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Thompson Hine LLP, a full-service business law firm with approximately 400 lawyers in 11 offices, was ranked number 1 in the category “Most innovative North American law firms: New working models” by The Financial Times and was 1 of 7 firms shortlisted for The American Lawyer’s inaugural Legal Services Innovation Award. The firm has been recognized by the National Law Journal as a Legal Technology Trailblazer and featured by Bloomberg for its innovative service delivery models, which drive accuracy and predictability. The firm’s commitment to innovation is embodied in Thompson Hine SmartPaTHTM – a smarter way to work – predictable, efficient and aligned with client goals. For more information, please visit ThompsonHine.com and ThompsonHine.com/SmartPaTH.

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<p class="is-style-callout"><strong><em>This blog post was co-authored by Thompson Hine partner <a href="https://www.thompsonhine.com/professionals/anthony-j-rospert/" target="_blank" rel="noreferrer noopener">Tony Rospert</a> and associate Micah Fishman. </em></strong></p>

<h2 class="wp-block-heading"><strong>Yes. Or at Least, They Shouldn’t Lie. (Do We Even Need to Say That?)</strong></h2>
Lawyers experienced in the art of settlement negotiations can become primarily focused on little more than getting the best results for their client and will often use various implicit and explicit statements to convince the other side of the merits of their position. But there are always ethical limits on zealous representation, and settlement negotiations are no exception. Each jurisdiction will have a different interpretation of just how far lawyers can go in using puffery and deception to secure the best deal for their client. While it is never ethically permissible to lie, being completely transparent in settlement negotiations may not be the best strategy either; divulging information that is not required could be deemed a failure to provide <a href="https://www.americanbar.org/groups/professional_responsibility/publications/model_rules_of_professional_conduct/rule_1_1_competence/" target="_blank" rel="noreferrer noopener">competent</a> representation. Thus, in any settlement discussion there is a tension between negotiating with honesty and good faith and obtaining the best results.
<h2 class="wp-block-heading">The Ethics Rules: A Certain Shade of Gray</h2>
Lawyers in negotiations who are tempted to overstate their cases should be familiar with their state’s version of <a href="https://www.americanbar.org/groups/professional_responsibility/publications/model_rules_of_professional_conduct/rule_4_1_truthfulness_in_statements_to_others/" target="_blank" rel="noreferrer noopener">Model Rule 4.1</a>, the ABA version of which provides: “<em>In the course of representing a client</em> a lawyer shall not knowingly: (a) <em>make a false statement of material fact or law to a third person</em>; or (b) fail to disclose a material fact to a third person when disclosure is necessary to avoid assisting a criminal or fraudulent act by a client, unless disclosure is prohibited by Rule 1.6.”

The ABA Standing Committee on Ethics and Professional Responsibility (“Committee”) issued <a href="https://www.americanbar.org/content/dam/aba/administrative/professional_responsibility/ethics-opinions/06-439.pdf" target="_blank" rel="noreferrer noopener">Formal Opinion 06-439</a>, which lays out a roadmap to analyze Model Rule 4.1 in the context of settlement negotiations. The Committee provides multiple examples of what a “false statement of material fact” is under Rule 4.1. The Committee opines 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.”

Likewise, exaggerating or emphasizing strengths and minimizing or deemphasizing weaknesses of factual or legal position can be deemed “puffing” or “posturing.” Parties to a negotiation typically would not be expected to rely on these statements, which must be differentiated from “false statements of material fact.”

The Committee gives an example: “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.” That is a fact, it is material, and it is false. However, the Committee opines that determining whether a statement can be regarded as one of material fact can depend on the particular circumstances, stating that the value placed on the subject of a transaction, price estimates, a party’s intent as to a satisfactory settlement of a claim, and the existence of an undisclosed principal (unless such nondisclosure would be deemed fraud) would all typically not be considered statements of material fact, nor would statements pertaining to goals of negotiating, or willingness to compromise.

Model Rule 4.1(a) pertains only to statements of material fact the attorney knows are false, and therefore does not apply to false statements that are made unwittingly, that concern inconsequential matters, or that do not relate to facts. The Committee reminds us that lawyers may decline to give the client’s bottom line without violating the rules, but if a lawyer discloses the limit of their settlement authority, they must be truthful. Further, parties are not allowed to waive the protection from attorney misrepresentation under Rule 4.1, whether by informed consent or by impliedly agreeing to allow false statements to be made in the process.
<h3 class="wp-block-heading">Example: The Personal Injury Case</h3>
<a>In </a><a href="https://www.calbar.ca.gov/Portals/0/documents/ethics/Opinions/2015-194%20(12-0007)%20Puffing%20in%20Negotiations%20FINAL%2012-29-15.pdf" target="_blank" rel="noreferrer noopener">Formal Opinion No. 2015-194</a>, the State Bar of California Standing Committee on Responsibility and Conduct presents an example involving a plaintiff injured in an automobile accident who sustains $50,000 in medical expenses and advises her attorney that she is no longer able to work. The plaintiff earned $50,000 annually before the accident. Before discovery, the plaintiff’s attorney files suit and agrees to participate in a settlement conference. The plaintiff’s attorney falsely contends in a settlement conference brief that he can prove the defendant was texting immediately before the accident because a (nonexistent) credible eyewitness saw everything.

The defendant’s attorney asserts that the defendant will file for bankruptcy if they do not get a defense verdict. However, the defendant’s lawyer knows that the defendant does not qualify for bankruptcy and has no intention of filing. When the matter is not settled, the parties agree to meet in one month for a follow-up settlement conference at which the plaintiff will provide information showing her efforts to mitigate damages by seeking to obtain other employment. In the meantime, the plaintiff’s attorney learns that the plaintiff has obtained a new job and will be earning $75,000 annually. The plaintiff tells her attorney not to discuss her new employment at the upcoming settlement conference and to refrain from including any information about her efforts to obtain new employment. At the settlement conference, the plaintiff’s attorney makes a settlement demand including future earnings as a part of the plaintiff’s damages and specifying a dollar amount for that component.

What statements violate Model Rule 4.1? The misrepresentation regarding the nonexistent eyewitness is not considered an expression of opinion and, thus, is an ethical violation. This is an improper false statement of fact that is intended to mislead, and the type of statement that another would attach importance to in determining their course of action.

The defense attorney’s assertion that the defendant will file for bankruptcy is a false representation of fact because they in fact know there is no intention, and the defendant is not eligible to file.

The plaintiff instructing her attorney not to reveal that she has a new job making more money would be deemed a material omission of fact if the lawyer followed the plaintiff’s instruction. Concealing facts about her new employment is considered a misrepresentation since she would not be entitled to lost future earnings upon finding new employment. Including such damages in the demand implicitly and impermissibly misrepresents that the plaintiff has not found new employment. Here, the opinion warns lawyers that if following a client’s instructions would violate ethics rules, lawyers must counsel against such concealment and misrepresentation. If the client insists on proceeding with such conduct, the attorney must withdraw from the representation.
<h2 class="wp-block-heading">The Catch-All Trap</h2>
While Rule 4.1 is explicit that it applies to misrepresentations made while representing a client, there is no comfort for the lawyer who wants to argue that his or her misrepresentations are arguably made outside the scope of representation. Rule 8.4’s “catch-all” provisions reiterate that “It is professional misconduct for a lawyer to:
<ul class="wp-block-list">
 	<li>(b) commit an <em>illegal </em>act that reflects adversely on the lawyer’s honesty or trustworthiness;</li>
 	<li>(c) engage in conduct involving dishonesty, <em>fraud</em>, deceit, or misrepresentation;</li>
 	<li>(d) engage in conduct that is prejudicial to the administration of justice;</li>
</ul>
So, while a lawyers’ fraudulent tax returns may be filed outside the scope of representing clients, such filings are nonetheless violations of the Rules and the basis for many examples of discipline (and jail time).
<h2 class="wp-block-heading">Takeaways</h2>
Lawyers should become familiar with the ethics rules pertaining to settlement negotiations in the states where they are licensed, looking also to ethics opinions and case law. Lawyers should understand permissible distinctions such as puffing versus impermissible misrepresentations. For example, some states specifically <a href="https://filehost.thompsonhine.com/uploads/Georgia_Rule_4.1_33d1.pdf" target="_blank" rel="noreferrer noopener">allow puffing</a>. However, making <a href="https://nysba.org/app/uploads/2021/08/Opn-1228-Letterhead.pdf" target="_blank" rel="noreferrer noopener">affirmative false representations of fact</a> – lying – is never ethically permissible and one should not be too cavalier in classifying a statement as puffing when in fact it is a misrepresentation of fact. Hiding material facts can be an ethics violation as well as it can be deemed an <a href="https://www.americanbar.org/content/dam/aba/administrative/professional_responsibility/ethics-opinions/95_397.pdf" target="_blank" rel="noreferrer noopener">implied misrepresentation</a>. Not only can lawyers be disciplined for Rule 4.1 violations, but affirmative misrepresentations made by attorneys in negotiations have led to the imposition of sanctions, the filing of civil lawsuits against the attorney, and settlement agreements being set aside.

core/freeform

Ethics

Assistant Counsel

Amy G. McClurg

Legal Ethics, Professional Responsibility and the Business of Law

Must Lawyers Always Tell the Truth (Even When Negotiating Settlement Agreements)?