Fundraising

 

E-discovery managed services provide law firms with a competitive and financial advantage—from reducing capital expenditures, removing the need to upgrade software, purchase licenses or add human resources to operate and support software to providing a fixed monthly fee for better budgeting. All of these positives make for an excellent business plan.

However, can a firm ethically recover its costs in a managed services partnership? Do the ABA Model Rules allow a firm to bill its clients for more than what the firm is paying per gigabyte, but still pass on substantial savings by having the client pay less than the market average? The short answer is yes.

As background, managed services in e-discovery refers to the instantiation of dedicated environments for hosting review software and electronically stored information (ESI); otherwise known as infrastructure-as-a-service (IaaS) or software-as-a-service (SaaS). In either instance, it provides a valuable way for firms to reduce risk and costs for themselves and their clients.

When done correctly, managed services offers law firms a way to provide substantial value to their clients, including more repeatable and defensible processes, elevated job functions, budget certainty for their clients and (theoretically) greater efficiencies by benefiting from the latest in analytics such as TAR 2.0 based on continuous active learning.

Let's look at what laws or rules govern the question on whether the firm can ethically bill its clients for more than what the firm is paying per gigabyte, but still pass on savings to the client.

Applicable Rules

Rule 1.5(a) of the ABA Model Rules of Professional Conduct and Code of Judicial Conduct states that “A lawyer shall not make an agreement for, charge, or collect an unreasonable fee or an unreasonable amount for expenses.” Subsection (b) of this Rule states that 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” (emphasis added).

Unfortunately, Rule 1.5 doesn't give much guidance on what can be billed from a cost perspective, outside of the eight factors outlined in 1.5(a) and that such costs should be in writing. That still leaves open the question of what is reasonable.

Ethical Opinions

To define what is reasonable, often cited precedential ABA Formal Opinion 93-379 holds that:

At the outset of the representation the lawyer should make disclosure of the basis for the fee and any other charges to the client [emphasis added]. This is a two fold duty, including not only an explanation at the beginning of engagement of the basis on which fees and other charges will be billed, but also a sufficient explanation in the statement so that the client may reasonably be expected to understand what fees and other charges the client is actually being billed.

The Opinion further makes a corollary between Model Rules 1.5 and 7.1, stating that lawyers should not make any statement about fees that are misleading:

Initial disclosure of the basis for the fee arrangement fosters communication that will promote the attorney client relationship. The relationship will be similarly benefitted if the statement for services explicitly reflects the basis for the charges so that the client understands how the fee bill was determined (emphasis added).

The opinion then states that lawyers may pass on reasonable charges for services such as photocopying, computer research, on-site meals, deliveries, and other similar items” plus a “reasonable allocation of overhead expenses directly associated with the provision of the service” so long as the costs are put in writing up front and the client agrees to the same.

The San Diego County Bar Legal Ethics Opinion 2013-3 looked at this issue as well and opined that the lawyer failed to disclose what third-party costs would be incurred and that other changes were too ambiguous, and therefore she could not ethically bill for such costs.

The better practice for Lawyer would have been to specify in her fee agreement that, in addition to costs paid to third-party vendors, she would bill, and Client would be expected to pay, certain in-house expenses related to the engagement (emphasis added).

Accordingly, in the “absence of disclosure to the client in advance of the engagement,” a client should not expect the lawyer's cost to be part of their costs and would be improper if the lawyer assessed a surcharge on fees over and above the amount actually incurred unless the lawyer herself incurred additional expenses beyond the actual cost of the disbursement item.

The ABA issues Formal Opinion 00-420 defined a “surcharge” as a fee “made when the retaining lawyer charges the client more for the services of the contract lawyer than the cost incurred by the retaining lawyer for obtaining those services, either directly or through the contract lawyer's agency or employer; in other words, a surcharge is profit.

Therefore, if a lawyer receives a discounted rate from a third-party provider, it would be improper if she did not pass along the discount to her client rather than charge the client the full rate and reserve the profit to herself. Clients could view these practices as an attempt to create additional undisclosed profit centers when the client had been told he would be billed for disbursements.

Ethical Opinions in New York, Virginia (another in Virginia) and Washington, D.C. have permitted lawyers to issue a surcharge for the use of outside lawyers, subject to Rule 1.5, and that they should be reasonable, not unconscionable, and that the firm cannot create an undisclosed profit center.

E-discovery services offers a myriad of benefits to law firms and their clients, and firms can feel confident that they can ethically recover costs so long as: 1) the engagement letter clearly states the same; 2) the client agrees to the same; and, 3) the client signs off on the explanation of fees.

 

Daniel Gold, Esq. is a senior enterprise director for Catalyst, where he advises corporations on technology-driven strategies. He can be reached at [email protected].