Your Ethical Duties to Plan for Law Practice Succession
Unlike some states, California does not have specific legal ethics rules that require attorneys to adopt a law practice succession plan, there are several Rules of Professional Conduct that impose equivalent duties to plan. It’s not always easy to think about circumstances that could render you unable to continue practicing law–accidents, illness, disability, planned or unplanned retirement, or untimely death– but these events do occur. Under any of these circumstances, your clients’ interests, as well as your own, must be protected.
Every California has a duty of competence under CRPC Rule 3-110, which means that you have an obligation to take reasonable steps to ensure that client matters will not be neglected in the event of death or disability. Unexpected events could have serious impacts on your clients. Important client matters, such as court dates, statutes of limitations, or document filings, could be neglected if you fail to plan for these contingencies. California attorneys have a separate duty to keep clients informed of significant developments, under CRPC Rule 3-500. This rule has been interpreted to impose duties on attorneys to advise clients regarding change of employment, and generally also implies a duty to plan for client communications in the event of your death or incapacity. You also have a fiduciary duty and duty of loyalty to your clients, which means you must protect your clients’ interests in various contingent circumstances, including your death or incapacity. CRPC Rule 3-700, related to termination of employment, provides an analogous scenario. That rules requires attorneys to take reasonable steps to avoid reasonably foreseeable prejudice to client related situation in which they will no longer be able to represent client.
Navigating California’s Narrowing Attorney-Client Privilege
Two recent cases suggest that the attorney-client privilege in California is narrowing from its traditional robust scope. In LA County Board of Supervisors v. Superior Court (ACLU), the California Supreme Court held that law firm invoices are not categorically privileged, and may be subject to disclosure depending on the content of the invoices, and the active status of the underlying matters. In Wadler v. Bio-Rad Laboratories, a Magistrate Judge in the Northern District of California held, among other things, that the Sarbanes-Oxley Act preempts California’s rules regarding attorney-client privilege.
Neither of these cases, in and of itself, redefines the scope of California’s attorney-client privilege. Either case could be limited to its own facts or procedure, which are quite distinct situations. But taken together these cases suggest that California lawyers and firms need to be aware of the significant potential limitations on the attorney-client privilege, and how it may continue to evolve:
- Law Firm invoices are not automatically privileged. It is a not a departure from established rules and cases to say that communications are not automatically protected from disclosure based on the attorney-client privilege. The privilege is not a blanket protection that captures everything that lawyers send to their clients. The fact that law firm invoices are not themselves categorically protected shines a new light on the limitations of privilege, however. Most lawyers and law firms do not anticipate that the information in their invoices to clients could be subject to disclosure, and they act accordingly. Based on the ACLU case, it is a good idea to evaluate what information you convey on invoices and whether it would be privileged. Don’t draft client invoices with the expectation that they are categorically privileged.
- Not everything in a law firm invoice is privileged. It stands to reason that not everything on a law firm invoice is privileged. It is hard to see, for example, how the ZIP code for your office is privileged. It’s also not clear why the amount you pay for copies would be privileged, for example. But information about what you are copying would tend to suggest your legal strategy and tactics, your case staffing, and even your cost limitations, all of which likely would be, or at least arguably, should be, privileged. The Court in ACLU asserted that the privilege still would protect information that “lies in the heartland of the attorney-client privilege,” whatever that means. But gone are the days when lawyers could bill clients with a generic reference like “For legal services rendered.” Today, by client demand, invoices tend to be extremely detailed. Don’t draft client invoices with the expectation that each of those details will be privileged.
- The scope of privilege may change when the active status changes. Perhaps the most potentially troubling aspect of the ACLU case is the concept that the privilege for law firm invoices can change, depending on whether the matter is active, dormant, or closed. The scope of this concept is not yet clear, but the problems it could create are evident. Assume that your firm defends a series of class actions of a particular type, say wage-and-hour cases, for a particular client. Based on the ACLU case, could a litigation opponent successfully request your invoices for past, closed cases? Those invoices to clients, even though for closed matters, likely lay out your strategy and tactics for defending that particular type of case for that particular client, or type of client, in great detail. It is not difficult to imagine a scenario where the concepts of the ACLU case become a tool to subvert the protections of the privilege, through closed cases, even for the “heartland” information.
- Privileges will be evaluated case-by-case. Both the ACLU and Bio-Rad cases function as good reminders that privilege determinations are quite situation-specific, and will be evaluated that way. Lawyers and law firms should not assume that any category of communication will be per se protected by the privilege.
- California’s rules may not govern the privilege analysis. The Bio-Rad case illustrates the important point that the scope of the attorney-client privilege may not be determined under California rules or California law. Federal privilege may apply, or the particular privilege considerations of the federal statute at issue, like the whistleblower statute in Bio-Rad, and generally may be less robust.
5 Law Firm Systems to Review for 2017
Properly managing a modern and profitable law firm in 2017 and beyond requires balancing vigilance and innovation. The legal headlines are full of emerging risks to law firms, including confidentiality breaches and technology disasters. The legal headlines are also full of competitive risks for law firms. Passive management of a law firm, even a successful one, is not a good strategy. You may not change, but the marketplace surely will.
January seems like the right time of year to face up to the things we should be doing, but aren’t. Here are 5 firm systems that you should review critically in 2017, and annually:
- Firm Management. Consider whether your Partnership Agreement or other organizing documents are up to date, with detailed compensation structures that incentivize partners and other attorneys at the firm to think about and comply with all ethical requirements. Analyze governance policies to ensure that you prioritize compliance with legal ethics requirements, and to ensure an appropriate response in the event of an ethics question or a potential ethics issue.
- Clients and Matters. Analyze technology systems for identifying and resolving client conflicts, protecting client confidentiality, and documenting each of the firm’s engagements. Any system is only as good as the information that goes into it and only works if it is used consistently and uniformly. Many conflict issues arise from latent conflicts (a subsidiary vs. parent conflict, for example) that may not be obvious on the face of a conflict search. Ensure that your systems are properly set up, and are being used, and used in the right way.
- Calendaring and Deadlines. A sophisticated calendaring system to monitor all firm deadlines is essential. Take advantage of new technology to integrate calendaring functions into attorney workflow, and to ensure accuracy. Ensure that your system is durable and can be accessed in the event of an emergency or significant disruption.
- Information Management. Client confidentiality in California is not a gray area: you must keep client information confidential. This means that your firm must have sufficient systems in place to ensure that information is secure. Analyze whether your information security policies are sufficient (what rules exist regarding laptop security, thumb drives, cloud data, for example). Analyze whether attorneys and staff are following the policies. Consider whether your firm’s technology is sufficient to prevent a breach, and/or to respond to one if it occurs.
- Financial Management. Review your trust accounting procedures and safeguards to ensure that client funds are handled properly. The rules are quite clear about what you can, and cannot, do with these funds. Ensure that your attorneys and staff are properly trained to identify appropriate issues and to handle these items properly. Separately, consider any alternative fee arrangement from an ethical perspective: does the arrangement place the client’s interest in conflict with yours? does the arrangement incentive something that could be an ethical concern (e.g., incentivizing attorneys to spend as little time as possible on a case)? is the arrangement properly documented, to avoid ambiguity when bills come due?
Worry About the Conflicts that Your Software Probably Won’t Detect
Any law firm’s goal should be to avoid conflicts. That starts with detecting them, and today, most law firms have relatively robust conflicts-checking systems in place and in regular use. It’s fairly straightforward to deploy software that will keep a record of clients and permit searches to detect conflicts, or potential conflicts, when a new matter arises. But like all software, its output is only as good as the information you input. Some supplements are fairly easy, and you may already be doing them. Entering multiple variations, and spellings, even mis-spellings, of client names will increase the accuracy of your system. But recent conflict cases suggest that law firms should also be considering more than just the parties when entering client conflict data. A robust client conflicts system should give you a clear picture of your clients and their businesses, including subsidiaries, parents, affiliates, and potentially even other parties with whom they do business or compete.
Consider an example. If your current conflicts system does not include names of client subsidiaries, when you check party names for a new matter where the client would be adverse to a client’s subsidiary, the system won’t alert you to anything. And it’s true that conflicts are not always imputed from subsidiary to parent. But sometimes they are: if a subsidiary uses the same internal counsel, or shares confidential information, or otherwise looks and acts the same as the parent for legal matters, this should set off alarms about the potential conflict for your firm. So taking in a new matter for a client whose interests may be adverse to one of your current client’s subsidiaries is a potential problem. If the current design of your current conflicts-checking system, or the current implementation of it, would not signal this issue, you need to make it more robust.
Fortunately, it’s not that difficult to examine your current system to determine potential weak spots, and to fix them.More
Protecting the Attorney-Client Privilege for In-Firm Ethics Communications
When a client matter raises a legal ethics issue or, in the worst-case scenario, when a client accuses you of malpractice, it’s a good idea seek the advice of other lawyers at your firm. But maintaining the privilege of those communications within your firm, related to legal ethics issues or malpractice, is more difficult than it may seem at first glance. Until relatively recently, California cases suggested that the attorney-client privilege for attorneys seeking legal ethics advice within their own firm regarding ethics issues about current clients necessarily gave way to the firm’s fiduciary duties to its client.
This generally meant that when a lawyer sought in-firm legal advice from another attorney, even one designated as the firm’s general counsel, there would be no attorney-client privilege for those communications. This seemed an odd result, since we would expect courts to encourage attorneys to seek advice internally when an ethical issue, or a malpractice issue, arises. If those communications are not privileged, and beyond that, if you had an affirmative duty to disclose all of them to the clients, how likely would you be to seek that advice?
California courts are now clearly moving in the direction of recognizing the attorney-client privilege for in-firm communications regarding legal ethics issues. Following similar trends in other jurisdictions, including New York, Massachusetts, and Georgia, recent California opinions suggest that courts will recognize the attorney-client privilege for in-firm ethics advice and communications. So you can assert and protect the attorney-client privilege for in-firm ethics advice, but successfully asserting the privilege in these situations requires advance planning.
Tracking Proposed Revisions to California’s Rules of Professional Responsibility
California’s Commission for the Revision of the Rules of Professional Responsibility has proposed 68 new and amended rules for attorneys, and is seeking public comment on the proposed rules. California is the only state that whose professional responsibility rules do not track the ABA Model Rules. The Commission has issued an Executive Summary detailing the proposed and amended rules, comments, and dissenting views. The Commission also issued a detailed list of rule revisions considered, but rejected. Among other things, the proposed rules include suggested revisions to rules related to personal relationships with clients, conflicts imputed through a law firm, attorney’s fees, and handling clients with diminished capacity. The public comment period expires September 27.
California Supreme Court Will Review Arbitration, Advance Conflict Waivers, and Disgorgement of Fees
The California Supreme Court has granted review in Sheppard, Mullin, Richter & Hampton, LLP v J-M Manufacturing Co., Inc. to address several legal ethics issues of critical importance to California law firms. The Court of Appeal in the case below held that the question of whether the firm’s arbitration provision was enforceable was for the court, not the arbitrators, to decide; that the firm’s simultaneous representation of J-M and another client violated California Rules of Professional Conduct 3-310(C)(3); and that the firm’s violation of Rule 3-310(C) made the entire fee agreement unenforceable, meaning the firm was not entitled to any fees related to the matter from the date of the conflict forward.
The Supreme Court’s review will consider the following: “(1) May a court rely on non-legislative expressions of public policy to overturn an arbitration award on illegality grounds? (2) Can a sophisticated consumer of legal services, represented by counsel, give its informed consent to an advance waiver of conflicts of interest? (3) Does a conflict of interest that undisputedly caused no damage to the client and did not affect the value or quality of an attorney’s work automatically (i) require the attorney to disgorge all previously paid fees, and (ii) preclude the attorney from recovering the reasonable value of the unpaid work?”More
Can Advance Conflict Waivers Ever Be Informed Consent?
Recent examples in California courts have demonstrated the limits of advance conflict waivers and the effects of these limits. Needless to say, finding out that an advance conflict waiver is not effective to resolve a conflict can come as a shock, because it generally happens after-the-fact. Recent cases suggest that attorneys and firms who use advance conflict waivers should go back to the drawing board to evaluate how they are used and, more importantly, what they can accomplish and what they cannot.
Start at the beginning. California Rules of Professional Conduct Rule 3-310(C) provides that attorneys cannot represent clients with conflicting or potentially conflicting interests “without the informed written consent of each client.” Rule 3-310(A)(2) provides that “‘Informed written consent’ means the client’s or former client’s written agreement to the representation following written disclosure.” In general terms, an advance conflict waiver is a provision in an attorney-client fee agreement that notifies the client of the potential for conflicts and ostensibly gets the client to waive those potential conflicts in advance. But waiving potential conflicts in advance is the trick. Before a conflict arises, how can you adequately describe the circumstances of the conflict to a client so that the client can give informed consent? The answer is fairly straightforward: you can’t. This does not mean that advance conflict waivers are worthless, however.More
Is the Arbitration Provision in Your Firm’s Fee Agreement Properly Drafted?
Some recent California cases have illustrated the importance of a properly drafted arbitration provision in attorney-client fee agreements, and what is at stake. Typically, arbitration is vastly superior to litigation for law firms to resolve disputes with clients related to representation, including fee disputes. Arbitration is confidential, generally has limited discovery and streamlined procedures, and can lead to a swifter resolution of what are sure to be ugly issues. But if your arbitration provision is not properly drafted, it may not be worth much when you need it. Some minor revisions to your fee agreement may mean the difference between arbitrating and litigating disputes with clients. More
Mistakes were Made? Learn from the Post-Mortem Analysis
Assume that your firm has made a mistake that led to an ethical lapse: a conflict of interest with no informed consent, or a similar misstep. Once the actual fallout from the situation subsides, from a compliance perspective the relevant question is whether you can learn from these circumstances and avoid similar issues. For any law firm in similar situations (and there are many, since California law firms deal with similar issues nearly every day) if it appears that your firm may have made mistakes that led to ethical lapses, once you move beyond the paranoia and anxiety phase it is critical to conduct a thorough and objective post-mortem analysis to prevent similar occurrences in the future. To do this, you must ask, and answer, some potentially difficult questions.More