Despite the hazards of suing a past client for unpaid legal fees, these lawsuits are on the rise as firms are increasingly unwilling to let crucial six-figure payments slide, according to several attorneys who regularly advise other lawyers.
Realization rates in the legal industry trended upward in 2021, an indication to malpractice attorneys that law firms and their clients are finding new ways to ensure proper compensation for legal services. However, litigation by law firms to recoup allegedly unpaid legal fees has increased in recent years, and the amount of money at stake is growing too, as law firms pay closer attention to their margins.
“The days of being able to say goodbye to $300,000 or more without blinking an eye are gone,” said Abraham Reich, the chair emeritus at Philadelphia-based Fox Rothschild who advises law firms in malpractice suits. He stated that he was speaking generally about the topic of legal fee disputes rather than any firm in particular, although his firm has sued several clients in New York courts in recent months.
“You’ve got to have a good reason for writing off six- or seven-figure legal fees,” he continued. “Unless there has been an oversight, a problem with the representation or some other policy reason not to pursue it, you’re seeing more claims to be pursued.”
The legal industry is one of the only businesses in which the purchasing party doesn’t know the cost of the product before receiving it, a significant source of tension between lawyers and their clients, especially individuals without sophisticated resources to review retainer agreements and set legal budgets, say lawyers interviewed for this report.
A Big Law attorney based in New York who advises law firms on professional responsibility said much of the mistrust that exists between law firms and their clients can be laid at the feet of hourly billing. He declined to be named for this report to avoid running afoul with his firm.
“Lawyers who are charging for time are really inviting distrust from clients, even if they are the most honest and scrupulous lawyers,” he said. “My own view is that the best solution is to require budgets and strict adherence to budgets.”
He said fixed fees, by contrast, promote efficiency in the provision of services.
“If you have a blank check, you can bill as much time as you want. It necessarily promotes inefficiency,” he said. “If it doesn’t promote inefficiency, it permits inefficiency to breed into the system.”
Reich isn’t as convinced that fixed fees would solve the problem.
“That is an argument that has been put on the table for a long time, that hourly rate lawyers representing someone are going to churn fees and spend more time than they need to because they’re getting paid for every hour they’re putting in,” he said. “While there are some instances where people may act in that behavior, I tend to give our legal industry the benefit of the doubt.”
The apparent lack of clarity between law firms and clients when it comes to payments owed continues to lead to fee dispute litigation, with several law firms currently engaged in litigation seeking to recoup allegedly unpaid fees.
Among them, Fox Rothschild is fighting in New York state court to recoup more than $460,000 in arbitration fees from a former client who claimed his compensation agreement changed when his previous lawyers joined Fox Rothschild.
In his response to Fox Rothschild’s motion for summary judgment, Douglas Schoninger, CEO of former client PRO Rugby, said he was happy that the previous firm was small and could work with his cash flow restrictions.
He said in a January filing that his former firm “at no time indicated to the defendant that the firm was presently in talks to be sold to the plaintiff, Fox Rothschild, a large national firm.”
When the case went to arbitration, Schoninger claimed that Fox Rothschild didn’t reasonably notify him of the arbitration because the firm knew he had not agreed to the arbitration with the firm.
Another case in which Fox Rothschild is the plaintiff concerns nearly $104,000 in allegedly unpaid legal costs in connection with a film production company. The firm has sued the production company’s founder in addition to the company itself, arguing that both are liable for the amount due.
While Fox Rothschild’s in-house lawyers litigating the case said client Epic Match Media never expressed disapproval to the firm’s invoices, the former client stated in his affirmative defenses that the firm was negligent in its representation.
“Fox seeks to pierce the corporate veil of Epic Match—which is entirely controlled by Peterson [the production company’s founder]—in order to hold Peterson accountable for Epic Match’s failure to make payment to Fox Rothschild for legal services rendered on behalf of defendants at Peterson’s direction,” the firm’s suit, filed in April 2021, states.
A spokesperson for Fox Rothschild did not respond to a request for comment.
One common hazard faced by law firms pursuing unpaid fee litigation against past clients is the threat of a countersuit alleging malpractice.
Such was the case when Atlanta-based Smith, Gambrell & Russell filed a notice against a former client seeking a lien in a bankruptcy case. That action led to a malpractice suit—since dismissed— filed against the firm in 2018, according to a 2021 complaint from the firm. Smith Gambrell claimed in that complaint that the malpractice suit was to avoid paying legal fees, which have since amounted to $561,256, according to court records.
Smith Gambrell’s office managing partner in New York, John McCarthy, who is litigating the case on behalf of his firm, declined to comment for this report.
While you could never prevent a client from countering with a malpractice suit, Reich said it’s worth it to pursue unpaid legal fees when the magnitude of loss is significant enough.
“There was a period of time when people would say, ‘I’m not pursuing a legal claim. Let’s just walk away from it,’” Reich said. “But [law firms] are becoming more of a business. And if the fee is large enough, we do a pretty deep analysis of the nature of representation and the issues of whether there could be a potential claim for malpractice.”