A question I get from lawyers surprisingly often has to do with the permissibility of accepting payment for legal fees from someone other than the client. I say “surprisingly” because there is actually a Rule of Professional Conduct specific to this issue. This nifty little rule is tucked away in a list of nine specific types of concurrent conflicts of interest set out in Rule 1.8. Third-party payor arrangements are addressed in Rule 1.8(f). Pursuant to Rule 1.8(f), a lawyer may accept compensation for representing a client from one other than the client if: (1) the client gives informed consent; (2) there is no interference with the lawyer’s independence of professional judgment or with the client-lawyer relationship; and (3) information relating to representation of a client is protected as required by Rule 1.6.
Third-party payor agreements are commonplace in insurance litigation, and no doubt most insurance defense lawyers are familiar with the provision. The questions I receive generally involve fee payments by friends or relatives in the areas of family and criminal law. Such arrangements are generally permissible, although they create unique ethical issues. The expectations of friends or family footing a client’s legal bill often conflict with the obligations the lawyer owes the client under the Rules of Professional Conduct. Therefore, certain ethical issues need to be addressed at the beginning of any representation involving a third-party payor.
Because the expectations and objectives of the third-party payor may not align with the best interests of the client, a lawyer who will be compensated by someone other than the client must obtain the client’s informed consent to the arrangement. Rule 1.8(f)(1). In order to obtain “informed” consent, the lawyer must tell the client about any material risks of the arrangement and any reasonably available alternatives. See Rule 1.0(f) (“Informed consent” denotes the agreement by a person to a proposed course of conduct after the lawyer has communicated adequate information and an explanation appropriate to the circumstances). For example, where a husband has agreed to pay a wife’s legal fees in a volatile domestic matter, the lawyer should discuss with the client the possible ramifications if the husband suddenly decides to stop payment, as well as alternative means of financing the litigation that may be available to the client.
The lawyer will also have to obtain the client’s informed consent if the third-party payor fee arrangement creates a conflict of interest for the lawyer under Rule 1.7. For example, a concurrent conflict of interest may exist if the payor is one of the lawyer’s regular clients. If the lawyer’s representation of the client will be materially limited by the lawyer’s own interest in the fee arrangement or by the lawyer’s responsibilities to the third-party payor, the lawyer must comply with the requirements set out in Rule 1.7(b).
A lawyer may not accept a financial arrangement that interferes with the lawyer’s independence of professional judgment or with the client-lawyer relationship. Rule 1.8(f)(2). A similar prohibition is set out in Rule 5.4(c) (lawyer may not permit a person who pays the lawyer to render legal services for another to “direct or regulate” the lawyer’s professional judgment). Third-party payors may want to exercise some control over the manner of the representation. It is imperative for the lawyer to establish at the beginning of the representation that the third-party payor is not the lawyer’s client and that the lawyer will be acting solely at the direction of—and in the best interest of—the client. For example, in 2003 FEO 7 an adult child seeks to hire (and pay) a lawyer to prepare a durable power of attorney for her father to execute. The father is not present at the time of the request. The adult child asks that specific powers be included in the document, including the power to transfer to her, as attorney-in-fact, title to any of her father’s assets. The opinion provides that, before agreeing to the representation, the lawyer must clarify to the payor that he represents the father and conduct an independent consultation with the father to obtain his informed consent to the representation and to determine whether father wants or needs the requested power of attorney. Id. See also 2006 FEO 11 (lawyer may not, at the request of a third party, prepare documents, such as a will or trust instrument, that purport to speak solely for principal without consulting with, exercising independent professional judgment on behalf of, and obtaining consent from the principal).
Often the attempts to control the representation pertain to the payor’s desire to minimize the amount of fees spent on the representation. For example, in a criminal matter, the third party may want the lawyer to plea the case out instead of going to trial. The lawyer may not enter in a third-party payor agreement that requires cost saving measures that may restrain the lawyer’s exercise of independent professional judgment when determining the tasks and services necessary to represent the client competently. If the requirements will restrain the lawyer’s professional judgment, the lawyer is ethically prohibited from complying with restrictions. For example, in 98 FEO 17, the Ethics Committee concluded that a lawyer may not enter into a third party payor billing arrangement with an insurance carrier if the billing requirements interfere with the lawyer’s ability to exercise his independent professional judgment in the representation of the insured.
Some constraints on the representation requested by a third-party payor may be permissible if the client consents in advance after full disclosure of the benefits and risks involved. Rule 1.2(c) permits a lawyer to limit the scope of a representation “if the limitation is reasonable under the circumstances.” As noted in comment  to Rule 1.2, “The scope of services to be provided by a lawyer may be limited by agreement with the client or by the terms under which the lawyer’s services are made available to the client....In addition, the terms upon which representation is undertaken may exclude specific means that might otherwise be used to accomplish the client’s objectives. Such limitations may exclude actions that the client thinks are too costly.”
If a lawyer is accepting payment of legal fees from someone other than the client, the lawyer must ensure that information relating to representation of a client is protected as required by Rule 1.6. Rule 1.8(f)(3). A third-party payor may expect to be kept informed regarding the status of the representation. However, the lawyer’s duty of confidentiality runs to the client alone. Therefore, information about the client’s representation must not be disclosed to the payor unless the lawyer obtains the client’s informed consent or the particular situation fits within another exception to Rule 1.6. Even if the client consents to the disclosure of information to the third-party payor, the lawyer should consider the effect such disclosure may have on the application or waiver of the attorney-client privilege.
The lawyer should enter into carefully drafted agreements with the client and the payor at the outset of the litigation. I have included below an example of a Third-Party Payor Provision for a client’s engagement agreement provided by Lawyers Mutual. The lawyer should enter into a separate agreement with the third-party payor. Both agreements should state that the third-party payor is not the lawyer’s client in the matter; that the payor will have no right to instruct the lawyer in the matter; and that lawyer will not, without the client’s prior permission, disclose confidential information regarding the matter to the payor.
If payment on the matter will be ongoing, billing issues should be addressed in advance and the procedure for payments set out in the agreements. The lawyer may need to obtain consent from the client to provide the third-party payor with information pertaining to billing. Both agreements should provide who is entitled to any funds left over at the end of the legal matter. (For examples of scenarios that may occur without this last provision in the agreements, take a look at 2005 FEO 12, Payment of Legal Fees by Third Parties).
Lawyers must be mindful that no matter the source of payment for legal fees, the lawyer’s professional responsibilities are owed solely to the client. When a third party will pay the lawyer’s legal fee, it is imperative that the lawyer explain the restrictions set out in Rule 1.8(f) to the client and to the third-party payor and memorialize that understanding in a written fee agreement signed by the client and a separate agreement signed by the third-party payor.
Lawyers Mutual Sample Contract Provision
Third Party Payor of Fees and Expenses
Note: This is a sample form only and is written for the general purposes of facilitating clear expectations and avoiding misunderstandings between an attorney and client. It is not intended as legal advice or opinion and will not provide absolute protection against a malpractice action.
[NOTE: In addition to supplementing the engagement letter with a clause regarding third party payment of fees and expenses, a separate letter should be sent to the third-party payor confirming that he or she is not the lawyer’s client, is not entitled to receive privileged or confidential information, and will not have input regarding the direction of the representation. This separate letter should also confirm details of the billing arrangement with the third-party payor, in accordance with parameters set by the client.]
Fees and Expenses Paid by Third Party
As we have discussed, some or all of the fees for legal work performed by Lawyer for Client will be paid by _______________ (the “Third Party Payor”).
Based on all the information presently available, Lawyer has concluded that this arrangement will not compromise Lawyer’s duty of loyalty or independent judgment to the client. Specifically, Lawyer has determined that his or her representation of Client will not be materially limited by Lawyer’s own interests in accommodating Third Party Payor or by Lawyer’s responsibilities to a payor who is also a co-client. In reaching this conclusion, Lawyer has considered the requirements of Rule 1.7(b) of the North Carolina Rules of Professional Conduct.
It is understood and agreed that Third Party Payor is not Lawyer’s client in this matter. Lawyer will take instructions from Client, not from Third Party Payor, and Lawyer will only pursue Client’s best interests in this matter. Third Party Payor will not be consulted concerning strategic decisions in the case, nor will he or she in any other way have power, input, or influence as to the representation. Lawyer’s sole duty and loyalty in this matter is to Client. Privileged or confidential information cannot and will not be disseminated to any third party, including Third Party Payor, except as directed by Client. Please let the firm know immediately if Client objects to the firm sending invoices directly to Third Party Payor that contain details of each task performed on Client’s behalf, who performed the task, and how long the task took to complete. If Client has any concerns regarding Lawyer’s billing method, we will work closely with Client to come up with an alternative that is acceptable to Lawyer, Client, and Third Party Payor, such as sending only summary invoices to Third Party Payor.
Although we do not currently anticipate any conflict as a result of this arrangement, it is possible that circumstances could change in the future causing a divergence of interests. If a conflict arises between the duties Lawyer owes Client and the interests of Third Party Payor that could materially limit Lawyer’s representation of Client, Lawyer may be required to withdraw from this engagement.
Client understands and consents to the payment of fees and expenses by Third Party Payor.
[Optional] Although Third Party Payor has agreed to pay fees incurred by Lawyer on Client’s behalf, Lawyer holds both Third Party Payor and Client individually and collectively responsible for payment of Lawyer’s fees and expenses. Should Third Party Payor become delinquent regarding payment of Lawyer’s fees and expenses, Client will be notified and attempts will be made to seek payment from either Client or an additional third party.