«Margaret J. Lockhart, Esq. Cooper & Walinski, LPA 900 Adams Street Toledo, Ohio 43604 Telephone: 419.241.1200 Fax: 419.720.3423 Threats, Lies, and ...»
Threats, Lies and Silence
Negotiation Ethics for In-house Counsel
Margaret J. Lockhart, Esq.
Cooper & Walinski, LPA
900 Adams Street
Toledo, Ohio 43604
Threats, Lies, and Silence
Negotiation Ethics for In-house Counsel
Lawyers, including in house lawyers, are expected to represent their clients
zealously. And lawyers have a duty to maintain their clients’ confidences. But, when
dealing with third parties, lawyers are prohibited from making false statements of fact and, under certain circumstances from failing to disclose material facts. How can lawyers negotiate effectively if they have to tell the truth? Do they have to tell the whole truth and nothing but the truth? How will their clients react if they do? These thorny ethical issues often lack clear answers.
Lawyers’ conduct is governed by the local jurisdiction’s ethical rules. Many states have adopted a version of the American Bar Association’s Model Rules of Professional Conduct (“Model Rules”). Lawyers should look to their own state’s rules to determine what conduct is permissible. In 2002, the ABA’s Section of Litigation issued Ethical Guidelines for Settlement Negotiations (“ABA Guidelines”). The ABA Guidelines are intended to be an informal “guide for lawyers who seek advice on ethical issues arising in settlement negotiations,” not a formal set of rules or mandates. 1 I. When is a lie not a lie?
The Model Rules state that a lawyer shall not in the course of representing a client knowingly “make a false statement of material fact or law to a third person.” Model Rule
4.1. The Restatement of the Law Governing Lawyers 2 provides that a lawyer communicating with a non-client may not “knowingly make a false statement of material fact or law to the non-client.” Misrepresentations can lead not only to attorney discipline, but can also cause settlement agreements to be vacated or lead to civil or criminal convictions for fraud.
So lawyers may not ethically lie. But lawyers lie all the time, particularly in settlement negotiations. Indeed, according to one legal commentator, “[t]o conceal one’s true position, to mislead an opponent about one’s true settling point, is the essence of negotiation.” 3 If lawyers can’t lie, must they disclose their client’s bottom line, reveal weaknesses, and forfeit their leverage in negotiations? The answer is no.
The Model Rules recognize that puffery and misdirection are commonplace in
negotiations. The comments to Rule 4.1 provide:
1 American Bar Ass’n Section of Litigation, Ethical Guidelines for Settlement Negotiations (2002). The Guidelines are available on the ABA website.
2 Restatement (Third) of the Law Governing Lawyers Section 98 (2000).
3 Gerald Wetlaufer, The Ethics of Negotiation, 75 Iowa L. Rev. 1219, 1220-21 (1990) This rule refers to statements of fact. Whether a particular statement should be regarded as one of fact can depend upon the circumstances.
Under generally accepted conventions in negotiation, certain types of statements ordinarily are not taken as statements of material fact.
Estimates of price or value placed on the subject of the transaction and a party’s intentions as to an acceptable settlement of a claim are ordinarily in this category, and so is the existence of an undisclosed principal except where nondisclosure of the principal would constitute fraud. Lawyers should be mindful of their obligations under applicable law to avoid criminal and tortious misrepresentation.
The ABA Guidelines state that:
[t]he prohibition against making false statements of material fact or law is intended to cover only representations of fact, and not statements of opinion or those that merely reflect the speaker’s state of mind. Whether a statement should be considered one of fact, as opposed to opinion, depends on the circumstances.
ABA Guidelines at 35.
The comments and guidelines recognize when a lawyer opens settlement negotiations by saying that her client won’t take less than X and the adversary says his client won’t pay more than Y, they are simply establishing parameters and neither side accepts the others’ position as a statement of fact. And when a lawyer negotiating a contract for sale says the business being sold is worth no more than $3.2 million, when she knows it has greater value to her client, she is not perceived as being untruthful. In other words, a lie is not a lie under circumstances where the accepted convention is to stretch the truth.
A lie is a prohibited misrepresentation when it goes beyond puffing and relates to a fact material to the transaction. For example, if a lawyer says her client has $200,000 in insurance coverage to cover a claim, knowing there is $1 million in coverage, the lawyer has violated the ethical rule. 4 Similarly, a lawyer who agrees in settling a case to disclose the identity of a confidential informant has misrepresented a material fact if there is no informant. 5
II. When is a truthful statement a lie?
4 See Slotkin v. Citizens Casualty Co. of New York, 614 F. 2d 301 (2d Cir 1979), cert. denied, 449 U.S.
981 (1980) (settlement based on misrepresentation set aside) and In re McGrath, 468 N.Y.S. 2d 349 (1st Dept. 1983) (attorney making misrepresentation disciplined).
5 Ausherman v. Bank of America Corp., 212 F. Supp. 2d 435 (D. Md. 2002), aff’d 352 F.3d 896 (4th Cir.
If lawyers are prohibited from making false statements of fact to third parties, can they avoid ethical traps simply by not speaking at all on a particular subject? Not
according to the Model Rules, which state:
A lawyer is required to be truthful when dealing with others on a client’s behalf. A misrepresentation can occur if the lawyer incorporates or affirms a statement of another person that the lawyer knows is false.
Misrepresentations can also occur by partially true but misleading statements or omissions that are the equivalent of affirmative false statements.
Rule 4.1, Comment 1. 6
The Model Rules prohibit half truths. For example, in Sheppard v. River Valley Fitness One, L.P, 7 two different employees filed discrimination lawsuits against Fitness One. Fitness One filed counterclaims alleging that the employees conspired to fabricate their lawsuits. Fitness One settled with one of the employees, who agreed to the entry of a $50,000 consent judgment against him. But the settlement required him to pay only $100 and to provide testimony for the companion case against the other employee. After he obtained the testimony, First One’s attorney tried to use the consent judgment to his advantage in the other employee’s case. He advised the other employee’s counsel of the $50,000 judgment and said that given the “extensive evidence” marshaled in the other case, the litigation had only one possible outcome. He did not disclose that the true cost of the settlement was only $100. He demanded $50,000 to settle the case.
The opposing attorney moved to compel production of the settlement agreement and disclosed counsel’s tactics to the court.
The court issued sanctions, 8 finding that the attorney, inter alia, “intentionally misled the plaintiffs… to intimidate them into a $50,000 settlement.” The court reasoned:
It is evident … that Whittington wanted Sheppard to believe that the [other employee’s] case had settled for a payment of $50,000. True, Whittington did not say so explicitly. However, he managed to convey that impression anyway by selecting certain words and omitting certain details with studied precision. 9 6 The ABA Guidelines also state that a lawyer must refrain from making “a partially true but misleading statement that is equivalent to an affirmative false statement.” ABA Guidelines at 35.
7 428 F.3d 1 (1st Cir. 2005).
8 In addition to monetary sanctions, the magistrate judge ordered the offending attorney to take at least 10 hours of CLE on professional conduct responsibility rules within three months. Id. at 5.
9 428 F.3d at 10 (emphasis in original).
Although counsel’s words were literally true “if dissected and construed from a minimalist point of view,” the court found that they were meant to convey more. Having chosen to disclose the face dollar amount of the settlement, counsel’s failure to disclose the true value became a sanctionable misrepresentation.
III. When is silence or an an omission a lie?
The Model Rules recognize that a lawyer generally has no ethical duty to make affirmative disclosures of fact when dealing with a non-client. But under certain circumstances, a lawyer’s silence or failure to speak may be unethical.
Under Model Rule 4.1(b) a lawyer “may not knowingly fail to disclose a material fact to a third person when disclosure is necessary to avoid assisting a criminal or fraudulent act by a client, unless disclosure is prohibited by Rule 1.6.” 10 The comments to the rule state, “Rule 4.1(b) requires a lawyer to disclose a material fact, including one that may be protected by the attorney-client privilege, when the disclosure is necessary to avoid the lawyer’s assistance in the client’s illegal or fraudulent act.” The comments recognize that a client can prevent the disclosure by refraining from the wrongful conduct. If the client persists, the lawyer “usually can avoid assisting the client’s illegal or fraudulent act by withdrawing from the representation.” If withdrawal is not sufficient, Rule 4.1(b) “requires disclosure of material facts necessary to prevent the assistance of the client’s illegal or fraudulent act.” The disclosure may include “disaffirming an opinion, document, affirmation, or the like, or may require further disclosure to avoid being deemed to have assisted the client’s illegal or fraudulent act. Disclosure is not required unless the lawyer is unable to withdraw or the client is using the lawyer’s work product to assist the client’s illegal or fraudulent act.” The ABA Guidelines recognize that while there is no general obligation “to correct the erroneous assumptions of the opposing party or opposing counsel,” the duty to avoid misrepresentations and misleading conduct implies a professional responsibility to correct, and not to exploit, mistakes induced by the lawyer or the lawyer’s client. 11 Referring to Model Rule 4.1, the ABA Guidelines state that a lawyer must refrain from incorporating or affirming the statement of another that the lawyer “knows to be false.” The ABA Guidelines also state that “a lawyer should not exploit an opposing party’s material mistake of fact” and “may need to disclose information” to prevent an adversary’s reliance upon a unilateral mistake of fact. The ABA Guidelines give the example of an adversary’s reliance on an erroneous draft or settlement agreement.
According to the ABA Guidelines, “it would be unprofessional, if not unethical, 10 The Restatement states that a lawyer communicating with a non-client may not “fail to make a disclosure of information required by law.” Restatement (Third) of the Law Governing Lawyers Section 98.
11 ABA Guidelines at 56-57.
knowingly to exploit a drafting error or similar error concerning the contents of the settlement agreement.” The ABA Guidelines identify three situations where an attorney has a duty to
(a) to withdraw a previous false statement by the attorney;
(b) to withdraw a previous false statement by the client; and (c) to prevent the perpetration of a fraud through the representation. 12 The ABA Guidelines recognize, however, that the duty to disclose a misrepresentation is subject to the duty of confidentiality under Model Rule 1.6, which “trumps the ethical duty of disclosure under Model Rule 4.1(b).” 13 The courts have not hesitated to sanction attorneys who engage in misrepresentation by omission. In Mississippi Bar v. Mathis, a lawyer representing a woman claiming life insurance benefits for her deceased husband had secretly arranged for the husband’s autopsy. 14 He did not disclose the autopsy in discovery, and stood silent when his client testified (truthfully) that she opposed an autopsy because she could not bear to see her husband’s body torn apart. He resisted exhumation of the body for the same reason (creating the impression that no autopsy was performed). Upholding the
lawyer’s suspension for ethics violations, the court held:
Mathis had personal knowledge of the autopsy and his client did not. Still, in the face of such knowledge, Mathis boldly asserted that no autopsy had been performed and that none should be performed. Surely this failure to disclose is the equivalent of an affirmative misrepresentation. 15 The Debtor in In re Malden Mills Industries Inc., 16 filed a Chapter 11 proceeding in the District of Massachusetts. After three years of slow progress, the Plan was consummated and the Debtor filed a Motion for a Final Decree. Shortly before the Motion was filed, Counsel for the Creditor’s Trust asked the Debtor’s counsel why it was pushing to close the cases quickly, given the slow progress to date. The Debtor’s agent’s counsel responded that “the year was coming up, everything was done, the case needed to be closed and that people worked better with deadlines.” 17 Based on that representation, 12 Id. at 37.
14 620 So.2d 1213 (Miss. 1993).
15 Id. at 1221.
16 361 B.R. 1 (D. Mass. 2007) the Creditor’s Trust assented to the Motion and the court entered a final decree. Fourteen hours later, the debtor filed a new Chapter 11 proceeding in Delaware. The Creditor’s Trust filed a Motion to Reopen the Massachusetts proceeding, citing misconduct of the debtor and the debtor’s agent. The court granted the motion, finding that the Debtor sought the Creditors Trust’s agreement to the decree under false pretenses. The court rejected the Debtor’s and counsel’s claim that confidentiality prevented them from
disclosing the Debtor’s well-developed plan to file a second proceeding: