Freelance Lawyering Ethics Rule #6: Is a law firm allowed to make a profit off a freelance attorney’s rate?
Take Away: Yes, just like law firms are allowed to profit off their paralegal and associate rates, law firms can add a surcharge to a freelance lawyer’s rate. In terms of fees paid to a freelance lawyer, ethical rules permit firms to (1) absorb the cost paid to the freelance lawyer; (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. Most firms choose to add a surcharge to a freelance lawyer’s rate, i.e. pay the freelance lawyer $150 and charge their client $375, but they must make sure the total fee is “reasonable.”
In addition to easing law firm workload, increasing client service, and improved firm attorney well-being, law firms frequently view contract attorneys as a profit center to the firm.
When a law firm hires a freelance attorney, 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 four fee arrangements are ethical in California and the vast majority of states, assuming the fee passed to the client is not otherwise unconscionable pursuant to California Rule of Professional Responsibility 1.5, and assuming the attorney satisfies the standard requirements set forth under California Business and Profession Code sections 6147-6148; 6068(m) regarding fee arrangements.
California case law establishes that the amount a law firm pays to a freelance attorney is irrelevant to whether a fee is unconscionable, and nothing in Rule 1.5 suggests that the attorney’s profit margin is relevant to the issue of unconscionability. See case law citing prior rule 4-200: Shaffer v. Superior Court (1995) 33 Cal. App. 4th 993; Bushman v. State Bar (1974) 11 Cal. 3d 558, 564 (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.”) Note, however, that if the firm chooses to pass a marked-up rate to its client, according to the Los Angeles County Bar Association Professional Responsibility and Ethics Committee, it likely constitutes a “significant development” of the case and the firm should notify the client that it is working with an outside consulting attorney. Prior Rule 3-500; Bus. and Prof. Code §6068 (m); LACBA Formal Opinion 518.
Similarly, the ABA’s Model Rules of Professional Conduct do not explicitly address whether a law firm can add a surcharge to a contract attorney’s rate. Model Rule 1.5(a) states that a lawyer’s fee must be reasonable and should consider various factors such as the time and labor required, the nature of the services provided, and the fee customarily charged in the locality. The comment to this rule further explains that “the fee may be a reasonable percentage of the amount involved or may be fixed at the outset of the representation, depending on the circumstances.”
The District of Columbia Court of Appeals confirmed this in Matter of Cooperman (D.C. 2014) 83 A.3d 435, holding that a law firm could add a surcharge to a contract attorney’s rate as long as the fee charged was reasonable and the client was informed about the surcharge in advance. The court explained that “surcharge arrangements can be a legitimate and ethical means of compensating contract attorneys” and that the key was ensuring that the fee charged was reasonable.
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