Court Rules Discovery Sanctions Must be Paid by Clients, Not Their Attorneys

A federal district court in Pittsburgh recently ruled that counsel were not permitted to advance the cost of discovery sanctions imposed by the court against their clients. In a case challenging Pittsburgh-based grocery chain Giant Eagle’s mandatory mask policy, Senior Judge Nora Barry Fischer was faced with the question whether two plaintiffs, Vidovich and Zytnick, should pay Giant Eagle’s attorney’s fees and costs related to pursuing the plaintiffs’ Facebook posts about their interactions with the grocery chain. A court-appointed special master had recommended that plaintiffs be sanctioned, but their counsel at Thomson Rhodes and Anderson, contended that members of the firm were ultimately responsible for the delays and sought permission to pay the sanctions on their clients’ behalf.  Giant Eagle urged that the sanctions be paid by the plaintiffs personally.

Judge Fischer examined whether the plaintiffs’ fee agreement made any provision for advancing attorney’s fees and costs ordered as discovery sanctions and, not surprisingly, found no specific language providing that counsel were free to advance such fees and costs and secure reimbursement from the clients later. The court also reviewed Rule of Professional Conduct 1.8(e) and the supporting comment concerning the provision of financial assistance to clients in connection with litigation, and found that the rule did not directly address whether court ordered sanctions could be funded by counsel consistent with the rule.

The court found no Pennsylvania cases or ethics opinions directly addressing whether the firm’s proposal was inappropriate, but was “unpersuaded that the appropriate approach to this unsettled ethical issue is for plaintiffs’ counsel to note the lack of controlling authority and to forge ahead to advance such sanctions on behalf of his clients without first utilizing the available resources to obtain an opinion from ethics counsel, the Bar Association or the Disciplinary Board.”  The court noted that bar association ethics opinions in Florida and Oklahoma had both said that firms could not ethically advance their clients’ attorney’s fees imposed as a sanction, while an Alaska ethics opinion had concluded that such fees could be considered part of the “expenses” a firm was permitted to advance. The court’s research did not reveal a consensus on the question, and none of the opinions directly “addressed the facts and circumstances at issue here involving court ordered sanctions imposed against certain of the plaintiffs for proven discovery violations.”

The court declined to accept the law firm’s contention that advancing court costs and expenses for a client may be part of a firm’s efforts to maximize access to the courts for those who might not otherwise be able to afford it, as plaintiffs’ had not provided any evidence that Vidovich or Zytnick could not afford to fund the fees.

In a somewhat different context, a U.S. District Judge in Oregon recently imposed a $40,000 sanction on counsel of record and their law firm for failing to mention “long-standing, settled caselaw” that prevented the judge from issuing an injunction that was sought by the law firm in an attempt to prevent a strike by medical technicians and therapists at a health system. The court’s opinion rejected as “meritless” an argument that the attorneys’ actions were not sanctionable because they were merely arguing for an “extension” of existing case law and were unable to identify any case directly on point with the underlying facts. The December 16, 2021 Court Order is here: https://s3.documentcloud.org/documents/21164070/mcshanesanctionslawyerfirmliable.pdf

Takeaways: 

  • In the event of uncertainty as to whether the law firm or the client is financially responsible for payment of monetary sanctions, further analysis of the background facts and circumstances is likely required. The dearth of court decisions and ethics opinions addressing whether clients or counsel must fund monetary discovery sanctions is in part a function of the fact that Courts seldom focus on the identity of the payor of such sanctions orders. Answering who is the “right” responsible party may require a detailed inquiry into the attorney-client communications concerning the scope and timing of discovery, as well as the diligence exercised in preparing the client’s responses for production.
  • Once sanctions are imposed, whether the fees and costs will be funded by the clients or the law firm or both will often be the subject of frank discussion as between the law firm and its client(s).  Where the client has caused the delay in a document production, then the payment should come from the client.  If the delays were due to oversights or misjudgments by both client and counsel, then the costs may be shared by agreement with the client.  If the client and counsel cannot agree on a fair allocation, the question may be raised with the court, addressed via mediation or paid by counsel as an advance against any recovery at the conclusion of the case consistent with Rule 1.8(e). When a dispute develops as between client and counsel concerning the proper party to pay the costs, the client should be encouraged to consult independent counsel for guidance. As in the Giant Eagle case, the party seeking the sanction will typically urge as a tactical matter that the sanction be borne by its opponent, rather than by opposing counsel.
  • Lawyers and law firms may want to seek ethics guidance concerning the proper allocation of responsibility for a monetary sanction. Judge Fisher properly explained that there are available avenues to secure ethical guidance through bar association ethics committees or private ethics counsel. The Disciplinary Board in Pennsylvania does not typically provide ethics guidance upon request.
  • Law firm’s may want to consider addressing the payment of costs in the form of monetary sanctions in their fee letters at the outset of the representation, particularly in the case for clients with limited financial resources. The court’s ruling suggests that law firms may address in advance in their fee agreements a voluntary commitment to fund or advance monetary sanctions that may be imposed in the course of discovery, subject to reimbursement from any later recovery in the case. Law firms should also consider including language expressing an expectation that the client will reasonably cooperate in the discovery process and assist counsel in responding to discovery requests in a timely manner.

The case is Kimberly Pletcher, et al. v. Giant Eagle Inc., et al., C.A. 2:20-cv-00754 (W.D. PA), and the link to the opinion follows: http://lawyersrepresentinglawyers.com/wp-content/uploads/sites/36/2021/12/Kimberly-Fletcher-v.-Giant-Eagle-Inc.-Order-of-Court-12_15_2021.pdf

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ABA Issues Ethics Guidance on Passive Investment in Nonlawyer Owned Law Firms

What happens when a Pennsylvania lawyer desires to invest in a law firm in D.C. where some of the owners are not lawyers? Under the Pennsylvania Rules of Professional Conduct, the lawyer is not permitted to make that investment, but the D.C. Rules would allow it for a D.C. lawyer.

ABA Formal Opinion 499 resolves this question and provides guidance on key considerations for lawyers in states, like Pennsylvania, whose rules do not permit non-lawyer ownership in law firms. Lawyers may invest passively in a law firm that includes nonlawyer owners in jurisdictions that permit such alternative business structures, according to the new ABA ethics opinion. The lawyer may passively invest, even though the lawyer practices law in a jurisdiction that does not permit such nonlawyer ownership.

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ABA Issues New Guidance on Lawyers’ Ethical Duties to Prospective Clients

The ABA Standing Committee on Ethics and Professional Responsibility (the “Committee”) recently issued Formal Opinion 492 (the “Opinion”), in which the Committee offers helpful guidance on navigating the duties to prospective clients under Model Rule 1.18. Attorneys and conflict-avoidance software alike tend to focus on conflicts of interest with current and former clients, and may disregard the risks associated with prospective clients with whom an attorney-client relationship is ultimately never formed. The Opinion serves as an important reminder to attorneys that prospective clients are indeed owed certain duties – and that even a short consultation that does not lead to a retention could disqualify the lawyer – and even the lawyer’s entire firm – from undertaking a future representation of a different person or entity.

The duties described in Rule 1.18 apply to prospective clients. A prospective client is a “person who consults with a lawyer about the possibility of forming a client-lawyer relationship with respect to a matter.” The comments clarify what does – and what does not – constitute a consultation. Comment [2] explains that “a consultation is likely to have occurred if a lawyer … specifically requests or invites the submission of information about a potential representation without clear and reasonably understandable warnings and cautionary statements that limit the lawyer’s obligations, and a person provides information in response.” On the other hand, a consultation has not occurred within the meaning of the Rule if a person unilaterally provides information to an attorney, such as through an unsolicited email seeking legal help.1 To be accorded prospective client status, a person must have consulted with the attorney in good faith about the possibility of forming an attorney-client relationship.2 So under the current Model Rule, Tony Soprano’s efforts to conflict out every high-powered divorce attorney in the community by disclosing information during multiple consultations would have fallen short. Tony was not consulting with the attorneys in good faith.3

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ABA Issues New Ethics Guidance on Conflicts Arising Out of a Lawyer’s Personal Relationship With Opposing Counsel

Many lawyers are married to lawyers, socialize with other lawyers, and count lawyers they have interacted with on a professional level for years as friends. When do these relationships create conflicts of interest that require lawyers to take steps to address the conflict?

The American Bar Association’s Model Rule of Professional Conduct 1.7(a)(2) prohibits a lawyer from representing a client without informed consent where there is a significant risk that the lawyer’s personal interest will materially limit the lawyer’s ability to represent the client.

Comment [11] to Model Rule 1.7(a)(2) discusses how the Model Rule relates to personal interest conflicts based on blood or marriage:

When lawyers representing different clients in the same matter or in substantially related matters are closely related by blood or marriage, there may be a significant risk that client confidences will be revealed and that the lawyer’s family relationship will interfere with both loyalty and independent professional judgment…Thus, a lawyer related to another lawyer, e.g., as parent, child, sibling or spouse, ordinarily may not represent a client in a matter where that lawyer is representing another party, unless each client gives informed consent.

The practical implications of a personal interest conflict are easy enough to identify where the lawyers on opposite sides of a case are related by blood or marriage. For example, there would be a significant risk of a disabling personal interest conflict where a plaintiffs’ personal injury lawyer handling a matter on a contingency fee basis appeared at a settlement conference or mediation where his or her spouse was on the other side of the case. The test is whether the lawyer “reasonably believes” that he or she can continue to provide competent and diligent representation to the client notwithstanding the personal interest conflict. If so, then both clients should provide informed consent, in writing, to permit the lawyer to proceed with the representation notwithstanding the personal interest conflict.

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Division of Fees Between Discharged Counsel and Successor Counsel in Contingent Fee Cases

When a client terminates, without cause, its legal representation in a contingent fee matter and subsequently retains new counsel from a different firm, the Rules of Professional Conduct related to the division and disbursement of fees impose certain requirements on the successor attorney. The American Bar Association recently issued Formal Opinion 4871 (the “Opinion”) to identify the applicable rules, and to clarify the duties owed to the client by the successor attorney.

The Opinion explains that Model Rule 1.5(e) (or its state equivalent) has no application to the division of fees in cases of successive representation.2 Such situations are governed by Rule 1.5(b)- (c), which according to the Opinion, require the successor counsel to “notify the client, in writing, that a portion of any contingent fee earned may be paid to the predecessor attorney.”

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Ethical Implications When Outsourcing Legal Work

Outsourcing on the Upswing

In an era where lawyers and law firms seek to run “lean” as a way of keeping costs down, outsourcing legal and nonlegal services once performed in-house by law firms can be a wise financial move. The advent of COVID-19 has accelerated consideration of outsourcing various administrative services so as to streamline back office functions.

‘‘Outsourcing’’ generally refers to ‘‘the practice of taking a specific task or function previously performed within a firm or entity and, for reasons including cost and efficiency, having it performed by an outside service provider.’’ See ABA Commission on Ethics 20/20, Revised Proposal – Outsourcing (Sept. 19, 2001). Due to the COVID-19 pandemic, additional reasons for outsourcing include the need for social distancing and the necessity of firms working remotely.

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