California
Attorney Ethics Counsel

October 30, 2020

12 Steps to a Healthier Law Practice in 2020: Step 10 – Three’s A Crowd

Happy Halloween, even though it probably looks much different this year.  In November 2018, 69 new or amended California Rules of Professional Conduct (“CRPC”) were thrust upon California’s more than 250,000 lawyers.  These rules were renumbered and reorganized to align with the American Bar Association’s (“ABA”) Model Rules and replaced the 46 ethics rules that California lawyers had been following for nearly 30 years.  Despite each of us having been responsible for adhering to these rules since the end of 2018, many California lawyers and law firms still do not know, or do not fully appreciate, the significance of the modifications.  Therefore, as we enter into this new decade and the second full year of these rules being in effect, I invite you and your firm to join my 12-step program to a healthier law practice in 2020 and the years to come.

Each month I feature an article on the key ethics rule changes aimed at guiding you and your firm to a healthier law practice by better managing your risks of liability.  You can access each article directly on this blog page or you can subscribe to this blog to ensure that you don’t miss any of the 12-steps.  The steps do not have to be reviewed in order, but you are encouraged to read each step to optimize the value of this program.  To date, the following steps have been published:

Please note that the articles on this blog are not legal advice and do not take into account specific facts or circumstances for which a tailored analysis and risk management plan is recommended.

STEP 10 – THREE’S A CROWD

Avoiding crowds is our reality at the moment in an effort to reduce the risk of contracting or spreading the COVID-19 coronavirus.  Perhaps lawyers should take a cue from this pandemic and incorporate a similar precaution into our law practice in an effort to avoid unnecessary risks of liability.  Allowing third parties to permeate an attorney-client relationship can cause issues for both the client and the lawyer.

There is so much focus on the attorney-client relationship that lawyers often don’t consider the impact that third parties have on representations.  Putting all parties to a matter aside, some of the most obvious third party encounters that can affect a client’s representation and pose risks of liability to the lawyer may include, but are not limited to, a client’s close family member or friend, a client’s business relationship, a beneficiary of the legal services, a third-party vendor, or a third-party payor.

A lawyer’s ethical obligations require the lawyer to act in the client’s best interest at all times.  Generally, lawyers owe no duty of care to third-party nonclients and, thus, cannot be held liable to nonclients for the consequences of their professional negligence.  Borissoff v. Taylor & Faust (2004) 33 Cal.4th 523, 529 [“[A]n attorney will normally be held liable for malpractice only to the client with whom the attorney stands in privity of contract, and not to third parties.”].  However, a lawyer may be liable to third parties under certain, limited circumstances.  In order to effectively protect the lawyer’s duties to each client while also limiting liability to third parties, lawyers must make the time at the onset of the representation to thoughtfully analyze and communicate the risks of the third party’s involvement before continuing on with the relationship.

Under CRPC Rule 1.8.6 (Compensation from One Other than Client), California permits lawyers to represent a client when the client’s legal fees will be paid by a third party, such as a client’s family member, friend, employer or litigation funder.  Litigation funding is presently under the spotlight of the access to justice debate being waged in most states, including California.  The California Bar’s Committee on Professional Responsibility and Conduct (COPRAC) recently published Formal Opinion No. 2020-204 concerning alternative litigation funding.

A lawyer’s duties cannot be dictated by the funding contract, but must adhere to the lawyer’s ethical duties. See CA Formal Opinion No. 2020-204; ABA Formal Opn. No. 96-403.  Therefore, under Rule 1.8.6, third-party payors are permitted to pay for a client’s legal fees so long as (1) there is no interference with the lawyer’s independent professional judgment or the attorney-client relationship; (2) the client’s confidential information is protected; and (3) the lawyer has obtained the client’s informed written consent at or before the lawyer enters into the agreement for, charged or accepted the compensation from the third-party, or as soon thereafter as reasonably practicable, with few exceptions.  Violation of the rule is grounds for discipline and could led to civil liability.

Although it is now the rule stands alone, Rule 1.8.6 maintains the substance of former rule 3-310(F) and it still is not intended to revoke contractual relationships between insurers and insureds; however, some changes have been made.  Rule 1.8.6, Comment [3].  For example, Comment [4] explains that there are certain limited circumstances in which the lawyer may not be able to obtain the client’s written consent to a third-party payor before undertaking the representation, such as when a lawyer is hired by a family member or friend to represent an incarcerated person, or when a lawyer agrees to take on representation of creditors to be paid by the creditors’ committee before all creditors have been identified.  In such situations, the lawyer must obtain the client’s informed written consent “as soon thereafter as reasonably practicable.”  Rule 1.8.6, Comment [4].

Rule 1.8.6 is in line with Rules 1.2 (Scope of Representation and Allocation of Authority) in that a lawyer may limit the scope of the representation so long as the limitation is reasonable under the circumstances, the limited scope and any consequences are communicated to the client, and the client gives informed consent.  Carefully drafted agreements and candid communications with the client and the payor will decrease the risk of miscommunication and temper expectations.  When advising the client in writing about having another person pay for the client’s attorney’s fees, the lawyer should assure the client that the attorney-client relationship is only between the lawyer and client and that the lawyer will not allow the payor to interfere with the attorney-client relationship, interfere with the lawyer’s exercise of independent professional judgment on behalf of the client, or seek access to confidential client information.  See Sharp v. Next Entertainment, Inc. (2008) 163 Cal.App.4th 410, 428-429 [(“‘there is [a] danger that the lawyer will tailor his [or her] representation to please the payor rather than the client….”  ‘), quoting 1 Hazard & Hodes, The Law of Lawyering (3d ed., 2008 supp.) §11.8, p. 11-23.].  Obtaining a guarantee from a third-party that the third-party will pay the client’s fees if the client does not or cannot do so, must be in writing under Civil Code §1624, subdivision (a)(2).

Confidentiality under CRPC Rule 1.6 and B&P Code § 6068(e)(1) is a critical aspect of the attorney-client relationship that may be impacted in a third-party payor situation.  The attorney should make clear to both the client and the third-party payor that the payor is not a client of the attorney and, therefore, does not become privy to attorney-client communications or the client’s confidential information simply by virtue of the payment of the client’s legal fees.  A lawyer’s duty of confidentiality runs to the client alone and confidential client information cannot be disclosed to a third party without the client’s prior permission.  It must be determined at the onset of the relationship if the client is willing to give informed consent to sharing any confidential information with the third-party payor so the payor can monitor the matter or keep track of what fees and costs are being incurred.  Sharing the client’s confidences with the payor after the client has given informed consent satisfies the confidentiality obligation under Rule 1.6,  but the protections of the attorney-client privilege must also be considered when deciding what information should be disclosed to the payor.  It may be prudent to have separate agreements, billing statements and communications with differing detail, so the information provided to the third-party payor can be better controlled in order to minimize any unintended waiver of attorney-client protections.

Many of these same concerns apply in situations where a client’s family member(s) or other client confidant(s) are in close proximity to the client during the attorney-client representation, even if the legal fees are not being paid by the third-party.  For example, simply allowing a third-party to attend an attorney-client meeting or exchanging communications with a client through a third-party’s email address may impair client confidentiality under Rule 1.6 and B&P Code § 6068(e)(1).  In such instances, it is important to not only disclose to the client any risks presented by the third party, but in order to effectively mitigate any liability the third party may pose, the lawyer should inform the client and the third-party, preferably in writing, that the lawyer only represents the client and owes no loyalty or other duties to the third-party, and that the third-party should seek independent counsel as necessary.

However, even where it has been made clear by the lawyer that no attorney-client relationship exists with the third party, when the third party is so closely related to the client that he or she has an interest in the outcome of the client’s claim or holds a separate claim dependent upon the success of the client’s claim, an attorney may owe a duty to inform that third-party of the existence of the potential claim and the need to seek legal representation.  Meighan v. Shore (1995) 34 Cal.App.4th 1025, 1041 [attorney representing husband in a medical malpractice case owed a duty to inform his wife of her possible claim for loss of consortium in husband’s action]; see also Nichols v. Keller (1993) 15 Cal.App.4th 1672, 1686-1687 [attorneys employed to file and prosecute workers’ comp claim had duty to inform client of possible third-party tort claim against employer].

There are many other third-party relationships that can impact an attorney-client representation and present risks of liability to a lawyer.  Knowing and evaluating your ethical and legal obligations before accepting a representation where a third party is involved is only the first step to managing risk.  If you reasonably believe you can competently represent the client in accordance with your ethical obligations, then, even if the rules do not require it, best practice dictates that detailed disclosures should be communicated in writing to both the client and the third party, informed written consent from the client and the third party should be obtained, and the third party should be advised to seek any legal advice from independent counsel.  Finally, make sure your actions comply with your written commitments.

Please contact author, Kendra Basner, if you have any questions about this article or if you would like guidance as to the application of or compliance with these rules.

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