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Council Actions

At its meeting on April 20, 2018, the State Bar Council adopted the ethics opinion summarized below:

2018 Formal Ethics Opinion 4
Offering Clients On-site Access to Financial Brokerage Company for Legal Fee Financing

Opinion rules that a lawyer may offer clients on-site access to a financial brokerage company as a payment option for legal fees so long as the lawyer is satisfied that the financial arrangements offered by the company are legal, the lawyer receives no consideration from the company, and the lawyer does not recommend one payment option over another.

Ethics Committee Actions

At its meeting on April 19, 2018, the Ethics Committee agreed to take no action on proposed 2017 Formal Ethics Opinion 6, Participation in Platform for Finding and Employing a Lawyer, until the Authorized Practice Committee issues an advisory opinion on the unauthorized practice of law question raised in the proposed opinion. The committee also took no action on proposed 2016 Formal Ethics Opinion 1, Contesting Opposing Counsel’s Fee Request to Industrial Commission, which will continue to be tabled pending the conclusion of appellate action in a case that is relevant to the proposed opinion. The committee voted to re-publish three opinions after revision by the committee and approved two new opinions for publication. All of the proposed opinions appear below.

Proposed 2018 Formal Ethics Opinion 1
Participation in Website Directories and Rating Systems that Include Third Party Reviews
April 19, 2018

Proposed opinion explains when a lawyer may participate in an online rating system, and a lawyer’s professional responsibility for the content posted on a profile on a website directory.

Inquiry #1:

May a lawyer “claim her profile” or set up a profile on a website directory or business listing service such as Google’s My Business, LinkedIn, or Avvo and provide information for inclusion in the profile?

Opinion #1:

Yes, if the information provided by the lawyer and as presented in the profile is truthful and not misleading. Rule 7.1(a).

Inquiry #2:

May a lawyer pay to be included in a website directory of lawyers?

Opinion #2:

Yes. A lawyer may pay the reasonable costs of advertisements. Rule 7.2(b).

Inquiry #3:

May a lawyer provide profile information to a website that will use the information to rate the lawyer in an online lawyer rating system?

Opinion #3:

Yes, if the information provided by the lawyer is truthful and not misleading. Rule 7.1(a). In addition, no money may be paid by the lawyer for a rating and, before voluntarily providing information to a rating system, the lawyer must determine that the rating system uses objective standards that are verifiable and would be recognized by a reasonable lawyer as establishing a legitimate basis for evaluating the lawyer’s services. See, e.g., 2003 FEO 3 and 2007 FEO 14. Further, the standards for the rating system must be disclosed to the public at a location on the website that a user of the website can readily find.

Inquiry #4:

If a lawyer participates in a website directory, is the lawyer professionally responsible for claims on the website about participating lawyers such as statements that the participating lawyers are “top rated” or “the best”?

Opinion #4:

Yes, the lawyer is professionally responsible for statements or claims made about the lawyer or the lawyer’s services and may not participate in any communication about the lawyer that is false or misleading in violation of Rule 7.1.

Pursuant to Rule 7.1(a)(3), a communication is false or misleading if it “compares the lawyer’s services with other lawyers’ services, unless the comparison can be factually substantiated.” Further explanation of this prohibition is set out in comment [3] to Rule 7.1 which states that “[a]n unsubstantiated comparison of the lawyer’s services or fees with the services or fees of other lawyers may be misleading if presented with such specificity as would lead a reasonable person to conclude that the comparison can be substantiated.” Characterizing lawyers listed in a website directory as “top rated” or “the best” is a comparison of the participating lawyers’ services with those of other lawyers. A lawyer may not participate in such a directory unless objective, verifiable standards for participation, as required by 2007 FEO 14, Advertising Inclusion in List in North Carolina Super Lawyers and Other Similar Publications, are applied and disclosed by the website.

Inquiry #5:

A website directory that permits lawyers to “claim their profiles” also allows consumers—usually present and former clients—to post “reviews” of a lawyer on the lawyer’s profile page. May a lawyer ask present or former clients to post reviews on her profile page?

Opinion #5:

Yes, as long as there is no quid pro quo. Rule 7.2(b) (a lawyer shall not give anything of value to a person for recommending the lawyer’s services). Under no circumstances may a lawyer solicit, encourage, or assist in the posting of fake, false, or misleading reviews. Rule 8.4(c).

Inquiry #6:

When a client is pleased with the lawyer and her services, the client’s posted review on the lawyer’s profile or webpage may contain hyperbolic accolades such as the lawyer was “the best,” “awesome,” “the smartest,” “the toughest,” etc. Rule 7.1(a)(2) and (3) prohibit a lawyer from engaging in misleading communications that create unjustified expectations or that compare a lawyer’s services with the services of other lawyers unless the comparison can be factually substantiated. Is a lawyer required to seek the removal of any review that does not meet this standard?

Opinion #6:

Yes. Most users of the Internet understand that reviews by third parties generally contain statements of opinion, not fact. To the extent that a third party review is a statement of opinion about the lawyer or her services, the lawyer is not professionally responsible for the statement and does not have to disclaim the review or take action to have the review removed or redacted from the lawyer’s profile or webpage. If a review contains a material misstatement of objective fact, however, the lawyer must take action to have the review removed or edited to delete the misstatement, or to post a disclaimer. For example, the lawyer must take action to remove, redact, or disclaim a review that falsely states that the lawyer obtained a million dollar settlement.

Inquiry #7:

Lawyer A, at the urging of a marketing firm, initially claimed her website profile or set up business pages on a number of websites like Facebook. However, she tired of posting to the profiles and pages, and soon ceased to visit the majority of them altogether. Most of the profiles and website pages allow for third party reviews that Lawyer A no longer reads. Is Lawyer A responsible for the content of the reviews posted on these website profiles and pages?

Opinion #7:

No, a lawyer is professionally responsible only for third-party content about the lawyer of which the lawyer is aware or reasonably should be aware. The lawyer is not required to monitor online profiles or pages if the lawyer does not visit the website, post to that website, or otherwise actively participate in the website. If a lawyer has abandoned a profile or webpage and the lawyer is unaware of the content of the reviews posted on the profile or webpage, the lawyer has no professional responsibility relative to that content. However, if the lawyer becomes aware, or reasonably should be aware, that material misstatements of fact are included in reviews posted on her profile or webpage, the lawyer is professionally responsible and must take action to have the offensive content removed or an explanatory disclaimer posted.

Inquiry #8:

A lawyer determines that third-party generated content on her profile on an online directory contains material misstatements of fact and that she is professionally responsible for seeking to remove or disclaim the misstatements. When she asks the website to remove the content or post an explanatory disclaimer, the website refuses to do so. What should the lawyer do?

Opinion #8:

The lawyer must withdraw from participation in the website and seek to have the lawyer’s profile or page on the website removed.

Inquiry #9:

Is a lawyer required to seek the removal of negative reviews that the lawyer perceives to be false or misleading?

Opinion #9:

Because there is no risk of creating unjustified expectations, there is no duty to correct or seek removal of a negative review posted on a lawyer’s profile or website page. Nevertheless, the lawyer may seek removal of negative reviews to protect the lawyer’s reputation. Lawyers are cautioned to avoid disclosing confidential client information when responding to a negative review. See Rule 1.6(a).

Inquiry #10:

For a monthly fee, a website offers a premium service called “Pro” that is promoted as enabling a lawyer to “upgrade” the lawyer’s profile on the website. This service provides the following benefits according to the website: no competitive ads will be shown on the lawyer’s profile page; the lawyer’s contact information is shown in a search result; the lawyer can see who is contacting her by phone, email, or on her website; the lawyer can select the best reviews and promote them at the top of the profile page; and the lawyer can write her own headline at the top of her profile. In addition, under the lawyer’s photo, whether it appears on the lawyer’s profile page or in a search result, the word “Pro” appears. On search results, a sidebar states that “Pro” indicates that information is “verified.” May a lawyer subscribe to this service?

Opinion #10:

Yes, if the information on the profile page continues to be truthful and not misleading and an explanation of the “Pro” designation appears in a prominent location beside or near the designation wherever the designation appears on the lawyer’s profile or webpages. In the absence of the explanation that the designation indicates that the lawyer paid for enhanced services, the designation implies that lawyers without the designation are not professional or “Pro.” This is a comparison of the lawyer’s services with the services of other lawyers that cannot be factually substantiated in violation of Rule 7.1(a)(3). If the website does not post the explanation, the lawyer must do so or must discontinue the premium service.

In addition, to avoid misleading users, if only selected reviews can be read by a user, there must be an explanation that the lawyer has selected the best reviews to promote. If there is an implication that the selected reviews are the only reviews that the lawyer has received or, if the lawyer has received unfavorable reviews and the profile page falsely implies that the “promoted reviews” are typical, there must be an explanation.

Proposed 2018 Formal Ethics Opinion 2
Duty to Disclose Adverse Legal Authority
April 19, 2018

Proposed opinion rules that a lawyer has a duty to disclose to a tribunal adverse legal authority that is controlling as to that tribunal if the legal authority is known to the lawyer and is not disclosed by opposing counsel.

Inquiry:

Rule 3.3(a)(2) provides that a lawyer shall not knowingly “fail to disclose to the tribunal legal authority in the controlling jurisdiction known to the lawyer to be directly adverse to the position of the client and not disclosed by opposing counsel.”

Does the duty of disclosure set out in Rule 3.3(a)(2) require a lawyer to inform the tribunal of rulings entered in lateral and lower courts?

Opinion:

Pursuant to Rule 3.3(a)(2), the lawyer’s duty is to disclose to the tribunal legal authority that is controlling as to that tribunal. The lawyer must make a legal determination as to the legal authority that is controlling for the particular tribunal.

Rule 3.3, Candor Toward the Tribunal, sets forth the duties of lawyers as officers of the court “to avoid conduct that undermines the integrity of the adjudicative process.” Rule 3.3, cmt. [2]. Preserving the integrity of the adjudicative process is consistent with the principle of stare decisis.

As an officer of the court, a lawyer has a duty to assist the tribunal in fulfilling its duty to apply the law fairly and properly. Therefore, a lawyer must not allow the tribunal to be misled by false statements of law and “must recognize the existence of pertinent legal authorities.” Rule 3.3, cmt. [4]. As explained in Rule 3.3, cmt. [4], the “underlying concept is that legal argument is a discussion seeking to determine the legal premises properly applicable to the case.”

The comments to Rule 3.3 reference “pertinent legal authorities” and “legal premises properly applicable” to the case. These phrases indicate that the lawyer’s duty is to disclose to the tribunal legal authority that is controlling as to that tribunal. The disclosure duty covers not only court decisions, but also statutes and regulations adverse to a client’s position. A lawyer is not required to inform the tribunal of authority that is not controlling.

Pursuant to Rule 3.3(a)(2), a lawyer has a duty to disclose to a tribunal considering a matter legal authority that is controlling as to the tribunal if the authority is directly adverse to the position of the lawyer’s client, is known to the lawyer, and is not disclosed by opposing counsel. The lawyer’s knowledge of the adverse authority may be inferred from the circumstances. See Rule 1.0(g).

Proposed 2018 Formal Ethics Opinion 3
Use of Suspended Lawyer’s Name in Law Firm Name
April 19, 2018

Proposed opinion rules that the name of a lawyer who is under an active disciplinary suspension must be removed from the firm name.

Inquiry #1:

Lawyer is a named partner in a law firm. Pursuant to an order issued by the Disciplinary Hearing Commission, Lawyer is actively suspended from the practice of law. Must Lawyer’s name be removed from the law firm name during the suspension period?

Opinion #1:

Yes. A suspended lawyer may not be associated with her former firm during the suspension period. The Regulations for Professional Corporations and Professional Limited Liability Companies Practicing Law state that if a shareholder in a professional corporation or member of a professional limited liability company becomes legally disqualified to render professional services in North Carolina, the name of the professional corporation or professional limited liability company shall be promptly changed to eliminate the name of such shareholder or member, and such shareholder or member shall promptly dispose of her shares of stock in the corporation or interest in the professional limited liability company. 27 N.C. Admin. Code 1E, Rule .0102. In addition, Rule 5.5(b) of the Rules of Professional Conduct prohibits a lawyer who is not admitted to practice law in North Carolina from holding out to the public or otherwise representing that the lawyer is admitted to practice law in this jurisdiction.

Therefore, within a reasonable timeframe from the effective date of the active disciplinary suspension not to exceed three months and until the active suspension ends, the suspended lawyer’s name must be removed from the firm name, firm signage, letterhead, all forms of advertisement, and the firm website. The law firm is reminded to amend the articles of incorporation with the North Carolina secretary of state and, if the suspended lawyer’s name is contained in the firm’s website URL, to change or redirect the URL to a URL that does not contain the suspended lawyer’s name. (If a URL with appropriate is not available, the law firm may adopt a trade name for its URL provided the URL is registered with and approved by the North Carolina State Bar. 2005 FEO 8.)

Inquiry #2:

Does the answer to Inquiry #1 change if Lawyer is under a stayed disciplinary suspension?

Opinion #2:

Yes. If Lawyer’s disciplinary suspension is stayed, she is permitted to practice law. Therefore, inclusion of Lawyer’s name in the firm name, firm signage, letterhead, all forms of advertisement, and the firm website is not false or misleading in violation of Rule 7.1, and does not violate other State Bar rules.

Should the suspension become active and Lawyer is no longer permitted to practice law, Lawyer’s name must be removed from the firm name, firm signage, letterhead, all forms of advertisement, and the firm website. See Opinion #1.

Inquiry #3:

Lawyer is administratively suspended for failure to pay State Bar membership dues and/or failure to satisfy the continuing legal education (CLE) requirements of State Bar membership. Must Lawyer’s name be removed from the firm name?

Opinion #3:

Yes. Whenever a member of the North Carolina State Bar fails to fulfill an administrative obligation of membership in the State Bar, the member is subject to administrative suspension. 27 N.C. Admin. Code 1D, Rule .0903. However, unlike a disciplinary suspension, administrative suspensions can be cured within a relatively short period of time. See 27 N.C. Admin. Code 1D, Rule .0904(f) (Reinstatement by Secretary of the State Bar). As noted in the Scope section, the Rules of Professional Conduct are rules of reason. Rule 0.2, Scope. It would be impractical and expensive for a firm to remove a lawyer’s name from the firm name, firm signage, letterhead, all forms of advertisement, and the firm website if the administrative suspension is of limited duration. Therefore, provided Lawyer is reinstated to active status within a reasonable period of time not to exceed three months from the effective date of the administrative suspension, it is not a violation of Rule 7.1 or Rule 7.5 for Lawyer’s name to remain in the firm name, firm signage, letterhead, all forms of advertisement, and the firm website.

Proposed 2018 Formal Ethics Opinion 5
Accessing Social Network Presence of Represented or Unrepresented Persons
April 19, 2018

Proposed opinion reviews a lawyer’s professional responsibilities when seeking access to a person’s profile, pages, and posts on a social network to investigate a client’s legal matter.

Introduction:

Social networks are internet-based communities that individuals use to communicate with each other and to view and exchange information, including photographs, digital recordings, and files. Examples of currently popular social networks include Facebook, Twitter, Myspace, Instagram, and LinkedIn. On some forms of social media, such as Facebook, users create a profile page with personal information that other users may access online. Websites that host the social networks often allow the user to establish the level of privacy for the profile page and postings thereon, and to limit those who may view the profile page and postings to “friends”—those who have specifically sent a computerized request to view the profile page which the user has accepted. NYCBA Formal Op. 2010-2 (September 2010).

Lawyers increasingly access social networks to prepare or to investigate a client’s matter. However, the use of social networks has ethical implications. Several rules restrict a lawyer’s communications with people involved in a client’s matter. Rule 4.2 restricts a lawyer’s communications with persons represented by counsel. Rule 4.3 restricts a lawyer’s communications with unrepresented persons. Furthermore, all communications by a lawyer are subject to Rule 4.1’s prohibition on knowingly making a false statement of material fact or law to a third person and to Rule 8.4(c)’s prohibition on conduct involving dishonesty, fraud, deceit, or misrepresentation that reflects adversely on the lawyer’s fitness as a lawyer.

The technology and features of social networks are constantly changing. It is impossible to address every aspect of a lawyer’s ethical obligations when utilizing a social network to prepare or to investigate a client’s legal matter. Every lawyer is required by the duty of competence to keep abreast of the benefits and risks associated with the technology relevant to the lawyer’s practice, including social networks. Rule 1.1, cmt. [8]. Further, when using a social network as an investigative tool, a lawyer’s professional conduct must be guided by the Rules of Professional Conduct.

This opinion will address ethical issues that arise when lawyers—either directly or indirectly—seek access to social network profiles, pages, and posts (collectively referred to as “social network presence”) belonging to another person. Throughout the opinion “person” refers to opposing parties and to witnesses.

This opinion does not obviate comment [1] to Rule 8.4. The comment explains that the prohibition in Rule 8.4(a) against knowingly assisting another to violate the Rules of Professional Conduct or violating the Rules of Professional Conduct through the acts of another does not prohibit a lawyer from advising a client or, in the case of a government lawyer, investigatory personnel, of action the client, or such investigatory personnel, is lawfully entitled to take. See 2014 FEO 9 (use of tester in investigation that serves a public interest).

For guidance on communicating with a judge on a social network, see 2014 FEO 8. For the restrictions on communicating with a juror or a member of the jury venire, see Rule 3.5.

Inquiry #1:

Regardless of the privacy setting established by a user, some social network sites allow public access to certain limited user information. May a lawyer representing a client in a matter view the public portion of a person’s social network presence?

Opinion #1:

Yes. The public portion of a person’s social network presence refers to any information or posting that is viewable by anyone using the internet or anyone who is a member of the social network. Such information is no different than other information that is publicly available. Nothing in the Rules of Professional Conduct prohibits a lawyer from accessing publicly available information.

As noted by the Colorado Bar Association, “[a] lawyer’s conduct in viewing [the public portion of a person’s social media profile or any public posting made by an individual] does not implicate any of the restrictions upon communications between a lawyer and certain others involved in the legal system.” Colorado Formal Op. 127 (September 2015).

Some social networks automatically notify a person when his or her presence has been viewed. The person whose presence is viewed may receive information about the individual who viewed the presence. Under these circumstances, when a lawyer views a person’s public social network presence, it is the social network sending a communication, not the lawyer. Therefore, the notification generated by the social network is not a prohibited communication by the lawyer. See, e.g. ABA Formal Op. 466 (2014) (communication generated because of technical feature of electronic social media service is communication by the service, not the lawyer). However, a lawyer who engages in repetitive viewing of a person’s social network presence so as to generate multiple notifications from the network may be in violation of Rule 4.4(a). That rule prohibits a lawyer from using means that have no substantial purpose other than to embarrass, delay, or burden a third person, and from using methods of obtaining evidence that violate the legal rights of such a person.

Lawyers may view the public portion of a person’s social network presence. However, the lawyer may not engage in repetitive viewing of a person’s social network presence if doing so would violate Rule 4.4(a).

Inquiry #2:

May a lawyer use deception to access a restricted portion of a person’s social network presence?

Opinion #2:

No. Lawyers must never use deception, dishonesty, or pretext to gain access to a person’s restricted social network presence. Rules 4.1 and 8.4(c). When seeking access to a person’s restricted social network presence, a lawyer must not state or imply that he is someone other than who he is or that he is disinterested. Furthermore, lawyers may not instruct a third party to use deception.

Inquiry #3:

May a lawyer, using his true identity, request access to the restricted portions of an unrepresented person’s social network presence?

Opinion #3:

Yes. Generally, viewing the restricted portion of a person’s social network presence will require some form of communication. The person seeking access communicates a request such as a “friend request.” The request can be accepted, rejected, or ignored. A lawyer may send a request to view an unrepresented person’s restricted social network presence if the lawyer complies with the duty of honesty in Rule 4.1 and the disclosure requirements of Rule 4.3(b).

When a lawyer has properly obtained access to the social network presence of an unrepresented person who is involved in a legal matter with the lawyer’s client, the lawyer may post communications to the person’s social network presence provided the following conditions are satisfied: the content of the posts is not false, deceitful, or misleading; the lawyer explains his role in the legal matter; and the lawyer does not provide the person with legal advice except the advice to obtain legal counsel. Rules 4.3 and 8.4(c).

Inquiry #4:

May a lawyer, using his true identity, request access to the restricted portions of a represented person’s social network presence?

Opinion #4:

Yes, such a request does not violate Rule 4.2. Rule 4.2 restricts communications between a lawyer and represented person. The purposes of Rule 4.2 are to prevent overreaching by other lawyers who are participating in the matter, interference by those lawyers with the client-lawyer relationship, and the uncounseled disclosure of information relating to the representation. Rule 4.2, cmt. [1].

As noted by Robert Keeling, Tami Weerasingha-Cote, and John Paul Schnapper-Casteras in an article in the Cornell Journal of Law and Public Policy:

Rule 4.2 is largely focused on preventing lawyers from eliciting information from a represented person. In the social media context, no information is being elicited. Rather, the lawyer is merely asking to view information that the represented person chooses to post at her own initiative for her audience to view, regardless of the lawyer’s ability to access this information. Such passive observation is not the type of conduct the rule is aimed at preventing; only active engagement with the represented person triggers the operation of Rule 4.2.

Robert Keeling, Tami Weerasingha-Cote, and John Paul Schnapper-Casteras (2014), “Neither Friend nor Follower: Ethical Boundaries on the Lawyer’s Use of Social Media,” Cornell Journal of Law and Public Policy, Vol. 24: Iss. 1.

Requesting access to restricted social network presence is not a prohibited communication as contemplated by Rule 4.2. If the lawyer’s request for access is accepted, the lawyer may view the information posted without seeking consent from the represented person’s lawyer.

Inquiry #5:

If the lawyer’s request for access to view restricted pages of a represented person’s social network presence is accepted, may the lawyer post communications to the person’s social network presence?

Opinion #5:

Posts that engage the represented person and prompt the person to post information she otherwise would not post but for the lawyer’s communication are prohibited by Rule 4.2. Therefore, if the lawyer’s posts are intended to elicit information about the subject of the representation, the lawyer must first obtain consent from the person’s lawyer. Rule 4.2. If consent to post communications to the person’s social network presence is granted, the content of the lawyer’s posts must not be false, deceitful, or misleading. Rule 8.4(c). The same restrictions apply when the lawyer and the represented person are part of the same social network site at the time that the legal matter commences.

Not all posts are prohibited. Lawyers may post communications provided such posts are not related to the subject of the representation or intended to elicit information about the subject of the representation.

Inquiry #6:

May a lawyer request or accept information from a third party with access to restricted portions of a person’s social network presence?

Opinion #6:

Nothing in the Rules of Professional Conduct prevents a lawyer from engaging in lawful and ethical informal discovery such as communicating with third party witnesses to collect information and evidence to benefit a client. Witnesses who have obtained information from the restricted portions of a person’s (represented or unrepresented) social network presence are no different in this regard than any other witness with information relevant to a client’s matter. Therefore, when a lawyer is informed that a third party has access to restricted portions of a person’s social network presence and can provide helpful information to the lawyer’s client, the lawyer is not prohibited from requesting such information from the third party or accepting information volunteered by the third party. Similarly, a lawyer may accept information from a client who has access to the opposing party’s or a witness’s restricted social network presence.

However, the lawyer may not direct or encourage a third party or a client to use deception or misrepresentation when communicating with a person on a social network site. See Opinion #2.

Inquiry #7:

May a lawyer direct a third party to request access to restricted portions of a represented person’s social network presence? If so, may the lawyer direct the third party to communicate with the represented person and post to the person’s social network presence?

Opinion #7:

As stated in Opinion #4, requesting access is not prohibited by Rule 4.2. Therefore, lawyers may direct a third party to request access to restricted portions of a person’s social network presence. However, if the lawyer knows or reasonably should know that the third party used deception, misrepresentation, or engaged in illegal activity to gain access to restricted portions of the person’s social network presence, the lawyer may not use the information unless the lawyer complies with the requirements of 2003 FEO 4 (lawyer may not proffer evidence gained during a private investigator’s verbal communication with opposing party known to be represented by legal counsel unless lawyer discloses source of evidence to opposing lawyer and to court prior to proffer).

The lawyer may not direct the third party to communicate with the represented person and post to the represented person’s social network presence if the posts are intended to elicit information about the subject of the representation. See Opinion #5.

Proposed 2018 Formal Ethics Opinion 6
Shifting Cost of Litigation Cost Protection Insurance to Client
April 19, 2018

Proposed opinion rules that, with certain conditions, a lawyer may include in a client’s fee agreement a provision allowing the lawyer’s purchase of litigation cost protection insurance and requiring reimbursement of the insurance premium from the client’s funds in the event of a settlement or favorable trial verdict.

Inquiry:

Lawyer would like to purchase “litigation cost protection” insurance for matters he handles on a contingency fee basis. The insurance is purchased by a lawyer on a case-by-case basis for a one-time premium payment. The insurance is available for purchase up until 90 days after the initial complaint has been served upon the defendant(s). The insurance reimburses a lawyer for litigation costs advanced by the lawyer only in the event of a trial loss.

Inquiry #1:

Do the Rules of Professional Conduct prohibit a lawyer from purchasing litigation cost protection insurance for his contingency fee cases?

Opinion #1:

No. A lawyer has a duty to avoid conflicts of interest with his client. According to Rule 1.7(a), a lawyer has a conflict of interest if the representation of a client will be materially limited by a personal interest of the lawyer. The purpose of the insurance policy is to protect the lawyer’s investment in the costs and expenses of litigation. However, the insurance reimburses the lawyer only in the event of a trial loss. The lawyer and the client may have different cost-benefit calculations. Therefore, the terms of the policy incentivize going to trial in certain scenarios, which raises the possibility of a conflict of interests between the lawyer and the client.

However, there are inherent conflicts of interests present in every case taken on a contingency basis. A lawyer may prefer that his client accept a low settlement offer to ensure that the lawyer receives his fee, while the client wants to reject a settlement offer and take his chances at trial. In either event, the client has the ultimate authority regarding settlement of the client’s matter. Rule 1.2(a)(1). The presence or absence of a litigation cost protection insurance policy does not alter this dynamic of the client-lawyer relationship.

Lawyer may purchase litigation cost protection insurance so long as Lawyer does not allow the terms of the coverage to adversely affect Lawyer’s independent professional judgment, the client-lawyer relationship (including the client’s ultimate authority as to settlement), or the client’s continuing best interests.

Inquiry #2:

If Lawyer recovers funds for the client through a settlement or favorable trial verdict, Lawyer proposes to be reimbursed for the insurance premium from the judgment or settlement funds. Lawyer intends to disclose the cost of the insurance to the client as part of the representation agreement.

May Lawyer include in a client’s fee agreement a provision allowing Lawyer’s purchase of litigation cost protection insurance and requiring reimbursement of the insurance premium from the client’s funds in the event of a settlement or favorable trial verdict?

Opinion #2:

Yes. A provision in a fee agreement requiring client reimbursement of a particular expense implicates a lawyer’s professional duties under Rule 1.5. Rule 1.5(a) provides that a lawyer shall not charge an illegal or clearly excessive fee or charge or collect a clearly excessive amount for expenses. Rule 1.5(b) requires a lawyer who has not regularly represented a client to communicate to the client the basis of the fee and expenses for which the client will be responsible. Specifically as to contingency fees, Rule 1.5(c) provides:

A contingent fee agreement shall be in a writing signed by the client and shall state the method by which the fee is to be determined, including the percentage or percentages that shall accrue to the lawyer in the event of settlement, trial, or appeal; litigation and other expenses to be deducted from the recovery; and whether such expenses are to be deducted before or after the contingent fee is calculated [emphasis added]. The agreement must clearly notify the client of any expenses for which the client will be liable whether or not the client is the prevailing party....

The premium for the insurance is an “other expense” that Lawyer intends to deduct from any recovery. Therefore, the amount of the insurance premium must not be clearly excessive, and the circumstances under which the client is responsible for reimbursement of the premium must be clearly communicated to the client and clearly set out in the written fee agreement. Lawyer must describe with specificity what the insurance is and why Lawyer believes a litigation cost protection policy will serve the client’s best interests. Lawyer must also inform the client that other lawyers may choose not to purchase or to charge the client for the cost of a litigation cost protection policy. Finally, Lawyer must provide the client with the opportunity to review the insurance policy.

The Florida Bar determined that litigation cost protection insurance is “part of a business agreement, albeit with a third party rather than with the client, creating circumstances resembling the conflicts of interest that can arise, and be cured, pursuant to [Rule 1.8(a)].” Florida Bar Staff Opinion 37289 (Revised 2018). Florida’s version of Modal Rule 1.8(a) (which is substantially the same as NC Rule 1.8(a)) provides that a lawyer may enter into a business transaction with a client or acquire a pecuniary interest directly adverse to a client if: (1) the transaction and terms are fair and reasonable to the client and are fully disclosed and transmitted in writing in a manner that can be reasonably understood by the client; (2) the client is advised in writing of the desirability of seeking, and is given a reasonable opportunity to seek, the advice of independent legal counsel on the transaction; and (3) the client gives informed consent, in a writing signed by the client, to the essential terms of the transaction and the lawyer’s role in the transaction.

The Florida Bar concluded that in each instance in which a lawyer wishes to purchase litigation cost protection insurance and shift the cost to the client, the lawyer must consider the ethics concerns set out in Rule 1.8(a). Florida Bar Staff Opinion 37289 (Revised 2018). The Florida Bar also concluded that, prior to seeking the client’s informed consent, the lawyer must make “an objectively reasonable determination” that purchasing the insurance benefits the client prior to seeking the client’s informed consent. Id.

Similarly, a North Carolina lawyer must satisfy these professional responsibilities, in addition to those implicated by Rule 1.5, when the lawyer intends to be reimbursed for the insurance premium from the judgment or settlement proceeds. The lawyer may include in a client’s fee agreement a provision allowing the lawyer’s purchase of litigation cost protection insurance and requiring reimbursement of the insurance premium from the client’s funds in the event of a settlement or favorable trial verdict upon satisfying the following conditions:

(1) the amount to be charged to the client is not clearly excessive under the guidelines set out in Rule 1.5;

(2) the circumstances under which the client is responsible for reimbursement of the insurance premium are clearly communicated to the client and clearly set out in the written fee agreement;

(3) the lawyer fully explains to the client what litigation cost protection insurance is, why the lawyer believes a litigation cost protection policy will serve the client’s best interests, and that other lawyers may advance the client’s costs without charging the client the cost of a litigation cost protection policy;

(4) the lawyer provides the client with the opportunity to review the litigation cost protection policy;

(5) the transaction and terms are fair and reasonable to the client pursuant to the guidelines set out in Rule 1.8(a);

(6) the client is advised in writing of the desirability of seeking, and is given a reasonable opportunity to seek, the advice of independent legal counsel regarding the arrangement;

(7) the lawyer obtains the client’s informed consent in writing at the beginning of the representation; prior to seeking the required informed consent, the lawyer has to make an objectively reasonable determination that purchasing the insurance benefits the client; and

(8) the lawyer does not allow the terms or availability of coverage under the insurance policy to adversely affect the lawyer’s independent professional judgment, the client-lawyer relationship (including the client’s ultimate authority as to settlement), or the client’s continuing best interests.

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