Can a law firm cooperate with a client's outside billing auditor and pay the auditor a percentage of the firm's billings directly from the firm's account?
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This page answers the general question as of 2008. Ezel answers yours: whether it's allowed on your facts, under the current New York Rules of Professional Conduct, with citations.
Plain-English summary
A law firm regularly defended a self-insured entity in personal injury litigation. The client hired an outside vendor (an auditor) to monitor and administer its legal bills, told the firm it must let the auditor's fee, calculated as a percentage of the firm's billings, be withdrawn automatically from the firm's bank account, and the firm asked whether it could ethically participate and pay in this way.
On confidentiality, the committee draws on N.Y. State 716 (1999), which dealt with an insurer-hired auditor where the lawyer represented the insured. Because here the client itself sought the auditor, the confidentiality concern is less immediate, but the committee says the lawyer should still ensure the client understands the risks of disclosing billing information: further disclosure by the auditor, possible waiver of the attorney-client privilege, and possible adverse use of the information.
On fee sharing, the committee turns to DR 3-102, which bars sharing legal fees with a non-lawyer. It concludes the rule does not prohibit this arrangement: the payment is "simply an incident of fee-negotiation with a client, an agreement to allocate costs between client and lawyer," not fee division. Citing N.Y. State 733 (2000), the committee explains DR 3-102's purpose is to protect the lawyer-client relationship from outside lay control interested in its own profit, a concern absent where fees are allocated between lawyer and client. The committee also finds no problem under DR 2-103(D) (compensating someone to recommend or obtain employment) because the auditor is paid to monitor bills, not to bring in the client, and concludes nothing in the Code bars automatic withdrawal of the auditor's fee from the firm's operating account.
In practice
The opinion holds, under the former Code as it stood at the time, that a firm may cooperate with and pay a client-hired billing auditor a percentage of billings directly from the firm's account, subject to one condition the committee emphasizes: the client, with full understanding of the disclosure and privilege risks, chooses to employ the auditor. The committee treats the percentage-of-billings payment as cost allocation rather than fee division because the protective purpose of the fee-sharing bar (preventing lay control of the representation) is not implicated when the allocation runs between lawyer and client.
Common questions
Q: Does paying an auditor a percentage of my billings violate the ban on fee sharing with non-lawyers?
A: The opinion concludes no. It treats the payment as an allocation of costs between lawyer and client, not a division of a legal fee, so DR 3-102 is not violated.
Q: Can the auditor's fee be pulled automatically from the firm's operating account?
A: Yes. The opinion concludes nothing in the Code bars the client or the auditor from automatically withdrawing the auditor's fee from the firm's operating account.
Q: What does the lawyer have to do about confidentiality before sharing billing records?
A: The opinion states the lawyer should ensure the client understands the risks of disclosure, including further disclosure by the auditor, possible waiver of privilege, and possible adverse use of the information.
Background and rules framework
The opinion interprets former Code DR 3-102 (sharing legal fees with a non-lawyer, the analogue of ABA Model Rule 5.4), DR 4-101 (confidentiality, the analogue of ABA Model Rule 1.6), and DR 2-103(D) (compensating a person to recommend or obtain employment). It cites Judiciary Law section 491 on sharing fees with non-lawyers as an inducement for referrals.
Citations and references
Rules of Professional Conduct:
- MR 5.4 (professional independence; fee sharing with non-lawyers); MR 1.6 (confidentiality)
- Former Code DR 3-102, DR 4-101, DR 2-103(D), DR 1-102
Statutes:
- N.Y. Judiciary Law section 491 (sharing fees with non-lawyers as a referral inducement)
Cases:
- Emmons v. State Bar of California, 6 Cal. App. 3d 565 (Ct. App. 1970), purpose of the fee-sharing bar
Other opinions cited:
- N.Y. State 716 (1999): client consent before sharing billing records with an auditor
- N.Y. State 733 (2000): purpose of DR 3-102; N.Y. State 819 (2007); N.Y. State 698 (1998)
See also
- NY State Bar Op. 825: Legal services referred and paid for by an Employee Assistance Program
- NY State Bar Op. 845: Lawyer-real estate broker sharing a brokerage commission
- NY State Bar Op. 980: Disclosing confidences to collect a fee, and candor
Source
- Landing page: https://nysba.org/ethics-opinion-827/
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