Citigroup Judge: Pay Contract Lawyers What They’re Worth

In an opinion issued last Thursday in In re Citigroup Inc. Securities Litigation, Judge Sidney Stein of the U.S. District Court for the Southern District of New York found that the reasonable blended hourly rate for the contract attorneys hired by class counsel—most of whom performed document review and other relatively low-skilled tasks like summarizing depositions—was $200/hr. Unfortunately, to date, the only widely available article that discusses this aspect of the opinion in depth—a Forbes piece entitled Judge Cuts Fees In Citigroup Settlement, Citing ‘Waste And Inefficiency’—misleads readers about the basis for the Court’s determination. (Alison Frankel, writing for Thomson Reuters as part of its Practitioner Insights service, got it right. However, Practitioner Insights are available only to certain WestlawNext subscribers—even though I’m a subscriber, her column is outside my plan.)

According to Forbes writer Daniel Fisher,

The order…cut the fee award to [class counsel] by $26.7 million to $70.8 million. The law firm’s request for nearly $100 million in fees drew a spirited objection from attorney Ted Frank of the Center for Class Action Fairness, who accused [class counsel] of padding its bill by trying to mark up thousands of hours of work by inexpensive contract attorneys at rates of more than $400 an hour.

Contract attorneys in New York, as I have previously reported, typically make less than $50 an hour. While [class counsel] told the court the lawyers it hired through temp agencies were highly qualified with specific skills in securities litigation, people familiar with the attorneys who worked on this case say they were nearly all inexperienced lawyers who spent their time reviewing documents. Judge Stein agreed, saying “not all of the contract attorneys had the type of experience—and few performed the type of work—that justifies associate‐level rates.”

* * *Frank argued those contract attorneys should have been billed out as an expense, since most of them worked outside [class counsel]’s offices and didn’t require the health insurance and other overhead of full-time employees. The judge rejected that idea, saying case law supports paying a markup for the work of licensed attorneys as opposed to, say legal secretaries or outside experts. However, the judge also rejected [class counsel]’s claim that these lawyers were the equivalent of associates at white-shore [sic] Manhattan firms.

The judge ultimately cut the fees he’d consider under the “lodestar” for calculating the total award to $200 an hour. That’s still a hefty markup from the $32 an hour I have been told most of the lawyers were actually paid by temp agencies such as Hudson Legal.…

“The proposed contract attorney rates reach as high as $550, with a blended hourly rate of $466—higher than the $402 per hour rate for associates!” the judge noted. One lawyer working for another firm seeking payment in the Citigroup case was paid $15 an hour, the judge noted, yet that firm sought to bill the lawyer out at $550 an hour.

Although Judge Stein did note that one lawyer working for a firm seeking payment in the Citigroup case was paid $15 an hour, yet that firm sought to bill the lawyer out at $550 an hour (Opinion, p.42, fn.11), the firm’s profit margin was not the basis for the reduction of the contract attorney blended hourly rate to $200. Indeed, Judge Stein explicitly stated that “the amount Counsel paid contract attorneys is not the issue….” (Opinion, p.42).

Rather, in the course of its analysis, the Court quoted with approval In re AOL Time Warner Shareholder Derivative Litig., No. 02 Civ. 6302 (CM), 2010 WL 363113, at *22 (S.D.N.Y. Feb. 1, 2010) (Special Master’s R&R, adopted as Court’s opinion, id. at *1), in which that court explained: “‘The Court should no more attempt to determine a correct spread between the contract attorney’s cost and his or her hourly rate than it should pass judgment on the differential between a regular associate’s hourly rate and his or her salary.'” (Opinion, p.37).

Judge Stein explained that, in determining the appropriate blended hourly rate,

“[t]he Court also directed Counsel to produce the resumes of the contract attorneys here and considered them, and agrees with Counsel that some of these attorneys were particularly well-qualified. The Court further agrees that a paying client surely would have paid something approaching an associate’s rate for some number of the hours here. But the Court finds that not all of the contract attorneys had the type of experience—and few performed the type of work—that justified associate-level rates.

(Opinion, p.42, fn.11).

And later:

The Court has taken account of the qualifications and experience of the various contract attorneys here, the largely document-review work they performed, and the wide range of rates accepted in the market. Considering the hypothetical client and the range of services at issue, the Court concludes that a reasonable blended hourly rate for the contract attorneys here is $200.

(Opinion, p.43).

The test the court applied is consistent with the conclusion the ABA’s Standing Committee on Ethics and Professional Responsibility reached in Formal Op. 08-451 (Lawyer’s Obligations When Outsourcing Legal and Nonlegal Support Services). As I explained back in 2008, in that opinion, the Committee stated:

…the fees charged by the outsourcing lawyer must be reasonable and otherwise comply with the requirements of Rule 1.5. In Formal Opinion No. 00-420, we concluded that a law firm that engaged a contract lawyer could add a surcharge to the cost paid by the billing lawyer provided the total charge represented a reasonable fee for the services provided to the client. This is not substantively different from the manner in which a conventional firm bills for the services of its lawyers. The firm pays a lawyer a salary, provides him with employment benefits, incurs office space and other overhead costs to support him, and also earns a profit from his services; the client generally is not informed of the details of the financial relationship between the law firm and the lawyer. Likewise, the lawyer is not obligated to inform the client how much the firm is paying a contract lawyer; the restraint is the overarching requirement that the fee charged for the services not be unreasonable.

(For this reason, it’s surprising that even legal ethics lawyer John Steele got the story wrong, reporting at Legal Ethics Forum that Judge Stein “rejected the markup of fees for contract lawyers.”)

As readers of this blog know, there are a number of distinctions between “contract lawyers” and “freelance lawyers.” Even though Citigroup involves fees charged by large firms for (primarily) document review by contract lawyers working for agencies, rather than fees charged by solo practitioners and small firms for higher-skilled work performed by independent freelance lawyers, the opinion is significant to freelance attorneys and the firms that hire them because it stands for the proposition that, if the fee charged for work performed by a freelance lawyer is challenged, it should be upheld if it is reasonable based on the freelance lawyer’s qualifications and the nature of the work performed, regardless of how much profit the hiring attorney makes. This is of particular benefit to firms that work with highly qualified freelance lawyers.