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Ethics: Representing Multiple Parties During Settlement Negotiations

Thu, 09/22/2016 - 11:40 -- admin25

by Stephen Andrew Kennedy

Rule 1.06(b)(2) of the Texas Disciplinary Rules of Professional Conduct provides that “a lawyer shall not represent a person if the representation of that person . . . reasonably appears to be or become adversely limited by the lawyer’s or law firm’s responsibilities to another client or to a third person or by the lawyer’s or law firm’s own interests.” Note 3 to the Rule provides that “an impermissible conflict may exist or develop by reason of . . . the fact that there are substantially different possibilities of settlement of the claims or liabilities in question.”

For example, if a firm is representing multiple defendants in a patent case, it is foreseeable that Plaintiff will make a settlement offer to Client A but not Client B. Client A may want to accept the terms, or negotiate further. Client B could be adversely affected if A settles because (a) the non-settling party will be required to defend the case alone without the benefit of Client B contributing to the defense costs; and (b) Client A will be effectively contributing money to Plaintiff’s war chest to pursue Client B. In a patent case, a third adverse situation arises because the settlement agreement between Client A and the Plaintiff will be evidence of the amount of a reasonable royalty under the patent damages statute.

The firm representing multiple clients faces other ethical issues resulting from these facts. D.R. 1.03(a) requires counsel to keep B informed of all matters relating to the case. That would include the settlement offer to A. One can easily envision B directing counsel to submit a competing offer, jeopardizing A’s settlement position. By complying with D.R. 1.03(a), the firm potentially puts A’s interests at risk in violation of D.R. 105(b)(2) because the information concerning the possible settlement is confidential to A. If Client A insists that the settlement remain confidential, the firm will be in violation of D.R 103(a) with respect to Client B.

In Haase v. Herberger, 44 S.W.3d 267 (Tex. App.—Houston [14th Dist.] 2001, no pet.), a Houston court reviewed a malpractice claim filed against a firm that had represented two parties in a settlement. In Haase, a wife and husband were involved in divorce proceedings and the two were represented by the same attorneys. During the pendency of the divorce proceedings, a settlement offer was made on a civil case, which arose prior to initiation of the divorce case, in which the husband and wife were co-plaintiffs. The husband did not desire to settle the case. The wife did. The wife obtained an order from the divorce trial court authorizing her to settle the civil case without the husband’s signature. Displeased with the result, the husband sued the couples’ attorneys, seeking forfeiture of attorneys’ fees. The court recognized that this fact scenario was certainly “consistent with being a potential conflict of interest.” Id. at 270. Though the court found that the attorneys were otherwise authorized by law to proceed with the settlement due to the divorce court’s order, the court cautioned that in situations such as this, counsel “should have followed the direction found in subsection (c) of [Rule] 1.06.” Id. The Court emphasized that counsel should have had both parties “consent to such representation after full disclosure of the existence, nature, implications, and possible adverse consequences of the common representation and the advantages involved, if any.” Id. (quoting Rule 1.06 (c)).

When does a settlement offer to A arise to “an impermissible” conflict in the representation of both A and B? In Haase, the saving grace for the attorneys was the divorce court’s order permitting the wife to settle the civil case. In the hypothetical patent case presented, the attorneys do not have that situation. As soon as A gives an indication that it wants to negotiate a settlement with the Plaintiff, Note 3 to D.R. 1.06(b)(2) is triggered because an actual conflict has arisen due to “substantially different possibilities of settlement.” The firm must disclose the existence of the conflict and advise both clients that separate counsel is necessary at least for the purpose of advancing the settlement negotiations.

Sacrificing billable time to a pair of other law firms may not be the preferred result, but the Disciplinary Rules are clear and compliance is not optional. Protecting both clients’ interests, however, will yield more for the soul of the ethical lawyer than just monetary profits at the end of the day.

Stephen Andrew Kennedy is the founder and managing partner of Kennedy Law, L.L.P. He is grateful for the assistance of Chelsie Spencer, senior associate at the firm, for her assistance in researching and drafting this article. He can be reached at skennedy@saklaw.net.

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