have disagreed with yesterday’s post when outsourcing, just pass on the cost
(June 28, 2005). I believe a lawyer/firm should (1) tell a client whenever legal
services are going to be done by a “temporary” lawyer outside of the firm (or,
as in the article that touched off the topic, by individuals overseas not licensed
to practice in the firm’s jurisdiction); and (2) charge the client no more than the
actual amount paid for the outsourced services (plus any properly allocated
overhead), unless the client is fully informed that a surcharge is being added
and told the amount of the surchage.
First, let me reiterate a few tenets from my philosophy of “legal ethics”:
For me, what is “ethical” is broader than “what you can
get away with under the Rules or Code.” [Carolyn asked
"What's the most equitable -- and ethical -- result?"]
The legal profession continually fails to apply fidicuary principles
in the context of fees — which is where it often means the most
to clients. (see prior post)
The good ficudiary keeps the client fully informed and follows
all the “shoulds”, not just the “musts” found in ethical opinions.
When it comes to fees, it is particularly obvious that lawyer
self-regulation has left the foxes guarding the hen house, with
only a few sleepy watchdogs watching the foxes.
That being said, the opinions cited by Lisa Solomon are not convincing
regarding what a law firm’s obligation should be to a client when legal
services are provided by temporary lawyers or off-shore lawyers. ABA
Ethics Opinion 88-356, which is stressed by Lisa, is particularly unpersuasive
DISCLOSURE of OUTSOURCED Legal Services
Op. 88-356 correctly concludes that “where the temporary lawyer is performing
independent work for a client without the close supervision of a lawyer
associated with the law firm, the client must be advised of the fact that the
temporary lawyer will work on the client’s matter and the consent of the client
must be obtained.” Disagreeing with this limited obligation, ethics committees in
numerous states have correctly expanded the disclosure-agreement mandate to
all or virtually all utilization of out-of-firm legal service providers.
See Oliver v. Board of Governors, Kentucky Bar Ass’n, (Ky. 1989),
779 SW 2d 212 (disclosure should be made of a firm’s intention to use a
temporary attorney “in any capacity, in order to allow the client to make
an intelligent decision whether on not to consent to such an arrangement.”
Ill. St. Bar Ass’n Advisory Op. on Prof. Conduct Op. 92-97 (Jan. 22, 1993);
Ohio Bd. of Comm’rs on Grievances and Discipl. Op. No. 90-23 (Dec. 14,
1990) (requiring disclosure of temporary lawyers under Code of Prof.
Conduct); Bar of City of New York Comm. on Prof. and Judicial Ethics,
Op. No. 1988-3 (Mar. 31, 1988), reaff’d, Ethics Op. 1989-2 (May 10,
1989) (“The Committee continues to believe that the law firm has an ethical
obligation in all cases . . . to make full disclosure in advance to the client of
the temporary lawyer’s participation . . . and to obtain the client’s consent.”);
D.C. Ethics Opinion 284 (disclosure required “whenever the proposed use
of a temporary lawyer to perform work on the client’s matter appears
reasonably likely to be material to the representation or to affect the
client’s reasonable expectations.”); ”Contract Lawyers in Kentucky, by
Del O’Roark, KBA Bench & Bar, Vol. 61 No. 2, Spring 1997; and ”The
Economics and Ethics of Hiring a Temporary Lawyer,” by Peter Gardner, re
Vermont and New Hampshire, and fn. 31 on other sources).
PERMISSIBLE FEES on OUTSOURCED Legal Services
Once you have disclosure to the client of the use of outsourcing for legal services, you
will surely be faced with (1) a client smart enough to ask, “how much will the cost you
and how much will you charge me? or (2) a client not smart enough to ask that question.
In either situation, the ethical fiduciary will fully inform the client of the financial arrange-
ment (what else is a fiduciary for?), allowing the client to enter into informed decision-
making or negotiation.
Lisa Solomon points primarily to ABA Op. 88-356 for the proposition that no disclosure
is necessary of the amount paid by the firm for the services, and the conclusion that profit
can be added to the cost entailed by the firm. Unfortunately, there is very little reasoning
in the ABA Opinion. Here’s the entire discussion.
“Assuming that a law firm simply pays the temporary lawyer reasonable
compensation for the services performed for the firm and does not charge
the payments thereafter to the client as a disbursement, the firm has no
temporary lawyer. Rule 1.5(e), relating to division of a fee between lawyers,
does not apply in this instance because the gross fee the client pays the firm
is not shared with the temporary lawyer. The payments to the temporary
lawyer are like compensation paid to nonlawyer employees for services and
could also include a percentage of firm net profits without violation of the Rules
or the predecessor Code.”
The same approach is taken by other Committees after Op. 88-356. Beyond saying
that the total fee has to be reasonable, there are two themes:
(1) Just don’t call it a disbursement, and you can charge more than cost;
(2) It’s not a “split fee”, so you don’t have to disclose anything about the
This is, for me, not the reaction of a proud profession of fiduciaries who always put
the client’s interests first. It’s lawyers “lawyering” and using semantics to get more
money from their clients. The Virginia Bar Ethics Opinion 1712 (1998) spelled out
“Whether a law firm retaining a Lawyer Temp must
disclose its payment arrangement with the staffing agency
to the client depends on the particular facts. ABA Opinion
88-356 stated, and California Formal Opinion 1994-138
agreed, that when the hiring firm does not charge the Lawyer
Temp’s compensation to the client as a disbursement, there
is no obligation to disclose the compensation arrangement
with the Lawyer Temp to the client. On the other hand, if
the payment made to the staffing agency isbilled to the client
as a disbursement, or a cost advanced on the client’s behalf
(for example, “To-Reimbursement of costs advanced to staffing
agency for temporary lawyer”), then the hiring firm must disclose
the actual amount of the disbursement and also disclose any
mark-up of or surcharge on the amount actually disbursed to
the staffing agency.”
“. . . Since the charge is not represented to be the hiring law
firm’s actual disbursement of funds for client-reimbursement,
the hiring firm does not thereby misrepresent as an out-of-pocket
disbursement what is actually its out-of-pocket disbursement
plus a mark-up.”
The Virginia committee says whether there is a need to disclose the
financial arrangement for the temporary services ”depends on the facts.”
However, the facts are the same — it is only the nomenclature used on the
Billing Invoice that is different.
A similar bit of lawyering is done with the “fee split” issue. The Committees
should be saying: “What is this situation most like? Isn’t it very analogous to
a fee split? The money that the client pays for the package of legal services
goes in reality to two different legal service providers. We should give the
client the same treatment afforded in Rule 1.5(e) – full disclosure of the
arrangement and the right to consent to it — “including the share each lawyer
will receive” — before the arrangement is made.
Instead, the Friendly Watchdogs say, “Hey, it’s not a fee split, the client just
pays a single bill to the original law firm. See [how clever we are], no fee is
actually split.” So eager were they to find this loophole, none of the Ethics
Committees have bothered to acknowlege the wording in Comment  to
Model Rule 1.5. It says very clearly:
“A division of fee is a single billing to a client covering the fee of
two or more lawyers who are not in the same firm.”
It is difficult to say which principal (other than the one saying the client always
gets the short side of the wishbone) is being served by ignoring how much this
“division of fee” parallels the Temporary/Outsourced Lawyer situation — where
the client receives a single billing covering the legal services of both the original
firm and the “temporary lawyer.”
Surely, the client’s right to disclosure and consent can’t depend on
whether the Temporary Lawyer is paid before or after the client
pays the bill that charges for the Temp’s legal services.
The Virginia ethics committee, along with Carolyn Elefant, make an analogy,
to billing for associate hours, which is more than the associate is paid per
hour in salary. Ethics Opinion 1712 gushes:
“That the associate is an employee and the Lawyer Temp is
an independent contractor seem to be a distinction without a
difference in terms of non-disclosure of the spread between
compensation paid and rates charged. In each instance the
spread, or the mark-up, is a function of the cost of doing
business including fixed and variable overhead expenses, as
well as a component for profit. In each instance, too, DR 2-
105(A)(1) mandates that a lawyer’s fees shall be reasonable.”
With all due respect, there seem to be quite a few important differences:
Virtually every client is well aware that billing rates for associates
are higher than associate hourly pay. They expect that the lawyer
is paying benefits, and overhead and trying to make a profit from
the working of associates.
Some savvy clients are very much aware of how much associates
are likely to be making and may very well negotiate their hourly rates
using that information.
The firm has significant overhead expenses and sunk costs related to
each associate, and has every right to make a profit for taking the
entrepeneurial risk and using the resources well. The firm also cannot
readily lay off associates when times get slow — not without greatly
affecting morale and perhaps provoking law suits.
Firms often point to figures showing that per-associate
overhead is an enormous percentage of their hourly billing
rates. Why aren’t they willing to disclose similar ratios for
cost-plus-profit billing that is based on $10 per hour legal
services performed in India?
The firm has virtually no overhead expenses or sunk costs related to the
Temp — independent contractor — lawyer. The firm can also use temporary
services when needed and eschew them when not needed. There is no
entrepeneurial risk. The risk of not being fully paid for the disbursements
for temporary lawyers is not different than other kind of third-party costs.
The firm has ways to guard against that risk.
Most clients would be surprised and irked to know that a law firm was
attempting to create profit-centers for services that are obtained outside the
firm — especially if such services have traditionally been reimbursed by the
client as disbursements and costs that are charged separately.
Let’s end with Carolyn’s ultimate question: “Finally, if profit is what it takes to encourage
this type of arrangement – which is clearly beneficial to a conventional law firm set up,
then why not reward those attorneys who do it? “ There are already plenty of reasons
for law firms to use these arrangements. As Del O’Roark points out, “contract lawyering
offers flexibility to the profession. It allows a firm to leverage its output in peak times or
meet one-time requirements for a lawyer with special expertise without taking on all the
overhead.” Peter Gardner echoes these conclusions:
“It appears that temporary lawyers can, indeed, be an integral part
of a firm’s business strategy as long as applicable professional ethics
provisions are understood and complied with. A temporary lawyer is
typically an experienced independent contractor who provides consistent,
high quality work product on specific or general projects for law firms
and solo practitioners (I will refer to both as “firms”). A temporary lawyer
enables a firm to manage work flow and resources efficiently and cost-
effectively, and may even be less expensive to a client than were a firm
to engage outside counsel.”
“Outsourcing” can make a law firm more competive — more responsive to the needs
of the client (so long as quality is assured and efficiencies realized). Firms should not
need extra inducement to adopt the practice.
If traditional rules on the treatment of disbursements and dividing fees make sense
ethically — and I believe they do — they should be followed regarding outsourcing and
the use of temporary lawyers. Fully-informed clients should be allowed to make
reasoned decisions and to bargain from strength with their fiduciary-lawyers. We
should not leave the decision to use a temporary lawyer or off-shore legal service
provider solely to the lawyer. And, we should not leave it to the lawyer to decide
the size of any mark-up above the firm’s costs for such services.
Carolyn Elefant has written more today on these issues.
Showing her mixed feelings on whether to use mark-ups.
June 29, 2005
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