|Oregon State Bar Bulletin JULY 2009|
In the typical lawyer-client arrangement, the lawyer’s fees are paid by the client. But that is not universally the case. There are probably many reasons why a client’s fees are paid by another person, but three come readily to mind. A family member or friend may wish to help a client who lacks resources. An employer may be contractually or otherwise obligated to provide a defense to an employee who is sued over conduct arising out of the employment. An insurance carrier may be obligated to defend its insured under the terms of the insurance contract.1
Notwithstanding the frequency with which third-party fee payment situations arise, RPC 1.8(f) prohibits a lawyer from accepting payment from someone other than the lawyer’s client unless certain conditions are met. The rule is one of several “special conflict” situations where the conflict arises not because the lawyer represents multiple clients with conflicting interests, but because of some aspect of the relationship between the lawyer and client. The rationale behind RPC 1.8(f) is the possibility that the exercise of the lawyer’s independent judgment on behalf of the client will be influenced by the desires of the person paying the fees, putting the lawyer in the impossible situation of attempting to serve two masters.
Even though it is expressed as a prohibition, RPC 1.8(f) is really a conditional permission to accepting payment from someone other than the client. The three conditions are straightforward: the client must give informed consent; there can be no interference with the lawyer’s independence of professional judgment or with the client-lawyer relationship; and information relating to the representation must be protected as required by RPC 1.6. Each of these conditions imposes responsibilities on the lawyer that don’t exist in the standard “client pays” scenario.
At first blush it seems unlikely that a client would reject a third person’s offer to fund the legal representation. However, the requirement of informed consent means that the client must consent to more than the mere fact that someone else is paying the fee.2 As explained in RPC 1.0(g), “informed consent” means that the client has been given “adequate information and explanation about the material risks of and reasonably available alternatives to” the third-party payment. Armed with that information, a client may choose not to accept or be bound by the limits or conditions that may accompany the other person’s payment. For example, the client may not wish to deal with securing new counsel in the middle of the case if Mom is unable or unwilling to advance additional fees once an initial retainer is exhausted. In an employment case, the employer’s willingness or obligation to provide a defense to an employee may evaporate if it subsequently determines that the employee was not acting within the scope of employment. An insured client may wish to have more control over the handling of the case than the insurance contract allows. In either of the latter situations, the client may also be unwilling to agree to information-sharing arrangements that might be a condition of the provision of the representation.
Clearly, the lawyer who is considering accepting payment from someone other than the client must ensure that the client makes an informed choice. This means inquiring about and understanding any limitations on the third-person’s ability or willingness to pay and then communicating the information to the client.3 While RPC 1.8(f) does not require the client’s consent to be confirmed in writing, documenting the basis upon which the client’s informed consent was given will go a long way to resolving any subsequent concerns.
The second condition, that there be no interference with the lawyer’s independent professional judgment or with the relationship between lawyer and client, also requires some extra effort on the part of the lawyer. At the very least, it means explaining to the third party that paying fees doesn’t make one a client and that the lawyer cannot permit the third party payor to dictate the objectives of the representation or the strategy or tactics for achieving those objectives. And of course, the lawyer must be watchful throughout the representation for pressure from the payor, particularly in the face of explicit or implicit threats to cease funding the case if the lawyer won’t do as the payor desires.
Similarly, a third party cannot be allowed to interfere with the client-lawyer relationship itself, such as by firing the lawyer unilaterally. If the payment stream stops, the lawyer may well wish to withdraw from the representation,4 but the lawyer can be fired only by the client.
Protecting the client’s confidential information as required by RPC 1.6 is the third condition of accepting payment from someone other than the client. RPC 1.6 covers “information relating to the representation of a client,” which is defined in RPC 1.0(f) to include both information protected by the attorney-client privilege and “other information…that the client has requested be held inviolate or the disclosure of which would be embarrassing or would be likely to be detrimental to the client.”5 The principal exception to the duty of confidentiality under RPC 1.6(a) is if the client gives “informed consent” to the disclosure. Accordingly, complying with the obligation in RPC 1.8(f) to protect the client’s information means that billing statements containing client information about the representation6 cannot be shared with the person paying the fee, nor can the lawyer discuss the case with the person paying the fee unless the client has given informed consent to the sharing of such information. Where the client has given informed consent to sharing information, the lawyer must be careful to understand any limits imposed on the consent and to abide by them.
Meeting the conditions of RPC 1.8 is not the end of the complications that can flow from accepting payment from someone other than a client. When the third person has deposited fees in advance, there is a possibility that the representation will end before all the funds are exhausted. RPC 1.16(d) instructs that any advance payment of fee or expense that has not been earned or incurred must be refunded7 on termination of the representation. RPC 1.15-1(c) requires a lawyer holding funds of a client or third person to “promptly deliver to the client or third person any funds…that the client or third person is entitled to receive….” The question then becomes, who is entitled to the refund of unearned fees?
Unfortunately, the Rules of Professional Conduct do not answer that question, which will depend on the understanding and expectations of the client and the third person. The possibilities are several: Was the third person making a loan to the client? A gift? Or did the third person intend only to advance the fees necessary for this engagement, retaining the right to any refund? Any lawyer caught between the competing demands of a client and the person who advanced the fees comes quickly to appreciate the value of specifying in the fee agreement how a refund will be handled.
In the absence of such a written guide, the manner in which the payment was made offers some clues, as it is reasonable to assume that any refund goes back to its source. Thus, for instance, if the third person paid the fees directly to the lawyer, then absent contrary instructions from the payor, the refund should go to the third person. By contrast, if the third person gave the money to the client, who then paid it to the lawyer, the refund would seem to belong to the client. In questionable situations, the lawyer should inquire of the client and the third person and, if there is not agreement between them about the refund, the lawyer must hold the funds until the dispute is resolved. RPC 1.15-1(e).
1. References herein to insurance refer to the typical liability policy.
2. See, e.g., In re Richards, 8 DB Rptr 71 (1994), in which a lawyer was disciplined for accepting a fee and taking direction from a third person on behalf of a client who could not be located and therefore could not consent.
3. RPC 1.4(b) also requires explaining a matter to the extent reasonably necessary to permit the client to make informed decisions regarding the representation. While it is arguable that this rule applies only after the lawyer-client relationship has been established, it could as easily be interpreted to apply to the prospective client’s decision whether to enter into the relationship and on what terms.
4. In so doing, the lawyer would need to seek and obtain the court’s permission if required and observe the other requirements of RPC 1.16.
5. This definition comes from the characterization in former DR 4-101 of “confidences” and “secrets,” respectively.
6. Protected information on a billing statement might include such things as descriptions of tasks performed, issues studied, person conferred with, and the like. Anything more than “Services rendered” followed by a dollar amount should be redacted, if shared at all.
7. Use of the term “non-refundable” in relation to fees is disfavored as being incorrect and misleading at best. See OSB Formal Op. No. 2005-151. “Earned on receipt” in a written agreement permits the lawyer to treat the funds as the lawyer’s property immediately, but does not mean that the lawyer can retain any portion not actually earned if the anticipated scope of work is not completed.
ABOUT THE AUTHOR
Sylvia Stevens is general counsel for the Oregon State Bar. She can be reached at (503) 620-0222 or toll-free in Oregon at (800) 452-8260, ext. 359, or by e-mail at firstname.lastname@example.org.
© 2009 Sylvia Stevens