February 2017 | Earn one hour of MCLE Credit in Legal Ethics
The ethics of settlement in civil cases
Virtually every civil case ends in settlement. As between the parties, settlements are contractual in nature. However, as to attorneys, several provisions of the California Rules of Professional Conduct, and other ethical authority, mandate what attorneys can and cannot do in settling a client"s civil case.
Attorneys must "promptly communicate” to their clients "all amounts, terms, and conditions of any written offer of settlement made to the client ….” See Rule 3-510. (Compare, in a criminal matter, all offers, whether oral or written, must be promptly communicated to the client.) Simply that a settlement offer is not in writing does not relieve attorneys of the duty to communicate such matters to their clients. In accordance with the general obligation under Rule 3-500 to keep clients reasonably informed about significant developments, attorneys also should communicate oral offers of settlement if the offer constitutes a "significant development.” Whether a settlement offer is binding is irrelevant to the duty to communicate: "Rule 3-510 does not require that there be an offer in the contract law sense.” Matter of Yagman (Rev. Dept. 1997) 3 Cal. State Bar Ct. Rptr. 788, 795.
Client controls settlement
Attorneys are required to communicate settlement offers to clients because it is the client, not the attorney, who has the authority to accept or reject a settlement offer. The client has the unilateral right to control the outcome of the case through settlement. In re Guzman (Rev. Dept. 2014) 5 Cal. State Bar Ct. Rptr. 308, 314. A settlement agreement cannot be enforced through entry of judgment under Code of Civil Procedure section 664.6 unless the settlement is signed by the party/litigants or stipulated to orally before the court by the parties. The signature or stipulation of an attorney is insufficient. Williams v. Saunders (1997) 55 Cal. App. 4th 1158, 1163.
Attorneys are not permitted to abridge a client"s control over settlement. Language in a retainer agreement intended to prohibit a client from settling or dismissing a case without the attorney"s agreement is "an improper intrusion on the unilateral right of clients to control the outcome of their cases.” Matter of Van Sickle (Rev. Dept. 2006) 4 Cal. State Bar Ct. Rptr. 980, 989. Similarly, an attorney fee agreement cannot require a client to proceed with a case to settlement or trial in lieu of dismissal—"the law will not enforce an agreement …constraining a client to pursue an unwanted lawsuit.” Lemmer v. Charney (2011) 195 Cal. App. 4th 99, 104-105. In some circumstances, however, reasonable limitations on a client"s authority to settle may be permissible. Little v. Amber Hotel Co. (2011) 202 Cal. App. 4th 280, 296 (fee agreement creating attorney lien was permissible and could not be extinguished through settlement between the parties). For example, a retainer agreement may specify that the client will accept any settlement offer of a specified minimum if the amount reflects a reasonable estimation of the value of the client"s claims. Ramirez v. Sturdevant (1994) 21 Cal. App. 4th 904, 917-18.
Negotiation of settlement terms
In addition to an attorney"s obligation to abide by a client"s settlement instructions, settlement negotiations may raise ethical issues. Consider the following:
The State Bar Committee on Professional Responsibility and Conduct (COPRAC) has opined that, in litigation where attorney"s fees are recoverable, an attorney is ethically obligated to inform the client that the client possesses, and can waive, the right to seek an award of statutory attorney"s fees as a condition of settlement, even though such a result may deprive the attorney of compensation. Cal. State Bar Form. Opn. 1989-114; Cal. State Bar Form. Opn. 2009-176. Consequently, a client may be able to settle an action by waiving the right to attorneys" fees, leaving the attorney, retained on a contingency basis, with little or no payment for the services performed. Id. Where attorney"s fees are significant as compared to plaintiff"s potential recovery, a fee waiver settlement offer may present an effective way to bring resolution to the matter. Fee waiver settlement offers are ethically permissible, and an attorney may not veto such a settlement offer that the client wishes to accept. Cal. State Bar Form. Opn. 2009-176 at pp. 3-4.
A settlement proposal (or agreement) also must not preclude an attorney from representing any other person or entity in any proceeding against a particular party. Such a term violates Rule 1-500 because it would restrict the attorney"s right to practice law. Both an attorney proposing and an attorney agreeing to such a term would violate the rule. Cal. State Bar Form. Opn. 1988-104. For the same reason, the American Bar Association has opined that a settlement prohibiting an attorney from using information about the opposing party in subsequent actions against that party would improperly interfere with an attorney"s practice of law. ABA Form. Opn. 00-417. The Los Angeles County Bar Association also has opined that a settlement term obligating a settling party to pursue a conflict of interest claim against his attorney if the attorney represents a similarly situated client violates Rule 1-500. Los Angeles Bar Ass"n Form Opn. 468 (1993).
Finally, attorneys are not permitted to intentionally deceive opposing counsel. Bus. & Prof. C. § 6106, 6128(a) and 6068(d); Coviello v. State Bar (1955) 45 Cal.2d 57, 65-66 (misleading opposing counsel falls short of the honesty and integrity required of an attorney). In the context of negotiating written agreements, the California Attorney Guidelines of Civility and Professionalism advise attorneys to avoid negotiating tactics that are false, not made in good faith or are abusive. According to COPRAC, attorneys may not mispresent factual information during settlement negotiations but may engage in puffery and generally make statements regarding a client"s negotiation goals and willingness to compromise. Cal. State Bar Form. Opn. 2015-194. Drafting the settlement agreement is subject to similar restrictions: although an attorney has no obligation to alert opposing counsel to any errors made by opposing counsel in drafting the agreement, an attorney may not make a material change to the agreement in a manner intended to deceive or defraud. Cal. State Bar Form. Opn. 2013-189.
Settlements often involve more than one party, adding another layer of ethical considerations.
Where two or more clients resolve their claims or defenses together (an "aggregate settlement”), Rule 3-310(D) requires the informed written consent of each client. Aggregate settlements take a variety of forms. For example, a defendant might offer to settle a lawsuit through a lump sum payment to a group of plaintiffs or make settlement contingent upon all plaintiffs" agreement.
Informed written consent to an aggregate settlement is required because, even though the representation initially may not have posed a conflict, a conflict may arise as a result of the proposed settlement. Some clients may wish to settle while others might prefer to hold out; or, they may disagree over how to apportion the settlement proceeds. Because an attorney cannot favor one client over another, the attorney faces the difficult situation of advising each as to the value of his or her claim or whether to reject the settlement and aggressively pursue his or her case. In our research we found no published California court opinion addressing whether joint clients can provide advance consent to a potential aggregate settlement negotiated by their attorney or agreed to by a majority of the jointly represented clients. However, an advance consent under these circumstances may implicate the rule prohibiting impairment of a client"s control over the settlement. Some out-of-state authorities take the position that an advance waiver would not be enforceable. New York City Bar Ass'n Form.Opn. 2009-6 (collecting cases and other authority); ABA Form Opn. 06-438.
Where the joint client and aggregate settlement problem is presented, informed written consent should give clients the information needed to determine whether to accept the proposed settlement. While Rule 3-310(D) does not detail the information an attorney should provide to clients regarding a proposed aggregate settlement, ABA Formal Opinion 06-438 recommends disclosure of at least the following information: the total amount or the result of the aggregate settlement; the claims, defenses or pleas involved in the aggregate agreement; the details of every other client"s participation in the agreement such as each client"s contribution or receipt of settlement funds; the total fees and costs paid to the attorney (if any) as a result of the aggregate settlement; and how costs are to be apportioned among the joint clients.
Although class actions involve numerous class members represented by the same attorney, Rule 3-310(D) does not apply to class settlements subject to court approval. Class counsel, however, should take care to avoid other conflicts of interest in connection with settlement. For example, a settlement that favors one category of class members over another may create a conflict preventing class counsel from providing adequate representation to the class. Ortiz v. Fibreboard Corp. (1999) 527 US 815, 864. Similarly, a settlement that conditions incentive awards on class representatives" support of the settlement is problematic because it separates the interests of the class representatives from those of the absent class members. Radcliffe v. Experian Information Solutions Inc. (9th Cir. 2013) 715 F3d 1157, 1167.
Settlement of client disputes
The Rules of Professional Conduct place the following restrictions on the settlement of client disputes:
Rule 3-400(B) prohibits an attorney from settling a current client"s malpractice claim or potential malpractice claim unless the client is (1) "informed in writing that the client may seek the advice of an independent lawyer of the client"s choice” and (2) "given a reasonable opportunity to seek that advice.” Where the dispute between attorney and client is simply a fee dispute, Rule 3-400(B) still applies if the settlement includes a general release of all claims and Civil Code section 1542 waiver: "[a] lawyer negotiating such a settlement with a client must advise the client that the lawyer cannot represent the client in connection with that matter, whether or not the fee dispute also involves a potential or actual legal malpractice claim.” Cal. State Bar Form. Opn. 2009-178. Of course, it also would "be unethical for an attorney, knowing he/she had committed malpractice, to attempt to negotiate an arbitration provision into an existing retainer agreement without fully disclosing the fact of the attorney"s negligence to the client.” Id. Irrespective of negotiation of any settlement with a client, if an attorney believes he has committed malpractice, he has an ethical obligation to promptly communicate to the client the factual information regarding the potential malpractice. Id.
Attorneys also are prohibited from seeking a client"s agreement, written or oral, not to file a State Bar complaint against themselves. Bus. & Prof. Code 6090.5. The rule prohibits not only proposing or suggesting a prohibited agreement, but also may encompass factual recitations in a settlement agreement that the client has not filed and/or has no future intent to file a complaint with the State Bar. Cal. State Bar Form. Opn. 2012-185. A settlement contingent upon the withdrawal of a complaint already made to the State Bar also violates the rule. Id. Where a lawyer has already sought an agreement from his client not to file a State Bar complaint, withdrawal of such a request does not cure the ethical violation. Id.
Handling settlement funds
Settlements often conclude with the exchange of funds. An attorney receiving settlement proceeds on behalf of a client must properly handle those funds. Rule 4-100 requires the attorney to promptly pay or deliver funds (or property) the client is entitled to receive. Where the attorney has a charging lien on the client"s recovery and there is a dispute regarding the amount to which the attorney is entitled, the attorney is nonetheless obligated to promptly take reasonable steps to pay or deliver to the client the portion of the proceeds that are not in dispute. 4-100(B)(4). As to the disputed amount, if the attorney and client cannot reach an agreement, COPRAC recommends that the attorney must seek arbitration or a judicial determination without delay. Cal. State Bar Form. Opn. 2009-177.
Merlo and Hodel are business litigation attorneys with the Irvine, California law firm of Hodel Wilks LLP. They represent clients in a broad range of litigation matters, including attorney malpractice, and have represented attorneys in connection with ethics matters. Hodel is also a member of COPRAC. The views expressed herein are their own. This article appears in the California Bar Journal as part of COPRAC"s outreach and education efforts. For more information on COPRAC, go to www.calbar.ca.gov/ethics.