-arbitrator panel that includes one non-attorney arbitrator. After attending a training session, an arbitrator’s first few assignments always are to a three-arbitrator panel.

Q: What are some common issues raised in fee arbitrations?

Many fee disputes arise from a basic lack of communication. The most common reasons clients claim they were overcharged are that they did not understand the billing process and what their attorneys did. (Dissatisfaction with the outcome, of course, is another common reason.) Clients frequently complain their attorney did not review the fee agreement with them or even provide them with a copy, and therefore they did not understand the hourly rates or other bases that would be used to calculate the fees, which and how many attorneys might work on their case, and how and when they would be billed for the work. Clients also frequently complain the bills they receive fail to provide an adequate explanation of why their attorney engaged in certain tasks, or even what tasks the attorney performed. Typically, the attorney’s work is important to the case and provides value to the client, but the bills fail to communicate that importance and value, and therefore lead the client to question the attorney’s work. The attorney’s failure to send bills at regular intervals can make the situation even worse.

A less common, but still persistent, problem is the use of “nonrefundable” retainers. The problem arises when an attorney fails to understand the difference between a true nonrefundable retainer and advanced fees. A true nonrefundable retainer is a sum paid to secure the attorney’s availability to perform future legal work for the client over a given time period. By accepting a nonrefundable retainer, the attorney agrees to stand ready to represent the client on a designated matter regardless of any workload or other constraints, and not to represent any interests adverse to the client. A nonrefundable retainer is earned upon receipt because it compensates the attorney for making these sacrifices; it typically does not include compensation for the work to be performed in the future.

In contrast, advanced fees are any sum a client pays, usually at the representation’s outset, that the attorney holds and then bills against as services are performed. Advanced fees are used to compensate the attorney for the actual services performed; they are not earned until the work is performed. The attorney must account to the client for advanced fees, showing the specific work and time that was billed against the fees. Any unearned advanced fees must be refunded to the client at the representation’s conclusion.

Q:What are some common problems you see with fee agreements?

The most common problem we see with fee agreements is the failure to comply with the fundamental statutory requirements for an enforceable agreement. Business and Professions Code Section 6147 states a contingency fee agreement must be in writing and provide certain basic information about the fee, including the contingency fee rate to be charged, how costs will be paid, what services, if any, are not covered by the contingency fee, and a statement that the fee is not set by law but is negotiable between the attorney and the client. Business and Professions Code Section 6148, subdivision (a), establishes the requirements for all other types of fee agreements, including when the agreement must be in writing and the agreement’s required contents. Failure to comply with these statutes renders a fee agreement voidable at the client’s option and limits the attorney to a reasonable fee rather than the agreed-upon fee.

Another frequent problem is the misuse of arbitration provisions. In general, there is nothing improper about including an arbitration provision in a fee agreement. Problems arise, however, when an attorney uses an arbitration provision either to (1) establish in advance of an actual fee dispute that any award rendered through the mandatory fee arbitration process will be binding, or (2) avoid mandatory fee arbitration altogether. An agreement to make mandatory fee arbitration binding is enforceable only if the agreement is reached after a fee dispute arises. Moreover, even when a fee agreement includes a provision requiring binding, contractual arbitration of all disputes between an attorney and a client, the attorney still must participate in mandatory fee arbitration before the OCBA if the client so elects. After that arbitration is completed, the attorney may exercise his or her right to trial de novo by demanding binding, contractual arbitration instead of a court action.

Finally, fee agreements sometimes fail to adequately define the scope of the attorney’s services. When a fee agreement very narrowly defines the scope of an attorney’s services, clients tend to question why certain tasks were undertaken because they believe the services fall outside the scope of service to which they agreed. It therefore is important that fee agreements adequately address the scope of the services to be provided.

Q: What billing problems come up in fee arbitration?

As suggested above, the most common billing problem that arises in fee arbitration is the failure to adequately describe the specific work for which the attorney is billing the client and how the fees were calculated. Business and Professions Code Section 6148, subdivision (b), provides, “All bills rendered 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.” An attorney’s failure to comply with these requirements renders the fee agreement voidable at the client’s option and limits the attorney to a reasonable fee rather than the agreed-upon fee.

Although block billing does not necessarily violate these requirements, it is the billing method that most frequently leads to a client challenging an attorney’s bills and those bills violating the foregoing standards. We frequently see attorneys use a few vague catchphrases to describe several hours of work and thousands of dollars in fees. For example, “TC w/ expert; conf. w/ ABC; research and draft memo” is not an uncommon billing description used to justify five or more hours of work and more than $1,500 in fees, but that description provides the client with no information about the work’s subject matter or why it was performed. The more information an attorney provides about the work performed and the time spent on each specific task, the less likely the client is to object to the billing entry, and the less likely the attorney is to violate Section 6148, subdivision (b).

Another common shortcoming we see in billing entries is a simple description of the work performed followed by the total amount of fees charged without identifying which attorney performed the work, the applicable hourly rate, or the number of hours. This billing method frequently is found to violate Section 6148, subdivision (b).

Q:What tips would you give to help attorneys avoid getting involved in fee disputes?

The best tip we can provide is to ensure the attorney’s fee agreement complies with all statutory requirements and to take the time at the beginning of each representation to explain to the client how the fee agreement operates. This discussion should not only include an explanation about the attorney’s hourly rates and how the fees and costs will be calculated, but also an explanation about the types of tasks the client can expect to see on the bills and the number of hours some tasks commonly take. In litigation matters, the attorney should explain the client will not necessarily prevail on every motion or request to the court, and may even lose the case, but the client still will be billed for the work unless the fee agreement provides otherwise (such as in a contingency fee case).

The attorney also should anticipate any issues that may arise during the representation and address them in the fee agreement. For example, if there is a possibility of a statutory or contractual attorney fee award, the fee agreement should state whether those fees belong to the attorney or the client, or whether the fees will be divided between the two in a particular manner. Similarly, in contingency fee and flat fee representations, the attorney should anticipate the possibility that the representation may be terminated before the attorney has earned the entire fee, and the fee agreement should explain how the attorney’s fee will be determined in that situation. Many times, attorneys fail to specify their customary hourly rate, and it therefore is left to the arbitrators to determine a reasonable hourly rate for the attorney. A fee agreement may not provide that a client forfeits any advanced fees or deposits if the client terminates the attorney before the representation is completed because an attorney cannot keep fees he or she did not earn. Due to the possibility a representation may end before the attorney earns the entire fee, attorneys also should keep contemporaneous time notes for the work they perform even in contingency fee or flat fee cases where the attorney may not regularly bill the client. These notes will help the attorney establish what amounts to a reasonable fee if he or she is later limited to a quantum meruit recovery.

Finally, attorneys should exercise measured judgment in deciding how much to bill their clients for each task they perform. An unfortunate reality of the practice of law is that attorneys cannot necessarily bill their clients for the full amount of time they spend performing every task on the clients’ behalf. For a wide variety of reasons, some tasks just take longer than they reasonably should. Before sending out a bill, an attorney always should review each entry and ask whether a reasonable attorney would charge that amount for the work involved given all the surrounding circumstances. Writing off a little bit of time often can go a long way toward avoiding a fee dispute with a client. An attorney should not be afraid to show on a bill that he or she spent ten hours doing a particular task, but only billed the client seven hours.

Eric S. Blum is a Co-Chair of the OCBA Mandatory Fee Arbitration Committee and works in private practice as a business litigator. David J. Hesseltine is a Co-Chair of the OCBA Mandatory Fee Arbitration Committee and a Senior Appellate Attorney with the California Court of Appeal, Fourth Appellate District, Division Three, in Santa Ana, California.