Can a law firm bill a client for 'costs' (copying, computer research, messenger, interest) at amounts higher than what the firm actually pays?

Plain-English summary

The inquirer described a personal injury retainer under which the client agreed to pay "costs," then asked about four billing practices: (1) charging interest on all costs the firm advanced, though the retainer said nothing about interest; (2) using an outside copier service at a flat rate but re-billing clients at roughly $0.30 per page (far above retail rates), allegedly to cover overhead; (3) obtaining flat-rate online research (Lexis or Westlaw) and charging clients more than the firm's actual cost; and (4) paying a flat rate for messenger service but billing clients more than that flat rate.

The committee started from RPC 1.5, which requires that a lawyer's fees and expenses be reasonable, and listed the rule's reasonableness factors, including whether the client received fair disclosure of the lawyer's billing practices. It noted RPC 1.5(b)'s duty to communicate the basis of fees and expenses and RPC 1.5(c)'s specific disclosure requirements for contingent fees. On interest (Hypothetical 1), the committee said interest charges are material; billing them without prior disclosure may violate the duty to charge a reasonable fee under RPC 1.5 and call into question compliance with RPC 1.4.

On copying, computer research, and messenger charges (Hypotheticals 2 through 4), the committee relied on Comment 1 to RPC 1.5, which permits charging a reasonable amount to which the client agreed in advance or an amount that reasonably reflects the lawyer's cost. The committee concluded that a markup of the magnitude described for copying would not be reasonable whether or not disclosed, and if undisclosed might implicate RPC 8.4; that marking up messenger costs likewise affects reasonableness and could be unreasonable even if disclosed when unrelated to the cost incurred; and that computer-research charges may be passed on if reasonable, with the apportionment of flat research fees left to the lawyer's discretion within the reasonableness mandate. To avoid misunderstandings, clients should receive advance disclosure of specific, foreseeable categories of expenses, such as online research.

In practice

Under this opinion, and under RPC 1.5 as it stood in 2006, two principles govern: expenses must be reasonable, and material charges must be disclosed. The opinion holds that a large markup on copying or vendor costs is unreasonable whether or not disclosed, and undisclosed may also implicate RPC 8.4; that in-house or vendor expenses may be passed through only at a reasonable amount the client agreed to in advance or that reflects the actual cost; that computer-research and similar charges may be passed on if reasonable; and that undisclosed interest charges raise concerns under RPC 1.5 and RPC 1.4. The committee noted it did not have all the facts and exercised its discretion to address the underlying issues; it framed the analysis around reasonableness and advance disclosure rather than fixed limits.

Common questions

Q: Can a firm bill copying at more than it actually pays an outside copy vendor?

A: Only within reason. The committee said copying may be a separately reimbursable expense, but a markup of the magnitude described (for example, billing far above the vendor's flat rate) would not be reasonable whether or not disclosed.

Q: Can a firm charge interest on advanced costs that the retainer never mentioned?

A: The committee treated interest as a material charge. Billing it without prior disclosure may violate the reasonable-fee duty under RPC 1.5 and call into question compliance with RPC 1.4.

Q: Can clients be billed for Lexis or Westlaw research?

A: Yes, if reasonable. The committee said computer-research charges may be passed on so long as they meet the reasonableness standard, with clients given advance disclosure of foreseeable expense categories.

Q: Does undisclosed markup ever go beyond a fee problem?

A: The committee said a markup of the magnitude described, if undisclosed, might also implicate RPC 8.4, which addresses dishonest conduct.

Background and rules framework

The opinion interprets Washington RPC 1.5 (fees and expenses; the counterpart to Model Rule 1.5), including its reasonableness factors, RPC 1.5(b) (communicating the basis of fees and expenses), and RPC 1.5(c) (contingent-fee disclosures), along with RPC 1.4 (communication) and RPC 8.4 (misconduct, including dishonesty). It draws on Comment 1 to RPC 1.5 regarding reimbursement for in-house and vendor expenses.

Citations and references

Rules of Professional Conduct:

• Model Rule 1.5 / Washington RPC 1.5, 1.5(b), 1.5(c) (reasonable fees and expenses; disclosure; contingent fees)
• Model Rule 1.4 / Washington RPC 1.4 (communication)
• Model Rule 8.4 / Washington RPC 8.4 (misconduct, including dishonesty)

See also

• WA Ethics Op. 2115: Fee Waivers and PIP Reimbursement
• WA Ethics Op. 1103: Contingent Fee Plus Staff Costs
• WSBA Ethics Op. 1039: Contract Lawyer Markup

Source

• Landing page: https://ao.wsba.org/print.aspx?ID=1575

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

Advisory Opinion: 2120
Year Issued: 2006
RPC(s): RPC 1.4, 1.5, 8.4
Subject: May a law firm charge a client "costs" in an amount greater than actual costs incurred in advancing the client`s case?

INTRODUCTION:

The inquirer describes specific factual scenarios set forth in detail below. Although the Committee does not have all the facts it needs to completely analyze the scenarios described by the inquirer, it believes the underlying issues are significant to the Bar and exercises its discretion under Rule 1 of the Professional Conduct Committee to provide the following advisory opinion.

FACTS:

The inquirer presents the following specific facts and hypothetical:

Client signs a retainer in a personal injury case and agrees to pay costs. Regarding costs, the retainer specifically states:

Client agrees to assume responsibility for all costs and disbursements incurred in this matter Attorneys are authorized to pay these expenses in advance and Client agrees to reimburse Attorney for these costs and may pay any of these expenses out of the share accruing to Client. In the event a settlement or judgment provides for payment of an award over time, any fees or costs owing to Attorney will be payable at the time of settlement or judgment in an amount equal to the agreed percentage of the present value of the gross amount to be received by the Client in the future.

On the basis of this retainer agreement:

(1) Law firm charges client interest charges on all costs expended by the firm, even though the retainer says nothing about charging client interest on costs;

(2) Law Firm hires outside copier service at a flat rate amount to make copies and provides space to set up a copy center. Law firm uses copier service to then re-bill clients for copying cost at an amount that is much higher than actual copying costs. For example, black and white copies retail for .05 to .07 cents per page (i.e. Kinkos). Law firm bills contingency fee clients approximately .30 per copy, which supposedly also includes the costs for overhead (although overhead charges are not the actual costs for services since outside copier service used at flat rate). For example, if during a case, client has 20,000 copies generated on his file, a retail business would charge him $1,000 at .05 per copy Hypothetical law firm charges this same client $8,000 for the same amount of copies;

(3) Law Firm obtains on-line research program (Lexis-Nexis or Westlaw) at a flat rate per year. When attorney at law firm does legal research, law firm calculates the amount of time used on behalf of client on the online research program or number of cases downloaded and charges clients for “legal research” at a cost much higher than the actual costs paid by law firm. Client also believes that legal research was contemplated in the contingency fee agreement as part of the 33% he has to pay to attorney. In other words, legal research is part of the attorney’s work and should not be charged as a separate cost; and

(4) Law firm is charged a flat rate for legal messenger services. Law firm separately bills personal injury client for separate deliver costs, even though delivery costs are not the actual costs paid by the firm because firm pays a flat rate (excluding special deliveries). Personal injury clients are routinely billed for legal messenger delivery charges at a much higher rate than the flat rate paid by law firm.

DISCUSSION:

RPC 1.5 of the Rules of Professional Conduct requires that a lawyer’s fee be reasonable. The reasonableness requirement applies to hourly fees, contingency fees, and expenses. The following non-exclusive factors are relevant to the determination of whether a fee is reasonable:

(1) the time and labor required, the novelty and difficulty of the questions involved, and the skill requisite to perform the legal service properly; (2) the likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the lawyer; (3) the fee customarily charged in the locality for similar legal services; (4) the amount involved and the results obtained; (5) the time limitations imposed by the client or by the circumstances; (6) the nature and length of the professional relationship with the client; (7) the experience, reputation, and ability of the lawyer or lawyers performing the services; (8) whether the fee is fixed or contingent; and (9) the terms of the fee agreement between the lawyer and the client, including whether the fee agreement or confirming writing demonstrates that the client had received a reasonable and fair disclosure of material elements of the fee agreement and of the lawyer`s billing practices.

RPC 1.5(b) requires the lawyer to communicate with the client about the scope of the representation, the rate of the fee and expenses, and any changes in the rate of fees or expenses.

RPC 1.5(c) sets forth with specificity the disclosures that must be made in contingency arrangements:

(1) A contingent fee agreement shall be in writing…. [and] (2) shall state the method by which the fee is to be determined, including the percentage or percentages that shall accrue to the lawyer in the event of settlement, trial or appeal; litigation and other expenses to be deducted from the recovery, and whether deducted before or after the contingent fee is calculated. Upon conclusion of a contingent fee matter, the lawyer shall provide the client with a written statement stating the outcome of the matter and if there is a recovery, showing the remittance to the client and the method of its determination.

A. Interest Charges (Hypothetical 1)

As set forth above, the overarching principle of RPC 1.5 is that a lawyer’s billing practices be reasonable. Relevant to this inquiry is whether a client received notice of those practices, including an explanation of material elements of the agreement. In a similar vein, Rule 1.4 imposes a general duty to communicate upon lawyers, including a duty to “explain a matter to the extent reasonably necessary to permit the client to make informed decisions regarding the representation.” RPC 1.4(b).

Interest charges are material. The reasonableness inquiry includes an assessment of whether a material charge was disclosed. The facts presented suggest that the firm charges interest on all costs expended by the firm and that the client was not informed of the interest charge. To the extent such charges are billed to clients without any prior disclosure, such a practice may well violate the lawyer’s duty to charge a reasonable fee under RPC 1.5 as well as call into question the lawyer’s compliance with RPC 1.4.

B. Computer, Photocopying, and Messenger Expenses (Hypotheticals 2-4)

As noted above, RPC 1.5 requires that a lawyer’s fees be reasonable. RPC 1.5 does not elaborate on whether specific categories of expenses may be separately charged or must be included in the lawyer’s fees as part of the overhead of practicing law. Comment 1 to the Rule provides some additional guidance: [1] Paragraph (a) requires that lawyers charge fees that are reasonable under the circumstances. The factors specified in (1) through (8) are not exclusive. Nor will each factor be relevant in each instance. Paragraph (a) also requires that expenses for which the client will be charged must be reasonable. A lawyer may seek reimbursement for the cost of services performed in-house, such as copying, or for other expenses incurred in-house, such as telephone charges, either by charging a reasonable amount to which the client has agreed in advance or by charging an amount that reasonably reflects the cost incurred by the lawyer. Hypothetical (2) implies that the lawyer obtains copying services from a third party vendor and then charges the client more than the vendor charges for the costs of copies. Comment 1 clarifies that copying may be considered to be a separately reimbursable expense, whether performed in-house or by an outside vendor. However, RPC 1.5 requires the lawyer to charge a reasonable cost for expenses. The mark-up of the magnitude described in the hypothetical would not be reasonable whether or not disclosed to the client. If undisclosed to the client, a mark-up of that magnitude might also implicate RPC 8.4 Hypothetical (4) implies that the lawyer is marking up third party vendor costs by an unspecified amount and has not disclosed this practice to the client. As set forth on RPC 1.5, the failure to disclose the mark-up to the client affects its reasonableness. Even if disclosed and agreed to by the client, the mark-up could be unreasonable if it is not related to the costs incurred by the lawyer. As to Hypothetical (3), Comment 1 states that telephone charges may be passed on to the client so long as the charges are reasonable. By analogy, it may imply that charges for computer research such as Lexis or Westlaw may be passed on to clients provided they meet the reasonableness standard. Decisions on how to apportion flat fees for legal research services among clients or how to charge individual clients for legal research are left to the discretion of the lawyer, within the overall mandate that fees be reasonable and that clients be informed of the basis of the fees that appear on their bills. To avoid misunderstandings, clients should be provided with advance disclosure of specific, foreseeable categories of expenses for which they will be charged, such as on-line research.