MARYLAND STATE BAR ASSOCIATION, INC.
COMMITTEE ON ETHICS
ETHICS DOCKET NO. 2001-31
(1) Engagement of Contract Attorneys; (2) Referral Fees to Lawyer Referring Contract Attorney
You ask the following questions relating to the engagement of a temporary or contract lawyer1 to do legal research and writing:
(1) Whether it is necessary to obtain the client’s permission to engage a contract lawyer, under the following circumstances:
(a) The contract lawyer signs motions and pleadings; and
(b) The contract lawyer submits her work product to the retaining lawyer for her use.
(2) In paying the contract lawyer, is it permissible.
(a) For the retaining lawyer to pay the contract lawyer’s fees and absorb the cost as part of overhead?;
(b) To bill the client for the contract lawyer’s fees as a cost?;
(c) To provide in the engagement letter with the client that the contract lawyer will be retained and that the client agrees to pay to the retaining lawyer a stipulated rate or amount for the contract lawyer, which rate includes a markup or a surcharge for the retaining lawyer?
(3) Whether it is permissible for the retaining lawyer to pay a “referral fee” to a lawyer who is responsible for finding the contract lawyer or for referring work to her?
Client’s Permission in Retaining a Contract Lawyer.
There are a number of state and local bars that have taken the position that the use of a contract or temporary lawyer always must be disclosed to the client. However, we believe the better view is that of the ABA Standing Committee on Ethics and Professional Responsibility, as follows:
“[T]he role of contract lawyers retained to work on a client’s matter(s) should be disclosed to the client ~when not otherwise required by Rules 1.5(b), 1.5(c), or 1.5(e)] based on the relationship of the contract lawyers with the firm, particularly when the work of the contract lawyer will not be supervised within the justifiable expectations of the client. The bases for disclosure, independent of Rule 1.5, are found in Rule 1.2(a) (Scope of Representation), requiring discussion with the client concerning the means by which the representation is pursued; Rule 1.4 (Communication), a general requirement for communication concerning the representation; and Rule 7.5(d) (Firm Names and Letterheads), which prohibits misrepresenting a relationship among lawyers.”
ABA Formal Opinion 2000-420.
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(b) When the lawyer has not regularly represented the client, the basis or rate of the fee shall be communicated to the client, preferably in writing, before or within a reasonable time after commencing the representation.
(c) A fee may be contingent on the outcome of the matter for which the service is rendered, except in a matter in which a contingent fee is prohibited by paragraph (d) or other law. The terms of a contingent fee agreement shall be communicated to the client in writing. The communication shall state the method by which the fee is to be determined, including the percentage or percentages that shall accrue to the lawyer in the event of settlement, trial or appeal, litigation and other expenses to be deducted from the recovery, and whether such expenses are to be deducted before or after the contingent fee is calculated. Upon conclusion of a contingent fee matter, the lawyer shall provide the client with a written statement stating the method of its determination.
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(d) A division of fee between lawyers who are not in the same firm may be made only if:
(1) the division is in proportion to the services performed by each lawyer or, by written agreement with the client, each lawyer assumes joint responsibility for the representation;
(2) the client is advised of and does not object to the participation of all the lawyers involved; and
(3) the total fee is reasonable.
Previously, in ABA Opinion 88-356, the ABA Committee explained:
“[W]here the contract lawyer is performing independent work for a client without the close supervision of a lawyer associated with the law firm, the client must be advised of the fact that the contract lawyer will work on the client’s matter and the consent of the client must be obtained. This is so because the client, by retaining the firm, cannot reasonably be deemed to have consented to the involvement of an independent lawyer. On the other hand, when the contract lawyer is working under the direct supervision of a lawyer associated with the firm, the fact that a contract lawyer will work on the client’s matter will not ordinarily have to be disclosed to the client. A client who retains a firm expects that the legal services will be rendered by lawyers and other personnel closely supervised by the firm. Client consent to the involvement of firm personnel and the disclosure of those personnel of confidential information necessary to the representation is inherent in the act of retaining the firm.(fn) (fn: See Rule 1.6 and the Comments to Rule 1.6 which provides in part: ‘Lawyers in a firm may, in the course of the firm’s practice, disclose to each other information relating to the representation of the client of the firm unless the client has instructed that particular information be confined to specified lawyers.’)”
Based on the foregoing, whether client consent is necessary for a contract lawyer to sign motions and pleadings depends on the reasonable expectation of the client and the degree of supervision by the retaining lawyer.3 However, it appears that the engagment of a contract lawyer to do legal research and writing under the close supervision of the retaining attorney, who adopts the work as her own, would not require client consent.
Arrangements For Payment of Services of Contract Lawyer.
a) The Retaining Lawyer Absorbs the Costs.
It is perfectly acceptable for the retaining lawyer to absorb the costs associated with the engagement of a contract lawyer, and not include them in the fees and expenses billed the client.
“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 firm has no obligation to reveal to the client the compensation arrangement with the temporary lawyer. Rule 1.5(e), relating to division of a fee between lawyers, does not apply in this instance because the gross fee the client pays the firm in not shared with the temporary lawyer. The payments to the temporary lawyer are like compensation paid to nonlawyer employees for services and could also include a percentage of firm net profits without violation of the Rules or the predecessor Code. See ABA Informal Opinion 1440 (1979).”
ABA Formal Opinion 88-356.
b) Billing the Client for the Fees as a Cost.4
In the fee arrangement with the client there should be an explanation of the lawyer’s fees and it should also explain what costs and expenses the client will be responsible for paying. Rule 1.5(c) requires that this be done in writing in contingent fee cases, and it is a good practice for all retainers. See, Rule 1.5(b).
In ABA Formal Opinion 93-379, the following guides were provided in connection with billing of costs to the client: fees for legal services should be inclusive of general office overhead, in the absence of disclosure in advance tot he contrary; in the absence of disclosure, it is improper to assess a surcharge on disbursements over and above the actual payment to third parties made by the lawyer on the client’s behalf, unless the lawyer incurs additional expense beyond the actual cost of the disbursement item. It is impermissible for a lawyer to create an additional source of profit of the law firm beyond that which is involved in the provision of professional services themselves, unless the client has agreed or consents otherwise. See, MSBA Opinion 92-19.
ABA Opinion 93-379 dealt with the costs of non-lawyers’ expenses, such as court stenographers, photocopying, etc. In ABA Opinion 2000-240, the ABA Committee concluded that the principles of Opinion 93-379 equally are applicable to charges for legal services provided by contract lawyers when billed tot he client as a cost or expense, and we agree.
Rule 1.5(a)5 requires that a lawyer’s fee shall be reasonable, and that is so whether or not the retainer agreement is in writing. ABA Formal Opinion 2000-420 determined that “Subject to Compare, MSBA Opinion 92-19 (costs for legal research and writing obtained through a professional legal research organization must be billed as a cost to client, if they are billed). Rule 1.5(a) … a lawyer may … add a surcharge on amounts paid to a contract lawyer when services provided by the contract lawyer are billed as legal services. This is true whether the use and role of the contract lawyer are not disclosed to the client. The addition of a surcharge above coset does not require disclosure to the client in this circumstance, even when communication about fees is required under Rule 1.5(b).” In accordance with the ABA’s 1995 Statement of Principles In Billing For Legal Services” “If the client and the lawyer reach an agreement with respect to a billing arrangement after disclosure and understanding, fees for legal services calculated in accordance with such agreement should be presumed reasonable.”
Accordingly, subject to Rule 1.5(a) (reasonableness of fees), the retainer agreement with the client can provide for the engagement of a contract lawyer at a stipulated rate or amount, which rate includes a surcharge or profit for the retaining lawyer.
Payment of Referral Fee.
There is nothing in the Rules of Professional Conduct which would prohibit the payment of a referral fee by the retaining lawyer to the attorney referring the contract lawyer. For example, ABA Formal Opinion 88-356 pointed out that a fee paid to a placement agency for contract lawyers, even if it is included by the retaining lawyer in her bill to her client for services, is not a “legal fee” paid by the client, so that the arrangement did not involve fee splitting. Thus, the restrictions of Rule 1.5(e) dealing with the division of a fee between lawyers not in the same firm is not pertinent. Also, since the referring lawyer would be paid a fee by the retaining lawyer for referring the contract lawyer, the arrangement would not be covered by Rule 7.2(c) (prohibiting a lawyer giving anything of value for recommending his services).
However, whether the referral fee may be included in the retaining lawyer’s bill for services to her client is another matter, given the requirement of Rule 1.5(a) that fees shall be reasonable. You did not disclose what is the amount of the referral fee to be paid, or what services are performed by the referring attorney, other than making the referral. In the more typical case, a placement agency is involved, and the agency performs services for which it is compensated.6 Since the inquiry did not propose billing the client for any referral fee paid, the Committee has assumed for purposes of this opinion that such is not contemplated.
1’The term “contract lawyer” is used to mean “any lawyer retained by a lawyer or law firm who is not employed permanently for general assignment by the lawyer or law firm engaged by the client.” It includes “any lawyer on temporary assignment for or associated on a non-permanent basis with a lawyer or law firm.” ABA Formal Opinion 2000-420. It has the same meaning as “temporary lawyer,” which has been defined as “a lawyer engaged by a firm for a limited period, either directly or through a lawyer placement agency.” ABA Formal Opinion 88-356. It does not include other types of engagements, such as with research organizations which may utilize the services of lawyers. In MSBA Opinion 92-19, we said that contracting with firms for research services is distinguishable from engaging a lawyer to perform legal research on a temporary basis. [The MSBA opinions and an index of opinions maybe found at www.msba.org (click on “Ethics Opinions”)].
2 Rule 1.5 Fees.
3 There are other legal considerations in connection with the signing of a pleading or paper with which the lawyer must comply. See, e.g., Md. Rule 1-311 (Signing of pleadings and other papers must be by attorney admitted to practice in Maryland, with an address and telephone number) and Md. Rule 1-3 12 (Requirements of signing attorney: maintain an office for the practice of law in U.S.; be a regular employee of a governmental agency or other non-governmental organization authorized to sign on behalf of her employer; or have a practice limited to sanctioned pro bono programs, etc.).
4 In ABA Formal Opinion 2000-420, the Committee opined that:
“Services of a contract lawyer may be billed to the client as fees for legal services or as costs or expenses incurred by the retaining lawyer. Whether the cost attributable to a contract lawyer is billed as an expense or included in legal service fees is not addressed by the Model Rules and does not seem to be a matter of ethics.”
5 Rules 1.5 Fees.
(a) A lawyer’s fee shall be reasonable. The factors to be considered in determining the reasonableness of a fee include the following:
- the time and labor required, the novelty and difficulty of the questions involved, and the skill requisite to perform the legal service properly;
- the likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the lawyer;
- the fee customarily charged in the locality for similar legal services;
- the amount involved and the results obtained;
- the time limitations imposed by the client or by the circumstances;
- the nature and length of the professional relationship with the client;
- the experience, reputation, and ability of the lawyer or lawyers performing the services; and
- whether the fee is fixed or contingent.
6 “The placement agency is compensated for locating, recruiting, screening and providing the temporary lawyer for the law firm just as agencies are compensated for placing with law firms non-lawyer personnel (whether temporary or permanent.)” ABA Formal Opinion 88-356.