ethics cube

The American Bar Association Standing Committee on Ethics and Professional Responsibility (the “Committee”) issued its most recent opinion, which has an interesting new take on Model Rule 1.16 and the hot potato rule.

Rule 1.16 addresses lawyer withdrawal.  Subsection (a) defines when lawyers must withdraw or terminate their representation of a client, and Rule 1.16(b)(2)-(b)(6) set forth situations constituting good cause for which a lawyer may unilaterally terminate legal services.   

What about where no good cause exists? Can a lawyer withdraw when they just don’t feel like representing the client anymore?  What about when the lawyer wants to avoid a conflict of interest in taking on a new matter?  Rule 1.16(b)(1) says that a “lawyer may withdraw” if doing so “can be accomplished without material adverse effect on the interests of the client.”  Opinion 516 says that good cause is not required, the lawyer can withdraw for any reason, and the lawyer’s motivation for withdrawal is irrelevant under Rule 1.16(b)(1) – the lawyer just needs to analyze whether there will be a material adverse effect on the client’s interests that cannot be remediated.  

Material adverse effect on the interests of the client

The Committee determined that a “material adverse effect” exists when, notwithstanding a lawyer’s efforts to remediate negative consequences, such withdrawal or termination will “significantly impede the forward progress of the matter, significantly increase the cost of the matter and/or significantly jeopardize the client’s ability to accomplish the objectives of the representation.” The material adverse effect must “relate to the client’s interests in the matter in which the lawyer represents the client.”

So long as a lawyer’s withdrawal would not significantly harm the client’s interests in the matter in which the lawyer represents the client, Model Rule 1.16(b)(1) would not force the lawyer to complete the matter simply because the lawyer agreed to do so initially, even if the client may believe the lawyer’s reason for withdrawal is disloyal or the lawyer will be adverse to the client in an unrelated matter after the representation terminates.

The Committee concluded that such determination is aligned with various existing ethics opinions. Connecticut ‘s view is that there is no material adverse effect if all projects for that particular client have already been completed. Same goes for D.C. when no outstanding projects are contemplated in the near future.  Michigan’s opinion reflects no material adversity when the case is at an early stage. Pennsylvania found there would be no material adversity where the client retained successor counsel. Missouri provided one avenue to avoid material adversity is by providing ample notice to clients of the impending withdraw.

There will likely be no materially adverse impact on the client when the representation has just gotten started, and the retainer has not even been deposited. The same is true where there’s been no substantial services rendered or where co-counsel can finish any remaining work. Another example is when the bulk of the work has been completed and the only remaining work is ministerial in nature. Where all matters have been complete and there is no impending matter at the time the lawyer withdraws, there generally will be no material adverse effect on the client’s interests in the matter.  Having to secure new counsel in this situation, according to Opinion 516, is unlikely to have a material adverse effect on the client’s interests.    

The Committee opined that Rule 1.16(b)(1) does not prohibit lawyers from disappointing the client, or withdrawing despite a client’s perception the lawyer is disloyal.  Client consent is not a prerequisite. Although restricted by a lawyer’s duty of confidentiality to other clients, lawyers must fully explain the reason for withdrawing, even if the client is not satisfied by the explanation.

Permissible withdrawal under Rule 1.16(b)(1), allows withdrawal irrespective of the lawyer’s reason, as long as it does not have a materially adverse impact on the client’s interests in the matter. Thus, lawyers may withdraw for any reason.

Dropping the “hot potato”

The opinion notes that Rule 1.16(b)(1) may at times be inconsistent with case law holding that a lawyer who withdraws from a representation to litigate against the now-former client may sometimes be disqualified.  The “hot potato” doctrine, an extension of the common law duty of loyalty, comes from Picker International v. Varian Associates where the court concluded “a firm may not drop a client like a hot potato, especially if it is in order to keep happy a far more lucrative client.”  When courts apply the “hot potato” rule, they treat the withdrawal as if it did not happen – such that the lawyer represents two current clients adverse to each other and apply Rule 1.7(a)(1), which bars a representation directly adverse to another current client absent client consent.     Other courts recognize that the “hot potato” doctrine is not absolute and that it should not apply  when the withdrawal is not significantly prejudicial, such as when “a lawyer’s representation is sporadic, non-litigious and unrelated to the issues involved in the newer case.”

The Committee points out that the “hot potato” rule neither originates from Rule 1.16 nor other professional conduct rule and that although disqualification decisions may be informative, they are not dispositive of the meaning of the Rules of Professional Conduct.  In ruling on a disqualification motion, courts may decline to disqualify lawyers even when there appears to be a conflict of interest under the applicable rule or (less frequently) disqualify lawyers when there is no violation of an applicable rule as the courts do not rely exclusively on the meaning and application of the Rules of Professional Conduct in deciding these motions.  I think the dissent’s point about this not entirely being a get out of jail card is valid because you can still get DQ, but the focus on reading this with Rule 1.9 seems to me important.  If there is no material adverse effect on client’s interests in matter you are terminating, and you aren’t dropping them to work on a substantially related matter, and you aren’t using information related to the terminated matter (like you put a screen in place), what is the basis for the DQ? 

The Dissent

Unusually, two members of the Committee dissented from the opinion, asserting that it was incomplete because it did not address whether terminating a representation for the purpose of turning around and filing suit against that client for another client could have material adverse effect on the interests of the hot potato client. The dissenters also thought the mandatory withdrawal analysis under Rule 1.16(a)(1) should have been addressed.  They also noted that the analysis fell short in only addressing litigators and not transactional lawyers.

What this means for lawyers

Although Rule 1.16(b)(1) is not a free pass, Opinion 516 clarifies that while dropping a client like a hot potato might not be the best look, it does not automatically equate to a Rules’ violation. Lawyers should always carefully analyze whether there would be an adverse material effect before terminating any representation. Still, lawyers must be aware that withdrawing from a representation in this manner might get them disqualified anyway. While the dissent might disagree, this Opinion should motivate lawyers to timely close out matters, promptly convert current clients to former clients, and document everything to avoid this doctrine altogether.

Rule 1.16(b)(1) and other Professional Conduct Rules don’t include the “hot potato” doctrine because a lawyer’s motive for invoking Rule 1.16(b)(1) is simply not relevant, regardless of any perceived disloyalty. The predominant question under Rule 1.16(b)(1) is whether withdrawing from a representation materially adversely impacts the client’s interests in the matter the lawyer withdrew from and not whether the lawyer will be adverse to that client in a different and unrelated matter after the representation has terminated.

USA, Jersey City, New Jersey, court stenographer using stenograph machine

Today, several jurisdictions (D.C, Utah and Arizona) permit lawyers to practice in organizations where non-lawyers have ownership interests.  For example, D.C.’s Rule 5.4(b) permits D.C. barred attorneys to “practice law in a partnership or other form of organization in which a financial interest is held or managerial authority is exercised by an individual nonlawyer who performs professional services which assist the organization in providing legal services to clients,” so long ss certain requirements are met.

For firms with offices in jurisdictions that bar non-lawyer ownership, this raises a question:  Does the adoption of rules permitting nonlawyer ownership in these jurisdictions mean we can we allow nonlawyers in those jurisdictions become partners?  The Professional Ethics Committee for the State Bar of Texas (the “Committee”) recently issued Opinion 704, which answers the question, at least for Texas attorneys. It concluded that a Texan attorney, practicing in Texas, could not join a D.C. law firm in which a nonlawyer is a partner.

Texas Rule 5.04(b) (as with most jurisdictions around the country) prohibits lawyers from forming “a partnership with a non-lawyer if any of the activities of the partnership consist of the practice of law.”  Further, the Committee notes that subsection (d) expands the prohibition to include professional corporations or associations. The main reasons for the prohibition in Texas, as described in the comments are to prevent nonlawyers from soliciting clients, to avoid assisting nonlawyers in the practice of law and to protect the professional independence of lawyers.

Even the rules are bigger in Texas

The Committee applied Texas Rule 5.04 to lawyers licensed and practicing in Texas that are seeking to join partnerships in jurisdictions where the Rules of Professional Conduct affirmatively allow lawyers partner with nonlawyers.

In doing so, they relied on the nearly 35 year old ABA Comm. on Ethics & Prof’l Responsibility, Formal Op. 91-360. There, the ABA Committee opined that when a lawyer is licensed both in a state that allows nonlawyer law firm ownership such as D.C. and also in a state that prohibits it, the ethics rules of the latter state would forbid the lawyer from practicing law within the state as a member of a D.C. law firm with a nonlawyer partner. Yet, the ABA Committee opined that if that same lawyer had joined a D.C. firm with a nonlawyer partner, but only practiced in D.C., the lawyer would not be subject to discipline.

Recent ethics authorities have called for revisiting Op. 91-360, because it no longer reflects either the current language ABA Model Rules or the realities of the legal profession.  

The Committee also pointed to NYSBA Ethics Op. 1038 in justifying the wide application of its Rule. There, the NYSBA Committee on Professional Ethics determined that a New York barred attorney practicing principally in New York was prohibited from joining a firm in D.C. that had nonlawyer members.

Opinion 704 makes clear that a Texas-barred attorney practicing law in Texas violates Rule 5.04 by joining a firm with a nonlawyer partner or owner, regardless of whether the firm is in a state that permits nonlawyers to own law firms.

Takeaway

Lawyers cannot pick and choose which rules to follow based on the rules that are the most favorable to their situation. Lawyers or firms licensed or operating in multiple states must be cognizant of the jurisdictional differences in ethics rules. Until more follow D.C.’s lead in allowing nonlawyer firm ownership, the state with the most restrictive rule will govern lawyers’ ability to share legal profits with non-lawyers.   

business ethic ethical company corporate concept

In the days of yore, lawyers were generally viewed as a socially “conservative” group not likely to seek attention or say controversial or unkind things in public. Those days are, of course, long gone. Today many lawyers go out of their way to say things that are intended to draw attention and address controversial topics. Those who like to speak on such matters need to consider when the things they say might cross ethical lines, including their local versions of Model Rule 8.4(g), which is designed to create a better legal environment, one free of harassment and discriminatory behavior. The Rule has many variations in jurisdictions across the country and though it has faced constitutional challenges and widespread controversy, it isn’t going anywhere. Lawyers need to be cognizant of and avoid the types of speech and behavior that violate this rule lest they find themselves in.  

ABA Model Rule 8.4 (g) says that it is misconduct for a lawyer to knowingly engage in harassment or discrimination on the basis of race, sex, religion, national origin, ethnicity, disability, age, sexual orientation, gender identity, marital status or socioeconomic status. 

The ABA amended the Model Rules to include this anti-discrimination provision back in 2016. But many states, Ohio for example, already had a version of this rule on their books years before the ABA adopted the model rule while others have adopted more expansive versions since. Likewise, there are several states that don’t prohibit discrimination directly within their ethics rules but proscribe such conduct in their comments to their ethics rules.  

Variations   

Unlike many of the Model Rules, virtually every state that has adopted a version of Model Rule 8.4(g) has varied the wording from that appearing in the ABA version. There are thus dozens of variations across the country. A few key aspects to look at when evaluating the application of the rule are (1) the context in which the conduct occurs and (2) the substantive conduct at issue. For instance, in many states the prohibition only applies to conduct in a lawyer’s professional capacity—using terminology such as “conduct related to the practice of law” or “conduct in connection with the practice of law.”  These definitions aren’t always fully explained, but one can envision arguments that such conduct transcends beyond that demonstrated in a courtroom and could be included to cover conduct at work or bar events too. The second aspect to evaluate is what the type of conduct and the subject matter covered by your state’s rule. For instance, your state may cover more than just comments of a sexual nature, but also those covering race, religion, national origin and more.

Model Rule 8.4(g) provides in part that “It is professional misconduct for a lawyer to engage in conduct that the lawyer knows or reasonably should know is harassment or discrimination on the basis of race, sex, religion, national origin, ethnicity, disability, age, sexual orientation, gender identity, marital status or socioeconomic status in conduct related to the practice of law.”

Ohio’s Rule 8.4(g) provides “It is professional misconduct for a lawyer to do any of the following: engage, in a professional capacity, in conduct involving discrimination prohibited by law because of race, color, religion, age, gender, sexual orientation, national origin, marital status, or disability”.

Iowa’s Rule 8.4(g) provides that “It is professional misconduct for a lawyer to engage in sexual harassment or other unlawful discrimination in the practice of law or knowingly permit staff or agents subject to the lawyer’s direction and control to do so.

New Mexico’s Rule 8.4(g) provides in part “It is professional misconduct for a lawyer to engage in conduct that the lawyer knows or reasonably should know is harassment or discrimination on the basis of race, sex, religion, national origin, ethnicity, disability, age, sexual orientation, gender identity, or marital status in conduct related to the practice of law.

Examples

Formal Opinion 493 issued by the ABA Standing Committee on Ethics and Professional Responsibility provides several hypotheticals. This Opinion is a good read to determine what type of conduct is deemed “related to the practice of law” and what type of conduct is considered discriminatory or harassment. For instance, presenting at a CLE is “conduct related to the practice of law” as would be serving as an adjunct professor in a law school legal clinic. Yet, making comments about the type of colleges that individuals of a particular race should attend would somehow not be sufficient, without more, to violate the aspect of the rule pertaining to discrimination or harassment based on race. But the real-life examples will depend on the lawyer’s conduct and how it fits in with their particular state’s rule.  

Earlier this year, an Iowa lawyer was found to have violated Rule 8.4(g) for amongst other remarks, making sexually derogatory comments about certain defendants their office was prosecuting and making a joke with a sexual innuendo about his wife in front of office employees.

But even if your state does not have an 8.4(g) type of rule on the books, your conduct could still be an ethics violation.  Conduct that isn’t charged under Rule 8.4(g), can still easily fall into another category of Rule 8.4 Misconduct. Take for instance another disciplinary case recently issued out of New Mexico, where Rule 8.4(d) (“conduct that is prejudicial to the administration of justice”) was charged instead of Rule 8.4(g) despite the lawyer telling a prosecutor to “lay off the trendy feminist baloney.”

Takeaways

What you once may have classified as a funny joke, now may be deemed a Rule 8.4(g) violation in your state. These comments can be made at bar events, at work, in front of colleagues, to your clients, opposing counsel and more—so you always want to be careful what you are saying and to whom you are saying it. You may think you have a much friendlier relationship with someone that sees you as no more than a colleague and is offended by your comment or behavior. Times have and are continuing to change regarding what conduct is professionally, societally, and ethically acceptable. Looking at your state’s rules, opinions, and cases may save you not only from embarrassment, but from picking up a disciplinary case as well.

Exclamation Point

The ABA Standing Committee on Ethics and Professional Responsibility (the “Committee”) recently issued its first opinion on generative AI and not a day too soon. While states such as Florida, California, West Virginia, and Kentucky, as well as the District of Columbia have issued generative AI guidance, most states have yet to do the same. The states that have issued generative AI opinions have selected nearly the same exact ethics rules as relevant to the generative AI analysis as is found in the ABA’s Formal Opinion 512. The consistency in guidance provides at least some comfort in this ever-evolving component of the legal industry.

The Committee points out there is no single definition of artificial intelligence and that we have been using artificial intelligence for quite some time. Examples include electronic discovery in litigation, contracts analytics to conduct due diligence, basic research, and AI tools to help predict how judges may rule on legal questions. The opinion discusses a subset of AI which is generative, meaning it is a type of technology that creates new content. It can be used for the same purposes accomplished by more traditional AI. But generative AI (“GAI”) tools produce new text – they are prediction tools that create a “statistically probable output” when asked. To achieve this result, the generative AI tools analyze text from the internet or privately owned data sources. There are certain GAI tools designated as “self-learning,” indicating they learn from themselves as they collect more data.

Competence

Lawyers do not have to become experts to use GAI in client representation, but they must reasonably comprehend the capabilities and weaknesses of the specific GAI tool they plan to use. Lawyers can achieve the required level of competence through self-study or associating with another who has expertise in the relevant field. Notably, the Committee reminds lawyers that this is not a “static undertaking.”  GAI and its applications expand every day. Lawyers are encouraged to attend continued education classes, read materials, and consult with others about GAI technology aimed at the legal industry. Lawyers must also identify innate risks with GAI—generating inaccurate output, lack of ability to comprehend, assess, or contextualize the results, and hallucinations. Use of GAI without independent verification could violate a lawyer’s duty of competence. The required degree of independent verification is fact specific, bearing in mind that lawyers will be deemed fully responsible for their work.

Confidentiality

All information relating to the representation of a client must be kept confidential absent client consent or other applicable exception. The opinion advises lawyers to evaluate the likelihood of disclosure and unauthorized access to information, the level of sensitivity of the information, difficulty in protecting the information, and barriers to client representation directly caused by the safeguards. This includes evaluating the risk of access and disclosure to those both outside and inside the firm, especially when it comes to self-learning GAI. Using GAI for client related work risks disclosure of confidential information because, in most of the generally available cost-free applications, the information you upload to it becomes part of the GAI itself (i.e. out of your control).  These fact-driven assessments of the tools you are using must be made prior to inputting the information into a GAI tool.

Self-learning GAI may reveal information related to the representation to others outside of the firm that are using the same GAI tool. There is also a risk that those inside the firm who are subject to an ethical screen or who could inadvertently use the information for another client’s benefit are revealing client confidences. The Committee makes clear that informed client consent must be obtained before entering information relating to the representation into a self-learning GAI tool. Informed client consent in the form of generalized, boiler-plate language in an engagement letter won’t cut it.

However, lawyers need not obtain informed client consent, even with self-learning GAI, when there will be no input of client information related to the representation. The Committee opined that the baseline for lawyers includes reading and understanding the Terms of Use, privacy policies, and related contractual terms for any GAI tool they use to determine who will be able access the information the lawyer inputs or consult with a coworker or outside expert who has analyzed the terms. It may become necessary to consult with IT professionals or cyber security experts.

Communication

Lawyers may have a duty to communicate GAI use in a representation even when informed consent is not required. When asked, lawyers must always disclose their GAI usage to clients. Even if not questioned by the client, lawyers must discuss with clients when GAI output will influence a significant decision in the representation such as assessing jury selection. The Committee reminds lawyers that engagement agreements are the sensible place to disclose GAI use and to host client instructions.

Hallucinations, Meritorious Claims and Contentions and Candor Toward the Tribunal

As most of us have learned in the news, GAI “hallucinates” – a lot.  That means it can misstate facts and law.  It frequently makes cases up that it thinks should exist.  Obviously, a lawyer could not submit papers with such misstatements and doing so will not be excused because GAI “did it.”

Misstatements to a court can be deemed misrepresentations under Model Rule 8.4(c) regardless of the lawyer’s intent. Accordingly, output from a GAI tool must be thoroughly examined to safeguard against false assertions being made to the court. GAI problems have already involved instances of citing fictitious opinions, erroneously analyzing authority, and using misleading arguments.

Supervision

Managerial lawyers must establish permissible use policies regarding GAI pertaining to law firm matters. Supervisory lawyers are required to make reasonable efforts to ensure the firm’s lawyer and non-lawyer staff use GAI in a manner consistent with the lawyer’s professional obligations under the ethics rules, including GAI training. The obligation to supervise also applies to supervising others outside of the law firm who are retained to use GAI tools for client representation. Third-party providers should be thoroughly evaluated before work is outsourced to them. This includes reference checks, awareness of vendor hiring practices, using confidentiality agreements, and the availability of a legal forum in the event of violations of the vendor agreement.

Fees

First and foremost, a lawyer using GAI to create work product must analyze how that use will be dealt with in billing clients.  Alternative calculations of value may be appropriate, but lawyers must explain the basis of any fees and expenses prior to charging the client—including prior to charging the client for any use of GAI tools or services. Lawyers who bill their clients at an hourly rate cannot bill their clients for time they would have used on the task absent GAI when their use of GAI allowed the lawyer to complete the task in a much shorter period of time.  Their actual time is what must be billed. Lawyers looking to charge GAI work as an expense should look to the principles described in ABA Formal Opinion 93-379. The Committee previously explained that overhead expenses should generally not be billed to the client absent an agreement to the contrary. Lawyers will therefore want to examine whether the use of a GAI is truly an “overhead” expense. This may be affected by issues such as whether the tool is client specific and the provider charges on a per-use basis. Firms that have created in-house GAI tools must still only charge the direct costs associated with the GAI tool and a reasonable allocation of expenses with providing the GAI tool absent a contrary agreement. Last, lawyers cannot charge time for their own inexperience, such as learning to use a GAI tool, unless the client explicitly requests the lawyer learn to use the GAI tool.

Lawyer in a Courtroom

Conflicts of interest aren’t always straightforward, especially with trust and estate planning matters. The Supreme Court of Utah recently determined that there was no former client conflict under Utah’s Rule 1.9 where lawyers were found to have only represented the former trustees and not the trust itself in litigation.

Trustees (“Trustees”) hired lawyers to represent them in their duties as Trustees of the trusts at issue. After a significant period, Trustees hired the same lawyers to hire them to defend a lawsuit brought by the trusts’ beneficiaries. A jury eventually found that Trustees breached their fiduciary duties to the trust. The court entered a $1.8 million judgment against the Trustees, which was mainly payable to the trusts. The court removed the Trustees and appointed Successor Trustees (“Successor Trustees”). Using the same attorneys, the now former trustees (“Former Trustees”) requested that the court reduce the judgment.

Differing viewpoints

The Successor Trustees moved to disqualify the Former Trustees’ attorneys arguing a Rule 1.9(a) conflict existed under the Utah Rules of Professional Conduct. Rule 1.9(a) prohibits a lawyer who has represented a client in one matter from subsequently representing another person whose interests are materially adverse to the former client’s interest in the same or a substantially related matter, absent client consent. The argument was based on the view that the lawyers had represented the trusts in the litigation initiated by the beneficiaries and therefore were prohibited from assisting the Former Trustees in trying to reduce the judgment. They argued that to do so would be adverse to the interests of the trusts and the trusts were their former clients. The lawyers were disqualified by the district court.

The Former Trustees appealed, arguing the district court erred in finding a disqualifying conflict under Rule 1.9(a) because the trial court misinterpreted existing precedent in finding that an attorney’s representation of a trustee means they also automatically represent the trust itself. The Former Trustees argued that only they were represented by the lawyers—not the trust as well.

Attorney-client relationship

The Utah Supreme Court found that while an attorney can represent a trust, an attorney-client relationship does not arise with the trust solely due to the lawyer’s representation of a trustee.  While a trust is capable of forming an attorney-client relationship with a lawyer, context determines whether such relationship was actually formed. The trust holds the attorney-client privilege and the trustee, as fiduciary, claims the privilege on the trust’s behalf.

Putting the facts to the test  

The test is whether the lawyers (1) previously represented the trusts (2) in the same or substantially related matter (3) in which the Former Trustee’s interests are materially adverse to the trusts.

In this instance, the beneficiaries’ suit was against the trustees, not the trusts. The trusts were not named in the lawsuit. The Utah Supreme Court found that the lawyers never represented the trusts in the lawsuit.

The attorneys for the Former Trustees may have represented the trust when retained to assist in trust administration. But the court found that even so, the fact that the attorneys (or at least one of them) may have represented the trusts at some point is not the concern. The concern is whether the lawyers represented the trusts in the same or a substantially related matter, which here would be whether the attorneys represented the trusts in the same lawsuit. The applicable time period could not have started to run until the beneficiaries filed the lawsuit for breach of fiduciary duty against the Former Trustees.    

While not a decisive factor, when lawyers are paid from trust funds it suggests they are involved in the administration of the trust. When lawyers are paid from a trustee’s personal funds, that suggests they are looking out for the trustee personally. But, even when lawyers are paid with trust funds, that alone does not create an attorney-client relationship with a trust. Further, the court found some ambiguity in that the lawyers engagement letter to the Former Trustees had only clarified that the lawyers did not represent the beneficiaries but said nothing about representing the trust. However, that ambiguity was not evidence of their attorney-client relationship with the trust.

The Utah Supreme Court found that because the lawyers never represented the trusts in the lawsuit, Rule 1.9(a) would not serve to block the lawyers from continuing to represent the Former Trustees.

Takeaway

While substantive law regarding trusts will vary from state to state, former client conflicts are fairly common.  Different states with the nearly identical former client conflict rules, may very well issue opinions with a vastly different result. For those states without clear cut answers to the questions raised in this opinion, engagement letters become even more crucial.  This case was not ultimately decided on the content of the engagement letter, but it is a wonder how far the case would have made it in court had the Former Trustee’s engagement letter explicitly mentioned who the client was not—rather than just mentioning who the client was. This case surely raises the question of when it would be advantageous for trusts and estates lawyers (and those in other fields of practice as well) to follow suit.

This blog post was co-authored by Thompson Hine partner Tony Rospert and associate Micah Fishman.

Yes. Or at Least, They Shouldn’t Lie. (Do We Even Need to Say That?)

Lawyers experienced in the art of settlement negotiations can become primarily focused on little more than getting the best results for their client and will often use various implicit and explicit statements to convince the other side of the merits of their position. But there are always ethical limits on zealous representation, and settlement negotiations are no exception. Each jurisdiction will have a different interpretation of just how far lawyers can go in using puffery and deception to secure the best deal for their client. While it is never ethically permissible to lie, being completely transparent in settlement negotiations may not be the best strategy either; divulging information that is not required could be deemed a failure to provide competent representation. Thus, in any settlement discussion there is a tension between negotiating with honesty and good faith and obtaining the best results.

The Ethics Rules: A Certain Shade of Gray

Lawyers in negotiations who are tempted to overstate their cases should be familiar with their state’s version of Model Rule 4.1, the ABA version of which provides: “In the course of representing a client a lawyer shall not knowingly: (a) make a false statement of material fact or law to a third person; or (b) fail to disclose a material fact to a third person when disclosure is necessary to avoid assisting a criminal or fraudulent act by a client, unless disclosure is prohibited by Rule 1.6.”

The ABA Standing Committee on Ethics and Professional Responsibility (“Committee”) issued Formal Opinion 06-439, which lays out a roadmap to analyze Model Rule 4.1 in the context of settlement negotiations. The Committee provides multiple examples of what a “false statement of material fact” is under Rule 4.1. The Committee opines that “statements regarding a party’s negotiating goals or its willingness to compromise, as well as statements that can fairly be characterized as negotiation ‘puffing,’ ordinarily are not considered ‘false statements of material fact’ within the meaning of the Model Rules.”

Likewise, exaggerating or emphasizing strengths and minimizing or deemphasizing weaknesses of factual or legal position can be deemed “puffing” or “posturing.” Parties to a negotiation typically would not be expected to rely on these statements, which must be differentiated from “false statements of material fact.”

The Committee gives an example: “a lawyer representing an employer in labor negotiations stating to union lawyers that adding a particular employee benefit will cost the company an additional $100 per employee, when the lawyer knows that it actually will cost only $20 per employee.” That is a fact, it is material, and it is false. However, the Committee opines that determining whether a statement can be regarded as one of material fact can depend on the particular circumstances, stating that the value placed on the subject of a transaction, price estimates, a party’s intent as to a satisfactory settlement of a claim, and the existence of an undisclosed principal (unless such nondisclosure would be deemed fraud) would all typically not be considered statements of material fact, nor would statements pertaining to goals of negotiating, or willingness to compromise.

Model Rule 4.1(a) pertains only to statements of material fact the attorney knows are false, and therefore does not apply to false statements that are made unwittingly, that concern inconsequential matters, or that do not relate to facts. The Committee reminds us that lawyers may decline to give the client’s bottom line without violating the rules, but if a lawyer discloses the limit of their settlement authority, they must be truthful. Further, parties are not allowed to waive the protection from attorney misrepresentation under Rule 4.1, whether by informed consent or by impliedly agreeing to allow false statements to be made in the process.

Example: The Personal Injury Case

In Formal Opinion No. 2015-194, the State Bar of California Standing Committee on Responsibility and Conduct presents an example involving a plaintiff injured in an automobile accident who sustains $50,000 in medical expenses and advises her attorney that she is no longer able to work. The plaintiff earned $50,000 annually before the accident. Before discovery, the plaintiff’s attorney files suit and agrees to participate in a settlement conference. The plaintiff’s attorney falsely contends in a settlement conference brief that he can prove the defendant was texting immediately before the accident because a (nonexistent) credible eyewitness saw everything.

The defendant’s attorney asserts that the defendant will file for bankruptcy if they do not get a defense verdict. However, the defendant’s lawyer knows that the defendant does not qualify for bankruptcy and has no intention of filing. When the matter is not settled, the parties agree to meet in one month for a follow-up settlement conference at which the plaintiff will provide information showing her efforts to mitigate damages by seeking to obtain other employment. In the meantime, the plaintiff’s attorney learns that the plaintiff has obtained a new job and will be earning $75,000 annually. The plaintiff tells her attorney not to discuss her new employment at the upcoming settlement conference and to refrain from including any information about her efforts to obtain new employment. At the settlement conference, the plaintiff’s attorney makes a settlement demand including future earnings as a part of the plaintiff’s damages and specifying a dollar amount for that component.

What statements violate Model Rule 4.1? The misrepresentation regarding the nonexistent eyewitness is not considered an expression of opinion and, thus, is an ethical violation. This is an improper false statement of fact that is intended to mislead, and the type of statement that another would attach importance to in determining their course of action.

The defense attorney’s assertion that the defendant will file for bankruptcy is a false representation of fact because they in fact know there is no intention, and the defendant is not eligible to file.

The plaintiff instructing her attorney not to reveal that she has a new job making more money would be deemed a material omission of fact if the lawyer followed the plaintiff’s instruction. Concealing facts about her new employment is considered a misrepresentation since she would not be entitled to lost future earnings upon finding new employment. Including such damages in the demand implicitly and impermissibly misrepresents that the plaintiff has not found new employment. Here, the opinion warns lawyers that if following a client’s instructions would violate ethics rules, lawyers must counsel against such concealment and misrepresentation. If the client insists on proceeding with such conduct, the attorney must withdraw from the representation.

The Catch-All Trap

While Rule 4.1 is explicit that it applies to misrepresentations made while representing a client, there is no comfort for the lawyer who wants to argue that his or her misrepresentations are arguably made outside the scope of representation. Rule 8.4’s “catch-all” provisions reiterate that “It is professional misconduct for a lawyer to:

  • (b) commit an illegal act that reflects adversely on the lawyer’s honesty or trustworthiness;
  • (c) engage in conduct involving dishonesty, fraud, deceit, or misrepresentation;
  • (d) engage in conduct that is prejudicial to the administration of justice;

So, while a lawyers’ fraudulent tax returns may be filed outside the scope of representing clients, such filings are nonetheless violations of the Rules and the basis for many examples of discipline (and jail time).

Takeaways

Lawyers should become familiar with the ethics rules pertaining to settlement negotiations in the states where they are licensed, looking also to ethics opinions and case law. Lawyers should understand permissible distinctions such as puffing versus impermissible misrepresentations. For example, some states specifically allow puffing. However, making affirmative false representations of fact – lying – is never ethically permissible and one should not be too cavalier in classifying a statement as puffing when in fact it is a misrepresentation of fact. Hiding material facts can be an ethics violation as well as it can be deemed an implied misrepresentation. Not only can lawyers be disciplined for Rule 4.1 violations, but affirmative misrepresentations made by attorneys in negotiations have led to the imposition of sanctions, the filing of civil lawsuits against the attorney, and settlement agreements being set aside.

disqualified banner. disqualified speech bubble. disqualified sign

A common situation faced by law firms – and especially larger law firms – is the potential conflicts and disqualifications posed by Model Rule 1.10(a)’s imputation of one lawyer’s conflicts to all lawyers in the firm.  This can become a substantial issue when different lawyers get initial calls from different parties to an event or transaction seeking counsel.  When different lawyers get confidential information from adverse parties, even without agreeing to be their lawyer, the end result is that the entire Firm can be disqualified from representing anyone. 

The American Bar Association Standing Committee on Ethics and Professional Responsibility (the “Committee”) in their recent Formal Opinion 510, issued late last month, focuses on how to avoid the imputation of conflicts in the context of prospective client interactions.  The Committee also provides lawyers with guidance on the reasonable measures they must take to avoid imputing conflicts to the entire law firm.

Under Model Rule 1.18, when a prospective client does not retain a lawyer after consultation, that lawyer is disqualified from representing a client adverse to the prospective client in the same or a substantially related matter if the prospective client shared “disqualifying information” with the lawyer. Disqualifying information is information that may be “significantly harmful to the prospective client in the matter.” Under Model Rule 1.10(a), a lawyer’s conflict is typically imputed to all other lawyers in the firm. This is consistent with Model Rule 1.18(c) in the context of prospective clients. However, representation can still be permissible if the conduct falls under Model Rule 1.18(d). There is no imputation when writen consent is provided by both the potential client and affected client, under Model Rule 1.18(d)(1). When consent is not provided, representaton can still be permissible under Model Rule 1.18(d)(2), so long reasonable measures are taken.

Reasonable measures

When consent is not provided, representation can still be permissible under Model Rule 1.18(d)(2) as long as 1) reasonable measures were taken to avoid learning more disqualifying information than reasonably necessary to determine whether to represent the client, 2) the lawyer is timely screened from participation and not apportioned any fees from the representation, and 3) prompt, written notice is provided to the prospective client. What measures are reasonable can depend on a host of facts, including the lawyer’s background and experience, the identity of the client, and the type of engagement.

Information necessary to assess whether to take on the representation

Lawyers may obtain two types of information during an initial consultation to aid in the determination of whether to accept a representation. The first relates to the lawyer’s professional responsibilities, such as the identity of parties needed to assess the permissibility of the representation under the applicable Rules of Professional Conduct.  The lawyer may also obtain information necessary for the lawyer to assess whether they are competent to handle the matter, whether the prospective client intends to use the lawyer’s services to perpetuate a crime or fraud, or to determine if the client’s claim was frivolous.

The second type of information relates to the lawyer’s business decisions—such as whether the lawyer wants to take on such representation. Information that would assist in this determination would include how time intensive the matter would be, how much income could be generated Modfrom taking on the matter, the probability of being fully compensated, the possible expenses associated with the representation, and whether taking on the matter is consistent with the lawyer’s law firm’s internal policies.

Lawyers are cautioned not to take their questioning too far – the Rule contemplates only obtaining the information reasonably necessary.  A line of questioning designed to or going beyond that necessary to obtain only the information truly needed to determine whether to accept the representation will still raise the possibility of disqualification. The Committee gives various examples, including extracting detailed information designed to convince the prospective client to retain the lawyer, offering strategic insight, or taking the opportunity to promote themselves.

Reasonably necessary inquiry

The Committee reminds lawyers that their line of questioning may be for legitimate or permissible purposes, but that does not mean the inquiry is “necessary” to the lawyer’s determination whether to represent the prospective client. For instance, Model Rule 3.1 prohibits lawyers from bringing or defending a frivolous proceeding. But during the initial consultation, a brief inquiry would generally be all that is required for a lawyer to determine whether a proposed lawsuit is frivolous and thus whether to take on the representation, but more than that would not be “reasonably necessary”. The more detailed inquiry into such facts and research of law would be undertaken during the representation to comply with Model Rule 3.1.

The bottom line is that once a lawyer has enough information to determine whether to take on the prospective representation, any further inquiry can no longer be deemed “necessary.” Once the lawyer determines he or she will decline the representation or is required to turn down the representation, stopping the inquiry completely will put the lawyer in the best position to avoid imputing the conflict to the whole firm.

Typing

You just figured out that the materials you got from opposing counsel include documents that may have been inadvertently included.  What should you do? Model Rule 4.4(b) provides a clear answer—promptly notify the sender. But what happens when you receive, through non-party discovery, a DropBox link that supplies you with live access to opposing party’s corporate file directory? A court in New York was recently presented with this novel question.

How did this happen?

Defendants subpoenaed documents from Plaintiff’s financial consultant. The production contained emails that contained links to a DropBox site. Plaintiff used the site in lieu of an in-house server to store its electronic files.  For about a week, Defendants’ counsel and the client used the links to download and review the Plaintiff’s unproduced documents before finally alerting Plaintiff’s counsel and warning of their intent to use the accessed materials.

Thinking beyond the Rule 

Similar to the Model Rules, New York’s Rule 4.4(b) requires lawyers to promptly notify the sender upon receiving documents related to the representation of the lawyer’s client when the lawyer knows or reasonably should know were inadvertently sent. In addressing the obligations, the Commercial Division referenced both Cmt.[2] and Cmt.[3] in its Decision. The court concluded that the Rule does not support the argument that Defendant’s counsel was allowed to download and examine Plaintiff’s electronically stored corporate files prior to notifying Plaintiff’s counsel.

Cmt.[2] in relevant part provides that “Although this Rule does not require that the receiving lawyer refrain from reading or continuing to read the document, a lawyer who reads or continues to read a document that contains privileged or confidential information may be subject to court-imposed sanctions, including disqualification and evidence-preclusion. Whether the lawyer or law firm is required to take additional steps, such as returning the document or other writing, is a matter of law beyond the scope of these Rules, as is the question whether the privileged status of a document or other writing has been waived.”

Cmt.[3] in relevant part provides that “Nevertheless, substantive law or procedural rules may require a lawyer to refrain from reading an inadvertently sent document or other writing, or to return the document or other writing to the sender or permanently delete electronically stored information, or both. Accordingly, in deciding whether to retain or use an inadvertently received document or other writing, some lawyers may take into account whether the attorney-client privilege would attach. But if applicable law or rules do not address the situation, decisions to refrain from reading such a document or other writing or instead to return them, or both, are matters of professional judgment reserved to the lawyer.”

A distinction should be drawn here

The court found that the difference between the issue being one of whether the review of and use of was permissible under the more typical situation under Rule 4.4(b) where one received inadvertently received individual privileged documents in discovery is that the corporate file directory was not actually produced. Instead, the corporate directory was secretly and continually accessed by Defendant and their counsel under circumstances that should have raised red flags and that were outside of the scope of discovery. Further, while Plaintiff should have taken greater precautions to secure its DropBox files, that still did not authorize Defendants to rummage through these electronically stored files without authorization. The Court found that the Defendant should have notified opposing counsel and/or requested direction from the court as to what use could be made from the documents accessed through the DropBox.   

The Decision

The court found that the cases provided did not suggest “that when an e-mail contains a link to an entire cloud-based file directory to facilitate the recipient’s provision of services (i.e., not as a link to specific documents referenced in the email), that automatically means that the producing party’s entire cloud-based file directory becomes fair game for discovery.”

Accordingly, the Defendants were ordered to return all documents from the DropBox that were not independently produced during discovery, destroy all notes and derivative work product flowing from such documents, and for Defendants (counsel and client) to pay plaintiff for the cost of bringing the motion for protective order and for attorneys’ fees—to the tune of $155,977.  The Decision has been appealed. Upon motion, the court denied Defendant’s challenge to the attorney fees award, but stayed the enforcement of the sanctions award pending appeal due to the novelty of the issue. 

Takeaway

While your jurisdiction’s ethics rules may or may not explicitly prohibit lawyers from reviewing inadvertently sent documents or links to document, do not just assume that you are allowed to keep reviewing the materials or that you can use the materials in any meaningful way, especially without researching the applicable substantive rules. While you may at first think you got a lucky break by seeing the materials, what you do afterward may cost your client and firm a substantial amount of money and harm.

Caution text and sign.

Like it or not, artificial intelligence is not going away and it’s evolving—quickly.  While AI talk has been brewing for quite some time, many of us assumed AI’s direct effect on our business was still years off.  But over the last year the pace of development and use has accelerated exponentially and it is now obvious that lawyers must address numerous AI issues head on. Technological and societal changes often outpace the law, but lawyers remain ethically bound to stay abreast of changes in the law, including relevant technology. So, where do lawyers turn for ethical guidance when, as one authority has noted, “even for those who create generative AI products, there is a lack of clarity as to how it works?”

Recent guidance and resources

California’s Practical Guidance Executive Summary is one great resource. The Florida Bar Board of Governors’ Review Committee on Professional Ethics has issued Proposed Advisory Opinion 24-1. Also leading the charge, Michigan issued an ethics opinion, which confirms that judges have an ethical duty to understand artificial intelligence. Ethics counsel for the North Carolina State Bar also lists several ethics rules lawyers should be considering when using AI.

The American Bar Association recently created its Task Force on Law and Artificial Intelligence.  The New York State Bar Association created their own AI Task Force as well. Stay tuned for additional guidance from local and state bar associations.

Watch out for these ethics rules   

The Rules of Professional Conduct are written broadly enough to cover AI, even if the words “artificial intelligence” cannot be found in the rules or comments. While AI issues are easily found in several other rules, here are the most rules most often implicated:

  • 1.1 (Competence) Lawyers have a duty to provide competent representation. Do not overly rely on AI. Before using an AI tool, lawyers should have a reasonable degree of understanding.
  • 1.4 (Communication) Lawyers have an ethical duty to keep their clients reasonably informed, which will vary based on the circumstances and may include the use of AI.
  • 1.5 (Fees) Lawyers should not overcharge clients for time saved by using AI. Lawyers should be clear about who is paying for the costs associated with AI.
  • 1.6 (Confidentiality)  Lawyers must protect the confidential information of their client, including from inadvertent disclosure. This may necessitate working with IT and asking for client consent in advance.
  • 5.1 and 5.3 (Supervision) Lawyers must ensure proper training, supervision, and adherence to policies.  
  • 8.4 (Misconduct) AI systems may be trained on biased information. Lawyers must be watchful in identifying and addressing biases in AI tools to make certain they provide fair and unbiased legal services to their clients. Lawyers should continue learning about AI biases and their impact on the legal practice.

A few other practical tips

  • Start looking for changes in local rules and standing orders governing use of AI in the courtroom. For instance, the United States Court of Appeals for the Fifth Circuit has proposed to amend its rule to require lawyers and pro se parties alike to certify that no generative AI program was used to draft the document presented for filing, but if generative AI was used, that a human has reviewed the material for accuracy and approved it as well.
  • Always review documents and pleadings for accuracy before submitting to your client or the court!
  • AI for legal purposes is not cheap.  It can be priced many different ways that cost may increase over time.  So it is now the time to consider how AI will factor into the firm budget and pricing structures.  That also means that prudent lawyers will discuss he use of AI with their clients, including an understanding as to who is footing the bill.
  • Pay close attention to detect AI provisions in agreements, engagement letter, and outside counsel guidelines.
  • Watch out for Unauthorized Practice of Law (UPL) issues by leaving tasks that require legal judgment solely up to AI.

If you have not heard of the Corporate Transparency Act (CTA), now is the time to become familiar. Millions of companies will be affected by its reporting requirements. With the effective date being right around the corner, all lawyers need to be thinking about the CTA. The CTA, which Congress passed as a component of the Anti-Money Laundering Act of 2020, was created to enable the government to prevent, detect, and combat money laundering, the funding of terrorism, and other prohibited activity by requiring certain companies to report their beneficial ownership information to the Financial Crimes Enforcement Network division of the U.S. Department of the Treasury (“FinCEN”). There are still some moving parts with the CTA. For example, the reporting form is not yet available. However, the ethical implications inherent in CTA compliance must be considered now.

Reporting Companies & Beneficial Ownership

Companies that are deemed to be “Reporting Companies” are required to report beneficial ownership to FinCEN. There are two types of ”Reporting Companies”: Domestic Reporting Companies and Foreign Reporting Companies. There are currently twenty-three (23) exceptions that exempt entities that would otherwise be considered a Reporting Company. Lawyers and law firms alike will want to consider whether they intend to assist clients in ascertaining whether the client is a “Reporting Company.”

A beneficial owner is an individual who either directly or indirectly: (1) exercises substantial control over the reporting company, or (2) owns or controls at least 25% of the reporting company’s ownership interests. However, the Reporting Company does not have to report an individual as a beneficial owner to FinCEN should that individual fall under one of the five qualifying exceptions to the beneficial owner definition. Similarly, lawyers will want to consider whether they intend to assist clients in determining whether an individual qualifies as a beneficial owner.

Of specific interest to attorneys – the CTA also requires up to two “company applicants” to be identified for entities formed after January 1, 2024.  This may implicate law firms if they are involved in the preparation or filing or formation documents for clients.  The lawyers or paralegals providing those services would have the corresponding obligation under the CTA to register with FinCEN as a company applicant for the client.

Timing & Penalties

If an entity was formed before January 1, 2024, its report must be filed with FinCEN no later than January 1, 2025. Entities that are formed on or after January 1, 2024, have only ninety calendar days to file the report. Companies only have thirty days to report a change. Lawyers who intend to prepare and file CTA reports, monitor for changes in “Beneficial Owners” that would trigger an update, or otherwise dive into CTA related representations, must bear in mind that the CTA includes stiff civil fines and criminal penalties, such as potential imprisonment.  Failure to comply not only impacts clients but can lead to potential penalties for firms and for individual lawyers involved in violating its provisions.

Abundance of Ethical Considerations

The effect of the CTA is far reaching. Many practitioners will feel the impact it has on their practice, but all practitioners should know about it. Lawyers have a duty to stay abreast of changes to the law and the reporting requirements found in the CTA certainly qualify as a change. For example, the CTA likely implicates the provisions you want to include in employment agreements, shareholder agreements, or LLC operating agreements to require beneficial owners to provide the information needed by the entity to comply with the CTA’s reporting requirements.  In addition, due diligence for loans, mergers and acquisitions will likely need to include CTA compliance.   

Lawyers also have a duty to keep their current clients reasonably informed about the representation. While there is no duty to notify former clients, lawyers will want to be diligent in notifying current clients about the CTA. Now is the time to determine if the client is former or current.

Don’t wait until January to determine your firm’s capacity or desire to handle CTA related engagements and how it impacts various practice areas. Limitations on the scope of your representation will need to be clearly communicated with your clients. You will want to evaluate any third-party referrals for CTA filings and corporate formation filings.  If your firm will play a role in corporate formations and filings, you will want to consider who will be responsible for such filings and how to track and update FinCEN registration for those individuals.  Finally, you will want to start thinking of changes in firm policy and procedure that align with your level of involvement in CTA related representations, and ensure all staff are properly trained and supervised to comply accordingly.