Carolyn Elefant of MyShingle has asked “Is There An Ethical Obligation to
Pass On Cost Savings from Outsourcing?” After checking my own viscera,
and confirming them with Model Rule 1.5, and Comments thereto, and with the
Statement of Principles [in Billing for Services and Disbursements] of The Task
Force on Lawyer Business Ethics (ABA, 1996) (excerpts via LawCost.com), I’ve
concluded:
Every arrangement for fees related to legal services and
disbursements must be premised on “at the least, a fully
informed client.” Statement of Principles
A law firm that plans to outsource a client’s legal services
must fully disclose the arrangement to the client, and must
receive the client’s agreement. (see Model Rule 1.5(e) re
division of fees; Principles on Staffing)
“complaint Bill” “It is the obligation of the lawyer and law firm to
assure that the client fully understands and agrees to the basis for
billing for disbursements and other charges.” This includes
“whether overhead other than direct charges paid to the
vendor are included.” Principles on Disbursements/Costs.
A lawyer shall not make an agreement for, charge, or collect . . .
an unreasonable amount for expenses” (Rule 1.5 (a)), but may
only charge “a reasonable amount to which the client has agreed
in advance or . . . an amount that reasonably reflects the cost
incurred by the lawyer.” (Comment [1] to Rule 1.5)
A law firm wouldn’t charge a client a “profit margin” above the fee of an expert
consultant or witness, and therefore should not do so with fees for outsourced
legal services. If it chooses, it might allocate reasonable overhead for arranging
the outsourcing (which is a “cost” to the firm), but it is difficult to imagine that this
amount is anything but de minimis. (I presume that attorney time spent within the
firm reviewing the work-product from out-of-firm sources will be billed to the client
or has otherwise been factored into the fees be charged.)
Therefore, I agree with George Washington University law professor Thomas
Morgan, who is quoted recently saying that ethics rules require law firms to pass on to
clients cost savings from outsourcing. (see Made in India By Daniel Brook, Legal
Affairs (May/June 2005). Unless Lisa Solomon is equating a “reasonable measure
of profit” with “properly allocated overhead,” I disagree with the promotional materials
written by Lisa, where she says that an “attorney may charge the client a premium or
reasonable measure of profit in excess of the research and writing provider’s cost to
the attorney, as long as the total charges to the client are reasonable.”
You can find relevant excerpts from the ethics materials cited in
this post, here.
city life–
even melting snow
costs money
spring rain–
hitting the windows
that cost me so much
saved from the fire
a nest in its beak…
the crow moves on
ISSA translated by David G. Lanoue
June 28, 2005
when outsourcing, just pass on the cost
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Although I enjoy your blog and ordinarily agree with your analyses, I must strongly disagree with your conclusion that it is not ethical for attorneys to charge clients anything more than the actual amount paid for outsourced legal research and writing services.
As explained on my website, with one exception, all of the bar associations that have addressed the issue—including, most notably, the ABA—have determined that an attorney may charge the client a premium or reasonable measure of profit in excess of the research and writing provider’s cost to the attorney, as long as the total charges to the client are reasonable. (The sole exception is the Maryland Bar Association, which did not give any reason or cite any rule in support of its position).
The bar associations have addressed the issue in the context of questions concerning the use of “contract” or “temporary” lawyers. The following ethics opinions address this question: ABA Formal Op. 88-356; Alaska Bar Ass’n Ethics Op. 96-1; Calif. State Bar Ass’n Formal Op. 1994-138; Colo. Bar Ass’n Ethics Op. 105; D. C. Bar Op. 284; Ga. Formal Advisory Op. 97-1 (June 5, 1998); ISBA Op. No. 98-02; Oliver v. Board of Governors, Kentucky Bar Ass’n, 779 S.W.2d 212 (Ky. 1989); S.C. Op. 91-09 (1991); Virginia Legal Ethics Op. 1712 (July 22, 1998); and Wis. Op. E-94-4. Many of these opinions adopt ABA Formal Op. 88-356 in whole or in part, and many also note the importance of supervision by the hiring attorney. A lawyer admitted to practice in at least one US jurisdiction, who happens to provide legal research and writing services only (as distinguished from doing depositions or making court appearances) is still a “temporary attorney” covered by these opinions.
The basic fallacy underlying your analysis is that the cost of outsourced legal research and writing should be billed out to the client as a disbursement. In fact, ABA Formal Op. 88-356 states: “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 law firm has no obligation to reveal to the client the compensation arrangement with the temporary lawyer . . . .”
Furthermore, as I also point out on my website, regardless of whether or not an attorney chooses to charge the client more than the attorney pays for legal research and writing services, outsourcing is still cost-effective for the client, since even a rate that includes a reasonable profit to the attorney will generally be less than the attorney’s own hourly rate.
The article referenced in your post simply states that “Thomas Morgan, the professional responsibility expert, says bar association ethics rules require law firms to pass on to clients cost savings from outsourcing.” The article does not state the basis for Mr. Morgan’s opinion.
Finally, as noted above, my comments pertain to research and writing providers who, like me, are admitted to practice in at least one US jurisdiction. I agree with the proposition that a law firm should disclose to a client if an individual not admitted to any state bar (such as an Indian attorney) is performing work for the client, just as the firm would disclose the fact that research was being performed by a law student by identifying the student as a law clerk.
I hope you will revisit this issue in your blog once you have reviewed the ethics opinions cited above.
Comment by Lisa Solomon — June 28, 2005 @ 9:33 pm
Although I enjoy your blog and ordinarily agree with your analyses, I must strongly disagree with your conclusion that it is not ethical for attorneys to charge clients anything more than the actual amount paid for outsourced legal research and writing services.
As explained on my website, with one exception, all of the bar associations that have addressed the issue—including, most notably, the ABA—have determined that an attorney may charge the client a premium or reasonable measure of profit in excess of the research and writing provider’s cost to the attorney, as long as the total charges to the client are reasonable. (The sole exception is the Maryland Bar Association, which did not give any reason or cite any rule in support of its position).
The bar associations have addressed the issue in the context of questions concerning the use of “contract” or “temporary” lawyers. The following ethics opinions address this question: ABA Formal Op. 88-356; Alaska Bar Ass’n Ethics Op. 96-1; Calif. State Bar Ass’n Formal Op. 1994-138; Colo. Bar Ass’n Ethics Op. 105; D. C. Bar Op. 284; Ga. Formal Advisory Op. 97-1 (June 5, 1998); ISBA Op. No. 98-02; Oliver v. Board of Governors, Kentucky Bar Ass’n, 779 S.W.2d 212 (Ky. 1989); S.C. Op. 91-09 (1991); Virginia Legal Ethics Op. 1712 (July 22, 1998); and Wis. Op. E-94-4. Many of these opinions adopt ABA Formal Op. 88-356 in whole or in part, and many also note the importance of supervision by the hiring attorney. A lawyer admitted to practice in at least one US jurisdiction, who happens to provide legal research and writing services only (as distinguished from doing depositions or making court appearances) is still a “temporary attorney” covered by these opinions.
The basic fallacy underlying your analysis is that the cost of outsourced legal research and writing should be billed out to the client as a disbursement. In fact, ABA Formal Op. 88-356 states: “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 law firm has no obligation to reveal to the client the compensation arrangement with the temporary lawyer . . . .”
Furthermore, as I also point out on my website, regardless of whether or not an attorney chooses to charge the client more than the attorney pays for legal research and writing services, outsourcing is still cost-effective for the client, since even a rate that includes a reasonable profit to the attorney will generally be less than the attorney’s own hourly rate.
The article referenced in your post simply states that “Thomas Morgan, the professional responsibility expert, says bar association ethics rules require law firms to pass on to clients cost savings from outsourcing.” The article does not state the basis for Mr. Morgan’s opinion.
Finally, as noted above, my comments pertain to research and writing providers who, like me, are admitted to practice in at least one US jurisdiction. I agree with the proposition that a law firm should disclose to a client if an individual not admitted to any state bar (such as an Indian attorney) is performing work for the client, just as the firm would disclose the fact that research was being performed by a law student by identifying the student as a law clerk.
I hope you will revisit this issue in your blog once you have reviewed the ethics opinions cited above.
Comment by Lisa Solomon — June 28, 2005 @ 9:33 pm
David,
I have to disagree with your position here as well. Law firms routinely bill associates’ hours at far more than associates are compensated, even when you add in benefits, training and related overhead like secretaries and overhead. Thus, you may have a law firm charging $200/hr for a first year associate’s time and upwards of $300 for a sixth or seventh year. Isn’t it a far better situation where a firm hires an experienced attorney, perhaps with a decade of experience, on a contract basis, pays that attorney $125 an hour and bills the client $200/hr. Seems that everyone comes out ahead?
You may ask why the attorney should be able to profit at all? Well, first of all, many attorneys who sub-contract bear the risk of payment, often paying a per diem person up front before collecting. Thus, an attorney has a risk of non-collection. Also, the attorney who has the case has invested money in marketing to bring that client in. 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?
Comment by Carolyn Elefant — June 28, 2005 @ 9:54 pm
David,
I have to disagree with your position here as well. Law firms routinely bill associates’ hours at far more than associates are compensated, even when you add in benefits, training and related overhead like secretaries and overhead. Thus, you may have a law firm charging $200/hr for a first year associate’s time and upwards of $300 for a sixth or seventh year. Isn’t it a far better situation where a firm hires an experienced attorney, perhaps with a decade of experience, on a contract basis, pays that attorney $125 an hour and bills the client $200/hr. Seems that everyone comes out ahead?
You may ask why the attorney should be able to profit at all? Well, first of all, many attorneys who sub-contract bear the risk of payment, often paying a per diem person up front before collecting. Thus, an attorney has a risk of non-collection. Also, the attorney who has the case has invested money in marketing to bring that client in. 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?
Comment by Carolyn Elefant — June 28, 2005 @ 9:54 pm
I just wanted to clarify above that though associates are billed out at $200/hr, they do not earn anywhere near that much in salary – e.g., at 2000 billables a year, $200/hr is $400,000 and a first year makes about 1/4 of that.
Comment by Carolyn Elefant — June 28, 2005 @ 9:55 pm
I just wanted to clarify above that though associates are billed out at $200/hr, they do not earn anywhere near that much in salary – e.g., at 2000 billables a year, $200/hr is $400,000 and a first year makes about 1/4 of that.
Comment by Carolyn Elefant — June 28, 2005 @ 9:55 pm
Carolyn, if you’re so opinionated on this topic, why didn’t you voice your sentiments at your website? I haven’t got time to respond in detail now.
Comment by David Giacalone — June 28, 2005 @ 9:58 pm
Carolyn, if you’re so opinionated on this topic, why didn’t you voice your sentiments at your website? I haven’t got time to respond in detail now.
Comment by David Giacalone — June 28, 2005 @ 9:58 pm
Hi, Lisa. Thanks for taking the time to Comment. You don’t need an excuse to differ with me. As I just said in an email to you, I do not have access to the ABA opinion and I hope you can get me a copy, so that I can put it in context and give your viewpoint more consideration.
By the way, when I used to do an occasional brief or motion for another firm, I insisted that the client be charged no more than they paid me (which was less than half of their usual hourly rate).
Comment by David Giacalone — June 28, 2005 @ 10:09 pm
Hi, Lisa. Thanks for taking the time to Comment. You don’t need an excuse to differ with me. As I just said in an email to you, I do not have access to the ABA opinion and I hope you can get me a copy, so that I can put it in context and give your viewpoint more consideration.
By the way, when I used to do an occasional brief or motion for another firm, I insisted that the client be charged no more than they paid me (which was less than half of their usual hourly rate).
Comment by David Giacalone — June 28, 2005 @ 10:09 pm