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Is Marking Up Contract Lawyer Costs Worse When Plaintiffs Lawyers Do It?

The practice of law firms marking up the cost of contract lawyers has been around for ages. Nearly two years ago, I posted that bar rules allowing firms to mark up the cost of U.S.-based contract lawyers without disclosure gave firms incentive to treat contract lawyers as profit centers, and discouraged them from offshoring document review, because in that situation firms would be required to disclose their markup to clients.

Notwithstanding the general recognition that contract lawyers provided a profit center for law firms, I rarely saw any criticism of the practice. To the contrary, use of contract lawyers was touted as a cost-saving tool for clients, since even with the hefty markups, firms claimed that contract lawyers still cost less than full-fledged associates.

But now that plaintiffs firms are using contract lawyers too, someone is voicing opposition to the practice. In this week's issue of Forbes, Cardozo Law Professor Lester Brickman asserts that plaintiffs firms' use of contract lawyers and markup of their fees has "turned [shareholder] suits into ATM machines." Brickman explains that plaintiffs firms use contract lawyers to tag, code and sort documents, tags that could be accomplished more affordably and efficiently through use of technology and administrative staff. He elaborates:

As part of [the discovery process], each document is coded as to document type, author, recipients, date, subject and other bibliographical data and put into a searchable data base. The coding is largely done electronically by data processors or paralegals. Documents that exist in paper form are converted to electronic form so that they can be electronically searched as well using "optical character recognition." In addition to this objective coding, the documents are also searched to determine relevancy, whether they are protected by the attorney-client privilege or whether they involve sensitive business information that may call for a protective order to maintain some degree of confidentiality. Initially, this subjective search is usually performed by contract lawyers working either for the vendor or the law firm. Law firm associates then do additional review as required.

In securities class actions, document review is done differently on the plaintiffs' side. Instead of using electronic means and clerical personnel to objectively code documents, the lawyers use contract lawyers to do this task, document by document. In the Tyco securities litigation, of the 423,380 hours that the lawyers for the class claimed to have worked (not including clerical staff), 290,552 hours (69%) were accounted for by contract lawyers reviewing 83.5 million documents. In the Xerox securities litigation, 201,506 of the 290,759 hours claimed to have been worked by class counsel were run up by contract lawyers reviewing 4 million pages of documents.

Brickman acknowledges that defense firms once added a profit margin on these expenses, but he says that clients and competition "drove out much of the profit." Yet Brickman never criticizes those firms for introducing the practice of markups in the first place. Nor does he address one of the points raised by commenters -- that firms continue to charge upwards of $300/hour for junior associates whose salaries translate into $50-$80 an hour.

Brickman gets other fact wrong as well. He writes:

Though contract lawyers are paid about $35 to $40 an hour, plaintiffs' firms "bill" this time to the class at $300 an hour or more, sometimes without disclosing that work was not done by the firm's lawyers.

While it's true that contract lawyers only get $35 or $40 an hour, that's different from what the law firms pay for them. For most large projects, firms use staffing agencies that also mark up the cost of contract attorneys, frequently close to double the amount that the attorney is paid. So though an attorney may only earn $35/hour as a contract lawyer, chances are, the law firm is paying his or her staffing agency between $60 and $70. In addition, Brickman seems to suggest that plaintiffs lawyers' failure to disclose that work was done by contract attorneys is somehow wrong. But many ethics rules do not require such disclosure, just as they don't require lawyers to disclose how much profit they earn off of full-time associates. Perhaps the rules governing recovery of fees in class action suits require this disclosure, but if they do not, then lawyers aren't doing anything wrong by not revealing who did the work.

Don't get me wrong. Though I don't take issue with marking up contract lawyer fees, I do think that some rule of reason should apply and that firms shouldn't be able to pass on to clients three or four times a contract lawyer's hourly rate. But I disagree with that practice for any law firm, regardless of which side of the case they're on.

What do you think? Are plaintiffs firm markups worse than those of defense firms? Or is Brickman holding them up to a double standard?

Posted by Carolyn Elefant on July 24, 2009 at 03:09 PM | Permalink | Comments (3)


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