An incredibly unhelpful ethics opinion from Colorado

Were you looking for something that is very well-written but entirely unhelpful to your needs as a lawyer?  Well, you’ve come to the right place today.

Wait, I now see how that paragraph could be misconstrued in an entirely unflattering way and as an inadvertent passing of judgment on this whole blog.  Obviously, I didn’t mean that.  After all, I said “well-written.”

Anyway, what I’m actually intending to refer to is Colorado Formal Ethics Opinion 134 which was enacted in January 2018 but which was brought to my attention by a loyal reader of this space.  It likely came into his path because of some treatment in the ABA/BNA Lawyers’ Manual which I admittedly have not read beyond their headline and lead sentence, which is as follows:

Advance Agreements on Joint Settlement OK, Colorado Bar Says

A lawyer who represents multiple clients in a case can prepare for them, with informed consent, an agreement stating that a majority vote controls for settlement offers, a recent Colorado bar ethics opinion says.

That is one way to spin the Colorado opinion and draw peoples attention, but studying the opinon itself reveals that the picture being painted is far too rosy because a more fair introduction to the opinion would be:

Advance Agreements on Joint Settlement OK to Memorialize But Lawyer Can’t Enforce It in the Future, Colorado Bar Says

A lawyer who represents multiple clients in a case can prepare for them, with informed consent, an agreement stating that a majority vote controls for settlement offers, a recent Colorado bar ethics opinion says, but what would be the point?  The same opinion explains that if any of the clients later rejects the settlement and refuses to abide by the majority vote then the lawyer doesn’t have settlement authority and can’t continue to represent everybody.

I’m not kidding.  That is the TL/DR version of Colorado Formal Opinion 134.  Don’t believe me, go read it for yourself.

Now, Colorado may feel like it has given a helpful opinion because it distinguishes its opinion from some others by saying it is perfectly ethical for a lawyer to participate in preparing an agreement along these lines for jointly represented clients and explaining how Rule 1.8(g) is not triggered until some future point when a settlement is on the table for consideration.  But . . . geez.  From a practical perspective, it’s an exercise in navel-gazing because of this paragraph of the opinion:

If multiple clients agree in advance on a majority-decision rule for how they will respond to an aggregate settlement proposal, but one client in the future refuses to follow the majority’s decision, the dissenting client might be in breach of that agreement.  The other clients might have claims against the dissenting client.  This circumstance creates an unwaivable conflict for their joint lawyer due to the dispute between in the dissenting client and the other clients.  The lawyer may not take sides in the dispute, and may not seek to enforce the agreement againts the dissenting client, on behalf of the majority clients, by compelling the dissenting client to settle.  The lawyer might need to withdraw from the joint representation entirely.

Because of that, it seems hard to understand how any good Colorado lawyer armed with this opinion could ever respond to an inquiry by joint clients about putting together a majority-rule agreement with any advice other than:

Yeah, you don’t want me to go through all of that.  If anyone changes their mind later, I can’t enforce it and you probably just end up in additional litigation maybe over breaching the contract and you all just end up having to hire more and different lawyers.  So, let’s just wait until we have something in front of us to think about on settlement some day and then work it out if and when that day ever comes around.

 

 

 

My 300th Post. The shady “Stormy” story gets shadier.

If you had told me back in March 2015 when I started this blog that my 300th blogpost would struggle with trying to decide which angle of a statement to The New York Times made by a personal attorney for the 45th President of the United States about paying $130,000 to a porn star to apparently buy silence regarding that porn star’s past affair with the President at a time that was within months of the President’s third wife giving birth to his fifth child would be worst legal ethics bit, then I … well, I don’t even know what I would have begun to have thought, much less said.

But this is the reality of the world in which we now live.  So, here we are.  Let’s get this over with.

You’ve certainly likely already reports from yesterday either The New York Times article itself, or the thoughts of other folks online about the story which are too numerous to try to link to at this point.  The very short version is Michael Cohen, a New York lawyer who has been the private, personal attorney of the current occupant of The White House and who was, in the recent past, something of an in-house attorney for the 45th President’s family corporate organization has now provided a statement to one of the largest newspapers in the nation — that he says echoes substantively what he has told the Federal Election Commission — that he personally paid $130,000 to a woman, who goes professionally by the name, Stormy Daniels, and was not reimbursed directly or indirectly by the current President’s campaign or his family corporate organization.

I am a lawyer – I may have mentioned that on one or more occasions.  For anyone who might be reading this and wondering what it is like to be a lawyer, Mr. Cohen’s experience as he describes it is definitely not what lawyers do.  The best of our profession often times think of ourselves as, and even describe ourselves, as problem solvers.  But we traditionally are not allowed to solve problems for people simply by throwing our own money at the problem.  That aspect is just one of the ways in which this incident, and how the statement describes it, raises a whole host of immediate, problematic ethics issues for discussion.

Those include:

(a) If Cohen’s statement about the transaction is true, it might have been a violation of New York’s ethics rules on business transactions with clients or not providing financial assistance to a client regarding litigation or certainly otherwise a scenario that creates a serious, personal interest conflict of interest for the attorney.  (b) The making of the statement itself is not something a lawyer should likely be doing unless he’s been instructed to by the client because it just made things worse for the lawyer’s client because the porn star who had been worried she was still under an NDA now believes she is free to speak out about the affair and actually confirm other media reports rather than being coy about the whole situation. (c) It also is quite likely that Cohen’s version of the events is probably not 100% the truth, key details have been omitted, and it could very well, if nothing else, be a violation of a rule such as RPC 8.4(c).

Now, in trying to discuss such topics at length, I could repeat what other fine lawyers on the ground in New York and who are well versed in ethics have now already said in a story in The ABA Journal online about the likely violation of New York RPC 1.8(e), but I won’t.  You can read what they say at this link instead.  (Plus, I quite recently wrote about a somewhat similar kind of situation involving a much less crazy overall scenario and so it seems like it isn’t necessary to write more about the “doing a financial favor for a client” piece of the puzzle.)

I could also spend some time complaining about the fact that much of what I first read online posted by journalists about Cohen’s statement was how everybody kept claiming that Cohen had said he’d paid the money to Ms. Daniels “out of his own pocket,” which he never actually said apparently.  But, instead you can go read a good take on that aspect of the situation here.

I also could focus on the fact that, without respect to the shadiness of the whole transaction and how problematic that is for a lawyer to be near, the decision to give a statement to The New York Times appears likely to damage his client as Ms. Daniels is now signaling through the media that she can tell all because Cohen’s public statement confirming the payment is a breach of the NDA she signed.  But, there is already a better article about that development you can read here.

Instead, I want to point out my own opinion, given the way a certain someone is known to operate, about how this likely went down:

Cohen is likely telling the truth about paying with funds of his for which no one reimbursed him, but omitting the most salient detail.  He probably wasn’t “reimbursed” by anyone after making the payment because he was probably provided those funds, pretty much immediately in advance of the transaction, as some sort of bonus or even a “gift” with the tacit understanding about what he was expected to do with those funds — purchase Ms. Daniels’s silence.

So, under that theory, if Cohen’s conduct is unethical, then it is probably because it either is, or might very well be akin to, money laundering or money laundering in reverse. . . if that’s a thing.

Idaho why lawyers are so often tripped up on this.

I’m writing from Boise where tomorrow I’m delighted to have the chance to speak on legal ethics for the Idaho Prosecuting Attorneys Association.  (I’m also delighted that the weather is unseasonably warm at the moment.)  Last year I had the chance to do a similar presentation for the Tennessee District Attorneys General Conference.  Prosecuting attorneys throughout the country are finding themselves more frequently in the cross-hairs of disciplinary proceedings.

But today’s post isn’t really about that, but it does help explain the selection process.  As I find myself drawn to write about a recent instance of discipline imposed on a private attorney in Idaho that involves behavior that I’ve counseled lawyers about so I know it happens to be relevant beyond just the Idaho Bar.

The case involves the issuance of a suspension order against Attorney Beckett issued at the end of January 2018, but for which the 28-day active suspension period will run during the month of February.  You can read the press release put out by Idaho State Bar Counsel here.

The underlying case was a personal injury lawsuit, and Beckett was able to get the case successfully settled for his client.  His client, though, wanted immediate access to parts of what would be forthcoming from the settlement.  Perhaps simply motivated by an effort to be accommodating, or more likely because of a failure to properly communicate with the client and manage expectations regarding how long such things take, Beckett agreed to provide two advances of the forthcoming settlement funds to the client out of his own money and from money belonging to a separate company Beckett owned.

As the press release explains, he didn’t do that in a way that was at all proper because she didn’t manage to keep the funds properly segregated to avoid commingling them with money in other accounts and also didn’t communicate to the client the available alternatives.  Despite the fact that, as the press release makes clear, Beckett didn’t charge any interest or fees for the transaction and that no other clients were harmed in any way, the conduct violated Rule 1.15 and 1.4 of the Idaho Rules and merited a 60-day suspension, with 28 days of active suspension, and a six-month probationary period.

What is interesting is that the press release makes no mention of Rule 1.8(a) governing business transactions with clients.  When I have had to counsel lawyers about inquiries from clients along these lines, that is the Rule most pertinent to the discussion for a path to actually doing what the client wants if the lawyer is insistent on providing an accommodation.

Idaho, like Tennessee, has a Rule 1.8(a) patterned after the ABA Model Rule.  Tennessee’s, for example, provides that a business transaction with a client – which is what a loan like what Beckett did would be — cannot happen unless

(1) the transaction and terms on which the lawyer acquires the interest are fair and reasonable to the client and are fully disclosed and transmitted in writing in a manner that can be reasonably understood by the client;

(2) the client is advised in writing of the desirability of seeking and is given a reasonable opportunity to seek the advice of independent legal counsel on the transaction; and

(3) the client gives informed consent, in a writing signed by the client, to the essential terms of the transaction and the lawyer’s role in the transaction, including whether the lawyer is representing the client in the transaction.

Now, working through that rule is not 100% of the battle altogether, because the risk still exists that a bar counsel would argue that other provisions in the same rule, RPC 1.8(e) and (i) in Tennessee for example, would still work to prohibit such a business transaction altogether if the case has been settled but no order of dismissal ending the litigation has been entered.

Those provisions provide:

(e) A lawyer shall not provide financial assistance to a client in connection with pending or contemplated litigation, except that:

(1) a lawyer may advance court costs and expenses of litigation, the repayment of which may be contingent on the outcome of the matter; and

(2) a lawyer representing an indigent client may pay court costs and expenses of litigation on behalf of the client.

and

(i) A lawyer shall not acquire a proprietary interest in the cause of action or subject matter of litigation the lawyer is conducting for a client, except that the lawyer may:

(1) acquire a lien authorized by law to secure the lawyer’s fee or expenses; and

(2) contract with a client for a reasonable contingent fee in a civil case.

RPC 1.8(i) has always struck me as a prohibition that can be drafted around in the transaction documents to sever any connection between the litigation and the loan, but (e) is trickier if the litigation, despite being settled is technically still “pending” at the time of the client’s inquiry.

An ethics opinion from the Coinhusker state

Answering the question that was undoubtedly on the minds of every lawyer practicing in that state, the Lawyer’s Advisory Committee of the Nebraska Supreme Court issued Ethics Advisory Opinion for Lawyers No. 17-03 making clear that, yes, lawyers can accept payment from clients in the form of Bitcoin or other similar digital currencies.

I don’t exactly know what to make of this opinion.  I’m not normally a list maker, but here’s a quick pros and cons lists to label my feelings.

Pros:

  1.  It offers a pretty good explanation of what Bitcoin is and how it works.
  2. If you are a Nebraska lawyer interested in the answer to the question it definitely gives you a definitive answer.
  3. It is well written.
  4. It demonstrates how adaptable ethics rules for lawyers are that they don’t have to be changed simply because new technology arises that didn’t exist when the rule was first created.  (But see con #3.)

Cons:

  1.  I don’t know who this opinion is really for in terms of usefulness.
  2. Nebraska? Surely that wasn’t the state with a pressing need to be the first to issue an opinion on this topic.
  3. It incorrectly treats using property to pay an attorney fee differently than when the property involved isn’t Bitcoin.
  4. It entirely overlooks the most important aspect of lack of confidentiality in terms of impact on such a payment arrangement.

Since expanding on the “cons” is always a bit more fun as a writer, let me do that.

Who is the opinion for?  Why would any lawyer today be willing to accept Bitcoin as a form of payment?  Most answers to that question that I can come up with require the lawyer to be something of a believer in its use as a financial system.  If the lawyer in question happens to practice in Nebraska, that seems a pretty solid bet.  If that is true, then to some extent the opinion gives with one hand but takes away with the other by saying that a lawyer can accept payment in Bitcoin but then has to immediately convert the payment back into dollars.  If a lawyer is willing to put his or her faith into the Bitcoin currency system (and obviously the client must already have faith in that system), then why require them to immediately convert that client’s payment to dollars?

The answer to that – according to the opinion — is that Bitcoin is classified as property under the law and not as a currency and has the potential for rapid fluctuation in value.  But… shifting to the third con on the list… why should accepting this kind of property with fluctuating value as payment for services be treated so differently than other forms of property?

While we likely wouldn’t need a regulatory body to issue an ethics opinion on whether lawyers can accept payment in the form of gold or silver (of course they can), would we be comfortable with such an opinion declaring the lawyer has to immediately sell that property to turn it into cash?  If gold and silver seem too unwieldy for the thought exercise, then how about shares of stock or stock options.  (Let’s assume those would be otherwise done in compliance with restrictions such as Model Rule 1.8(a) and (i).)  Stocks can certainly fluctuate significantly in value and always have the potential to do so very rapidly.

Would you agree with an opinion that says a lawyer would have to immediately trade shares of stock for dollars because of the risk of rapid increase in value or decrease in value?  Why can’t two or more grown-ups negotiate an agreement for compensation in the form of property with a fluctuating value just because one or more of them is an attorney?  Why wouldn’t the lawyer taking on the risk of decrease in value play a role in evaluating reasonableness of the fee?

And, finally, the opinion talks a bit about confidentiality issues involved in payment via Bitcoin from a third party rather than the client, but completely overlooks the fundamental risk to client confidentiality created by accepting payment in Bitcoin from a client.  Such a transaction — necessarily because of the very architecture upon which Bitcoin is founded as the opinion does explain — is an open transaction for which confidentiality cannot be reasonably expected much less guaranteed.

Somehow the opinion  doesn’t manage to advise lawyers to make sure the client understands that – unlike cash or checks or wire transfers or even credit card payments — the fact of the client’s payment of money to a particular lawyer and all of the implications that payment entails is available to anyone sophisticated enough to understand how to delve into the Bitcoin ledger system.

So, in the end, sure the opinion says that a lawyer can accept payment in Bitcoin, but under this framework why would anyone ever do so?

Coming to praise rather than bury – Colorado Formal Op. 129

It is almost three months old now, but I wanted to right a word or two about a really well-constructed ethics opinion issued in Colorado, not just because it is an opinion that deserves to be read, but also because it raises a not-quite-academic question about the phenomenon of captive law firms.

The opinion put out by the Colorado Bar Association Ethics Committee, Colorado Bar Formal Op. 129, is titled “Ethical Duties of Lawyer Paid by One Other Than the Client.”

Because questions of insurance defense representation raising similar issues were previously addressed by the Committee in Formal Opinion 91, this new opinion focuses on “ethical questions that can arise in third-party payer situations that do not involve insurance as a source of payment.”  (My not-quite-academic question is importantly a variation on that theme and the different approach often allowed for the tripartite relationship….)

The opinion helpfully catalogs quite a few such scenarios, like

  • friend or family paying for someone’s defense against criminal charges
  • parents paying for representation of children
  • corporations paying for attorney fees of an employee or officer
  • contractual indemnitor paying legal fees of an indemnitee

Those last two are ones, I suspect, that lawyers don’t think about as often in terms of making sure they know what is necessary for compliance with all of the pertinent ethics rules in their jurisdictions, which if the jurisdiction tracks the approaches under the ABA Model Rules as Colorado mostly does are RPCs 1.0(e), RPC 1.6, 1.7, 1.8(f), and 5.4(c).

The opinion does a good job at addressing in detail the various ethical questions, particularly on the dynamics that can arise where, for example, the person that will be paying the freight for the representation also happens to be a client of the attorney in some other matter and how compliance with just RPC 1.8(f) and 5.4(c) alone may not be enough because of the conflict issues raised by RPC 1.7.

The opinion merits a full read, but, if you only have 1 or 2 minutes to spare, then the best part is — II.  Practical Considerations – Discussions with the Third-Party Payer — which provides insightful, detailed, and potentially uncomfortable guidance about what really ought to happen in terms of communicating to the person who will be holding the checkbook who the client actually is and to whom the lawyer’s professional duties are owed, the limitations on the rights of the person making the payments, and the consequences of non-payment.

All of this then leads to my promised question, if these same principles are the ones that would have to be adhered to by a lawyer who represents insurance policyholders for an insurance company through a model in which the lawyer’s firm is a “captive” firm of that company, would there be any realistic way to comply?  Wouldn’t the process of obtaining the informed consent of that client always require having to make crystal-clear the significant financial interest that the lawyer has in keeping his/her only source of business happy?

I say that my question along these lines is not-quite-academic, because it is actually answered in Colorado by that earlier opinion, Formal Opinion 91 which was issued in 1993 but was updated with an addendum in 2013.  For readers in Colorado, I’m pretty sure the answer is that a lot of disclosure would have to be made, but that acquiring informed consent is feasible.

But, for readers not in Colorado, there may or may not be guidance quite as clear on the question.

An exception to “Fool me once, shame on you; fool me twice, shame on me” in Ohio

Lawyers who frequently represent other lawyers in disciplinary proceedings are well aware that the ethics rules in their state offer up an inherent 2-for-1 construction for bar prosecutors because states with versions of RPC 8.4(a) patterned on the Model Rules establish that a lawyer also violates RPC 8.4(a) by violating any other ethics rule.  That same rule also makes it an ethics violation for a lawyer to attempt to violate the ethics rules.

Unlike criminal law where people often find themselves in jail just for a criminal offense of attempting to commit a crime, situations where a lawyer ends up being disciplined merely for attempting to break a rule are rare.

The Supreme Court of Ohio issued a public reprimand against an Ohio lawyer for just such a thing yesterday.  The lawyer was ultimately hoodwinked out of $2,000 by a person posing as a personal injury client (including a fake limp and a bandaged arm).  Despite the fact that the swindler committed a crime and was ultimately sentenced to 8 months in prison, the fleeced lawyer ended up being disciplined as well.  Why?  Because the lawyer provided the $2,000 to the thief intending it to be an advance of living expenses.  The lawyer also entered into a contingent fee agreement to represent the person in pursuit of a lawsuit for the claimed injuries from an industrial accident.

RPC 1.8(e) in Ohio, as in Tennessee, is patterned upon the Model Rules, and prohibits lawyers from “provid[ing] financial assistance to a client in connection with pending or contemplated litigation,” unless the financial assistance involves advancing court costs or expenses of litigation.  Paragraph [10] of the Comment to that rule in Ohio, as is the case here in Tennessee, explains:

Lawyers may not subsidize lawsuits or administrative proceedings brought on behalf of their clients, including making or guaranteeing loans to their clients for living expenses, because to do so would encourage clients to pursue lawsuits that might not otherwise be brought and because such assistance gives lawyers too great a financial stake in the litigation.

So, because the lawyer thought he was dealing with a real client with a real case and provided money for a prohibited purpose — living expenses — it ultimately didn’t matter that the person was not really a client.  The lawyer’s own fastidiousness in terms of record keeping ultimately helped leave no doubt the reason for the financial transaction as the opinion explains that he had the person “sign a photocopy of seven $100 bills with the notation, ‘Temporary loan of $700.00 cash advanced 2/3/14…” and also gave the person a check for $1,300.

All of this came to light only after the lawyer, prompted by a telephone call from another person inquiring about hiring the lawyer in a personal injury matter made a report to local police.  (Presumably, the first guy put the word out that they had a live one in the lawyer and the caller was looking for the same deal.)

So, despite only getting fooled once, the Supreme Court of Ohio still publicly shamed the lawyer.

(P.S.  Readers should be proud of me for avoiding the temptation to load this post up with puns making use of the lawyer’s last name.)

Lawyering vicariously.

Lawyers in private practice work in a variety of settings ranging from solo practice to law firms with thousands of lawyers in scores of offices.  Lawyers also practice in a variety of business structures ranging from d/b/a arrangements on one end to Swiss Verein models.

My rough guess would be that the majority of United States private practice lawyers practice in connection with a business entity that provides (or at least is designed to provide) limited personal liability.  In Tennessee, we deviate from ABA Model Rule 1.8(h)’s approach to prospective limitations on liability for legal malpractice by prohibiting them entirely under RPC 1.8(h)(1).  But RPC 1.8(h)(1) does not mean that lawyers (or even a solo practitioner) cannot take advantage of Tennessee’s business organization laws to house their law practice in a professional limited liability company to manage financial risk.  This point is made clear in Tennessee in paragraph [14] of the Comment:

Nor does this paragraph limit the ability of lawyers to practice in the form of a limited-liability entity, where permitted by law, provided that each lawyer remains personally liable to the client for his or her own conduct and the firm complies with any conditions required by law, such as provisions requiring client notification or maintenance of adequate liability insurance.

Not all lawyers practice in such arrangements, however.  Some form traditional partnerships.  Others practice in an even looser fashion through things that are essentially just office-sharing arrangements but are often described, on letterhead or office signs or both, as “an association of attorneys.”  What I didn’t think lawyers would do would be to attempt to set up a version of both things (admittedly, my lack of awareness of this might just be my own ignorance of what is going on in the marketplace).

Three lawyers in middle Tennessee who may or may not be a law firm, appears to be an example of folks who have structured their law practice to do just that.  They hold themselves out to clients on letterhead as an association of attorneys while having also formed an LLC for the purpose of sharing office expenses.  Undertaking such an approach seems to offer the worst of both worlds, and an order denying summary judgment in a legal malpractice case — highlighted by the ABA/BNA Lawyers Manual on Professional Conduct — does not delve into whether the lawyers’ decision not to just become a law firm organized as a PLLC offers any tangible benefits.

What the order clearly does, however, is raise but leave unanswered, whether lawyers simply sharing office space can end up having vicarious liability for legal malpractice committed by one of their number.  The federal district court’s opinion is relatively short and can be read in full here.  Although it does not shut the door to the ability of these lawyers to demonstrate that vicarious liability should not be available, it does cite to existing Tennessee law regarding unincorporated associations to explain that Tennessee law permits such things to be sued as entities and for vicarious liability to arise among members for statutory violations and contract breaches.

In the end, I think with better constructed arguments, the firm in question ought to be able to muster stronger substantive arguments in opposition to vicarious liability than the one rejected by the court.  After all the concept of vicarious liability derives fundamentally from agency principles and one would hope the uninvolved lawyers could demonstrate lack of control or input into handling of the matter, as well as lack of interactions with those involved that would justify any apparent agency basis to justify vicarious liability.  But given the sole argument that the court indicates was teed up – we’re not a partnership and only partnerships can bring about vicarious liability —  the denial of summary judgment certainly appears to be the correct result.

What I’m still struggling to figure out is the reason one would go to the trouble of creating an LLC for office expense sharing, but attempt for that entity to have no relationship to your law practice and, instead, have your law practice be part of an “association of attorneys.”  I am certain that everyone involved is highly intelligent so there has to be a good reason to do so.  The only explanation I can conjure up is that it must be driven by a desire to avoid imputation of conflicts of interest among the lawyers sharing office space.

In Tennessee, our RPC 1.0(c) defines a “firm,” in part, as “a lawyer or lawyers in a law partnership, professional corporation, sole proprietorship or other association authorized to practice law.”  We dedicate a paragraph of the Comment accompanying this rule to giving guidance to lawyers about how the specific facts of their practice setting can impact whether or not they get treated as a “firm” for purposes of the ethics rules:

Whether two or more lawyers constitute a firm within paragraph (c) can depend on the specific facts.  For example, two practitioners who share office space and occasionally consult or assist each other ordinarily would not be regarded as constituting a firm.  However, if they present themselves to the public in a way that suggests that they are a firm or conduct themselves as a firm, they should be regarded as a firm for purposes of the Rules.  The terms of any formal agreement between associated lawyers are relevant in determining whether they are a firm, as is the fact that they have mutual access to information concerning the clients they serve….

Because RPC 1.10 imputes conflicts among lawyers in a firm, if these lawyers had organized themselves as a PLLC, then the conflicts of one would extend to all.  Typically, when handled correctly, a mere “association of attorneys” will not be treated as a firm for RPC 1.10 purposes.  If there’s another explanation out there, I’m missing it.  But, I’m also wondering how much added risk of still being treated as a firm comes from the information sharing necessary on the LLC side to work out expense arrangements.

A reminder (for you) about the importance of coverage issues and (for me) that there is a second side to most stories.

This is an update on the California lawyer who successfully compelled arbitration of a client’s salacious claims that he treated her as essentially a “sex slave” that I wrote about here.

While I talked about that case as an example of the growing power of arbitration provisions in the arena of attorney-client contracts, I did not mention two things that could have, should have, been mentioned.  One was shortsighted in a way I strive not to be — which is that I failed at the time to acknowledge explicitly that nothing had been proven and that there may well be a second side to the story that the accused lawyer had not yet told.  The second thing I failed to mention was just an ancillary point at the time — the opportunity to note that if the lawyer had lost on the arbitration argument it might have meant he would be looking at his carrier claiming not to have to provide coverage.

A lawsuit filed in federal court by the lawyer’s carrier seeking a declaratory judgment and rescission of an insurance policy gives me an opportunity to address both things.  Law360 had an initial story about this that prompted me to find and read the federal declaratory judgment suit brought by the carrier.  Unlike your run-of-the-mill declaratory judgment suit, it makes for an interesting read.

In addition to arguing — relatively undaunted by the fact that court hearing the underlying suit decided the allegations arose from the attorney-client relationship — that there should be no coverage for the claim because it does not involve the delivery of any legal services, the declaratory judgment action seeks rescission of the insurance policy on the basis that the lawyer failed to disclose known circumstances that amounted to a claim, or could have amounted to a claim, at the time the firm applied for the insurance policy.

It is the carrier’s pleading setting out those circumstances that the potential second side to this lawyer’s story comes to the fore.

The lawyer and his law firm put in their application with their insurance carrier for coverage on January 12, 2015, resulting in a claims-made policy period commencing on February 28, 2015.  The insurance company fills us in on the fact that they have now learned that a woman – who may or may not be Jane Doe, the insurance company will not say definitively — had filed a bar complaint against the lawyer and that, in connection with that, back on March 25, 2014 the lawyer pursued a court ordered domestic violence restraining order against the woman.  The declaratory judgment action suit details 8 aspects of what was in the lawyer’s request for the restraining order that appear to indicate knowledge of a potential claim by someone that should have been disclosed in the insurance application, but was not.

  • The lawyer had a “dating relationship” with a woman described as an “ex-girlfriend” but the lawyer had “broken it off three times.”
  • The lawyer alleged the woman “had previously attempted to extort me.”
  • The woman had filed a bar complaint on March 20, 2014 that indicated she had quit being lawyer’s client because she “no longer felt [lawyer] was negotiating the best deals for me.”
  • The woman had demanded $40,000 and an apology from the lawyer and, in an email to her before the bar complaint, the lawyer agreed to pay $30,000 and make a written apology.  But then the woman said lawyer must go on a trip with her for 10 days or she would “go to the bar on me.”
  • The lawyer says the woman then made demands for sex.  And the lawyer had his lawyer send a “cease and desist letter.”
  • The woman then sent mass e-mails to other lawyers at lawyer’s firm with “false and malicious statements intended to hurt me professionally and personally, and damage my relationship with my colleagues, and in the entertainment community generally.”
  • According to the lawyer, the woman also said “we would be at war.”

In light of those accusations, made by the lawyer himself in court filing seeking a restraining order, and the fact that he was seeking to have a court bar the woman from coming within 100 yards of him, his home, and his workplace, the insurance carrier makes the point that, regardless of whether this woman happens to be “Jane Doe” or a different woman that the lawyer failed to disclose the existence of these circumstances, and the carrier seeks rescission of the insurance contract on the basis of the failure to disclose.  Of course, if the two women are really just one woman, then the insurance company’s argument seems significantly stronger.  The “Jane Doe” lawsuit filed against the lawyer started on April 10, 2015,

Yet, if the two women are really just one woman, then the flavor of the underlying lawsuit changes a good bit.  If the woman who filed the bar complaint is the same woman who has made the “sex slave” claims, then there is now a plausible basis for significant questions about the suit.  This second side of the story would merit watching — for while there would still be underlying ethical concerns for the lawyer in terms of having admitted had a sexual relationship with a client, this alternate version of events makes him seem a lot more sympathetic than the picture painted in the lawsuit — but the second side of the story may not play out publicly any time soon because … wait for it … lawyers for the firm (as explained in the Law360 article) indicate a belief that there is an arbitration provision in the underlying insurance contract and that the coverage dispute should be arbitrated.

Some arbitrary thoughts related to attorney-client arbitration agreements

It is undeniable that the American judicial system long ago embraced arbitration as a valid form of alternative dispute resolution.  As a result, it is also hornbook law at this point that agreements to arbitrate disputes are to be enforced just like any other contract.  As a practical matter, there isn’t anything empirically wrong with the concept of enforcing agreements to arbitrate like any other contract as they are just that, contracts.

Nevertheless, you have to turn a blind eye to reality to think that arbitration provisions cannot be used by parties with superior bargaining power to impose a non-judicial forum upon parties with no real choice beyond a take-it-or-leave-it option as to the contract.  This is not always the case, of course.  But it is not credible to say it does not happen in some circumstances and, unless you read the terms and conditions for that extremely popular smartphone in your hands and refused to “agree”, then I’m pretty sure it has happened to you.

Given the fiduciary duties owed by attorneys to clients (and the fact that in some jurisdictions those duties can be extended even to the time of the events surrounding formation of the attorney-client contractual relationship itself), it should come as no surprise that there are many lawyers who react to the concept of mandatory arbitration provisions in engagement agreements with clients as being unsettling.  For some lawyers, they draw a line of distinction between their view of requiring clients to agree to arbitrate all fee disputes rather than all disputes, but given the interrelated dynamic of fee disputes and legal malpractice claims drawing a line in that regard can just result in multiplication of proceedings.

From time-to-time, I’ve addressed variations of the ethical issues associated with including agreements to arbitrate disputes in their engagement agreements and also tried to talk about the practical issues – such as the fact that some larger insurance carriers will discourage firms from doing so on the basis that arbitration might not actually be a better forum than litigation.  But usually the tips I’ve offered are largely common sense approaches that would look to authority on enforcing arbitration provisions in other situations where there is a real imbalance of power between the contracting parties.  And, of course, one bastion that seems never likely to fall is that an arbitration provision in an agreement with a client cannot serve to allow the lawyer to contract out of any ethical obligation and will not serve to prevent the client from pursuing a disciplinary complaint against the lawyer.  Thus, as just an example, RPC 1.8(h) in Tennessee and some other jurisdictions prohibits lawyers from making “an agreement prospectively limiting the lawyer’s liability to a client or prospective client for malpractice.”  So, if the arbitration forum being mandated would be one that actually limits remedies in some significant fashion, then what might otherwise be an enforceable provision could well end up unenforceable.

I think those tips are still solid ones, but July has brought at least two news reports of court rulings sending client disputes to arbitration that, at least, reiterate the point that growing acceptance of agreements to arbitrate disputes in the lawyer-client arena is a real thing.

The first is a July 2, 2015 opinion from the Third Circuit that ruled that arbitration was required with respect to the dispute of a client who was not even a party to the engagement agreement containing the arbitration provision.  There are at least some obvious extenuating circumstances to help justify the first result.  The client who had not signed an engagement agreement was claiming to be a joint client of the firm along with her husband who did sign and, the court concluded, in suing the firm for malpractice she was essentially trying to enforce the engagement agreement that also included the arbitration provision.  That, for the Third Circuit, justified holding her to the arbitration requirement as a matter of equitable estoppel.

The second is an extremely sordid matter in which a Hollywood actress who is being allowed to pursue her case under a pseudonym will be required to arbitrate her claims that a Beverly Hills lawyer essentially forced her to engage in sexual activity and perform sexual favors over a number of years.  There is really no extenuating circumstance I can manage to decipher to justify this result; the only justification appears to be the court’s conclusion that the claims being made against the lawyer arose out of the attorney-client relationship and since the arbitration provision said that the parties were agreeing to arbitrate all such claims it would have to include even these claims of sexual abuse.  Let me try to opt for understatement and say that outcome surprises me.  Let me also try to find the silver lining in the gray cloud and say that an arbitration forum — and its inherently private rather than public nature — should at least make it easierharder for the actress’s identity to be publicly-outed.  (Edited thanks to a wonderful reader catching that error on my part.)

Plaintiffs’ personal injury firm is to investment banker as . . . ?

A major issue that has dogged the legal profession in the past, and looks likely to dog it again in the near future (if you don’t happen to think it already does), is the debate over the restriction imposed under the ethics rules that prevents non-lawyers from having any ownership stake in a law firm.  In Tennessee, this prohibition is housed in two parts of RPC 5.4.  RPC 5.4(b) imposes a prohibition on partnerships with nonlawyers if any partnership activities involve the practice of law, and RPC 5.4(d) addresses restrictions on law practices taking other corporate forms.  “Third rail” analogies are overdone in general, but it would not be far from the mark to say that, at least for the American Bar Association, advocating in favor of changing the ethics rules to permit non-lawyer investment in law firms is the “third rail” of politics within that organization.  To some extent, this is not surprising as it is not a position that enjoys any sort of widespread popularity.  As but an example, in March 2015, the Tennessee Bar Association polled Tennessee lawyers and asked whether they supported or opposed allowing non-lawyer corporations to own and operate law firms and received a response that was 85% in opposition.

In 2015, D.C. is the only U.S. jurisdiction to permit such nonlawyer ownership to any extent.  There are multiple nations that now allow for such investment, including the U.K. and Australia, which has led even to public ownership in stock in publicly-traded law firms in those nations.  There are loud voices that insist that American lawyers should be empowered to obtain capital and investment from non-lawyer sources.

I do not think of myself as an advocate at this stage for the rules to shift from the current restrictions but I certainly acknowledge there is intellectual merit to arguments that, as long as certain other restrictions under the ethics rules remain, then it should not be dismissed out of hand.  For example, provided that the core concept that lawyers must not allow outside influences to interfere with their independent professional judgment set out in rules such as RPC 1.8(f) and RPC 5.4(c) survives, then the specter of a lawyer somehow being “beholden” to shareholders to “win at any cost” or to put the bottom line above client interests should not be viewed as any greater a concern or fear than when insurance companies retain and pay lawyers to represent insureds.  If those arrangements do not result in the eradication of the independent professional judgment of the lawyers hired in such an arrangement, then why should such eradication be presumed if a law firm were to be publicly-traded.  In fact, there are, in Tennessee and elsewhere, law firms that are essentially captive entities which provide only legal services to insureds of an insurance company.  If such an entity can exist without running afoul of the core tenets of RPC 1.8 and RPC 5.4, then there is no real intrinsic reason that non-lawyer investment in a law firm might not also be accomplished without eroding the attorney-client relationship or bankrupting the professional ethics of lawyers operating in such a structure.

One thing has always seemed clear to me, any significant change in the U.S. on this issue is not going to be brought about by the kind of lawsuit that was filed by Jacoby & Meyers seeking a ruling that New York’s ban on non-lawyer ownership was unconstitutional as a First Amendment violation.  That suit appears to have now received its death knell ruling earlier this month.  While I am not surprised by the outcome, I do admit to being surprised at the level of vitriol that seems to lurk beneath the surface in the district judge’s opinion.  In taking down the constitutional challenges presented to him, Judge Kaplan’s opinion seems to drip with antipathy toward the litigant as much as the litigant’s positions.  (And, worse yet, it also reads like the judge is perturbed as much by having been reversed previously in the case by the Second Circuit as anything else.)  Which is kind of a shame because some of the firm’s positions — for example, an equal protection argument with a premise that lawyers with Jacoby & Meyers and investment bankers are similarly situated — merited a real rebuke.  It isn’t quite “as a fish is to a bicycle” kind of stuff, but investment banker is not among the first things people would think of to equate with a plaintiffs’ personal injury law firm.