Free Lunches and Other Disbursement Headaches

Business
By Wendeen H. Eolis
New York Law Journal

Presiding over a workshop for senior business executives and law department officials from around the country, John Prudent* (not his real name), Executive Vice President of a Fortune 500 corporation declares, "No more free lunches for outside lawyers, please."

In the company's million dollar conference room with artworks to match, Prudent instructs, "outside counsel disbursements should be monitored with a fine tooth comb-especially the high-priced lunches they have amongst themselves." I am here to provide advice on how to review a firm's invoice when it comes through the door.

With Prudent's opening salvo in mind, I glance down at my perfectly poached shrimp cocktail-the type of appetizer I am prone to order for a brainstorming session with my colleagues on a client's behalf-on his tab. Then I set my gaze on this well-heeled crowd that favors Rolex watches for timekeeping purposes and Mont Blanc pens to keep track of expense accounts.

Timekeeper charges are at the heart of most legal bill controversies; they typically amount to upwards of 90% of a company's legal fees. Disbursements are generally way down the Totem pole and far behind timekeeper rates, billing rate changes, para legal task allocations, case administration costs and usually even lower than intra-office conference charges.

For the most part, the task-based billing statements that Prudent has reviewed read like gibberish to him, except for the disbursements portion. Prudent discloses that the disbursements have risen from 5% to 11% of the aggregate legal costs and he has calculated a 15% jump in payments to outside law firms, company-wide over the prior year. He is determined to reverse the tide.

Today, Prudent turns his attention to disbursements, pouncing on one category after another. He labels his discovery of allocated costs for use and maintenance of a law firm's equipment as an "overcharge." He objects to meals and taxis for secretarial and para legal personnel who work on the company's account evening and weekends as a matter of convenience for the firm. He lambastes the litigators for paying charges for photocopying at $.25 per page instead of using a commercial copying service. He dismisses most ministerial costs as part of the firm's overhead for which he doesn't "want to pay the freight beyond the considerable fees" his company generates. He scowls at surcharges for long distance telephone calls, and charges of $2.00 a page for outgoing local faxes and rejects as unreasonable any surcharges for incoming faxes.

Several participants in the group indicate resentment of data processing charges and call their law firms' communications methods antiquated. I assure them that these are negotiable items and encourage clients to ask that fancy courier services be replaced by secure E-mail transmissions wherever practicable. A labor counsel tells the charged-up crowd that he does not fly first class, nor do his frequent flyer miles accrue to his personal account when he flies on company business. He asks, "Why should outside counsel take greater liberties than we do?" Prudent says, "Tell me about a firm's disbursement policy and I'll tell you about the lawyers' attitude toward the client."

As if to challenge anyone who would dare to dispute his high-minded single-themed focus on law firm disbursements, he reads the American Bar Association's formal opinion 932D79 issued by the Committee on Ethics and Professional Responsibility. It states, "In the absence of an agreement to the contrary, it is impermissible for a lawyer to create an additional source of profit for the law firm beyond that which is contained in the provision of professional services themselves. The lawyers' stock in trade is the sale of legal services, not photocopy paper, tuna fish sandwiches, computer time, or messenger services."

Putting the more crucial timekeeper fee items aside, Prudent treats the review of disbursements as a shortcut route to evaluating a law firm's fairness and efficiency.

After acknowledging Prudent's concerns and commending him for his research, I am obliged to clarify that the opinion to which Prudent has referred "is not binding upon lawyers, but intended to provide guidance on the subject of disbursements." I discourage over zealousness. Even the stringent United States Bankruptcy Court Guidelines that narrowly restrict law firms' rights with regard to "disbursements" accept certain charges above straight out-of-pocket expenses.

However, it is reasonable to challenge disbursement statements that include surcharges and/or undefined allocable expenses unless they have been authorized in the retention agreement or are accurately described by the caption of "disbursements and related charges." Law firms are well advised to use the latter terminology to avert various objections, not to mention the possible appearance of an impropriety.

Generally, a law firm leaves room for compromise in the matter of its expense reimbursement policy. A client's sophistication about the inner workings of a law firm combined with its own policy statement as to acceptable categories and parameters for disbursements are the best ammunition for a satisfactory negotiation. Disbursement procedures as well as fee issues should be addressed in the retention agreement.

For the relationship to succeed between client and lawyer, it must be built upon a fundamental understanding on both sides with regard to the purpose and the goals of the engagement as well as specific monetary arrangements. A company's policy regarding reimbursements should take into consideration that nitpicking could result in missing the forest for the trees. When the client focuses on disbursements, it normally reflects frustration or dissatisfaction with the firm's service.

In Prudent's case, I recommend that his business managers and their in-house lawyers review budgets and bills for legal services as well as those for reimbursements for an interim period. While such double teaming may produce duplication of effort on a short term-basis, it forces the in-house lawyers to get to know their business clients much better and offers executives a crash course on the dynamics and economics of legal matters.

There are neither short cut strategies to determine if a law firm is a good buy nor foolproof methods to insure that the client is getting a fair shake on every fee and disbursement item. The relationship must be continuously monitored and nurtured by all concerned to maximize its effectiveness. I caution Prudent and his colleagues in their efforts to contain legal costs, to avoid becoming penny-wise and pound-foolish.

Before Prudent and his fans run off to consult the United States Bankruptcy Court's Guidelines, I point out that flush companies like theirs cannot reasonably ask law firms to grant the same parameters that apply to entities in bankruptcy-not even with respect to disbursements. At the same time I make clear that a law firm that is insensitive to a client's cost/benefit considerations must be rehabilitated or replaced. The relationship between a client and outside counsel may persist merely because it is viable, but it works smoothly only as long as both sides perceive the collaboration as valuable.

Here are a few tips to nip potential disbursement woes:

The client should resist paying significant administrative overtime (which also eliminates the attendant costs of meal and transportation expense) except for time sensitive and emergency matters.

The client should insure that he has the right to approve individual disbursements above a specific amount –depending upon the nature of the matter.

Travel expense policy should be pre-approved including criteria with regard to class and type of transport, quality of lodging permitted etc.

Surcharges arising from allocable costs should be identified clearly and negotiated in advance for such items as photocopying, telephone, faxes etc.

Outsourcing (an increasingly popular law firm practice that can shift certain overhead costs into the client expense column by contracting for various client services through an outside vendor and then passing along the vendor bill to the client) should be identified and expressly approved before commencement of such an arrangement.

Clients should be alert to any sudden increases in any disbursement category from one month to the next. The vast majority of law firms prefer to bill out-of-pocket expenses and related charges on a monthly basis. I find that disbursements normally run between 4-8% of the legal bill except in the course of a major transaction and big-ticket litigation where they may easily run higher. For the purposes of enhancing the client-law firm relationship, I suggest that companies consider discussing alternate methods as well as the traditional ones by which to determine company obligations for both fees and disbursements. Numerous law firms are negotiating a pre-arranged percentage of their legal bills as an additional guaranteed amount for expenses. Others are offering capped fee and expense proposals. Still others are pitching an all-inclusive flat fee for a designated engagement.

The well being of both the client and the law firm depends upon a sense of fairness in finances as well as confidence in the cooperation and dedication to the legal matters at hand. This applies not only in the negotiations of the retention agreement, but also throughout the engagement.

Prudent is not alone in his penchant to turn to disbursements before perusing the rest of the legal bill. In my recent survey for a client among lawyers and executives who approve legal fees (the participants were equally divided between the two categories), more than 18% of one hundred forty respondents indicate that they review disbursements prior to looking at the details of the rest of a legal bill. Law firms are well advised to insure that these items do not unnecessarily call attention to themselves.

The law firm's billing partner could avert many a legal fee audit by providing a brief oral synopsis of what is contained in the upcoming bill-including the category of disbursements if the nature of an item or the overall expense is likely to jump out on the page-before the invoice hits the client's desk. One final word: a timely, articulate bill, prepared with consideration to the golden rule averts a lot of headaches-and probably earns the client's blessing of his outside lawyers' occasional free lunches.