Simon on New Rules: Rule 1.8 — 10 Conflict Rules in One | New York Legal Ethics Reporter

Simon on New Rules: Rule 1.8 — 10 Conflict Rules in One

By Roy Simon

[Originally published in NYPRR June 2009]

In NYPRR April and May 2009, I reviewed some interesting provisions in the New York Rules of Professional Conduct, which took effect on April 1, 2009. Last month’s column (NYPRR May 2009) ended with a discussion of Rule 1.7, the general rule on conflicts of interest. This column discusses select provisions of Rule 1.8, which governs 10 different “specific” conflicts. It is really 10 Rules in one. This column covers only the provisions that differ significantly from the cognate provisions in the old Code of Professional Responsibility. The provisions not covered here — subparagraphs (d), (e), (f), and (h) through (k) are mostly old wine in newly numbered bottles.

Rule 1.8: Current Clients — Specific Conflict of Interest Rules

I sometimes call Rule 1.8 the 10 Commandments because the Rule contains 10 specific prohibitions — or, more accurately, “restrictions” — which prohibit lawyers from engaging in the specified conduct unless they satisfy strict conditions. These 10 restrictions are denominated (a) though (j), and by means of Rule 1.10 (“Imputation of Conflicts of Interest”), all of them are imputed to every lawyer in a firm except the “anti-sex” rule. Instead, Rule 1.8(k) retains verbatim the language of former DR 5-111(D), which basically allows a lawyer to have sex with clients of the firm as long as the lawyer “does not participate in the representation of that client” and complies with the general rules on conflicts. The provisions of Rule 1.8 are all negative commandments — the “Thou shalt not” variety — with each one containing the phrase “a lawyer shall not” somewhere in the rule. In summary, the 10 restrictions are as follows:

Rule 1.8(a): Entering a business transaction with a client

Rule 1.8(b): Using confidential information to the client’s disadvantage

Rule 1.8(c): Soliciting a gift from a client or drafting an instrument giving the lawyer a gift

Rule 1.8(d): Acquiring literary or media rights in the representation of a client

Rule 1.8(e): Advancing or guaranteeing financial assistance to a client

Rule 1.8(f): Accepting compensation from a third party for representing a client

Rule 1.8(g): Making an aggregate settlement

Rule 1.8(h): Prospectively limiting a lawyer’s malpractice liability to a client, or settling a malpractice claim with an unrepresented client

Rule 1.8(i): Acquiring a proprietary interest in a client’s cause of action

Rule 1.8(j): Entering into sexual relations with a client

All of these restrictions are familiar to New York lawyers, but they were scattered across three different Canons in the old Code of Professional Responsibility. Their Code ancestors were found in DRs 4-101(B)(2); 5-103(A)-(B); 5-104(A)- (B); 5-106; 5-107(A)-(B); 5-111(B)-(C); 6-102; and EC 5-5. It is convenient to have them all gathered together in a single rule — and it is logical for them to be grouped together because all of the “specific conflicts of interest” regulated by Rule 1.8 are specialized versions of a lawyer’s personal conflicts of interest. (It’s hard to find a topic more personal than sex.)

Generally, a lawyer’s personal conflicts of interest are regulated by Rule 1.7(a)(2) (see NYPRR May 2009) which provides as follows:

(a) Except as provided in paragraph (b), a lawyer shall not represent a client if a reasonable lawyer would conclude that …

(2) there is a significant risk that the lawyer’s professional judgment on behalf of a client will be adversely affected by the lawyer’s own financial, business, property or other personal interests.

Paragraph (b), which sets out the steps needed to overcome a Rule 1.7(a)(2) conflict, provides, in pertinent part, as follows:

(b) Notwithstanding the existence of a concurrent conflict of interest under paragraph (a), a lawyer may represent a client if:

(1) the lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client; … and

(4) each affected client gives informed consent, confirmed in writing.

The crucial term “informed consent,” in turn, is defined as:

(j) “Informed consent” denotes the agreement by a person to a proposed course of conduct after the lawyer has communicated information adequate for the person to make an informed decision, and after the lawyer has adequately explained to the person the material risks of the proposed course of conduct and reasonably available alternatives. [Emphasis added.]

Each of the 10 situations regulated by Rule 1.8 implicates a lawyer’s personal interests in ways that pose a “significant risk” to the lawyer’s professional judgment. Accordingly, each situation could have been regulated by Rule 1.7. Why, then, is Rule 1.8 necessary? What does Rule 1.8 add to Rule 1.7?

Rule 1.8 does two things. First, it adds additional restrictions and disclosure requirements. Second, it makes some personal interest conflicts nonconsentable no matter how fully a lawyer discloses the potential for conflicts of interest that will harm the client. And some of the restrictions in Rule 1.8 are designed to protect clients against themselves. In essence, Rule 1.8 collects in one place 10 situations that have historically proven especially dangerous for clients, whether the conduct creating the conflict was initiated by the lawyer or by the client.

Let me explain the function of Rule 1.8 in more detail by going one by one through the 10 commandments of Rule 1.8 that differ significantly from the equivalent provisions in the old Code of Professional Responsibility.

Rule 1.8(a): Business Transactions with Clients

Rule 1.8(a) governs business transactions with clients. It provides as follows:

(a) A lawyer shall not enter into a business transaction with a client if they have differing interests therein and if the client expects the lawyer to exercise professional judgment therein for the protection of the client, unless:

(1) the transaction is fair and reasonable to the client and the terms of the transaction are fully disclosed and transmitted in writing in a manner that can be reasonably understood by the client;

(2) the client is advised in writing of the desirability of seeking, and is given a reasonable opportunity to seek, the advice of independent legal counsel on the transaction; and

(3) the client gives informed consent, in a writing signed by the client, to the essential terms of the transaction and the lawyer’s role in the transaction, including whether the lawyer is representing the client in the transaction.

This language looks deceptively like DR 5-104(A) in the old Code, but it differs in several ways, some significant.

First, DR 5-104(A)(1) referred to “the terms on which the lawyer acquires the interest,” which suggested that the rule applied only when the lawyer was a buyer. Rule 1.8(a)(1) deletes that misleading and unnecessary phrase, making it clear that the rule applies whether the lawyer is the one acquiring an interest or the one whose interest is being acquired — whether the lawyer is a buyer or seller, lender or borrower, owner or investor. (I always thought that the rule applied to a lawyer in any kind of transaction with a client, but it was distracting to deal with language that suggested otherwise.)

Second, Rule 1.8(a)(2) contains a much bigger change, and a trap for unwary creatures of Code habits. Under DR 5-104(A) (2) a lawyer was required to advise the client to seek independent counsel, but under Rule 1.8(a)(2) the lawyer must give that advice “in writing” — and the lawyer must also give the client “a reasonable opportunity to seek” independent counsel. To me, that means the lawyer has to give the client some time to absorb the advice to seek independent counsel. Giving the advice to get independent counsel and asking for the client’s agreement to the deal in the same sitting is therefore not usually advisable, especially with an unsophisticated or inexperienced investor/buyer/borrower who does not appreciate the value an independent lawyer could add to assessing, shaping, and negotiating the terms of the transaction.

Third, Rule 1.8(a)(3) replaces the vague requirement that the lawyer disclose to the client “the lawyer’s inherent conflict of interest” with a specific requirement that the lawyer disclose “the lawyer’s role in the transaction, including whether the lawyer is representing the client in the transaction.”

Putting subparagraphs (a)(2) and (a)(3) together, suppose a lawyer has persuaded a client to invest in a start-up business in which the lawyer is a partner. A reasonable time before the closing, the lawyer should say to the client, “I am a partner in the business. I am not representing you in your investment in my business. You should have independent advice about whether to enter into this transaction, so here is a letter advising you to consult an independent lawyer before you sign this deal. I will give you a reasonable time to look for a lawyer. How much time do you need?”

The hard point will come if the client says, “I don’t need a lawyer. I’m ready to sign today. I’ve talked to friends about this and thought it over, and I don’t need to spend money for a fancy lawyer to tell me what I already know. Let’s close this deal now.” That creates a tough problem. If a client does not want a lawyer to review the transaction and does not intend to look for a lawyer, has the client already had a “reasonable opportunity” to find a independent counsel in the transaction? Is no time ever a “reasonable” time?

Here’s my view: If the client is an experienced investor and has invested in similar deals before, and if the client says unequivocally that he will not seek or retain his own counsel, then a nanosecond may indeed be a reasonable time. But if the client is not experienced, or if the client might change his mind and hire a lawyer, or if the deal has unusual features that some lawyers might consider unfair to the client, a lawyer is taking a tremendous risk to close the deal on the spot, without insisting that the client spend a day (or a week) thinking about whether to retain independent counsel.

If the business transaction between the lawyer and client later goes bad, the client will hire independent counsel at that time, and a judge or jury will evaluate the deal in hindsight. In that situation, I do not think a jury will be very sympathetic to an argument that the client had a “reasonable opportunity” to find independent counsel for the transaction. This comports with my general view that a lawyer should never enter into a business transaction with a client unless the client actually has independent counsel. Rule 1.8(a)(2) may allow the transaction when the client has merely been advised (in writing) to obtain independent counsel, but entering into a business deal with an unrepresented client invites trouble. Why take the risk?

Rule 1.8(b): Using Confidential Information to a Client’s Disadvantage

Rule 1.8(b) is nothing new. It essentially continues the language in DR 4-101(B)(2), which prohibited a lawyer from knowingly using confidences and secrets to the disadvantage of a client except when permitted by one of the exceptions in DR 4-101(C), including consent after full disclosure. Rule 1.8(b) provides as follows:

(b) A lawyer shall not use information relating to representation of a client to the disadvantage of the client unless the client gives informed consent, except as permitted or required by these Rules.

Rule 1.8(b) has two interesting features. First, it continues to use the phrase “information relating to the representation of a client” (apparently taken from ABA Model Rule 1.6) instead of the term “confidential information” (which is defined in NY Rule 1.6 as “information gained during or relating to the representation of a client” etc.). Thus, the definition of “confidential information” was meant to be broader than information “relating to” the representation, and I’m sure the Courts intended to use the broader term “confidential information” in Rule 1.8(b) rather than the narrower phrase “relating to the representation.”

Second, Rule 1.8(b) is entirely redundant and unnecessary because Rule 1.6(a) already provides that a lawyer “shall not knowingly reveal confidential information … or use such information to the disadvantage of a client” except with consent, implied authority, or one of the Rule 1.6(b) exceptions. The COSAC proposals had omitted Rule 1.8(b) precisely because it was already covered by Rule 1.6(a). Thus, Rule 1.8(b) is mere repetition for emphasis. The great French author Andre Gide reportedly once said, “Everything worth saying has been said before, but some people weren’t paying attention so we’ll say it again.” Perhaps that was the guiding philosophy of the Courts here. And perhaps the fact that the Courts inserted this rule on their own, without public comment and without the benefit of input from a large, experienced committee like COSAC, explains the error in using the wrong term to define the key concept of confidential information.

Rule 1.8(c): Gifts from Clients

Rule 1.8(c) had no equivalent in the old Disciplinary Rules, but it codifies the concepts in EC 5-5, which in turn traced its pedigree back to the famous opinion in In re Putnam, 257 NY 140 (1931). Rule 1.8(c) generally prohibits lawyers from soliciting gifts from clients (including relatives) and from preparing any instrument by which a client (excluding relatives) makes a gift to the lawyer.

The first branch is similar to the first two sentences of EC 5-5, which provided as follows:

A lawyer should not suggest to the client that a gift be made to the lawyer or for the lawyer’s benefit. If a lawyer accepts a gift from the client, the lawyer is peculiarly susceptible to the charge that he or she unduly influenced or overreached the client. …

Rule 1.8(c) (1) essentially makes this aspirational prohibition mandatory. It provides that a lawyer shall not:

(1) solicit any gift from a client, including a testamentary gift, for the benefit of the lawyer or a person related to the lawyer;

This is a sweeping prohibition. ABA Model Rule 1.8(c) prohibits lawyers from soliciting only “substantial” gifts from their clients. The COSAC/NYSBA proposal for Rule 1.8(a)(1), following the ABA’s lead, applied only to “substantial” gifts. But the Courts crossed out the word “substantial,” resulting in a version that expresses a zero tolerance policy. As adopted, the rule prohibits a lawyer from soliciting “any” gift from a client, no matter how small — and I’m concerned that some unsuspecting lawyers will get trapped by it.

Who is a person “related” to the lawyer within the meaning of Rule 1.8(c)(1)? The scope of the term “related” is crucial because Rule 1.8(c)(1) not only prohibits a lawyer from soliciting any gift for herself, but also prohibits the lawyer from soliciting any gift that will benefit any person “related to the lawyer.” A special definition after Rule 1.8(c)(2) (applicable to both subparagraphs) defines the term “related” for Rule 1.8(c) purposes as follows:

For purposes of this paragraph, related persons include a spouse, child, grandchild, parent, grandparent or other relative or individual with whom the lawyer or the client maintains a close, familial relationship.

This is a broad definition of “related” — and New York Rule 1.8(c)(1) has no exception that would allow a lawyer to ask clients who are relatives for gifts to benefit anyone in this broad range of “related persons.” Suppose a lawyer does some estate planning or tax work or real estate work (or any kind of legal work) for Mom and Dad. If we read Rule 1.8(c) (1) literally — as we must until the Courts say otherwise —a lawyer who counts his Mom among his clients may not say, “Mom, I think you should start getting assets out of your estate by giving me and my wife $12,000 per year as a gift.” That suggestion may be a good idea, and Mom may want to do it (especially if she understands the favorable tax implications), but the lawyer is forbidden to solicit the gift. Likewise, a lawyer who does legal work for his Dad must not say, “Dad, could you please pay my kids’ college tuition? Things are really tight now, and tuition has gone up again.” This solicitation is verboten under Rule 1.8(c)(1). Indeed, a lawyer may not even say, “Mom and Dad, for my birthday this year I’d like a new watch” — unless Mom and Dad first ask the lawyer what he wants for his birthday so that the lawyer is not “soliciting” the gift. Of course, it’s hard to imagine that the disciplinary authorities would bring charges against a lawyer who did any of these things in good faith. But my job isn’t to predict which violations the disciplinary authorities will punish; my job is just to read the rules and tell what they say. Rule 1.8(c)(1) says you can’t ask Mom and Dad for a birthday gift (or any other gift) if Mom and Dad are clients of yours.

Does such a broad total prohibition make sense? The ABA doesn’t think so. Comment 6 to ABA Model Rule 1.8 says that “due to concerns about overreaching and imposition on clients, a lawyer may not suggest that a substantial gift be made to the lawyer or for the lawyer’s benefit, except where the lawyer is related to the client as set forth in paragraph (c).” (Emphasis added.) The text of Rule 1.8(c)(1) eschews any exception allowing a lawyer to solicit gifts from relatives, so the equivalent New York Comment lops off the italicized phrase. Why? Have New York lawyers taken advantage of their family clients more often than lawyers in the rest of the country?

I doubt it. And given that the rule applies to “any” gift, not just a “substantial” gift, I think the rule is overly protective. It therefore seems inevitable to me that one of three undesirable (and probably unintended) consequences will follow: (1) lots of lawyers who do legal work for their relatives will solicit gifts in good faith (as I think they always have), but the disciplinary authorities will ignore these violations of Rule 1.8(c) (1) completely; or (2) lots of lawyers will take the rule seriously and stop doing free legal work for their families out of fear that they (the lawyers) will violate the rule; or (3) some lawyers will get nailed for asking their client-relatives for gifts in circumstances that pose minimal risk of abuse or overreaching. I predict the answer lies behind door number one or door number two, not door number three. If I’m right, the Courts have written a rule that doesn’t mean what it says and won’t be enforced. That’s not good rulemaking. The lack of an exception for soliciting gifts from clients who are relatives is understandable, but the decision by the Courts to apply the absolute prohibition to “any” gift, not just a “substantial” gift, was in my view a bad decision.

The second branch of the rule, Rule 1.8(c)(2), traces its lineage back to the second two sentences of EC 5-5, which provided as follows:

If a client voluntarily offers to make a gift to the lawyer, the lawyer may accept the gift, but before doing so, should urge that the client secure disinterested advice from an independent, competent person who is cognizant of all the circumstances. Other than in exceptional circumstances, a lawyer should insist that an instrument in which the client desires to name the lawyer beneficially be prepared by another lawyer selected by the client. [Emphasis added.]

The phrase “exceptional circumstances” in EC 5-5 was ambiguous, as was the word “insist” (whose meaning I once interpreted as an expert witness in a case where everyone agreed that the circumstances were exceptional). Rule 1.8(c)(2) eliminates that ambiguity by providing that a lawyer shall not:

(2) prepare on behalf of a client an instrument giving the lawyer or a person related to the lawyer any gift, unless the lawyer or other recipient of the gift is related to the client and a reasonable lawyer would conclude that the transaction is fair and reasonable. [Emphasis added.]

Rule 1.8(c)(2) thus makes the prohibition absolute as to nonrelatives — but it also relaxes the prohibition almost completely (subject only to a “fair and reasonable” test that was not in EC 5-5) if the recipient of the gift (whether the lawyer or someone else, such as the lawyer’s spouse or children) is “related” to the client within the definition quoted above.

Putting the two branches of Rule 1.8(c) together, a lawyer must not solicit any gift from a client, even if the client is a close relative or a close personal friend. If a client who is a relative within the meaning of Rule 1.8(c) offers to give the lawyer or the lawyer’s close relatives a gift (including a testamentary gift), the lawyer may draft the instrument making the gift as long as the terms are “fair and reasonable.” But if a client who is not related to the lawyer offers to give the lawyer a gift, the lawyer absolutely must not draft the instrument making the gift. And there is no provision for client consent in either branch of Rule 1.8(c). These are flat prohibitions. Client consent cannot overcome them.

Rule 1.8(g): Aggregate Settlements

Rule 1.8(g), which governs aggregate settlements, provides as follows:

(g) A lawyer who represents two or more clients shall not participate in making an aggregate settlement of the claims of or against the clients, absent court approval, unless each client gives informed consent in a writing signed by the client. The lawyer’s disclosure shall include the existence and nature of all the claims involved and of the participation of each person in the settlement. [Emphasis added.]

This provision largely tracks old DR 5-106, but the “court approval” language is new, as is the requirement that client consent be reflected “in a writing signed by the client.” (A mere letter or email to the client confirming the client’s consent is not sufficient.) The requirement of a signed writing was added by COSAC. The Reporters’ Note to the COSAC proposal explained that the requirement “should provide stronger protection to clients against overreaching by lawyers.”

The “court approval” exception, however, is curious. The Reporters’ Note from COSAC suggested that the court approval exception would apply in situations “such as in class actions,” reflecting the reality that individual consent to a class action settlement is rarely (if ever) obtained from every member of a class, and indeed a court may approve a settlement even if some members of the class expressly object to it. Class actions are simply different from individual actions, and the “court approval” exception in Rule 1.8(g) recognizes that fact.

But read literally, the court approval exception also could be interpreted to open an avenue for converting “mass actions” (multiple individual clients bringing related claims) into “class actions” (allowing court approval to substitute for individual client consent). I do not think that is what it means. New York’s CPLR, which is enacted by the Legislature, contains no mechanism for court approval of an aggregate settlement in any setting other than a class action (or its close cousin, the derivative action). I cannot believe that the Courts would have created a new and radical rule of civil procedure in the guise of a rule of professional conduct. Thus, even if a lawyer obtains court approval for an aggregate settlement outside the class action or derivative action context, the lawyer must still obtain each individual client’s “informed consent” (a defined term — see Rule 1.0(j), quoted earlier in these comments) after appropriate disclosures (including the mandatory disclosures expressly set out in the last sentence of Rule 1.8(g)), and must memorialize each client’s informed consent in a signed writing agreeing to the aggregate settlement.

Conclusion: A Valuable Collection of Conflict Rules

Rule 1.8 is largely an organizing principle, assembling in one convenient place the rules governing 10 disparate types of personal interest conflicts. Few lawyers will encounter all of these provisions during their careers, but nearly all lawyers will encounter some of them frequently. They are strict provisions — sometimes much stricter than necessary, I think. Lawyers will be well advised to take the time to read them carefully and abide to the letter with all that apply.

Professor Roy Simon is the author of Simon’s New York Rules of Professional Conduct Annotated. The brand new 2015 edition analyzes more than 100 new cases, ethics opinions, and other developments critical to New York practice. It’s the legal ethics bible for all New York-area lawyers. To purchase, click here.

In addition, Professor Simon advises lawyers and law firms on questions of professional conduct and serves as an expert witness in cases raising issues of lawyer conduct. You may reach Professor Simon at 516-463-5289 or Roy.Simon@hofstra.edu.

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Roy Simon