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Law Firm Markup of Research Costs: Annoying or Unlawful?

Virtually every law firm that subscribes to commercial, computerized legal research providers like LexisNexis or Westlaw pays a flat rate for unlimited searches. Even so, the companies will ordinarily provide a breakdown of the per-minute cost of each individual search, which collectively would total far more than the cost of the flat fee.

So can a law firm that pays a flat fee subscription service -- let's say, hypothetically, $1,000/month -- charge the client for the per diem or hourly cost -- probably around $150 to $200 of each individual search? If the firm ran 10 searches for a client, the cost to the client would well exceed the subscription price.

That question lies at the crux of Texas businessman Virgil Waggoner's recent lawsuit against Chadbourne & Parke for overcharging him for legal research costs. According to The National Law Journal, Waggoner claims that that Chadbourne charged him $20,000 for computerized legal research services that actually cost the firm only $5,000. The suit, filed by Patricia Meyer, of San Diego's Patricia Meyer & Associates, alleges that the overcharges constitute unfair business practices, unjust enrichment, fraud and deceit.

A couple of other blogs are discussing the story, and so far I haven't found much support for the law firm's position. In a post at BNET Technology, author Eric Sherman sought comment from Roy Simon, the Howard Lichtenstein Distinguished Professor of Legal Ethics at Hofstra University School of Law, who responded that:

Bottom line: Lawyers can mark up expenses beyond cost plus overhead if the client agrees after full disclosure. A client might agree if the product (Lexis, or a court reporter) is one that the client really isn't in a position to buy directly.

However, as Sherman points out, the Chadbourne retainer apparently did not include this disclosure. Moreover, even if it did, Sherman doesn't believe it would justify markups:

But with flat rate pricing, suddenly the costs rapidly drop because the subscriptions can be amortized across all the clients of a firm. That means online research has the potential to become a major profit center, but only if clients don’t insist on cutting the rates, and as I've learned in covering the legal industry for other outlets, controlling outside counsel expenses is a major area of interest for most corporations.

National legal research and writing expert Lisa Solomon takes the rationale a step further, arguing at Legal Research and Writing Pro that firms should treat online legal research costs as ordinary overhead expenses, which are typically rolled into an hourly rate or flat fee, rather than passed through to clients as disbursements. Solomon recommends:

Still, cost recovery should be the exception, not the rule. Don’t nickel and dime your clients: when setting your rates -- whether you bill by the hour, charge a flat fee, or use any other billing arrangement -- take into account all of your overhead -- including the cost of your online legal research subscription.

I think most of us would agree that firms shouldn't be marking up the cost of legal research. But should they recover the costs as a separate line item expense on their bill, or as Solomon suggests, treat the cost as overhead and roll it into an hourly rate? Post your thoughts below.

Posted by Carolyn Elefant on May 15, 2009 at 02:22 PM | Permalink | Comments (8)


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