When a lawyer bills a client for expenses in a contingency case, he cannot mark up the amount charged for any third-party services, such as court reporter fees. The fee charged must “reasonably reflect” the actual cost of those services, according to a recently released ethics opinion from the State Bar of Michigan.
An attorney had asked the SBM Professional Ethics Committee for clarification on how to bill clients for out-of-pocket expenses that were advanced on the client’s behalf in a contingency case. These expenses included outside services, such as court reporters, and in-house costs, such as copying fees.
Michigan Rule of Professional Conduct 1.5(a) and (b) apply to all charges a lawyer seeks to impose as part of representing a client, the committee emphasized. It also said this includes fees incurred in the delivery of legal services and costs the lawyer wants reimbursed, like filing fees, court reporter expenses and copying charges.
“The amount a lawyer charges a client for expenses must reasonably reflect the lawyer’s actual cost for the services rendered,” the committee stated, citing an ABA ethics opinion.
As for the cost of third-party services, a lawyer can only pass along the costs that were actually incurred in obtaining those services, the committee reasoned.
Meanwhile, the committee advised those lawyers handling personal injury, wrongful death and no-fault cases to pay close attention to MCR 8.121 when it comes to contingency fees.
“[L]awyers have to be cautious not to establish reimbursement policies or billing practices that may be viewed as seeking to avoid the fee limitations by, for example, passing along to the client in-house costs customarily absorbed by a lawyer in contingent fee matters,” the committee wrote.
The lawyer also had asked whether interest and late charges can be added to expenses and, if so, how to properly handle such fees.
Charging a client interest or a late fee under existing law and in compliance with MRPC 1.5(a) on a past-due account is not unethical in a contingent fee matter, “just as it would not be unethical in a non-contingent fee matter,” the committee stated.
PI, wrongful death and no-fault cases
The committee went on to note that lawyers charging contingent fees in personal injury, wrongful death and no-fault cases need to be keenly aware of MCR 8.121.
“In cases governed by MCR 8.121, the court must approve any interest to be passed on to the client,” the committee said, citing RI-336.
“Michigan’s ceiling on contingent fees in claims or actions for personal injury, wrongful death, and no-fault benefits set forth in MCR 8.121, which is cross-referenced in MRPC 1.5(c), includes as part of the analysis the calculation of whether a fee is ‘reasonable,’” the committee stated.
Therefore, in these kinds of cases, lawyers must be careful not to establish reimbursement policies or billing practices that might be perceived as seeking to avoid the fee limitations. For example, lawyers should not pass along in-house costs customarily absorbed by a lawyer in contingent fee cases.
Late fees and interest
Charging interest or a late fee that complies with existing law and with MRPC 1.5(a) on an overdue account is not unethical in a contingent fee matter, the committee stated.
“However, in order to comply with the reasonableness standard and avoid creating an impermissible revenue stream, an interest charge or late fee must reflect the cost the lawyer actually incurred as a result of (1) advancing payment to a third party and (2) not receiving timely reimbursement from the client,” the committee said.
The committee then addressed what renders an account “untimely.”
“[I]f, for example, a contingent fee agreement only obligates the client to repay court costs and expenses at the conclusion of the representation, imposing interest or a late fee on the court costs and expenses from the date each item is paid by the lawyer on the client’s behalf is unsupportable,” the committee said, noting that it’s beyond the scope of the committee to determine an interest rate or the legality of anything identified as a “late fee.”
Meanwhile, if the contingent fee agreement requires that the client repay court costs and expenses as each item is paid by the lawyer on the client’s behalf and billed to the client, interest or a late fee that complies with MRPC 1.5 and existing law can be charged, the committee reasoned.
However, the committee noted that the late fee or interest can only be charged after the client has (1) been billed, (2) been given a “reasonable opportunity” to pay without incurring the interest charge or late fee, and (3) failed to pay after receiving notice that payment was due.
For all these reasons, the last paragraph of RI-241 is rescinded, the committee said.
“[T]o the extent that any other language contained in RI-241 states or implies that an arbitrary mark-up or surcharge in a contingent fee matter assessed with the client’s consent could meet the standard of MRPC 1.5(a), that language is also rescinded and replaced with this opinion,” the committee concluded.
Here is a copy of the ethics opinion that discusses how contingency fee lawyers need to be careful when passing on costs to their clients:
Michgan Ethics Opinion – RI-364
September 25, 2013
SYLLABUS
MRPC 1.5(a) and (b) apply to all charges a lawyer may seek to impose in connection with representing a client, including fees for the delivery of legal services and costs for which the lawyer seeks reimbursement, such as filing fees, court reporter fees, and copying charges.
The amount a lawyer charges a client for expenses must reasonably reflect the lawyer’s actual cost for the services rendered. As to services provided by third parties, a lawyer may pass along only the costs the lawyer incurred in securing those services. In contingent fee cases subject to MCR 8.121, lawyers must be careful not to establish reimbursement policies or billing practices that may be viewed as seeking to avoid the fee limitations by, for example, passing along to the client in-house costs customarily absorbed by a lawyer in contingent fee matters.
Charging interest or a late fee that complies with existing law and with MRPC 1.5(a) on an overdue account is not unethical in a contingent fee matter, just as it would not be unethical in a non-contingent fee matter. However, in order to comply with the reasonableness standard and avoid creating an impermissible revenue stream, an interest charge or late fee must reflect the cost the lawyer actually incurred as a result of (1) advancing payment to a third party and (2) not receiving timely reimbursement from the client. If the contingent fee agreement obligates the client to repay court costs and expenses as each item is paid by the lawyer on the client’s behalf and billed to the client, permissible interest or a late fee may be charged, but only after the client has been billed for the costs and/or expenses, has been given a reasonable opportunity to pay without incurring an interest charge or late fee, and has failed to pay after receiving notice that payment was due.
References: MRPC 1.1, 1.4(b), 1.5(a), (b), and (c), 1.8(e)(1) and (2), and 7.1(a); RI-241; RI-363; MCR 8.121; ABA Op 93-379.
TEXT
A lawyer seeks guidance about billing clients for out-of-pocket expenses advanced by the lawyer on the client’s behalf in contingent fee matters. In the facts presented, the enumerated out-of-pocket expenses include reimbursement of third parties for services provided, such as court reporters, and in-house expenses for which the lawyer seeks payment from the client, such as copying charges. Also at issue is whether interest and “late charges” can be charged on those expenses and, if so, how ethically to make such assessments. In one example provided by the inquirer, a billing statement includes an item identified only as “miscellaneous interest” without reference to any items to which the interest pertained, the interest rate being applied, or the period of time for which interest was calculated. For the reasons to follow, this type of unspecified charge is unethical per se.
The Committee reaffirms that MRPC 1.5(a) applies to all charges a lawyer may seek to impose in connection with representing a client, including fees for the delivery of legal services and costs for which the lawyer seeks reimbursement, such as filing fees, court reporter fees, and copying charges. In contingent fee matters, in order to comply with the requirement that the contingent fee agreement “shall be in writing and shall state the method by which the fee is to be determined,” the agreement must specifically describe the categories of expenses for which the client will be responsible, how and when the expenses will be presented for payment, and, if late fees or interest are to be charged, how each will be calculated and when each becomes payable or begins to accrue. For other types of fee agreements (hourly, fixed, and mixed), consistent with the Committee’s conclusion that MRPC 1.5(a) applies to all charges a lawyer may seek to impose, the communication requirement contained in paragraph (b) applies to all types of “fees” to be charged by the lawyer.
A similar topic was discussed in Informal Opinion RI-241, in which a lawyer proposed to add a “surcharge” to a contingent fee client’s bill, representing a 20% “mark up” on out-of-pocket expenditures, such as court reporting fees and expert witness fees, that was to be charged when the case settled if the client did not pay for the expenses as billed during the pendency of the litigation. The opinion noted: “Clients who are represented on a contingency fee basis usually do not pay the monthly bill but wait until the conclusion of the case.” 4Relying upon ABA Formal Opinion 93-379 in concluding that charges other than attorney’s fees are subject to the “reasonableness” analysis under MRPC 1.5, RI-241 determined that, absent a specific agreement to the contrary, a lawyer could not “mark up” charges beyond the actual costs incurred by the lawyer and/or paid to the third parties. However, portions of RI-241 must be clarified. The last sentence of the opinion asserts that an agreement in writing based upon “adequate consultation” can support adding a surcharge, while ignoring the application of the reasonableness standard embraced earlier in the opinion. Simultaneously, RI-241 acknowledged: “In considering phrases in the representation agreement such as ‘costs,’ ‘disbursements’ or ‘expenses,’ clients would normally conclude that the lawyer would be passing on the actual outlay of funds made by the lawyer on behalf of the client.”
Similarly, ABA Formal Opinion 93-379 states: “At the beginning of the engagement lawyers typically tell their clients that they will be charged for disbursements. When that term is used clients justifiably should expect that the lawyer will be passing on to the client those actual payments of funds made by the lawyer on the client’s behalf. Thus, if the lawyer hires a court stenographer to transcribe a deposition, the client can reasonably expect to be billed as a disbursement the amount the lawyer pays to the court reporting service.”
ABA Formal Opinion 93-379 also addressed in-house costs and third-party disbursements incurred by the lawyer:
[T]he lawyer may recoup expenses reasonably incurred in connection with the client’s matter for services performed in-house, such as photocopying, long distance telephone calls, computer research, special deliveries, secretarial overtime, and other similar services, so long as the charge reasonably reflects the lawyer’s actual cost for the services rendered. A lawyer may not charge a client more than her disbursements for services provided by third parties like court reporters, travel agents or expert witnesses, except to the extent that the lawyer incurs costs additional to the direct cost of the third-party services.Id. at 1. We agree that the amount a lawyer charges the client for expenses must reasonably reflect the lawyer’s actual cost for the services rendered and that, as to services provided by third parties, the lawyer is able to pass along only the costs the lawyer incurred in securing those services.
Michigan’s ceiling on contingent fees in claims or actions for personal injury, wrongful death, and no-fault benefits set forth in MCR 8.121, which is cross-referenced in MRPC 1.5(c), includes as part of the analysis the calculation of whether a fee is “reasonable.” For that reason, in such cases, lawyers must be careful not to establish reimbursement policies or billing practices that may be viewed as seeking to avoid the fee limitations by, for example, passing along to the client in-house costs customarily absorbed by a lawyer in contingent fee matters. Cf. Informal Opinion RI-363.
Charging interest or a late fee that complies with existing law and with MRPC 1.5(a) on an overdue account is not unethical in a contingent fee matter, just as it would not be unethical in a non-contingent fee matter. However, in order to comply with the reasonableness standard and avoid creating an impermissible revenue stream, an interest charge or late fee must reflect the cost the lawyer actually incurred as a result of (1) advancing payment to a third party and (2) not receiving timely reimbursement from the client.
With respect to what renders an account “untimely,” if, for example, a contingent fee agreement only obligates the client to repay court costs and expenses at the conclusion of the representation, imposing interest or a late fee on the court costs and expenses from the date each item is paid by the lawyer on the client’s behalf is unsupportable. If, on the other hand, the contingent fee agreement obligates the client to repay court costs and expenses as each item is paid by the lawyer on the client’s behalf and billed to the client, interest or a late fee that comports with MRPC 1.5 and existing law8 can be charged, but only after the client has been billed for the costs and/or expenses, has been given a reasonable opportunity to pay without incurring an interest charge or late fee, and has failed to pay after receiving notice that payment was due.
For these reasons, the last paragraph of RI-241 is rescinded and, to the extent that any other language contained in RI-241 states or implies that an arbitrary mark-up or surcharge in a contingent fee matter assessed with the client’s consent could meet the standard of MRPC 1.5(a), that language is also rescinded and replaced with this opinion.
