LEGAL FEE AUDITS

Copyright ©1997 Brad Malamud & Jim Schratz

Types of Audits

Computerized Audit
The invoices are input into computer software specifically written to review legal billing. Fees and costs are allocated by tasks. Block billing is split into tasks. Time is assigned to each task. Custom auditing software is used to verify each fee and cost allocation. This is the first step in reviewing legal billing. Many attorneys and claim adjusters can use these reports to determine questionable or excessive charges.

Desk Audit
The computer reports are used by an expert to determine reasonable billing and or question certain charges. The auditor may request certain pleadings and other case documents as part of the process. The auditor prepares a written report documenting billing concerns.

Complete Audit
This audit adds an on-site inspection of the law firm's files. This is the most complete audit. This type of audit is normally performed on larger files.

LEGAL FEE AUDITS
Legal audits are generally performed to determine "reasonable" billing. Auditors often review billing that contains problems similar to those discussed below.

A legal fee audit is based on the auditors experience, the facts and circumstances of the matter, billing guidelines, case law and state bar rules.

This booklet will discuss case law. It is not a comprehensive guide to auditing legal fees. For more information, see Jim Schratz, Billing Guidelines and Fee Disputes: A Case Law Review, Vol 18, No. 3, Trial Diplomacy Journal, 159, May/June 1995; Brad Malamud, How Times Have Changed: A Systematic Approach to Billing, Vol. 62, No. 4 Defense Counsel Journal 583, October 1995.

In general, there are three types of situations in which legal fee audits are performed.

1. Panel Counsel
Panel or retained counsel is engaged directly by the company or individual. Often there is an on-going relationship. By providing the law firm with Billing Guidelines, the auditor can insure compliance with established rules.

2. Cumis Counsel
Independent counsel often overworks a file due, in part, to the fact that someone other than the client is paying the bill. Billing Guidelines should be sent once a carrier reserves its rights. The guidelines are a bench-mark, along with case law, for the determination of reasonable billing.

3. Prevailing Party Audits
The prevailing party's attorney(s) may seek payment where the loser is required to pay based on a fee-shifting statute or a contractual attorneys' fee clause. These bills may contain excessive billing and billing for work that is not related to successfully litigated issues.

CASE LAW

The person hiring the attorney is not always the same person or entity that pays the legal bills. The payor's first opportunity to question the reasonableness of the billing may be at the conclusion of the matter. In these cases, the bills may contain many of the problems listed. The remainder of this booklet discusses case law solutions for legal billing problems.

The overriding rule is, "[a]ttorneys' fees must be reasonable." Weinberger v. Great Northern Nekoosa Corp., 925 F.2d 518, 525 (1st Cir. 1991).

Orsic v. Bethlehem Mines, 719 F.2d 670, 677 (3d Cir. 1983), held that, "Double dipping, in any form, cannot be condoned. Our cases supply no authority for rewarding non-stop meter running in law offices. ... Even a Michelangelo should not charge Sistene Chapel rates for painting a farmer's barn."

Case law is decided by appellate courts. Since few non fee-shifting attorney fee cases are tried and far less result in written appellate decisions, most of the decisions are from cases involving federal or state law fee shifting statutes. Although most cases apply statutory-based rules, the holdings, are, in general, applicable to all attorney fee billing.

FEES

Block Billing
"Block" billing is the use of a single time entry to describe two or more separate and unrelated tasks. Block billing makes it difficult to allocate time to specific legal work. Allocation is crucial to isolate excessive time billed for a single task or to differentiate covered from uncovered work. Courts have reduced legal fees based on block billing alone. See Cristancho v. National Broadcasting Co., Inc. 117 F.R.D. 609 (N.D. Ill. 1987); In re Leonard Jed Co., 103 B.R. 706 (Bankr. D.Md. 1989).

General Descriptions

It is difficult to determine reasonable billing when billers use general terms and do not describe specific tasks and why those tasks were performed. Improperly described billing may not be fully compensable. See U.S. Football League v. National Football League, 887 F.2d 408 (2d Cir. 1989). In re Fine Paper Antitrust Litigation, 98 F.R.D. 48, 81 (E.D. Pa. 1983) held that "Any ambiguities arising out of time records should be resolved against the applicant."

Center Foundation v. Chicago Insurance Co., 227 Cal.App. 3d 547, 560 (2nd Dist. 1991) held that Cumis counsel must engage in "... ethical billing practices susceptible to review at a standard stricter than that of the marketplace."

Quarter Hour Billing Increments
Most law firms and many courts require a .1 hour (6 minute) minimum billing increment. Some firms have a .25 hours minimum. .25 hour increments often result in excessive billing. See Ecos, Inc. v. Brinegar, 671 F. Supp. 381 (M.D. N.C. 1987); In re Tom Carter, 55 B.R. 548 (Bankr. C.D. Cal. 1985).

Supervision, Training and Excessive Work
Businesses must train and supervise their employees. A law firm should have sufficient training and staffing to handle each matter. The client should not be billed for training. It is improper to over-work a motion, perform unnecessary discovery or perform excessive research. See Bruno v. Western Electric Co., 618 F. Supp. 398 (D.C. Colo. 1985); In re Jefsaba, Inc., 172 B.R. 786 (Bankr. E.D.Pa 1994); Williamson v. John D. Quinn Construction Corp., 537 F.Supp. 613 (S.D.N.Y. 1986); Metro Data Systems, Inc. V. Durango Systems, Inc., 597 F.Supp. 244 (D. Ariz. 1984).

Up-To-Speed and Transient Billing
Clients should not be billed for new staff to get up-to-speed or for transient billing that does not add to the matter. The lawyer who begins the representation should also conclude it. If the law firm changes attorneys, the additional costs associated with the change is an overhead cost. See Wright v. U-Let-Us Skycap Services, Inc., 648 F.Supp 1216 (D. Colo. 1986).

Duplication of Effort
Duplication of effort or performance of unnecessary work is not compensable. For example, a law firm may summarize a deposition more than once, or send more than one biller to a deposition, court appearance, etc. The billing partner should remove any duplication of effort or unnecessary work from the bill. See In re Stoecker, 128 B.R. 205 (Bankr. N.D. Ill. 1991); Harman v. Lyphomed, Inc. 734 F. Supp. 294 (N.D. Ill. 1990) aff'd in part, rev'd in part 945 F. 2d 969 (7th Cir. 1991); Ramos v. Lamm, 713 F.2d 546 (10th Cir. 1983).

Excessive Conferencing
A client should only be billed for work that is necessary. Although occasional conferences may be useful, constant conferencing and frequent group meetings are often wasteful. The courts have ruled that attorneys should work independently. See Keith V. Volpe, 664 F. Supp. 1312 (C.D. Cal. 1986); In re Olson, 884 F.2d 1415 (D.C. Cir. 1989); Makover v. Neco Enterprises, Inc., 785 F.Supp. 1083 (D.R.I. 1992).

Increased Billing Rates and Inappropriate Level
Without permission of the client, the law firm may not raise billing rates. See Severson & Werson v. Bolinger, 235 Cal. App. 3d 1569 (1991). Similarly, a lawyer should not perform paralegal level activities, unless billing rates are reduced accordingly. See Blumber v. Jacob, 624 F.Supp. 669 (S.D. Ohio 1985)

Clerical and Administrative Work
Paralegals often perform secretarial services. The billing partner should write this time off the bill. Similarly, clients should not be billed to prepare billing statements or approve vendor invoices. Neither of these are legal services. See Richardson v. Byrd, 709 F.2d 1016 (5th Cir. 1983) cert. denied 464 U.S. 1009 (1984); Missouri v. Jenkins, 491 U.S. 274 (1989).

Duty to Review Pre-Bills for Excessive Charges
The Supreme Court has stated that all attorneys must review their pre-bills and exclude unnecessary time and costs. "Counsel for the prevailing party should make a good-faith effort to exclude from a fee request hours that are excessive, redundant, or otherwise unnecessary, just as a lawyer in private practice ethically is obligated to exclude such hours from his fee submission." Hensley v. Eckerhart, 461 U.S. 424, 434 (1983). The court further pointed out that the basis for a fee award is not the hours expended, but rather the hours that were reasonably expended to advance the client's interest. In many cases, the billing partner has not reviewed the pre-bills and simply bills all fees and costs that were recorded. The auditor may seek to determine which time and costs charges were "written- off" the pre-bills.

COSTS

Administrative Charges/Overhead
Courts normally reduce or eliminate administrative charges and law firm overhead items. These items include overtime, local meals, local transportation at night, unnecessary copying, word processing, secretarial services, unnecessary faxing, and express delivery when regular mail would suffice. See Laffey v. Northwest Airlines, 572 F.Supp. 354 (D.C. 1983); Real v. The Continental Group, Inc., 653 F.Supp. 736 (N.D. Cal. 1987).

Computerized Research
Many firms, and particularly recently admitted attorneys, overuse computerized research and/or may research areas that are within the expertise of the law firm. Courts have reduced such expenses. See, Winter v. Cerro Gordo County Conservation Board, 925 F.2d. 1069 (8th Cir. 1991).