MARYLAND STATE BAR ASSOCIATION, INC.
COMMITTEE ON ETHICS
ETHICS DOCKET NO. 2013-01
Counsel’s Use of a Third-Party Claims Processing Service to Assist in Processing Personal Injury Claims
You requested an opinion concerning the propriety of a working relationship between your law firm and a third-party claims processing service. You are considering using this company in lieu of in-house paralegals for processing plaintiffs’ personal injury claims.
You have enclosed a copy of the proposed memorandum of understanding between your firm and the processing service, as well as two versions of proposed contingency fee agreements with clients. The MOU lists the tasks which the law firm and the processing service will each provide. For example, under the MOU, the attorney will meet with the client to determine if the case should be accepted, periodically review the documents obtained by the paralegal, and negotiate a settlement of the case, among other tasks. The processing service will meet with the client “as needed,” gather all pertinent documents and information, monitor the case status, prepare an initial demand package pursuant to the attorney’s instructions, assist “as needed” with claim negotiations, and administratively close the case with the attorney’s approval. The MOU also discusses in very broad terms the arrangements to cover expenses for your firm and the processing service, but does not outline all of the proposed financial arrangement.
You have requested opinions on these documents and the proposed arrangement.
Discussion
It is not the role of the Committee to opine on the propriety of specific terms of business agreements or specific business relationships between law firms and vendors. However, because your inquiry raises questions of general interest to the profession in the changing legal marketplace, we offer the following general guidance on work share relationships between law firms or lawyers and third-party paralegal service companies.
The relationship between an attorney or law firm and a processing service falls within the ambit of MRPC 5.3(a)-(b), which states:
With respect to a nonlawyer employed or retained by or associated with a lawyer:
- a partner, and a lawyer who individually or together with other lawyers possesses comparable managerial authority in a law firm shall make reasonable efforts to ensure that the firm has in effect measures giving reasonable assurance that the person’s conduct is compatible with the professional obligations of the lawyer;
- a lawyer having direct supervisory authority over the nonlawyer shall make reasonable efforts to ensure that the person’s conduct is compatible with the professional obligations of the lawyer.
Any lawyer retains a nonlawyer must take reasonable steps to ensure the person’s conduct is “compatible with the professional obligations of the lawyer.” The newly amended version of Section 5.3 of the ABA Model Rules provides “[t]he extent of this obligation will depend upon the circumstances, including the education, experience and reputation of the nonlawyer; the nature of the services involved; the terms of any arrangements concerning the protection of client information; and the legal and ethical environments of the jurisdictions in which the services will be performed, particularly with regard to confidentiality.” ABA Model Rule 5.3, Comment 3, August 2012 Amendments. 1
Your letter does not describe the background or location of the processing service company and its employees, nor does it precisely state how the lawyers in your firm intend to supervise the paralegals employed by the processing service, or even if you will have the right to do so under this arrangement.
Law firms have historically used independent firms to provide in-house services such as printing, filing and secretarial services. Other law firms use contract medical paralegals to review cases and computer experts to run firm networks. Law firms are now outsourcing paralegal work to many vendors, including offshore firms. See, e.g.,“Outsourcing Paralegal Work,” Opinion 07-02, Ethics Opinion of Florida Bar (January 18, 2008). Recognizing this trend, the ABA recently revised the comments to Model Rules 1.1 (Competence), 5.3 (Responsibilities Regarding Nonlawyer Assistants), and 5.5 (Unauthorized Practice of Law) to “provide guidance regarding the ethical implications of retaining lawyers and nonlawyers outside the firm to work on client matters.” ABA House of Delegates, Resolution 105C, Adopted August 2012.
As technology advances and service delivery becomes globalized, traditional service delivery models are changing rapidly. These changing models are important to modern service delivery in the legal profession. However, they also present ethical challenges in reconciling modern technology and service delivery patterns with the well-established rules of professional conduct.
This is especially true when it involves supervision of nonlawyer assistants, whether contractor or otherwise. The importance of supervision and control is particularly heightened in paralegal work on personal injury cases, where issues such as conflicts, limitations, and client communication require the active, day-to-day involvement of the lawyer. 2 The Standing Committee on Ethics and Professional Responsibility of the ABA recognized that “a lawyer may outsource legal or nonlegal support services provided the lawyer remains ultimately responsiblefor rendering competent legal services to the client under Model Rule 1.1.” Formal Opinion 08-451, p.1, August 5, 2008 (emphasis supplied). Unless the arrangement with the processing service provides the lawyers the right and ability to control and supervise the work of the paralegals on a direct, day-to-day basis, it would not appear to comply with MRPC 5.3(a) and/or (b).
The lawyer’s duty to supervise includes the responsibility to ensure that work performed by the processing service is delegated to individuals who are competent to perform them, and that it is performed adequately and appropriately. The ABA Standing Committee recommends that “[a]t a minimum, a lawyer outsourcing services for ultimate provision to a client should consider conducting reference checks and investigating the background of the lawyer or nonlawyer providing the services as well as any nonlawyer intermediary involved, such as a placement agency or service provider.” Formal Opinion 08-451, p.3. The lawyer should also consider inquiring into the processing service’s hiring practices to evaluate the quality and character of the employees likely to have access to client information. Id., at 3.
The MOU does not address what steps the law firm has taken to ensure that the claim processing service will keep client records confidential. Nor does it appear from the facts provided that any steps have been taken to ensure compliance with Rule 1.6, (duty of confidentiality). This becomes a particularly critical issue if some client files are managed or maintained off-site from your law firm. Additionally, access to the law firm’s server and files must be restricted to prevent contract paralegals from having unauthorized access to confidential client files unrelated to the work of the processing firm.
There is no requirement that these paralegals be physically located within your office. However, the lawyer has a duty to not only supervise nonlawyer personnel, but also to insure the confidentiality of attorney files. As MRPC 1.6(a) provides:
(a) A lawyer shall not reveal information relating to representation of a client unless the client gives informed consent, the disclosure is impliedly authorized in order to carry out the representation, or the disclosure is permitted by paragraph (b).
The ABA Standing Committee recommends that lawyers who are using third-parties to provide services “should consider investigating the security of the provider’s premises, computer network, and perhaps even its recycling and refuse disposal procedures. In some instances, it may be prudent to pay a personal visit to the intermediary’s facility, regardless of its location or the difficulty of travel, to get a firsthand sense of its operation and the professionalism of the lawyers and nonlawyers it is procuring.” Formal Opinion 08-451, p. 3. The Standing Committee also recognized that “written confidentiality agreements …are strongly advisable in outsourcing relationships.” Id., p. 5. Currently no such agreements appear to exist between your law firm and the processing service.
The duty to supervise also includes the duty to insure paralegals are not engaged in the unauthorized practice of law. This includes making sure the client understands that the claim processors are paralegals and not attorneys and cannot give legal advice. Third parties, including claims adjusters, must have a similar understanding. Any communication from the paralegal to a third-party must make it clear that the paralegal is not a lawyer. A law firm who assists a nonlawyer in practicing law will be in violation on MRCP 5.5(a). Similarly, any communication which suggests or implies that the processing service, and not the law firm, is representing the client would run afoul of MRPC 5.5(a).
The use of a third-party processing service also presents issues concerning potential conflicts-of-interests. The MOU fails to address some basic key questions: can the processing service represent both defendants and plaintiffs? Is the attorney going to insure that the processing service runs conflicts and reports back to attorney? If so, how? And will the processing service run conflicts for all parties involved, including witnesses? These questions must be addressed to ensure compliance with the rules of professional conduct.
A lawyer must take reasonable measures to prevent conflicts of interest resulting from the company’s relationship with other clients. Any conflict that arises can be imputed to the lawyer and would result in a violation of MRPC 1.7. This would include the responsibility to ensure that the processing service does not handle matters for other clients that potentially conflict with those handled by the lawyer, or other cases being handled by the same processing firm.
Because the processing service, and not the lawyer, would manage the processing service’s files, this creates a challenging responsibility for your firm to insure that the processing service does not expose the law firm to conflicts of interest.
As other state ethics opinions have noted:
[T]he attorney should satisfy himself that no conflicts exist that would preclude the representation. [Cite omitted.] The attorney must also recognize that he or she could be held responsible for any conflict of interest that may be created by the hiring of Company and which could arise from relationships that Company Opinion 07-02, quoting Los Angeles County Bar Association Professional Responsibility and Ethics Committee Opinion 518.
The law firm should obtain the informed consent of the client to use subcontracted paralegals. In considering informed consent in the context of overseas paralegal, the Florida Bar Ethics Committee opined that the “attorney should bear in mind factors such as whether a client would reasonably expect the lawyer or law firm to personally handle the matter and whether the non-lawyers will have more than a limited role in the provision of the services.” Opinion 07-2, supra, p. 6. Also, where the client directs the selection of a particular nonlawyer service provider outside the firm, the lawyer ordinarily should agree with the client concerning the allocation of responsibility for monitoring as between the client and the lawyer. ABA Model Rule 5.3, Comment 4, August 2012 Amendment.
Another important area of concern is the fee arrangement between the law firm and the processing service. MRPC 5.4(a) unambiguously states that a “lawyer or law firm shall not share legal fees with a nonlawyer.” Any kind of arrangement in which a law firm is splitting the proceeds with a non-lawyer service would be in violation of this rule. No compensation arrangement can be based in any way on the value of the claims settled, the profitability of a file, or any other contingent or success-based compensation. Compensation must entirely be based upon the intrinsic, commercially reasonable value of the paralegal work effort, regardless of the magnitude of the claim or its outcome.
While these are some of the major ethical issues which may arise under the Code of Professional Responsibility, this is by no means an exhaustive list. A paralegal in a personal injury practice performs a critical function which requires active supervision and control by attorneys.
The arrangement you describe presents far more ethical complexities than simply hiring a contract paralegal from an employment service, a relatively commonplace occurrence. Instead, it seeks to subcontract the paralegal function of your office. With rapid changes in technology and law firm economics, the Committee recognizes that new models of services delivery will continue to emerge. While many of these models, including the one you describe, are not expressly prohibited by the Code of Professional Responsibility, they present complex difficult ethical issues which need to be carefully explored.
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1. Maryland has not adopted the amendments to the ABA Model Rules, but many of the provisions are parallel. Maryland frequently looks to the Model Rules for guidance.
2. In discussing the importance of supervision, the Committee is not expressing an opinion as to whether or not such paralegals would be an employee or independent contractor, which involves a complex analysis beyond the scope of this Committee’s role. See, e.g., IRS Publication 15-A, 2010 Ed. p. 6.
REFERENCES: Maryland Rules of Professional Conduct 5.3(a), 5.3(b), 5.3(c), 5.4, 1.6(a), 1.7, 1.5(e), and 5.5(a).
ASSIGNED TO: Timothy F. Maloney
DATED ASSIGNED: August 28, 2012
DATE DISTRIBUTED: November 2, 2012