Ethics Question of the Month - July 2020
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Let’s Make a Deal
Attorneys Jerry and Janine are attempting to settle a dispute between their respective clients. Jerry’s client, ABC Custom Parts, supplies electronic components for goods produced by Janine’s client, XYZ Manufacturing. The dispute involves a large shipment of parts sold to XYZ by ABC that were defective, preventing XYZ from filling some orders.
Janine has approached Jerry to work out a solution because, if they go to court, the litigation costs and business disruptions could be substantial for both parties. She suggests a deal: (1) ABC ramps up production to quickly remedy the backlog issue, and (2) ABC provides a discount on several future shipments to cover XYZ’s damages.
Jerry suspects that he has some negotiating leverage because XYZ will experience more significant delays if it has to locate a new supplier and wait for them reconfigure their facility. He also knows that XYZ has a reputation for avoiding litigation and believes that they are especially eager to avoid it here. He wants to use his perceived advantage to force Janine to agree to a quick settlement on favorable terms to his client.
During the course of his settlement discussions with Janine, he makes the following representations, none of which are accurate:
- Jerry’s client cannot accept any discount over $10,000; his client specifically authorized him to offer a discount up to $17,500.
- An employee of ABC, Carl, will testify that the defect in ABC’s shipment was due to a mistake made by an XYZ employee who provided the wrong specifications; Jerry knows this is not true.
- Carl is an excellent witness; Jerry knows from experience that Carl is a terrible witness.
- Our clients’ dispute needs to get settled quickly because ABC is now negotiating with another potential customer and, if they reach a deal, ABC will not have the capacity to do any more work for XYZ; Jerry knows ABC has the capacity to accommodate the new customer and XYZ.
- His reading of the applicable precedents suggests that XYZ’s damages are far less than Janine says they are; Jerry knows Janine’s assessment of damages is probably accurate.
Under the Texas Disciplinary Rules of Professional Conduct, which is most accurate?
A. All of Jerry’s comments are improper because the rules state that a lawyer shall not “make a false statement of material fact or law to a third person” or “engage in conduct involving dishonesty, fraud, deceit or misrepresentation.”
B. All of Jerry’s comments are proper because the rules permit “puffing” by an attorney when negotiating with opposing counsel.
C. 2 is improper, but the rest are not.
D. 2 and 4 are improper, but the rest are not.
E. 2, 4, and 5 are improper, but the rest are not.
F. 1 is proper, but the rest are improper.
The two operative rules here are Texas Disciplinary Conduct Rules 4.01 and 8.04. Rule 4.01 reads:
In the course of representing a client a lawyer shall not knowingly:
(a) make a false statement of material fact or law to a third person; or
(b) fail to disclose a material fact to a third person when disclosure is necessary to avoid making the lawyer a party to a criminal act or knowingly assisting a fraudulent act perpetrated by a client.
Comment 1 to Rule 4.01 acknowledges, however, that there is some wiggle room when it comes to negotiations between attorneys:
Paragraph (a) of this Rule refers to statements of material fact. Whether a particular statement should be regarded as one of material fact can depend on the circumstances. For example, certain types of statements ordinarily are not taken as statements of material fact because they are viewed as matters of opinion or conjecture. Estimates of price or value placed on the subject of a transaction are in this category. Similarly, under generally accepted conventions in negotiation, a party's supposed intentions as to an acceptable settlement of a claim may be viewed merely as negotiating positions rather than as accurate representations of material fact. Likewise, according to commercial conventions, the fact that a particular transaction is being undertaken on behalf of an undisclosed principal need not be disclosed except where non-disclosure of the principal would constitute fraud.
Rule 8.04(a)(3), meanwhile, strictly prohibits any dishonesty, stating that “A lawyer shall not . . . engage in conduct involving dishonesty, fraud, deceit or misrepresentation.” The comments to the rule do not contain any language regarding exceptions for statements made during negotiations.
So what are the parameters for being, um, “dishonest” during negotiations? Although commentators often disagree with one another – and some readers may disagree as well -- the expert consensus is generally that making a false and material factual statement is not permitted, while subjective opinions about the strength of the case or the amount the client will be willing to pay are an acceptable part of the negotiation process.
In ABA Formal Ethics Opinion 06-439 (2006), the ABA Standing Committee on Ethics and Professional Responsibility considered this question and found that “statements regarding a party’s negotiating goals or its willingness to compromise, as well as statements that can fairly be characterized as negotiation ‘puffing,’ ordinarily are not considered ‘false statements of material fact’ within the meaning of the Model Rules.” The Committee provided some examples of both permissible and impermissible statements during negotiation:
lt is not unusual in a negotiation for a party, directly or through counsel, to make a statement in the course of communicating its position that is less than entirely forthcoming. For example, parties to a settlement negotiation often understate their willingness to make concessions to resolve the dispute. A plaintiff might insist that it will not agree to resolve a dispute for less than $200, when, in reality, it is willing to accept as little as $150 to put an end to the matter. Similarly, a defendant manufacturer in patent infringement litigation might repeatedly reject the plaintiff's demand that a license be part of any settlement agreement, when in reality, the manufacturer has no genuine interest in the patented product and, once a new patent is issued, intends to introduce a new product that will render the old one obsolete. In the criminal law context, a prosecutor might not reveal an ultimate willingness to grant immunity as part of a cooperation agreement in order to retain influence over the witness.
A party in a negotiation also might exaggerate or emphasize the strengths, and minimize or deemphasize the weaknesses, of its factual or legal position. A buyer of products or services, for example, might overstate its confidence in the availability of alternate sources of supply to reduce the appearance of dependence upon the supplier with which it is negotiating. Such remarks, often characterized as "posturing" or "puffing," are statements upon which parties to a negotiation ordinarily would not be expected justifiably to rely, and must be distinguished from false statements of material fact. An example of a false statement of material fact would be a lawyer representing an employer in labor negotiations stating to union lawyers that adding a particular employee benefit will cost the company an additional $100 per employee, when the lawyer knows that it actually will cost only $20 per employee. Similarly, it cannot be considered "posturing" for a lawyer representing a defendant to declare that documentary evidence will be submitted at trial in support of a defense when the lawyer knows that such documents do not exist or will be inadmissible. In the same vein, neither a prosecutor nor a criminal defense lawyer can tell the other party during a plea negotiation that they are aware of an eyewitness to the alleged crime when that is not the case
The State Bar of California Standing Committee on Professional Responsibility and Conduct has also considered this issue in Formal Opinion No. 2015-194 (2015) and provided six helpful hypotheticals to guide California attorneys as to what constitutes “puffery” and therefore permissible versus what is a misrepresentation of fact and therefore impermissible. Here are three of them:
Example Number 1: Attorney’s misrepresentations about the existence of a favorable eyewitness and the substance of his expected testimony.
Attorney’s misrepresentations about the existence of a favorable eyewitness and the substance of the testimony the attorney purportedly expects the witness to give are improper false statements of fact, intended to mislead Defendant and his lawyer. Attorney is making representations regarding the existence of favorable evidence for the purpose of having Defendant rely on them. Attorney has no factual basis for the statements made. Further, Attorney’s misrepresentation is not an expression of opinion, but a material representation that “a reasonable [person] would attach importance to . . . in determining his choice of action in the transaction in question . . .” (Charpentier v. Los Angeles Rams Football Co., Inc. (1999) 75 Cal.App.4th 301, 313 [89 Cal.Rptr.2d 115] quoting Rest.2d Torts, § 538). Thus, Attorney’s misrepresentations regarding the existence of a favorable eyewitness constitute improper false statements and are not ethically permissible. This is consistent with Business and Professions Code section 6128(a), supra, and Business and Professions Code section 6106, supra, which make any act involving deceit, moral turpitude, dishonesty or corruption a cause for disbarment or suspension.
Example Number 2: Attorney’s inaccurate representations to the settlement officer which Attorney intended be conveyed to Defendant and Defendant’s lawyer regarding Plaintiff’s wage loss claim.
Attorney’s statement that Plaintiff was earning $75,000 per year, when Plaintiff was actually earning $50,000, is an intentional misstatement of a fact. Attorney is not expressing his opinion, but rather is stating a fact that is likely to be material to the negotiations, and upon which he knows the other side may rely, particularly in the context of these settlement discussions, which are taking place prior to discovery. As with Example Number 1, above, Attorney’s statement constitutes an improper false statement and is not permissible.
Example Number 3: Attorney's inaccurate representation regarding Client's "bottom line" settlement number.
Attorney’s inaccurate representation regarding Client’s “bottom line” settlement number. Statements regarding a party’s negotiating goals or willingness to compromise, as well as statements that constitute mere posturing or “puffery,” are among those that are not considered verifiable statements of fact. A party negotiating at arm’s length should realistically expect that an adversary will not reveal its true negotiating goals or willingness to compromise. Here, Attorney’s statement of what Plaintiff will need to settle the matter is allowable “puffery” rather than a misrepresentation of fact. Attorney has not committed an ethical violation by overstating Plaintiff’s “bottom line” settlement number.
Although commentators often disagree with one another – and some readers may disagree as well -- the expert consensus is generally that making a false and material factual statement is not permitted, while subjective opinions about the strength of the case or the amount the client will be willing to pay are an acceptable part of the negotiation process. Jerry’s representations 1, 3, and 5 fall into the latter category, while 2 and 4 do not because they are disprovable factual assertions. The best answer is D. For a more in-depth discussion, to legalethicstexas.com.