When I put up this post about the ethics of collecting a profit on fees paid to contract attorneys, I didn’t include my own thoughts because my views are mixed.
From an ethical perspective, I’m fairly certain there’s no problem with the practice, so long as overall rates are reasonable. In fact, the entire large law firm structure depends upon leveraging young associates who are paid salaries of around $125,000 and might generate billings of three times that ($200/hr billing rate x 2000 hour billable requirement, less any costs associated with training and benefits). After all, you don’t get to one billion dollars in revenues by billing associates out at cost. In short, there’s no way any bar association on this planet would criticize a model that enables large firms to profit.
In this context, allowing a law firm to profit off contract lawyers or
outsourced services is not just ethical, but further, conduct we would
want to encourage. If a firm can hire a contract attorney with a
decade of experience for $100 an hour and bill her out at $200, then
the client gets a far, far better product at a lower cost than
if the law firm had used a junior associate. Here, the financial
reward to the firm should motivate it to enter into more of these types
of arrangements that benefit all parties involved.
[added 6/29/05 - 8 pm] There’s another reason why lawyers deserve to mark up contract work: risk. If there’s a problem with the work that’s been performed, the retaining firm remains liable, not the contract attorney (though some contract attorneys do carry malpractice insurance). ]
But while the ethics of profitting off contract services is clear, I still can’t bring myself to wholeheartedly endorse mark-ups on contract service in all cases as a matter of policy. In some ways, I’m torn because the contract question impacts solo and small firm lawyers from both ends, because many solos find ourselves on the giving and receiving end of contract work. As a
solo, I have provided services on a contract basis, at fairly lucrative
rates (which the retaining attorney most likely marked up to the client). But I’ve also used contract attorneys to ease my workload – and
often, those attorneys have worked on matters where I’ve agreed to a
flat rate or where compensation is contingency or deferred. In this
type of case, the contract attorney benefits me by freeing me up to
take on revenue generating matters but I can’t immediately pass those
So when firms can profit off contract lawyers, it means that contract
lawyers can charge more services. This benefits the solo who provides
contract services, but harms the solo who needs to use contract lawyers
and can’t pass on the costs because it potentially drives up the rates
of contract attorneys. Many solo attorneys are already short sighted
enough when it comes to paying for help (which is why so many wind up
neglecting cases or getting dangerously stressed) – and if it costs too much to hire
a contract attorney, they won’t, which hurts those attorneys and
As for me, when I’ve used contract attorneys and billed them, I’ve
always passed them on as cost with maybe a 20 percent mark up to
reimburse me for the cost of locating and training the person and the
risk of noncollection since I always pay my contract attorneys whether
or not the client pays. I might act
differently if I relied on contract attorneys more extensively, but
since it’s usually a project here or there, they don’t provide much of
a revenue source anyway. Frankly, I don’t know what percentage mark up
is reasonable for associates. It seems that the biglaw markups
are probably too high though again – what’s the benchmark? The rates that a solo charges? The rates that competitors are charges (all pretty much the same anyway?) The mark-ups sure aren’t excessive when compared to some of the fees recovered in class actions. How can we even begin to sort out what kind of mark-ups are unreasonable? It’s a question that I’ll be pondering as the year
progresses and as I begin to grow my firm beyond just me and occasional
per diem workers (more on that later).
As with so many other questions, the ethics part or the legal part is
usually easy. It’s just that for me it’s never enough. I want to do
the right thing too – what’s right for me but also what’s right for my
clients. And it’s a constant struggle to figure out what that is. Profitting off contract services is ethical in our profession. But the amount of the mark-up an when it applies and the appropriate benchmark for evaluating it are harder questions to which I don’t know the answers – and maybe most of us lawyers just don’t want to know.
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