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Law Firms Marking Up Fees
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Susan Hackett recently wrote a piece for Corporate Counsel magazine that recommended law firms to think again when sending out their yearly rate increase letter. The response to her piece was incredible, vehement, and not surprising, according to a Legal Rebels posting entitled “The Aftermath of Urging Law Firms Not to Send Out Price-Increase Letters.”

Hackett received responses from lawyers in the law firms suggesting they might call their clients to discuss the price of services for 2013, and use the call to ask for more work or introduce alternatively priced services.

  
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Hackett found the responses from law firms interesting, but did not post the memos.  She desired firms engage in hard dialogue with corporate counsel, or new ways of viewing work, not punish the law firms by publishing the memos to embarrass.

Hackett’s article and aftermath post brings up the issue on whether a law firm may hire a lawyer who is not an associate, partner, or shareholder of the law firm to provide legal services for a client of the firm, and then bill the client a higher fee for the work done by the lawyer than the amount paid to the lawyer by the firm.  This situation comes up more in the bear economy as law firms do not want to hire workers, but may have times when there is too much work.

Some authorities on the issue for California include Rules 2-200, 3-500, 4-200 of the California Rules of Professional Conduct, and The State Bar of California Standing Committee On Professional Responsibility and Conduct Formal Opinion No. 1994-138 (Opinion).

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According to the Opinion, if the outside lawyer arrangement meets the criteria discussed below, a law firm may markup the amount that it pays the outside lawyer as long as it discloses the hourly rate the firm will invoice the client for the outside lawyer’s work in a fee agreement pursuant to Rule 3-500 of the California Rules of Professional Conduct, and the fee complies with Rule 4-200 of the California Rules of Professional Conduct.  The law firm does not need to disclose to the client what it pays the outside lawyer as in a fee splitting situation under Rule 2-200 of the California Rules of Professional Conduct.

The criteria for determining whether a compensation method constitutes a division of fees focuses on the division of specific fees paid by a client rather than on compensation arrangements not directly tied to a client’s payment of fees. The criteria to determine whether there is a division of fees is whether (1) the amount paid to the outside lawyer is compensation for the work performed and is paid whether or not the law office is paid by the client; (2) the amount paid by the attorney to the outside lawyer is neither negotiated nor based on fees which have been paid to the attorney by the client; and (3) the outside lawyer has no expectation of receiving a percentage fee. If all three criteria are met, there is no division of fees.





 

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