Ethics Corner: Legal process outsourcing companies

Carol M. Langford

There is a big elephant in the room, and if law firms don’t deal with it, they will be put out of business.

Legal process outsourcing companies (LPOs) are offshore entities that essentially engage in the practice of law and charge far less than an American law firm. We have all heard about them, but the new LPO does not just review documents or perform simple research; they want to counsel, advocate and produce legal documents. Most law firms are unaware of how openly and unabashedly they are seeking to grab business away from firms. I don’t need to paint a picture of how doctors lost control of their profession by ceding it to health insurance companies, and I see this as similar.

Here is the real problem with LPOs: GCs of major corporations are having law firms they once would have paid to do things like memos, document review and other tasks supervise the LPO’s work. The LPO thus takes income from the firm, but keeps the firm on the hook for professional liability (Rule 3-110 imposes a duty to supervise). We all know that the definition of what is and is not the practice of law can get murky, which gives the LPOs more freedom to take on projects that might cross the line. It also gives legal malpractice insurers greater ability to deny coverage in the event of a problem; if it is not the practice of law, they will say a suit is not covered.

Moreover, the industry standard E&O policy coverage for LPOs is 5 million dollars. Yes, that’s right; the amount many solo practitioners have for coverage. The LPO’s argument: We are not providing legal work and thus don’t need a lot of coverage. But…if the work done by the LPO is poor, who suffers the financial loss? The law firm, of course. If a law firm suffers a significant loss that is uninsured it will go out of business.

Take note of the lawsuit against the McDermott law firm currently under way. J-M Manufacturing Co, the world’s largest supplier of plastic pipe, hired McDermott to help respond to prosecutor’s requests for documents after a former employee filed a whistleblower lawsuit. J-M alleged that the contract attorneys the firm used “negligently performed their duties.” This suit is seen as an important case concerning the quality of work performed by the growing cadre of contract lawyers who earn as little as $25 an hour to review documents related to litigation; far less than what a first year associate at a big law firm would charge.

Having worked on several challenging and exacting document review projects I can say that sometimes the determination of what is responsive is quite substantive and complex. The issue is whether the document is responsive and/or privileged, but that can require insight into the law and internal corporate processes of the client. When a mistake is made by an LPO, it is “game over” for the client; the bell cannot be unrung.

How should firms deal with this? Demand to be paid to really supervise, and hope the GC doesn’t go to another firm that will be more sanguine about their potential liability. Develop a niche that would be hard to fill by someone offshore. Cut your costs so you can refuse work that will bring supervisory problems. But most of all, be able to tell a GC to take a hike if she is putting you in a position of shouldering a responsibility with no pay that can take down your firm. I’ll bet the McDermott firm wishes it had done that.

Carol M. Langford is an attorney in Walnut Creek specializing in providing advice and counsel on ethics matters. She practices before the State Bar of California. She is also an adjunct professor of law at U.C. Berkeley Boalt Hall School of Law.