Texas Lawyer Penny Robe is the Chair of the Law Practice Management Committee for the State Bar of Texas and Discusses Ethical Contract Attorney Fees in Texas

State Bar of Texas Podcast
State Bar of Texas Annual Meeting 2019: Ethical Use of Contract Lawyers with Penny Robe
06/14/2019

Intro: Welcome to the State Bar of Texas Podcast, your monthly source for conversations and curated content to improve your law practice, with your host, Rocky Dhir.

Rocky Dhir: Hello and welcome to the State Bar of Texas Podcast, recorded from the Annual Meeting in Austin, Texas. This is Rocky Dhir and I’m the host for today’s show which is being sponsored by LawPay, trusted by more than 35,000 law firms to accept legal payments online. It’s the only payment solution offered as a member benefit by the State Bar of Texas.

Joining me now I have Penny Robe. Penny welcome.

Penny Robe: Thank you. Happy to be here.

Rocky Dhir: So today’s topic, your topic for today is going to be about the ethical use of contract lawyers, which I don’t know that a lot of lawyers think about, but before we get into that, tell us a little bit about yourself.

Penny Robe: Okay, so I’m a solo practitioner in Plano, Texas. I’ve been practicing law 27 years.

Rocky Dhir: Hey shout out to Plano, yes.

Penny Robe: Yeah, Plano is great.

Rocky Dhir: I am in Plano, it’s great, yes.

Penny Robe: Are you? Oh cool, yeah, so – yeah, I’m like at Granite Park area.

Rocky Dhir: Oh okay, I’m at Shops at Legacy.

Penny Robe: Oh yeah, very close by, we should have lunch.

Rocky Dhir: We are right there, yeah. Yeah, we could did the little telephone thing with the Styrofoam cups.

Penny Robe: We really could.

Rocky Dhir: Yeah, absolutely.

Penny Robe: Stone throw, but they can hurt, so we won’t throw any stones.

Rocky Dhir: Somebody will sue us for throwing a rock if it hits somebody.

Penny Robe: Exactly.

Rocky Dhir: And what do in your law practice?

Penny Robe: So my practice, I do probate and guardianship, estate planning, I do the family stuff like divorce and child custody and I also do transactional business. I was in-house for about a decade so I do small business — any business too small to have an in-house attorney and then I was a JAG in the Air Force, so I also do a lot of military law.

Rocky Dhir: Oh, thank you for your service.

Penny Robe: Yeah, my pleasure, my honor. And I was a prosecutor before that, so.

Rocky Dhir: Also double service to the community.

Penny Robe: Yes, I have definitely an uncommon career path, so.

Rocky Dhir: Well, now what got you into the topic of contract lawyers? How did that come about?

Penny Robe: So, I didn’t start being in private practice until I was 17 years into my career and so law practice management became of high interest at that point.

Rocky Dhir: Sure.

Penny Robe: I’m actually currently the Chair of the Law Practice Management Committee for the State Bar of Texas, so all aspects of law practice management are of interest to me and this particular topic I wanted some help early on and I looked at the rules for how I could bring somebody into my firm in a way that I could afford, and doing it as a contract is a more affordable way than me picking up a base salary when I’m new at this and don’t know don’t have enough revenue.

Rocky Dhir: Benefits in the whole nine yards.

Penny Robe: Exactly.

Rocky Dhir: So was there something that surprised you about the rules like when you read it?

Penny Robe: The rules are surprisingly restrictive in Texas compared to other states. The ABA rules are much easier and more generous than the Texas rules, but our fee splitting rules makes it a little bit challenging.

Rocky Dhir: Okay, can you walk us through? So what does an ABA rule say or what other states say and then what happens here in Texas?

Penny Robe: So the ABA rule allows you to have somebody work for you and let’s say — I’m going to use not real numbers obviously, but let’s say you’re paying that attorney a $100 an hour and under ABA rules, you can charge the client $200 an hour, the contract attorney, no problem.

In Texas, that is forbidden because that is fee-splitting.

Rocky Dhir: Got it.

Penny Robe: And so the only way you can pay your contract attorney one rate and then charge the client — well, there’s a couple of paths like that you can do that, which is what I’m going to talk about. So one path to do it is going to be to truly have an outsourced attorney so — and I actually do this for other people sometimes because I’ll draft military retirement division orders, for example.

Rocky Dhir: Okay.

Penny Robe: It’s pretty specialized, it doesn’t come up that much for a divorce attorney and people hire out QDRO attorneys the same kind of thing. So if you’re going to do that, you just pay that attorney, they get paid what they get paid. Sometimes directly by the client but you’re not running it through your firm and do an up-charge because that would be fee-splitting forbidden.

So that’s one way, it’s just the straight pass-through. You can bill it through your firm or not, but that outsource attorney is going to get with a client pace.

Rocky Dhir: But the attorney is doing the outsourcing does not mark up the fees in some way, it’s still just a straight password.

Penny Robe: Well, they can themselves like, I mean, my fee is my fee but it’s the same as if the client is my client.

Rocky Dhir: Okay.

Penny Robe: So it’s not a subcontract in the way we sometimes think of it in a business sense.

Rocky Dhir: Okay.

Penny Robe: So I’m basically helping that client and I can have an agreement through the firm but they can’t pay me a different amount than the client pays them for my services if I’m truly outsourced like that.

Rocky Dhir: Okay, okay.

Penny Robe: So, there’s no up-charge allowed. Now, maybe they could charge some administrative fee or see option two —

Rocky Dhir: Oh, the second path.

Penny Robe: Yes, the second path, would be to have disclosed up-charge or discount to the client and the client has to consent in writing.

Rocky Dhir: Does that ever happen though, I mean, practically speaking does it happen?

Penny Robe: I think it does not in the example — not in that example but I think it does happen sometimes in personal injury cases for example, where you’ve had one firm do some work already and they are switching to another firm and it’s a contingency case, you’re going to have a written agreement out of that final amount, who’s getting what percentage and that has to be consented to in writing by the client beforehand.

Rocky Dhir: If you’re going to talk about this topic then I assume there are lawyers who don’t know about these rules, is there some level of malignance may be of what the law says, what the rules say?

Penny Robe: I do think there is especially because the ABA rules allowed us, and so if people don’t go to the right source, they can think they’re doing right because they’re following the ABA guidance and —

Rocky Dhir: So they go to the computer and they search for ethical rules on contract lawyers and they pull up the wrong set of rules.

Penny Robe: Right. Yes or maybe they’re using some national firm because some — there’s some companies that have a business model to do this, where they’re bringing in contract attorneys and it has to be written clearly in writing who’s getting what or the next path is to associate that attorney with your firm.

So if you’re a firm that does temp attorneys, you have to have a “firm” of all those temp attorneys and then you can pay your — that temp attorney one thing even if it’s a contract versus an employment situation, and charge the client something else but they’re your — it’s your firm, law firm, that’s the way Texas views it.

So I can definitely have a firm. I can have an attorney in my firm as an associate for example of counsel, they have to be part of my firm though for me to pay them something other than what the client is paying them unless that client consents in writing.

Rocky Dhir: So they’re an associate presumably that means that there’s an employment relationship and now the employment rules kind of come into play, is that —

Penny Robe: Maybe but you can have an associate that you’re paying as a contractor depending on whether you follow — then you got to worry about the IRS rules for when you have a misclassified employee, that’s a whole another talk.

Rocky Dhir: So then they are not just a 1099 employee, now you might have to pay 941 because it’s a contractor but they say that’s an employee —

Penny Robe: If you are paying somebody on a 1099, that’s an independent contractor, that’s what I’m talking about.

Rocky Dhir: Okay.

Penny Robe: So if you’re going to do that you can, but they have to be part of the law firm, if you’re doing that rather than a W-2.

Rocky Dhir: Got it. So how do you get somebody to be part of your law firm?

Penny Robe: You do it by basically putting it out there that they’re part of your law firm, but when you do that they’re part of your professional liability, so if you have the malpractice insurance, you need to include them and also conflicts of interest is the big trigger there as well.

So if somebody becomes part of your law firm then all their conflicts are yours and all of yours are theirs.

Rocky Dhir: It’s like a marriage.

Penny Robe: It is, absolutely like a marriage. Yeah, so that’s the big pros and cons if you’re looking at it. So that’s where if it’s a one-off, like the example I was giving with drafting QDROs, you wouldn’t want to associate with every law firm that needs a QDRO as a contract attorney, that would not make sense.

Rocky Dhir: Now, let’s say you get a traditional contract lawyer and they’re not part of your firm, then if you’re the lawyer hiring this contract attorney, are you now on the hook for any malpractice that that contract lawyer performs? What are your ethical obligations in that particular scenario?

Penny Robe: So if you’ve made them part of your firm, then you are.

Rocky Dhir: Sure, but if they’re not part of your firm, they are just a contract attorney.

Penny Robe: Then you’re not, that’s where you have to either do it as the straight pay and I think doing that without telling the client is hard.

Rocky Dhir: Sure.

Penny Robe: Anyway, like you can have in your fee agreement, I have the right to hire a subcontractor, other attorneys, but if you’re going to pay them other than what you billed the client for them, then it has to be revealed to the client. It gets interesting because like some attorneys will say, well, I’ll draft for you, go straight for you.

Rocky Dhir: Sure.

Penny Robe: That has to be revealed because you’re still fee-splitting even if they get no fee unless you don’t bill the client and everybody is working for free, but working for free is a form of fee-splitting if you get paid for the work. You see what I mean?

Rocky Dhir: Got it.

Penny Robe: So that makes it a little bit tricky. Sometimes people will think, well, I can do a ghostwriter, I never tell the client that that’s an area where I needed help. You’re not helping yourself to do that because then you’re fee-splitting in the other direction, like we all think of it as don’t fee-split by up-charging and only giving a 100 to the attorney but you keep 200.

Rocky Dhir: Sure, sure.

Penny Robe: But the opposite is true as well, if you say, I’m going to get this help but I’m not going to let the client know how much I needed the help, like it’s my first one and I needed help. If you bill that, that’s still fee-splitting.

Rocky Dhir: So it sounds like disclosure; full disclosure is kind of your best bet.

Penny Robe: Disclosure is the key, absolutely.

Rocky Dhir: I’m sure there’s a lot more in this topic to cover, but I’ll ask you a kind of one final question just to kind of help the listeners know where to go if they’re interested so that they don’t go down the wrong path and they don’t go to the wrong set of rules, where should they go to get the right guidance on how to properly and ethically and legally bring on a contract attorney?

Penny Robe: Yeah, absolutely, so well, if they’re here, it’s in my paper.

Rocky Dhir: Okay, well, there you go, yeah.

Penny Robe: Absolutely, but the source materials I use in writing my paper there’s an Ethics Opinion #577 and then the fee-splitting rule is Texas Disciplinary Rules 1.04(f) on fee-splitting.

Rocky Dhir: So, you go to the State Bar website and look for those?

Penny Robe: Yeah, I think Texas Ethics maybe is the website for the opinions; you know the Ethics Opinion? I can’t remember that website but it’s 577 as the opinion, and that those are both attached to my paper as well.

Rocky Dhir: Okay, we’re going to get to your paper in just a second but it does look like we’ve reached the end of our program for now.

I want to thank you, Penny, for joining us today, so thanks for being here.

Penny Robe: Yeah, my pleasure, absolutely.

Rocky Dhir: Now, if our listeners do have questions or let’s say that they want to get your paper, what’s the best way for them to reach you?

Penny Robe: The easiest is probably going to be email, which is pretty straightforward, penny@robelawfirm.com. So Penny like the money, Robe like a judge wears.

Rocky Dhir: Nice, okay. Unfortunately, that is all the time we have for this episode of the State Bar of Texas Podcast brought to you by LawPay. Thank you again LawPay.

Penny Robe: Thanks.

Rocky Dhir: All right, go pay.

Penny Robe: I use LawPay, thanks.

Rocky Dhir: Yeah, we love that. Also thank you to our listeners for tuning in. If you like what you heard, please rate and review us in Apple Podcasts, Google Podcasts, Spotify or your favorite podcasting app.

I’m Rocky Dhir, until next time thanks for listening.

Outro: If you would like more information about today’s show, please visit legaltalknetwork.com. Go to texasbar.com/podcast. Subscribe via Apple Podcasts and RSS. Find both the State Bar of Texas and Legal Talk Network on Twitter, Facebook, and LinkedIn or download the free app from Legal Talk Network in Google Play and iTunes.

The views expressed by the participants of this program are their own and do not represent the views of, nor are they endorsed by the State Bar of Texas, Legal Talk Network, or their respective officers, directors, employees, agents, representatives, shareholders, or subsidiaries. None of the content should be considered legal advice. As always, consult a lawyer.

Texas Center for Legal Ethics : Opinion 577

QUESTION PRESENTED
May a law firm hire a lawyer who is not an associate, partner, or shareholder of the law firm to provide legal services for a client of the firm and then bill the client a higher fee for the work done by that lawyer than the amount paid to the lawyer by the firm?

STATEMENT OF FACTS
A law firm enters into an arrangement with a lawyer who is not an associate, partner or shareholder of the law firm to work on a matter for a client. The law firm will pay the lawyer an agreed- upon amount for his work on the matter, but the lawyer will not assume joint responsibility with the law firm for the representation.

The law firm intends to charge the client an hourly fee established by the law firm for the lawyer’s work as well as for the work of the partners, shareholders and associates of the law firm. The result is that the law firm will charge the client more for the lawyer’s work than the law firm is paying the lawyer for that work. The lawyer will be identified on the law firm’s bills along with a description of the work done and the hours spent doing that work, but the amount paid by the law firm to the lawyer will not be disclosed to the client.

DISCUSSION
Rule 7.01(a) of the Texas Disciplinary Rules of Professional Conduct refers to lawyers practicing under a firm name, and Rule 7.01(d) provides that “[a] lawyer shall not hold himself or herself out as being a partner, shareholder, or associate with one or more other lawyers unless they are in fact partners, shareholders, or associates.” Rule 1.04(f) deals with a division of fees between “lawyers who are not in the same firm . . . .”

The Terminology Section of the Texas Disciplinary Rules provides that “‘Firm’ or ‘Law firm’ denotes a lawyer or lawyers in a private firm; or a lawyer or lawyers employed in the legal department of a corporation, legal services organization, or other organization, or in a unit of government” and that “‘Partner’ denotes an individual or corporate member of a partnership or a shareholder in a law firm organized as a professional corporation.”

Rule 1.04(f) requires that, when a law firm and a lawyer who is not “in” the firm divide legal fees or agree to do so, the division must meet several requirements: (1) either the billing is in proportion to services performed or the lawyers involved assume joint responsibility for the matter, (2) the client consents in writing to the terms of the fee division arrangement, and (3) the total fee complies with the requirement of Rule 1.04(a) that a fee for legal services not be unconscionable.

If a lawyer is “in” the law firm that is billing for the lawyer’s work, such billing will not involve a division of fees and the requirements of Rule 1.04(f) will not apply. To determine whether a lawyer is or is not “in” a law firm, the relationship between the lawyer and the law firm must be considered in more detail. A lawyer will either be in the law firm and referred to in this opinion as a “firm lawyer” or not in the law firm and referred to in this opinion as a “non-firm lawyer.”

The Texas Disciplinary Rules do not provide guidance on when a lawyer is in a law firm for purposes of the Rules. That may be in part because traditionally law firms consisted basically of partners or shareholders and “associates,” who were any lawyers employed by the law firm who were not partners or shareholders. Today the legal services landscape is more varied.

In the case of a firm lawyer, his relationship with the firm may be as a shareholder, partner, or associate or he may have some other type of relationship with the firm. For the purposes of this opinion, firm lawyers who are not shareholders, partners, or associates will be referred to “other firm lawyers.” Other firm lawyers are lawyers that are reasonably considered to be “in” the law firm.

Such a determination can be based on various objective factors, including but not limited to the receipt of firm communications, inclusion in firm events, work location, length and history of association with the firm, whether the firm and the lawyer identify or hold the lawyer out as being in the firm to clients and to the public, and the lawyer’s access to firm resources including computer data and applications, client files and confidential information. Examples of other firm lawyers include lawyers referred to as of counsel, senior attorneys, contract lawyers and part-time lawyers.

Just as with partners, shareholders and associates, a firm may establish an hourly rate for other firm lawyers that results in the firm charging the client more for the work of the other firm lawyers than the law firm is paying those lawyers for that work.

Doing so does not mislead or deceive the client because other firm lawyers are understood to be “in” the firm, as are partners, shareholders and associates. For the same reasons, the law firm may identify other firm lawyers on the firm’s bills with a description of the work, the hours expended, and the lawyer’s hourly rate. Doing so does not violate either Rule 1.04(f) or Rule 7.01.

For the purposes of this opinion, the term “non-firm lawyer” as applied to a particular lawyer’s relationship to a law firm means a lawyer who is not “in” the law firm and instead practices separately from the law firm even when working with the firm on a particular client’s matter. The determination as to whether a particular lawyer is or is not “in” a particular law firm can be based on the various objective factors discussed above.

Examples of non-firm lawyers can include outside patent counsel, local counsel, counsel with expertise dealing with a particular government agency, counsel in another state hired to advise regarding the application of that state’s laws, and lawyers hired individually or through another organization that provides temporary additional staffing or capabilities such as document review or research for a particular matter. In many cases, a non-firm lawyer is in fact a member of another law firm.

In the case of non-firm lawyers, it is the opinion of the Committee that a division of fees subject to Rule 1.04(f) is not involved if the law firm bills the client as an expense, and without markup, the non- firm lawyer’s fees which have been billed to the law firm by the non-firm lawyer.

Billing for a non-firm lawyer’s services as an expense should not be considered a division of fees implicating Rule 1.04(f) because there is in fact no division of fees taking place – the law firm is billing and collecting for the law firm the fees due for the law firm’s services and the law firm is billing, collecting and paying over the fees charged by the non-firm lawyer for that lawyer’s services.

Although treating a non-firm lawyer’s bills as an itemized expense without markup would be the most usual arrangement in such cases, the law firm could also avoid a division of fees while including the non-firm lawyer’s work in hourly billing provided that there was a clear presentation in the bill of the non-firm lawyer’s billed time and resulting bill amount without markup or markdown. In this latter billing arrangement, the law firm would also be required to indicate clearly in the bill that the non-firm lawyer was not a lawyer in the firm.

Under Rule 1.04(f), a division of fees will exist when a law firm includes in its bills fees for work done by a non-firm lawyer and the amounts billed to the client for the non-firm lawyer’s work differ from the amounts billed by the non-firm lawyer to the law firm for such work. In that situation, either the non- firm lawyer is sharing fees for his services with the law firm or the law firm is sharing a portion of its fees with the non-firm lawyer.

For example, consider the situation in which a law firm is handling a lawsuit for a client and then brings in a non-firm bankruptcy lawyer for advice on a particular issue. In one month the bankruptcy lawyer bills the firm $500 for five hours of work on the case billed at the bankruptcy lawyer’s standard billing rate of $100 per hour.

The law firm may, without engaging in a division of fees subject to Rule 1.04(f), bill to the client the $500 billed by the bankruptcy lawyer either as an expense or as hourly work for which exactly $500 is included in the law firm’s fee.

However, if the firm bills the client more than $500 (say, $600) for the bankruptcy lawyer’s work, there will be a division of fees between the firm and the bankruptcy lawyer because the law firm rather than the bankruptcy lawyer will receive the excess (in this example $100) over the $500 billed by the bankruptcy lawyer for his 5 hours of work.

There would also be a division of fees if the law firm chose to bill the client less than $500 (say $450) for the bankruptcy lawyer’s work because in that case the law firm would be sharing with the bankruptcy lawyer the law firm’s fees to the extent the amount collected for the bankruptcy lawyer’s work itself was insufficient to cover the full $500 due to the bankruptcy lawyer – in this example $50 of the law firm’s fees would be shared with the non-firm lawyer.

Thus, in the case of non-firm lawyers, when a law firm bills a client for the work of the firm’s lawyers and for the work of a non-firm lawyer, there will be a division of fees under Rule 1.04(f) unless the law firm bills the non-firm lawyer’s fee to the client in the same amount as billed to the law firm by the non-firm lawyer.

If there is a difference between the amount billed by the non-firm lawyer and the amount charged by the law firm to the client with respect to this work, such billing will not be permissible unless all the requirements of Rule 1.04(f) are met – proportionality of fees to services performed or joint responsibility for the representation, written client consent to the terms of the fee division, and a total fee that is not unconscionable under Rule 1.04(a).

In addition, Rule 7.01(d) will prohibit the law firm from incorporating the non-firm lawyer’s name, work and time into its own bill unless the law firm does so in a way that identifies the non-firm lawyer as a lawyer who is not in the firm.

The Committee notes that the conclusions reached in this opinion differ substantially from the conclusions reached in American Bar Association Standing Committee on Ethics and Professional Responsibility Formal Opinion 00-420 (November 29, 2000) (the “ABA Opinion”). The ABA Opinion concluded, interpreting rules similar to the applicable provisions of the Texas Disciplinary Rules, that if the costs associated with a contract lawyer’s services are billed as an expense they should not be greater than the actual cost incurred by the billing lawyer (including expenses of the billing lawyer in obtaining and providing to the client the services of the contract lawyer) but that a billing lawyer may add a surcharge for the services of a contract lawyer when the services are billed to the client as a fee for legal services provided that the total charge is reasonable.

However, for the reasons set forth above, this Committee believes that the conclusions reached in the present opinion correctly interpret the provisions of the Texas Disciplinary Rules of Professional Conduct applicable to Texas lawyers with respect to the issues addressed in this opinion.

CONCLUSION
Under the Texas Disciplinary Rules of Professional Conduct, a law firm may establish an hourly rate for a lawyer who is not a shareholder, partner or associate but is otherwise “in” the firm, the law firm may use that hourly rate in billing clients for such lawyer’s work at a rate that is more than the law firm is paying the lawyer for that work, and the law firm may identify such lawyer on the firm’s bills with a description of the work performed, the hours expended, and the lawyer’s hourly rate without distinguishing such lawyer from other lawyers in the firm and without disclosing the amount paid by the firm to such lawyer.

However, when a law firm bills a client for legal services provided by a lawyer that is not “in” the law firm, there will be a division of fees between the law firm and the lawyer unless the law firm bills the client precisely the amount that has been billed to the law firm by such lawyer.

Any arrangement for division of fees between a law firm and a non-firm lawyer would be required to meet all the requirements of Rule 1.04(f) – proportionality of fees to services performed or joint responsibility for the representation, written client consent to the terms of the fee division, and a total fee that is not unconscionable under Rule 1.04(a).

In addition, the law firm would be prohibited from incorporating a non-firm lawyer’s name, work and time into its own bill unless it did so in a way that showed that the non-firm lawyer was not in the firm.