Business of Law
In my last couple of posts here on the LAWCLERK blog I’ve discussed how the internet is democratizing access to legal information and some specific tips to help lawyers take advantage of this trend, specifically by capitalizing on freelance legal help via online marketplaces. In this post we’ll talk about one of the most important parts of this process: how to charge for the advantages this democratization brings.
A key aspect of charging for freelance work is the well-established principle that a lawyer or law firm can charge market rates for work outsourced to freelance attorneys. This may seem obvious but there have been Supreme Court opinions as well as a fair number of ethics opinions on the topic. The question is whether it’s proper for attorneys to charge clients the prevailing market rate for outsourced freelance work as opposed to simply passing along the cost of the freelance work without marking it up. Now, I’m happily not a practicing attorney, let alone an ethics attorney, so I tend to look at most of this stuff from a high-level point of view, but from that vantage point I’ve noticed that courts and ethics committees tend to justify this position in two ways: the first is that the practice does not represent a windfall for the charging attorney and the second is the bar of reasonableness.
Regarding the windfall, courts and other regulators reject that argument by analogizing freelance legal professionals to associates who are also billed out at market rates to clients. If billing out associates at a market rate, as opposed to at the firm’s cost, does not create concerns of a windfall to law firms then billing out other resources at market rates (such as freelance attorneys) should similarly not raise concerns of a windfall.
The more substantive argument is the one regarding reasonableness. The Supreme Court and ethics groups around the country have regularly grappled with a “reasonableness” standard regarding how lawyers are to be compensated either because a reasonableness component had been explicitly included in a given rule or law or because the Court or committee defaulted to it in the absence of another better standard.
Whether court or committee, these groups ultimately conclude that the best way to determine a reasonable rate is to rely upon the prevailing market rate. This makes intuitive sense because in a free market, one in which goods and services are exchanged in an unencumbered fashion, the market rate is what people are willing to pay in light of the relative scarcity or abundance of a given asset. If the price is too high other suppliers will enter the market and undercut existing suppliers until the market reaches equilibrium. If the price is too low, suppliers will reallocate resources to other production capacities, limiting supply and pushing the price back up. Provided that a given market is operating efficiently, the most reasonable price is the one buyers and sellers land on through the free exchange of a good or service.
As a side-note, I’ve seen this reasonableness discussion in legal before. At Avvo we went around and around with regulators about the “reasonable cost of advertising.” Former Avvo General Counsel, Josh King, put it best when he said “‘What’s “reasonable?’ It’s what someone’s willing to pay, based on the perception of the value delivered.”
So, when trying to determine what a “reasonable” amount is to bill clients for the work of freelance legal attorneys, the obvious conclusion is: what everyone else is paying all other market forces being equal. Otherwise known as the market rate. It’s clearly reasonable.
Reasonableness = opportunity
And this reasonableness leads to opportunity. One of the ways to grow a profitable law practice is for a lawyer or group of lawyers to win a bunch of work and then build a pyramid of resources, usually associates, to do that work. Then, by charging the client more than it costs the lawyer or firm to have the work done the lawyer or firm makes a profit on every hour billed by those in that pyramid. Both winning the work and building the pyramid are hard to do. But, for those rainmaking attorneys that don’t have the skill in building a pyramid or the access to associates to build it, they can take advantage of democratized legal expertise, made available to them through online freelance attorneys, to build a profitable practice.
It’s not hard to figure out what to charge clients for work performed for them by freelance legal work. Charge them the prevailing market rate. That’s what they’d have to pay if they went somewhere else to have the work done. It’s not a windfall to the outsourcing attorney. It’s the “perception of value derived.” It’s just plain reasonable.