It’s easy to forget about costs when you’re embroiled in a lawsuit, but you could end up winning the trial and losing the fiscal war if you let the litigation tab spiral out of control.
“Business owners can be bamboozled by a litigation attorney when they’re in the heat of battle,” says Kim Karelis, a partner and expert witness with Ropers Majeski Kohn & Bentley PC. “Avoid disputes by negotiating a reasonable fee schedule in advance.”
Smart Business spoke with Karelis about the best ways to avoid and resolve a legal fee dispute.
What is a legal fee dispute?
Attorneys usually charge a flat fee for routine tasks like reviewing a contract or setting up an LLC, so novice executives may experience sticker shock when they receive a bill from a litigation attorney if they don’t perform adequate due diligence. The lack of a formal fee schedule can sometimes lead to a dispute and additional litigation if the two parties can’t resolve the issue.
What should business owners know about hiring a litigation attorney?
Refuse block billing and question vague descriptions for services when negotiating a retainer agreement so you can compare and determine whether an attorney’s fees are reasonable and customary. Only the senior partner should bill for in-house strategy meetings involving several staff members and you shouldn’t pay bloated fees for photocopies, phone calls and secretary time.
Consider the cost for expert witnesses, court filling fees and depositions, and estimate your true ROI by comparing the total tab to what you may gain or lose by going to trial.
Finally, be wary of an attorney who seems unreasonable or wants to bill for every single second. Lawyers should be willing to negotiate, especially in this market.
What else can business owners do to prevent legal fee disputes?
Hiring a referral from a trusted colleague is probably your best bet, but you still need to get everything in writing and seek an outside opinion before signing an agreement if you’re unfamiliar with litigation costs.
Establish a budget and a goal for the action and consult several attorneys to see if they’re reasonable and attainable.
Lastly, nip potential problems in the bud by reviewing invoices and questioning any unreasonable charges you find in a timely basis.
What happens if a dispute arises?
Clients have the right to seek arbitration by a panel consisting of neutral attorneys and a layperson who will decide the appropriate amount of attorney’s fees through an informal, low cost proceeding administered by the local bar association. The losing party has the right to pursue a court trial. However, they must act quickly and file the paperwork within 30 days of the loss.
What are the legal standards that apply to legal fee disputes?
A signed retainer agreement takes precedent when a fee dispute arises. If none exists, the court will attempt to determine a fair charge for the attorney’s services, in part by assessing whether his fees are unreasonable or unconscionable.
While the courts tend to side with clients, especially when the attorney’s charges are vague, there’s little sense in taking chances when the problem is avoidable.
How are legal fee disputes usually resolved?
Most executives and attorneys don’t want to air their dirty laundry in public, so they try to resolve their disputes through informal, private discussions and by consulting an outside expert.
While few disputes end up going to trial, the chances increase when emotions run high and business owners don’t do their homework.
Kim Karelis is a partner and expert witness with Ropers Majeski Kohn & Bentley PC. Reach him at (213) 312-2012 or firstname.lastname@example.org.
Insights Legal Affairs is brought to you by Ropers Majeski Kohn & Bentley PC
In this country, unlike many others, litigants — win or lose — generally pay the attorneys’ fees they incurred in litigation. This rule, known as the “American Rule,” can be frustrating for the winner. After all, if you have won the case, why shouldn’t the loser pay? Nevertheless, the American Rule is the default rule in our legal system.
As with most rules, there are exceptions. Some contracts, statutes or codes of civil procedure trump the American Rule and provide that the loser is obligated to pay the winner’s reasonable legal fees. Given the American Rule’s sting, lawyers keep a keen eye out for such exceptions, hoping to recover fees for their clients.
Most lawyers know that, when the exceptions to the American Rule apply, courts will allow businesses to recover reasonable fees paid to outside counsel. But some do not know that many courts will allow recovery for a client’s in-house counsel as well, says Christopher Moore, a partner at Novack and Macey LLP.
Smart Business spoke with Moore about how to maximize chances for the recovery of in-house legal fees, the importance of detailed time records and how such fees are calculated.
Can a business recover for the legal services rendered by an in-house lawyer?
Most courts say yes. That might seem counterintuitive because an in-house lawyer typically is paid a salary, which would have been incurred whether he or she was involved in a particular litigation or not. Thus, the money paid to an in-house lawyer can be viewed as ‘overhead,’ rather than costs incurred as a result of litigation. And, while some courts have denied fee recovery for in-house counsel on that basis, that is, because a business incurs no added attorneys’ fees when in-house counsel assists it in litigation, many courts do not. As the Seventh Circuit has recognized, ‘every hour spent on a case by an in-house lawyer is an hour that he or she could have spent for the business on some other matter.’
What can a business do to maximize its chances of recovering for such services?
Just because a court may allow a business to recover for the services provided by its in-house lawyer does not mean that all — or even any — fees attributable to his or her work are recoverable. For example, litigants seeking legal fees have to show that those fees were reasonable, and this principle applies with equal force to businesses seeking to recover fees for their in-house attorney.
Reasonableness aside, businesses face an additional hurdle when they try to recover fees for work done by their in-house lawyer: They have to show that the in-house lawyer ‘actively participated’ in, or ‘substantially contributed’ legal services to, the litigation. Fees are not generally recoverable if the in-house lawyer was acting merely as a ‘liaison’ between the business and outside counsel.
What this means in practice is not always clear. However, a business’s chance to recover is maximized when that lawyer performs the type of work that is often associated with litigating a case. Examples include preparing discovery documents, outlining deposition questions, examining witnesses, or participating in tactical trial decisions. Obviously, it helps if in-house counsel files an appearance, presents argument, or appears in court at trial.
Conversely, fees will not be allowed when in-house counsel acts more like a client by, for example, merely keeping the business up-to-date on the litigation, transmitting progress reports to the business, or communicating the business’s views on litigation strategy to outside counsel.
What kind of time records should be kept?
Because fee recovery depends on demonstrating that the fees were reasonable and that in-house counsel was actively participating in a case rather than acting as a liaison, it is vital that in-house counsel keep detailed records of their work. At a minimum, those records should not only show the time devoted to each litigation task but also describe specifically how the work performed was work for which courts allow a business to recover. Courts have denied recovery when time records lacked such detail and thus failed to demonstrate that in-house counsel was substantially contributing to the litigation, rather than acting as a client liaison.
How are in-house fees calculated?
There are various ways that courts could measure recoverable fees for in-house counsel, but two principal approaches seem to have emerged.
In one approach, courts accept the view that the work performed by a salaried, in-house attorney is recoverable, but they are mindful that such work can be viewed as part of a business’s overhead. As such, a business seeking to recover fees needs to show these courts how much of its overhead can be allocated to the litigation at hand. The calculations needed to make such a showing can be complex. Still, courts favoring this approach, or something similar, are concerned that a different approach could permit litigants to recover more than the costs actually attributable with in-house counsel’s work, and thereby result in a windfall to the victorious litigant.
In another approach, courts have awarded fees for in-house litigation work based on a ‘market rate.’ Essentially, this is what non-in-house lawyers in the same market would have charged the business for the same services. Courts favoring this approach see at least one advantage: It avoids the need to make the complex inquiries and calculations that the first approach and similar methods require. Moreover, courts favoring this approach believe that the market-rate approach likely produces a fee calculation roughly equivalent to that given by the first-described approach. This is because, among other things, time devoted by in-house counsel to a particular litigation is time he or she could have spent on some other task.
In the end, courts favoring the market-rate approach reason that such time is no less valuable than what a business would have to pay outside counsel to do the neglected work.
Christopher Moore is a partner at Novack and Macey LLP. Reach him at (312) 419-6900 or CMoore@novackmacey.com.