Ethics Opinion 267

Disclosure of Billing Practices: Billings Based on Time and “Attorney Charge”

When a client is informed that he will be billed on a time basis, it is a violation of the Rules of Professional Conduct to impose additional fees that are not disclosed to the client and are not calculated on the disclosed basis. The proposed “attorney charge” billing procedure does not violate the Rules where the client is informed of the hourly rates of the attorneys likely to work on the client ’s matter, and he is given a range of estimated total charges and a statement that the range may be exceeded in certain circumstances.

Applicable Rules

• Rule 1.5 (Fees
• Rule 7.1(a)(1) (Communications Concerning a Lawyer’s Services)
• Rule 8.4(c) (Misconduct)

Inquiry

The inquirer requests an opinion as to the ethical propriety of charging clients in the manner described in the following two hypothetical billing practices.

1. Time Basis and Value Billing Practices

Firm clients are provided with a written fee schedule. The schedule lists matters for which a flat or standard fee is charged and identifies some other matters that will be billed on a “time basis.” The schedule does not identify the “time basis” rates that will be applied. When work is performed on a time basis, the client receives a statement for “services rendered.” The statement gives only a brief generic description of these services. It then specifies an amount for services, a separate amount for expenses, and a total.

The amount charged for services may incorporate a number of different charges, in addition to the time charges of the responsible attorney(s), i.e., the attorney(s) who actually worked on the matter. In one circumstance, the “services” amount includes a set fee that is described within the firm as an administrative or processing fee. This fee may amount to between 10-20% of the time charged amount, depending on the number of hours worked by the responsible attorney. The statement also may include a levy that is based on the hourly rate of the originating attorney (i.e., the attorney who brought the client to the firm) although it may not reflect time actually worked on the matter by that attorney. In still other instances, the firm may employ a procedure it characterizes as “value billing.” Under this procedure, a premium of 20-200% may be added to the “time basis” amount charged by the responsible attorney This additional amount is included in the services portion of the client’s bill.

In all instances, the client is not informed that he is being charged for services on other than a time basis. The additional levies, whether described internally as an administrative fee, processing fee or value premium, are not identified or explained in the statement, and they are added to the statement, regardless of the amount of time, if any, that the originating attorney may actually have expended on the matter.

2. “Attorney Charge” Basis

In a different billing arrangement, the client receives a letter enclosing a written fee schedule. The schedule lists matters for which a flat or standard fee is charged and identifies some other matters or types of proceeding that will be billed on an “Attorney Charge” basis.

The letter explains the firm’s procedures for handling client matters, e.g., it states that the originating attorney reviews and forwards incoming matters to the responsible attorney and the originating attorney’s secretary checks to ensure that the work is performed in a timely manner. The letter then explains the manner in which fees are calculated for certain types of work. In particular the letter provides that the fees charged for this particular type of work will take into account the effort involved; the expertise and efficiency of the responsible attorney; whether the matter is handled on an expedited basis; and the originating attorney’s charge for supervision or administration. (This charge is not based on time, if any, worked by the originating attorney.) The letter further advises that the resulting fee will be within a general range, e.g., $800-$2000, but that it may be higher depending on the complexity of the matter and whether there are issues that require unusual time and effort.

Discussion

The hypothetical billing practices described above raise two questions: what is an attorney obliged to tell clients about (1) the fees they are charged, and (2) the manner in which those fees are calculated? The answer is addressed in Rules 1.5, 7.1(a)(1), and 8.4(c) of the Rules of Professional Conduct (referred to hereinafter as “Rules”). In the circumstances presented, the time basis and value billing practices described in section 1 above violate the Rules. The billing practices described in section 2 are generally adequate, although in certain circumstances, they also may violate the Rules.

1. Time Basis and Value Billing Practices

(i) Rule 8.4(c)

This Committee has stated previously that, “when a lawyer bills a client, there should be no hidden meaning.” See Opinion No. 185, applying DR 1-102(A)(4) (the predecessor to Rule 8.4) to an analogous billing question. This simple precept applies, as well, to the instant Inquiry. In the scenario presented, the client is informed that he will be billed on a “time basis.” This term is commonly understood to mean that the bill will be calculated by multiplying the number of hours worked by the per hour charge. Accordingly, when the client receives a statement, the client is entitled to expect that the amount billed will reflect attorneys fees for time actually expended on legal work. The inclusion of unidentified administrative or processing fees, or any other unspecified or “value” billed levies that are not calculated on the agreed basis, violates the prohibition in Rule 8.4(c) against engaging “in conduct involving dishonesty, fraud, deceit or misrepresentation.”

(ii) Rule 7.1(a)(1)

The ethical impropriety of the hypothetical billing procedures is reinforced by Rule 7.1(a)(1). Rule 7.1 governs “all communications about a lawyer’s services.” See Rule 7.1, Comment [1] (emphasis added). It provides that “a lawyer shall not make a false or misleading communication about . . . the lawyer’s services” and specifies that a communication is false or misleading if it contains “a material misrepresentation . . . or omits a fact necessary to make a statement considered as a whole not materially misleading. . . . ” Rule 7.1. Comments to the Rule note the importance of ensuring that statements about a lawyer’s services are accurate.

On the facts presented, the information given to the client is inaccurate and misleading. The bill is not based on time expended, and it does not apprise the client of this fact. The client is affirmatively misled because the bill fails to differentiate between the firm’s time charges and other fees about which the client has not been informed. It merely describes the attorney’s fees and other assorted surcharges as “services.” The client, thereby, is left to assume, predictably and erroneously, that the total is calculated on the basis that was disclosed to him.

(iii) Rule 1.5(b)

Rule 1.5 recognizes that attorneys’ fees may be calculated in many different ways. The Committee is not commenting here on the concept of “value billing.”¹ Rather, the question at issue is whether the attorney properly may impose a premium that is not time based, when that premium is not disclosed to the client, and is contrary to the manner in which the client was told his bill would be calculated. ABA Formal Opinion 93-379 (Nov. 3, 1993) concluded in analogous circumstances that:

It goes without saying that a lawyer who has undertaken to bill on an hourly basis is never justified in charging a client for hours not actually expended. If a lawyer has agreed to charge the client on this basis (i.e., hourly), and it turns out that the lawyer is particularly efficient in accomplishing a given result, it nonetheless will not be permissible to charge the client for more hours than were actually expended on the matter. When that basis for billing the client has been agreed to, the economies associated with the result must inure to the benefit of the client.

See ABA/BNA Laws. Man. on Prof. Conduct § 1001:207, 213. This Committee agrees with that conclusion.

Rule 1.5(b) provides that the lawyer who “has not regularly represented the client” shall give written advice of the “basis or rate” of the fee the client will be charged. The Rules assume that lawyers regularly representing a client will have reached “an understanding concerning the basis or rate of the fee,” i.e., the lawyer is not expressly required to provide such a client with written advice. See Rule 1.5, Comment [1]. Thus, all clients, whether new or existing, whether receiving fee advice orally or in writing, are entitled to know the basis or rate of the fee.

The information provided to the Inquirer’s hypothetical clients does not satisfy this requirement. The term “time basis” is simply not an adequate description. Where the fee is based on an hourly rate, the client is entitled to know the rate or range of rates applicable to his work. Where the fee is calculated by reference to factors other than time, and for example, includes an additional administrative or processing charge, the attorney has an obligation to explain the basis of that fee—what the fee is for, and how it is calculated. Moreover, the client must be accorded an appropriate opportunity to consider this information.

In inquiries about fees and billing matters, this Committee has held, repeatedly, that the attorney owes his client the “utmost duty of candor and fair dealing” (Opinion No. 185); that “the attorney bears the responsibility for seeing that there is no misunderstanding as to fee arrangements. (Opinion Nos. 4, 25, and 29); and that, when a lawyer seeks to impose “atypical requirements in a fee agreement, . . . the lawyer must explicitly bring the matter to the attention of the client at the time the agreement is presented.” Opinion No. 211. We reaffirm these guiding principles and conclude, with respect to the instant inquiry, that they have been violated.

2. “Attorney Charge” Basis

Unlike “time basis” or value billing, the term “attorney charge” has no widely understood meaning. In the example posed in the inquiry, the letter to the client does supply some explanatory detail. It states that fees for matters described in the fee schedule as “Attorney Charge” will take into account several of the factors listed in Rule 1.5(a) and an administrative or processing fee. Additionally, it gives a range of possible costs and advises that, in unusual circumstances, that range may be exceeded.

Rule 1.5(b)

The ethical propriety of the “attorney charge” billing practice is determined by reference to Rule 1.5(b). The Committee’s conclusion in this regard is premised on the assumption that the letter sent to the client accurately describes the manner in which fees are calculated. If the letter does not accurately describe the firm’s billing practices, Rules 8.4(c) and 7.1(a)(1) would also apply, for the same reasons that were discussed in Section 1 above.

The information contained in the client letter, i.e., the hourly rates of the attorneys likely to work on client matters, a range of estimated total charges, and a cautionary statement that, in certain circumstances, the range may be exceeded, satisfies the Rule 1.5(b) requirement that there be a clear communication of the basis or rate of the fee. It gives the client an adequate basis on which to decide whether he will pursue the matter or retain that particular attorney. With respect to the letter’s advice that the estimated range of fees may be exceeded for matters that are unusually complex or time consuming, it should be noted that the attorney has an ongoing obligation to ensure that the client has a clear understanding with respect to the basis or rate of the fee. When a cost estimate becomes substantially inaccurate, “a revised estimate should be provided to the client.” See Rule 1.5, Comment [1].

Inquiry No. 95-6-22
Adopted: September 18, 1996

1. The Committee also is not commenting on the reasonableness, under Rule 1.5(a), of the ultimate sum that a client may be asked to pay under the firm’s value billing calculation, or as a result of the other unspecified levies that are added on.