The ABA’s “Law Practice Today” July 2017 issue features “Stay Ethical While Growing Your Firm” by Montage Legal Group co-founders Laurie Rowen and Erin Giglia. The article discusses how firms and freelance lawyers can manage their relationships based on applicable ethics rules, and also discusses the Of Counsel title.
Montage Legal Group’s founders are frequent commentators on freelance attorney and contract attorney ethics. In May 2017, Laurie and Erin spoke for the OCBA on “Ethics of Growing Your Practice: Use of Contract Attorneys, Referrals and Associations.” In June 2017, Erin was quoted in, “Where Should Firms Draw Line on Contract Lawyers,” by Miriam Rozen, The American Lawyer (June 9, 2017), discussing freelance attorney rates and fees. Various publications frequently reference their article, “Ethics of Contract Lawyering” (Part 1 and Part 2), Law.com-The Recorder (April, 2013).
If you have questions regarding the ethics of freelance lawyering, please contact Erin and Laurie at [email protected]. An excerpt from the article is below.
Of Counsel, Freelance and Other Lawyer Relationships: Stay Ethical While Growing Your Firm (Law Practice Today, July 14th, 2017)
Most lawyers start law firms with the same goal in mind – to earn a living practicing law. With luck, small firm lawyers will generate enough work to learn that a fine line separates being too busy and not busy enough. Once a firm has crossed into “too busy,” it has several options for immediate help: (1) bring in an outside lawyer to become “of counsel” to the firm; (2) hire a contract/freelance attorney periodically on an hourly or flat fee basis; or (3) refer matters to lawyers outside the firm, possibly in exchange for a referral fee. Each of these arrangements is permissible, but different ethical rules apply to each situation. In this article, we discuss applicable ABA and California ethical rules, pitfalls to avoid, and best practices.
- Of Counsel Relationships
Law firms often form relationships with outside attorneys to assist with legal projects when a firm is too busy or needs additional expertise. Outside attorneys may help with single projects or multiple matters, and may develop a continuous relationship with a firm. Firms often select the title “of counsel” to define a relationship with an outside attorney in an effort to appease their clients or make their firm appear to have additional resources, but firms should be aware of the requirements and ethical implications of an “of counsel” title before making the designation. A firm should not call a temporary or contract attorney “of counsel” unless the relationship meets the applicable definition.
- Definition of “Of Counsel”
American Bar Association Formal Opinion 90-357 defines the term “of counsel” as a “close, personal, continuous, and regular relationship” between the law firm and an “of counsel” lawyer, and states that it is a relationship which is neither that of a partner nor an associate of a firm. The ABA is clear that the relationship cannot involve “only occasional collaborative efforts among otherwise unrelated lawyers or firms.” The California Supreme Court adopted the ABA’s definition, and further states that “the essence of the relationship between a firm and an attorney ‘of counsel’ to the firm is the closeness of the ‘counsel’ they share on client matters.” People ex rel. Department of Corrections v. Speedee Oil Change Systems, Inc., 20 Cal.4th 1135 (1999).
The ABA and California rules allow an attorney to hold one or more “of counsel” designations while maintaining a separate source of work, so long as the firms involved appropriately monitor and clear conflicts and adhere to all applicable ethical rules. Specifically, State Bar Of California Standing Committee On Professional Responsibility And Conduct Formal Opinion (COPRAC) 1993-129 states that “the number of ‘of counsel” relationships in which a member or law firm may serve is limited not by any strict numerical standard … in theory, law firm ‘O’ may serve as ‘of counsel’ to law firms ‘A’, ‘B’ and ‘C.’”
The ABA and California rules are clear that holding multiple “of counsel” positions simultaneously is permissible. As discussed below, however, the number of firms with which a lawyer can have an “of counsel” relationship may be limited from a practical standpoint due to conflict of interest rules.
- Of Counsel Lawyers Have Automatic, De Facto, Imputed Conflicts of Interest
Any attorney or law firm contemplating an “of counsel” relationship also must understand the conflict-of-interest rules that an “of counsel” designation creates in their respective state. California Rule of Professional Conduct 3-310 governs attorney conflicts regardless of whether a lawyer is a partner, associate, of counsel or a temporary contract attorney, and prohibits an attorney from accepting or continuing client representation if an actual or potential conflict affects the member’s representation.
Pursuant to ABA rules and California rules, law firm conflicts are automatically deemed imputed to an “of counsel” lawyer, and vice versa. Under this single de facto analysis, current and former clients of every firm lawyer and the “of counsel” lawyer become relevant to all the lawyers’ respective ethical obligations and potential disqualifications. See Speedee Oil, 20 Cal.4th 1135 (1999) (stating that for purposes of conflicts of interest and disqualification, an “of counsel” attorney and the principal firm must be considered “a single, de facto firm” so that if one of them is precluded from a representation because of a conflict of interest, the other is presumptively precluded from the representation as well.) See also COPRAC 1993-129.
An “of counsel” title can exponentially increase conflicts, and can preclude “of counsel” attorneys from representing clients adverse to the firm in their outside practices without providing written disclosure to and/or receiving informed written consent from clients pursuant to CRPC 3-310. A lawyer who purports to be “of counsel” to multiple law firms at the same time has imputed conflicts with each and every firm, even if that lawyer is working on only one matter. Firms can be conflicted out of matters simply by designating a contract lawyer as “of counsel.”
While ethically there is no limit on the number “of counsel” positions a lawyer may hold, from a practical standpoint, all the firms in effect become one firm for the purposes of conflicts of interest. For this reason, unless the title “of counsel” is necessary because the lawyer is truly a member of the law firm, the best practice is to avoid using the title. Without an “of counsel” title, firms can take precautions to limit their temporary lawyer’s access to confidential client information, and can prevent an outside attorney from being “deemed associated” to the firm for conflict purposes. See ABA Formal Opinion No. 88-356 (stating that firm conflicts are imputed to the temporary attorney only if the temporary attorney is “deemed associated” with the firm such that knowledge of and access to the firm’s clients’ confidential information is presumed.)
As long as an attorney complies with the “of counsel” relationship requirements, the association with an established law firm can prove beneficial. But such benefits do not come freely, and before accepting the “of counsel” designation, attorneys must carefully consider the added burden of disclosure and consent requirements, and potential conflict disqualifications.
- Freelance Attorney Relationships
Firms often rely on freelance lawyers, also known as temporary or contract lawyers, to assist with legal projects during periods of increased work such as trial preparation, to add specific expertise, to creatively lower fees to firm clients, or to cover for vacation and maternity leave. While many ethical rules apply the law firm/freelance lawyer relationship, the most commonly misunderstood rules involve (1) Aiding and Abetting the Unauthorized Practice of Law; (2) Fees to Client/Upcharging; and (3) the Duty to Disclose.
- Aiding And Abetting The Unauthorized Practice Of Law
No person may practice law unless the person is an active member of the State Bar of California. See Cal. Bus. Prof. Code § 6125; Birbower, Montalbano, Condon & Frank, PC v. Superior Court, 17 Cal.4th 119, 128 (1998). Rule of Professional Conduct 1-300(A) states, “A member shall not aid any person or entity in the unauthorized practice of law.”
While the California State Bar Act does not define the “practice of law,” courts have discussed its meaning, which is not as stringent a requirement as it initially appears. “The primary inquiry is whether the unlicensed lawyer engaged in sufficient activities in the state or created a continuing relationship with the California client that included legal duties and obligations.” California ethical rules permit law firms to contract with out-of-state attorneys to handle many legal projects, including drafting legal pleadings, research and writing, as long as the law firm remains ultimately responsible for the final work product. Birbower, (1998) 17 Cal.4th 119, 129.
Winterrowd v. Am. Gen’l Annuity Ins., 556 F.3d 815 (9th Cir. 2009) is instructive on this issue. In Winterrowd, a lawyer barred in Oregon but not in California assisted a California lawyer litigating a case before the United States District Court for the Central District of California. The Oregon attorney did not “appear” before the court, did not sign any pleadings, and had little contact with opposing counsel or clients, and the California attorney supervised the Oregon attorney. The court held that there was no ethical violation under these circumstances. See Orange County Bar Association Formal Opinion 2014-1 (concluding that “the mere act of Out-of-State Lawyer’s ghostwriting a document for California Counsel of Record is not likely to constitute the unauthorized practice of law in California.”); San Diego County Bar Association Ethics Opinion 2007-1 (“the attorney does not aid in the unauthorized practice of law where he retains supervisory control over and responsibility for those tasks constituting the practice of law.”)
Simply engaging an out-of-state contract lawyer to ghost-write generally does not violate ethical rules, so long as an attorney licensed by the state retains full control over the representation and exercises independent judgment in reviewing the non-licensed attorney’s work.
- Upcharging/Fees Charged to Client
When a law firm uses a freelance attorney for a legal project, the firm can elect to bill the client in several different ways: (1) absorb the cost; (2) pass the cost to the client at the same rate the firm paid the freelance attorney; (3) mark up the cost and pass the marked up cost to the client; or (4) pass a flat fee cost to the client. Each of these fee arrangements are permissible in California, assuming the fee passed to the client is not otherwise unconscionable pursuant to Rule of Professional Responsibility 4-200, and the attorney satisfies the California Business and Profession Code sections 6147-6148; 6068(m) requirements regarding fee arrangements.
California case law is clear that that the amount a law firm pays to a freelance attorney is irrelevant to whether a fee is unconscionable, and nothing in Rule 4-200 suggests that the attorney’s profit margin is relevant to determine unconscionability. Shaffer v. Superior Court, 33 Cal. App. 4th 993 (1995); Bushman v. State Bar (1974) 11 Cal. 3d 558, 564 (1974) (a fee which “shocks the conscience” is unconscionable); see also ABA Formal Ethics Opinion 2000-420 (“When costs associated with legal services of a contract lawyer are billed to the client as fees for legal services, the amount that may be charged for such services is governed by the requirement of ABA Model Rule 1.5 that a lawyer’s fee shall be reasonable. A surcharge to the costs may be added by the billing lawyer if the total charge represents a reasonable fee for services provided to the client.”); but see Texas Opinion No. 577 (ruling that in Texas, law firms may not mark-up fees of temporary lawyers).
Adding a surcharge to a freelance attorney’s rate is ethically permissible in CA and most states that follow ABA rules. If the firm chooses to add a surcharge to the freelance attorney rate, however, it likely constitutes a “significant development” sufficient to trigger client disclosure rules.
- Duty to Disclose
Law firms often resist using freelance lawyers under the mistaken belief that they always have to notify their clients if they are using a freelance attorney. California rules are clear that no duty to disclose applies unless the work by the outside lawyer constitutes a “significant development” in the representation. Under Rule of Professional Responsibility 3-500, “A member shall keep a client reasonably informed about significant developments relating to the employment or representation, including promptly complying with reasonable requests for information and copies of significant documents when necessary to keep the client so informed.”
- When is Disclosure Required?
What constitutes a “significant development” for disclosure purposes depends on the individual case and circumstances. COPRAC Opinion 1994-138 enumerates examples of relevant factors to determine whether a firm is required to disclose the freelance attorney relationship, including: (i) whether responsibility for overseeing the client’s matter is being changed; (ii) whether the new attorney will be performing a significant portion or aspect of the work; or (iii) whether staffing of the matter has been changed from what was specifically represented to or agreed with the client. See San Diego County Bar Association Formal Opinion 2007-1 (discussing COPRAC 2004-165, and stating that in addition to the three factors listed in COPRAC 1994-138, whether use of a temporary lawyer constitutes a “significant development” also depends on whether the client had a “reasonable expectation under the circumstances” that a contract lawyer would be used to provide the service.)
It should be noted that in California, if a firm chooses to add a surcharge to a freelance attorney rate, i.e. pay a freelance attorney $150 but charges its client $250, this likely constitutes a “significant development,” regardless of the type of work the contract attorney intends to perform. LA County Bar Association Formal Opinion 518; OCBA Formal Opinion 2014-1.
- Scope and Manner of Disclosure
If disclosure is required, California ethics opinions suggest that disclosures should be in writing in a fee agreement at the outset of the case, or as soon use of the contract attorney is anticipated. See OCBA Formal Opinion 2014-1 (stating “where the lawyer reasonably expects, at the outset of the case, that he will use the services of a contract lawyer to perform significant functions, he also should include such a disclosure in a written fee agreement.”)
While there is no formal opinion or rule that discusses specifically what information a firm must disclose to a client about involving an outside contract attorney, In re Wright, 290, B.R. 145, 151-52 (C.D. Cal. Bkrtcy. 2003) may be instructive. The Wright Court suggests that, in the bankruptcy context, a lawyer seeking fees for work performed by a contract lawyer must demonstrate that his client consented to the arrangement with the contract lawyer. In re Wright, 290 B.R. at 156. The lawyer who hired the contract lawyer also must “demonstrate that the client agreed to the use and billing rate of [the] contract attorney if the firm contemplated [his or her] use at the time that the firm was employed.” Id. at 156.
As the OCBA Ethics Committee concluded, “there is nothing inherently unethical with a client or lawyer hiring another lawyer – often a contract lawyer – to ghostwrite a document to be submitted to court, without identifying the contract lawyer or disclosing his involvement. Only when the client or lawyer seeks to recover his attorneys’ fees must the contract lawyer’s role be disclosed to the court. If, however, the involvement of the contract lawyer constitutes a significant development, then his involvement must be disclosed to the client.” OCBA Opinion 2014-1; see also ABA Formal Opinion 88-356 (stating that assuming there is no division of fees, and that the law office does not charge the outside lawyer’s compensation to the client as a disbursement, the law office has no obligation to reveal to the client the compensation arrangement with the outside lawyer whether that attorney is paid by salary or on an hourly basis.)
- Financial Arrangements Between Lawyers – Referral Relationships
Small law firms frequently have clients who request assistance beyond a firm’s expertise. If the firm can ensure competent representation, the firm may choose to handle these matters internally, or with help from an “of counsel,” or a freelance attorney. There are situations, however, when a firm may best serve the client’s needs, and avoid possible ethics violations, by referring the matter to a different law firm. Referral relationships have many benefits including cross-referral possibilities, but referrals among lawyers also involve certain ethical considerations.
- Referrals Between Lawyers
Referrals between California lawyers are governed by Rules of Professional Conduct 2-200 and 1-400. Attorney advertising and solicitation rules under Rule 1-400 apply to the referral situation because California allows attorneys to pay other attorneys referral fees. Attorneys must comply with Rule 1-400’s advertising and solicitation rules when making referrals the same way every attorney must comply when making statements about themselves.
Rule 1-400 states that an attorney may not make statements to a potential client that are untrue, confusing, or misleading, including when making a referral to an outside firm. Attorneys may not use intimidation, harassment, or coercion, and also may not make any guarantees or predictions when making a referral.
- Referral Fees
Lawyers receiving referrals from other California lawyers are ethically permitted to pay the referring lawyer a percentage of the fees collected in exchange for the referral. Under Rule 2-200, sharing a client fee among lawyers not in the same firm is ethically permissible if the client consents to the arrangement after a full, written disclosure of the terms of the division. The fee-division may not increase the total fees charged to the client, and the overall fee may not be unconscionable.
While it may be tempting to create a financial incentive to non-lawyers (including lawyers admitted to practice law outside California) to encourage referrals, Rule 1-320 prohibits sharing legal fees with a non-lawyer. Rule 1-320 extends beyond a simple percentage referral fee, and further prohibits California lawyers from giving non-lawyers gifts or other compensation in exchange for referrals, or as a reward for making a recommendation resulting in employment of the member’s law firm.
As of March 2017, the California Supreme Court is reviewing proposed Rule 1.5.1, which will replace Rule 2-200 if approved. Rule 1.5.1 requires that the lawyers dividing a legal fee have a written agreement between them. Rule 1.5.1 also requires that the written client disclosure include the (1) fact of division, (2) identity of lawyers or law firms who are dividing the fee, (3) terms of division. The client must also consent in writing at the time of the agreement to divide the fee, or as soon as possible after the agreement.
While law firms have options when considering accepting matters beyond their current capacity, they must be mindful of the ethical rules that apply to the relationships they form with lawyers outside their law firms. Law firms may decide to retain matters internally with help from a contract/freelance attorney on a project basis, or consistently work with an attorney who will act as “of counsel” to their firm, so long as the attorneys involved properly clear conflicts of interest, and adhere to the duties of disclosure. Law firms may also ethically refer matters to other law firms. Relationships among lawyers of different firms can benefit lawyers and clients alike, both financially as well as in the quality of representation.
About the Authors
Laurie Rowen and Erin Giglia are the co-founders and owners of Montage Legal Group, a network of freelance lawyers who work on a project basis for law firms that need help with overflow and specialty areas of law. Follow them on Twitter @montagelegal.
Prior to founding Montage, Erin and Laurie both practiced litigation at Snell & Wilmer LLP in Orange County, California. Laurie and Erin have been featured in Forbes.com and the ABA Journal, and have received numerous honors in connection with their work with Montage, including receiving OC Metro Magazine’s 2011 “Top 40 under 40” young professionals, the National Association of Women Business Owners-OC’s 2012 Entrepreneur to Watch, and the Enterprising Women’s Magazine’s 2014 Enterprising Women of the Year Award. Laurie and Erin have published many articles on contract lawyering, including the “Ethics of Contract Lawyering” (Part 1 and Part 2), in Law.com-The Recorder (April, 2013). To contact Laurie and Erin with questions on freelance attorney ethics, please email [email protected].
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