Client’s Mere Acknowledgement Insufficient to Satisfy Fee Splitting Rule

Reeve v. Meleyco, Third App. Dist., case no. C085867, filed 3/24/20.  Client contacts lawyer 1 about a serious traffic accident inuring the client’s wife and child.  Client and lawyer 1 meeting with lawyer 2 about the case and discuss a division of fees, 35% to lawyer 1.  Lawyer 2 and client sign a fee agreement without any discussion of the fee division.  Lawyer 1 continues to work on the case. Client becomes nervous that he will have to pay lawyer 1 in addition to paying lawyer 2 his contingent fee.  Lawyer 2 sends client a document that asks him to certify his “understanding” that lawyer 1 would receive 25% of the fees and that the total fee would not be increased because of the division.  Client signs the following acknowledgment “I, [client], acknowledge receipt of this letter and understand the contents.”  The case settles, the money is disbursed but lawyer 1 is not paid.  He files an action against lawyer 2 and recovers a judgment based on breach of the fee splitting agreement and quantum meruit.  On appeal, the judgment is reversed. The Court of Appeal finds the fee-splitting agreement is unenforceable because the client did not expressly approve the terms of the division, as required by former Rule of Professional Conduct 2-200 (now Rule 1.5.1. It also found that the quantum meruit claim was barred by the two-year statute of limitations (Code Civ. Proc. §339.)

ATILS Shrugged

 

 

On March 12, 2020, the Board of Trustees of the State Bar of California voted to shelve consideration of most of the proposals contained in the final report of the State Bar’s Task Force on Access Through Innovation of Legal Services (ATILS).  Among the most heralded of those proposals was the the so-called “sandbox”, a program that would relax regulatory standards for certain projects designed to test the efficacy of innovation in the delivery of legal services, including their potential for harm to the public.  The exact nature of these sandbox proposals was not precisely defined but presumably with revolve around one or more of these three axes – non-attorney ownership of legal service providers, relaxed unauthorized practice of law of rules, and commodification of legal services through technological platforms.  Utah and then Arizona had adopted the sandbox concept.  ATILS did not in its initial set of recommendations released for public comment in July 2019.  Those recommendations prompted a tsunami of negative comment, mostly from practicing lawyers. and largely about the proposed changes to Rule 5.4, the rule forbidding non-lawyers from owning a stake in law firms or dividing fees with lawyers

This seemed to be a surprise to the advocates of legal reform.  But it should not have been.  The crisis in “PeopleLaw” sector, to use Prof. Henderson’s nomenclature, is not only about clients who can’t get access to justice but about lawyers who can’t make a living serving those markets.  Opening up PeopleLaw to competitors fired with non-lawyer investment would make even more difficult for these lawyers to compete.  Not being able to beat them, they would be compelled to join them, becoming employees in larger, more bureaucratic legal service providers designed around efficiency, at less compensation with no control over their working conditions.  A similar path to that followed in recent decades by our fellow professionals in the medical field.

Moreover, ATILS did not present much evidence to support its view that relaxation of ownership rules would decrease the costs of legal services.  The evidence it did marshall was a law review article examining the implementation of “Alternative Legal Structures” in Great Britain which found that most non-lawyer investment went not to grossly underserved PeopleLaw sectors like family law but to areas that were much more lucrative like personal injury, products liability and mass torts (Robinson When Lawyers Don’t Get All The Profits, 29 Georgetown Journal of Legal Ethics 1.

Not exactly a surprise; investors, like Willy Sutton, go where the money is.

Sally and Johnny pondering the use of dispute resolution software platforms for in pro per marital dissoution litigants.

Hence, the sandbox, a safe space where entrepreneurs would be allowed to develop the evidence supporting the structural change advocated by the legal reformers. It is a curious concept, and not only the name, which conjures up children engaged in enjoyable frivolity. Perhaps this is meant to evoke the child-like creativity of the entrepreneurs who will find use it to find new ways to deliver legal services at low cost, without much need for expensive lawyers.  It falls into place a little more neatly when you learn that “sandbox” is a software development jargon:  “A sandbox is a testing environment that isolates untested code changes and outright experimentation from the production environment or repository, in the context of software development including Web development and revision control” as defined by Wikipedia.  The ATILS proposals are being pushed by the tech industry and software developers are very clearly in touch with their inner children.

Which is part of why they are going nowhere, for now. Certainly, the intervention of Covid 19 pandemic played a part in putting the “sandbox” on hold.  But the backdrop is a growing disillusion with technology and its alleged benefits, growing skepticism that the tech industry really has society’s best interests at heart.  Disruptive technologies have made people fearful, not more secure.

At some point, the “sandbox” is probably inevitable and a good thing.  There is no path backwards for lawyers, only forward, and that path is not going to be easy. Technology products may help to bring down the costs of some legal services (see Sally and Johnny, above.) Limited license practitioners could bring down the costs of routine services as well.  Legal education may transform itself into practical training without the academic excesses that make it needlessly expensive.  Lawyering is not going to be the same; it will be smaller, more focused, less independent. It’s been moving that way for some time now. The challenge is preserving some shreds of humanity amid the economic pressure to commodify and tech-up.  For that reason alone, tapping the brakes on dramatic restructuring of the profession is a good thing.

Unicorn Sighting: Discipline for Conflict of Interest

It is has been an item of conventional wisdom that conflicts of interests, while presenting many interesting ethical issues, are mostly dealt with through civil remedies, such as disqualification and actions for breach of duty, not discipline.  This is evidenced by a relative paucity of discipline case law dealing with conflict of interest, at least with types of conflict of interest addressed by Rule of Professional Conduct 1.7 and its forbearer, former Rule 3-310. A recent unpublished case from the Review Department runs against the conventional wisdom;  unicorns, it seems, do exist.

In the Matter of Foster, filed 3/16/20, is not a precedential decision, being public but not “published” under State Bar Rule of Procedure 1.159  but follows in the wake of a published Court of Appeal decision Knutson v. Foster (2018) 25 Cal.App.5th 1075.  The Review Department succinctly summarized the underlying facts.

Respondent Richard James Foster is charged with multiple counts of professional misconduct involving conflicts of interest arising from his representation of a professional swimmer and his failure to provide her with written disclosure of his relationships in the professional swimming world. Foster’s client was in a contract dispute with USA Swimming, an organization within which Foster maintained close professional relationships. He also previously represented the USA Swimming coach who tendered the contract offer to his client.

The Court of Appeal reversed the trial court’s granting of Foster’s motion for a new trial, finding ample evidence that Foster’s conflicts of interest in led to young swimmer Knutson’s damages, including emotional distress damages suffered when she learned that he lawyer had betrayed her in negotiating a settlement with a party that Foster’s had formerly represented, including revealing her confidential information and taking actions to actively assist the other party to the settlement.  A rather long list of the bad stuff can be found in the slip opinion at pages 18-19.  The Court of Appeal found Knutson entered into the settlement based on her lawyer’s concealment of these materials facts.  It did not find that Knutson had to prove that she would have achieved a “better result” but for Foster’s actions.  The Court of Appeals referred the matter to the State Bar as provided in Business and Professions Code section 6086.1.

The State Bar Court hearing judge found Foster culpable of five counts of misconduct : (1) former rule 3-310(B)(1) for failing to disclose a relationship with a party or witness; (2) former rule 3-310(B)(3) for failing to disclose a relationship with an interested person or entity); (3) former Rule 3-310(E) for representation adverse to a former client) and (4) and (5) two counts of revealing client confidences in violation of Business and Professions Code section 6068(e), subdivision (e).  The hearing judge did not find culpability on a moral turpitude charge (Bus.& Prof. Code section 6106) for concealing documents. She recommended 60 days actual suspension.

Both Foster and the Office of Chief Trial Counsel (OCTC) appealed.  OCTC sought the moral turpitude violation and one year of actual suspension.  Foster sought an admonition, a non-disciplinary disposition that itself has just about unicorn status.  The Review Department noted that “few published California disciplinary opinions deal with disclosure, client conflicts, and client confidences under rule 3-310.” It supported the hearing judge’s analytic approach of looking to the rather more established disciplinary case law dealing the business transaction rule -former Rule 3-300, current Rule 1.8.1 – in support of the discipline recommendation.

Given the paucity of discipline case law dealing with conflicts of interests in the discipline context, should In the Matter of Foster been a published decision.  Rule of Procedure 1.159(d) sets forth publication criteria:

Criteria for Publication. By majority vote, the Review Department may designate for publication an opinion which:
(1) Establishes a new rule, applies an existing rule to a set of facts significantly different from those stated in published opinions, or modifies, or criticizes with reasons given, an existing rule;
(2) Resolves or creates an apparent conflict in the law;
(3) Involves a legal issue of continuing interest to the public generally and/or to attorneys of the State Bar, or one which is likely to recur;
(4) Makes a significant contribution to legal literature by collecting and analyzing the existing case law on a particular point or by reviewing and interpreting a statute or rule; or
(5) Makes a significant contribution to the body of disciplinary case law by discussing the appropriate degree of discipline based on a set of facts and circumstances materially different from those stated in published opinions.

It seems to me that Rule 1.159(d)(4) and (d)(5) should apply.  It wouldn’t be a surprise if OCTC moves to publish this case.  It is possible that a petition to the California Supreme Court will be made.  Unfortunately, the Court’s own criteria for accepting review under California Rule of Court 9.16 are rather limited.  It is stretch to say that the review is necessary to resolve important questions of law and the facts would make it unlikely that this recommendation would be deemed unsupported by the weight of  the evidence.

So it seems likely that this unicorn will remain a rarity.