THIS OPINION IS MODIFIED AND RESCINDED IN PART BY R1-364.
August 10, 1995
A law firm may not add a surcharge to a client's bill over the lawyer's actual cost unless the lawyer incurred additional expenses beyond the actual cost or the written fee agreement between the parties expressly provides for a surcharge. It is the duty of the lawyer to fairly and adequately inform the client of the firm's billing practices, including any surcharges or late fees.
References: MRPC 1.4(b), 1.5(a), (b), and (c), 1.8(e), 4.1; RI-150; CI-537; MCR 8.121(F); ABA Op 93-379.
A law firm bills its clients for numerous costs and disbursements incurred in the course of representation. Internal costs such as copying services are charged at rates which include not only direct costs, but certain indirect costs such as depreciation of the machine, maintenance, etc. Other out-of-pocket expenditures, such as court reporting fees, expert witness fees and other unspecified trial material are billed to the client as they are incurred. If the client does not take advantage of the opportunity to pay at the time of billing, the firm proposes to apply a 20% or less "mark up" to the balance.
The mark up arrangement would most commonly arise during the course of personal injury cases where the law firm is retained on a contingency fee basis. The law firm would issue monthly bills to all its clients, including the contingency fee matters. The monthly bill would reflect the costs and expenses incurred on behalf of the client. Clients who are represented on a contingency fee basis usually do not pay the monthly bill but wait until the conclusion of the case. At that time, the law firm would add a "mark up" to the bill balance. Upon resolution of a contingency fee case, the mark up balance would be deducted from the recovery before any distribution is made to the client.
The law firm asks whether the proposed billing practices are ethically permitted.
At the commencement of representation, a lawyer is required to make disclosure of the basis for the fee and any other charges to the client. Most contingent fee agreements and retainer agreements provide that costs and expenses will be incurred beyond the lawyer's fee which the client is expected to pay. In considering phrases in the representation agreement such as "costs," "disbursements" or "expenses," clients would normally conclude that the lawyer would be passing on the actual outlay of funds made by the lawyer on behalf of the client. A lawyer has a duty to adequately explain all aspects of the case with the client. MRPC 1.4(b) sets forth this obligation. As part of that duty, it is a lawyer's responsibility to ensure that the original contingency fee agreement and retainer agreement are accurate and completely set forth all agreements and practices so that a client can make informed decisions regarding the representation. Both MRPC 1.5(c) and MCR 8.121(F) require all contingent fee agreements to be in writing. MRPC 1.5(b) states:
"(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."
Further, MRPC 1.5(a) prohibits a lawyer from entering into an agreement for, charging, or collecting an illegal or clearly excessive fee. A fee is clearly excessive when a lawyer of ordinary prudence would be left with a definite and firm conviction that the fee is in excess of a reasonable fee. Although there are no specific factors set forth regarding a determination as to whether the collection of disbursements is reasonable, an analogy can be made to the collection of fees. ABA Op 93-379. This Committee has opined that a lawyer may not bill more than one client at full rate for the same time period. In RI-150, the Committee stated "under no circumstances is it appropriate to charge the client for more than the time actually spent on that client's case . . . ." Similarly, in the charging of fees it would be inappropriate to charge the client for more than the expense actually paid or incurred by the law firm.
Finally, MRPC 4.1 prohibits misleading statements by a lawyer and states:
"In the course of representing a client, a lawyer shall not knowingly make a false statement of material fact or law to a third person."
The ultimate ethical obligation is owed by a lawyer to the client. Therefore, the lawyer's billing to the client, whether made during the course of the representation or at the conclusion, may not contain a false statement of material fact to the client. By entering into a contingent fee agreement or retainer agreement that provides for the payment of disbursements and later issuing a final statement that included a surcharge on those disbursements, the lawyer would be misrepresenting the status of the payments made on behalf of the client. This view is consistent with ABA Op 93-379 which states:
"At the beginning of the engagement, lawyers typically tell their clients that they will be charged for disbursements. When that term is used clients justifiably should expect that the lawyer will be passing on to the client those actual payments of funds made by the lawyer on the client's behalf. Thus, if the lawyer hires a court stenographer to transcribe a deposition, the client can reasonably expect to be billed as a disbursement the amount the lawyer pays to the court reporting service.
". . .
"It is the view of the Committee that, in the absence of disclosure to the contrary, it would be improper if the lawyer assessed a surcharge on these disbursements over and above the amount actually incurred unless the lawyer incurred additional expenses beyond the actual cost of the disbursement item.
". . .
"Clients quite properly 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."
It is not unethical for a lawyer to charge interest or a time-price differential on overdue accounts, as long as the arrangement is in writing and the terms comply with other applicable law. See, Vol 70 No 9 MBJ 948 (1991); CI-537. It is the lawyer's responsibility to determine the amount of a legally allowable "late fee." The written fee agreement would need to specify the "due date" for the payment of the disbursements and the "late fee" that would be charged and collected if the client chose not to timely pay for the disbursements.
We note that most contingency fee arrangements provide that costs and expenses will be advanced by the lawyer, and paid first out of any recovery for the client. The client must remain obligated to pay the costs, MRPC 1.8(e). If the contingency fee agreement provides that costs will be paid from the recovery, then the client's obligation to pay does not become "ripe" until the recovery is awarded0. Any "late fee" could not be applied until the obligation to pay is triggered. If the lawyer chooses not to advance costs and expenses, and the written fee agreement provides that the costs and expenses are to be paid when incurred and billed, then the client's obligation to pay is "ripe" when billed and the "late fee" could accrue from the due date identified in the written agreement.
With respect to the surcharges, we have found no authority which clarifies whether costs and expenses deducted from a contingent fee recovery pursuant to MCR 8.121(C) must be actual costs, or may be flat costs agreed upon between the lawyer and client in writing.
ABA Op 93-379 states that disbursements made by a lawyer to third parties should be charged to the client only in the amount of the actual disbursement, even when the lawyer has received a discounted rate. The ABA Opinion continues, regarding "in-house services," that a lawyer should charge only the direct costs associated plus a reasonable allocation of overhead expenses directly associated (i.e. a proportion of the salary of the photocopy machine operator). In the absence of a specific agreement to the contrary, it would be improper for a lawyer to "mark up" such charges beyond the actual costs incurred.
However, the lawyer would be able to charge and collect a surcharge if the client has agreed in writing to pay the surcharge after consultation and opportunity to obtain independent advice concerning the matter. A lawyer may not add a surcharge unless the lawyer actually incurs additional expense beyond the actual cost of a disbursement item, or the lawyer and client have agreed in writing after adequate consultation that the surcharge will be charged and paid.