Corporate legal departments increasingly use third party platforms and managed billing services to review outside counsel invoices. In many cases, the client selects the system and directs its law firms to submit bills through it. Some of these services now use artificial intelligence, automated review, or a combination of technology and human reviewers to examine individual time entries and recommend billing reductions. The arrangement may look like an accounts payable function, but the information being submitted can reveal much more than legal spend.
Consider the difference between:
“Prepare for deposition” and “Prepare examination of former CFO concerning disputed revenue recognition practices and inconsistencies in prior statements.”
Or compare:
“Research expert issues” with “Research potential grounds to exclude Dr. Jones’s causation opinion and confer regarding alternative expert.”
Courts in the Sixth Circuit have long recognized that ordinary information about legal fees generally is not privileged.[1] But billing records may contain privileged communications or work product when the descriptions reveal legal advice, research, or litigation activity. A federal court in the Western District of Tennessee has applied that distinction, recognizing that legal billing records are not privileged in their entirety but may contain protected information.[2] Other courts have reached the same conclusion.[3] The concern can extend beyond the wording of an individual time entry. The Texas Supreme Court has observed that billing records, viewed collectively, may show how counsel allocates resources, which issues receive greater attention, when specialists or consultants become involved, and other information reflecting litigation strategy.[4]
When the client has selected the billing vendor and instructed its lawyers to use the platform, the basic question generally is not whether outside counsel has authority to send the invoice. The harder question is what happens to protected information once it is provided to the client’s third party vendor. A New York ethics opinion considered a similar issue before AI entered the picture. There, a self-insured client hired an outside vendor to monitor and administer its legal expenses and required its law firm to participate. The New York State Bar concluded that the arrangement was permissible, but cautioned that the client should understand the risks associated with providing billing information to the vendor, including further disclosure, possible waiver of attorney client privilege, and the possibility that the information could later be used adversely to the client.[5] The opinion did not conclude that using the vendor automatically waived privilege. Rather, it recognized that a client may choose to use an outside billing vendor while still needing to understand the consequences of giving that vendor access to information contained in legal bills. That same concern carries forward when the billing review is performed through newer technologies.
The use of technology does not necessarily change those basic principles, but it can change how much information is processed and what can be done with it. In 2002, the South Carolina Bar considered an independent software provider that electronically processed legal billing information without human involvement. The Bar concluded that the automated nature of the process did not eliminate the confidentiality concerns associated with providing billing information to a third party.[6] Tennessee ethics authorities also recognized years ago that outside review of detailed legal bills can implicate client confidentiality, although those opinions arose in a different setting involving an insurer’s use of outside auditors for bills submitted by lawyers representing insureds.[7] While these authorities do not answer whether a client’s use of an AI billing vendor affects privilege today, they show that the information contained in legal invoices, and what happens when that information is sent to a third party for review, has long raised confidentiality concerns. AI makes those questions more pressing because modern systems may be able to process larger volumes of information, identify patterns across entries, and involve additional service providers in the review process.
For in-house counsel, the practical takeaway is to treat managed legal billing platforms as vendors that may receive substantive information about the company’s legal matters, not simply financial data. Before using an AI enabled or managed billing service, legal departments should understand who can access invoice narratives, whether subcontractors or separate AI providers receive the information, how long the information is retained, whether it may be used for benchmarking, product development, or other purposes, and what contractual restrictions govern further use or disclosure. Companies may also want to consider whether their billing guidelines require more narrative detail than is actually necessary. Legal departments routinely scrutinize how outside counsel handles confidential information. The systems they select to review those same legal matters deserve similar scrutiny.
Endnotes.
[1] See In re Grand Jury Investigation No. 83-2-35, 723 F.2d 447, 451 (6th Cir. 1983) (recognizing the general rule that the amount of fees paid or owed to an attorney is not protected by the attorney client privilege); Humphreys, Hutcheson & Moseley v. Donovan, 755 F.2d 1211, 1219 (6th Cir. 1985) (noting that client identity, attorney fees, and the general nature of the services performed ordinarily are not privileged).
[2] See Pollard v. E.I. DuPont de Nemours & Co., No. 95-3010, 2004 WL 784489, at *4 (W.D. Tenn. Feb. 24, 2004) (recognizing that legal billing records may be protected to the extent particular entries reveal privileged communications or attorney work product).
[3] See Clarke v. American Commerce National Bank, 974 F.2d 127, 129-30 (9th Cir. 1992) (explaining that billing records may be privileged when they reveal the client’s motive for seeking legal advice, litigation strategy, or the specific nature of legal services provided); Clarke v. American Commerce National Bank, 977 F.2d 1533 (9th Cir. 1992) (order on rehearing) (ordering redaction of portions of attorney billing statements that would reveal litigation strategy).
[4] In re National Lloyds Insurance Co., 532 S.W.3d 794, 803-05 (Tex. 2017) (explaining that billing records, viewed collectively, may reveal counsel’s strategy and thought processes through information concerning allocation of resources, the experience of attorneys assigned to particular matters, and the use of consultants and experts).
[5] N.Y. State Bar Ass’n Comm. on Prof’l Ethics, Op. 827 ¶¶ 2-4 (2008) (addressing a self insured client that hired an outside vendor to monitor and administer its legal expenses and identifying further disclosure, possible privilege waiver, and possible adverse use among the risks associated with providing billing information to the auditor).
[6] S.C. Bar Ethics Advisory, Op. 02-01 (2002) (addressing an independent software provider that electronically processed legal billing information without human review and concluding that the automated process did not eliminate the confidentiality issue associated with disclosure to a third party).
[7] Tenn. Bd. of Prof’l Responsibility, Formal Ethics Op. 99-F-143 (1999), clarified by Formal Ethics Op. 99-F-143(a). Those opinions addressed an insurer’s use of outside auditors to review bills and files relating to insured clients and therefore involved a different factual setting from a corporate client selecting its own billing vendor.
