Outside counsel guidelines and term limits

While I am on something of a short streak of writing about people much more famous and influential than I am, it seems as good a time as any to offer my thoughts about the article that two very fine lawyers with Hinshaw & Culbertson wrote for The Professional Lawyer in 2017 about even more aspects of the growing problems outside counsel guidelines are creating for lawyers in private practice.  (These same two authors did an earlier article that talked about the problems with indemnity provisions in such guidelines – you can go read that here if you’d like.)  The more recent article was titled The New Battle Over Conflicts of Interest: Should Professional Regulators–or Clients–Decide What is a Conflict?

If you don’t know the article of which I speak, or it has been a while since you read it, you can go read it (again) here.

It is difficult to contest the point being made by the authors in this article, and the earlier one, that increasingly frequent provisions in OCGs are creating real problems for lawyers in private practice.  Particularly so, those pieces of OCGs that feel like they are overreaching related to who must be treated as clients for purposes of determining conflicts.

The authors summarize the nature of these issues quite well as involving clients using OCGs to “expand[] the definition of who is the client (far beyond the bounds of prevailing case law);” “limit[] the universe of other clients from whom lawyers and their firms may accept work;” and to “expand[] the definition of ‘interest’ and ‘positional’ conflicts in order to prevent lawyers and firms from undertaking or continuing to work for other clients that may take public positions on issues that the client unilaterally—and often ex post facto—deems adverse to its own interests.”

What I do disagree with, however, is the authors’ proposal for how to fix this problem.  The authors propose that states amend their versions of Model Rule 5.6 to make it unethical for lawyers to propose or agree to restrictions on their right to practice in connection with being hired by a client, just as is now the case for employment agreements or as terms for resolving a client’s matter.

Under the proposed revision, Rule 5.6 would read as follows (the bold and italicized piece being the new stuff):

A lawyer shall not participate in offering or making:

(a) a partnership, shareholders, operating, employment, or other similar type of agreement that restricts the right of a lawyer to practice after termination of the relationship, except an agreement
concerning benefits upon retirement; or

(b) an agreement in which a restriction on the lawyer’s right to practice is part of the terms of engagement of a lawyer by a client or of the settlement of a client controversy.

My immediate reaction to reading that proposal was to think of the problems I have whenever people argue for imposing term limits on their elected representatives.  You get the opportunity to vote people out every time they come up for re-election.  You shouldn’t need a law that limits the number of terms they can serve because you can always simply just vote them out of office in the regular course of things.

The solution to overreaching in outside counsel guidelines is equally simple: lawyers and firms should reject OCGs that go too far and refuse to agree to terms that unreasonably define who must be treated as the client or that become tantamount to restrictions on the right to practice.

The counterargument for that position is about the same as the counter-argument when the discussion involves term limits — the deck is typically too stacked in favor of incumbents so that the balance of power is truly off and that simply saying “you can vote them out” is naive.

The nature of present day demands on lawyers and law firms means that most firms and lawyers won’t be willing enough to turn work away to push back on outside counsel guidelines that are unreasonable and amount to overreaching.  Any firm that really wants to take a stand will have too much economic pressure on it to do so.  I hear the point, but, while that might be a pretty bad basis for enacting term limits and preventing some truly effective politicians from serving for as long as their constituents might like, it’s an extraordinarily bad basis for revising an ethics rule.

In particular, it is a bad basis for revising an ethics rule when there are already one or more ethics rules that lawyers can point to as being breached by aspects of the very OCGs being complained about.  For example, the authors point out that OCGs, in order to enforce their expansive requirements about what is a conflict, also impose obligations on the lawyer to tell the client about matters they are contemplating undertaking.  In so doing, these OCGs are demanding that lawyers agree to disclose information that they are obligated to treat as confidential under RPC 1.18 (assuming they have that provision in their state).

A lawyer who wants to refuse to agree to outside counsel guidelines of that type would have a strong, persuasive argument to offer not only about that violation but the potential risk that an in-house lawyer would have – if insisting that it remain in the agreement – of being considered to have violated their state’s version of Model Rule 8.4(a) which, in most places, makes it a disciplinary violation for a lawyer to “knowingly … induce” another lawyer to violate the ethics rules.

It also seems to me be a bridge too far for lawyers and firm to be able to demand that clients be permitted to agree to advance conflict waivers and similar contractual provisions which would serve to narrow the scope of conflicts but also demand that clients should not be able to propose that the lawyer agree to treat requirements of conflicts even more broadly.

The authors also offer an alternative to their own proposed revised language – perhaps to avoid issues associated with when a restriction would be made a term of engagement or not, by suggesting that Rule 5.6 could otherwise be revised simply in (b) to prohibit “an agreement containing a restriction on the lawyer’s right to practice.”  There would be significant problems — perhaps in the nature of unintended consequences – that would come from that alternate revised Rule 5.6 proposal.

If someone is being hired as an in-house lawyer, their corporate employer should be permitted to require that they restrict their practice to only representing the corporate employer and not represent any other clients while employed in-house.  Technically speaking, the second version of the revised Rule 5.6 wouldn’t permit that.  And, even if you are a private practice lawyer and one client wants to provide you with enough work that they also want to have you agree that you won’t work on any other matters for any other clients, why shouldn’t that be okay?

There are examples out there of such lawyers other than just Tom Hagen, the lawyer in The Godfather.

And, coincidentally, Hagen’s also a pretty good example of a lawyer who should have simply turned down a proposed client engagement rather than allowing economic benefits to sway his decision.

 

Bad ethics opinion or the worst ethics opinion? Tenn. FEO 2016-F-161 edition

I haven’t rolled a post out with this title in a while, but the more truthful title when it comes to an ethics opinion, issued here in Tennessee on September 9, 2016 would be: “More bad than worthless or more worthless than bad?”

First, the good news.  Tenn. Formal Ethics Op. 2016-F-161 is short.  It won’t take you but maybe five minutes to read it in full.  You’ll never get those 5 minutes back, but…

Now, the not-so-good news … Formal Ethics Opinion 2016-F-161 could have been a whole lot shorter, maybe only a paragraph — in fact, the first paragraph with the heading “OPINION” probably would have sufficed.  It states a premise that isn’t necessarily incorrect — a settlement agreement that would require an attorney to return work product violates RPC 5.6(b) if it restricts the lawyers ability to represent other clients– but it doesn’t do anything more than that.

To the extent it does, it isn’t exactly helpful because it works from a premise that doesn’t involve something that clearly involves work-product, and not surprisingly (given that it treats something as if it were work-product when that is less than clear) it doesn’t really explain why one thing might be okay and the other not.

If you were looking for a jumping off point to make the point that a demand for relinquishing work-product as part of a settlement agreement could violate RPC 5.6, I’m not sure this is the premise to pick:

Plaintiff’s counsel received from Defendant 541,927 pages in image form and had to electronically covert every single page to a pdf document.  Plaintiff’s counsel then processed the 541,927 pages with optical character recognition to make each document searchable.  The documents were then organized by relevant subtopics and incorporated into demonstrative exhibits.  Creating this work product was the only way to understand the complex issues in the case, articulated the product defects, depose experts, present claims, and ultimately reach a successful settlement for the client.  Plaintiff’s counsel relied on the produced materials to cut a full-size vehicle into parts for use in explaining complex engineering, vehicle dynamics, and safety mechanisms to the jury.  This demonstrative evidence is useless without the underlying work product.

In addition to the way in which that description reads like the inquiring attorney wrote it, did you catch the part there where things went askew?  Of course, you did.  It was that moment where they wrote “Creating this work product…” despite not having referenced any creation of work product.

What they described was the production of materials by the other side in discovery.  Converting TIFFs to PDFs doesn’t turn the other side’s document production into your work product.  OCR’ing those PDFs doesn’t do that either.  The incorporation of certain aspects of the discovery into demonstrative exhibits might rise to the level of the creation of work product, but the demonstrative exhibits would be the work product not the source material that was added to them as a component part.  But even giving the Board the benefit of doubt, the opinion doesn’t exactly tackle whether (or how) the request to return discovery materials also requires the return of additional things — work product — that incorporate parts of the discovery materials.

The opinion also doesn’t clearly indicate that the settlement agreement being examined requires anything to be returned besides discovery documents produced.  What is says is this: “The parties agreed on a settlement amount, and as a condition precedent to signing the settlement agreement Defendant demanded return of all documents produced….”  Now the opinion then says “… which included Plaintiff’s counsel’s work product,” but I don’t know how to take that because “documents produced” on its own wouldn’t support a reading that work-product must be returned.

Otherwise, the TN opinion to bolster the premise that requiring return of work product could be a problem spends a bit of time trying to (sort of) adopt the rationale of a North Dakota ethics opinion from 1997.  This part of that North Dakota opinion is fine: “Whether providing the opposing side access to or losing his or her own access to work product materials would restrict the attorney’s representation of other clients is a factual question the attorney must decide based on the documents involved and the facts and circumstances of the case.”

But, there is a key deficiency in the North Dakota opinion too , at least as described by the TN opinion, there is a seeming failure to recognize that if a client pays an attorney for work product the attorney creates, that work product also belongs to the client.  Remember, in this context RPC 1.16(d), which only provides the slimmest of windows for a lawyer to refuse to turn over work-product that a client hasn’t paid for, upon the termination of the representation.

So, when the Tennessee opinion quotes the North Dakota opinion to say: “Under 5.6(b) an attorney may not agree — even at a client’s request: To turn over to opposing party or counsel documents protected by the attorney work product doctrine if that action would restrict the attorney’s representation of other clients….,” it overlooks the fundamental concept that the client, not the attorney, makes the decision whether to settle a matter.  (RPC 1.2)  And, if the condition on settlement is that the attorney relinquish work product that now would belong to the client because the attorney’s fee will be paid, then… well, it’s pretty dangerous for an attorney to seek to blow up that settlement on the basis that the work product is the attorney’s alone to do with as she sees fit.

 

Today – Ethical Issues When Changing Law Firms.

There probably has been news this week about a set of departures of lawyers from one prominent firm to another or efforts that firms are taking to disincentivize their lawyers from taking their clients and moving on to a new destinaton.  As I indicated on Monday, I’m not actually around at the moment so this post was prepared and scheduled in advance so I won’t pretend that I’m doing anything other than guessing.  (As the McElroy Brothers would say, I’m sort of parting the kimono at this moment.)  But it is still that time of year, and just last week there were stories such as this one and this one and this one about such topics.

Today, if you are in any of the states where it is being broadcast today, including Alabama and North Carolina, you can sign up to hear me talk for an hour on Ethical Issues When Changing Law Firms.  In addition to getting necessary CLE credit, you’ll hear me discuss aspects of RPC 5.6 and RPC 1.16, as well as talk a bit about the relatively recent revisions to ABA Model Rule 1.6 to permit disclosure of client confidential information for purposes of running conflict checks when looking at making a lateral move.

Although in my practice I have advised and counseled both lawyers moving firms and firms being left behind, today’s seminar will have as its primary focus the perspective of a lawyer making a move and practical tips and approaches having an eye toward avoiding grass stains in your search for greener pastures.

Three updates for you on this election-year President’s Day.

Given that there isn’t a lot going on in the news that relates to legal issues, I feel obligated to offer lawyers something to read.  (I don’t think I’ve ever gone on record here about how badly I wish someone would create and implement a sarcasm font upon which all users could agree.  Maybe it would be a way to use comic sans where everyone would be ok with it?)

Back around Thanksgiving, I wrote about a Virginia federal court ruling that laid the framework for a future decision about whether a particular provision in a law firm operating agreement violated RPC 5.6.  Specifically, the provision required a departing shareholder who goes on to practice law in competition with the firm to forfeit half of their equity interest in the firm.  I concluded my original post by speculating that the outcome would ultimately hinge on how the court interpreted a paragraph in Comment [2] of D.C.’s version of the rule.  Sure enough, the court has now ruled, and its ruling did hinge to a significant extent upon application of that language as quoted in this piece from the ABA/BNA Lawyers’ Manual.  Interestingly though, much of the fight in the case actually came down to whether half of the shareholder’s equity interest was even a “substantial” financial penalty at all.

In the face of an argument from the firm that it wasn’t substantial because it was significantly less than the departing lawyer’s salary at his new destination, and expert testimony that the fragility of law firms should allow provisions forfeiting equity to avoid a “death spiral” when owners leave unexpectedly, the court looked only at the penalty in its own context:

Moreover, the practical effect of the Firm’s forfeiture clause is to penalize withdrawing members who wish to continue to represent even one of the Firm’s clients by depriving them of a previously accrued equity interest to which they otherwise would be entitled.  When Moskowitz left the Firm, he faced a choice: receive the full value of his [ownership interest] and turn down his clients who sought his continued representation, or forfeit fifty percent of his equity interest in the Firm and continue to represent his clients’ interests. There is a clear disincentive attached to the latter option.

Update part two & three – I’ve also tried to keep up with events in Pennsylvania and Texas as they unfold with respect to the fates of their top law enforcement officers, both of whom face criminal prosecution.

In Pennsylvania, the sitting Attorney General had something of a mixed bag of recent events.  Her effort to have her law license reinstated denied, but she managed on a first vote to survive being removed from office by the Pennsylvania Senate.

As to the Texas AG, you may recall that back when I first posted about any of this, I mentioned a disciplinary complaint that had nothing to do with, and predated in time, the indictment against him.  (Though unlike the events made the subject of the indictment, the disciplinary complaint actually related to the AG’s conduct in office.) Although there have not been any recent events regarding the indictment to catch my attention, there has now been news that the disciplinary complaint which originally was headed toward dismissal, has now been reinstated and will move forward over the AG’s advice to public officials that they could freely disregard the authority of the United States Supreme Court.

 

Lawyer ethics rules are public policy statements. Of course they are.

There is a lot of activity that can take place at the intersection of the lawyer ethics rules and public policy.  There can be issues that aren’t addressed by lawyer ethics rules (or at least not fully addressed) but that are addressed as a matter of state public policy.  What there really can’t be though are issues that are addressed by a state’s lawyer ethics rules but that are not addressed by state public policy.  At least, there can’t be in a state where the attorney ethics rules have been adopted as part of a court rule.

This is because, generally speaking, court rules are elevated in dignity to the equivalent of statutes.  Thus, using Tennessee as an example, the Tennessee Rules of Professional Conduct, enshrined as they are in Rule 8 of the Tennessee Supreme Court Rules, establish the public policy of our state on the issues they address.  Our Tennessee Supreme Court made this point plain in 2002.  Crews v. Buckman Labs, 78 S.W.3d 852 (Tenn. 2002) was an important decision on both questions of lawyer ethics and employment law where the Court explained that a lawyer claiming to have been fired for exercising her ethical duty to report another lawyer’s misconduct could challenge the employment action as an unlawful termination in violation of state public policy.

This point — that attorney ethics rules are state public policy — was a bit lost on one of the litigants in a piece of litigation in federal court in Virginia arising from a dispute among former law partners governed by the D.C. Rules of Professional Conduct.  The point was not lost on the district judge presiding over the litigation, however.

The Moskowitz v. Jacobson Holman, PLLC litigation came about after a lawyer departed his law firm for greener pastures.  The firm, exercising its authority under its operating agreement, denied the lawyer 50% of his equity interest on departure because he took some clients with him when he left.  In response to a counterclaim from the firm, the departed lawyer argued that the provision in the operating agreement allowing such forfeiture violated RPC 5.6 and was void.  On a motion for judgment on the pleadings, the district court ruled that if it is shown that RPC 5.6 was violated, then no additional showing would be required to find that aspect of the contract to be unenforceable.  (Though the suit was filed in Virginia federal court, the D.C. ethics rules applied to the firm’s agreement.)

There are, of course, other contexts where this kind of argument about public policy made by the law firm could be viable.  For example, courts are split about whether an agreement to share fees with a nonlawyer in violation of the attorney ethics rules can still be enforced by the nonlawyer.  Since the party seeking to enforce the terms of the contract is not a lawyer in those instances and the ethics rules do not apply to their conduct, it is not surprising to learn that some courts allow enforcement of such a contract even though the lawyer involved violated his or her ethical obligations under the relevant version of RPC 5.4(a).  In the context of an RPC 5.6 violation though, everyone involved is a lawyer and governed by the ethics rules.

To me, the closer question is the one that the court had to assume was true for purposes of resolving the judgment on the pleadings issue:  whether the kind of forfeiture provision in the law firm’s operating agreement actually violates RPC 5.6(a).

In Tennessee, our version of the rule is identical to the ABA Model Rule and provides that lawyers cannot “participate in offering or making a partnership, shareholders, operating, employment, or other similar type of agreement that restricts the right of a lawyer to practice after termination of the relationship, except an agreement concerning benefits upon retirement.”

Nothing in our Comment to the Rule, nor the ABA’s, elaborates on what terms short of actual restriction on practice qualify as prohibited by the rule.  At least in my state, a robust argument could be had over whether a “financial penalty” alone is something that “restricts the right of a lawyer to practice after termination of the relationship.”  The fact that the “except” language in the dependent clause addresses a financial issue is certainly potentially persuasive evidence that this type of arrangement could be found to violate RPC 5.6(a).

Under the D.C. version of the rule, an additional paragraph exists in the Comment [numbered as Cmt. [2] in D.C.] that states:  “Restrictions, other than those concerning retirement benefits, that impose a substantial financial penalty on a lawyer who competes after leaving the firm may violate paragraph (a).” Yet, D.C.’s word choice leaves an opening.  D.C. went with “may violate” so the potential exists that you could have a provision that imposes a substantial financial penalty on a lawyer who competes after leaving the firm that would not violate RPC 5.6(a).