Beyond Ethical Considerations in LPO

© 2008 William B. Bierce. All rights reserved

After several state and city bar associations have blessed offshore paralegal services ("legal process outsourcing") subject to compliance with many specific ethical considerations, the American Bar Association issued its Formal Opinion No. 08-451, "Lawyer’s Obligations When Outsourcing Legal and Nonlegal Support Services" on August 5, 2008. The ethics opinions frame the minimum standards for lawyers to avoid losing their licenses.

Beyond such ethical and disciplinary considerations, the big question is how to make LPO effective and how the global law firm persuades its global corporate clients to stay in the fold. LPO service providers claim to be able to provide better management, better process, faster delivery, lower cost and more effective allocation of resources. This article analyzes the ethical framework and suggests some business management issues that require individual attention by corporate counsel and law firms considering significant levels of LPO.

In-scope LPO Services

The various ethics opinion identifies a full range of in-scope services that lawyers may outsource to other lawyers and to paralegals. The list is framed by its extremes:

• Transcription of dictation tapes
• Reproduction of documents
• Creation and maintenance of a data base for complex litigation
• Preparing a survey of the law in 50 states on an issue of importance to a client
• Drafting of patent applications
• Development of legal strategies for preparation of motion papers in litigation
• Creation of business entities
• Business closings
• Immigration forms and letters
• Legal research
• Drafting of standard forms

Avoiding Unauthorized Practice of the Law

Ethics opinions of bar associations generally hold a lawyer hiring or supervising an LPO provider responsible for facilitation, by action or inaction, of the unauthorized practice of the law. In its Professional Ethics Opinion 07-02 of January 18, 2008, approved internally by its Board of Governors on July 25, 2008, the Florida’s Bar Association attempted to provide some clarity to this concept by suggesting a rights-based analysis whether an activity constitutes the practice of law, citing a 1963 Florida Supreme Court decision:

"...if the giving of [the] advice and performance of [the] services affect important rights of a person under the law, and if the reasonable protection of the rights and property of those advised and served requires that the persons giving such advice possess legal skill and a knowledge of the law greater than that possessed by the average citizen, then the giving of such advice and the performance of such services by one for another as a course of conduct constitute the practice of law." Florida Bar v. Sperry, 140 So. 2d 587, 591 (Fla. 1962), judg. vacated on other grounds, 373 U.S. 379 (1963)

The bar opinions generally refrain from concluding that any particular LPO constitutes "unauthorized practice," leaving that issue open for the attorney and the courts to decide in each case.

Avoiding Malpractice

Direct Services The ABA ethics opinion confirms what has been well known for decades. "There is nothing unethical about lawyer outsourcing legal and nonlegal services." But to be legal, the lawyer who outsources any legal or nonlegal function must render legal services to the client with the "legal knowledge, skill, thoroughness and preparation reasonably necessary for the representation." Id., p.2, citing ABA Code of Professional Ethics, Rule 1.1 (basic duties of a lawyer). This is sometimes referred to as the "duty of competency."

Indirect Services A lawyer engaging others to deliver non-legal or legal services must make "reasonable efforts" to ensure that the third-party service provider, if a lawyer, conforms to the Rules of Professional Conduct and, if not a lawyer, delivers the services in a manner that is compatible with the professional obligations of the lawyer.

Avoiding Surprises: Due Diligence

The ABA ethics opinion focuses on the challenge of ensuring that the tasks are delegated to competent individuals and adequately and appropriately overseeing the execution of the outsourced project. The due diligence checklist is fairly rudimentary:

• Background checks, including educational qualifications
• Interviews with the principal lawyers
• Inquiry into hiring practices, the quality and character of the prospects
• Security measures for protection of sensitive client data, including physical security of premises, physical, administrative and logical security of the network, and data destruction in refuse and disposal procedures
• Site visits "in some instances."

The New York City Bar Association’s Ethics Opinion No. 2006-3 (August 2006) underscores that due diligence continues as an ongoing process of supervision, as a duty to communicate with the non-lawyer to ensure understanding of the assignment and review whether the assignment is being carried out according to the lawyer’s expectations.

Avoiding Cultural and Environmental Gaps

The ABA ethics opinion highlighted the risks of hiring foreign lawyers, whose services might not be competent for U.S. legal support due to any one of many cultural and environmental gaps.

Individual Lawyers Possible gaps needing assessment include:

• Lack of comparability of legal training to American legal system
• Lack of cultural inculcation of core American ethical principles
• Ineffective policing by foreign disciplinary enforcement system

Where such conditions apply, the American lawyer may still hire the foreign-trained lawyer, but would need to consider the foreign-trained lawyer is just a paralegal for U.S. clients.

Country Risk "Country risk" identifies those business and legal risks that arise from the constitutional and geo-political environment where the foreign lawyer (or paralegal) delivers the work. Particular concerns include:

• Susceptibility of confidential documents and records to seizure in judicial or administrative proceedings.
• Susceptibility of client data to "cyber extortion" or inaccessibility if the provider and the attorney have a dispute that local courts cannot promptly resolve (though there may be contractual and technological solutions to this particular risk).

Avoiding a Surprised Client: The Duty of Informed Consent

Clients have a reasonable expectation that their attorneys will inform them of "who or what entity is representing them" because LPO involves client confidences and general lacks a high degree of supervision and control. In contrast, there is no such supervision and control in outsourcing, the ABA concluded, so the client, according to the ABA ethics opinion. Thus, for the ABA, it "may be" necessary to disclose the outsourcing to the client. Outsourcing and offshoring require "informed consent" when there are risks that a client should be aware of.

Florida’s Bar leaves the door open to disclose, or not disclose, a foreign LPO provider’s role, depending on materiality. If a client would think it is material to its decision to entrust the legal services to the law firm, the law firm must disclose the outsourcing.

Informed consent has many threads. Under the Florida Bar ethics opinion 07-02, "The requirement for informed consent from a client should be generally commensurate with the degree of risk involved in the contemplated activity for which such consent is sought." This means contractual requirements to ensure data destruction, prohibit re-use or sale of client data and contractual gap-filling in case a foreign jurisdiction lacks adequate legal rules on data security, breach notification and identity protection.

In the context of legal services, the level of information necessary for "informed consent" depends on a client’s sophistication. Even sophisticated clients can be expected to demand and receive disclosures of the likely or reasonably possible scenarios of events and the probable impact of each upon the client’s legal rights and remedies.

Avoiding Leaks; Protecting Confidentiality

The ABA opinion strongly advises individual confidentiality agreements. The Florida Bar considers that a law firm hiring an LPO provider should limit the overseas provider's access to only the information necessary to complete the work for the particular client and bar any access to information about other clients. The Association of the Bar of the City of New York (Ethics Opinion 2006-3) recommends "contractual provisions addressing confidentiality and remedies in the event of breach, and periodic reminders regarding confidentiality."

Confidentiality obligations extend to data collected from opposing parties and third parties, particularly medical and financial records.

Avoiding Conflicts

Further, the outsourcing service provider should be vetted for possible conflicts of interest in representation of adversaries of the firm’s clients on the same or substantially related matters.

Avoiding Overcharges and Fee Disputes; Re-working the Law Firm’s Fee Agreement

The most controversial element of the ABA opinion lies in its conclusion that the fees charged by a lawyer hiring outsourced LPO services must be reasonable and, if the services are hired by a law firm, the law firm may not mark up the costs of the outsourced service provider if the firm elects to pass along the costs as a disbursement. However, some markup would be allowed for overhead expenses (such as office space, support staff, equipment and supplies) and "a reasonable allocation of the cost of supervising these services if not otherwise" included in the firm’s fees. The New York City Bar and Florida Bar generally concur in this approach, which is based on a 1993 ABA Formal Opinion 93-379 on the subject of pass-throughs of expenses for non-legal services.

In contingent-fee cases, outsourcing costs cannot be included as a disbursement if it covers work that is customarily provided by attorneys, according to the Florida Bar opinion.

Avoiding Ineffective Business Practices

None of the ethics opinions cited asks whether it is unethical for a lawyer to follow the business practices and work flows recommended by the LPO provider. Aside from malpractice worries, this issue is largely an open book.

Adopting effective LPO business practices requires an understanding of project management, competitive bidding procedures in complex services, filling gaps in implicit and explicit assumptions about instructions and cost-benefit analysis.

Further, extensive experience with offshore outsourcing suggests the use of strategic tools for in-house counsel and law firms to deal with the business of non-legal services ancillary to legal services. LPO agreements should adopt key clauses on such topics as:

• Price benchmarking and competitive pricing throughout the term
• Security, data protection and remediation of suspected identity theft
• Intellectual property and trade secret rights (not just protecting client data)
• Audit and control issues
• Relationship governance
• Termination rights and portability of the operations to insourcing or re-sourcing to a third party provider

Law firms and corporate counsel may know how to manage paralegals, but legal process outsourcing requires a more holistic approach to client protections. Achieving effective outsourcing may require hiring experienced legal and business consultants to accelerate benefits, reduce risk and provide a clear framework for effective supervision and evolution of the LPO relationship.