Bill Brown's Legal Ethics Updates

 

A Minnesota lawyer was suspended after lying to opposing counsel and disciplinary authorities about whether he knew his client died before he settled the client's case (In re Lyons, Minn., No. A09-472, 4/8/10).  These false and misleading statements concerned a material fact, the court ruled in a per curiam opinion.  It suspended the lawyer indefinitely with no leave to apply for reinstatement for at least 12 months.  Thomas John Lyons, Jr. represented a man who had been erroneously reported to be dead by Trans Union LLC, a credit reporting agency.  Lyons filed suit against Trans Union under the Fair Credit Reporting Act in federal district court in Montana.   A Montana lawyer, Sean Frampton, served as local counsel.  On Oct. 7, 2007, while settlement negotiations were ongoing, Frampton sent Lyons an e-mail stating that the client was critically ill.  On Oct. 9, Frampton again contacted Lyons, saying that the client was going to be taken off life support that day, and that the client's wife wanted Lyons to settle the suit.  Lyons confirmed that he would do so.  He also inquired about the funeral.  The client died that day.   On Oct. 26, Trans Union offered to settle the case for $19,000.   Without mentioning the client's death, Lyons accepted the offer.  He later told Trans Union that the client was hospitalized and that the release was being signed “by his wife or power of attorney.”  When the release was ultimately signed by the client's wife as personal representative of her husband's estate, Trans Union e-mailed Lyons asking if the client had died.  Lyons responded “Yes—HOW IRONIC.”  Trans Union pressed Lyons to say when he learned of the client's death.  Lyons replied that the client had died and that he had learned of the client's death after the parties agreed to settle.  Trans Union insisted that it was not bound by the settlement.  Litigation was resolved when Lyons agreed to pay $7,500 to the client's wife.  Lyons told disciplinary authorities that he had learned of the client's death in early November, after the settlement had been negotiated, and he likewise testified at the disciplinary hearing that he did not recall receiving actual notice of the client's death until after he reached a settlement with Trans Union.  However, Frampton testified in his deposition that he told Lyons of the client's death within a short time — a day or two — after the client's death.  The referee found that Frampton had informed Lyons within a week of the client's death.  Lyons was found to have violated several provisions of the Montana Rules of Professional Conduct: Rule 3.3(a)(1) (false statement of material fact to tribunal), Rule 4.1 (false statement of material fact to third person), Rule 8.4(c) (conduct involving dishonesty, fraud, deceit, or misrepresentation), and Rule 8.4(d) (conduct prejudicial to administration of justice).  The Minnesota Supreme Court noted that application of the Montana disciplinary rules to Lyons's conduct in connection with the litigation was appropriate under Rule 8.5(b)(1) of the Minnesota Rules of Professional Conduct, which provides that in Minnesota's exercise of disciplinary authority, the rules to be applied for conduct in connection with a matter pending before a tribunal are the rules of the jurisdiction in which the tribunal is located.  Determining what sanction was appropriate, the court characterized Lyons's misconduct as serious.  Lyons made false and misleading statements to disciplinary authorities during their investigation when he asserted that he did not learn of the client's death until after the settlement was negotiated, and he gave false and misleading testimony on the same subject at the disciplinary hearing, the court explained.  The court also said that “Lyons' false and misleading statements to opposing counsel about whether he knew of his client's death before the parties reached a settlement concerned a material fact.”  As authority, the court cited In re Forrest, 730 A.2d 340, 15 Law. Man. Prof. Conduct 320 (N.J. 1999), and Harris v. Jackson, 192 S.W.3d 297 (Ky. 2006), along with an earlier Kentucky case that quoted ABA Formal Ethics Op. 95-397 (1995).

 

Private attorneys may be retained by government entities in California to litigate nuisance abatement actions on a contingent fee basis if a government lawyer supervises and controls all critical decision-making in the litigation (Santa Clara County v. Superior Court ((Atlantic Richfield Co.)), Cal., No. S163681, 7/26/10).  Prosecutorial duties in some matters may be delegated to private attorneys who have an arguable stake in the outcome as long as public entity attorneys directly supervise the litigation and retain complete control over the course and conduct of the case, the court explained.  Several California cities and counties filed lawsuits demanding that companies that had manufactured lead based paints reimburse the public entities for the expense of removing lead paint from public buildings.  Most entities were represented by both  government   lawyers  and private firms that were hired under contingent fee agreements -- giving the firms 17 percent of the net recovery.  The defendant companies filed a motion to bar payment of the contingent fees.   They asserted that as a matter of public policy the  government  cannot hire private  lawyers  on a contingent fee basis to litigate a public nuisance claim.  The trial court granted the motion, citing People ex rel. Clancy v. Superior Court, 705 P.2d 347 (Cal. 1985), invalidating a city's contingent fee contract with outside counsel to pursue nuisance abatement actions against adult bookstore owners. The appellate court reversed, however, holding that Clancy does not bar all contingent fee agreements with private counsel in public nuisance abatement actions, only those where private attorneys appear in place of, rather than with and under the supervision of,  government  attorneys.  On appeal, the California Supreme Court agreed that Clancy should not be read as an absolute prohibition against the use of private counsel by public entities to pursue public nuisance claims under contingent fee agreements.  However, such arrangements are valid and enforceable, the court said, so long as there is detailed supervision by  government   lawyers .  Since it was unclear whether all the retention agreements in this case involved the requisite close supervision, the court reversed and remanded so that the public entities could revise the agreements to make it clear that  government  counsel retains final authority to control all critical decisions.  The court conceded that Clancy appeared to support a bright-line rule barring any attorney with a financial stake in the outcome of a case from representing the interests of the public.  The court stated that Clancy needs to be interpreted more narrowly, since the litigation at issue in that case carried the threat of criminal liability, implicated important constitutional concerns, and jeopardized ongoing business activity.  “Accordingly, the absolute prohibition on contingent-fee arrangements imported in Clancy from the context of criminal proceedings is unwarranted,” it said.   Although private  lawyers  pursuing public nuisance actions on behalf of the public are subject to a heightened standard of ethical conduct that requires rigorous neutrality, the court said, this lofty standard is not compromised when contingent fee counsel is brought in to assist  government  attorneys in the prosecution of public nuisance abatement actions.  A contingent fee retention agreement should encompass more than “boilerplate language” on control or supervision, the court said, and must make clear that –
• the public entity attorneys will retain complete control over the course and conduct of the case;
• the  government  attorneys will retain a veto power over any decisions made by outside counsel; and
• a  government  attorney with supervisory authority must be personally involved in overseeing the litigation.

 

A lawyer was suspended for 120 days by the Nebraska Supreme Court for offering to stay quiet about what he believed to be illegal conduct by a prosecutor in return for the dismissal of charges against the  lawyer's  client (State ex rel. Counsel for Discipline v. Koenig, Neb., No. S-08-128, 7/31/09).  The  lawyer's  threat exceeded the bounds of proper plea negotiations, the court concluded, noting that his behavior prejudiced the administration of justice and implied that he could improperly influence a public official.  The court also concluded that the lawyer did not violate the ethics rule that makes it professional misconduct to commit a crime that reflects adversely on a  lawyer's  fitness to practice law.  It noted the lawyer had never been charged or convicted of any crime in connection with the threat.  While representing a client, Dustin Garrison, who was charged with driving without a valid registration or proper proof of insurance, Lyle J. Koenig notified the prosecutor handling the case, Rick Schreiner, that the newly elected county attorney was in violation of the same registration law.  In his letter to the prosecutor, Koenig included a photograph of the allegedly expired license plate and a copy of a motion to appoint a special prosecutor, which he said he would file if the charge against Garrison were not dismissed.  “Obviously, these motions are only proposed, Koenig wrote, ending with, “Can't you dismiss [this case]? Our lips, of course, are forever sealed if [Garrison's] case gets dismissed.”   A few days later, Koenig sent a second letter to Schreiner, asking, “Does this case have any settlement possibility before we file the enclosures?”  Attached to the letter was a motion to dismiss for selective prosecution which alleged that the county attorney, “at least until recently, was operating his motor vehicle without proper registration.”  But rather than dismissing the charges against Garrison, the state moved for appointment of a special prosecutor.  Garrison pleaded no contest to the expired plate charge, and the no proof of insurance charge was dismissed.  Koenig never filed any of the motions and never published any information about the county attorney's vehicle registration.  In the disciplinary case against Koenig, he characterized the sealed lips remark as a joke, saying he thought Schreiner would realize that he “was trying to inject a little humor” into the situation. Applying a clear and convincing evidence standard, the Nebraska Supreme Court concluded that Koenig's actions prejudiced the system of justice (Nebraska Rule of Professional Conduct 8.4(d)), stated or implied an ability to exert improper influence on a  government  official or to achieve results by unethical means (Rule 8.4(e)), and thereby violated professional conduct rules (Rule 8.4(a)).  Koenig's tactics could not be justified as zealous advocacy, the court found.  “While Koenig's conduct might be considered zealous advocating of his client's position, it does not fall within the ethical bounds of our adversary system,” the court observed.  As for Koenig's attempt to paint his conduct as a joke, the court pointed out that the prosecutors and the referee in the disciplinary hearing did not see it that way.  A reasonable person in Schreiner's position could not help but take the threats seriously, and the “joke” resulted in the appointment of a special prosecutor.  The court noted, however, that Koenig did not violate Rule 8.4(b), which makes it professional misconduct to commit a criminal act that reflects adversely on a  lawyer's  fitness, or Rule 3.5(a), which forbids  lawyers  to try to influence officials through means prohibited by law.  Although the referee concluded that Koenig committed attempted bribery, the court pointed out that Koenig had not been charged with any offense in connection with the letters.  “We decline to determine or hypothesize whether Koenig's misconduct in this case would constitute a criminal act — i.e., an act that is deemed criminal, beyond a reasonable doubt,” the court stated.  On the question of an appropriate sanction, the court pointed out, as aggravating factors, that Koenig had been disciplined on two previous occasions and that he was unwilling to acknowledge the wrongfulness of his conduct.  Several mitigating factors were considered: his cooperation during the disciplinary proceeding, his continuing commitment to the legal profession, and the lack of any harm to clients.  All considered, the court rejected the referee's recommended one-year suspension and instead suspended Koenig from the practice of law for 120 days.

 

An arbitration award requiring a company to reinstate a fired in-house lawyer to her high-level, sensitive job is void as a violation of public policy, ruled a divided Wisconsin Supreme Court (Sands v. Menard, Inc., Wis., No. 2008AP1703, 7/21/10).  Given the strong, ongoing animosity between company executives and the lawyer, the court ruled that reinstatement would put her in the conflicted position of handling a representation at odds with her personal interests.  Front pay is the appropriate remedy for the company's wrongful termination of the lawyer, the court announced.  Three dissenting justices contended that the majority's “public policy” ruling undermines the authority of parties to decide what issues they will submit to arbitration and what limits, if any, will be placed on the arbitrators' powers and potential remedies. Dawn M. Sands was fired from her position as executive general counsel for home improvement chain Menard, Inc.  She believed that Menard had engaged in gender-based pay discrimination against her and then retaliated against her when she complained about it.  Pursuant to a binding arbitration agreement, Sands' claims were submitted to a three-member panel of arbitrators.  The arbitrators found that Menard violated the federal Equal Pay Act by paying Sands less than a similarly situated male employee and that the company retaliated against her for asserting her rights, all in violation of the Equal Pay Act, Title VII of the federal Civil Rights Act of 1964 and the Wisconsin Fair Employment Act.  The arbitration panel not only awarded Sands back pay and punitive damages but also ordered that Menard reinstate her with a specified salary and bonus.  Sands had not sought reinstatement, but the arbitrators concluded that reinstatement should be awarded in her case rather than “front pay”, i.e., loss of future earnings.  It found that not reinstating Sands would reward the company for its mistreatment of her and send the wrong message to company employees.  A trial court confirmed the arbitration award, and the intermediate appellate court affirmed.  When appealed to the high court, the Wisconsin Supreme Court vacated the reinstatement award and remanded for the trial court to award front pay instead of reinstatement.  The majority took the position that an attorney's professional obligations — particularly the duty of loyalty to clients —embody the strong public policy of Wisconsin.  “Therefore, an arbitration panel exceeds its powers when it orders the reinstatement of an attorney where reinstatement would clearly lead to a violation of that attorney's ethical obligations,” reads the opinion.  “We … hold that an arbitration award requiring an attorney to violate her ethical obligations is void as a matter of strong public policy.”  The majority emphasized that Sands performed an unusually high-level, sensitive role at Menard and that the relations between management and the lawyer were hostile and strained.  “In view of this especially bitter litigation marked by personal and professional animosity, we see no way Sands could now return to Menard and serve the company in conformity with her ethical obligations,” the court declared.  In a lengthy dissenting opinion, Chief Justice Shirley S. Abrahamson argued that the majority exceeded its own powers by vacating the reinstatement award. Emphasizing the limited role that courts play in reviewing arbitration awards, Abrahamson said that “the place to resolve novel and emerging questions of law is not in a court's review of a private arbitration award.”  Abrahamson disputed the majority's assertion that Sands would be forced to violate her ethical obligations if the reinstatement award were left in place. The “personal interest” conflict referenced in Rule 1.7(a)(2) means a business-related conflict, not merely personal feelings, she contended. It is entirely possible, Abrahamson added, that the parties' hurt feelings would fade so that the representation could continue without a conflict if Sands were reinstated, or that the parties would reach a settlement to avoid reinstatement.

 

The attorney-client privilege cannot be claimed by a company that failed to confirm that its in-house lawyer was actually authorized to practice law (Gucci America Inc. v. Guess? Inc., S.D.N.Y., 09 Civ. 4373 (SAS) (JLC), 6/29/10).   Magistrate Judge James L. Cott ruled that the attorney-client privilege does not cover a company's communications with an in-house lawyer who was an inactive member of a state's bar.  The company's belief that its employee was an actively licensed attorney authorized to practice law was not reasonable because the company never did any due diligence, i.e., checking the state bar's website, to confirm the employee’s professional status.  During discovery in a trademark infringement case that Gucci America, Inc. was pursuing against Guess?, Inc. and several other companies, Gucci submitted a privilege log including communications with its in-house legal counsel, Jonathan Moss.  Upon discovery of Moss’s inactive California bar license, Guess disputed Gucci’s privilege claim.  Upon investigation, Gucci terminated Moss and sought a protective order.  Moss had transferred to inactive status in 1996 and remained on inactive status for more than 13 years, meaning his license was inactive throughout his eight years of employment with Gucci. During that time, Moss provided Gucci with legal advice and appeared before courts and administrative agencies on Gucci's behalf, Cott said. Gucci explained that it never checked Moss's bar status because its primary outside law firm recommended him and because initially he was hired for a nonlegal position before being promoted to inside legal counsel.  The company contended that Gucci management had always believed that Moss was an attorney authorized to practice law.  Magistrate Judge Cott agreed with Guess, that the attorney-client privilege does not apply under these circumstances.  Whether the work product doctrine shields the Gucci-Moss communications is to be resolved following additional briefing.  The court noted that “the attorney-client privilege contemplates that the client communicate with an individual who is not simply trained in the law, but actually authorized to engage in the practice of law.”  The court further observed that California explicitly limits the practice of law — including legal advice and court appearances — to active bar members.  Though Gucci claimed that Moss’s choice to switch to inactive status did not impact his status as a bar member, the magistrate judge disagreed.  Inactive membership is preserved for attorneys who choose to refrain from practicing law in California, and a voluntarily inactive bar member who holds himself out as entitled to practice law could be found to have committed a misdemeanor, he said.  Cott also rejected Gucci's argument that Moss was authorized to practice law for purposes of the attorney-client privilege because of his membership in two federal district courts in California.  Although Moss was ostensibly an active member of those courts' bars, he was constructively suspended from practicing in them because of his inactive status with the California State Bar, Cott said. “Because Moss did not possess a bar membership authorizing him to practice law in any jurisdiction, Gucci's communications with Moss do not satisfy any standard of the attorney-client privilege,” Cott declared. Citing United States v. Boffa, 513 F. Supp. 517 (D. Del. 1981), Cott said that Gucci could avail itself of the privilege if it was able to demonstrate that it reasonably believed Moss was authorized to practice law. According to Cott, Boffa set out three factors for determining whether a client reasonably believes that his counsel is in fact an “attorney”:

 

    1] whether the purported lawyer fraudulently held himself out as an attorney; 

 

     2] whether the client genuinely and reasonably believed him to be an attorney; and

 

     3] whether, pursuant to that belief, the client made confidential communications to the purported attorney.

 

A lawyer who gained access to an incarcerated female and had sex with her after he misrepresented to prison officials that he was counsel for the woman had his license to practice law revoked (Lawyer Disciplinary Bd. v. Stanton, W. Va., No. 34257, 6/10/10).  A hearing panel recommended an admonishment.  The disciplinary board concluded that admonishment was too lenient and voted to suspend Stanton's license for one year.  But the WV Supreme Court said it has an obligation to protect vulnerable persons in state custody “from the lustful advances of attorneys.”  Therefore, it concluded that nothing less than disbarment was called for in order to deter future similar misbehavior.  “Accepting any sanction other than disbarment does not send a clear and resounding message to the bar, the public and other interested parties, including jail and prison authorities who must work with attorneys on a daily basis,” the court said.  Attorney G. Patrick Stanton, Jr. traveled to a minimum-security prison where he visited an inmate named Rose Auvil. Stanton had previously represented Auvil in other matters, but he was not her lawyer at the time of this visit. In fact, Stanton was no longer in private practice but rather was employed as the head of the state insurance commissioner's consumer advocacy office.  However, Stanton indicated to corrections officers that he was representing Auvil and that his visit was related to the representation, having contacted the prison prior to his arrival, relaying that he was scheduling an attorney/inmate visit.  Upon arriving, he wrote “attorney” on the visitor log, and presented his bar card.  Subsequently a corrections officer witnessed Auvil performing oral sex on Stanton.  Later Stanton admitted that he and Auvil began a sexual relationship in 1986 that he sometimes paid for these sessions and that he had visited her at other correction facilities.  No criminal charges were filed against Stanton, though a hearing panel found that Stanton violated West Virginia Rules of Professional Conduct 8.4(c) (conduct involving dishonesty, fraud, deceit, or misrepresentation) and 8.4(d) (conduct prejudicial to administration of justice).  Commenting on Stanton’s misconduct, the court said, “[it] fueled a wave of questions by the public, the incarcerated, jail authorities, and fellow members of the legal profession.”  The court further concluded, “His conduct fell so far below what should reasonably be expected of attorneys as to be shocking to this Court.”  There must be mutual trust and understanding between lawyers and prison officials, the court explained, so that attorneys and clients may easily and conveniently confer on matters. “Jail or prison officials should not have to over-analyze the motivations of an attorney who seeks to meet with an incarcerated individual whom he states or implies is his client,” the court stated.

 

An in-house lawyer was fired after notifying his client's management team of his concerns about possible wrongdoing within the company.  In a split-decision, the Minnesota Supreme Court ruled that the in-house counsel cannot obtain redress under the state whistleblower statute (Kidwell v. Sybaritic Inc., Minn., No. A07-584, 6/24/10).  Though the court agreed that lawyers are not excluded from protections of the whistle blowing statute, it held that the jury verdict for the lawyer in the case at hand cannot stand.  Three justices found that the lawyer sent the e-mail not as a whistleblower to expose illegality but rather in his role as their lawyer.  Another justice opined that the lawyer breached his fiduciary duty by sending a copy of the e-mail to his father, forfeiting his whistleblower claim.  Three dissenting justices asserted that the court had no basis to second-guess the jury's finding that the lawyer acted in good faith with the purpose of blowing the whistle on possible corporate misconduct.  Additionally, they argued that a lawyer's breach of confidentiality does not automatically destroy a whistleblower claim.  Brian F. Kidwell served as general counsel of Sybaritic, Inc. for about 10 months.  The company terminated his employment three weeks after he sent an e-mail message to Sybaritic's top management expressing his concerns about a “pervasive culture of dishonesty” within the corporation.  He claimed that the company was illegally withholding potentially damaging e-mails in discovery in pending litigation and engaging in certain other activities that he asserted were unlawful.  The subject of the e-mail was “A Difficult Duty.”  After his termination, Kidwell sued Sybaritic in state court under the Minnesota Whistleblower Act, Minn. Stat. §181.932. A jury found in his favor and awarded him damages. The intermediate appellate court overturned the jury verdict and granted judgment for Sybaritic, holding that Kidwell did not engage in conduct protected by the whistleblower statute because he was fulfilling the responsibilities of his job when he reported a suspected violation of the law.  The Supreme Court concluded that Sybaritic is entitled to judgment notwithstanding the verdict in Kidwell's whistleblower case.  In a plurality opinion four justices rejected the proposition that a report made in fulfillment of an employee's job duties can never constitute protected conduct under the whistleblower statute.  The statute does not contain any language that would support a “blanket job duties exception,” noted Justice Gildea.  At the same time, Gildea insisted that an employee's job duties are relevant in determining whether the employee made the report in good faith for purposes of exposing an illegality, as is required for a viable claim under the Minnesota whistleblower statute.  An employee cannot be said to have “blown the whistle,” Gildea said, when the employee reports illegality because it is that individual's job to investigate and report wrongdoing.  But if an employee responsible for reporting illegality makes a report for the purpose of exposing illegality, then the person can be viewed as engaging in protected conduct under the whistleblower statute, Gildea said.  “When in-house counsel sends his client written advice in order to ‘pull’ that client ‘back into compliance,’ the lawyer is not sending a report for the purpose of exposing an illegality and the lawyer is not blowing the whistle,” Gildea wrote.  Justice Magnuson asserted that in applying the whistleblower statute to lawyers, courts need to keep in mind the fiduciary obligations that attorneys owe their clients, including the duty of confidentiality. A lawyer who blows the whistle on a client must still comply with Minnesota Rule of Professional Conduct 1.6 both before and after the claim is brought, he maintained.  The trial court found as a matter of law, Magnuson noted, that Kidwell breached his fiduciary duty to Sybaritic by disclosing client confidences outside the authorization of Rule 1.6. “Because Kidwell breached his fiduciary obligations to his client, in my opinion he forfeited his right to recovery,” Magnuson wrote.

 

Arizona attorneys may charge clients a “nonrefundable” minimum fee to complete a discrete job or to work a specified number of hours on the matter, whichever comes first (Arizona State Bar Comm. on the Rules of Professional Conduct, Op. 10-03, 6/10).  If counsel does not complete the task within the specified hours, the agreement may further provide that the billing structure will switch to an hourly rate for the remainder of the matter, so long as the client understands how that new rate is triggered and the overall fee remains reasonable.  In this instance inquiring lawyers asked the committee whether it would be ethical to charge a nonrefundable fee to complete a task with a proviso that there would be a cap on the maximum number of hours worked.  Would it be ethical for a lawyer who normally bills at $200 per hour to charge the client a fixed rate of $2,000 that would pay for either 10 hours of legal work or completion of the matter, whichever occurs first?  Could the agreement provide that the lawyer would begin billing at an hourly rate to finish the task if it called for more than 10 hours of work?  The committee concluded that this arrangement is ethically permissible so long as it is designated as a “nonrefundable fee” and not a “flat fee,” which connotes an entirely different arrangement. The importance of explaining the system to the client and a recommendation this explanation be in writing were stressed.  An Arizona opinion (Opinion 99-02 (1999)) permitted nonrefundable fees in Arizona if the fee is reasonable under the eight factors contained in Arizona Rule of Professional Conduct 1.5(a), the lawyer adequately informs the client of the terms and basis for this type of fee and the lawyer obtains the client's agreement, preferably in writing, the panel said.  This same opinion implicitly suggests that a “hybrid” fee would be ethical, so long as the overall fee is reasonable.  Arizona Ethics Op. 03-06 (2003) further clarified that a combination contingent fee/hourly fee agreement would be acceptable provided that the overall fee charged was reasonable. A nonrefundable fee becomes the property of the lawyer the instant it is paid and therefore should not be placed in a trust account where it will be commingled with client funds, the committee said. By contrast, it added, a “flat fee” is historically associated with the idea that the client pays one amount for all legal services necessary to complete the legal matter.  Here the proposed arrangement only guarantees a maximum number of hours and does not certify that counsel will see the task through to conclusion, the committee recommended that lawyers avoid using the term “flat fee.” Instead, the minimum fee aspect of the arrangement should be referred to as “earned on receipt” or “nonrefundable,” it advised.  Were the attorney to need to shift the minimum fee arrangement to an hourly rate to complete the project, the panel said, would be important to explain the circumstances of the new hourly fee to the client (Arizona Rule of Professional Conduct 1.4).  Where the client balks at continuing at an hourly rate, the lawyer would have to comply with Rule 1.16 (duties on termination) before withdrawing from the representation.  Where litigation is pending, an attorney remains counsel of record until the court allows withdrawal.

 

A corporate official at Juridica Capital Management – a litigation financing firm – announced on May 21 that the emerging business of third-party litigation financing is gaining attention of large insurers who view it as an attractive new market where they can offer products.  A big development in third-party litigation financing is that “this phenomenon has caught the attention of the sleeping giant” that is the U.S. insurance industry, said Timothy Scrantom, Juridica's president, at a conference on third-party litigation financing sponsored by the Rand Corp., a public policy think tank based in Santa Monica, Cal.  As reported by ABA/BNA Lawyers’ Manual on Professional Conduct, large insurers are looking at  creating new products that would insure companies and law firms against several types of litigation risk, including adverse cost risk, appellate risk, and the risk of obtaining a smaller recovery than expected.  “The policies will cover all downside risk in investing in claims,” added Richard Fields, Juridica's CEO, who also spoke at the Arlington, VA conference.  “Five to 10 years from now, we'll be sitting here talking about a [third-party litigation financing] industry that's owned by the insurance industry,” Fields said, half-jokingly, at another point during the two-day conference.  Fields declined to name specific insurers that are planning to become active in this area.  Scrantom observed, “There is a robust industry developing” in third-party litigation financing fueled by “a strong appetite” for outside funding on the part of law firms, corporations, and investors.  He estimated the current market available for litigation financing at $40-50 billion.  This is especially germane since traditional sources of credit are not as readily available now.  This means that corporate plaintiffs and law firms will increasingly turn to outside investors to help fund multimillion-dollar commercial lawsuits in a variety of areas, including patent infringement, antitrust, and international arbitration.  Along with large insurers, so-called third-party litigation financing in commercial cases is attracting the attention of major financial services companies, certain hedge funds, and specialized legal claim investment firms that offer funding in return for a sizable portion of any recovery.  This phenomenon is driven by at least four major factors, according to Aaron Katz, a director at the fixed income division of Credit Suisse Securities, another company involved in litigation financing.  First there is “a discernible trend toward more liberalization” of legal ethics rules that have restricted outside funding of litigation.  Second, multinational U.S. firms are facing more competition abroad, particularly in Europe, where the concept of outside legal financing is more established.  Third, corporations are putting more pressure on law firms to come up with alternative litigation financing arrangements and move away from the traditional hourly billing model where the financial incentives between attorney and client are not aligned.  Fourth, business-to-business litigation is becoming “an increasingly important tool” to protect a company's core business assets, particularly in the area of patent litigation, Katz said.  In addition, accounting firms are becoming more adept at valuing claims, added Juridica's Scrantom.  In addition to Juridica, which is publicly traded, Burford Capital Management and privately held ARCA Capital Partners are large litigation financing firms operating in the United States. Both Juridica and Burford are incorporated in the United Kingdom, which has seen significant expansion of third-party investment in litigation over the past five years.  Though most outside litigation funding activity to date has been on the plaintiffs' side, there is growing interest in third-party funding of corporate defense litigation, according to James Tyrrell, a partner with Patton Boggs in New York.  Corporate CEOs “are looking for ways to take liabilities off their books,” he said.  One way is to pay an outside party to assume a portion of the defense claims. The outside party will bet it can resolve the claims for less than it received from the seller to assume the claims, pocketing the remainder as profit, said Tyrrell, who said he has worked with several of his firm's clients to find outside sources of litigation funding.  The emerging funding model also has its critics. “Dilution of control over the litigation” is one concern expressed by John Beisner, a partner with Skadden Arps in Washington, D.C., who has written articles against third-party funding for the U.S. Chamber of Commerce.  Outside groups with a financial interest in the litigation could unduly influence decisions on settlement.  Moreover, large-scale investment by third parties in litigation could lead to a “loser pays” system in U.S. courts, forcing a shift in the long-standing custom that defendants absorb their own litigation costs, Beisner warned. “If courts start to get a sense that the litigant appearing before them is an investor — rather than someone pursuing their individual rights — I think judges are going to look a lot more carefully at whether the defendant isn't at least owed back [by the plaintiff] what it put in to defend the litigation,” he remarked.  Geoffrey Lysaught, senior director of Northwestern University's Searle Center on Law, Regulation, and Economic Growth, disputed the notion argued by opponents that outside litigation funding is undesirable because it would lead to more lawsuits. “The real question is whether the claims are meritorious or not,” he said, noting that an increase in meritorious lawsuits could be viewed positively.  Rather than restricting such funding activity, Lysaught suggested the proper policy response by regulators would be to require “mandatory fee shifting” in cases where there is an outside funder.  “A loser pays system would reduce speculative litigation and allow meritorious claims to go forward,” Lysaught said.

 

Missouri lawyers are prohibited from collecting “nonrefundable” fees (Missouri Supreme Court Advisory Committee, Formal Opinion 128, 5/18/10).  Under Missouri Rule of Professional Conduct 4-1.15(f) there is no such thing as a flat fee that is “earned upon receipt”.  Rather the opinion states, “all flat fees must be deposited into a lawyer trust account and promptly removed when actually earned, similar to prompt removal of earned hourly fees.”  Lawyers often receive advance payment before they complete any work and sometimes describe all or part of these payments as either a “minimum” or “nonrefundable” fee.  But such characterizations are misleading since Missouri does not recognize nonrefundable fees “earned upon receipt.”  Missouri Rule 4-1.16(d) mandates that any fee that has not been earned must be refunded at the end of the representation.  A lawyer may keep a so-called flat fee if the total amount charged was reasonable, but counsel must return any portion of that fee that was not earned.  The factors listed in Rule 4-1.5(a) for determining the reasonableness of a fee are to be analyzed to determine whether the attorney must refund all or a portion of the fees paid in advance.  Some confusion over nonrefundable fees may stem from the historical view that a flat fee is “earned upon receipt” for trust account purposes.  This concept of “earned upon receipt,” contradicts Rule 4-1.15(f), stating, “A lawyer shall deposit into a client trust account legal fees and expenses that have been paid in advance, to be withdrawn by the lawyer only as fees are earned or expenses incurred.”  It may be appropriate for lawyers to charge a reasonable “intake fee” to compensate counsel for the loss of potential business where the lawyer receives enough information at the preliminary interview to create a conflict of interest under either Rule 4-1.8 or 4-1.9.  An attorney “may charge a fee for initially intaking a prospective client or accepting a case, to the extent that it creates a conflict in a situation in which the attorney may have to decline representation of others involved in the case,” the opinion reads. The committee opined that such a fee would be “earned at commencement” and not accurately characterized as “nonrefundable.” The opinion stresses the importance of clearly explaining the arrangement to the client. For instance, counsel should avoid calling the fee “nonrefundable” if the attorney is charging an intake fee based on the attorney's inability to represent anyone else in the matter.  The committee intentionally used the word “fee” rather than “retainer” to describe these arrangements, observing that historically the term “retainer” was used to describe a fee paid to make sure a specific attorney remained available to a client.  Today that term has taken on multiple and inconsistent meanings causing confusion among clients.  The committee urged lawyers not to use the term “retainer” when they actually mean an advance fee deposit, flat fee, or initial deposit.