Law firms that want to include mandatory arbitration provisions in their client engagement agreements must explain to the client the benefits and disadvantages of arbitrating a prospective dispute, the New Jersey state supreme court held late last year — and merely providing a link to the arbitration rules doesn’t satisfy the requirement, the court said.  The 50-page ruling sent a legal malpractice case against a Newark-based firm back to court, where the former client had filed it, instead of to an arbitrator.

JAM-med up

The client, described in the court’s opinion as a “sophisticated businessman,” retained the 150-lawyer firm to represent him, and signed a four-page retainer agreement.  The client was invited to take his time reviewing the document and to ask any questions he had, according to the opinion.

The retainer agreement included an arbitration provision requiring any dispute about the firm’s legal services or fees to be determined by binding arbitration, and warning that the client was waiving his right to a jury trial.  The provision indicated that the arbitration would be conducted by the well-known JAMS private arbitration/mediation organization, and included a link to the 33-page JAMS rules.  As described in the court’s opinion, the client signed the retainer agreement without asking any questions.

After the representation ended, a fee dispute arose, and the law firm invoked the JAMS arbitration provision.   While that was ongoing, the client filed a malpractice claim against the firm in court, asserting that the arbitration provision violated the New Jersey Rules of Professional Conduct and his constitutional right to trial by jury.

The firm won in the trial court; the appellate division reversed in favor of the client, and the state supreme court likewise sided with the client, invalidating the arbitration provision.  In addition, the supreme court referred the issue to the state’s ethics advisory committee, so that it could give further guidance to Garden State lawyers on the scope of their disclosure duties in connection with arbitration provisions.

What’s higher than a fiduciary duty?

If the same arbitration provision were in an ordinary commercial contract, the court wrote, it would on its face have passed muster.  But, of course, unlike a vendor in a transaction, lawyers are fiduciaries.  And while all fiduciaries are held to duties of fairness, good faith and fidelity, the court said, “an attorney is held to an even higher degree of responsibility in these matters than is required of all others.”

According to the court, this ultra-high level of responsibility and the fact that it’s the lawyer who prepares the retainer agreement, means that the lawyer must make the disclosures necessary for the client to make informed decisions.  This duty, said the court, is expressed in New Jersey’s version of Model Rule 1.4(c), requiring lawyers to explain matters to the extent reasonably necessary to open the way to informed decision-making about the representation.

By virtue of their superior knowledge, lawyers are already thinking at the beginning of a representation about the “prospect that the client may be a future adversary,” and that leads lawyers to select the forum perceived to be most advantageous for resolving disputes, the court noted.  Calling that situation at least the “shadow” of a conflict, the court ruled that lawyers who insert arbitration requirements in their retainer agreements — either for fee disputes or legal malpractice claims — “must explain the advantages and disadvantages of the arbitral and judicial forums.”

ABA, courts weigh in

The court partly relied for its reasoning on the ABA’s Formal Op. 02-425 (Feb. 20, 2002) (“Retainer Agreement Requiring the Arbitration of Fee Disputes and Malpractice Claims”), which advised that binding arbitration provisions are permissible if the client “has been fully apprised of the advantages and disadvantages, and consented.”

The New Jersey Supreme Court opinion also helpfully collects cases and ethics opinions from around the country on the issue — and many of these jurisdictions bring their own twist (underscoring the need for you to be aware of your own bailiwick’s approach).

For instance, at one end of the spectrum is my own Buckeye State, where in Adv. Op. 96-9, the Board of Professional Conduct advised back in 1996, under former disciplinary rules, that a client retainer agreement “should not contain language requiring a client to prospectively agree to arbitrate legal malpractice disputes.”

Bottom line:  arbitration may be something you want to include in your retainer agreements, but you need to be savvy about complying with your jurisdiction’s requirements about client communication in order to create valid provisions.

A ruling handed down last month by the South Carolina Supreme Court provides object lessons on several aspects of the lawyer discipline system and how to stay out of trouble.  In its order and opinion, the court publicly reprimanded a lawyer who pursued a probate case all the way to the U.S. Supreme Court, engaging along the way in litigation tactics that the court found “frivolous and abusive.”

Frivolous will contest

According to the court’s disciplinary opinion, the lawyer was licensed in California, but was admitted pro hac vice in the Palmetto State, where she pressed a decade-long series of challenges to her great-aunt’s will.   The lawyer’s clients were herself and her own mother — the great-aunt’s closest living relatives.  The opposing parties were the caregivers to whom the great-aunt had bequeathed her estate.  The state supreme court affirmed the rejection of the substantive claims in 2018.   422 S.C. 234 (2018).

The next year, without going into detail, the state supreme court affirmed more than $16,000 in sanctions against the lawyer under the state’s civil Rule 11, in an opinion finding that she lacked standing to pursue the claims, that her argument in support of standing “border[ed] on frivolity,” and that she had “engaged in abusive litigation tactics.”

The U.S. Supreme Court denied certiorari.  140 S. Ct. 59 (2019).  But in the meantime, as required by the state’s Frivolous Proceedings Sanctions Act, the state supreme court had reported the Rule 11 sanction to the state’s Commission on Lawyer Conduct, launching the disciplinary proceedings.

As reported in the court’s disciplinary opinion, the hearing panel found that the lawyer had violated South Carolina’s version of Model Rule 3.1 (barring frivolous proceedings).  The court found an additional violation of  the state’s version of Model Rule 8.4(a) (making it misconduct to violate the Rules, knowingly assist or induce another to do so, or do so through the acts of another).  The panel had recommended that the lawyer receive a “Letter of Caution,” a form of confidential disposition available in South Carolina disciplinary proceedings.  But the state supreme court opted instead to publicly reprimand the lawyer, and also ordered her to pay costs.

Take-aways on pro hac vice, objectivity and more

Even though the court’s disciplinary opinion lacks detail about the underlying frivolous conduct that constituted the ethics rule violations it found, here are three things to chew on:

  • Losing your objectivity can lead to problems.    When you represent yourself and/or your family members, it can be easy to lose your way.  You may not be the most objective and best judge about the case, how far to go, and what methods are appropriate in pursuing the client’s goal.  From the scanty details given, we don’t know enough to say whether this was an issue in this case, but the risk is real and the precept is sound.
  •  You can be disciplined under another jurisdiction’s ethics rules.  This case is a good reminder that when you litigate away from your home jurisdiction, your pro hac vice admission likely requires you to comply with the away-state’s ethics rules and to accept that state’s disciplinary authority over you.  Here, a California lawyer, admitted pro hac vice in South Carolina litigation, found herself in the cross-hairs of that state’s disciplinary counsel.
  • A judicial finding of frivolous conduct can have disciplinary consequences.  When there is a judicial finding of frivolous conduct in underlying litigation, as there was here, it becomes that much easier for a disciplinary authority to conclude that a lawyer has violated Rule 3.1, which is tellingly titled “Meritorious Claims and Contentions.”  What is required, the rule comment advises, is that lawyers “inform themselves about the facts of their clients’ cases and the applicable law and determine that they can make good faith arguments in support of their clients’ positions.”

There’s more to say here (e.g.,  you can violate the ethics rules through the act of another, as was found here), but you get the point.  Even a public reprimand is a painful consequence, and watching your P’s and Q’s can help avoid it.

By now, you’re probably one of the 3.7 million people who’ve seen the video of a virtual court hearing in Texas that went terribly wrong for the county attorney.  (If not, here it is on YouTube.)   As depicted for all to see, the hapless lawyer appears on-screen as a fluffy white cat, complete with moving kitty lips as he plaintively explains to the judge that it’s a filter, and “I’m here live — I’m not a cat.”

Ethics lessons from this excruciating situation?  You’ve come to the right place!

  • Technological competence.  We’ve pointed out many times that Model Rule 1.1 cmt. [8] calls on lawyers to keep abreast of changes in the law, including the benefits and risks associated with relevant technology.  We’ve been Zooming for a year now.  Don’t let this happen to you.  Get help with any tech you aren’t comfortable with — before the hearing.
  • Professionalism.  I was struck by the poker faces of the kitty-lawyer’s opposing counsel.  They keep their composure throughout rather than dissolving in helpless laughter at the situation.  (One comes close to losing it, but still manages to keep it together.)  And the judge is extremely patient.  His voice never rises as he tries to walk the lawyer through how to take off the filter that has turned him into a fluffy feline.  In any court disaster it’s worth remembering — there but for the grace of God go you.
  • Cats and dogs.  Last, if you have to have a Zoom filter on — make it a dog, for heaven’s sake.

Here’s a newsflash:  you can’t defend yourself against a client’s bad online review by revealing client confidential information, as the ABA Ethics Committee reminded us in an opinion last week.

We’ve recently reported on the Oklahoma lawyer who was disciplined for his rogue consultant’s conduct in connection with an online review; a New Jersey lawyer who was disciplined for responding to a client’s online review by posting a bad Yelp review of his own, which revealed client information; and a Massachusetts lawyer who was disciplined for disclosing client information on Facebook.

No “self-defense”

If these cautionary tales were not enough, the ABA now has removed all doubt, with its guidance that the “self-defense” exception to the duty of confidentiality does not support revealing client information in response to an online review.

Model Rule 1.6(a), adopted in some form in all U.S. jurisdictions, bars disclosing “information relating to the representation of a client.”  That’s a very broad prohibition, and of course covers much more territory than just information that would come under the attorney-client privilege.

What the ABA has now made crystal clear is its view that the confidentiality exception expressed in Model Rule 1.6(b)(5) does not apply here.  The “self-defense” exception covers three situations that can entitle you to disclose otherwise-confidential information:

  • establishing a claim or defense in a lawyer-client controversy;
  • establishing a defense to a criminal or civil charge based on conduct in which the client was involved; and
  • responding to allegations in “any proceeding concerning the lawyer’s representation of the client.”

In its latest Opinion 496, however, the ABA flatly rules out applying these exceptions to permit any degree of confidential information disclosure in response to online reviews:  “A negative online review, alone, does not meet the requirements of permissible disclosure in self-defense under Model Rule 1.6(b)(5) and, even if it did, an online response that discloses information relating to a client’s representation or that would lead to discovery of confidential information would exceed any disclosure permitted under the Rule.”

The ABA specifically shot down any notion that the world of online reviews would fall into the third, catch-all exception for “any proceeding concerning” representing a client, saying that “online criticism is not a ‘proceeding,’ in any sense of that word, to allow disclosure under [that] exception…”

What’s a lawyer to do?

Instead of firing  back and risking your license, the ABA has several good recommendations on what you can do:

  • consider not responding — after all, doing so “may draw more attention to [the bad review] and invite further response from an already unhappy critic.”
  • ask the website or search engine to take down the adverse information;
  • if you do choose to respond online, don’t disclose “information that relates to a client matter, or that could reasonably lead to the discovery of confidential information by another.”
  • post an invitation for your critic to contact you privately to resolve the matter;
  • post a response saying that “professional considerations preclude a response.”

Any of these would be a better alternative than responding in the numerous ways that have gotten lawyers into trouble.

Commentators such as Prof. Alberto Bernabe, over at the Professional Responsibility Blog, have noted that the latest opinion does not break any new ground.  Nonetheless, it is a valuable reminder about avoiding risky online behavior, with some good how-tos.

The scope of the “no-contact rule” — barring a lawyer from communicating with represented persons — is spotlighted in a disqualification ruling that a Florida district court handed down earlier this month.  The opinion is a reminder that the prohibition against contact (without permission of the person’s counsel) extends only to “the subject of the representation.”

“Did not discuss Plaintiff’s case…”

The plaintiff sued the defendant collection agency in the Middle District of Florida for allegedly violating the federal Fair Debt Collection Practices Act; she was represented by the Agruss Law Firm.  In early November, according to the collection agency, Agruss employees contacted it twice, even though the firm knew that the collection agency was represented by counsel in the plaintiff’s case.

Based on Florida’s version of Model Rule 4.2, “Communication with Person Represented by Counsel,” the collection agency demanded that plaintiff’s counsel be disqualified based on the phone contacts.

Not so fast, responded the Agruss firm.  The law firm explained in its brief in opposition to disqualification that it frequently represents plaintiffs in FDCPA actions.  It acknowledged that on one of the dates in question a paralegal of the firm had phoned the collection agency — but it submitted unrebutted affidavit evidence that the call did not relate to the plaintiff’s case in the Florida action.  Rather, said the law firm, its paralegal had called the collection agency in order to investigate a potential FDCPA claim against the collection agency by a completely different person.  The law firm later filed a separate complaint in the Northern District of Texas against the collection agency on that person’s behalf.

A second call to the collection agency was made a few days later by a principal of the Agruss firm, who simply listened to the agency’s outgoing voicemail message, and who never spoke to anyone at the agency, according to a second affidavit.

Based on this evidence, the district court denied the plaintiff’s motion to disqualify the Agruss firm, holding that there had been no violation of the “no-contact” rule.

Must be “about the subject of the representation”

Florida’s Rule 4-4.2, like its Model Rule counterpart, provides that in representing a client, a lawyer “must not communicate about the subject of the representation with a person the lawyer knows to be represented by another lawyer in the matter,” without the consent of the other lawyer.

Although the evidence showed that the Agruss firm had contacted the defendant collection agency directly, the court said, it was about a completely different case.  Therefore, the contact was not “about the subject of the representation,” as would be necessary in order to demonstrate a violation of the rule, according to the court.

Some “no-contact rule” basics

The law firm in this case was on the right side of the no-contact rule.  As comment [4] notes, it does not bar “communication with a represented person, …  concerning matters outside the representation. ”  But  there are some fine points about Rule 4.2 (set out in the comments) that you should keep in mind, including:

  • The rule applies even though the represented person initiates or consents to the communication.
  • You may not make a communication prohibited by the no-contact rule through the acts of another. (See Model Rule 8.4(a).)
  • “Parties to a matter” may always communicate directly with each other, even though they are represented by counsel.

What about business entities?  There is a large body of cases and ethics opinions regarding contacts with current and former employees of entities.  In general, under the Model Rules’ approach, counsel for an entity can’t assert blanket representation of all the employees so as to bring them within the scope of the no-contact rule and keep opposing counsel from contact with them.  (See ABA Formal Eth. Op. 396 (July 28, 1995).)  On the other hand, contact is improper with “a constituent of the organization” who “regularly consults with the organization’s lawyer concerning the matter or … whose act or omission in connection with the matter may be imputed to the organization for purposes of civil or criminal liability.”  In contrast, as comment [7] notes, former employees of an organization are generally fair game (unless represented by their own counsel).

Seek advice if you have a no-contact rule issue.  And as we frequently say, this is an area where you need to pay attention to the relevant jurisdiction’s rules and opinions.

An Oklahoma lawyer was suspended last month for two years based on misconduct involving an unlawful response to a bad on-line review of the lawyer’s services.  The disciplinary case is a lesson in being careful about who you’re dealing with when you hire a consultant, and also about not doubling down when confronted with a potential problem.

Social media consultant goes rogue

According to the Oklahoma Supreme Court’s opinion, after the contentious breakup of his prior firm, the lawyer started his own firm and needed a new website.  He hired a tech consultant to advise him on the website and “online reputation management.”  The consultant advised the lawyer to search for his own name online to see what results appeared.  After finding an article on RipoffReport.com that described the lawyer as “a criminal,” he asked the consultant “how we can get rid of it.”  The consultant replied that such negative articles could be “de-indexed.”  The lawyer exchanged another email with the consultant, asking for the IP address of the “Ripoff page.”  According to the court’s opinion, Ripoff Report publishes online consumer reviews of businesses.

Six days later, the consultant emailed extortionate threats and initiated a flood of emails to the computer servers of Ripoff Report and its Arizona counsel.  The inundation impaired the servers of the company and its lawyers so badly that their data became inaccessible.  The consultant threatened that if the page criticizing the lawyer was not removed within four hours, “we will begin targeting your advertisers” to get them to “pull their ads.”

Faced with the imminent crash of the servers, Ripoff Report’s lawyers reached out to the lawyer and in a tape-recorded call asked him if he knew who was responsible for the threats regarding the negative content about him.  The lawyer denied all knowledge, even when Ripoff  Report’s lawyers suggested exactly what happened — that he had hired someone innocently to help him, not knowing that their way of “helping” would be unlawful.  As the court wrote, instead of taking the opportunity to confirm the truth, the lawyer “doubled down.”

The lawyer paid the consultant even after the consultant described his methods and touted the success of the extortion, the court said.

Months later — spoiler alert — the lawyer learned who had placed the derogatory review on Ripoff Report:  the consultant himself.  The lawyer went to the FBI and reported the consultant, but portrayed himself as a victim, and failed to provide the FBI with two incriminating emails.  The court said that the lawyer “accepted and helped conceal the fraud when he believed it was carried out to his benefit and then reported it only after learning the scheme was against him as well.”

Following the FBI investigation, the lawyer eventually pled guilty to three federal criminal misdemeanor charges, paying more than $425,000 in fines and restitution but avoiding jail time.

Protection of interests “to the detriment of others”

Model Rule 8.4(b) as adopted in the Sooner State makes it professional misconduct to commit a criminal act that reflects adversely on the lawyer’s honesty, trustworthiness or fitness as a lawyer.  Model Rule 8.4(c) bars engaging in conduct involving dishonesty, fraud, deceit or misrepresentation.  The panel hearing the disciplinary complaint against the lawyer for these violations recommended a one-year suspension, but the supreme court imposed a two-year-and-a-day suspension with no automatic reinstatement, finding that the lawyer paid the consultant after “fully appreciating the criminal nature of his conduct” and that his misrepresentations were made to protect his own interests “to the detriment of others.”

Take-aways

Responding to unfavorable on-line reviews continues to be a source of grief to unwary lawyers.  Here, an innocent situation — trying to manage his on-line image — spun out of control for a lawyer who was taken in by a consultant who essentially conned him.  But like Mom always said, things only get worse when you don’t face them, and here, the lawyer made things worse when he doubled-down and lied when initially confronted with the havoc the consultant had wrecked.  Good lessons for us all.

In a narrow ruling last month by a sharply-divided West Virginia high court, a law firm escaped liability for failing to prevent a phishing/spoofing scheme that resulted in more than $266,000 in closing funds being wired to scammers, after they impersonated plaintiffs’ real estate agent.  The opinion is part of the developing law on lawyer liability for cyber-scams.

Diverted e-mails spell trouble

Plaintiffs wanted to relocate to West Virginia and contracted with a real estate agent, who worked for a broker.  A cash deal was made for a house, and Catrow Law was retained to handle the closing.

Leading up to the closing, Catrow sent settlement fund wiring instructions to the real estate agent via encrypted email, identifying the account name where the purchase money was to be transferred as “Catrow Law Real Estate Trust Account,” with account and routing numbers for an account at a West Virginia bank.

The agent printed out the wiring instructions, scanned them, and sent them to the plaintiffs via unencrypted email.  After that, things went seriously wrong.

An email purportedly from the real estate agent to plaintiffs started a series of emails that actually went back and forth between the plaintiffs and scammers.  The plaintiffs didn’t notice that every time they replied to the emails, their replies went to lfrurn@gmail.com rather than lfrum@cbimove.com.

It was undisputed that Catrow wasn’t part of the fraudulent email chain; in fact, the firm only communicated with the plaintiffs through the real estate agent.

The day before the closing, the scammers sent new wiring instructions to plaintiffs, directing the funds to a bank in Albany, New York and a different account name, account number and routing number (rather than the Catrow firm’s).

The plaintiffs obediently wired the cash to the scammers’ account.  Next day, at the closing, a Catrow lawyer notified the parties that the funds hadn’t been received in the Catrow escrow account, and it became apparent that plaintiffs had been victimized.  The scammers were never identified, and the funds were never recovered.

Sympathy for plaintiffs… but no breach of duty

Plaintiffs sued everyone involved, and after the real estate agent and broker settled, only the Catrow firm was left in the suit.  The trial court granted the firm’s motion for summary judgment, holding that plaintiffs failed to raise any material fact issue on the issue of duty.

On a narrow 3-2 vote, the justices of West Virginia’s high court agreed.  (The Mountain State does not have an intermediate court of appeals.)  While the majority said it sympathized with the plaintiffs, it ruled that they “were unable to establish that [the law firm] breached any duty owed to them.”

Plaintiffs had proffered a Maryland lawyer as an expert witness to testify that the law firm departed from the standard of care by not making personal contact with the plaintiffs to confirm the closing instructions, and by not ensuring that the emails between the real estate agent and the plaintiffs were secure.  The court, however, upheld the exclusion of plaintiffs’ expert because he disclaimed any ability to opine based on West Virginia law.

The plaintiffs also argued that the firm had a duty to warn them about the prevalence of wire fraud schemes and to caution them to not take any action before confirming that wiring instructions were legitimate.  This duty arose, plaintiffs asserted, because the firm was a title agency and knew of the danger of phishing scams based on alert bulletins that its title company had sent to the firm.

The court’s majority rejected this argument, pointing to plaintiffs’ failure to adduce in opposition to summary judgment any evidence that the Catrow firm had actually received any such warning bulletins.  Without such evidence, the court ruled, plaintiffs failed to raise an issue of material fact.

In a footnote, however, the court cautioned that it was not determining whether receiving the scam warning bulletins would have raised the duty that plaintiffs were arguing for.  And the court did not consider whether there could be any other source of duty that could give rise to liability on the law firm’s part.

Watch out

While the law firm here escaped liability, scams that bump up against your legal work are dangerous.  On different facts or different reasoning, malpractice theories of recovery can’t be ruled out.  As a 2015 New York City Bar Association ethics opinion has noted,  banks have also sued lawyers for lost funds caused by counterfeit checks, and some insurers have refused to indemnify scammed lawyers.

We’ve posted before here and here about the ethical duty of competence as it relates to technology.  Model Rule 1.1 includes a comment pointing to a duty of technological competence; three-quarters of U.S. jurisdictions have now incorporated that comment into their rules.  And of course, the ethics rules can be considered by courts as defining the standard of care in a malpractice suit.  (Model Rules, Scope, § 20.)

All this gives plenty of reasons to redouble your efforts to avoid cyber-scams.  Here are some tips on protecting yourself, including the need to watch for phishing.

With the coronavirus pandemic surging across the US and around the world, my family, along with millions of other Americans, will be sacrificing our usual Thanksgiving celebration in order to stay safe and to help prevent the spread of COVID-19.  If you’re a lawyer who’s in the same boat, I hope that, like me, you still can find things to be thankful for, including your membership in our profession.

I don’t want to sound too much like a Pollyanna, but I continue to find many things about the legal community that make me proud and grateful.  In my own Buckeye State, for instance, more than a thousand lawyers served as poll workers on Election Day.  Nationwide, when the pandemic hit, nurse-attorneys left their offices and helped with front-line care-giving.  And some law-firm competitors teamed up to deliver innovative client service in areas hit hard by the virus.

In past Thanksgiving messages, we’ve pointed out what a privilege it is to be a lawyer and the gratitude that should go along with our status:  for our skill and training; the opportunity to do work with purpose; our ability to change society; the chance to help others and to grow ourselves.

All that continues to be true — and even more so, as our nation has been tested in recent months.  Whatever our political persuasion, we can be grateful that we live in a nation where the rule of law has maintained its grip.

Let’s give thanks for the rule of law and our role as lawyers in upholding it.  And let’s hope that next Thanksgiving we can gather with all our dear ones again.

Needing to adjust the basis of your legal fee mid-stream is a fairly common occurrence.  When a matter becomes more complicated than you originally contemplated,  or for other reasons, the fee agreement you entered into with the client at the beginning may become unworkable before the matter is over.

But renegotiating fees with an existing client is not the same as reaching terms on the original arrangement.  Such adjustments can be considered a “business transaction” with a client — requiring written informed consent under state versions of Model Rule 1.8(a) — and determining when the rule applies is not always straightforward.  A recent opinion from the Fifth Circuit in Wiener, Weiss & Madison v. Fox sheds some light, and warns that failure to comply with Rule 1.8 when required can void a fee agreement.

Show me the money

Rule 1.8(a) prohibits “enter[ing] into a business transaction with a client or knowingly acquir[ing] an ownership, possessory, security or other pecuniary interest adverse to a client” without fulfilling three requirements:

  • the transaction must be fair and reasonable to the client and fully disclosed to the client in writing;
  • the client must be advised in writing that it would be desirable to seek advice on the transaction from “independent legal counsel,” and given a reasonable opportunity to do so;
  • the client must give informed consent, “in a writing signed by the client, to the essential terms of the transaction and the lawyer’s role in the transaction, including whether the lawyer is representing the client in the transaction.”

The client in Wiener was in the midst of a messy divorce in Louisiana when a receiver was appointed over the couple’s significant assets, consisting of “state-licensed gaming enterprises.”  After her husband declared bankruptcy, the client hired the Wiener firm, which originally agreed to represent her on an hourly basis, payable from the bankruptcy estate.  A year later, the bankruptcy court approved over $1.2 million in fees to the firm.

With more work to be done, the firm and the client agreed on a contingency fee for the firm’s ongoing representation:  up to a 35 percent interest in the gross proceeds the client might receive for claims against the estate and as an equity owner of the estate.

Three years after that, the bankruptcy court approved a reorganization plan, and the firm informed the client that if she “wanted them to stay on,” she had to “increase the contingency percentage.”  The client signed a new agreement in 2013 upping the contingency fee to 40 percent.

Finally, in 2016, the client received full ownership of the gaming enterprise out of the bankruptcy, and the firm proposed revising the fee arrangement once again — apparently sweetening the deal for the firm and making its fee come solely from distributions of cash or property to the client.

For the first time, the firm recommended that the client seek independent legal advice about whether to execute the new, eleven-page contingency agreement.  The client took that advice, and independent counsel advised against signing the agreement.

The firm eventually sued the client to enforce the contingent fee agreement.  In response, the client asserted that the firm’s claims were barred because the later agreements violated Rule 1.8(a).

The district court disagreed, reasoning that the revised fee agreement was not a “business transaction” under Rule 1.8 because it conveyed only a contingent claim to proceeds of the bankruptcy estate.

Business transaction — or not?

Reversing the district court, the Fifth Circuit agreed with the client, voiding the contingent fee agreements.

The reason for the the business-transaction rule, wrote the court, is to prevent conflicts between the client’s interests and the lawyer’s own financial interests.  “[S]uch potential conflicts are rarely more present than during a contingency fee relationship where the attorney seeks to gain a property interest in the client’s business at the end of the representation.”  It matters not, the court said, that a contingency agreement by its nature provides for a future interest.

The court cited other cases in jurisdictions “from sea to shining sea” to support its decision, as well as the ABA’s Formal Opinion 00-418 (July 7, 2000) (advising that lawyers can invest in clients, including stock in lieu of fees, but must comply with Rule 1.8(a)).

Bottom line for the law firm:  both of its executed fee agreements with the client were void and unenforceable for failure to advise the client to get independent counsel before entering into them.  The court remanded and the firm is now likely consigned to a quantum meruit recovery.  (A motion for rehearing was denied.)

Takeaways and unanswered questions

  • Before renegotiating fees with an existing client, you must consider whether Rule 1.8(a) applies.
  • If a new fee arrangement might advantage you or your firm — either increasing the amount of the potential fee or the certainty of receiving it — you risk having the arrangement voided if Rule 1.8 is not followed.
  • As always, local conditions count.  Consult case law, rules and ethics opinions in the jurisdiction at issue.

This case deals with specific circumstances – an unsophisticated client and substantial economic advantage to the firm from the new agreement.  But the opinion suggests that any new agreement with an existing client can be a “business transaction.”  If so, then:

  • Does Rule 1.8 apply to new matters for existing clients?
  • Does Rule 1.8 apply to fee increases on existing matters?
  • Does it make a difference who the client is?

Again, these answers may vary greatly based upon local rule and precedent.  No matter what, it is important to consider these issues and address them before moving forward.

The plaintiff’s lawyer in a slip-and-fall case got a pandemic-based pass from the Sixth Circuit Court of Appeals last week, avoiding sanctions that the defendant requested after the lawyer misstated the record.  The lawyer had based the plaintiff’s appeal argument on an unsigned interrogatory answer that appeared only in a draft.

But the court in its opinion said that although the conduct was improper, it would exercise its discretion and not impose sanctions.  The conduct was “concerning,” said the court, but it would give the lawyer the “benefit of the doubt” absent bad faith, because Michigan’s COVID-19 stay-at-home order was in effect when the lawyer filed the appeal on behalf of the plaintiff, “which may have limited her attorney’s access to the record.”  (The court did not recommend its opinion for publication.)

Evidence “not part of the record at all”

The district court had granted summary judgment in favor of the defendant department store on the plaintiff’s injury claim.  On appeal, her lawyer’s central argument was that the court  below ignored evidence that the store had posted “Wet Floor” warning signs near where the plaintiff had fallen.

However, the argument was based solely on an unsigned draft interrogatory answer that mentioned the signs — but that never became part of the record below.  The only evidence of record was the signed final version of the interrogatory answers, which did not mention the warning signs.

The lawyer was aware of the discrepancy because the defendant’s counsel brought it to his attention during a deposition.  Nonetheless, the lawyer “quoted the unsigned, draft version” in the plaintiff’s briefing in the district court and “perpetuated that error on appeal,” although the unsigned draft “was nowhere else to be found in the record.”

After the department store brought the mistake to light again on appeal, the lawyer “doubled down,” wrote the court, “insisting that [the court] should now expand the record and reverse based on an unsigned interrogatory that the district court had no authority to consider.”

Exercise of judicial discretion in a pandemic

Despite this conduct, the court declined to sanction the lawyer under Federal Appellate Rule 38 (“Frivolous Appeal”) or 28 U.S.C. § 1912 (“Damages and costs on affirmance”).   While sanctions are appropriate under 28 U.S.C. §1927 for lawyer conduct that “falls short” of the obligations owed to the court and causes expense to the opposing party, the court wrote, “We appreciate that these are trying times.”

The imposition of sanctions for frivolous conduct on appeal is discretionary, and although the lawyer’s actions “might have been unprofessional and serous enough to meet the standard for imposing sanctions,” the court chose not to do so, citing the lack of bad faith and the Michigan stay-at-home order that in the court’s view could have limited the lawyer’s access to the record.  Under the circumstances, the lawyer did not present the kind of “truly egregious” misconduct that would justify sanctions, the court wrote.

Don’t try this at (stay-at) home

We recently posted about a New York ethics opinion permitting lawyers to withdraw from representation based on their fear of COVID-19 infection.  Courts are likewise grappling with lawyer-conduct issues raised or affected by the corona virus, and we are sure to see more such instances.  While the lawyer here avoided sanctions, the court noted that the lawyer’s “obstinance makes the case … close.”  It goes without saying that the evidence you cite on appeal must actually be in the record.  The court here truly extended a COVID-19 lifeline.

Hat tip to Prof. Doron Kalir, of Cleveland-Marshall College of Law, who called this opinion to my attention.