by Nicole Nuzzo
With costs of goods rising and inflation and recession conversations front and center, law firms are looking for ways to reduce costs in an effort to maintain some semblance of their once bottom line. While raising rates and reducing labor costs are undoubtedly considered, most law firms accepting credit card payments are likely spending well into six figures on one line item in their budget—credit card processing fees.
Credit cards entered the mainstream in the 1960s and, since then, have been a widely accepted form of payment. Notwithstanding, paying for legal services with a credit card was historically frowned upon because use of credit cards for legal fees was deemed “wrong” and unprofessional as this would put professional services in the same category as “sales of merchandise and sales of nonprofessional services,” a seemingly offensive act. ABA Informal Op. No. 1120 (1969). Later, the American Bar Association overruled prior decisions in this regard and approved the use of credit cards under certain circumstances and so long as a number of conditions were met. Cal. State Bar Formal Op. 1980-53.
Until directly considered by the State Bar of California Standing Committee on Professional Responsibility and Conduct (COPRAC) in 2007, the question of whether a California lawyer could accept credit card payment for legal services was unresolved. In 2007, COPRAC concluded that payment of earned fees via credit card was permitted. Cal. State Bar Formal Op. 2007-172. That said, in the same opinion, it was made clear that a lawyer accepting payment via credit card has ethical obligations to her clients if she chooses to do so. Id. The opinion also assumed the lawyer would absorb the service charge debited by the credit card issuer, which according to the committee, “amounts to the attorney’s payment for a convenient method of receiving funds owed to the attorney.” Id.
Passing Surcharge Costs on to a Client In 1985, California passed a law that prohibited merchants from adding a surcharge when customers paid by credit card as opposed to cash, but permitted retailers to offer discounts for payment by cash or check (as opposed to credit card). Cal. Civ. Code § 1748.1. In 2018, several businesses challenged then Civil Code Section 1748.1 in federal court and prevailed, with the court holding that the California law could not be enforced against the businesses that brought the case. Italian Colors Rest. v. Becerra, 878 F. 3d 1165 (9th Cir. 2018). Merchants, however, remain barred from misleading customers, such as by hiding different prices for cash versus credit card payments or imposing surcharges “surreptitiously at the point of sale.” Generally speaking, the California ban on merchants adding a surcharge when customers pay by credit card, as opposed to by cash, was no longer enforceable. Id. at 1176.
This article addresses the ethical risk when a lawyer attempts to pass on credit card processing fees to a client. If an attorney chooses to accept credit card payment, she should ensure compliance with Cal. State Bar Formal Op. 2007-172. The liability and general requirements of a merchant accepting credit card payments are beyond the scope of this article; however, a lawyer accepting credit card payments should ensure compliance with such requirements. San Diego Bar Op. 2013-3.
While California law now permits adding a surcharge when customers pay by credit card so long as it is not misleading to customers, lawyers have added ethical duties to their clients that cannot be ignored.
Costs Versus Overhead No California authority states explicitly whether a lawyer may charge a client a surcharge for payment of legal fees with a credit card. Given the absence of direct or indirect California authority, and although ABA Model Rules are not binding in California, they may be used as guidance by lawyers where there is no direct California authority. San Francisco v. Cobra Sols., Inc., 38 Cal. 4th 839, 852 (2006).
In 1993, the American Bar Association issued Formal Opinion 93-379, which addressed billing for professional fees, disbursements, and other expenses. The opinion concluded that a lawyer may not charge a client for “overhead expenses” associated with properly maintaining, staffing, and equipping an office, such as malpractice insurance, renting office space, maintaining a library, or utilities. A lawyer can properly recoup “in-house services” and “direct costs” reasonably incurred in connection with the client’s matter, however, so long as the charge reasonably reflects the lawyer’s actual cost for the services rendered and the lawyer does not have an agreement with the client providing otherwise. ABA Formal Op. 93-379.
Absent a specific agreement in advance, a lawyer is not permitted to charge more than the direct costs associated with services, such as court reporters, expert witnesses, and the like, as it would be improper for a lawyer to add a surcharge to the actual costs of a disbursement. Id. The opinion explained, “[T]he lawyer’s stock in trade is the sale of legal services, not photocopy paper, tuna fish sandwiches, computer time or messenger services”; and therefore, in the absence of an agreement to the contrary, a lawyer is prohibited from creating an additional source of profit for the law firm beyond the professional services provided. Id.
Some California authority, in different contexts, have concluded that overhead costs are not recoverable costs. See, e.g., Allen v. Los Angeles, 1995 WL 433720, at *20 (C.D. Cal. Jan. 13, 1995) (disallowing costs for meals, parking, and telephone charges); Zynga Game Network Inc. v. Erkan, No. 09-3264 SC at *2 (N.D. Cal. Aug. 31, 2010) (private express mail services are part of firm’s overhead and should be absorbed as the cost of doing business). However, these cases addressed whether a court would award these costs and not whether a lawyer may ethically charge a client for these kinds of expenses.
Whether a credit card surcharge is an ethically impermissible pass-on of an “overhead expense,” such as staffing and equipping an office, or a properly recouped “direct cost” or “in-house service” reasonably incurred in connection with the client’s matter, such as computer research, special deliveries, and secretarial overtime, remains undecided in California. However, in a prior opinion regarding credit card payments, as noted above, COPRAC assumed that a lawyer would absorb the service charge debited by a credit card issuer. Later in the opinion, COPRAC specifically stated that such cost was a payment made by an attorney for a convenient method of receiving funds. Cal. State Bar Formal Op. 2007-172. Similarly, courts have routinely denied awards of costs, which are deemed overhead expenses.
With this in mind, a lawyer choosing to pass on a credit card processing fee to a client should be prepared to consider it a “direct cost” reasonably incurred in connection with a matter—synonymous with photocopying, long-distance phone calls, and computer research, as opposed to “overhead” such as staff salaries, malpractice insurance, rent for office space, or utilities.
Retainer Agreements if Passing on Surcharge If a lawyer chooses to pass on a credit card surcharge, she should certainly review her retainer agreement and procedures at intake to ensure her surcharge practice is fair, reasonable, and fully explained to the client.
In California, a lawyer shall not make any agreement or collect any unconscionable or illegal fee. Cal. R. Prof’l Conduct Rule 1.5 (a). Rule 1.5 sets forth factors to be considered in determining whether a fee is conscionable. Fee agreements and billings “must be fair, reasonable and fully explained to the client.” Bird, Marella, Boxer & Wolpert v. Superior Ct., 106 Cal. App. 4th 419, 430-31 (2003) (quoting Lynch v. Warwick, 95 Cal. App. 4th 267 (2002)).
Unlike California, which remains silent on this issue, some states expressly forbid surcharges such that lawyers are to treat processing fees as overhead costs absorbed in the ordinary course of business. See Mississippi State Bar Ethics Op. 135; Michigan State Bar Ethics Op. RI-344. Other states have expressly permitted passing along the fees so long as lawyers notify their clients in their fee agreements. See New York State Bar Ass’n Op. 1050 (2013); Virginia State Bar Legal Ethics Op. 1848 (2009).
In the states permitting these charges, the charge should be reasonable, and the lawyer should ensure the client knows the basis for calculating the charges. Id.
Currently, in California, there is no law or ethics opinion directly addressing whether a lawyer can properly pass on a surcharge to clients who pay for legal fees with credit cards. Though, if a lawyer is going to do so, it would be best practice to at the very least ensure the fee is equal to (and not greater than) the surcharge the lawyer is being charged and that the fee is disclosed in the fee agreement, including not only the existence of a surcharge but exactly how it is calculated.
The Practical Reality Depending on clientele and area of practice, passing on a credit card processing fee, even if ethically permissible, may put a lawyer’s business at a disadvantage. With sophisticated business clients, perhaps the client will consider the surcharge a fee in the normal course of business and not lose much sleep over it. However, with unsophisticated clients who do not generally hire lawyers and do not have a line item in their budget for legal fees, passing on such fee could result in a deterrent to retention, failure to pay a lawyer’s legal fees, or delayed payment of legal fees. If check and credit card are offered as a form of payment, but a client must pay 2-3% for credit card processing, the lawyer may end up having to wait for a check to be cut as opposed to being paid instantly with a credit card via a link.
While California law is silent on whether a lawyer may pass on credit card processing fees, even if ethically permissible, the practical reality may be that law firms find it too risky to pass on such fees as it very well could deter retention or instant payment such that the loss in revenue and cash flow is not worth the potential benefit.
Nicole Nuzzo is a partner with Farzad & Ochoa, Family Law Attorneys, LLP, who is designated by the State Bar of California Board of Legal Specialization as a Certified Family Law Specialist. Nicole limits her practice to family law matters. Nicole is a member of the OCBA Professionalism & Ethics Committee and may be reached at Nicole.Nuzzo@farzadlaw.com.