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Law Firm Cost Recovery – An Unethical Profit Center?

Posted by Judie Bronsther | Nov 17, 2014 | 0 Comments

Disbursements can account for 30% of legal bills, and recently clients have been homing in on them with concern.  Gone are the days when, without much inquiry, clients funded their lawyers' “Lifestyles of the Rich and Famous” travel, accommodations, meals and wine.  Now those expenses are receiving critical review and even rejection.

It's been a tradition that law firm out-of-pocket disbursements were routinely passed along to clients and often marked up.  Disbursements have earned a honored position on some law firms' financial operating statements because of the profit they generate.  But under certain circumstances, such mark-ups can violate lawyers' Codes of Professional Responsibility.  ABA Formal Opinion 93-379 issued by the American Bar Association's Committee on Ethics and Professional Responsibility noted:

"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 photocopy paper, tuna fish sandwiches, computer time or messenger services." (emhapsis added)

So read your retainer agreement carefully and make sure that you are not agreeing to pay more for disbursements than actual cost.  And it could be hidden.  If, for example, your retainer agreement provides that photocopies, scans, or faxes will be charged to you at a given price per page, that's enough disclosure and you're going to be paying more than actual cost for those expenses or disbursements.      But copying charges are chump change.  Want to really see excessive billing?  Look at your firm's electronic research charges.

Most law firms pay a flat rate for online legal research services such as LexisNexis and Westlaw – just like they paid for their hard copy libraries for which they never separately charged.  But, despite the fact that firm's increasingly are shedding their hard-copy libraries and relying instead on electronic libraries for which they pay flat monthly charges, some firms nevertheless bill for online research at highly inflated time-based rates.  That's a no-no in light of ABA Formal Opinion 93-379.

Recently the New York Times reported[1] that when a certain, large New York law firm relocated to different quarters, it left behind 95% of its hard-copy library and discarded tens of thousands of volumes because “we have an account with an online library… that's all that's used.”  So, that sets up this question: if the cost of a hard-copy library is overhead, not charged for separately from legal fees, shouldn't its functional equivalent (online library services) be treated the same way?  Courts in Arizona, California, Florida, Hawaii, Idaho, Illinois, Massachusetts, Minnesota, New Mexico, New York, North Dekota, Oklahoma, Rhode Island, Wyoming and Washington think so.  The court in Cassillas v. Schubauer put it this way, “… the expense for non-computerized legal research is not taxable and is not within other similar expenses and charges.  We hold that computerized legal research fees cannot be taxed as disbursements under Section 15-17-37.” 2006 SD 42, 714 N.W.2d 124, 133.

Clients can avoid disputes with their attorneys over disbursements by publishing billing guidelines that give specific guidance concerning the expenses that they will pay.  I recommend that clients expressly note in their billing guidelines that they will not pay for:

1.      photocopying at no more $.10 a page;

2.      faxes (PDFs are preferable anyway);

3.      Scanning;

4.      Routine postage;

5.      Meals in-town;

6.      Staff overtime (secretarial staff costs are built into hourly rate and other fee arrangements);

7.      Temporary secretarial staff;

8.      Computerize research fees;

9.      Word processing/secretarial services;

10.    Excessive use of overnight courier/mail/delivery services;

11.    Local courier/messenger/delivery services;

12.    Telephone charges;

13.    Equipment rental or purchase charges;

14.    Seminars, CLE, training expenses;

15.    Office supplies;

16.    Storage fees;

17.    Administrative charges (such as fees for opening a new file, installing a computer, preparing an invoice, etc.);

18.    Books, magazine and subscription services;

19.    Conference room charges.

[1] “So Little Paper to Chase in a Law Firm's New Library,”by David W. Dunlop, The New York Times, N.Y. / Region, Oct. 22, 2014, http://www.nytimes.com/2014/10/23/nyregion/so-little-paper-to-chase-in-a-law-firms-new-library.html?_r=0

About the Author

Judie Bronsther

Ms. Bronsther began her career in 1979 as an associate with Finley, Kumble, Wagner, Heine, Manley & Underberg specializing in corporate finance. In 1984, she joined forces with a client, Empire Securities, a brokerage house specializing in oil and gas transactions, and became Executive Vice President and General Counsel. In 1989, she joined Kaye, Scholer, Fierman, Hayes and Handler. Ms. Bronsther graduated from University of Rochester, magna cum laude, and New York University School of Law. Ms. Bronsther has written extensively on the subject of legal cost control and lectures frequently on this subject.

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