Ethical Issues When Fees Are Paid by Non-Clients

I. INTRODUCTION

It is not unusual for lawyers or law firms to be compensated for their services by someone other than their clients. For example, family members might pay legal fees on behalf of a criminal defendant or a party in a divorce proceeding, or in connection with estate planning matters involving relatives; or an employer might pay legal fees on behalf of an employee being sued in a job-related context. There are, of course, many other situations where a lawyer or law firm might be compensated for their services by someone other than the client. As common as such arrangements may be, because third-party payors may have interests that differ from those of the client (including interests in minimizing the amount spent on the representation and in learning how the representation is progressing), the lawyer must ensure that the payment from a non-client is properly documented and does not create a conflict of interest or interfere with the lawyer’s responsibilities to the client.

Rule 1.8.6 of the California Rules of Professional Conduct imposes three requirements on a lawyer who enters into an agreement for, charges, or accepts compensation for representing a client from someone other than the client.

First, there must be no interference with the lawyer’s independent professional judgment or with the attorney-client relationship. The lawyer’s duties are to the client regardless of who is funding the engagement. The lawyer must not allow the relationship with (or dependence on payment by) the third-party payor to impair the lawyer’s objectivity and loyalty to the client.

Second, confidential information of the client must be protected, as required by Business and Professions Code Section 6068(e)(1) and by Rule 1.6 of the California Rules of Professional Conduct. Just because a third party is paying the bills does not mean that the lawyer can share confidential information with a third party. As discussed below, this may require the lawyer to explain to a person paying the fee that he or she is not the lawyer’s client.

The California State Bar’s Standing Committee on Professional Responsibility and Conduct recently issued an advisory opinion addressing a lawyer’s obligations when the lawyer represents a client whose case is being funded by a third-party litigation funder. As stated in Cal. State Bar Form.Opn. 2020-204, “If the funder seeks client confidential information, the lawyer must advise the client of the risks of disclosure and obtain the client’s informed consent to disclose confidential information to the funder. The lawyer should also take appropriate steps to limit the risks to the client that the disclosure of such information will effect a waiver of attorney-client privilege or work product protection which may include having the funder sign a non-disclosure agreement, appropriate labeling of shared materials as confidential or taking other steps to maintain the confidentiality of the shared materials.”

Third, consistent with other conflict-of-interest scenarios, the lawyer must obtain the client’s informed written consent. In seeking such consent from the client, the lawyer should assure the client that the acceptance of compensation from the identified non-client will not interfere with the lawyer’s independent professional judgment or the attorney-client relationship in connection with the specified engagement, and that the lawyer will not reveal any confidential information to the third-party payor absent the client’s informed consent.

In accordance with paragraph (c) of Rule 1.8.6, such consent is required to be obtained at or before the time the lawyer has entered into the agreement for, charged, or accepted compensation from the non-client, or as soon thereafter as is reasonably practicable. As the Comments to Rule 1.8.6 acknowledge, there are certain circumstances where a lawyer might not be able to obtain such consent before the lawyer has entered into an agreement for, charged, or accepted compensation. This might happen, for example, in certain commercial settings, such as when a lawyer is retained by a creditors’ committee involved in a corporate debt restructuring and agrees to be compensated by the debtor for services to be provided to other creditors who have not yet been identified. In such limited situations, paragraph (c) permits the lawyer to comply with the Rule as soon thereafter as is reasonably practicable. Another example where the client’s written consent might not be immediately attainable is when the lawyer is retained by a family member to represent a person who is incarcerated.

The Rule further provides that no disclosure or consent is required if nondisclosure or the compensation is otherwise authorized by law or court order, or if the lawyer is rendering legal services on behalf of a public agency or nonprofit organization that provides legal services to other public agencies or the public. In addition, there may be situations where payment is made by an affiliate or agent at the instruction of the client, or incidental to and in consideration of a business relationship between the client and the payor (e.g., lenders, investors and underwriters often require a business entity to pay their legal fees in a transaction), where as a practical matter informed written consent is not sought because the client has caused such payment to be made. Although the State Bar of California has not addressed this issue, other states’ authorities support the notion that consent may be implied by such circumstances. See, e.g., Fragiao v. State, 18 P.3d 871 (Supreme Court of Hawaii 2001) (finding no violation of Hawaii’s Rule 1.8(f)(1) where client requested payment by third party); Connecticut Rule of Professional Conduct 1.8(f)(1) (“informed consent shall be implied where the lawyer is retained to represent a client by a third party obligated under the terms of a contract to provide the client with a defense”); Wisconsin Rule of Professional Conduct 1.8(f)(1) (“no further consent or consultation need be given if the client has given consent pursuant to the terms of an agreement or policy requiring an organization or insurer to retain counsel on the client’s behalf”). See, also, Comment [3] to Rule 1.8.6 (“This rule is not intended to abrogate existing relationships between insurers and insureds whereby the insurer has the contractual right to unilaterally select counsel for the insured, where there is no conflict of interest.”). But, even when informed written consent is not required, the lawyer must nevertheless comply with the first two requirements of Rule 1.8.6 (i.e., no interference with independent professional judgment or the attorney-client relationship, and protection of confidential information). See Comment [2] to Rule 1.8.6.

II. OBLIGATIONS IN FAVOR OF NON-CLIENT PAYOR

If the lawyer enters into an agreement to obligate a third party to pay the lawyer’s fees, the lawyer should comply with Business and Professions Code Section 6201(a), which provides that such obligation cannot be enforced unless the lawyer provides written notice of the payor’s right to arbitrate the fee dispute. Although Section 6201(a) refers to a “client,” case law has held that the provision protects third-party payors as well. See Wager v. Mirzayance (1998) 67 Cal.App.4th 1187 (“plaintiff's lawsuit was ‘an action against the client’ within the meaning of section 6201(a), and thus that plaintiff was required to provide defendant with notice of his right to arbitrate the fee dispute”).

In addition, where the lawyer is being compensated by a third party and there are funds remaining after the representation is concluded, the lawyer must return the excess funds to the payor – not the client – unless the parties have agreed otherwise. See Cal. State Bar Form.Opn. 2013-187 (“Since the funds in the account belong to the payor, the attorney cannot give the money to the client.”). See, also, paragraph (d)(7) of Rule 1.15 of the California Rules of Professional Conduct (“A lawyer shall ... promptly distribute, as requested by the client or other person, any undisputed funds or property in the possession of the lawyer or law firm that the client or other person is entitled to receive.”).

Because there might be some confusion on the part of the payor as to whether or not they are a client of the lawyer, the lawyer may be obligated to clarify the absence of an attorney-client relationship. Case law indicates that “one of the most important facts involved in finding an attorney-client relationship is the expectation of the [purported] client based on how the situation appears to a reasonable person in the [purported] client’s position.” See Responsible Citizens v. Superior Court (Askins) (1993) 16 Cal.App.4th 1717. A third-party payor that is paying fees for such legal services might, under the circumstances, reasonably believe that they have formed an attorney-client relationship with the attorney they are paying. Although payment of attorney fees by itself does not determine the existence of an attorney-client relationship, such payment is an indicia of an attorney-client relationship. See Hecht v. Sup.Ct. (Ferguson) (1987) 192 Cal.App.3d 560. If there is likely to be any confusion on the part of the payor, the attorney would be well-advised to notify the payor that they are not a client of the attorney.

III. CONCLUSION

Whenever you are confronted with a situation where someone other than your client will be paying your fees, remember that Rule 1.8.6 prevents you from doing so, unless: there is no interference with your independent professional judgment or the lawyer-client relationship, confidential information is appropriately protected and you obtain the client’s informed written consent when required.

Neil J Wertlieb is an inaugural co-chair and a founding member of the California Lawyers Association Ethics Committee, and a former chair of the Business Law Section and its Corporations and Business Litigation Committees. Mr. Wertlieb is the General Counsel of Milbank LLP. The views expressed herein are his own.