A federal district court refused last week to disqualify a Connecticut lawyer in a suit against Yale University, even though finding a violation of the state’s version of Model Rule 4.2, the “no contact rule.”  Although ruling that disqualification was too extreme a sanction, the court ordered the turnover of interview notes from the lawyer’s interview of the improperly-contacted witness.

The case underscores the need to tread carefully when contacting anyone associated with the opposing party.

Coin curator’s claim

Yale University has an acclaimed art museum, and the museum’s former Curator of Coins and Medals sued the university for age discrimination after it terminated his employment.

In addition to being the museum’s coin curator, the plaintiff was an adjunct professor in the classics department.  The plaintiff’s lawyer phoned another professor in the department and interviewed him for 34 minutes as a potential witness, according to the opinion.  The other professor had never been involved in a law suit, and later said that it did not occur to him during the interview that he needed to consult with Yale’s lawyers before answering questions from the opposing side.

Yale’s counsel only learned about the interview six weeks later, and promptly moved to disqualify the plaintiff’s counsel for violating the no-contact rule, asserting that the professor interviewed was a represented “party” who was off-limits under the rule, absent consent from Yale’s lawyers.

Conceded “technical” violation

Connecticut’s Rule 4.2 differs from the Model Rule by barring communication about the subject of the representation “with a party the lawyer knows to represented by another lawyer in the matter,” without the other lawyer’s consent.  (The Model Rule uses the word “person,” not “party.”)  This raises the question “Who is included as a party?” for purposes of the no-contact rule, especially when an organization is a party.

Under the Connecticut rule comments, a “party” includes an organization’s employees with managerial responsibility; employees whose act or omission in connection with the matter may be imputed to the organization; and employees whose statements may constitute an admission of the organization.  While not express in the opinion, the profession presumably fell into one of these categories — perhaps the third one.

The plaintiff’s lawyer conceded that his interview raised a “technical violation” of Rule 4.2, but that it had been inadvertent, because the professor and the plaintiff were close colleagues and the lawyer regarded the professor as a witness on behalf of the plaintiff.  The lawyer argued that he had no intent to gain an unfair advantage, and that Yale was not prejudiced.

Trial taint needed for DQ

The district court agreed that the circumstances did not merit disqualification, notwithstanding the conceded rule violation.

As in many other jurisdictions, there is authority in the Second Circuit that disqualification motions require balancing the need to uphold ethical standards with a party’s right to freely-chosen counsel.  Therefore, an ethical violation, standing alone, might not be sufficient to mandate disqualification.  Many opinions in the Second Circuit and elsewhere hold that the remedy of disqualification is justified only when a violation poses a significant risk of trial taint.

The court agreed that disqualification was not necessary here.

Here, the district court explained, the taint concern was that the plaintiff’s lawyer had obtained confidential information about Yale’s litigation strategy from the professor, who had previously discussed the case with Yale’s lawyers.  The plaintiff’s lawyer had proposed to provide the court with the notes from the interview for in camera review; but the best remedy, said the court, was to order the lawyer to turn the notes over to Yale’s counsel.

Take-home lessons

If you’re involved in representing a client in any matter (not just litigation), you need to take heed of the no-contact rule.  As this case highlights, the rule comes in different flavors depending on jurisdiction.  While the case here involved disqualification, there is also always the possibility of disciplinary action from violating an ethics rule.  Last, the court’s order to turn over the interview notes — clear attorney work product — to the opposing party is a surprising remedy.  But obviously, such an order can’t be ruled out in circumstances that would appear to call for it.

You probably know about the ethics rule that prohibits lawyers from trying to prospectively limit their liability to clients (or at least I hope you do!).  You can find it in your state’s version of Model Rule 1.8(h).

In an interesting twist, the Utah Ethics Advisory Committee recently opined that it’s permissible to include a provision in a retainer agreement requiring the client to indemnify the lawyer against third party claims against the lawyer arising from the client’s own “behavior or negligence.”

Narrow reading — but not alone

The Utah committee said that an indemnification provision against liability, loss and expense to the lawyer caused by third-party claims arising from client’s conduct “is not specifically prohibited by the rules.”

While Utah’s Rule 1.8(h) (identical to the Model Rule) bars prospective limitation of liability to a client for malpractice, the committee said, “it does not address the specific question of whether an attorney may include an indemnification provision for claims brought by third parties.”  Therefore, such a provision “is not prohibited on its face.”

Third-party indemnification provisions might be helpful in representations involving opinion letters — for example, providing a legal opinion on behalf of a lessor, which is to be given to and relied on by the lessee.  The lawyer would be benefitted by being able to seek indemnification from the lessor client against later claims by the lessee.

Few state ethics committees seem to have addressed the issue of third-party indemnification.  But the New York State Bar Association, in a 2013 opinion, has approved the concept in the context of opinion letters.  And a 2005 Oregon opinion advised that a lawyer asked to investigate a client’s employee could seek indemnity from the client against subsequent claims by the employee against the lawyer.

Insurance deductible?  Not so fast

What about using such an indemnification provision to hold a client responsible for the lawyer’s malpractice insurance deductible if the client unsuccessfully sues the lawyer for malpractice?

The Utah committee also considered that question, and concluded that Rule 1.8(h) doesn’t expressly bar that scenario, because “requiring payment for an unsuccessful malpractice claim, on its face, does not limit liability for malpractice.”  But trying to use indemnification to extract payment from the client for your malpractice insurance deductible may be misconduct under other rules, said the committee.  Rule 8.4(d) bars engaging in conduct that is “prejudicial to the administration of justice.”  An agreement that would make a client (or, by then, presumably a former client) responsible for paying your deductible after the client loses a malpractice case against you, could “have a chilling effect on a client’s pursuit of a malpractice claim and would thus be prejudicial to the administration of justice,” the committee advised.

Client communication

In any event, client communication is key.  To say the least, “the average client may not understand what indemnification is or in what specific circumstances it could be applied.”  Sophisticated clients might, but your best bet is clear explanation and understanding.  Model Rule 1.4(b) (“Communication”) requires you to “explain a matter to the extent reasonably necessary to permit the client to make informed decisions regarding the representation.”

That would seem to apply to the client’s decision to agree to indemnify you for anything.

*****

Note:  My co-editors and I are thrilled that the ABA Journal has again honored The Law for Lawyers Today as one of its “Web 100,” putting us among the 35 best legal blogs in the U.S.  Read the magazine’s announcement here.  We’re very proud, and we promise to keep bringing you fresh and lively news and comment from “Legal Ethics World.”  Thanks for reading!

Advising a “client” on how to move “grey money” into the U.S. has resulted in an agreed public censure in September for a New York attorney.  The lawyer (along with a number of others) was caught on video by Global Witness, a British-based public advocacy group.  But the sanction raises some questions regarding the imposition of discipline for conduct based on a pretextual situation.

The “client” was actually an undercover investigator who posed as a German lawyer and succeeded in getting appointments with 13 firms (out of 50 he tried) to supposedly get advice on behalf of an undisclosed African government official.  The question from the fake lawyer’s fake client:  how to launder funds described as “gray money” or “black money,” including by buying a New York brownstone, a jet and a yacht.

60 Minutes exposé

The video later aired on 60 Minutes.  (The section on the censured lawyer is here.)  We previously wrote about Global Watch’s sting operation, noting that the bad news was that some of the firms appeared to be on ethical thin ice in their interaction with the investigator (assuming the secret tapes accurately reflected their conduct).  The good news was that 37 firms didn’t schedule meetings with the fake prospect.  (And one lawyer who agreed to a meeting firmly rejected the bait, saying that “it ain’t for me,” and pointing out the Foreign Corrupt Practices Act.)

The American Bar Association’s response to the 60 Minutes segment is here.

Agreed censure for “counseling a client”?

Almost two years after the 60 Minutes piece, the censured New York lawyer entered into a discipline-by-consent agreement based on his meeting with the Global Witness actor.

Significantly, the main charge was counseling “a client to engage in conduct [the lawyer] knew was illegal or fraudulent,” in violation of New York’s version of Model Rule 1.2(d).

Of course, no lawyer should violate that rule.  But the brief opinion of the New York Appellate Division’s First Department reflects no acknowledgment that the person speaking to the censured lawyer was an actor, that there was no bona fide prospective “client,” and that there was never going to be any action taken in response to whatever comments the censured lawyer might have made.  Rather, the opinion speaks of the conduct occurring during “a meeting with a potential client.”

The lawyer’s misconduct was significantly mitigated, the First Department noted, by his cooperation, and the fact that it was a single “aberrational” incident in the lawyer’s 50-year career.  Those factors justified the relatively light sanction — a public censure.

Beware possible counseling traps

This case spotlights the knife-edge you sometimes walk in counseling clients — including that a disciplinary authority might view as sanctionable even conduct undertaken in response to a pretext where there is no actual client.

You can never “counsel a client to engage, or assist a client, in conduct that the lawyer knows is criminal or fraudulent.”  But under Rule 1.2(d) you can and should “discuss the legal consequences of any proposed course of conduct with a client.”

And, as Comment [9] explains, you are not precluded “from giving an honest opinion about the actual consequences that appear likely to result from a client’s conduct. … There is a critical distinction between presenting an analysis of legal aspects of questionable conduct and recommending the means by which a crime or fraud might be committed with impunity.”

The stakes now appear higher than ever in getting that distinction right.

Some answers are so obvious that you are left wondering why the question needed to be asked in the first place. Like “should a client pay a fee it agreed to in advance?”  Or, “should an attorney try his or her best to prevail?”

And now this:  the ABA’s Standing Committee on Ethics and Professional Responsibility issued an advisory opinion earlier this month instructing lawyers who suffer a data breach that exposes “material client information” to notify clients of the breach and take additional measures to protect the confidentiality of the compromised information.  Obvious?  We think so.

When we advise clients about their data protection obligations, we often suggest that compliance is strengthened when data security strategies align with an organization’s culture. For law firms, this should be relatively easy:  lawyers learn (we hope in law school) that they have an ethical obligation under Model Rule 1.6 to preserve the confidentiality of their clients’ information.  In today’s world, that surely means that the lawyer and her firm should take appropriate measures to protect the information from cyber thieves and other threats to the security and confidentiality of a client’s confidential information.

Likewise, our duty of communication (Model Rule 1.4), coupled with our confidentiality obligations, should make it a no-brainer that when a breach occurs, the affected clients should be told.

Nevertheless, in its Formal Opinion 483 the Committee devotes 16 pages to state and support this conclusion. (Interestingly, the Committee primarily relies on rules dealing with competent representation and technological aptitude, and only secondarily refers to the duty of confidentiality.)  The opinion does contain instruction that, while hardly novel or visionary, provides sound advice:

  • A firm should implement technological and other measures to detect intrusions into its data systems;
  • A firm should develop, implement and test a data incident response plan. As we’re fond of saying, the time for a pilot to learn how to deal with catastrophic engine failure is not when the plane is hurtling to the ground from 30,000 feet.
  • The firm should promptly take measures to restore the affected systems and close the breach. (Don’t just stand by and do nothing!)
  • The firm should, alone or in concert with skilled cyber forensics professionals, determine how and why the breach occurred. (Again, don’t just scratch your head.)
  • The firm should notify current clients whose data are compromised. Oddly, the Committee stated that it is “unwilling” to impose that obligation with regard to former clients.
  • The opinion provides guidance on what the client notification should contain. Importantly, the opinion reminds lawyers that they may have additional notification obligations under federal and state data breach notification laws that apply, yes, even to lawyers.

 

Opinion 483 provides useful, if obvious, direction on our duties in response to a data breach. It hardly lays out a truly comprehensive set of best practices for safeguarding client information, but it does point in the right direction.

Picture this:   You’re travelling across U.S. borders, heading home from a client meeting abroad.  However, unlike other trips, this time a Customs and Border Protection agent requests that you unlock and hand over for inspection your computer and cell phone — full of client confidential information.  You’ve been concerned about this issue, and so you’ve had your IT department encrypt all of the sensitive data on your devices.  Will that protect you client’s information from disclosure?

Ethics duties at the border

We wrote here last year about the ethics issues with border searches of e-devices, including the New York City Bar Association’s July 2017 opinion on how to deal with the duty of confidentiality in that scenario.

The NYCBA ethics committee advised that you may of course ethically comply with lawful government orders, but also that you should not comply “unless and until” you “undertake reasonable efforts to dissuade border agents from reviewing clients’ confidential information or to persuade them to limit the extent of their review.”

The concern about this issue was heightened by a sharp uptick in border searches of e-devices.  Customs officers searched an estimated 30,200 cellphones, computers and other electronic devices of people entering and leaving the U.S. last year — an almost 60 percent increase from 2016, according to Homeland Security Department data.

Most recently, in January 2018, the CBP revised Directive No. 3340-049, which includes procedures for searching information subject to attorney-client privilege.  Section 5.2 calls for segregating privileged material to ensure that it is “handled appropriately.”

Encryption – it’s no panacea

What about encrypting the client information on your e-device to make sure it stays confidential and won’t be revealed during a potential border search? That approach may be of limited use.

Section 5.3.3 of the revised CBP directive provides that if border officers can’t inspect your device “because it is protected by a passcode or encryption,” they may detain it and convey it (or a copy of its contents) to third parties who can supply “technical assistance.”

This is an indirect reference to the various U.S. intelligence agencies that are authorized pursuant to Section 2.6 of Executive Order 12333 to provide technical support and assistance to the CBP.  This aid may be derived from the National Security Agency, which leads the federal government in cryptology, or from the National Media Exploitation Center which consists of representatives from multiple intelligence agencies that are  responsible for decrypting, translating and analyzing documents and electronic devices in the federal government’s possession.

If CBP officers seek to decrypt and access the confidential information on your device, they likely have the authority and the technical resources, through federal intelligence agencies, to do so.

The magnitude of the risk, and what to do

Even though the 5,000 devices searched in February last year sounds like a lot, it’s only a tiny percentage according to CBP’s Office of Public Affairs. The agency says that in FY 2017, only about .007 percent of arriving international travelers screened and processed by CBP officers were required to submit to an e-device search.  That possibly points to a low risk for any one lawyer who might be returning from international travel.

But given the breadth of your ethics duty, and the limits on the ability of encryption to protect confidential client information on your devices, it would be a best practice to heed the advice that the NYCBA gave last year:

  • Depending on the circumstances, including the sensitivity of the information, you should consider not carrying any client confidential information across the border.
  • Rather than exposing your client’s information to disclosure in a search, you should securely back up client information and cross the border only with a blank “burner” phone or laptop.
  • And before coming back across the border, you should also turn off syncing of cloud services, sign out of web-based services, and/or uninstall applications providing local or remote access to confidential information.

Lawyers and their firms should consider incorporating these measures into their data security policies and practices. It’s what the times, and your ethics duties, would seem to call for.

In the aftermath of Hurricane Florence, which last month dumped up to 35 inches of rain on parts of the Carolinas, Virginia and Maryland, caused 48 deaths, and up to $22 billion in property damage, comes a timely new ABA opinion about our ethical obligations related to disasters.

The hurricane did not spare lawyers and law firms.  Ahead of the 1,000-year storm, Law360.com reported that firms in Florence’s projected path shuttered offices, activated contingency plans, and were glad if their firm systems and client data were stored in the cloud.  (Subscribers can access the story here.)  (And doing the profession proud, volunteer lawyers manned hot-lines to help storm victims get needed legal services.)

But what are our actual disaster-related ethics duties?

Communication, withdrawal, files and more

Disasters happen; that’s a fact of life.  The entire 13-page Opinion 482 (Sept. 19. 2018) repays reading.  Some highlights and nitty-gritty advice from the opinion:

  • Model Rule 1.4 requires us to communicate with our clients.  To be able to reach clients following a disaster, the opinion says, you should maintain or be able to quickly recreate, lists of current clients and their contact information.
  • You “must evaluate in advance storing files electronically” so that you can have access to those files via Internet or smart device, if such are available after a disaster.
  • If you can continue to provide services in the disaster area, you continue to have the same ethics duties as before; but in an emergency, you may be able to provide advice outside your area of expertise, as allowed by comment [3] to Rule 1.1 (“Competence”).  (We’ve previously written here about “emergency lawyering.”)
  • If you’re a litigator, check with courts and bar associations to see if deadlines have been extended across the board.
  • You “must take reasonable steps in the event of a disaster to ensure access to funds” you are holding in trust, the opinion advises.  Of course, your obligations will vary depending on the circumstances.  If you know of an impending disaster, you should determine if you should reasonably transfer client funds to an account that will be accessible; or even attempt to complete imminent transactions before the disaster hits, “if practicable.”
  • You may need to withdraw after a disaster, under Rule 1.16 (“Withdrawal”) and Rule 1.3 (“Diligence”), if a client needs immediate legal services that you will be unable to timely provide.
  • If client files are destroyed, your duty of communication will require you to notify current and former clients about the loss of client property with “intrinsic value.”  But there is no duty, the opinion concludes, to notify either current or former clients about the loss of documents that have no intrinsic value, for which there are electronic copies, or that serve no current useful purpose.
  • To prevent the loss of important records, “lawyers should maintain an electronic copy of important documents in an off-site location that is updated regularly.”

Disaster Prep 101:

The ABA has a committee devoted solely to the topic of disaster preparedness, and its website has helpful resources and tips on everything from getting insurance, to types and methods of information retention, and how you can assess damage and rebuild after a disaster strikes your practice.  The committee’s 44-page Surviving a Disaster — A Lawyer’s Guide (Aug. 2011) is also helpful.

And remember, calamitous disasters aren’t confined to weather, war, and the like.  A disastrous health event can leave your practice reeling, especially if you are a solo or in a small firm.  As we’ve pointed out before, one’s own death and disability are not pleasant to think about, but choosing a profession in which we owe fiduciary duties to others requires us to make contingency plans, like those laid out in my home bar association’s “What-If Preparedness” program.

In all events, thinking about the unthinkable is part of what we do.

You can’t interview potential expert witnesses and share confidential information with them solely to taint them with a conflict that would prevent the experts from working for the other side, the Texas State Bar Professional Ethics Committee recently said in Opinion No. 676.

“T’aint” ethical

Lots of litigation requires expert testimony in order to support plaintiff’s allegations or to defend against them.  But if a lawyer shares confidential information with a prospective expert, the expert may be disqualified from working for the other side.  (There is a helpful collection of the cases on this point at Freivogel on Conflicts.)

What if your case involves an area where there are only a few specialized experts who can testify?  How about “interviewing” all of them, and providing confidential information about the case, even though you don’t have any actual intention of hiring them?  Can you try to keep the qualified experts out of the grasp of the other side with that tactic?

Not surprisingly, the Texas ethics committee said “No.”

The Lone Star State’s version of Model Rule 4.1(a) prevents using means to represent a client that have no substantial purpose other than to burden a third person, or using methods of obtaining evidence that violate the rights of a third person.  That prohibition applies to prevent a lawyer from hiring an expert, or communicating confidential information to a potential expert, “when the lawyer has no substantial purpose other than to … imped[e] the opposing party’s access to a limited pool of potential experts,” the committee said.

That “substantial purpose” is clearly a question of fact, said the committee, and it’s not necessarily improper to retain an expert and still interview additional ones, as long as the lawyer is actually considering using them.

Using misrepresentations and deceit to disqualify a prospective expert could also violate Texas’ version of Model Rule 8.4(c), barring dishonesty, fraud, deceit or misrepresentation, the committee added.

Can a client DQ a lawyer by “taint shopping”?

The principle that the Texas ethics committee applied is echoed, as to lawyers and clients, in comment [2] to Model Rule 1.18.  If a prospective client consults us about the possibility of hiring us, we take on confidentiality duties to that person or entity, even if we are not ultimately hired.

But especially in smaller legal markets, there can be an abusive tactic where a person “interviews” several lawyers in a specialty area — not with the goal of hiring one of them, but to preclude the other side from doing so.  That’s commonly known as “taint shopping,” and comment [2] makes clear that “a person who communicates with a lawyer for the purpose of disqualifying the lawyer is not a ‘prospective client.'”  Such a pretextual “shopper” is not owed any duties under Rule 1.18.

Making big news this summer was the shut-down of Avvo Legal Services just a few months after it was acquired by Internet Brands.  (A couple of the many reports are here and here.)  Some speculated that the new corporate owner had no stomach to continue to fight for that portion of Avvo’s business model in the face of numerous state ethics opinions that found a wide variety of ethics problems with it.

The flat-fee service that Avvo offered through a network of lawyers required the lawyer to rebate a “marketing” fee to Avvo out of the fee that the lawyer received.  As we’ve pointed out, that raised issues of fee-splitting with non-lawyers; but other aspects of the model also troubled ethics boards.

Does “processing fee” = fee-splitting?

On another front now drawing notice, another on-line legal services provider is contesting charges in California district court that its own business plan violates false advertising and unfair competition statutes, including recently-filed allegations that it supports its business with spurious attorney ratings.

The suit is significant for highlighting that despite the demise of Avvo Legal Services, the ethics issues remain in light of the other players that continue to occupy the same space in the marketplace, and that litigation, not just regulatory action, sometimes results.

The plaintiff in the California federal case is LegalForce RAPC Worldwide, an IP firm.  In an amended complaint filed earlier this month, LegalForce alleges that it competes with defendant UpCounsel Inc. to “provide individuals and small businesses with affordable access to attorneys,” by using technology to match clients with lawyers specialized in corporate, patent and trademark law.

The allegations, which withstood an earlier motion to dismiss, include that UpCounsel’s model features a “processing fee” markup that constitutes impermissible fee-sharing with non-lawyers.

The amended complaint says that UpCounsel tries to attract consumers by promising to provide lawyers in the “Top 5%” of specialized IP and corporate practice niches in cities across the U.S, and that the representation constitutes false advertising, as there is no ranking system that could provide a basis for the claim.

“Reviews” outnumber lawyers, says complaint

In addition, according to the allegations of the amended complaint, UpCounsel falsely advertised superior consumer ratings for the lawyers in its network.  As an example, the plaintiff pointed to the rating given to IP lawyers in Cotati, California:

“Cotati Intellectual Property Lawyers, 5.0 ***** Based on 5450 reviews.”  “It is impossible for Cotati Intellectual Property Lawyers to have 5,450 reviews on UpCounsel,” says the amended complaint, because “Cotati is a small town … with a population of 7,455. There are only 21 attorneys in the city of Cotati licensed to practice law in California, and none of these 21 attorneys are listed on UpCounsel.”

LegalForce alleges that this same pattern of “perfect or near-perfect review scores” based on thousands of purported reviews is duplicated as to lawyers advertised by UpCounsel in other cities, such as Tallahassee and Savannah.

More to come…

The ethics issues regarding on-line legal service providers have not gone away just because Avvo has withdrawn from that market.  As Prof. Alberto Bernabe, a legal ethics professor at John Marshall Law School in Chicago, has pointed out, “Where Avvo left off, someone else will pick up…,” including, most recently, “Text a Lawyer,” an on-line platform where prospective clients can ask lawyers questions via text.

Regulators and litigation parties will surely continue to confront the ethical issues inherent in these platforms, although the ABA’s recently-passed revamp of some of the legal marketing rules in the Model Rules of Professional Conduct fails to address on-line referral providers.

The New York City Bar Association recently found that common forms of third-party litigation funding for law firms violate New York’s Rule 5.4(a), which like the analogous Model Rule, bars fee-splitting with non-lawyers.

In its Opinion 2018-5, the NYCBA’s Professional Ethics Committee advised that “a lawyer may not enter into a financing agreement with a litigation funder, a non-lawyer, under which the lawyer’s future payments to the funder are contingent on the lawyer’s receipt of legal fees or on the amount of legal fees received in one or more specific matters.”  (Left untouched by the opinion are agreements between funders and clients, which do not implicate the fee-splitting issue.)

While ethics opinions are advisory, they can be cited by courts as persuasive authority; and an opinion from the influential NYCBA could help shape the conversation in an area that has been marked by controversy.  As we described earlier this year, two jurisdictions now require some disclosure when third-party funding is part of a case (Wisconsin by statute and the Northern District of California by rule), and the U.S. Chamber of Commerce has favored a change to the Rules of Civil Procedure to require such disclosure.  And as we have also described, some courts still view third-party funding as impermissible under the old doctrines of champerty and maintenance.  Yet, litigation funding is big business, with the U.S. market estimated at $5 billion annually, and growing.

Fee-splitting problem

Against this backdrop, the Committee considered two arrangements, both of which it found forbidden by the fee-splitting rule:  (1) where the funding to the firm is not secured other than by the lawyer’s fee, “so that it is implicit that the lawyer will pay the funder only if the lawyer receives legal fees in the matter;” and (2) where instead of a fixed amount or interest rate, the amount of the lawyer’s payment to the funder will depend on the amount of the lawyer’s fee.

Rule 5.4(a) (“Professional Independence of a Lawyer”) provides that “a lawyer or law firm shall not share legal fees with a non-lawyer.”  The purpose of the rule, as described in comment 1, is to protect independent legal judgment.  See also Roy Simon & Nicole Hyland, Simon’s New York Rules of Professional Conduct Annotated at 1420 (noting that the rule’s intention is to protect independent legal judgment by removing the incentive for non-lawyers to interfere or pressure lawyers to use improper measures to win cases).

The Committee noted the long-standing nature of the fee-splitting prohibition, and that it has been broadly interpreted to bar many different types of business arrangements in which lawyers agree to make payments to non-lawyers based on the lawyer’s receipt of legal fees, or on the amount of those fees.  A financing arrangement contingent on the receipt of fees or their amount is no different, and is impermissible, said the Committee, “regardless of how the arrangement is worded.”

“Rightly or wrongly,” the Committee said, Rule 5.4(a) “presupposes that when non-lawyers have a stake in legal fees from particular matters, they have an incentive or ability to improperly influence the lawyer.”

Lessons from the case law… and a call to the legislature?

The Committee acknowledged that New York courts have enforced litigation funding contracts against attempts to invalidate the agreements based on public policy grounds, but said that would be expected:  “[L]awyers who violate the Rules cannot ordinarily invoke their own transgressions to avoid contractual obligations.”

And as for the argument that the prohibition on fee-sharing is overbroad?  The Committee recognized that there is room for question there, including whether there might be adequate contractual or other means of preventing litigation funding arrangements from interfering with independent legal judgment.  But “that is a matter to be decided by the state judiciary,” said the Committee.

Funder reaction:  not warm

As described in Law360 (subscription required), the chief investment officer at one major funder, Burford Capital, called the NYCBA’s opinion “flatly wrong.”  The chief investment officer of another funder, Bentham IMF, said it was “going the wrong way.”

Perhaps these reactions are predictable; but the NYCBA’s opinion is only the most recent of a string of advisory opinions from other jurisdictions, such as Maine, Virginia, Nevada and Utah, that point in the same direction.

Stay tuned.  This is a topic with possible ramifications on how new firms are financed, as well as an ongoing debate over the role of the fee-splitting rule in actually protecting clients.

In the movie “Goodfellas,” Robert De Niro famously advises that the two greatest life lessons are “Never rat on your friends, and always keep your mouth shut.”  Those are good rules if you’re in a crime syndicate.  But as most lawyers know, our Rules of Professional Conduct can actually require us to “rat out” our fellow lawyers, under some limited circumstances.  Model Rule 8.3(a), adopted in some version in almost all jurisdictions, says:

“A lawyer who knows that another lawyer has committed a violation of the Rules of Professional Conduct that raises a substantial question as to that lawyer’s honesty, trustworthiness or fitness as a lawyer in other respects, shall inform the appropriate professional authority.”

Rule 8.3(b) applies the principle to judges.

But do you ever have to, in effect, rat yourself out — self-reporting your own ethical misconduct?

In almost every jurisdiction (my home state of Ohio is an exception), the answer is “No.”  The Model Rule, as incorporated into almost all the state professional conduct rules and the rules of the District of Columbia, deals expressly with reporting the ethical misconduct of “another lawyer.”  Under that language, there is no ethical duty to self-report your own violation of the professional conduct rules.  In some jurisdictions, though, self-reporting might be considered as part of the mitigating factors that can reduce the severity of professional discipline, as a recent Nevada opinion illustrates.

Stayed suspensions for trust fund misconduct

In the Nevada case, two lawyers got one-year fully-stayed suspensions after their employee improperly used more than $1 million in client trust account funds to pay firm business expenses.  As described in the state supreme court’s opinion, the two lawyers admitted they violated Nevada’s version of Model Rule 5.3, by failing to properly supervise a non-lawyer assistant, and they agreed to the sanction.  The lawyers were not aware of the non-lawyer’s actions.  And, strikingly, “Within fifteen minutes of discovering the non-lawyer assistant’s improper trust fund transfers,” they “self-reported to the State Bar.”  In accepting the proposed discipline, the supreme court noted the lawyers’ “full and free disclosure to disciplinary authority.”  It also helped that the lawyers immediately hired a forensic accountant for an audit, and began repaying the trust account shortfall out of earned fees.

… And you might have to self-report crimes and/or other discipline

The general rule excusing you from ratting on yourself is turned upside down in many places, however, when it comes to self-reporting discipline that is imposed on you by a court (for instance a federal court) or by a disciplinary authority in another jurisdiction.  In those cases, many jurisdictions require you to bring the matter to the attention of your home state’s disciplinary body.  It’s not the misconduct itself, but the fact of disciplinary action emanating from somewhere besides your home jurisdiction’s highest court that triggers this kind of self-reporting duty.

You also might have a duty to self-report if you are charged with or convicted of a crime.  If (heaven forbid) you find yourself in that situation, you should get advice about what your jurisdiction requires of you, including any mandatory time frames on self-reporting.

Carve-out for lawyer assistance programs

Last, a PSA:  If you are struggling with a mental health problem, or with substance abuse, be aware that the lawyer assistance program that every jurisdiction has is very likely exempted from reporting to disciplinary authorities misconduct that its staff lawyers learn of in the course of helping you.  Check your own state’s version of Model Rule 8.3(c), but those I’m aware of have some form of the Model Rule’s carve-out:   “This Rule does not require disclosure of information otherwise protected by Rule 1.6 or information gained by a lawyer or judge while participating in an approved lawyers assistance program.”

Here in Ohio, our lawyer assistance program advises that no disciplinary problem is ever made worse by seeking help.