Ethics Opinion 827

By Committee on Professional Ethics

GAVEL7

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

  1. 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  The client informs the law firm that the law firm must permit the auditor’s fee to be withdrawn automatically from the law firm’s bank account.3.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.

  1. 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.

  1. 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

  1. 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 alsoN.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.
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