Ethics Question of the Month - October 2021
Getting By With A Little Help From Your Friends
XYZ Law Firm, a small insurance defense firm, has been hired by an insurance company client to defend a large number of lawsuits in a new and growing area of litigation. The firm anticipates that the demands of these new cases will quickly exceed the capacity of their current lawyers.
But XYZ is reluctant to hire partner-track associates because one or two appellate decisions could cause the novel legal theory driving the new cases to be summarily rejected by the courts. In that event, the firm would be over-staffed and would need to implement layoffs, diminishing XYZ’s reputation and possibly jeopardizing the firm’s long-term growth strategy. Moreover, the initial stages of litigation might require the experience and expertise of a seasoned litigators rather than inexperienced associates.
Coincidentally, XYZ has just reached an agreement with a 30-year insurance defense litigator, Dale, who has long been reluctant to become a partner in any law firm because of previous negative experiences with law firm partnerships. Dale has no interest in joining XYZ as a partner but agrees to leave his solo practice to accept a full-time Of Counsel position with XYZ. Dale is excited about the opportunity to shape a new and emerging area of law and to become an experienced and leading expert in it.
When asked about ideas for additional staffing, Dale suggests a law school classmate, Tracy, who has a solo practice and has the time to work on these cases on a contract basis. Moreover, Dale has spoken with Tracy, and they are both willing to work under an arrangement where XYZ can bill their time to the client at $500 per hour while paying them $325 per hour, allowing the firm to collect $175 per hour in profit for the two experienced attorneys.
According to the Committee on Professional Ethics, which of the following is most accurate?
A. XYZ cannot bill the client for one rate and pay Dale and Tracy a different rate.
B. XYZ can use this billing arrangement for Dale, but not for Tracy.
C. XYZ can use this billing arrangement for Tracy, but not for Dale.
D. XYZ can use this billing arrangement for both Dale and Tracy.
In Ethics Opinion 577, the Committee on Professional Ethics addressed the issue of whether a law firm can mark up the hourly rate it charges to the client above the hourly rate it pays to other lawyers. The committee focused on whether a lawyer is “in” the firm or not, pointing to Rule 1.04(f) of the Texas Disciplinary Rules of Professional Conduct:
A division or arrangement for division of a fee between lawyers who are not in the same firm may be made only if:
(1) the division is:
(i) in proportion to the professional services performed by each lawyer; or
(ii) made between lawyers who assume joint responsibility for the representation; and
(2) the client consents in writing to the terms of the arrangement prior to the time of the association or referral proposed, including
(i) the identity of all lawyers or law firms who will participate in the fee-sharing arrangement; and
(ii) whether fees will be divided based on the proportion of services performed or by lawyers agreeing to assume joint responsibility for the representation; and
(iii) the share of the fee that each lawyer or law firm will receive or, if the division is based on the proportion of services performed, the basis on which the division will be made. . .
The committee concluded that if the lawyer in question is not “in” the firm, marking up the fee would be an improper fee division. This so-called “non-firm” lawyer is one who “instead practices separately from the law firm even when working with the firm on a particular client’s matter.” What is the difference? Says the committee:
Examples of non-firm lawyers can include outside patent counsel, local counsel, counsel with expertise dealing with a particular government agency, counsel in another state hired to advise regarding the application of that state’s laws, and lawyers hired individually or through another organization that provides temporary additional staffing or capabilities such as document review or research for a particular matter. In many cases, a non-firm lawyer is in fact a member of another law firm.
By contrast, the opinion describes the in-firm lawyers who are not partners or associates or may be described as “other firm lawyers”:
Other firm lawyers are lawyers that are reasonably considered to be “in” the law firm. Such a determination can be based on various objective factors, including but not limited to the receipt of firm communications, inclusion in firm events, work location, length and history of association with the firm, whether the firm and the lawyer identify or hold the lawyer out as being in the firm to clients and to the public, and the lawyer’s access to firm resources including computer data and applications, client files and confidential information. Examples of other firm lawyers include lawyers referred to as of counsel, senior attorneys, contract lawyers and part-time lawyers.
How a lawyer is classified determines whether the rate can be marked up:
Under the Texas Disciplinary Rules of Professional Conduct, a law firm may establish an hourly rate for a lawyer who is not a shareholder, partner or associate but is otherwise “in” the firm, the law firm may use that hourly rate in billing clients for such lawyer’s work at a rate that is more than the law firm is paying the lawyer for that work . . . . However, when a law firm bills a client for legal services provided by a lawyer that is not “in” the law firm, there will be a division of fees between the law firm and the lawyer unless the law firm bills the client precisely the amount that has been billed to the law firm by such lawyer.
Dale is an “in-firm” lawyer whose hours can be included in the bill at a rate different from his actual compensation. Tracy is a “non-firm” lawyer whose time must be billed to the client as an expense at the same hourly rate that he is charging the firm. B is the best answer.