Does Lola v. Skadden signal the cooking of a golden goose?

Does Lola v. Skadden signal the cooking of a golden goose?

It has long been common practice for law firms to hire lowly paid temporary attorneys to perform routine, low-value work like first-pass document review. Firms either hire these attorneys directly or through temp agencies to work on a project-by-project basis. Typically, these contractors will command pay of between $25 and $100 per hour, but, sometimes, will be billed to the client at many multiples of that.

In general, when hiring contracted attorneys, the marked-up cost passed through to the client need only be "reasonable," according to multiple ethics opinions and judicial decisions. For non-lawyers and/or those engaged in legal support services, however, ethical and judicial guidance is less clear. While the practice is not explicitly banned, most authorities that have addressed the issue head-on have generally concluded that outsourced non-legal work must be passed through to the client at cost barring an agreement to the contrary. Representative of these guidelines is a New York City ethics committee opinion that states, plainly:

[B]y definition, the non-lawyer performing legal support services... is not performing legal services. It is thus inappropriate for the New York lawyer to include the cost of outsourcing in his or her legal fees. See DR 3-102. Absent a specific agreement with the client to the contrary, the lawyer should charge the client no more than the direct cost associated with outsourcing, plus a reasonable allocation of overhead expenses directly associated with providing that service. (emphasis added)

In a 2009 opinion, the Supreme Court of Ohio's Board of Commissioners on Grievances and Discipline reiterated:

The most straightforward approach, particularly when nonlegal support services as opposed to legal services are outsourced, may be for a lawyer or law firm to bill the client for the outsourced services as an expense based upon the actual cost of the service to the law firm, with an adjustment if necessary to cover a lawyer or law firm’s costs of supervision of the outsourced services.

Generally, then, it can be said that outsourced lawyers performing legal work can be billed to the client at a surcharge with no questions asked, provided the price is "reasonable," while outsourced non-legal work must be passed through at cost with only associated overhead included.

But now a case has come along that challenges the very definition of what legal work is, and recasts an activity that was long understood to be the purview of lawyers -- and by which law firms have bolstered their bottom lines -- as merely the routine task of machines. In so doing, Lola v. Skadden, Arps, Slate, Meagher & Flom has the potential to disrupt a long-standing and highly profitable revenue stream.

Is doc review "legal practice"?

Lola raises the important question: is it permissible to bill an attorney as an attorney if he or she is not doing legal work?

The decision arises in a class action suit led by an attorney, David Lola, to collect unpaid overtime wages for document review work he performed in the North Carolina office of Skadden Arps. Lola, who is licensed in California, performed routine document review for a case that involved reviewing and redacting documents according to preset, mechanical requirements outlined by Skadden supervisors. Lola was paid $25 per hour to do this work for 45 to 55 hours a week.

In his complaint, Lola argued he was entitled to overtime pay from Skadden and his temp agency, Tower Legal Staffing, Inc. The work he was doing, he argued, did not amount to legal practice, entitling him to overtime pay under the Fair Labor Standards Act. Skadden said the work did in fact qualify as “the practice of law."

After US District Judge Richard Sullivan granted Skadden’s motion to dismiss, the 2nd Circuit vacated the order on appeal, holding that the definition of legal practice under the FLSA is a matter of state concern but, more importantly, that Lola’s document review work did not involve sufficient legal thinking and judgment to qualify as true legal work.

Specifically, the 2nd Circuit said:

A fair reading of the complaint in the light most favorable to Lola is that he provided services that a machine could have provided. The parties themselves agreed at oral argument that an individual who, in the course of reviewing discovery documents, undertakes tasks that could otherwise be performed entirely by a machine cannot be said to engage in the practice of law.

That assertion contrasts starkly with that of Judge Sullivan, who wrote that document review is “the bread and butter of much legal practice and essential to the competent representation of clients.”

Ultimately, the appeals court found that, because some forms of document review do not constitute legal practice, the lawyers doing that work are not exempt from receiving overtime pay under the Fair Labor Standards Act's "learned professions" exemption, a loophole law firms have used to avoid paying overtime to contracted licensed attorneys who are engaged in document review beyond 40 hours a week.

While some have said that Lola will potentially cut into law firm margins because it forces them to pay overtime wages, the far bigger potential consequence is that it may, in time, limit the ability of law firms to mark up routine, outsourced work at all. At the very least, Lola is cause for reexamination of how and at what price certain types of menial work -- regardless of who is performing it -- is billed, and whether those rates are fair to the clients paying for it.

Lola's fallout

For now, Lola is only binding on legal markets in the 2nd Circuit.  And many dispute whether it was correctly decided. A post in the Harvard Law Review, for example, raises the question of whether the court’s application of state law to an agency regulation (as opposed to an agency statute) creates an impermissible "agency subdelegation," among other potential shortcomings in the decision.  A federal court ruling on a similar case in New York involving overtime pay for document review at Quinn Emanuel arrived at an opposite conclusion, finding that Lola’s requirement that the work at issue must involve the application of legal judgment was satisfied by New York's definitions of “the practice of law” and by the nature of the attorney’s document review assignments.

The ambiguity of the "practice of law" standard, which the ABA has tried to define, further complicates Lola's application, as do the differences from state to state as to the propriety of marking up certain types of work. Some states have already put the kibosh on marking up the wages of contract attorneys, irrespective of whether those lawyers are engaged in the practice of law.

Still, there is seemingly little dispute that clients are casting more jaundiced eyes on the bills presented to them for routine legal work, and the Lola decision will likely only heighten that scrutiny.

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