Contract Attorney use has been estimated in early 1998 to be a $500 Million industry growing 30% annually. “More Law Firms Hiring From the Temporary Pool”, NY Times, Feb. 24, 1998. This growth was corroborated locally by a recent survey of Pennsylvania law firms showing 77% of Pennsylvania’s law firms are using contract attorneys and their numbers are growing. “Managing Partner Survey”, PaLaw 1997. Based on these statistics, if you are an attorney or client of law firms, you have probably already encountered the billing or payment issue surrounding the use of contract attorneys. In addition, if you are a client, you might not even be aware that you have used contract attorneys if the law firm has not told you. Is nondisclosure of contract attorney use legal or appropriate? This article will attempt to answer these two issues.
The majority of guidance governing the use of contract attorneys is found in the American Bar Association’s (“ABA”) Formal Opinions which support law firms profiting from their use of contract attorneys even without client disclosure. As this article will explain, there are also business reasons why this is the correct decision even though it might initially come as a surprise to some attorneys and clients.
ABA Formal Opinion 88-356 (the “ABA Opinion”) provides general guidance on contract attorney use. It advises that law firms need not disclose the use of contract attorneys to the client “where the temporary lawyer is working under the direct supervision of a lawyer associated with the firm”. ABA Opinion, Page 10. The ABA Opinion goes on to add that “the fee paid by the client to the firm ordinarily would include the total paid the [contract] lawyer and the agency, and also may include charges for overhead and profit.” Therefore, it is permissible under the ABA Opinion for clients to pay a law firm for a contract attorney’s services without being informed that a contract attorney is being used. Further support for this position is gained from ABA Formal Opinion 93-379, Billing for Professional Fees, Disbursements and Other Expenses Pgs 9-10, which states:
In the absence of an agreement to the contrary, it is impermissible for a lawyer to create an additional source of profit for the law firm beyond that which is contained in the provision of professional services themselves. The lawyer’s stock in trade is the sale of legal services, not photocopying paper, tuna fish sandwiches, computer time or messenger services.
By implication, the use of contract attorneys is providing legal services, and therefore it is appropriate for a law firm to profit from their use.
Allowing a law firm to fully profit from the use of a contract attorney also draws support from a California appellate court in a 1995 case of first impression. Shaffer v. Superior Court, 39 Cal. Rptr. 506 (1995). In this case, the law firm of Gibson, Dunn & Crutcher was sued for legal malpractice for inter alia unconscionable legal fees. The plaintiff sought to determine the rate paid to a contract attorney who had worked in spare offices and the firm’s library and had billed the plaintiff for1800 hours at rates ranging from $215 to $250 an hour. The California Court of Appeals held the profit margin realized by Gibson, Dunn & Crutcher was undiscoverable and would open a “veritable pandora’s box of questions and problems” if it was. Id. at 512-13. The court held the appropriate test is to look to whether the fees paid were worth what the defendant paid as measured in the legal marketplace. Id. at 513.
Even with the permissibility for law firms to make a profit using contract attorneys, does this make sense in all instances? The answer is clearly no. In many instances the client should be informed and the law firm would benefit from increased good will by sharing cost savings to the client. As the Shaffer case illustrates, an uninformed client might be upset if they find out contract attorneys were used and they were billed at the regular associate’s rate. However, in other instances, a law firm unable to bill a contract attorney profitably might elect not to use a contract attorney and inefficiently staff the project with available (or unavailable) internal resources. So what are the solutions?
In major litigation, it often makes sense to bill the client the costs of the use of contract attorneys as a disbursement. Law firms will still profit from the supervision of contract attorneys, and the large fees that occur in complex litigation. However, the opportunity to pass savings to a client which generally reach $100 an hour/$4,000 a week can create substantial good will. In a six-month project, one contract attorney provided at cost will save a client on average over a hundred thousand dollars and teams of attorneys can create hundreds of thousands of dollars in savings. Furthermore, this type of manual intensive work is generally not well received by associates at law firms who often attempt to seek out more interesting projects to work on. This can make staffing the project with a law firm’s attorneys a complicated calculation of how many pieces of several associates available time, which is constantly changing, will it take to complete the project? Therefore, the law firm and client both benefit by having experienced attorneys completely focussed on completing the document review task within set deadlines.
However, some projects require law firms to encounter overhead costs such as secretarial, office space, supplies and additional malpractice insurance expense from using contract attorneys. Law firms should be aware of these additional hidden costs and be entitled to recover them. Therefore in many cases some sort of cost plus an overhead mark-up is preferable for the law firm as opposed to simply passing the full cost through to the client.
Contract attorneys are also used for more specialized projects to fill in for maternity leaves, disabilities, sudden upsurges in workload, or to add a specialized skill to a project which would ordinarily require a law firm’s attorney to get up to speed in. In these situations, not allowing the law firm to fully profit from using a contract attorney creates the incentive to make do with the firm’s current resources. This can slow down the speed in which work is handled and ultimately reduce the quality of the work product. Both of these results are clearly not in a client’s best interest.
As a band aid solution, the law firm could attempt to hire a full-time attorney for a short term need. However, when the peak period ends, there are now extra attorneys at the firm trying to find projects to bill their time on. This can have bad consequences for the firm, clients and the individual attorneys.
Allowing law firms to staff up with appropriately skilled contract attorneys and make a profit, enables law firms to efficiently staff for peak periods or specialized projects with attorneys of appropriate skill and with available time to competently handle a project. Ultimately this is in both a client’s and law firm’s best interest.
This article has highlighted the broad discretion afforded to law firms in determining how to bill their clients for the use of contract attorneys. However, despite this legal discretion, law firms and their clients should realize there is no one correct answer to this business issue. There is nothing wrong with law firms using contract attorneys and clients do benefit from their services even when they do not realize cost savings. However, in some instances it might make sense for the law firm to pass on some of the cost savings to the client.
By Karl Schieneman, Esq., Managing Director and shareholder ofLegal Network Ltd., a Pittsburgh based provider of contract attorneys and paralegals.