Criticism of the growing use of billing guidelines by clients of many types does not address the root cause of the problem that leads to them, which is the legal and insurance concept called "moral hazard." This is the tendency of humans to be somewhat more lax about their scrutiny when the risk is borne by someone else. If I am shopping and by some fortunate turn of events the bill is going to go to my brother, I might be a bit more willing to pay the asking price than shop around to get a better deal. This works with even greater force if I don’t really care how upset my brother will be about the costs and it might be even better if I don’t have to tell him exactly what I plan on doing and he can’t object to my shopping spree.
In the Cumis or California Civil Code § 2860 context, many times the insured is not at risk for the defense bill but has a deal with the lawyers that whatever is paid by the carriers will be accepted by the law firm. When this is not so the insureds are what I term "real clients" and they are usually very concerned about the cost. Having reviewed several billion dollars in legal fees by now, I can tell you that when real clients are going to pay fees with their own money with no guarantee of repayment and when those clients have some degree of experience and sophistication about litigation or transactional work they are very reluctant to pay anything other than reasonable fees and costs. Such clients will not pay for overstaffing, they will not pay for rates other than the rates that they have negotiated, and they will not pay for vaguely described work or things which appear to be part of a law firm’s overhead and subsumed in the hourly rates of the professionals. Such clients are also reluctant to pay for significant charges for anything unless they are told in advance that such charges are going to be required. Real clients want budgets and they want these budgets to be adhered to or an explanation of why the budget must be blown. Most sophisticated clients are quite understanding when things change, but they do want to know why the changes happen and why the law firm was unable to predict that this was going to happen.
The problems in billing arises, in part, because the risk of high expense is shifted away from the law firm to either a client or a client’s insurer. If either of them is not very careful the effects of moral hazard produces a very large bill. All of this is rooted in and tied to the concept of billing by the hour. This way of charging for legal services is not something that has always been done, but is relatively recent—occurring in the last 40 or 50 years. The process has been condemned by the American Bar Association Commission on Billable Hours Report in August of 2002 (at page 6): "Hourly billing penalizes the efficient and productive lawyer. The inefficient and less productive lawyer ends up billing more hours. Advocates for hourly billing often argue that the difference is accounted for in the hourly rates. However, in most circumstances the rate differential does not come close to accounting for the difference in experience and productivity."
Regrettably, even if we all wanted to change things away from hourly billing there is no practical way out right now. A professionally-conducted survey in 2004 shows that about 80% of corporations use hourly fees for 90% of matters. This hourly rate billing system is going to be with us for a while.
In an attempt to control the charges to reasonable and predictable levels, billing guidelines and budgets are almost universally used by all sophisticated clients, whether they are insurance companies, private corporations, governmental entities, or experienced individuals. While it may have been true in the old days that such guidelines would be carved in stone and sent out in a boilerplate fashion, the current approach seems to be that the guidelines are proposed and a request is made for information on any reasonable deviations that the law firm feels must be made to handle the matter. In short, negotiations are opened to deal with how the charges are going to be billed for the particular matter. If the case must be handled by six lawyers, so be it. If it can be handled by one or two lawyers, all the better.
My experience has been that the size of the team and the experience of the team are very, very important to control. There does not seem to be any single formula to follow for the type of staffing on a matter. I have seen substantial, complicated, technical kinds of litigation where it was agreed that no associates would do anything on the file and it would be staffed by only certain very experienced senior lawyers Yet, even though the senior partner hourly rates were at the very top of the range the overall cost appears to be acceptable and the results are often very good. Some billing guidelines allow what is called "diamond staffing" where the size of the team increases as necessary and then decreases when the need is passed. That seems to be an effective alternative for some matters. What does not work (and what billing guidelines are suppose to prevent) is merely throwing bodies onto a file. Because at some point, perhaps at 12 or 13 timekeepers, a critical mass is reached and thereafter, the monthly charges continue at a high level even though nothing of any substance is happening on the case. This almost never occurs when the moral hazard element is not present.
The one California published opinion that seems critical of billing guidelines is Dynamic Concepts, Inc., v. Truck Insurance Exchange, 61 Cal.App.4th 999, 1009 n. 9 (1998) in which an obviously, irritated justice decided to throw dicta in a footnote that he had been wanting to write. He did this, even though in the case before him the carrier had not done anything to limit counsel’s ability to defend the case, but was willing, and in fact offered, to do all of the things reasonably necessary for the defense of an insured including providing an interpreter for German language documents and computerized indexing of documents. Before citing this opinion as one prohibiting any restrictions it would be wise to read the entire footnote 9 about "Outside Counsel Guidelines".
No other reported California opinion has picked up on this footnote’s dicta on guidelines. Although Dynamic Concepts has been cited 8 times by published opinions, none of these have dealt with billing guidelines and only one, The State of California v. Pacific Indemnity Company, 63 Cal.App.4th 1535, 1548-1549 (1998) has discussed even a somewhat related concept of the burden of proof and who must show that litigation charges were unreasonable or unnecessary for the matter.
Rather than objecting to the whole concept, the better way to handle any questions about billing guidelines is for the independent counsel to discuss the needs of the case and to modify any portions of the billing guidelines that appear to unreasonably interfere with the defense. In this day when e-mail is almost universally utilized it is a simple matter to document the agreed-upon changes to the guidelines. It has long been settled that appointment as independent counsel is not a meal ticket which allows exorbitant billing that is wasteful. See United Pacific Insurance Company v. Hall, 199 Cal.App.3d 551, 557 (1998): "While Cumis may prohibit an insurer from dictating the tactics of litigation, it does not delegate to Cumis counsel a meal ticket immunized from judicial review for reasonableness."
While many people laugh when they hear this, my own personal mental model for my first cut in evaluating legal charges is – Does it look like a duck? By that, I mean is this in the normal range of charges for similar litigation? If it is a typical case of a kind that I see usually costing, say, about $1,000,000 and the charges requested are $5,000,000, then there better be a very good explanation for why this particular matter is so far different from the norm. In such matters having something like billing guidelines makes the analysis more objective and focused. Although I often am asked to perform an analysis of legal fees using merely quantum meruit or "reasonable and necessary" it can make the evaluation much more subjective.
What the use of good billing guidelines attempts to do is avoid problems by setting out something similar to a range of options for a shopping trip. One hopes for the best, of course, but many times things do not turn out quite the way one wants either in litigation or in shopping. Nonetheless, in either example it is helpful to have some sort of baseline against which to measure the results. It is often heard said "no one told me" in both examples and that is something that can be avoided in litigation by the use of appropriate billing guidelines.
Gerald G. Knapton, is a partner in the Los Angeles, California office of Ropers, Majeski, Kohn & Bentley. He specializes in fee disputes and litigation management.
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