Frequent buyers of legal services know full well that most law firms have sky-high profit margins. But what they don’t know is, despite those generous margins, many law firms continue to bill their clients for overhead costs including air conditioning and conference room use. In short, many clients are not only paying for legal advice, but also for running their lawyers’ firms.
There is no other way to say it: These types of billing practices are unethical. There is little debate on this point, although most firms would be reluctant to admit to it. Take it from the American Bar Association, which said in a 1993 opinion that, “A lawyer may not charge a client for overhead expenses generally associated with properly maintaining, staffing and equipping an office.” Many courts have agreed with this opinion in frequently published decisions.
Still, many law firms continue to charge these expenses to clients outside of the firm’s hourly rate. For example: one law firm charged a client for an “overtime dinner expense” costing $287. Another charged not only the “cost” for printing documents, but also for the time of the person who presumably pressed the “print” button and watched the printer do its work. In a different matter, a law firm charged its client for the use of the firm’s conference room, including a food and beverage charge. One well-known litigator felt justified in billing his client for the rental of a hotel ballroom where his staff could assemble documents needed for the trial, which was occurring down the block from the hotel. Other firms have charged clients for simple tasks like scanning documents.
While many clients believe that these charges are isolated examples, the opposite is true. In-house counsel often encounter a common practice of charging for overhead costs such as air conditioning, office supplies, secretarial overtime and the basic clerical preparation of documents. Charges for attorney office meals and late-night transportation are common – even though such charges are arguably the result of a law firm culture that encourages attorneys to run up high numbers of billable hours.
These overhead charges, however small as they may seem, do add up. Such overhead costs can make up between 4 percent and 8 percent of a company’s annual legal bill. In an environment where corporate spending on outside legal services can easily add up to over $100 million annually, these costs are material.
What’s more, these overhead costs continue to be passed on to clients despite numerous court rulings that say “recovery is not... permitted for costs associated with routine office overhead.” While many corporate clients have gone so far as to insist upon detailed billing standards that can reduce these charges, many have not.
If the rules prohibiting law firms to pass their overhead to clients are so clear, why do so many clients put up with this practice? A few reasons stand out. Some clients find the task of tracking detailed bills to be more than their in-house staff can handle. Even with the assistance of automated billing software, catching impermissible charges can still become a formidable task for already burdened corporate legal departments. Other clients, even while establishing common sense billing standards, are still reluctant to challenge their lawyers on such charges, even when it is obvious to them that the overhead charges are abusive.
Despite all of this, these patterns can be broken. There are a number of institutional buyers of legal services who have successfully persuaded law firms to refrain from passing through the basic costs of their operations. By establishing billing guidelines that enforce the basic American Bar Association and court imposed standards, and by consistently monitoring for compliance with these standards, clients can save enormous amounts on their legal bills without affecting the quality of their legal representation.
David H. Paige is the founder of Sterling Analytics and a Managing Director in New York. He has over 20 years of experience as a legal fee consultant, and was a practicing attorney and managing partner in his own law firms for over 20 years.