Law Firms Suing For Fees: Ethical Or Not?

Law firms suing former clients for unpaid fees is not uncommon, but it is a complex issue. In the United States, the American Rule dictates that each side is responsible for paying their legal fees, even if they win at trial. However, there are exceptions to this rule, and in some cases, it is possible to recover attorney fees from the party at fault. While suing for legal fees can be an option, it is important to consider the risks and potential drawbacks, such as the time and resources required, the possibility of counterclaims, and the collectability of the judgment.

Suing for legal fees is common

There are exceptions to the "American Rule", where you may be able to persuade a court to order the other side to pay your legal fees. These exceptions include fee-shifting laws, which require the losing side to pay the winner's fees and expenses in some types of cases. State and federal statutes may include these "loser-pays" types of rules to help people who are at a financial disadvantage or to punish bad behaviour.

Additionally, you can include a provision in your contract stating that the prevailing party in a lawsuit is entitled to legal fees. This provision can help even the playing field, especially for small companies or individuals going up against larger entities with more resources. However, it is important to carefully consider the potential risks and benefits of suing for legal fees, as it can be a lengthy and costly process that may not always result in a favourable outcome.

In summary, while suing for legal fees is common, it is not a guaranteed outcome and there are important considerations to keep in mind before pursuing this course of action.

The American Rule

In the US justice system, the American Rule is the default legal rule controlling the assessment of attorneys' fees arising out of litigation. The rule states that each party to a legal matter must pay their own attorney's fees, regardless of the outcome of the case. This rule is in place to ensure that people with legitimate lawsuits are not discouraged from filing them due to the fear of having to pay for legal fees on both sides.

There are also exceptions to the American Rule when it is provided by contract or statute. For example, if two parties enter into a contract that specifies the payment of attorney fees to the prevailing party, they would be entitled to seek those fees. Additionally, in California, the Consumers Legal Remedies Act allows plaintiffs to recover attorney's fees, and in insurance bad faith cases, a policyholder may be able to recover attorney's fees as a separate component of damages.

It is important to note that suing for legal fees is common in many lawsuits, but it does not guarantee that a judge will award them. Some states have prevailing party provisions, where the losing party must pay the winning side's legal fees in certain cases. These provisions can be included in contracts to "even the playing field" and put both parties in a position to potentially recover their attorney's fees.

Exceptions to the American Rule

The American Rule, in place in states like California and Nevada, dictates that each party in a legal dispute must pay its own attorney's fees, regardless of the outcome of the case. However, there are several exceptions to this rule where a court may order one party to pay the other party's legal fees.

Firstly, in California, the Consumers Legal Remedies Act allows plaintiffs to recover attorney's fees. Similarly, in insurance bad faith cases, a policyholder may be able to recover attorney's fees as a separate component of damages. Additionally, in Nevada, Rule 68 of the Civil Procedure states that a party that declines a pretrial settlement offer and subsequently fails to obtain a better result at trial must pay the other party's reasonable attorney's fees and costs incurred after the offer was given.

Secondly, in cases involving government entities, anti-discrimination laws, consumer protection cases, or the public interest, some states permit the reimbursement of the winning side's legal fees by the losing side. For instance, government contractors with contracts involving expenditures exceeding $25,000 must file a payment bond, and the prevailing party in any action against the surety on the bond is entitled to reasonable attorney's fees.

Thirdly, if a pre-existing contract between parties stipulates that one side must pay the other side's legal fees in a dispute, a judge may enforce this agreement instead of adhering to the American Rule. This is particularly relevant in situations where one party is forced to defend itself due to another's conduct or mistake.

Lastly, the American common law permits attorney's fee awards under the "bad faith" and "common fund" theories. The "bad faith" theory allows an award against a party that has willfully disobeyed a court order or acted in bad faith, while the "common fund" theory enables a court to award attorney's fees to a party whose legal action creates or preserves a monetary fund or obtains a benefit for others and itself.

Risk of suing a former client for unpaid fees

Suing a former client for unpaid fees can be a risky and costly affair, as it may lead to a lengthy and expensive legal battle with no guaranteed outcome. In the case of Law Firm v Ajluni, the trial and appellate proceedings lasted a total of five years, indicating the potential for a prolonged and drawn-out process.

One significant risk to consider is the possibility of a counterclaim for malpractice, which could result in increased premiums for malpractice insurance or even exclusion from coverage. This double-edged scenario, where a claim for unpaid fees results in a counterclaim, puts law firms in a vulnerable position, potentially impacting their LPL insurance coverage.

Additionally, there is the risk that the former client may be "judgement proof", meaning they have no assets to collect even if a judgment is awarded in the law firm's favor. This scenario would result in a significant amount of time and resource expenditure for only a theoretical reward.

To mitigate these risks, law firms should consider the following:

• Reviewing their malpractice insurance policy to understand the potential implications of a counterclaim.
• Planning ahead by putting fee agreements in writing and including provisions for binding arbitration in case of fee disputes.
• Communicating expectations of timely payment and requesting clients to maintain a balance in the firm's trust account to cover anticipated costs.
• Billing frequently and ending the attorney-client relationship if fees remain unpaid after a set period.
• Requiring a substantial upfront cash retainer to reduce the risk of non-payment.

While suing for unpaid fees is an option, it is important to carefully consider the potential drawbacks and take proactive steps to minimize risks and protect the firm's interests.

Fee agreements

In the United States, the "American Rule" is the default position, whereby each party is responsible for paying their own legal fees, even if they win the case. This can be problematic for smaller companies, who may be forced to abandon a valid claim because they cannot afford to litigate.

However, there are exceptions to the "American Rule", and lawyers may use different types of fee agreements depending on the nature of the case and representation. Many lawyers charge by the hour for work done, with rates varying from $100 to $500 an hour or more. This fee often depends on the type of legal issue, region, reputation, and experience of the lawyer. Alternatively, a flat fee agreement may be used for more simple legal cases, such as fighting a traffic ticket, making a simple will, or handling an uncontested divorce.

There are ways to recover attorney's fees, and these are important to understand before beginning a lawsuit. For example, if you are forced to defend yourself in a case due to someone else's conduct and you prevail, you can collect your attorney's fees from the party truly at fault. Additionally, if your contracts provide that the prevailing party in a lawsuit is entitled to fees, you can avoid the "American Rule" and recover your attorney's fees. This provision is easy to include, and you should always insist on it if you are concerned about recovering your fees. However, these provisions can also cause parties to litigate to the death, as fees can become so high that they exceed the settlement value of the case.

Suing for legal fees is common in many lawsuits, but it is important to note that it does not guarantee that the judge will award them to you. If you are represented by a free legal service, you may not have to pay for a lawyer at all. In some states, laws require the party that loses a lawsuit to pay the winning side's legal fees in certain cases, known as prevailing party provisions.

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