Two updates – one persuasive, one not so much

An important development for labor lawyers that I delved into a bit recently here has now been put on hold.  I managed to point out that there would be significant efforts aimed through litigation at stopping the rule from ever going into effect.  Yesterday, a Texas federal district court has stayed the Department of Labor’s new “Persuader” rule from going into effect on July 1, 2016.  You can read the full 90-page order here or, if you’d prefer the cliffnotes, this ABA Journal online piece does a fine job as always.  Beyond the substantial concerns that exist about how the rule would impact the giving of legal advice and the seeking of legal counsel by employers in connection with union organizing efforts, the crux of things boils down to whether the Department of Labor exceeded its rule-making authority.

Speaking of people who are union members, some of you will recall that I’ve managed to write twice before, using Johnny Manziel as an example, about how much better off professional athletes can be if they would retain the services of an actual lawyer to represent them because of the benefits they would obtain from the obligations lawyers have to treat all information related to the representation of their clients as confidential.  Well, that didn’t work out so well.  We learned this week that Manziel’s lawyer handling his criminal matter managed to send a rather lengthy text to the Associated Press rather than to the prosecutor with whom he was intending to communicate.  On the upside, this time the lawyer quit rather than firing Manziel as his past agents did, but I’m starting to think that Manziel is just cursed at this point.

Unfortunately, this act of preventable negligence on the part of Manziel’s lawyer will, of course, spur some folks to argue that this is further proof that lawyers should never use text messaging to talk to a client or someone else involved in a matter about a client’s matter.  Do not count me among those folks as I think such advice is entirely unrealistic in 2016.  The only lesson to be learned is the old-fashioned, but harder to swallow, advice about being careful, cautious, and deliberate in all of your communications.

 

Digital assets and ethical issues – good news from the Tennessee legislature

Last week the Chattanooga Estate Planning Council was kind enough to have me come to speak to them about ethical issues arising from the uncertain world of the law regarding digital assets.  They were gracious hosts and, to the extent there were important ethics issues to really discuss, we managed to cover that most, if not all, such isssues stemmed from the fact that it is incredibly difficult for those working in estate planning to try to accomplish client objectives as to digital assets in Tennessee because we lack legislation to address it.  For that reason, it seemed to me that the two most prominent ethical concerns for lawyers working in that arena are the duty of competence under RPC 1.1 and the duty under RPC 1.4(b) to communicate about what their clients need to know to make fully informed decisions about the representation.

What’s necessary to address the duty of competence is difficult to pare down beyond recognizing that you have to be as fully up to speed on what Tennessee law does, and does not, address to understand the uncertainty and about how federal law (including the Computer Fraud and Abuse Act and the Stored Communications Act) permits service providers to deny requests for access to online information after users and subscribers have passed away.

The most difficult part about the duty of communication under RPC 1.4 is figuring out how to warn a client that no matter how well thought out their estate plan might be on the subject of distribution of digital assets, the client could, by accepting online terms and conditions for use (or updated and revised terms and conditions of use), thwart the plan by ceding ownership of digital assets or authorize service providers or online entities to refuse to honor the contents of such plans.

This week the Tennessee legislature passed legislation so that the time period of such uncertainty now has an end date — July 1, 2016.  Effective at that time, Tennessee attorneys will be able to count on a version of the Revised Uniform Fiduciary Access to Digital Assets Act that solves many problems intrinsic to this area of the law.  You can access the version that will go into effect by downloading the PDFs from this post at the TBA Law Blog here.  It will be codified as Tenn. Code Ann.  35-51-101 et seq.  And if you are interested in seeing all of the areas where it differs from the Revised Uniform Act, you can see the full Revised Uniform Act here.

For those that don’t have the time (or the inclination) to go study the Tennessee Act, among the many important and helpful things it accomplishes, there are three I want to highlight.

First, the term “digital asset” will have a clear definition.

[A]n electronic record in which an individual has a right or interest.  ‘Digital asset’ does not include an underlying asset or liability unless the asset or liability is itself an electronic record.

Thus, for example, my URL and this blog should be recognized as a digital asset of mine under state law.  If you have gone green and only receive your bank statements in digital form, then those statements would be a digital asset even though the money in your bank account that they document would not.  If you’re invested in Bitcoin on the other hand, then the value of your holdings in Bitcoin would be digital assets under the Tennessee Act.

Second, the Tennessee Act generally establishes a hierarchy that puts something called an “online tool” at the top, estate planning documents next, and general terms of service agreements last when it comes to directions to online service providers/custodians about post-death disclosure of digital assets.  Section 5 of the Tennessee Act explains:

(a)  A user may use an online tool to direct the custodian to disclose or not to disclose some or all of the user’s digital assets, including the content of electronic communications.  If the online tool allows the user to modify or delete a direction at all times, a direction regarding disclosure using an online tool overrides a contrary direction by the user in a will, trust, power of attorney, or other dispositive or nominative instrument.

(b)  If a user has not used an online tool to give direction under subsection (a) or if the custodian has not provided an online tool, the user may allow or prohibit in a will, trust, power of attorney, or other dispositive or nominative instrument, disclosure to a fiduciary of some or all of the user’s digital assets, including the content of electronic communications sent or received by the user.

(c)  A user’s direction under subsection (a) or (b) overrides a contrary provision in a terms-of-service agreement that does not require the user to act affirmatively and distinctly from the user’s assent to the terms of service.

Online tool, is also a defined term under the Tennessee Act.  “An electronic service provided by a custodian that allows the user, in an agreement distinct from the terms-of-service agreement between the custodian and user, to provide directions for disclosure or nondisclosure of digital assets to a third person.”  I’m not sure, as a frequent user of the Internet, that I have encountered one of these items yet.

Third, while this legislation goes a long way toward reducing uncertainty for estate planning lawyers in Tennessee, it does not change the fact that lawyers will still have to have cogent discussions with their clients when the topic of providing for distribution of digital assets in their estate planning documents arises.  This is in no small part because blithe acceptance of online terms of service agreements will still have consequences in Tennessee as Section 6 of the Tennessee Act makes clear that the underlying rights of users are still going to be limited to whatever is created in a terms-of-service agreement in the first place.  Thus, there will still be lots of confusion on the part of clients who may think, for example, that they actually own and can leave behind that digital library of e-books they possess, yet the terms-of-service they may have agreed to without reading could indicate that they do not actually own any of those items but possess only a lifetime license to use.

Traps for the Unwary – nonrefundable fees and retainers

For my last post of 2015, some thoughts on a frequent source of trouble for lawyers in certain practice areas where efforts are often made to charge nonrefundable fees.  In Tennessee, back in 2011, our rules were revised to specifically acknowledge the legitimacy of the concept of a nonrefundable fee but also to impose certain strict requirements on its use.

Specifically, Tennessee enacted RPC 1.5(f) that reads as follows:

A fee that is nonrefundable in whole or in part shall be agreed to in a writing, signed by the client, that explains the intent of the parties as to the nature and amount of the nonrefundable fee.

We also enacted language in the Comment to the Rule to provide further guidance about this type of fee arrangement:

[4a]  A nonrefundable fee is one that is paid in advance and earned by the lawyer when paid.  Nonrefundable fees, like any other fees, are subject to the reasonableness standard of paragraph (a) of this Rule.  In determining whether a particular nonrefundable fee is reasonable, or whether it is reasonable to charge a nonrefundable fee at all, a lawyer must consider the factors that are relevant to the circumstances.  Recognized examples of appropriate nonrefundable fees include a nonrefundable retainer paid to compensate the lawyer for being available to represent the client in one or more matters or where the client agrees to pay to the lawyer at the outset of the representation a reasonable fixed fee for the representation.  Such fees are earned fees so long as the lawyer remains available to provide the services called for by the retainer or for which the fixed fee was charged.  RPC 1.5(f) requires a writing signed by the client to make certain that lawyers take special care to assure that clients understand the implications of agreeing to pay a nonrefundable fee.

At the same time that Tennessee adopted this new rule, we also adopted revised language in the Comment to RPC 1.15 to help lawyers focus on the earned/unearned distinction, rather than other nomenclature, for making a proper determination about whether money paid to the lawyer by the client should go into the client trust account or somewhere else:

[10] Whether a fee that is prepaid by a client should be placed in the client trust account depends on when the fee is earned by the lawyer.  An advance payment of funds upon which the lawyer may draw for payment of the lawyer’s fee when it is earned or for reimbursement of the lawyer for expenses when they are incurred must be placed in the client trust account.  When the lawyer earns the fee, the funds shall be promptly withdrawn from the client trust account, and timely notice of the withdrawal of funds should be provided to the client.

The Comment goes on to explain, as do other aspects of the Comment accompanying RPC 1.5, that advance fees not earned must be refunded but a reasonable nonrefundable fee does not have to be returned to a client.

Therein lies the rub, of course, or at least one of the two peskier rubs.  The reasonableness requirement that applies over and above the technical/procedural requirements of RPC 1.5(f) can still create real issues.

Just as a 60% contingent fee agreement with a client is subject to challenge as unreasonable even if the client had signed a written agreement otherwise satisfying all the procedural requirements of RPC 1.5(c), a nonrefundable fee agreement remains subject to challenge even if RPC 1.5(f) could otherwise be shown to be satisfied if the amount is unreasonable.

The other pesky rub for lawyers comes when they properly document something with their client as one thing, but then deposit it into the wrong account.  For example, being scrupulous in papering up a fee as nonrefundable and thus earned by the lawyer at the time of payment, but not having faith in the arrangement and depositing the fee into trust “out of an abundance of caution.”  Down that road lies commingling no matter how good the lawyer’s intentions.

Earlier this week, the Tennessee Supreme Court issued a new opinion involving the suspension of a lawyer (who just so happens to be the lawyer whose constitutional challenge argument on behalf of another lawyer was characterized by the Tennessee Supreme Court as “rambling and bordering on incoherent”) for multiple offenses, including charging an unreasonable nonrefundable fee.

Reading the opinion, the lawyer seems to have only attempted to treat the fee as nonrefundable after she was discharged by her client.  The opinion indicates that she believes she deposited the $10,000 into trust and then withdrew amounts from trust as billed.  And her fee agreement, as described, does not seem to have involved an effort to satisfy the language of RPC 1.5(f).   (In fact, rather than make an effort to reference that rule, the agreement referenced instead a 1992 Formal Ethics Opinion that interpreted pre-2003 versions of the ethics rules.)

Nevertheless, even if the lawyer had a well-documented agreement making the $10,000 payment a nonrefundable fee, the facts as they played out were ones in which I suspect most lawyers in Tennessee would likely end up agreeing to refund a substantial amount of the difference between the $10,000 paid up front and the roughly $2,000 worth of work performed at hourly rates before the client discharged the lawyer.  Questions certainly exist in Tennessee about how RPC 1.5(f) will be interpreted with respect to the timing of how to determine reasonableness and whether you only evaluate it prospectively, or retrospectively, or a little of both, but I don’t think many lawyers would want these kinds of facts to be involved in any test case addressing those issues.

Fortunately, the Court did take this opportunity to stress the earned/unearned distinction now spelled out in the Comments to our rules with a reference to one of the best sources of discussion for the distinctions to be drawn among the three arrangements lawyers manage to call “retainers” these days, a law review article by my friend Doug Richmond.

Thus, to the extent that lawyers in Tennessee may continue to focus on what they call a fee when trying to figure out where it should be deposited, our Court considers a “classic” or “true” retainer — a payment to ensure lawyer availability — as earned when paid.  Likewise, “advance fee retainers” are considered to be synonymous with “fixed” or “flat” fees, and also earned when paid.  Thus, both of these types of “retainers” should not go into a client trust account.  The third type of “retainer,” the “security retainer” — the type of advance fee payment that you draw down from as you perform work (i.e. what the $10,000 paid to this now-suspended lawyer actually was — goes into the trust account because at the time it it paid it is not yet earned.

Update – Caveat requestor is where we will stay in TN.

I’ve previously written about a pending rule revision in Tennessee that the BPR initiated and to which the TBA responded here.  Last week the Tennessee Supreme Court entered this order and adopted essentially the language that the BPR was seeking and did not incorporate the suggestions the TBA made that would have actually provided the protection that the rule proposal was supposedly seeking.

So, effective as of October 6, 2015, the language of the rule governing the issuance of informal ethics opinions by disciplinary counsel to lawyers in response to oral or written requests will read as follows:

(c)  An advisory ethics opinion may be issued by Disciplinary Counsel when there is readily available precedent.  The advisory opinion shall not be binding on the Board and shall offer no security to the person requesting it.  All requests for advisory opinions, oral and written, and any response by Disciplinary Counsel shall be confidential and shall not be public records or open for public inspection except as subject to waiver by the requesting attorney or as otherwise provided in Section 32.

Whether this has accomplished anything of any value, in my opinion, remains to be seen, but I am doubtful.

If the concern and problem was only a public records law issue, then the Court’s ruling has fixed that situation.  If the concern though, as the BPR’s own filings in support of the revision indicated was in the mix, was that lawyers seeking guidance in the form of informal ethics opinions from disciplinary counsel may be at risk of not complying with RPC 1.6(b)(4) (the exception to the confidentiality rule that permits lawyers to disclose client confidential information to get advice on their own obligations under the rules) because the communication is not one that is protected as privileged when it is made, then this revision really does nothing to address that concern.  Comment [9] to our RPC 1.6(b)(4) still indicates that disclosure can only be made if the disclosing lawyer makes sure it will be protected as attorney-client privilege.  For lawyers like me, who need lawyers to be willing to pay to retain private counsel in order to make sure that the advice that they receive complies with the rules, the fact that the Court didn’t go down the path offered by the TBA is, selfishly, a good outcome.  But, for lawyers who opt to seek out free advice from disciplinary counsel, it means that they really need to be careful and see if they cannot manage to seek and obtain the advice without getting into much detail beyond generalities or, at least, find a way to use pseudonyms for the folks involved to avoid disclosing any RPC 1.6 information.

But what is really the most disappointing development is that, to the extent this rule proposal opened up an opportunity for the BPR to openly embrace, or for our Court to require, the BPR to leave the advice-giving function to its Ethics Officer and not other disciplinary counsel who also pursue investigations or litigate disciplinary cases, that opportunity was spurned.  And that means that lawyers posing requests to disciplinary counsel under Rule 9, Section 5.4(c) really do need to be wary because there doesn’t seem to me to be any protection in the rule, as revised, against the information disclosed by the lawyer in seeking the informal opinion to be freely disseminated among disciplinary counsel at the BPR and using such information against that lawyer in a subsequent disciplinary proceeding (including one that could be sparked by the very inquiry itself).

Your IT pro is your best friend, but can’t always protect you from fraud.

Last week I was confronted with another example of how valuable excellent IT professionals can be for practicing lawyers.  As routinely happens, our firm’s spam filter trapped a significant number of emails last Wednesday. Because legitimate email sometimes gets wrongly blocked or filtered, our IT folks also review what gets caught in the filters.  Last Wednesday, our IT gurus noticed an email that, if given the benefit of the doubt, could potentially be a legitimate effort by a lawyer in another state to share with me a document through a well-known online document sharing service.

I was asked by our IT department if I recognized the sender and whether the email address being used was legit.  I did and it was, but there were still enough peculiarities about the details of the email that the IT folks were skeptical about whether it was legitimate or the result of hacking or spoofing.  Although this lawyer might very well have a reason to be in touch with me (I do have a blog read regularly by perhaps a dozen people after all), I had to admit that I wasn’t expecting to hear from this lawyer.  I agreed to send a new email to the person explaining what had transpired on our end and asking “did you mean to send me some documents through [high-profile service],” fairly quickly, a response came back from the person’s email address that was short and sweet:  “Yes i did.”

Now I was distracted by other aspects of what I was doing along with dealing with this issue and I really had not focused on the fact it was a little early in this person’s part of the world for them to be sending the first email and the fact that the response email was a little too pithy to be consistent with their personality, but the folks who handle IT for a living at our firm have a much more singular focus and not only weren’t distracted but were still quite concerned about details of the email and, most particularly, that one of the links in the email appeared to be pointing to an IP address in French Polynesia rather than to anything affiliated with the document sharing service.  Relying on that person’s expertise, it was easy for me to agree that it was more likely that the intruder who had hacked into this person’s email was sufficiently in control to be drafting replies sent to the email account then than (edit: and thx to a loyal reader for catching the error) that the lawyer had really tried to share a document with me using a file sharing service.

I’m relatively tech savvy and would like to think that, even without the involvement of the IT professional, I would never have clicked on a link that when hovered over didn’t look right, but having such high-quality IT folks in my corner made sure that I never even had the opportunity to make that mistake.

Unfortunately, not every situation is one where your IT folks can protect you from falling victim to fraud.

Much has been written online about financial scams targeting lawyers.  A few better pieces available online discussing various aspects of these issues can be found here, here, and here.  Gone are the days when such scams were as easy to see through as the Nigerian Prince emails.  Instead, common current scams involve contacts from companies that on paper actually exist  and that want to hire you to pursue litigation against someone who owes them money or to pay you to defend them in a case where they are accused of owing someone else money.  Once you agree to be hired, the case then quickly settles and the settlement proceeds flow through your trust account and you are instructed to quickly send the proceeds, minus payment for yourself of course, to the party owed the money under the settlement agreement whether that is your client or the other party (depending on the variation of the scam being deployed).  Any lawyer that acts too quickly, however, comes to find out that the funds were no good – money orders forged or wires reversed or checks bounce – and the lawyer is left holding the bag and trying to get out from under a hellish trust account deficit and inquiries from disciplinary counsel about RPC 1.15 compliance.

One iteration of this scheme involving forged money orders, shell companies on both sides controlled by the fraudsters, and with an interesting twist also involving hacking and spoofing of law firm email accounts can be studied in this story today from the ABA Journal and the indictment of a Texas lawyer who was on the criminal side (rather than the victim side) of such an endeavor.

In the unforgettable words of Roy Trenneman from The IT Crowd: “People.  What a bunch of bastards.”

Traps for the Unwary – RPC 2.2: Lawyer as Intermediary

Press releases on public discipline issued by the BPR can be something of an art form and sometimes, but not always, don’t tell the whole story.  So setting aside any tea-leaf reading that might otherwise go into this one involving what sounds like a situation in which a lawyer was perhaps unknowingly used by clients to assist with some hinky efforts to shield assets, the reference to RPC 2.2 as being among the rules violated raises a fine opportunity to remind Tennessee lawyers about another trap for the unwary.

Tennessee is one of only two U.S. jurisdictions (Mississippi is the other) that still has such a rule on their books.  RPC 2.2 is pattered upon an ABA Model Rule that was quickly scuttled after adoption by the ABA.  As such, the existence of RPC 2.2 in Tennessee presents both a blessing and a curse.

If you are aware of it, and understand when it applies, it is a blessing because it makes excruciatingly clear what needs to be in your engagement letter with your various clients, what you need to say about your role, what your duties and obligations are, and when you have to terminate representing any of the clients because the situation has blown up.  If you are not aware of its existence, then it’s a curse because, given its very detailed requirements, a lawyer could find themselves incorrectly looking to RPC 1.7 and complying with those provisions to try to obtain informed consent to a joint representation only to learn later that s/he followed the wrong rule altogether.

For the lawyer involved, and the fact that this whole set-up apparently turned out to involve a gratuitous transfer, this might have become a second-level trap as Comment [4] to RPC 2.2 indicates that where what is going on is a gratuitous transfer, RPC 1. 7 and not RPC 2.2 is the relevant rule with which to comply.

But, for everyone other than the lawyer involved, this still presents a decent teachable moment to remind Tennessee lawyers that if you are undertaking to represent multiple parties in an undertaking that involves “provid[ing] impartial legal advice and assistance” to multiple parties who “are engaged in a candid and non-adversarial effort to accomplish a common objective with respect to the formation, conduct, modification, or termination of a consensual legal relations between them,” then your engagement would be as an intermediary and RPC 2.2 is the rule on point.  RPC 2.2 thoroughly details how to determine whether you have a conflict that would prevent undertaking the representation at all, what you need to do to go about getting informed consent of the multiple clients involved, and what the rules of the road are for the engagement going forward.

Traps for the unwary – Mid-stream changes to your client’s fee agreement

When lawyers think about problematic business transactions with a client, they usually think about things like loans or, perhaps, situations in which a lawyer is joining a client as an investor in a business venture.  The ethics rule regarding business transactions with clients, RPC 1.8(a), is broader in its coverage than just those situations and, in fact, broader than many lawyers realize.  A particular issue that pops up from time-to-time to cause trouble for lawyers is failure to understand that RPC 1.8(a) applies when you renegotiate a fee agreement with a client.  Given the nature of the attorney-client relationship and the broad fiduciary duties attorneys owe their clients, it should be logical that a lawyer faces a heavier than normal burden when trying to turn an existing fee agreement with a client into something more favorable for the lawyer.

It was but one of two problems involving handling of client fees, but failure to comply with RPC 1.8(a) when changing the terms of his client’s fee agreement was part of the reason a Tennessee lawyer was publicly censured at the end of last month.

The trap for a lawyer who does not realize that RPC 1.8(a) applies to such a change is that, even a change that would still amount to a reasonable fee arrangement in compliance with RPC 1.5, amounts to a violation of the rules unless it meets all of the additional requirements of RPC 1.8(a).  (Because the purpose of this rule is to prevent the lawyer from taking advantage of the client, RPC 1.8(a) does not apply when a lawyer is re-doing the terms of a fee agreement to make it more favorable to the client (i.e. marking down or walking away from a bill for example or agreeing to lower their hourly rate)).

Though numbered as three sub-parts, there are actually five additional requirements  to be met: (1) there has to be a writing transmitted to the client that discloses the transaction and the terms in a manner reasonably understood by the client; (2) the transaction and terms have to be fair and reasonable to the client; (3) the client has to be advised in writing that it is desirable to seek independent legal counsel for advice on the transaction; (4) the client must be given a reasonable opportunity to seek independent legal counsel; and (5) there has to be a writing, signed by the client, showing the client’s informed consent to the terms and the lawyer’s role (including whether the lawyer was also representing the client in the transaction.

Comment [1] to the rule offers a pretty specific pointer to try to make it harder for a lawyer to be unwary and, thus, prevent this rule from serving as a trap.  The next sentence in Comment [1] makes clear that this rule does not apply to standard commercial transactions (e.g. you represent a large bank and you also obtain a home mortgage from that bank) not only because requiring compliance would be impracticable but also because there is no real concern of an imbalance between lawyer and client in such situations.

When there is any real doubt about what the net outcome of a midstream fee change would be, the safe course is to make sure to comply with RPC 1.8(a).  Thus, while a lawyer who has been handling a plaintiff’s case on a hourly fee basis may be able to argue that moving the arrangement over to a contingent fee agreement was for the client’s benefit to avoid a burden of continuing to pay fees on a case that might not be successful, it’s a very risky endeavor to proceed without making sure that you tick each of the boxes to comply with RPC 1.8(a).