How to Win with Small Firm Resources

On Monday I featured tips on how to tame the digital chaos, one of the many presentations at the inaugural 2016 OSB Solo & Small Firm Section Conference.

Today’s post is a compilation of gems from “You Don’t Have to be Big: How Clients Can Win with Your Small Firm Resources,” featuring Megan Burgess, Thomas Hill, and Tim Williams.  Click here to learn what these panelists had to say.  Here are a few tidbits:

All Rights Reserved 2016 Beverly Michaelis

Passing on Credit Card Surcharges to Clients

The Back Story

In 2013, the U.S. District Court for the Eastern District of New York approved a Class Settlement among merchants, Visa, MasterCard, and other defendants.  Allegedly, the defendants conspired to collect excessive “surcharges,” also called merchant fees, transaction fees, or convenience fees.

The class action litigation was drawn out over 8 years and involved 400 depositions, 80 million pages of documents, 17 expert reports, and 32 days of expert deposition testimony.

On September 28, 2015, the Second Circuit Court of Appeals held a hearing regarding an appeal of the settlement. The matter has now been submitted to the Court for decision. It is not known when the Second Circuit will issue its decision.

Why should Oregon lawyers care about the Payment Card Interchange Fee Settlement?

Because it’s all about the money.  Or more precisely, the cost of getting paid.

Can Law Firms Pass On Credit Card Surcharges?

Some lawyers are taking the position that the Payment Card Interchange Fee Settlement permits them to pass on credit card surcharges to clients.

Depending on the situation, these fees can add up to real money:

  • Jane Client owes her law firm $7,000.  A fan of frequent flyer miles and other perks, she charges her legal bill to her Visa card.  Surcharge to the firm: $210.* Net amount collected by the firm: $6,790.
    If the firm has five “Jane’s” in a month, it ends up losing over $1,000 in billed fees.
  • Corporate client Oregon, Inc. informs its law firm that henceforth it will pay only by credit card.  A typical monthly invoice for Oregon, Inc. is $10,000.  Over a 12 month span, the law firm will eat $3,600 or more in legal fees – the cost of absorbing surcharges each time Oregon, Inc. pays its bill by credit card.*  Bottom line: taking credit cards isn’t cheap.

You Might Say a $10,000 Client Payment is a Good Problem to Have

Agreed.  It may not be easy to sympathize with or relate to either of these scenarios. But most lawyers do take credit cards, and by year-end the surcharge fees add up.

What to do?

If you’ve read my blog before, you know I’m an advocate of building the cost of taking credit cards into your fee – what you charge for services.  This continues to be a valid approach for the following reasons:

  • Assessing surcharges [or crediting clients for the net amount less fees] involves extra administrative and bookkeeping steps.  If you get the math wrong and the transaction involves trust account funds, you could face disciplinary action.
  • Passing on surcharges is unpopular.  Clients don’t like to be “nickel and dimed” to death.
  • Ethically, clients are not obliged to pay any cost to which they did not agree.  If you did not include the right to assess surcharges in your fee agreement, you cannot unilaterally pass on the cost after the fact.  [Granted, you can fix this by modifying your fee agreement – but it isn’t necessarily advisable and may not be successful.]  See OSB Formal Opinion 2005-97.
  • Legally, there are more than a few barriers.

Legal Implications of Passing on Surcharges

A bit of research reveals that passing on surcharges may be acceptable under the Payment Card Interchange Fee Settlementprovided you:

  1. Inform Visa and MasterCard before you begin surcharging.
  2. Show the surcharge as a separate item on all transaction receipts.
  3. Display prominent signage at checkout advertising surcharge fees.
  4. Apply surcharges only to credit card purchases – you cannot legally add a surcharge to a pre-paid card or debit card (even if you run it as a credit card transaction).
  5. Limit surcharges to transactions in the domestic United States and US territories.
  6. Verify surcharges are not prohibited by state law.
  7. Assess no surcharges to clients using American Express or Discover, as they are not part of the Payment Card Interchange Fee Settlement.

How Do These Requirements Translate to the Legal Profession?

Good question!  Assuming the Payment Card Interchange Fee Settlement gives you the right to begin surcharging:

  • Step two might require you to change your credit card processing practices. When a card is swiped, a receipt is generated.  Assuming it shows the surcharge as a separate item, and you provide the receipt to the client, you have complied with this step.  But what about “card not present” transactions where the card is not available to swipe?  These are far more common in a law firm. Do you currently email a contemporaneous receipt?  Maybe you should.  Will you list surcharges as a separate line item on billing statements?  Maybe you should do that too.
  • Step three may mean displaying a sign in your office, drawing prominent attention to the fees in your written fee agreement, including information on your intake form, discussing surcharges during the initial client interview, etc.
  • Step six would require vigilance when working with out-of-state clients. Surcharges are illegal in California and nine other states. Some predict this number will grow.

Can I Do it or Not?

I can’t give you the unequivocal green light.

While some law firms are surcharging now, please remember the settlement is under appeal.

Additionally, consider this comment in OSB Legal Ethics Opinion No. 2005-172:

Passing the merchant fee on to the client or crediting the client for the net amount of the transaction only … may implicate Regulation Z of the Truth in Lending Act,
12 CFR §226.  As a result, you may be compelled to offer cash discounts to all clients and make specified disclosures to your clients who pay by credit card.
See CONSUMER LAW IN OREGON ch 14 (Oregon CLE 1996 & Supp 2000).

While the language is “may implicate Regulation Z,” the safe harbor has always been to assume the Truth in Lending Act applies to these transactions.  [The Ethics Committee added this substantive law caveat to alert practitioners to the possibility.]

I’ve read the Orders and other documents posted at the Payment Card Interchange Fee Settlement in an effort to wrap my head around this.  I’ve never seen any source that fully reconciles the issues in the class action with the requirements set out in Regulation Z – not that I’m an expert.

Assuming the appeal doesn’t upset the apple cart, my suggestions on how the Payment Card Interchange Fee Settlement would translate to lawyers are only best guesses. There is no authoritative source to guide us on applying point-of-sale retail transaction requirements to a law firm setting.  For example, how does a law firm “display prominent signage at checkout?”

Proceed at Your Own Risk

If you want to assess surcharges, do your own substantive legal research and proceed at your own risk.  Before taking the plunge, consider these words of wisdom from LawPay, a popular credit card processor serving the legal profession:

Many law firms simply build the additional cost [of accepting credit cards] into their fees as a standard business expense. This is generally recommended as the proper and more professional way to handle the business expense of processing payments.

[All Rights Reserved 2016 Beverly Michaelis]

*Based on a surcharge of 3% per transaction – transaction rates vary.

The 7 Golden Rules of Collections Revisited

This classic post bears repeating.th (1)

In the annals of professional liability, there is one statistical truth: sue a client to collect fees and odds are the client will sue you for malpractice.

How can you avoid this dilemma?  Be proactive!  Develop policies and procedures designed to preserve client relations and avoid collection problems before they start.  In short, follow the seven golden rules of billing and collections:

  1. Always take the time to discuss fees, costs, and billing practices.  Most nonpaying clients who file retaliation suits or malpractice counterclaims do so because they never understood what the lawyer’s services would cost.
  2. Never leave home without a written fee agreement.  Be specific and complete.  Your agreement should: (a) specify the scope and timing of services; (b) describe what the client is expected to pay for and when; (c) explain billing practices; (d) identify what will occur if payment is not timely made.  Losing a potential client who refuses to negotiate and agree to a comprehensive fee and engagement agreement is a small price to pay compared to defending yourself in a malpractice claim or disciplinary proceeding.
  3. Consider alternative fee arrangements – flat fees, fixed fees, unbundled fees, evergreen retainers, or “last month’s rent.”  Clients cooperate more fully when they are financially invested in their case.  If the client is unwilling to commit financially, the matter quickly becomes your problem rather than the client’s.
  4. Keep detailed records documenting time spent and submit itemized bills
    to clients on a regular basis.  Inconsistent billing practices disrupt firm cash flow, infuriate clients, and make collection more difficult.
  5. Be a smart biller:  (a) review “pre-bills” and statements carefully; (b) if  you make a mistake, correct it quickly and accurately the first time; (c) send statements before clients receive their paychecks – usually just before the 15th and again at month end.  If you serve corporate clients, send bills in a manner and format that works for the accounts payable department; (d) always include a due date on all statements (most clients prioritize bills based on due date); (e) offer a carrot instead of a stick.  In lieu of late fees or interest, offer clients a discount if payment is received within 10 days of the billing date.
  6. Do not allow outstanding fees to accumulate during the course of representation.  As soon as a payment is missed, call the client.  Get to the root of the nonpayment.  Is the client dissatisfied?  If a client becomes seriously delinquent, terminate the attorney-client relationship and withdraw from representation if possible.  Re-read last week’s post and comply with all provisions of Oregon RPC 1.16 as well as applicable court rules.  Read more here about the do’s and don’ts when ending representation.
  7. Offer to arbitrate fee disputes through the Oregon State Bar’s Fee Arbitration and Mediation Program or consider other alternative dispute resolution methods.

If you decide to sue a client for fees, consider the following:

  • Will a judgment be collectible if obtained?
  • Do you stand to gain or lose a substantial amount of money?
  • Are there any grounds upon which the client can credibly dispute the debt or any part of it?
  • Have you really listened to your client’s side of the dispute?
  • Was a good result obtained in the underlying case?
  • Has an uninvolved, experienced lawyer reviewed the file for possible malpractice?
  • Will a law suit result in bad publicity reflecting negatively on you or your law firm?
  • Have you offered to arbitrate, compromise or meet the client part way on the amount due?

Most collection problems can be averted at the outset of representation.  A frank discussion of fees, finances, and billing procedures will greatly reduce the possibility of disputes.

[All Rights Reserved 2016 Beverly Michaelis]

The 5 Rules of Alternative Fee Arrangements

Call it an alternative fee agreement (AFA) or a hybrid fee agreement (HFA).  Lawyers are looking for creative ways to appeal to clients who are resisting the traditional hourly rate approach.

In this classic reboot, we examine AFA and HFA options and how you can ethically deploy them in your firm.money-tree

Employment Law HFA

Consider the employment law case that is less than a slam dunk.  You could put in many hours only to see no fee. Ah, the life of a contingent fee practitioner.

Or is it?  One creative lawyer decided to offer his client a hybrid fee arrangement: a reduced hourly rate of $100 per hour with a 25% contingent kicker in the event of a recovery. (Lower than the “going” contingent rate of 33%.)  If the client agrees, and your fee agreement passes the test below, there is nothing wrong with such an arrangement.

Family Law HFA

Among family law practitioners – who are forbidden to take a contingent fee – a popular hybrid fee arrangement incorporates a flat fee earned upon receipt with an hourly rate that kicks in at a specific stage. The flat fee compensates the lawyer for work done in the early stages of a case: initial consultation; file opening; drafting and finalizing the Petition for Dissolution (or preparing a response); serving the opposing party; drafting and serving the first request for production of documents.  The flat fee could encompass additional services – each lawyer can determine where the cut-off should be – but charging a flat fee for time spent from the first consultation through initial discovery is predictable and easy to do.  Again, if the client agrees and your fee agreement passes the test below, this is a perfectly fine arrangement.

Does your HFA or AFA Pass the Test?

To create an ethical alternative fee arrangement, apply the rule of the 5 “C’s:”

  • Clarity
  • Completeness
  • Compliant
  • Common sense
  • Can’t be excessive

Clarity

If a fee agreement is ambiguous, it must be construed against the lawyer. Cf. OSB Formal Ethics Op No 2005-15.” Oregon State Bar (OSB) Formal Ethics Opinion No. 2005-124.

If you decide to experiment with your fee agreements, strive to be as clear as possible.  With the employment law scenario, the main challenge is the math.  Conceptually the idea is pretty clear.  With the family law scenario, the number one problem is failing to explain what the client is “buying” with the initial flat fee earned upon receipt.  Just how far does the $1,000 initial payment go and when does the $200 per hour rate kick in?

Completeness

Consider all possibilities.  A good example in the employment law context: if you have the right to recover attorneys fees, address this in your agreement.  See OSB Formal Ethics Opinion No. 2005-69  [Attorney fee awards are the property of the client unless “the terms of the fee agreement expressly provided that Lawyer was entitled to the greater of the fee computed thereunder or the court-awarded amount.”]

Fee agreements should address all conceivable outcomes.

Compliant

May I also suggest reviewing this excellent article: Helen Hierschbiel, “Alternative Pricing Models: What’s in a Fee?,” Oregon State Bar Bulletin (November 2011).  Practice Tip: flat fee earned upon receipt fee agreements must include special “disclosure” language set out in Oregon RPC 1.5.

Common Sense

Don’t torture yourself or the client trying to figure out the math of your hybrid fee agreement.  Once you’ve developed a sample, run it by your next door neighbor or another lay person.  Ideally, run it by several nonlawyer friends.  Does it make sense to them?  If not, go back to the drawing board.  Remember: “If a fee agreement is ambiguous, it must be construed against the lawyer. Cf. OSB Formal Ethics Op No 2005-15.” Oregon State Bar (OSB) Formal Ethics Opinion No. 2005-124.

Can’t be Excessive

“The Oregon State Bar Legal Ethics Committee has also said that split contingent/hourly fee agreements do not automatically violate the rules of professional conduct. See OSB Formal Ethics Opinion No. 2005-54. However, the committee cautions lawyers that a fee that appears to be lawful at the outset, may turn out to be clearly excessive in the end….” Helen Hierschbiel, “Alternative Pricing Models: What’s in a Fee?,” Oregon State Bar Bulletin (November 2011).

All fees are subject to a look-back at the end of the case. The employment law HFA is more likely to be challenged than the family law HFA.  In the employment law scenario, tabulate the total hourly fees charged to the client and your contingent fee share of the recovery.  Add the two together.  Do these exceed the standard contingent rate of one-third?  If they do, you may be on perilous ground. Helen’s article, Alternative Pricing Models: What’s in a Fee? discusses all the factors that go into gauging the reasonableness of a fee.

Parting Thoughts

Developing alternative fee agreements that are ethically compliant and legally enforceable can be done – don’t get discouraged.  Check out the ABA book: Alternative Fees for Business Lawyers and Their ClientsIf you are an Oregon lawyer but do not belong to the ABA, use the Professional Liability Fund discount code at checkout to save money: OSBPLF.

[All Rights Reserved 2016 Beverly Michaelis]

Postscript

Thanks for joining me during Finance Month.  March will begin with two posts on technology.

Doubling Down on Your Bill When the Client Doesn’t Pay

 

We’ve all been there.  Non-paying clients can be incredibly frustrating, especially if you went out of your way to offer a reduced rate or special payment plan.  But before you resort to punitive measures, take a moment to think it through.

  • A literal doubling of your fee is likely to be challenged as excessive.  Review Oregon RPC 1.5.
  • Consider whether the proposed punitive action will make a difference.  Do you truly believe that doubling your fee will motivate the client to pay?
  • Collections can be a landmine of legal traps and pitfalls.

What Should You Do If the Client Doesn’t Pay?

In the case of non-paying clients, it may be appropriate and necessary to withdraw. If so, take care to abide by your ethical responsibilities.  If you represent the client before a tribunal and must file a formal Motion to Withdraw, read and understand Oregon Formal Opinion No. 2011-185 – Withdrawal from Litigation: Client Confidences.  If you have any doubt about what you can or cannot tell the court, seek advice from the Oregon State Bar General Counsel’s office or contact a lawyer colleague who specializes in ethics defense.

You should also consider ordering one (or more) of the free CLEs offered by the PLF on managing law firm finances:

  • 50 Shades of Green: Building a Profitable Solo or Small Firm Practice
  • Building and Maintaining a Profitable and Efficient Law Practice 
  • Increasing Revenue: Updated Strategies for Attracting New Clients and More Effectively Managing an Existing Client Base 
  • Money Matters 

These CLEs will help you to:

  • Banish personal habits that cause you to under earn
  • Identify profitable practice areas
  • Analyze overhead, liquidity ratios, budget, turnover, and realization rates
  • Establish effective billing practices
  • Reduce accounts receivable
  • Develop case and client selection skills to eliminate payment problems

Visit the PLF Website for details.  Select CLE > Past CLE.

[All Rights Reserved 2016 Beverly Michaelis]