SETTLEMENT AGREEMENTS
[Home] [Table of Contents]
This page originally dealt only with
agreements to limit a lawyer's practice. A number of conflicts issues also
arise with aggregate settlements. We have started to add cases and
opinions on aggregate settlements at the end of this page.
Agreements Restricting a Lawyer's Right to Practice
ABA Model Rule 5.6(b) provides as
follows:
A lawyer shall not participate in offering or making: . . . . (b) an
agreement in which a restriction on the lawyer's right to practice is part of
the settlement of a controversy between private parties.
The ABA House of
Delegates accepted the "Ethics 2000" Commission recommendation not
to change the substance of Rule 5.6(b).
DR 2-108(B) of the ABA Model Code is
nearly identical to Rule 5.6(b). Virtually every state has adopted one or
the other (as to New York, see below). In Jarvis v. Jarvis, 758 P.2d 244
(Kan. App. 1988), the court held that Kansas' version 5.6(b) means what it
says. The court held that a provision in a divorce settlement prohibiting
the wife from ever using a certain lawyer against her husband was void.
But, in Lee v. Florida Dept. of Ins., 586 So. 2d 1185 (Fla. App. 1991),
the court enforced such an agreement by disqualifying a lawyer who had entered
into one. The court said that whether the agreement violated Florida's
version of Rule 5.6(b) was a disciplinary matter.
A lawyer was disciplined for
violating the rule in In re Mark M. Hager, 812 A.2d 904 (D.C. App. 2002).
ABA Op. 00-417 (2000) held that a
lawyer may not agree to a confidentiality agreement if that meant the lawyer
could not ever oppose the other party. To the same effect, see
Hu-Friedy Mfg. Co. v. General Electric Co., 1999 U.S. Dist. LEXIS 11213
(N.D. Ill. July 19, 1999).
According to a recent article,
Milo Geyelin, Some Lawyers Promise Not to Sue In Exchange for Cash From Firms,
Wall St. J., May 16, 2001, a law professor was suspended from practice for three
years for entering into such an agreement. The article states that the
defendant required the professor to keep elements of the settlement
secret. It is not clear whether the agreement itself or the failure to
disclose it was viewed as the serious.
Not just the plaintiffs' lawyers
are at risk. Model Rule 8.4(a) provides that it is unethical for a lawyer
to induce another lawyer to violate a rule. According to the Geyelin
article cited in the preceding paragraph, two BellSouth lawyers were sanctioned
by a federal judge in Miami for participating in such an agreement. They
were ordered to take five hours of ethics instruction. Adams v.
BellSouth Telecomms., Inc., 2001 WL 34032759 (S.D. Fla. Jan. 29, 2001).
Ethics Opinions. The
following opinions provide further explanation of the rule: ABA Op. 93-371
(1993); Ala. Op. 02-05 (2002) (discusses in-house lawyer arrangement); Ala. Op. 92-01 (1992);
Cal. Op. 1988-104
(1988) (reaching same conclusion with regard to California DR 2-109(A), now Cal.
Rule 1-500); D.C. Op. 335 (May 2006) (settlement agreement may
not prohibit lawyer from advertising public information from case);
D. C. Op. 130 (1983) (applying
Model Code); Col. Op. 92 (1993) (parties may agree that lawyer
must turn over file to other party, unless doing so will restrict the lawyer in
representing other parties); D.C. Op. 93-371 (1993); D.C. Op. 35 (1977); Fla.
Op. 04-2 (2005); L.A. County Op. 468 (1992);
Ill. Op. 00-01 (2000); Md.
Op. 82-53 (1982); Mich. Op. CI-1165; N.M. Op. 1985-5 (1985) (parties may agree that lawyer must keep certain
information about the other party confidential); N.Y. Op. 730 (2000); N.Y. City Op. 99-03
(1999); N.C. Op. 179; Tex. Op. 505
(1994); Ore. Op. 1991-47 (1991); Tenn. Op.
97-F-141; Phila.
Op. 95-13 (1995). ABA Op. 94-381 (1994) deals in part with retainer agreements
between corporations and outside lawyers. It says that it would be
unethical for an in-house lawyer to request outside counsel to agree never to
oppose the corporation in the future on matters unrelated to the current
representation.
Restatement. Section
13(2) is very similar to Rule 5.6(b). However, cmt. c to § 13
does a few things that the cmt. to Rule 5.6 does not. First, it
explains the reason for the rule:
Proposing such an agreement would tend to create conflicts of interest
between the lawyer, who would normally be expected to oppose such a limitation,
and the lawyer's present client, who may wish to achieve a favorable settlement
at the terms offered. The agreement would also obviously restrict the
freedom of future clients to choose counsel skilled in a particular area of
practice.
Then, it "resolves" the split in Jarvis and Lee above
by concluding, "such agreements are void and unenforceable."
Treatises. Hazard &
Hodes § 47.6; Rotunda & Dzienkowski § 5.6-2.
Articles. Gillers &
Painter, Free the Lawyers: A Proposal to Permit No-Sue Promises in Settlement
Agreements, Geo. J. Legal
Ethics 291 (Spring 2005); Gillers, A
Rule without a Reason: Let the Market, not the Bar, Regulate Settlements that
Restrict Practice, 79 A.B.A.J. 118 (Oct. 1993).
How about an Agreement to Retain
Opposing Counsel After Settlement? Two lawyers tried that, and then
became the respondents in In re
Brandt, 10 P.3d 906 (Ore. 2000), a disciplinary
proceeding. Two plaintiffs' lawyers entered into a settlement agreement
that provided that the defendant would retain them after the settlements were
final. This would have the effect of preventing the lawyers from taking on
any new cases against the defendant. This was an attempt to avoid
violating Ore. DR
2-108(B), Oregon's version of Rule 5.6(b). The court held that the
settlement violated DR 2-108(B), and that it created a conflict of interest in
violation of Ore. DR
5-101(A)(1). The lawyers were suspended for one year. In The Florida Bar v.
Rodriguez, 959 So. 2d 150 (Fla. 2007), and The Florida Bar v.
St. Louis, 967 So. 2d 108 (Fla. 2007), one plaintiff's lawyer
was disbarred and another suspended for two years for agreeing with settling
defendant to be "retained" by the defendant after the
settlement. They also forfeited millions in fees from the defendant for
that agreement.
Basis for Cause of
Action. Franklin v. Fasack, 2002 Cal. App. Unpub.
LEXIS 56 (Cal. App. April 17, 2002). The case is procedurally too complex
to warrant a complete description of it here. A key point was that when
plaintiffs' lawyers negotiated a settlement for their clients, they
simultaneously negotiated a two-year consulting agreement with the defendant for
themselves. The consulting agreement was in lieu of an earlier request by
the defendant that the plaintiffs' lawyers agree not to sue defendant for two
years. The court held that plaintiffs' later malpractice complaint against
their lawyers stated a cause of action. The court based its finding on the
lawyers' failure to comply with California Rule 3-300, California's version of
Model Rule 1.8(a) (doing business with a client). California Rule 1-500,
the counterpart of Model Rule 5.6(b) (agreeing on restriction of practice) was
not mentioned.
In an interesting twist on Brandt,
a defendant in Kaplan v. Emerson Radio Corp., 1991 U.S. Dist. LEXIS 3520
(E.D.N.Y. 1991), agreed to retain a plaintiff's lawyer as part of a
settlement. At the conclusion of the retainer period the lawyer attempted
to sue the defendant on behalf of new plaintiffs. The court held that the
matters were substantially related and disqualified the lawyer.
The New York Variation. In
Feldman v. Minars, 658 N.Y.S.2d 614 (N.Y. App. 1997), the court held that
an agreement not to solicit clients for actions against a settling defendant is
not against public policy and is enforceable. The court noted that the
commentary to the New York rule is more liberal than that in other states.
A similar result obtained in Blue Cross & Blue Shield of N.J., Inc.
v. Philip Morris, Inc., 53 F. Supp. 2d 338 (E.D.N.Y.
1999). However, N.Y. City Op. 99-03 (1999) holds that such an
agreement violates New York's version of DR 2-108(B). As to a restriction
on the use of information in future actions, see N.Y. Op. 730 (2000).
Bassman v. Blackstone
Associates, 718 N.Y.S.2d 826 (N.Y. App. 2001). This is a
fraud action. The opinion is very brief, so we are making several
assumptions. Lawyers for the plaintiffs had earlier settled a similar, and
evidently related, case on behalf of other plaintiffs. The settlement
agreement provided that the lawyers could not reveal the amount of the
settlement or the amounts offered during settlement negotiations. The
defendants in this action moved to disqualify plaintiffs' counsel.
The court ruled that the confidentiality provisions of the earlier settlement
agreement had the effect of preventing the lawyers from handling this case and ordered the lawyers disqualified. To the same effect, see
Eschel v. Fleet Bank, 718 N.Y.S.2d 825 (N.Y. App. 2001); and Gilbert
v. Nat. Corp. for Housing Partnerships, 84 Cal. Rptr. 2d 204 (Cal. App.
1999).
Although Possibly Unethical,
Agreement Did not Invalidate Class Action Settlement. The court in Shebay
v. Davis, 717 S.W.2d 678 (Tex. App. 1986), held that although an agreement
not to sue the defendant for future plaintiffs might subject the lawyer to
discipline, the provision did not invalidate the settlement of a class action.
More from Texas. The
Texas Supreme Court in In re Mitcham, 133 S.W.3d 274 (Tex. 2004), held that an agreement not to represent plaintiffs against the other side
was grounds for disqualifying the lawyer who tried to bring such a case.
The court did not mention Texas Rule 5.06(b), Texas' version of Model Rule
5.6(b).
Not Quite an Agreement.
DeSantis v. Snap-On Tools Co., 2006 U.S. Dist. LEXIS 78362 (D.N.J.
Oct. 27, 2006). In this class
action certain parties objected to the fee award to class counsel because the
settlement agreement provided that class counsel had "no present intention
of representing any persons who are not Class Members with respect to
defendants." Evidently the
objectors claimed that this violated the Rule 5.6(b) (rule not cited in the
opinion) proscription against lawyers’ agreeing to limit their practices.
The court’s response:
This is not an agreement but mere attempt by one
negotiating party to achieve finality through the settlement. The Settlement
Agreement does not restrict Class Counsel's right to represent any future
clients and therefore does not create any impermissible conflict
of interest.
Aggregate Settlements
ABA Op. 06-438 (February 10, 2006).
This opinion deals with aggregate settlements.
It is very disclosure oriented, but contains no surprises. Here is the Committee’s summary:
In seeking to
obtain the informed consent of multiple clients to make or accept
an offer of an aggregate settlement or aggregated agreement of their claims as
required under Model Rule 1.8(g), a lawyer must advise each client of the
total amount or result of the settlement or agreement, the amount and nature
of every client’s participation in the settlement or agreement, the fees and
costs to be paid to the lawyer from the proceeds or by an opposing party or
parties, and the method by which the costs are to be apportioned to
each client.
American Law Institute, Principles of the Law of Aggregate Litigation. This project is ongoing.
Chapter 3 deals with the issues discussed on this page of our site.
According to Preliminary Draft No. 4, dated September 21, 2006, the
chapter will be structured as follows: Section 3.15 provides that class
actions and non-class actions must be dealt with differently; Section 3.16
defines the scope of the chapter: what a “non-class aggregate settlement”
is; Section 3.17 sets out conditions for an aggregate settlement to be
binding; Sections 3.18 provides for limited judicial review of non-class
aggregate settlements at the behest of a claimant; and Section 3.19 provides
for judicial review at the behest of a claimant’s lawyer.
Law Reviews.
Cramton, Lawyer Ethics on the Lunar Landscape of Asbestos Litigation,
31 Pepp. L. Rev. 175 (2003); Erichson, A Typology of Aggregate Settlements, 8 Notre Dame L. Rev. 1769 (2005);
Erichson, Beyond the Class Action: Lawyer Loyalty and Client Autonomy in
Non-Class Collective Representation, 2003 U. Chi. Legal F. 519, 575;
Garretson, A Practical Approach to Proactive Client-Counseling and Avoiding
Conflicts of Interest in Aggregate Settlements, 6 Loy. J. Pub. Int. L. 19
(2004); Gelb, Common Ethical Problems, 79 Mass. L. Rev. 167 (1994);
Jensen, Like Lemonade, Ethics Comes Best When It's Old-Fashioned: A Response
to Professor Moore, 41 S. Tex. L. Rev. 215 (1999); Jiru & Spanhel, Report
of the Working Group on Aggregate Settlements, 41 S. Tex. L. Rev. 57 (1999);
Menkel-Meadow, Ethics and the Settlements of Mass Torts: When the Rules Meet
the Road, 80 Cornell L. Rev. 1159 (1995); Moore, The Case Against
Changing the Aggregate Settlement Rule in Mass Tort Lawsuits, 41 S. Tex. L.
Rev. 149, 169-171 (1999); Rheingold, Ethical Constraints on Aggregated
Settlements of Mass-Tort Cases, 31 Loy. L.A. L. Rev. 395 (1998); Robinson
& Abraham, Collective Justice in Tort Law, 78 Va. L. Rev. 1481
(1992); Silver & Baker, Mass Lawsuits and the Aggregate Settlement Rule,
32 Wake Forest L. Rev. 733, 758-59 (1997); Silver, Merging Roles: Mass Tort
Lawyers as Agents and Trustees, 31 Pepp. L. Rev. 301 (2003); Baker &
Silver, The Aggregate Settlement Rule and Ideals of Client Service, 41 S.
Tex. L. Rev. 227 (1999); Silver & Baker, Mass Lawsuits and the Aggregate Settlement Rule, 32 Wake
Forest L. Rev. 733 (1999); Silver
& Baker, I Cut, You Choose: The Role of Plaintiffs' Counsel in Allocating
Settlement Proceeds, 84 Va. L. Rev. 1465 (1998); Weinstein, Ethical Dilemmas in Mass Tort Litigation,
88 Nw. U. L. Rev. 469, 521 (1994).
Hayes v. Eagle-Picher Indus., Inc.,
513 F.2d 892 (10th Cir. 1975). The
requirement in Rule 1.8(g) that each party give consent to the agreement after
being informed of its terms cannot be waived.
Burrow
v. Arce, 997 S.W.2d 229 (Tex. 1998).
Lawyer entered into an aggregate settlement without the approval of their
clients. In this opinion the court
ruled that the clients could sue for forfeiture of the lawyers’ fees even
without proving actual damages.
"Majority-Rule"
Settlements Don't Cut It. The Tax Authority, Inc. v. Jackson Hewitt, Inc.,
898 A.2d 512 (N.J. 2006). The New Jersey
Superior Court, Appellate Division, had held that an engagement letter signed by
154 joint plaintiffs that provided that a majority could bind all to a
settlement violated New Jersey's version of Model Rule 1.8(g) (the aggregate
settlement rule). In this opinion,
the New Jersey Supreme Court agreed, but reversed the appellate court, holding
that the prohibition should be prospective and that the agreement in this case
should be honored. A similar decision rejecting a settlement is Abbott v. Kidder Peabody & Co., Inc.,
42 F. Supp. 2d 1046 (D. Colo. 1999).
In re New York Diet Drug Lit., 839 N.Y.S.2d 434
(N.Y. Misc. 2007). Law Firm had filed this
action on behalf of about 5,000 users of a diet drug against the manufacturer.
The court approved a settlement in 2001.
Questions have been raised about the way Law Firm conducted itself in
connection with the settlement, and the court has ordered a trial on that
conduct. Many of the facts are
contested, so a detailed discussion of this case would be premature. The opinion contains a lengthy discussion of aggregate
settlements and the ethics rules in connection with them.
The settlement agreement is under seal. Evidently,
the manufacturer agreed to pay one amount for all the claims, but interveners
claim that Law Firm misrepresented to its clients the process by which their
respective shares were determined.
An excellent
discussion of these issues is at ABA/BNA Lawyers’ Manual on Professional
Conduct. In the online edition in the list of subjects go to “Conflicts
of Interest,” then to the sub-heading “Aggregate Settlements.” That
article discusses a number of additional cases. They are:
Abbott
v. Kidder Peabody & Co., 42 F. Supp.2d 1046 (D. Colo. 1999); In re
Sonnier, 157 B.R. 976 (E.D. La. 1993); In re Central Ice Cream Co.,
114 B.R. 956, 964 (N.D. Ill. 1989); Williams v. St. Paul Cos., 492 S.E.2d
560 (Ga. App. 1997); Knisley v. Jacksonville, 497 N.E.2d 883 (Ill. App.
1986); Baugh v. Baugh, 973 P.2d 202 (Kan. App. 1999); In re Hoffman,
883 So. 2d 425 (La. 2004); In re Faucheux, 818 So. 2d 734 (La. 2002); Scamardella
v. Illiano, 727 A.2d 421 (Md. App. 1999); Williamson v. Edmonds, 880
So. 2d 310 (Miss. 2004); Butler County Bar Ass'n v. Barr, 591 N.E.2d 1200
(Ohio 1992); Cleveland Bar Ass'n v. Kaigler, 566 N.E.2d 673 (Ohio 1991); Black
v. Bell, 484 N.E.2d 739 (Ohio App. 1984); State ex rel. Oklahoma Bar
Ass'n v. Watson, 897 P.2d 246 (Okla. 1994); In re Anonymous Member of
South Carolina Bar, 377 S.E.2d 567, 568 (S.C. 1989); Scrivner v. Hobson,
854 S.W.2d 148 (Tex. App. 1993); Quintero v. Jim Walter Homes Inc., 709
S.W.2d 225 (Tex. App. 1985); In re Guardianship of Lauderdale, 549 P.2d
42, 45 (Wash. App. 1976); Peissig v. Wisconsin Gas Co., 456 N.W.2d 348
(Wis. 1990); D'Huyvetter v. A.O. Smith Harvestore Prods., 475 N.W.2d 587
(Wis. App. 1991).
[Home] [Table of Contents]
[Top of Page]
Freivogel on Conflicts