June 28, 2013
In a personal injury or wrongful death matter in which a contingency fee agreement provides for the maximum permissible fee established by court rule, a lawyer may not ethically treat the provision of basic administrative services as case costs chargeable to the client through the creation of a separate entity owned by a shareholder of the law firm. Treating the provision of basic administrative services as case costs in these circumstances would per se constitute a clearly excessive fee.
A lawyer's ethical responsibilities with respect to nonlawyer personnel working under the lawyer's supervision are the same whether a nonlawyer assistant is an employee of the lawyer or law firm, an independent contractor or an employee of a separate entity.
The term "law-related services" as used in MRPC 5.7 applies to professional activities that at times overlap with the practice of law but constitute the practice of a separate profession or trade. "Law-related services," as defined in MRPC 5.7, do not include the provision of basic administrative services traditionally associated with supporting the practice of law.
References: MRPC 1.5, 5.3, 5.7 and MCR 8.121.
A law firm proposes to "control costs and increase efficiency" by outsourcing various services associated with its practice to a separate entity, a limited liability company solely owned by a shareholder of the law firm and apparently physically located within the premises of the law firm. The categories of services the law firm proposes to outsource are:
(1) reviewing medical records;
(2) performing medical research;
(3) obtaining outstanding medical balances from medical treatment providers;
(4) creating, editing, duplicating and producing photographs and videos;
(5) scanning, copying, printing, organizing and storing incoming medical records, pleadings and other critical documents; and
(6) performing clerical labor and providing materials necessary to the creation and assembly of case evaluation and demand letter packages.
The inquiring lawyer asks whether the proposed outsourcing is ethically permissible1 and whether the delineated services would be subject to Michigan Rule of Professional Conduct 5.7.2 A sample fee agreement accompanying the inquiry demonstrates the inquirer's presumption that, if the proposed outsourcing is ethically permissible, it is also ethically permissible for the law firm to bill the outsourced services as case costs—that is, as directly reimbursable expenses that can be passed on to the client. Implicit in the inquiring lawyer's discussion of "outsourcing" is the notion that the services are presently being provided by the law firm, where they have presumably been deemed overhead and not separately billed. As such, the services may be rightfully characterized as basic administrative services incident to the type of legal work being routinely performed by the law firm. As described, they are not themselves legal services, nor are they costs traditionally advanced by a law firm on behalf of a client for which reimbursement is sought, such as filing fees or court reporter fees. Fully answering the inquirer's question cannot end with whether outsourcing, standing alone, is ethically permissible.3 The circumstances posed primarily implicate MRPC 1.5, and only secondarily implicate MRPC 5.7.
Whether a lawyer's fee agreement may treat the provision of basic administrative services as case costs, even with client consent, depends on whether an agreement permitting such charges would constitute charging a "clearly excessive" fee. MRPC 1.5(a). The expense of providing basic administrative services has historically been considered to be a part of a law firm's overhead. As the American Bar Association noted in Formal Opinion 93-379:
When a client has engaged a lawyer to provide professional services for a fee (whether calculated on the basis of the number of hours expended, a flat fee, a contingent percentage of the amount recovered or otherwise) the client would be justifiably disturbed if the lawyer submitted a bill to the client which included, beyond the professional fee, additional charges for general office overhead.
The opinion also suggests that advance disclosure to the client, coupled with client consent, can satisfy the rule's reasonableness requirement. While there are circumstances in which such disclosure and informed consent may be permissible, the circumstances presented by the inquiring lawyer are qualitatively different. The inquiring lawyer's law firm represents plaintiffs in personal injury and wrongful death cases, cases as to which contingency fees are regulated not only by MRPC 1.5 but also by MCR 8.121. The standard contingency fee agreement in a personal injury or wrongful death case provides for an attorney fee of one-third of the net recovery; a fee in excess of this amount is "deemed to be . . . clearly unreasonable." MCR 8.121(A). Just as charging a "results-obtained" fee in a divorce case would constitute an impermissible back-door contingent fee in violation of MRPC 1.5(d), RI-346 (2009), permitting a lawyer to treat the provision of basic administrative services as case costs chargeable to the client in a personal injury or wrongful death case in which the contingency fee agreement provides for the maximum permissible fee would be unethical. Such an agreement would constitute charging a fee in excess of the maximum permissible fee in violation of MCR 8.121 and MRPC 1.5(a). A lawyer already charging the maximum permissible fee may not ethically seek or obtain client consent to charging what is effectively a greater fee.
With respect to the question posed, there is no significance to the fact that the services in question would be performed by an ostensibly separate entity. The circumstances presented do not suggest the existence of a separate business in fact, and for purposes of conflicts of interest analysis, where one entity is effectively the alter ego of another, the two entities are treated as a single entity. Cf., e.g., Restatement (Third) of the Law Governing Lawyers, §121, cmt.; American Bar Association Formal Ethics Opinion 95-390; American Bar Association/Bureau of National Affairs, Lawyers' Manual on Professional Conduct 51:106ff. No sound policy reason warrants treating the two entities as a single entity for purposes of a conflicts of interest analysis and as separate entities for purposes of the instant inquiry.
The inquiring lawyer's question appears to assume that routine administrative tasks performed by a law firm's nonlawyer personnel are services that are or can potentially come within the term "law-related services" as defined in the rule. MRPC 5.7(b) defines "law-related services" as:
services that might reasonably be performed in conjunction with and in substance are related to the provision of legal services, and that are not prohibited as unauthorized practice of law when provided by a nonlawyer.
As explained in the Comments to the rule, the term "law-related services" applies to professional activities that at times overlap with the practice of law but constitute the practice of a separate profession or trade.4 "Law-related services," as defined in MRPC 5.7, do not include the provision of basic administrative services traditionally associated with supporting the practice of law.
Some services utilized by lawyers in connection with a representation are unquestionably provided more effectively and more efficiently by individuals and/or businesses specializing in particular work—private investigators, expert witness consultants, some specialized legal and/or medical-legal researchers, etc. Cf., e.g., American Bar Association/Bureau of National Affairs, Lawyers' Manual on Professional Conduct 41:110ff, 41:324-325. There may well also be times when it is difficult to identify the line between administrative support services, which may not be billed to the client, and specialized outside services, which may reasonably be treated as case costs. However, among the categories of services proposed by the inquirer to be outsourced, all except "medical research"5 and "creating, editing, duplicating and producing photographs and videos" fit within the category of services appropriately deemed to be administrative services provided by a law firm as part of its overhead.
Because the bulk of the services about which the inquiring lawyer asks is traditionally associated with supporting a law practice, lawyers' ethical responsibilities with respect to these services are defined not by MRPC 5.7 but by MRPC 5.3, the rule of professional conduct defining lawyers' supervisory responsibilities over nonlawyer assistants. A lawyer's ethical responsibilities with respect to nonlawyer personnel working under the lawyer's supervision are the same regardless of whether a nonlawyer assistant is an employee of the lawyer or the lawyer's law firm, an independent contractor or an employee of a separate entity.
For all of these reasons, a lawyer or law firm representing a plaintiff in a personal injury or wrongful death case and charging the client the maximum fee permitted by MCR 8.121 may not ethically convert services that are traditionally understood to be part of a law firm's overhead to case costs chargeable to the client by transferring the work to a separate entity whether or not that entity is wholly owned by a shareholder in the law firm.
Although this question was not presented by these facts, the Committee further notes that a lawyer whose fees are not subject to MCR 8.121 who seeks to outsource basic administrative services that have traditionally been performed by the law firm to an entity owned or controlled by a member of the firm in order to bill those costs to the client may run afoul of MRPC 1.5.
1 The law firm does not inquire and the Committee does not express an opinion as to the legality of the proposed outsourcing in light of any particular body or bodies of law.
2 The import of MRPC 5.7 is whether a lawyer who provides "law-related services" may avoid the application of the Rules of Professional Conduct to those services either by the manner in which they are delivered or by appropriate disclaimers being imparted to recipients of those services—not whether the services themselves may be outsourced.
3 The Committee notes separately that whether services ethically may be outsourced depends upon whether, in so doing, the lawyer can fulfill all existing ethical obligations to the client.
4 Examples of "law-related services" cited in the Comments to MRPC 5.7 include, "providing title insurance, financial planning, accounting, trust services, real estate counseling, legislative lobbying, economic analysis, social work, psychological counseling, tax preparation, and patent, medical, or environmental consulting," and "investigative services in connection with a lawsuit."
5 Although the inquiring lawyer does not indicate what is meant by "medical research," the Committee assumes that employees of the separate entity will not be performing what is commonly understood as "medical research" but will, instead, be performing some other form of research that is beyond the ability of many nonlawyer assistants.