What Independent U.S.-Based Contract Lawyers Can Learn from the Attorneys’ Fees Award in Carlson v. Xerox

On January 14, Judge Alvin W. Thompson of the United States District Court for the District of Connecticut awarded $120 million in attorneys’ fees and $3.3 million in costs in Carlson v. Xerox as part of one of the largest securities fraud settlements in history. The January 14 decision is of interest because it addresses how the work of contract lawyers may be billed to the client.

The objectors to the settlement raised three challenges to compensation that the plaintiffs’ lawyers sought for work performed by contract lawyers. One of these challenges goes to the heart of the relationship among contract lawyers, hiring attorneys and clients.

The objectors argued that the lodestar (which represented 12.79% of the settlement amount) was inflated because the the amount paid to the contract attorneys should have been billed as an expense at cost (according to the decision, the contract lawyers were paid $55/hour or less; in a motion seeking discovery concerning the use of contract lawyers, the objectors claimed that most of the contract lawyers were paid $40/hour or less), and that the work performed by the contract lawyers shouldn’t have been billed as a fee (at $300/hr).

The court squarely rejected this argument, citing (among other authorities) ABA Formal Op. 08-451 for the proposition that an attorney may bill a contract lawyer’s charges to the client as fees rather than costs when the client’s reasonable expectation is that the retaining lawyer has supervised the contract lawyer’s work or adopted that work as her own.

This ruling is consistent with the results reached in other cases involving attorneys fee awards that included compensation for work performed by contract lawyers. For example, in In re Enron Corp. Securities, Derivative & ERISA Litigation, 586 F.Supp.2d 732 (S.D.Tex. 2008), the court upheld billing rates for contract attorneys who performed high-level, substantive work (such as taking depositions and researching and drafting papers on dispositive motions) that were comparable to the billing rates of associates in the locality. Of particular interest, the Enron court upheld billing some contract attorneys at partner rates based on those attorneys’ skill level and law practice experience. The Enron holding was based on an exhaustive review of case law involving fee awards that included compensation for work performed by contract lawyers.

There are two important take-aways from Carlson and Enron. First, as these cases demonstrate, courts are adopting the viewpoint, espoused in ABA Formal Op. 08-451, that, when it comes to attorneys fees issues, contract lawyers are the functional equivalent of law firm associates (and even, in some cases, partners); accordingly, their work can be billed at the prevailing rates charged in the community for firm associates and partners.

The second lesson flows from the first: don’t undercharge for your services. If you’re doing associate-level work, and you’re being billed out at an associate rate (or doing partner-level work and being billed out at a partner level), there’s room for you to charge a rate that reflects the value you provide to the lawyers with whom you work.