When it comes to pricing, where should law firms draw the line on contract lawyers?

12 June 2017 – Interesting post in today’s The American Lawyer on the issue of the cost and pricing of contract attorneys. If you do not have a subscription here is the full article:

Susman Godfrey has a policy when it comes to contract lawyers: The high-flying litigation firm discloses to clients exactly how much the temporary attorneys cost, and that’s exactly what the client pays.

In other words: No surcharge.

“We do a pure pass through,” said Erica Harris, Susman’s hiring partner and chairwoman of its employment committee.

In Texas, unlike in 48 other states, Susman and other law firms are bound by state bar ethical rules that forbid upcharging for contract attorney work.

The Houston-based firm applies the same standard in all its other offices as well—New York, Seattle and Los Angeles.

Many firms, however, not only harvest additional profits from contract attorney work, but also keep their own costs from the client, according to Erin F. Giglia, a lawyer and co-owner of Montage Legal Group, which represents a network of freelancing lawyers.

By using that strategy, those firms are not necessarily breaking any ethics rules or laws.

In all states but Texas and Maryland, firms are allowed to impose a surcharge for contract lawyers, Giglia said, unless the fees are unreasonable or a client specifically prohibits nondisclosure or additional costs in their retention agreement.

But to avoid future conflicts and misunderstanding, firms should—at minimum—disclose that contract lawyers have been hired, even though the ethics rules allow some wiggle room, said Giglia, whose network has about 100 lawyers.

“There is no rule that requires a law firm to disclose their profit margin on contract lawyers. In a lot of situations they are not required to disclose that they are working with contract attorneys at all,” Giglia said.

But if contract lawyers’ work on the case represents “a substantial development,” than ethics rules set by many state bars require disclosure, she said.

“There are many firms that like to use contract lawyers as a secret weapon,” Giglia said.

In an article about the ethics of using contract lawyers, Giglia noted that the American Bar Association has issued formal opinions that don’t stop the “secret weapon” approach. The ABA guidance generally allows for costs associated with legal services of a contract lawyer to be billed to clients as fees for legal services, as long as those fees are deemed reasonable.

California case law has found that “the amount a law firm pays to a freelance attorney is irrelevant to whether a fee is unconscionable,” Giglia wrote, and nothing in that state’s ethics rules identified “the attorney’s profit margin” as “relevant to the issue of unconscionability.”

No hard-and-fast rules are necessary for how law firms handle disclosure and upcharges to clients for contracted lawyers, according to Bruce Green, a professor at Fordham University School of Law, where he directs the Louis Stein Center for Law and Ethics.

Rather, firms should respond to specific situations, he said. “I don’t think you can overgeneralize,” Green said.

Ethically, it is not inherently misleading to not tell a client about supervised contracted lawyers working on a client matter that a client has asked a law firm to handle, he said.

Nor is it misleading to not tell the client how much profit the firm is making on the work that the contracted lawyers are completing, he said.

“I think it really depends on the expectation that the client has,” Green said.