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Law Firm Billing Fraud

Do law firms actively pressure attorneys to pad their hours? Does pressure to meet billable-hour requirements give associates incentive to exaggerate time spent on projects? Or does bill padding persist simply because lawyers are penalized for reporting it? And what's the client's role in all of this? These and other provocative questions are raised by the story discussed over at the Wall Street Journal Law Blog in a post by Ashby Jones about a recent incident of alleged billing fraud involving Holland and Knight. From the post (which references a WSJ article by Nathan Koppel):

After Matthew Farmer, a 42-year old junior partner with the firm, suspected that his own hours on a trial for home builder Pinnacle Corp. had been inflated by the partner in charge of billing, 62-year-old Edward Ryan, he blew the whistle on the firm.  The firm took no action and denies Mr. Ryan or the firm did anything wrong. “The amount billed by Holland & Knight in the litigation was reasonable and appropriate,” says L. Kinder Cannon III, the firm’s general counsel. Mr. Ryan declines to comment. Last October, Mr. Farmer took a 7% pay cut to join Cohn Baughman & Martin, a 12-lawyer firm. He says he left because he was upset that Holland & Knight wasn’t acting against Mr. Ryan.

The article quotes two experts who offered their explanations behind law firm bill padding: professor Stephen Gillers, who states that "there is a general consensus that billing fraud has increased" as law firms seek to increase profits and attract top lawyers," and professor William Ross, who opines:

Bill-padding is the perfect crime," adds William Ross, a professor at Samford University's Cumberland School of Law in Birmingham, Ala. It is seldom detected because it is almost impossible for clients to know whether "an attorney really spent three hours doing research instead of five hours," he says.

Others in the blogosphere suggest that the billable hour is to blame for unethical billing practices, because it encourages practices like "rounding up" and padding time. But though I'm no fan of the billable hour (because of its inefficiencies), I can't blame the billable hour for cheating clients; rather, it's the attorneys who abuse the practice who cause the harm. And these types of unscrupulous lawyers would cheat clients under any fee methodology.

In my view, there are two reasons that billing fraud is tolerated. First, attorneys have no incentive to report billing fraud. Matt Farmer got off easy when he criticized his firm for inflating hours -- he apparently left the firm voluntarily (though he took a pay cut to do so). A former colleague of mine wasn't so lucky: In her landmark ethics case that originated over 15 years ago, my former colleague's partners voted her out of the partnership after she complained in good faith about what she perceived as overbilling. She filed a suit for wrongful termination of the partnership agreement and won at the trial level. But the Texas Supreme Court overturned the decision, refusing to create a public policy exception to the at-will nature of a partnership for carrying out one's ethical obligations to report unethical conduct (such as overbilling). The dissent disagreed, with a quote from Huck Finn:

What's the use you learning to do right when it's troublesome to do right and ain't no trouble to do wrong, and the wages is just the same?

But the other issue with billing fraud is that in some instances, and for reasons unbeknownst to me, corporate clients don't seem to care about overcharges. In my colleague's case, the client testified that it believed that the fees charged by the firm were reasonable. And I assume that in the Holland & Knight case, the client had never taken issue with fees and the firm did not want to rock the boat by raising the matter voluntarily. In large bankruptcy cases, neither debtors nor creditors utter a peep about what appear to ordinary observers as exhorbitant legal fees.   

Why aren't corporate clients more bothered by claims of bill padding (or are they?)? Are they so satisifed with their attorneys or so enamored of the big-firm brand that they are willing to pay  fees that some lawyers have questioned as unreasonable? Is bill padding so prevalent across the board that clients simply can't tell when they've been overcharged? 

I find these issues of ethics and billing simply don't always apply themselves to bright line tests. But what's the answer? Eliminate the billable hour? Offer more protection to conscientious lawyers who come forward to complain about padded bills? Moreover, even if we want to pay more attention to making sure practices are ethical, as Professor Bainbridge  points out here, it's often difficult to distinguish the unethical from the unsavory. And before we can even address any of these questions,  we need to examine the threshhold issue: Are billing practices ever unethical when sophisticated clients, who ought to know better, don't complain?

Posted by Carolyn Elefant on August 31, 2006 at 03:47 PM | Permalink | Comments (11)


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