Beware of Business Client-Imposed Guidelines on Outside Counsel

Download

At the Legal Malpractice & Risk Management Conference last February the presentation “Outside Counsel Guidelines” examined the increasing use of client imposed guidelines that law firms must accept to receive the client’s business. These guidelines are reminiscent of the efforts of insurance companies in the 1980s and ‘90s to control the costs of defense counsel by unrealistically limiting costs and requiring advance approval before hiring expert witnesses, scheduling depositions, or performing certain legal research. The ethics problem these guidelines created for defense lawyers was resolved in KBA Ethics Formal Opinions E-331 and E-368. Those opinions made it clear that while insurance companies have an interest in limiting defense costs, this cannot be accomplished by compromising a lawyer’s ethical duty to an insured client.

The difference today is that the guidelines are coming from the client – not an insurance company providing a defense to an insured. One commentator described the situation as a duel between a law firm’s letter of engagement and the client’s outside counsel guidelines. Another difference is that many of the guidelines do not invoke ethics issues for the lawyer, but may impose intrusive requirements that may be expensive and unnecessary for the practice of the matter. While these guidelines are especially significant for large law firms, they are a growing business practice in controlling legal service. Lawyers in any size firm must be aware of their potential for ethics violations, malpractice claims, and unwarranted interference with a firm’s
business practices.

EVALUATING GUIDELINES

Client guidelines are typically divided into three categories – those that may reasonably be required of all outside counsel; those that a major client could reasonably apply to a large law firm; and those that overreach by resulting in unethical practice or are too intrusive in law firm management. The following examples of each category are from “When Intervention Goes Too Far,” by Rees W. Morrison, New York Law Journal (2/21/2008):

Reasonably acceptable guidelines:

  • Deliver work product electronically.
  • Present invoices electronically.
  • Not bill for too many meetings among the lawyers of the firm or with too many people at the meetings.
  • Maintain files and records of the client after the matter closes.
  • Notify the law department of billing-rate increases.

OK for big client/big firm:

  • Firm must provide training beyond firm standard CLE events.
  • Firm must appoint a client relationship partner who devotes non-trivial amounts of non-billable time to overseeing the relationship.
  • Firm must absorb costs of training associates who are new to a matter.
  • Firm must assign and keep a core group of lawyers on their matters.
  • Firm must bill in tenths of an hour.
  • Firm must prepare budgets in the form the client wants on major matters.
  • Firm must charge in agreed-to ways for travel time.

Over-Reach:

  • Client evaluates the performance and influences the promotion of individual law firm lawyers.
  • Client restricts in a heavy-handed way the addition to core teams of extra lawyers.
  • Client forces work into imposed staffing models.
  • Client insists that only associates with more than a certain number of years of experience work on matters.
  • Client seeks disclosure of total billable hours of lawyers who work on their matters.
  • Client demands non-billable project managers on major cases or matters.
  • Client demands most-favored-nation billing terms.
  • Client freezes billing rate for years.
  • Client seeks real-time billing information.
  • Client requests metrics on other companies’ matters, even if the data is redacted.
  • Client forces firm to absorb too many internal costs.
  • Client requires disclosure of conflicts of interest that are potential or related to business issues.

MANAGING THE RISK

At the Risk Management & Legal Malpractice Conference, five risk management considerations for client-imposed guidelines were outlined:

  1. All lawyers in a firm should be trained regarding client imposed guidelines and the pitfalls they may contain.
  2. Remove the authority of individual partners and lawyers to agree to client-imposed guidelines. Consolidate this authority in a managing partner or executive committee.
  3. Negotiate removal of guidelines that create ethics violations or impose too intrusive conditions on the business practices of the firm.
  4. Be prepared to walk away if the client insists on conditions that cannot be accommodated for either ethics or business reasons.
  5. Begin risk managing client-imposed guidelines by taking an inventory now of guidelines that currently apply to the firm. The point was made that before an inventory is taken, only a sole practitioner could be absolutely sure what guidelines are already in place.

Client-imposed guidelines are expected to become more prevalent in the future as more clients attempt to control legal service expenses and firm business practices. Now is the time to establish a policy on how your firm will risk manage the issues they present.

 


323 West Main Street, Suite 600 | Louisville, Kentucky 40202 | Phone: 502-568-6100 | Fax: 502-568-6103

Disclaimer: The contents of this Web site are intended for general information purposes only and should not be construed as legal advice or legal opinion on any specific facts or circumstances. It is not the intent of this Web site to establish an attorney’s standard of due care for a particular situation. Rather, it is our intent to advise our policyholders to act in a manner which may be well above the standard of due care in order to avoid claims having merit, as well as those without merit. In the event any statement on the Web site differs from a statement in an issued policy the policy will control.

SITE BY SCARNEGIE INTERACTIVE, LLC