Whose Signature Is on the Check?

When it comes to getting paid for legal services, attorneys typically focus far more on getting paid than on who is making the payment. But they need to be concerned about the signature on the check.

Model Rule 1.8(f)

The ethics rules of most jurisdictions expressly prohibit third-party payer fee agreements unless three conditions are met (see below). The American Bar Association's Model Rules of Professional Conduct (“Model Rules”) Rule 1.8(f), which has been adopted in some variation by the vast majority of states, provides:

A lawyer shall not accept compensation for representing a client from one other than the client unless: (1) the client gives informed consent; (2) there is no interference with the lawyer's independence of professional judgment or with the client-lawyer relationship; and (3) information relating to representation of a client is protected as required by Rule 1.6 [confidentiality of information].

The thrust of Rule 1.8(f) and similar professional ethics commentary is to protect the client from conflicts of interest that may result when the attorney is paid by someone other than the client. Accordingly, three special concerns must be addressed when a third party pays the legal bill: 1) the need for informed consent; 2) client confidentiality; and 3) client control of the matter. See, e.g., In re State Grand Jury Investigation, 200 N.J. 481, 495, 983 A.2d 1097, 1105 (2009); In re Nicole Energy Services, Inc., 385 B.R. 201, 220 -21 (Bkrtcy. S.D. Ohio 2008); Unauthorized Practice of Law Committee v. American Home Assur. Co., Inc., 261 S.W.3d 24, 42 (Tx. 2008).

Duty to Obtain Informed Consent

To comply with Rule 1.8(f), a lawyer must obtain the client's “informed consent” before accepting a third party's payment of the fee. Model Rule 1.4(b) articulates the standard: A “lawyer shall explain a matter to the extent reasonably necessary to permit the client to make informed decisions regarding the representation.” Accordingly, for consent to be considered “informed” in third-party payer arrangements, the client must have full knowledge of the circumstances and conditions under which the fee payment is provided and any potential risks to the client that such a fee agreement may create.

Best practices dictate that consent be given explicitly in writing, and if an actual conflict is created by the third-party payment, consent must be in writing as well. See Model Rule 1.7(b). A consent and conflict waiver should set forth at least three components: 1) the material risks created by payment by the third party; 2) the attorney's duty of confidentiality to the client; and 3) an explanation of the advantages and disadvantages of granting or not granting the consent and a waiver. Indeed, counsel would do well to consider sending the third-party payer a letter of non-engagement to confirm the payer's status.

Duty to Keep Client Confidences

When a third party is paying the legal bill for the client, the third party sometimes is surprised that she or he is not allowed to participate fully in the case due to confidentiality concerns. In some instances, the third party may contact the attorney for updates on the case or may attempt to provide additional information to the attorney that he or she is concerned has not been divulged by the client. Nonetheless, third-party payers are not entitled to information about the client's case just because they pay the legal bill.

Under Model Rule 1.8(f), a lawyer cannot accept compensation from a third party unless “information relating to representation of a client is protected as required by Rule 1.6″ ' the rule outlining an attorney's obligation to preserve client confidences. The Model Rules contemplate that attorneys will understand and comply with the duty of confidentiality and will hold firm against any pressure from third-party payers to divulge information regarding the status of the representation.

Of course, clients have the ability to consent to the disclosure of information to a third-party payer, but again, the consent is effective only if the client is adequately informed of the potential risks.

Controlling the Representation

Ethical concerns also arise when a third-party payer wants to have a say in the handling of the client's case. Rule 1.8(f)(2) provides that a lawyer may not accept compensation from a third-party payer unless “there is no interference with the lawyer's independence of professional judgment or with the client-lawyer relationship.” Courts have recognized that third-party payer agreements may open the door to an attorney “sacrificing” the interests of a client to satisfy the payer. See In re Abrams, 56 N.J. 271, 274, 266 A.2d 275, 277 (1970) (in a case prior to the adoption of the modern Rule 1.8(f), the court refused to approve representation involving a third-party payer on the ground that a serious risk existed that the lawyer would sacrifice the client's interests to further those of the third-party payer).

On the other hand, courts reviewing allegations of conflicts of interest are likely to require evidence of actual influence on an attorney's professional judgment. The mere suggestion of mixed loyalty for third-party payers will likely not suffice. See, e.g., Larmore v. Fleet Nat. Bank, 2006 WL 3293936, *6 (R.I. Super. Nov. 9, 2006) (holding that a third-party payer fee arrangement “presented at most an opportunity to exert influence,” which failed to support a finding of actual influence).

Practical Applications of Rule 1.8(f)

When a third party is paying the legal bill, the attorney would do well to document significant professional opinions and strategic decisions as they relate to the client's interests; this will reduce the risk of subsequent allegations of professional misconduct. The attorney also may recommend that the third-party reimburse the client for the attorneys' fees, rather than paying the fees directly to the attorney. See In re Special February, 1975 Grand Jury, 406 F. Supp 194, 197 (N.D. Ill. 1975) (noting that representation is more likely to be held permissible if employer reimburses employee for expenses of lawyer chosen by employee than if employer chooses and pays the attorney directly).

Just because third parties may not interfere with the attorney-client relationship does not mean that they may not play any role in the matter. Attorneys may be permitted to take direction from third-party payers if the direction is not influenced by interests outside the best interests of the client. Section 134 of the American Law Institute's Restatement of the Law Governing Lawyers provides clarification about the circumstances under which an attorney may take reasonable direction from a third-party:

(2) A lawyer's professional conduct on behalf of a client may be directed by someone other than the client if: (a) the direction does not interfere with the lawyer's independence of professional judgment; (b) the direction is reasonable in scope and character, such as by reflecting obligations borne by the person directing the lawyer; and (c) the client consents to the direction under the limitations and conditions provided in ' 122.

Restatement of the Law Governing Lawyers ' 134(2) (2000).

Employment law practice illustrates how third-party payers may be tempted to exert influence over the attorney-client relationship. Employers often pay employees' work-related legal bills, whether as part of employment or severance agreement negotiations or pursuant to defense and indemnity obligations. Employers may believe that, because they are paying the bills, they have the right to dictate strategy, especially strategy that benefits the employer. In such situations, the attorney must make clear that it is the employee who is the client and who is owed all the duties of representation.

Cara E. Greene is an associate in Outten & Golden LLP's New York City office and a member of the Executives and Professionals Practice Group. Nantiya Ruan is Of Counsel at the firm.

When it comes to getting paid for legal services, attorneys typically focus far more on getting paid than on who is making the payment. But they need to be concerned about the signature on the check.

Model Rule 1.8(f)

The ethics rules of most jurisdictions expressly prohibit third-party payer fee agreements unless three conditions are met (see below). The American Bar Association's Model Rules of Professional Conduct (“Model Rules”) Rule 1.8(f), which has been adopted in some variation by the vast majority of states, provides:

A lawyer shall not accept compensation for representing a client from one other than the client unless: (1) the client gives informed consent; (2) there is no interference with the lawyer's independence of professional judgment or with the client-lawyer relationship; and (3) information relating to representation of a client is protected as required by Rule 1.6 [confidentiality of information].

The thrust of Rule 1.8(f) and similar professional ethics commentary is to protect the client from conflicts of interest that may result when the attorney is paid by someone other than the client. Accordingly, three special concerns must be addressed when a third party pays the legal bill: 1) the need for informed consent; 2) client confidentiality; and 3) client control of the matter. See, e.g., In re State Grand Jury Investigation, 200 N.J. 481, 495, 983 A.2d 1097, 1105 (2009); In re Nicole Energy Services, Inc., 385 B.R. 201, 220 -21 (Bkrtcy. S.D. Ohio 2008); Unauthorized Practice of Law Committee v. American Home Assur. Co., Inc. , 261 S.W.3d 24, 42 (Tx. 2008).

Duty to Obtain Informed Consent

To comply with Rule 1.8(f), a lawyer must obtain the client's “informed consent” before accepting a third party's payment of the fee. Model Rule 1.4(b) articulates the standard: A “lawyer shall explain a matter to the extent reasonably necessary to permit the client to make informed decisions regarding the representation.” Accordingly, for consent to be considered “informed” in third-party payer arrangements, the client must have full knowledge of the circumstances and conditions under which the fee payment is provided and any potential risks to the client that such a fee agreement may create.

Best practices dictate that consent be given explicitly in writing, and if an actual conflict is created by the third-party payment, consent must be in writing as well. See Model Rule 1.7(b). A consent and conflict waiver should set forth at least three components: 1) the material risks created by payment by the third party; 2) the attorney's duty of confidentiality to the client; and 3) an explanation of the advantages and disadvantages of granting or not granting the consent and a waiver. Indeed, counsel would do well to consider sending the third-party payer a letter of non-engagement to confirm the payer's status.

Duty to Keep Client Confidences

When a third party is paying the legal bill for the client, the third party sometimes is surprised that she or he is not allowed to participate fully in the case due to confidentiality concerns. In some instances, the third party may contact the attorney for updates on the case or may attempt to provide additional information to the attorney that he or she is concerned has not been divulged by the client. Nonetheless, third-party payers are not entitled to information about the client's case just because they pay the legal bill.

Under Model Rule 1.8(f), a lawyer cannot accept compensation from a third party unless “information relating to representation of a client is protected as required by Rule 1.6″ ' the rule outlining an attorney's obligation to preserve client confidences. The Model Rules contemplate that attorneys will understand and comply with the duty of confidentiality and will hold firm against any pressure from third-party payers to divulge information regarding the status of the representation.

Of course, clients have the ability to consent to the disclosure of information to a third-party payer, but again, the consent is effective only if the client is adequately informed of the potential risks.

Controlling the Representation

Ethical concerns also arise when a third-party payer wants to have a say in the handling of the client's case. Rule 1.8(f)(2) provides that a lawyer may not accept compensation from a third-party payer unless “there is no interference with the lawyer's independence of professional judgment or with the client-lawyer relationship.” Courts have recognized that third-party payer agreements may open the door to an attorney “sacrificing” the interests of a client to satisfy the payer. See In re Abrams, 56 N.J. 271, 274, 266 A.2d 275, 277 (1970) (in a case prior to the adoption of the modern Rule 1.8(f), the court refused to approve representation involving a third-party payer on the ground that a serious risk existed that the lawyer would sacrifice the client's interests to further those of the third-party payer).

On the other hand, courts reviewing allegations of conflicts of interest are likely to require evidence of actual influence on an attorney's professional judgment. The mere suggestion of mixed loyalty for third-party payers will likely not suffice. See, e.g., Larmore v. Fleet Nat. Bank, 2006 WL 3293936, *6 (R.I. Super. Nov. 9, 2006) (holding that a third-party payer fee arrangement “presented at most an opportunity to exert influence,” which failed to support a finding of actual influence).

Practical Applications of Rule 1.8(f)

When a third party is paying the legal bill, the attorney would do well to document significant professional opinions and strategic decisions as they relate to the client's interests; this will reduce the risk of subsequent allegations of professional misconduct. The attorney also may recommend that the third-party reimburse the client for the attorneys' fees, rather than paying the fees directly to the attorney. See In re Special February, 1975 Grand Jury, 406 F. Supp 194, 197 (N.D. Ill. 1975) (noting that representation is more likely to be held permissible if employer reimburses employee for expenses of lawyer chosen by employee than if employer chooses and pays the attorney directly).

Just because third parties may not interfere with the attorney-client relationship does not mean that they may not play any role in the matter. Attorneys may be permitted to take direction from third-party payers if the direction is not influenced by interests outside the best interests of the client. Section 134 of the American Law Institute's Restatement of the Law Governing Lawyers provides clarification about the circumstances under which an attorney may take reasonable direction from a third-party:

(2) A lawyer's professional conduct on behalf of a client may be directed by someone other than the client if: (a) the direction does not interfere with the lawyer's independence of professional judgment; (b) the direction is reasonable in scope and character, such as by reflecting obligations borne by the person directing the lawyer; and (c) the client consents to the direction under the limitations and conditions provided in ' 122.

Restatement of the Law Governing Lawyers ' 134(2) (2000).

Employment law practice illustrates how third-party payers may be tempted to exert influence over the attorney-client relationship. Employers often pay employees' work-related legal bills, whether as part of employment or severance agreement negotiations or pursuant to defense and indemnity obligations. Employers may believe that, because they are paying the bills, they have the right to dictate strategy, especially strategy that benefits the employer. In such situations, the attorney must make clear that it is the employee who is the client and who is owed all the duties of representation.

Cara E. Greene is an associate in Outten & Golden LLP's New York City office and a member of the Executives and Professionals Practice Group. Nantiya Ruan is Of Counsel at the firm.