Would you give back the money?

The discussion in THINKING OF YOU, below, has suggested the following questions, which I've had to confront.

You're a legal ethics expert. Law Firm wants to be able to consult you from time to time as questions arise. The work will be by phone and email.

For a couple of years, you charge hourly. But you find yourself recording ten mintues here, twenty minutes there, etc. The recordkeeping is a bit of a drag.

So in the third year, based on the usage in the prior years, you suggest a quarterly payment of $X for the same phone and email advice.

That works well in the third year, but then in the third quarter of the fourth year, you realize that you have been called five times  that year for a total of less than two hours of work for the entire year so far. Your initial prediction, based on experience, was 3-4 hours per quarter.

Now the firm has 68 lawyers so no one knows how much the firm is utilizing you in total because any of the lawyers is free to call and do. No lawyer knows how much any other lawyer is using you.

Do you bill for the fourth quarter? Do you return any of the money? Do you alert the managing partner and negotiate a lower (or no) quarterly payment for the following year?

Comments

[Paul Gowder]

My gut says you take option b) and give some money back. It's analogous to the legal-fees-paid-in-advance situation, but with the additional complication that there's a recurring transaction; I'd say that it makes most sense to conceive of each quarterly payment as an advance on the hourly fee for each quarter's services... But I could see an argument for just seeing it as a flat fee arrangement. Does the firm get billed more if it uses your services more than the predicted amount in a given quarter, or does the flat fee remain the same?

[Andrew Perlman]

It seems to me that, if you are not permitted to increase your bill if you spend more time than anticipated, you should not feel obligated to give money back if you spend less time than expected. As Paul Gowder says above, this seems like a flat fee arrangement, which sometimes will favor you and sometimes the client.

I also think that the firm benefits from having an outside ethics counsel on call, especially a reputable one (like you, Stephen). This availability and the internal and perhaps external benefits it affords the firm is a value added even when the firm is not using you, especially if the firm holds you out (e.g. on its website) as the firm's outside ethics advisor.

Having said that, if the low usage continues, I think the lawyer should bring it to the attention of the managing partner and negotiate a new arrangement accordingly.

[stephen gillers]

No holding out on the website. That's priceless! :-)

Assume the deal in the third year is (was): "Given the frequency of usage the first two years, where the bill was hourly, using that frequency as a reference point, let's have a flat quarterly fee." Frequency is the same in year three but drops off significantly in year four.

[Rick Underwood]

Obvious solution is that you should give the money to me.

[Andrew Perlman]

Stephen, I think a "flat" quarterly fee, as per the provision you quote, means that you and the firm anticipated that, in some quarters, your work will be above the reference point and, in some quarters, it will be below. Once it becomes consistently below the reference point, I think it's worth raising the issue with the firm.

It seems to me that the key question is how many below average quarters need to go by before you raise the issue on your own. I think that's a judgment call that may turn, in part, on the size of the quarterly payments. If they are relatively low, I think you can wait longer than if they are large. My thinking is that, if the payments are low (and the anticipated hours are small), you can quickly make up for the slow quarters with one time intensive matter, which could arise at any point. Also, small payments really could be justified on the "value added" basis I mentioned earlier. Your mere availability to all of the firm's lawyers is worth something to the firm, even if you are used rarely.

[stephen gillers]

Assume an arrangement on a yearly basis -- $4X -- paid quarterly @ $1X. After two quarters of infrequent consults, I could, I think, legitimately say "a deal's a deal and it may have turned out opposite, with many consults;" or (b) reduce the quarterly payments -- or eliminate them -- for the second half of the year.

If that were the situation, I don't think I would have had to do (b) but I would. I do think I would have had to explain the under utilization if the firm wanted to continue for the next year at the same rate. Remember, the assumption is that it has no idea of how many calls I received because any lawyer could call.

Also influential would be my expectation that if the firm developed an extraordinary need during the year -- beyond routine phone and email advice and requiring substantially more research -- I would tell the firm, and the firm would be willing to renegotiate.

By the way, I do think a firm gets value in knowing that someone knowledgeable will take all calls and respond timely. The availability alone is a value, although with limits. So if compensation for actual time exceeded usual hourly rates, the availability could justify it.

[Andrew Perlman]

If the agreement is renewable annually, I think you should raise the issue prior to the renewal. As you said, you can raise the issue sooner, because you're a nice guy and feel that the payments exceed the benefit the client received in a couple of quarters, but I don't think you have an ethical obligation to do so.

Would you do the same if you had a contingency fee agreement that earned you 1 million dollars in fees for 200 hours of time? Would you let the client keep more of the money because your expected pay exceeds what your client reasonably anticipated at the time of the agreement? Consider that, in this situation, the client is likely to be a lot less sophisticated than a law firm and there is a lot more money at stake for the client.

[Gary Miller]

I wouldn't give money back. I would continue to monitor the situation annually. From a business perspective, neither side wants an imbalance.

Both sides give and get. The firm gets the expert on call, the expert gets a client and all that it entails (including potential conflicts and the forgoing of undertaking representation for others.

[Noah Rosenthal]

You could probably avoid this problem by addressing it in connection with the flat fee agreement. Is this a true retainer? If it is, you don't have to give it back. Is it a flat fee? If it is, you might be ethically required to give it back if the amount is unreasonable (RPC states) or unconscionable (California) in proportion to the work performed. In the flat fee context, I agree that the amount of fee is critical, because it helps determine whether or not it is unreasonable/unconscionable.

[Stephen Gillers]

To Andy: some cases say that a contingent fee reasonable when made can become unreasonable in light of subsequent events. Some courts have declined to enforce them when the lawyer has done little and gets a lot as it happens.

To Noah: Can it be both a true retainer and a flat fee? That is, can I say for $X I am available for telephone consultations on ethics problems and that fee also covers the time required to answer your questions. A true retainer is money for the promise of availability alone, as I understand it.

[Andrew Perlman]

Stephen, I agree that some contingency fee agreements can be unethical, but I don't think my hypo involves such a situation. The lawyer has put in 200 hours of work, and we can assume that the effort produced the nice settlement for the client. In this situation, I suspect that few courts would refuse to enforce the agreement as unethical, even though the effective $5,000 per hour rate is probably higher than what the client envisioned at the outset of the representation. If these are the assumed facts, would you enforce the agreement as written? Or would you voluntarily give your client more money?

[Noah Rosenthal]

Stephen, that's a good question, but I think it still works. It's true that, generally, a true retainer is intended simply to secure the attorney's availability (e.g., to compensate for the opportunity-cost of not being fully available for other work, or for being available without knowing how much work the lawyer will actually be asked to perform).

I suppose, I’m proposing something that is more of a hybrid – a true retainer and a flat fee all in one. At least one case, Bryan v. Butera, Beausang, Cohen & Brennan, 193 F. 2d 210 (3d. Cir. 1999) approves that kind of fee. The case involved a sophisticated client in bankruptcy, which was expecting—but was uncertain—that a bunch of adversary proceedings would be instigated against it. They paid the law firm a $1 million non-refundable retainer, which was also intended to cover all work performed over a certain period. Then, before the law firm did any work, the company fired the firm. The court let the lawyers keep the money. I think this practice is somewhat common on a smaller scale consistent with the hypothetical in your original post. Common, of course, does not mean ethical, but I think this is a valid arrangement.

I’m not sure if I’d advise one of my attorney-clients to do this even though I think it’s defensible as what I probably should describe as a true retainer/fee hybrid. As a practical matter, I might circumvent your hypothetical and suggest to my client that, if he is keeping sufficient records to discover that he billing way less than he feels he is earning, why not just spend the slightly more effort it takes to actually record your time formally? The client will probably agree to quarterly billing instead of monthly billing, which avoids the overhead problem on both sides of having monthly bills for an extremely small hour and dollar figures.

Other lawyers deal with this by simply not charging for such minimal advice and writing it off as business development and client relations. (As an ethics attorney, that makes me nervous because I prefer formalizing any relationship where advice is given.)

I’m straying way off topic now, so I’ll stop here.

[Stephen Gillers]

Noah: Bryan is an important case and one of several that disagrees with the New York Court of Appeals poorly done opinion in In re Cooperman (though it does not cite Cooperman). I think it must be that a lawyer can take a retainer for availability AND bill against it. That is good for the client, who would otherwise have to pay for the actual time.

Andy: Your hypo nets the lawyer $5000 hourly. I think the court would uphold it if there was real risk but not if it was clear at the outset that the client would get same amount. E.g., client is having trouble securing the proceeds of an insurance policy from a company in Australia, following the death of a distant relative who otherwise has no heirs. Necessary documents are hard to get, etc. The insurance company is going to pay the three million face amount of the policy, but needs the proof and the lawyer has to track down the documents (death certificates, birth certificates, whatever) and deal with Australian insurers from her office in Laramie. I don't think a court would uphold a fee netting $5000 hourly (a 1/3 contingency). The client would be much better off paying the lawyer's usual hourly fee of $345. I would find the fee unreasonable.

[Andrew Perlman]

Stephen: I agree that we could imagine a set of facts where the contingency fee is unreasonable. But as you note, we could also come up with a hypothetical where the fee is reasonable (e.g., the lawyer takes on a genuine risk of earning nothing and, because of excellent lawyering, obtains a pay day under the contingency agreement that effectively pays the lawyer $5,000 per hour). Assuming that the fee is reasonable (and the contingency fee is enforceable as written), my question is whether you think the lawyer should nevertheless share some of this money with the client.

[Stephen Gillers]

No, I don't, because on those assumptions, the lawyer did indeed take a risk. If the benefits went in the opposite direction, with the lawyer underpaid for the work she put in, the lawyer would have no claim to more. In the hypo that started this post, there was a prediction that the time in year three would be about the same as in years one and two and then, in the middle of year three, it appeared to the lawyer that it would be way less. Also important is, I think, that the client firm could not know this because any lawyer could call and no one at the firm knows what others are doing or not doing. So I think the lawyer, who does know, before the start of the following quarter, should give the firm the information he has but it does not, assuming the fall off is significant.