State Bar of Michigan: Charges must reasonably reflect actual costs

 By Traci R. Gentilozzi

Dolan Media Newswires
 
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.
 
The ethics opinion is RI-364 (MiLW No. 15-83490). It partly rescinds a prior ethics opinion, RI-241. 
 
No ‘work around’ allowed

Ann Arbor attorney Joan P. Vestrand said that this opinion offers important guidance when it comes a lawyer’s ability to assess interest on outstanding costs and when it is permissible to do so.
 
The opinion “emphasizes the requirement that all fees be reasonable and that reasonableness demands we not profit on costs incurred in a client's matter,” Vestrand told Michigan Lawyers Weekly in an email.
 
She noted that attorneys are limited to reimbursement for actual costs.
 
“That portion of the opinion that deals with assessment of costs in a contingent fee case is very helpful as well,” said Vestrand, who is associate dean of The Thomas M. Cooley Law School and recognized for her professional responsibility acumen. “It reminds us of the inappropriateness of bootstrapping onto a contingency fee percentage costs that represent services traditionally included within that percentage.”
The opinion “ends the notion of such a ‘work-around’ to capture a fee effectively in excess of the originally agreed-upon percentage,” she said. “Not only are some contingent fees limited by law, at the time fees are set clients are entitled to full understanding of how fees will be calculated and assessed for their consideration in hiring the lawyer.” 
 
RI-241 clarified
Similar questions already had been addressed in RI-241, the committee pointed out. In that opinion, a lawyer had proposed adding a “surcharge” to a client’s bill in a contingency case. It represented a 20 percent “markup” on the lawyer’s out-of-pocket expenses.
 
“Clients who are represented on a contingency fee basis usually do not pay the monthly bill but wait until the conclusion of the case,” the committee said in RI-241.
 
The committee in RI-241 looked to ABA Formal Opinion 93-379 and concluded that charges other than attorney’s fees are subject to the “reasonableness” analysis of MRPC 1.5. The committee said that, “absent a specific agreement to the contrary,” a lawyer cannot markup charges beyond the actual costs incurred or paid to third parties.
 
However, the present committee said that parts of RI-241 needed reviewed and clarified, especially the last sentence, which “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.”
 
In the same vein, the committee said that, when considering certain terms in the representation agreement, like “costs,” “disbursements” or “expenses,” RI-241 indicated that clients would typically conclude that a lawyer would pass on the actual outlay of funds made by the lawyer on the client’s behalf.
 
The committee also noted that ABA Formal Opinion 93-379 says, “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.”
Moreover, the committee observed that ABA Formal Opinion 93-379 also examined in-house costs and third-party disbursements incurred by the lawyer. It states: “[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.”
 
The committee agreed with the ABA opinion and said that the amount a lawyer charges for expenses must reasonably reflect the actual cost for the services rendered. As for services provided by third parties, the committee said it also agreed the lawyer can pass along “only the costs the lawyer incurred in securing those services.”
 
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.
 

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