Over at my Legal Blogwatch beat, I posted about an ongoing lawsuit against biglaw firm Chadbourne Park, alleging that Chadbourne wrongfully billed the client $20,000 for online research services when the actual cost to the firm was only around $5000.   The suit alleges that the firm engaged in deceptive trade practices in violation of state law and committed fraud.

The case raises a couple of important questions for solos:

1.  Should you mark up the cost of online legal research when you pass the charges on to your clients as a disbursement (i.e., expense item)?

2.    Should you pass on costs of online legal research to clients as a separate “line item” expense, or treat the costs as overheard, encompassed in your overall billing rate or flat fee?

As to the first question, ethics rules govern the permissibility of mark-ups of out-of-pocket expenses.  ABA Model Rule 1.5 provides that for costs such as telephone or copying charges or other out-of-pocket expenses, lawyers can charge a reasonable amount to which the client agrees in advance or an amount that reflects costs incurred by the lawyer.  So, back in the day when law firms operated copy rooms as profit centers (and maybe the same is true now), they’d typically include a provision in the retainer agreement stating that clients would be charged .25/copy, without noting that copies only cost the firm a few cents.

Still, even where you pass on actual costs to clients, as opposed to mark-up costs, should you do so?  Generally speaking, clients who receive a bill for $1000 for legal services often feel that they’ve been nickel-and-dimed when a lawyer tacks on fifty cents for the cost of postage or $2.50 for the cost of a file folder.  Of course, where you incur an extraordinary expense like an airline ticket or several hundred dollars worth of copying, seeking reimbursement is fair and a client won’t likely begrudge you for it.  But collecting smaller expenses just makes you look cheap.

Regarding the second question – whether you should bill for online legal research costs as a separate item or as part of overhead – I side with Lisa Solomon at Legal Research and Writing Pro.  Lisa recommends that you should roll online legal research costs into your hourly rate (or your flat fee, depending upon how you charge) since ost online legal research providers charge a flat monthly fee for subscription service rather than a per-search charge.  Thus, as Lisa suggests, there’s no reason to treat legal research subscriptions any differently from any other regular, ongoing costs of doing business like phone charges or Internet service which are reflected in a firm’s overhead rather than billed separately.

But there are other reasons to treat legal research costs as overhead beyond those that Lisa discusses. For starters, the task of trying to allocate legal research charges based on usage would, in my view, be an administrative nightmare.  Spending several hundred dollars worth of time to collect what at most amounts to a few hundred dollars just isn’t worth it, in my view.

In addition, an online legal research subscription benefits the firm as much, if not more than clients.  Online legal research subscriptions let lawyers keep current on issues or conduct research that can be converted into articles or studies that can help lawyers market their practice.  Because the benefits of online legal research (like the cost of rent or phone charges) inure equally to the firm and clients, they’re property treated as the cost of doing business and charged as overhead, rather than a pass-through.

Next, clients are becoming more savvy about costs.  The client in the Chadbourne case knew enough about how online legal subscription research services work to question his bill.  As the Internet makes more aspects of doing business transparent, we lawyers can expect to see questions – and eventually lawsuits from clients who believe they’ve been overcharged.  So taking liberties with a client’s bill to squeeze out a few more pennies doesn’t make sense from a business perspective.

As for me, though, the issue of passing on legal research costs is more about ethics and client relations than accounting concepts of expense versus overhead.  Quite simply, if I were a client,  I wouldn’t want to see a LEXIS charge on a bill from my lawyer, particularly if I knew that my lawyer was getting the service for a flat fee and charging me for a per diem share that reflected a per-search or hourly cost? Would you feel in that situation?