A law firm may only contract with an agency that would assist firm clients in preparing forms for medical benefits if: a) the clients are informed about the costs of such support services; and b) the lawyers adequately supervise the work of the Agency (and review the forms) to assure that the Agency's conduct is compatible with the lawyers' ethical obligations.[ERs 1.4, 1.5, 1.6, 5.3, 5.5]
The inquiring attorney is a member of a law firm (the "Firm") that assists clients in qualifying for and processing claims involving Medicaid and Arizona Long Term Care System ("ALTCS") benefits. The Firm wishes to contract with an outside agency (the "Agency")to assist the Firm's clients in preparing and processing applications for such benefits. According to the inquiring attorney, this preparation process involves the completion of application forms and the gathering of supporting documentation from the client. Members of the Firm review the applications and supporting materials prior to filing them on behalf of the Firm's clients. The Agency is not a law firm. The Firm pays the Agency for this service on an hourly basis.
Although the inquiring attorney states that the Firm will limit its involvement with the Agency to these form-preparation activities, the Agency does, however, also advise its own clients in these same planning activities. In addition, the inquiring attorney states that the Agency also engages in activities that include giving advice regarding the disposition of client assets in ways that permit the clients to become eligible for ALTCS and Medicaid benefits under Arizona and Federal statutes. In particular, in order for claimants to be eligible for certain Medicaid and/or ALTCS services, the value of the claimants' assets must be below certain threshold amounts. The Agency counsels its clients with regard to methods of disposing of assets that are permitted by the statutes and accompanying regulations so that the threshold amount can be attained. The Firm also provides advice and counsel to its own clients with regard to these issues.
The inquiring attorney's specific requests relate to the billing of such contracted services to the Firm's clients. In particular, the inquiring attorney wishes to know whether the Firm may pass such costs through to the client with or without the client's prior consent. The inquiring attorney also wishes to know whether the Firm may charge the client a higher rate than that billed to the Firm by the Agency, keeping the "balance as a profit." These specific questions are addressed below.
1. Assuming that the Firm may contract with the Agency for these application processing services:
A. May it do so without first informing the client and/or obtaining the client's permission?
B. May the Firm pass on to the Firm's client the cost the Firm incurs with the Agency in providing these services utilizing its routine billing procedures?
C. May the Firm charge its client a higher rate for this application processing service than the fee actually charged by the Agency? Must the Firm first inform the client and/or obtain the client's express approval to such a billing arrangement?
2. May the Firm contract with the Agency on behalf of the Firm's clients to provide the application processing services? If so, what ethical obligations and responsibilities does the Firm undertake?
RELEVANT ETHICAL RULES
Part 1: Billing Procedures
ER 1.4. Communication
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(b) A lawyer shall explain a matter to the extent reasonably necessary to permit the client to make informed decisions regarding the representation.
ER 1.5. Fees
(a) A lawyer's fee shall be reasonable. The factors to be considered in determining the reasonableness of a fee include the following:
(1) the time and labor required, the novelty and difficulty of the questions involved, and the skill requisite to perform the legal service properly;
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(7) the experience, reputation, and ability of the lawyer or lawyers performing the services;
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(b) When the lawyer has not regularly represented the client, the basis or rate of the fee shall be communicated to the client, preferably in writing, before or within a reasonable time after commencing the representation.
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ER 7.1. Communications and Advertising Concerning a Lawyer's Services
(a) A lawyer shall not make false or misleading communication about the lawyer or the lawyer's services. A communication is false or misleading if it:
(1) contains a material misrepresentation of fact or law or omits a fact necessary to make the statement considered as a whole not materially misleading;
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Part 2: Ethical Obligations and Responsibilities
ER 1.6. Confidentiality of Information
(a) A lawyer shall not reveal information relating to representation of a client unless the client consents after consultation, except for disclosures that are impliedly authorized in order to carry out the representation, and except as stated in paragraph (b), (c) and (d) or ER 3.3(a)(2).
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ER 5.3 Responsibilities Regarding Nonlawyer Assistants
With respect to a nonlawyer employed or retained by or associated with a lawyer:
(a) a partner in a law firm shall make reasonable efforts to ensure that the firm has in effect measures giving reasonable assurance that the person's conduct is compatible with the professional obligations of the lawyer;
(b) a lawyer having direct supervisory authority over the nonlawyer shall make reasonable efforts to ensure that the person's conduct is compatible with the professional obligations of the lawyer; and
(c) a lawyer shall be responsible for conduct of such a person that would be a violation of the rules of professional conduct if engaged in by a lawyer if:
(1) the lawyer orders or, with the knowledge of the specific conduct, ratifies the conduct involved; or
(2) the lawyer is a partner in the law firm in which the person is employed, or has direct supervisory authority over the person, and knows of the conduct at a time when its consequences can be avoided or mitigated but fails to take reasonable remedial action.
ER 5.5. Unauthorized Practice of Law
A lawyer shall not:
(a) practice law in a jurisdiction where doing so violates the regulation of the legal profession in that jurisdiction; or
(b) assist a person who is not a member of the bar in the performance of activity that constitutes the unauthorized practice of law.
ER 7.3 Direct Contact with Prospective Clients
(a) A lawyer may not solicit professional employment from a prospective client with whom the lawyer has no family or prior professional relationship in person or by telephone, when a motive for the lawyer's doing so is the lawyer's pecuniary gain.
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Matter of Struthers, 179 Ariz. 216, 877 P.2d 789 (1994)
Matter of Miller, 178 Ariz. 257, 872 P.2d 661 (1994)
Matter of Galbasini, 163 Ariz. 120, 786 P.2d 971 (1990)
Matter of Ireland, 146 Ariz. 340, 706 P.2d 352 (1985)
Matter of Swartz, 141 Ariz. 266, 686 P.2d 1236 (1984)
RELEVANT ABA OPINION
ABA Formal Op. 93-379
RELEVANT ARIZONA ETHICS OPINIONS
Ariz. Ops. 93-01, 94-10, 98-08
Part 1: Billing Procedures
The only question directly asked by the inquiring attorney, the circumstances under which the Firm may bill its clients for work contracted out to the Agency, is relatively straightforward. Assuming for purposes of this discussion that the Firm appropriately contracts with the Agency (see discussion in Part 2, below), three questions are presented: 1) May the hourly costs paid to the Agency by the Firm be passed through to the client? 2) May the Firm charge its client more than it pays the Agency for these services and retain the "profit"? 3) What information must the Firm give its clients with regard to these procedures?
It is well recognized that lawyers may contract with outside agencies for the provision of services on behalf of its clients. Costs incurred for the delivery of documents, investigators, photocopy and the like are billed to the client through the lawyer's routine billing procedures. However, even such services must meet the criteria of ER 1.5(a) and (b).
Though the Rules of Professional Conduct do not provide specific direction to the lawyer regarding how much a lawyer may charge his client, the criteria of ER 1.5 apply to both the attorneys' fees and the costs of representation. ABA Formal Op. 93-379 (December 6, 1993). Further, Arizona law plainly provides that charging an excessive fee constitutes grounds for disciplinary action. Matter of Swartz, 141 Ariz. 266, 686 P.2d 1236 (1984).
A similar question was discussed by this Committee in Ariz. Op. 94-10 (July 20, 1994). There, the inquiring attorney wished to know whether it was ethically permissible to bill clients for costs on a percentage of the total fee basis rather than itemizing such costs individually. The Committee determined that, so long as the arrangement was clearly disclosed to the client and so long as the arrangement "approximates the actual expenses" normally incurred, such a procedure was permissible.
The Committee noted that ABA Formal Op. 93-379 (December 6, 1993) provides that it is "permissible to charge a client no more than the direct cost associated with the services plus a reasonable allocation of overhead expense directly associated with the service." Ariz. Op. 94-10 at 3. The ABA Opinion uses photocopying expenses as an example. It notes that the lawyer may charge his client the direct costs of providing the photocopies plus a reasonable amount to cover such overhead expenses as the salary of the employees making the copies.
Such an analysis would properly be used in this case. While it would be appropriate to pass through to the client the costs paid directly to the Agency for the services provided, the Firm must assure itself that any "surcharge" over and above those costs is somehow related to other reasonable Firm expenses such as overhead.
In examining these issues in 1994, the Committee was also concerned with disclosure to the client. Specifically, the Committee conditioned its approval upon complete disclosure. In doing so, the Committee looked to the Arizona Supreme Court decision in Matter of Ireland, 146 Ariz. 340, 706 P.2d 352 (1983). There, the Court determined that it was improper for a lawyer to bill a client separately for the services provided by the lawyer's secretary when such fees were not part of the agreed compensation.
Ethical Rule 1.4(b) requires the lawyer to "explain a matter to the extent reasonably necessary to permit the client to make informed decisions regarding the representation." Ethical Rule 1.5(b) provides, "[w]hen the lawyer has not regularly represented the client, the basis or rate of the fee shall be communicated with the client, preferably in writing, before or within a reasonable time after commencing the representation." Further, ER 7.1(a) prohibits a lawyer from making a statement which either is false and misleading or fails to provide relevant information.
Finally, the Arizona Supreme Court has opined:
The question of whether separately billing the time of paralegals or messengers without express client agreement violates the disciplinary rules is not squarely presented by this case. We therefore decline to address it. Suffice it to say that it would be the better practice to have client agreement before such charges are billed. (emphasis added)
Matter of Ireland, supra 146 Ariz. at 344, 706 P.2d at 356 n.4.
It seems likely that a client seeking the assistance of a lawyer under the circumstances outlined by the inquiring attorney would anticipate that the work would be done by the attorney or by his employees. The interests of candor and disclosure set forth in ER 1.4(b) and ER 1.5(b) would require prior disclosure to the client, preferably in writing, of the proposed practice.
Part 2: Ethical Obligations and Responsibilities
Though not specifically addressed by the inquiring attorney, the proposed contract with the Agency raises other ethical concerns. Specifically, ER 5.3 sets forth stringent oversight and supervision requirements when an attorney proposes to be associated with a nonlawyer for the provision of legal advice. Setting aside for the moment the difficult questions relating to the unauthorized practice of law, the Rules of Professional Conduct require the lawyer in a situation such as this to: 1) "make reasonable efforts to ensure that . . . the [nonlawyer's] conduct is compatible with the professional obligations of the lawyer," ER 5.3(a); 2) make certain that the nonlawyer does not reveal confidential information, ER 1.6(a); and 3) refrain from developing a relationship with the Agency whereby the Agency directly solicits clients for the Firm.
Many of these issues were addressed by the Committee in Ariz. Op. 98-08 (October, 1998). There, the inquiring attorney wished to contract with a paralegal for the provision of services by that paralegal which included interviewing clients regarding estate planning services and orchestrating the execution of such documents. The Committee noted that ER 5.3 requires that a lawyer "make reasonable efforts to ensure that . . . the person's conduct is compatible with the professional obligations of the lawyer." The Committee noted:
ER 5.3(b) establishes an independent duty to supervise on the part of the attorney vis a vis the paralegal. Nonlawyers cannot be held to exactly the same professional standard as lawyers. Therefore, they are to be held to "conduct compatible with the professional obligations of the lawyer." ER 5.3(b) was intended to parallel ER 5.1(b), which governs the supervision of subordinate lawyers. However, because paraprofessionals are not subject to the same ethical responsibilities as are even subordinate lawyers, the supervising lawyer may be required to take even greater steps in the training and supervision of paralegals to ensure that their conduct is compatible with the supervising lawyer's ethical responsibilities.
Ariz. Op. 98-08 at 4.
The Arizona Supreme Court has addressed this issue as well. In Matter of Galbasini, 163 Ariz. 120, 786 P.2d 971 (1990), the attorney, Galbasini, had entered into a contract with RMJ, a "credit consulting" business, which was nothing more than an unlicensed debt collection agency. Galbasini essentially turned over all operations of his practice, including the preparation of pleadings and the pursuit of lawsuits, to RMJ. In determining that such conduct fell well below the standards set forth in ER 5.3, the Court first quoted from Hazard & Hodes, The Law or Lawyering:
"Reasonable" Supervisory Efforts
An attorney who supervises a nonlawyer associate is not required to guarantee that the associate will never engage in "incompatible" conduct, for that would be tantamount to vicarious liability. On the other hand, if a supervising lawyer takes no precautionary steps at all, he or she violates Rule 5.3 whether or not their nonlegal associates misbehave.
Circumstances will dictate what constitutes a "reasonable effort" to instill in nonlawyer personnel an appropriate respect for their duties. Certainly new personnel must be carefully screened and given at least some instruction in the fundamentals of professional responsibility.
Matter of Galbasini, supra 163 Ariz. at 124, 786 P.2d at 975.
Galbasini contended that he was unaware of the improper conduct undertaken by RMJ and, because he could not be held vicariously liable for this improper conduct, it was unfair for him to be sanctioned by the State Bar. The Supreme Court rejected that argument. "Although ER 5.3 may not establish a rule of vicarious or imputed liability, it does mandate an independent duty of supervision. Here, respondent conducted no supervision, reasonable or otherwise. . . . We therefore believe that respondent acted unreasonably under the circumstances and violated ER 5.3." Id.
The Supreme Court reiterated this holding in Matter of Miller, 178 Ariz. 257, 872 P.2d 661 (1994). There, the attorney, Miller, hired a nonlawyer to handle his firm's collection practice -- an area in which Miller had little expertise or experience. After the nonlawyer misappropriated some of Miller's client's funds, Miller was suspended for failure to adequately supervise a nonlawyer assistant. Citing Galbasini, the Court held:
This analysis concedes that an attorney who supervises a non-lawyer assistant is not required to guarantee that that assistant will never engage in conduct that is not compatible with the professional obligations of the lawyer. However, the analysis provides that if a supervising lawyer takes no precautionary steps whatsoever, ER 5.3 is violated, regardless of whether or not the non-lawyer assistants misbehave. (emphasis added)
Matter of Miller, supra 178 Ariz. at 259, 872 P.2d at 663.
The Comment to ER 5.3 describes the kinds of actions which an attorney must undertake when she associates with a nonlawyer: "[a] lawyer should give such assistants appropriate instruction and supervision concerning the ethical aspects of their employment, particularly regarding the obligation not to disclose information relating to the representation of the client, and should be responsible for their work product."
Once again, the Supreme Court is in accord. In Matter of Struthers, 179 Ariz. 216, 877 P.2d 789 (1994), the Court held: "Although there may often be some question of what is a reasonable effort to ensure proper conduct by nonlawyer employees, at a minimum the lawyer must screen, instruct and supervise."
In some of the situations described in the case law and in the prior opinions, the nonlawyers were actually hired by the lawyer or were physically located in the lawyer's offices. However, the Comment to ER 5.3 makes it clear that these strictures apply equally to employees and contractors. "Lawyers generally employ assistants in their practice, including secretaries, investigators, law student interns, and paraprofessionals. Such assistants, whether employees or independent contractors, act for the lawyer in rendition of the lawyer's professional services." (emphasis added)
As that Comment also states, maintaining client confidences is among the most important responsibilities a lawyer has to her client. This is embodied in ER 1.6(a) which requires that a lawyer not reveal information relating to representation of a client unless the client first consents to such revelation. This extends beyond the matters normally encompassed by the attorney-client and work product privileges. The Comment to ER 1.6 provides:
The principle of confidentiality is given effect in two related bodies of law, the attorney-client privilege (which includes the work product doctrine) in the law of evidence and the rule of confidentiality established in professional ethics. . . . The confidentiality rule applies not merely to matters communicated in confidence by the client but also to all information relating to the representation, whatever its source. A lawyer may not disclose such information except as authorized or required by the Rules of Professional Conduct or other law.
As stated by the inquiring attorney, the services which are proposed to be undertaken by the Agency include the preparation of various application forms and the gathering of documentation relating to a client's health and financial status. Plainly, such matters fall within the scope of materials and information over which the lawyer has a duty of confidentiality and to avoid unauthorized practice. Having an ability to take reasonable measures to ensure that the Agency and its personnel abide by this important requirement would be key. At the very least, the Firm would be required to undertake measures to screen the work and the personnel undertaking that work and to instruct those people about their obligations. See ERs 5.3, 5.5.
Finally, though it is not clear from the facts presented by the inquiring attorney, it is important that the proposed contractual arrangement not lead to the direct solicitation of clients. Of course, ER 7.3 prohibits a lawyer from soliciting professional employment from a prospective client with whom the lawyer has no family or prior professional relationship when a motive for doing so is the lawyer's pecuniary gain. It is also clear that, although the nonlawyer personnel of the Agency are under no such prohibition, the lawyer may not accomplish through the efforts of a nonlawyer that which he is prohibited from accomplishing directly. To the extent the Agency would solicit clients on behalf of the Firm, such a contract would be unethical.
Based upon the information provided by the inquiring attorney:
1. Assuming the contract with the Agency can be entered into without otherwise violating the Rules of Professional Conduct, the Firm may bill the costs associated with the contract directly to its clients if the clients are informed of such costs and consents to them. The Firm must assure itself that any surcharge to those costs are related to reasonable expenses such as identifiable overhead.
2. The Firm may contract with the Agency for the provision of services relating to the preparation of applications for benefits and the gathering of documents to support such applications. However, the Firm and its lawyers have ongoing responsibilities to supervise the conduct of the nonlawyer personnel of the Agency. The Firm also must take reasonable measures to insure that the conduct of the Agency and its personnel is compatible with the professional obligations of a lawyer. If such reasonable measures and such oversight cannot be undertaken, the arrangement with the Agency would be unethical.