How to Avoid Shocking Legal Bills

As an entrepreneur or small business owner, nothing can strike terror into your heart like the arrival of a fat envelope containing what you know to be the latest invoice from your law firm. You open it, race to the bottom of the last page, only to see that the number is worse by half than your wildest nightmare. Then you notice that the billings only go through March 15th and it's now April 30th, so another six weeks' worth of time has already been racked up that doesn't even appear on the damned thing.

I have painful memories of these envelopes. One contained a $14,000 shock, another a $30,000 jolt, yet another an $80,000 knot in my stomach.

Law firms, particularly the large ones, have gotten away with this for far too long. If my advertising firm were to send a client a bill for work that was never authorized — or for work outside the project scope that I thought was a good idea but had never discussed with anyone — the client would be outraged. And rightly so. Yet big law firms do this kind of thing all the time.

It doesn't have to be this way. You don't have to resign yourself to sickening surprises or invoices that destroy your cash flow projections. Here's what you can, and should, be doing:

Find good attorneys who have voluntarily branched out on their own. Specifically, look for a seasoned attorney with a background at a big firm — someone who has the experience to handle complex cases requiring multiple specialties but who got fed up with the big-law-firm rat race. These attorneys often have rates up to 50% lower than what large firms were charging for their services. Their customer service is usually a lot better, too.

Many independent attorneys have great networks of specialists who have also gone independent, so you don't have to give up the scope of expertise you assume you'll get at a big firm. And the clock won't be running for your introductory call with a specialist, unlike at a large firm where the clock is running for everything. You'll also reduce billing for background conferring — you know, those bills you get that have names of three other attorneys on them who you've never heard of and never dealt with? — that can happen at a large firm without your knowing about it.

Ask for estimates in advance. Need a new client agreement drafted? Ask what that's going to cost. A private placement memorandum? Ask again. You don't have to treat a relationship with an attorney like a relationship with the salesperson at Tiffany's, where you're embarrassed to ask what something's going to cost. It's not a sign of inferiority or lower economic class to be clear about what you're spending. It's responsible business practice. If billings go substantially over the estimate, you'll have a solid basis for negotiating. And you don't have to worry about damaging your relationship with your attorney if you question the bill. If it's way over the estimate, your attorney will be expecting your call.

Ask your attorney to check in at $1,000 increments. Frequent check-ins ensure that you control the spicket and keep you on top of what you're spending so that you never get surprised. By asking your attorney check in at specific billing intervals, you make sure that he or she discusses and gets your approval for expanded scopes of work you might not have known about — often research, which can eat up gobs of time.

Don't let months go by without receiving an invoice. You should get one each month, even if you've agreed to pricing on a project rather than hourly basis. Some attorneys procrastinate on invoicing--don't let them. When four months of billings hit you all at once, it can be a really unpleasant surprise.

Have a tracking system. Be clear about the amount of time you've authorized the attorney to spend on your case. Keep a phone log detailing when calls took place, how long they lasted, and what topics were covered.

Make sure your agreement with your attorney contemplates the specifics. My former company, Pallotta TeamWorks, had the briefest of agreements with a firm handling litigation for us on a contingency basis. It had a clause that said the firm was entitled to a percentage (let's say 25%) of "all economic benefit" they produced. That meant that the larger (and more ludicrous and therefore easier to defeat) a claim was against us, the more money they'd be entitled to. Say someone sued us for $10 billion for tripping over the carpet and the judge laughed them out of court. The law firm would be entitled to $2.5 billion, because their definition of "economic benefit" included any money they saved us. That clause caused a lot of unnecessary tension between us and the firm. Many lawyers are like barbers with bad haircuts: Their own business agreements aren't as good as those they draft for clients. Make sure that they are.

If your attorney won't agree to any of this, find someone else.

The bottom line: Unless you've hired a Beverly Hills interior designer, you should never expect to pay exorbitant invoices for huge amounts of work that you never asked for or approved. Don't be played for a fool.