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NEW YORK STATE BAR ASSOCIATION
COMMITTEE ON PROFESSIONAL ETHICS
Opinion #827 -
11/03/2008
TOPIC: Direct payment of client’s audit
expense from law firm account; sharing of legal fees
DIGEST: Not unethical to cooperate with outside audit of
client’s billings, nor to pay a percentage of gross billing to the
auditor directly from firm account, at the direction of the client.
CODE: DR 1-102, DR 2-103, DR 3-102, DR 4-101
QUESTION
- Where a client hires an outside vendor to monitor and administer its
legal bills and requires that the lawyer or law firm pay the
auditor’s bills, may the firm ethically participate in the
auditing function and may the lawyer permit the costs of such services
to be paid by the law firm, where the bills are based on a percentage of
the firm’s billings to the client? May the firm permit the
payments to the auditor to be made directly from its operating
account?
OPINION
2. A law firm regularly
defends an entity in personal injury defense litigation. The
entity “self-insures,” so no insurance company is involved
in retaining the law firm or conducting the client’s
defense. The client has hired an outside vendor (an auditor) to
monitor and administer the client’s legal expenses. The
auditor’s bills will be based on a percentage of the law
firm’s billing. The client informs the law firm that the law
firm must permit the auditor’s fee to be withdrawn automatically
from the law firm’s bank account.
3. In N.Y. State 716
(1999), this Committee considered whether a lawyer might ethically
cooperate with an outside auditor hired by an insurer, where the lawyer
represented not the insurer, but the insured. There, where the
decision to employ the auditor was not the client’s decision, we
looked primarily to DR 4-101, which deals with the lawyer’s duty
of confidentiality to the client. We determined that the lawyer
would need to obtain informed and knowledgeable consent from the client
before sharing confidential billing records with the auditor. We
did not, however, view cooperation with the auditor as intrinsically
impermissible.
- Here, where the client has sought the auditor’s services, the
problem addressed in N.Y. State 716 is less immediate. Even so, a
lawyer should take steps to ensure that the client understands any risks
for the client that follow from disclosure of billing information to the
auditor. These risks include the possibility of further disclosure
by the auditor to others, the possibility that the disclosure will waive
the attorney-client privilege, and the possibility that the information
disclosed to the auditor might somehow be used adversely to the
client.[1]
5. Assuming the
client understands and wishes to go forward despite these risks, we turn
next to DR 3-102 which states that “[a] lawyer or law firm shall
not share legal fees with a non-lawyer,” with exceptions not
relevant on these facts. The rule in its apparent simplicity might
seem to prohibit the arrangement described above. We think it does
not.
6. The arrangements
here at issue are simply an incident of fee-negotiation with a client,
an agreement to allocate costs between client and lawyer. They are
not, properly speaking, fee division. While no lawyer is obligated
to agree to the arrangement, the mere fact that the auditor’s fee
is calculated based upon the lawyer’s billings does not make the
payment from the lawyer to the auditor the division of a legal
fee. Moreover, as we opined in N.Y. State 733 (2000), the
intention of DR 3-102 is to secure the client-attorney relationship
against outside interference: “fee-splitting between lawyer
and layman poses the possibility of control by the lay person,
interested in his own profit, rather than the client's fate.”[2] This concern
is absent in the allocation of fees between a lawyer and a client.[3]
7. The arrangement
here also does not raise any concerns under DR 2-103(D), which prohibits
a lawyer from “compensat[ing] or giv[ing] anything of value to a
person or organization to recommend or obtain employment by a
client,” again with exceptions not relevant here.[4] Here,
the client is already the firm’s client. The auditor is
engaged by the client to monitor its legal bills, and compensated for
that service – not for bringing the client to the lawyer.
- This conclusion is not affected by the manner of payment requested
by the client. Nothing in the Code bars a lawyer from agreeing to
permit the client or the auditor from automatically withdrawing the
auditor’s fees from the lawyer’s operating account.
CONCLUSION
- Subject to the conditions described – notably that the client,
with a full understanding of the arrangements and their implications,
chooses to employ the auditor – the lawyer may cooperate with and
compensate the auditor from the firm’s operating account.
(22-08)
[1] “The nature of the necessary disclosure [to the client]
will vary somewhat from case to case and client to client . . .
. Ordinarily, however, the lawyer should at
least discuss the nature of the information to be found in the billing
records sought by the auditor as well as the relevant legal and nonlegal
consequences of the client’s decision.” N.Y. State 716.
[2] N.Y. State 733, citing Emmons v. State Bar of California, 6 Cal. App. 3d 565, 574, 86 Cal. Rptr. 367, 372 (Ct. App. 1970).
[3] See also N.Y. State 819 ¶ 7 (2007) (no violation of DR 3-102 when a
lawyer agrees to accept less than a judicially determined fee in a
domestic relations matter).
[4]To similar effect see Judiciary Law § 491, which prohibits
the sharing of fees with non-lawyers “as an inducement for
placing, or in consideration of having placed, in the hands of such
attorney-at-law, or in the hands of another person, a claim or demand of
any kind for the purpose of collecting such claim, or bringing an action
thereon.” See also N.Y.
State 698 (1998), in which we opined that a lawyer may not accept a case
tendered by a “consultant” who makes the payment of a
“contingent consultant’s fee” a precondition of
referral to the lawyer.
Related Files
Direct payment of client's audit expense from law firm account; sharing of legal fees (Adobe PDF File)
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