What Is "Reasonable" for Contract Lawyer Fees?
It is established that law firms are entitled to engage contract or temporary lawyers for specific engagements. When the assignment is completed, the law firm can sever the tie with the contract lawyer and everyone has benefitted: the lawyer who otherwise would not have been employed; the law firm that can take on additional work and its resulting benefits; and the client whose goals can be met more efficiently and timely.
However, an issue over contract lawyer fees has arisen in Citigroup's settlement of class action litigation over alleged misleading disclosures about its financial condition. There now is a dispute over the size of the fees that the plaintiffs' law firm charged and attributed to its use of contract lawyers. While the dispute centers on the size of the fees, the real issues are whether the engagement agreement mentioned anything about contract lawyers and, if so, what the terms were, and whether the fees charged were "reasonable" for the contract lawyers' expertise.
The crucial question that determines the extent of any cost savings when contract lawyers are used is how the clients are billed. This issue has been litigated and the conclusion is that the contract attorney is not an out-of-pocket cost for billing purposes. Firms are not required to bill the client at the cost to them for the contract attorney's time. They may bill at an "attorney's rate," a standard flat rate, or any rate that is established in the engagement agreement and is acceptable to the client. The rate can be high enough to cover overhead expenses of the firm's own staff, such as secretarial help, paralegals, word processors and so on, as well as provide a profit to the firm for the effort expended by the contract lawyer.
Such an arrangement can carry the perils and pitfalls of "fee-splitting," and thus covered under the Code of Professional Conduct. Model Rule 1.5 declares that fee-splitting is acceptable if both lawyers involved contribute something of value, if the client agrees in writing, and if the total fee is reasonable. Moreover, courts from California to Michigan have ruled that referral or split fees cannot be collected in full if there is not full documentation from either the client or the attorney side. Whether and to what extent the contract lawyer fees in the Citigroup litigation were documented is at the heart of the current dispute. Some press reports, as in Forbes magazine, suggest that there are arguments to be made on both sides. But to avoid second-guessing later, the controversy shows that it is better to err on the side of caution and detail when documenting contract lawyer fees. As inferred above, I suspect the issue is not one of documentation of time of the contract lawyers and consent of the client, but rather one of whether the fee charged for the contract lawyers efforts was reasonable under the circumstances.
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