State Bar of Arizona Ethics Opinions
90-17: Conflict of Interest; Direct Contact with Prospective Clients
Dual representation of workers' compensation carrier and injured workers in prosecution of third party claim; soliciting professional employment from workers on request of carrier.
December 28, 1990
The inquiring law firm has been retained by a workers' compensation carrier, primarily to prosecute third-party lawsuits that injured employees have elected not to pursue. The carrier has also asked the law firm to contact the injured workers concerning representation. The law firm has asked this committee for an opinion on whether it would be ethically permissible to do so.
A.R.S. § 23-1023 (8A A.R.S. (1983) at p. 80) provides that, if an employee is injured in the course of employment by the negligence or other wrongdoing of another not in the same employ, and the injured employee collects workers' compensation but fails to bring a personal injury action against the third party wrongdoer within one year after the cause of action accrues, the claim against the third party is deemed assigned by operation of law to the workers' compensation carrier. The carrier may then prosecute the claim after the end of the first year and within the applicable limitations period after the cause of action has accrued (two years in cases of negligent torts), or may reassign the claim in its entirety to the injured employee. If the employee proceeds against the third party, the compensation carrier that has paid the claim for compensation and medical, surgical and hospital benefits has a lien on the amount collectible to the extent of such benefits so paid to the injured worker. The amount collectible equals the amount of the recovery obtained less attorneys' fees and other reasonable and necessary expenses incurred and paid in obtaining the recovery. The statute requires that the employee obtain written approval from the compensation carrier if the employee decides to compromise the claim for less than the amount of benefits paid to him or her by the carrier.
The inquiring law firm represents the workers' compensation carrier. The carrier has suggested that the law firm contact the injured worker and notify the worker: (1) that the law firm represents it; and (2) that, if the worker wishes to recover monies on his or her own behalf for pain and suffering, the worker may contact the inquiring law firm or another law firm for representation, in which case the claim will be reassigned by the compensation carrier to the injured worker.
May a law firm that represents a workers' compensation carrier ethically contact the injured workers and offer to provide them with legal representation if they desire to pursue third-party claims under A.R.S. § 23-1023?
ETHICAL RULES INVOLVED
ER 1.7. Conflict of Interest: General Rule
(a) A lawyer shall not represent a client if the representation of that client will be directly adverse to another client, unless:
(1) the lawyer reasonably believes the representation will not adversely affect the relationship with the other client; and
(2) each client consents after consultation.
(b) A lawyer shall not represent a client if the representation of that client may be materially limited by the lawyer's responsibilities to another client... unless:
(1) the lawyer reasonably believes the representation will not be adversely affected; and
(2) the client consents after consultation....
ER 7.1. Communications Concerning a Lawyer's Services
A lawyer shall not make a false or misleading communication about the lawyer or the lawyer's services. A communication is false or misleading if it:
(a) contains a material misrepresentation of fact or law, or omits a fact necessary to make the statement considered as a whole not materially misleading;
(b) is likely to create an unjustified expectation about results the lawyer can achieve, or states or implies that the lawyer can achieve results by means that violate the rules of professional conduct or other law; or
(c) compares the lawyer's services with other lawyers' services, unless the comparison can be factually substantiated.
ER 7.2. Advertising (amended effective August 1, 1989)
(a) Subject to the requirements of ER 7.1 and ER 7.3, a lawyer may advertise services through public media, such as a telephone directory, legal directory, newspaper or other periodical, outdoor, radio or television, or through written communication.
(b) A copy or recording of an advertisement or written communication shall be kept for three years after its last dissemination along with a record of when and where it was used.
(d) Any communication made pursuant to this rule shall include the name of at least one lawyer responsible for its content.
(e) Written communications to prospective clients for the purpose of obtaining professional employment are subject to the following requirements:
(1) Such written communications shall be plainly marked “Advertisement” on the face of the envelope and at the top of each page of the written communication in type no smaller than the largest type used in the written communication; and
(2) A copy of each such written communication shall be retained by the lawyer for three years. If written communications identical in content are sent to two or more prospective clients, the lawyer may comply with this requirement by retaining a single copy together with a list of the names and addresses of persons to whom the written communication was sent.
(f) A lawyer shall not send, or knowingly permit to be sent, on behalf of himself, his firm, his partner, an associate, or any other lawyer affiliated with him or his firm a written communication to a prospective client for the purpose of obtaining professional employment if:
(3) The communication includes coercion, duress, fraud, overreaching, harassment, intimidation, or undue influence;
(4) The communication is otherwise improper under ER 7.1.
ER 7.3. Direct Contact with Prospective Clients (amended effective August 1, 1989)
(a) A lawyer may not solicit professional employment from a prospective client with whom the lawyer has no family or prior professional relationship in person or by telephone, when a motive for the lawyer's doing so is the lawyer's pecuniary gain.
(b) Subject to the requirements of ER 7.1 and ER 7.2, and paragraph (c) herein, a lawyer may initiate written communication, not involving personal or telephone contact, with persons known to need legal services of the kind provided by the lawyer in a particular matter, for the purpose of obtaining professional employment. Such written communication shall be clearly marked on the envelope and on the first page of the communication contained in the envelope, as follows:
THIS COMMERCIAL SOLICITATION HAS NOT BEEN
APPROVED BY THE STATE BAR OF ARIZONA
Said notification shall be printed in red ink, in all capital letters, in type size at least double that used in the body of the communication....
(c) At the time of dissemination of such written communication, a copy shall be forwarded to the Clerk of the Arizona Supreme Court and the State Bar of Arizona at its Phoenix office. If a written communication identical in content is sent to two or more prospective clients, the lawyer may comply with this requirement by forwarding a single copy together with a list of the names and addresses of persons to whom the written communication was sent.
ETHICS OPINIONS CITED
Arizona Opinions No. 86-1 (January 6, 1986), and No. 89-09 (November 6, 1989).
Ohralik v. Ohio State Bar Ass'n, 436 U.S. 447, 98 S. Ct. 1912, 56 L. Ed.2d 444 (1978).
Shapero v. Kentucky Bar Association, 486 U.S. 466, 108 S. Ct. 1916, 100 L. Ed. 2d 475 (1988).
Parsons v. Continental National American Group, 113 Ariz. 223, 550 P.2d 94 (1976).
This inquiry requires the committee to answer two questions: (1) whether the inquiring law firm may solicit employment from a party known to need legal services of the kind provided by the firm's lawyers in a particular matter and, if so, in what manner; and (2) whether the law firm's dual concurrent representation of the workers' compensation carrier and the injured worker creates a conflict of interest.
1. Contact with injured worker.
The inquiring law firm could not solicit professional employment from the injured worker in person or by telephone, absent a family or prior professional relationship with the injured worker, when a motive for the law firm's doing so is the firm's pecuniary gain. ER 7.3(a); and see Ohralik v. Ohio State Bar Ass'n, 436 U.S. 447, 98 S. Ct. 1912, 56 L. Ed.2d 444 (1978), and Shapero v. Kentucky Bar Ass'n, 486 U. S. 466, 108 S. Ct. 1916, 100 L. Ed.2d 475 (1988).
Subject to the requirements of ER 7.1, ER 7.2 and ER 7.3(c), a lawyer in the law firm could initiate written communication not involving personal or telephone contact, with the injured worker. ER 7.3(b). See Shapero v. Kentucky Bar Ass'n, supra. Such a communication may not be false or misleading. ER 7.1. Nor may it involve coercion, duress, fraud, overreaching, harassment, intimidation or undue influence. ER 7.2(f)(3). General non-exhaustive guidelines to assist in determining whether a statement of "advice and information regarding a specific legal problem" is false or misleading may be found in our Opinion No. 86-1 (January 6, 1986). And, in our Opinion No. 89-09 (November 6, 1989), we reviewed three proposed communications to prospective non-clients known to need legal services of the kind provided by the lawyer in a particular matter, in the context of whether they were false, misleading, coercive or constituted overreaching. That Opinion also provides guidance in the formulation and composition of solicitation letters.
In addition, the written communications would have to be labelled in accordance with the requirements of ER 7.3(b). Copies of such communications would have to be kept by the law firm for three years, ER 7.2(b), and copies of each communication would have to be sent to the Clerk of the Arizona Supreme Court and to the Phoenix office of the State Bar of Arizona, as required by ER 7.3(c).
The workers' compensation carrier could certainly notify an injured worker that he or she might have a third-party claim; that such a claim would be reassigned if the injured worker wished to pursue it; and that the injured worker might desire to consult with counsel of his or her own choice. The law firm, on behalf of the compensation carrier, could notify the injured worker, either personally or in writing, of these same matters. The problem arises when the law firm representing the compensation carrier notifies the injured worker of those matters with an eye to representing the injured worker as well. However, these problems are ameliorated or minimized when the law firm does not represent the carrier in the compensation case relating to the specific injured worker, but only on other unrelated matters. Any ethical problem would also be negated or substantially minimized when the law firm represents the carrier in regard to the specific injured worker's case only as it relates to recovering from the responsible third-party wrongdoer the amounts paid out by the compensation carrier (for compensation and medical, surgical and hospital benefits) to the injured worker which are subject to the statutory lien in favor of the compensation carrier.
2. Conflict of interest.
ER 1.7(a,b) provides that a lawyer may not represent a client if the representation of that client will be directly adverse to another client of the lawyer, or if the representation of a client may be materially limited by the lawyer's responsibilities to another client. However, these prohibitions are not absolute. A lawyer may represent two clients in a particular matter if the lawyer reasonably believes that the representation will not adversely affect either client and both clients consent after full disclosure of the implications of the dual representation.
Because of these exceptions, a determination of whether there is a conflict of interest between two clients or potential clients must be made on a case-by-case basis. Consequently, we cannot unequivocally say that the inquiring law firm may or may not represent both the injured worker and the workers' compensation carrier in each and every case. There may be situations, like the two examples set forth above, where representation of both clients would not adversely affect either client, or where representation of one client would not be materially limited by the law firm's responsibilities to the other. In such cases, the clients could consent to the dual representations after full consultation and advice concerning the possible ramifications of the dual representations.
However, in cases where the law firm represents the compensation carrier in the underlying compensation case itself, it would seem to be the exceptional case where the representation of one client (i.e., the compensation carrier) would not adversely affect the relationship with the other client (i.e., the injured worker), or where the representation of one client (i.e., the injured worker) would not be materially limited by the law firm's responsibilities to another client (i.e., the compensation carrier). The nature of workers' compensation law produces inherent and virtually unavoidable conflicts of interest between the carrier and the injured worker at one or more points during the administration of a worker's compensation case when the injured worker pursues a civil action against the third-party wrongdoer.
When the compensation carrier pursues a third-party lawsuit during the second year, it pays the costs and attorney's fees. If the third-party claim is reassigned and the injured worker pursues the claim, the injured worker pays the costs and attorney's fees. He or she may also obtain compensation for pain and suffering while the carrier could not. Generally, the injured worker will fare better in a third-party tort claim lawsuit than will the compensation carrier. Even after reducing the amount recovered by the injured worker by the sum of costs and attorney's fees, the amount actually collectible – the amount subject to the carrier's lien -- will frequently be greater than it would have been had the compensation carrier pursued the claim; and the compensation carrier will not have paid the costs and attorney's fees necessary to pursue the claim. In most cases, therefore, the compensation carrier would prefer that the injured worker pursue the third-party claim during the second year. This is undoubtedly why the compensation carrier has asked the inquiring law firm to contact the injured workers. However, having the compensation carrier's law firm pursue the claim for the injured worker creates obvious conflicts.
For example, it is in the interest of the compensation carrier, and the law firm that represents it in the underlying compensation case, to attempt to minimize the extent of an injured worker's disability. If this is accomplished, less money will have to be paid out by the carrier to the injured worker in compensation and medical benefits. However, in a third-party claim, it is in the interest of the injured worker, and the law firm that represents him or her, to maximize the extent of the injured worker's disability. A compensation carrier, and the law firm that represents the carrier in the administration of a worker's compensation case, may retain physicians and vocational consultants who, they believe, will be more inclined to support their view of the limited extent of the worker's disability. This would clearly impact the third-party claim adversely. The contrary would also be true. Experts retained to support the plaintiff worker's claims made in the third-party action would adversely affect the position taken by the compensation carrier on the extent of the worker's disability. The questions of which consultants to retain, and who will pay the expenses of retaining them, are just a few of the issues which very rarely could be resolved without producing benefit to one client and countervailing disadvantage to the other.
Confidences communicated to the law firm already representing the compensation carrier in the underlying compensation case concerning the injured worker's ability to work either benefit the carrier, to the detriment of the injured worker, or vice versa. The administration of a worker's compensation case often lasts for years. What is done in a third-party case may adversely affect the administration of the worker's compensation case for years into the future, possibly necessitating the withdrawal of the law firm from the representation of both the injured worker and the compensation carrier, to the prejudice of one or both of the clients. While it may perhaps appear to the law firm at the outset that no conflict of interests will arise, there is almost inevitably a divergence of interests between the injured worker and the compensation carrier whenever a third-party claim is asserted by the worker.
Perhaps the most serious conflict would arise when the claim against the third-party wrongdoer is settled. Usually, the claimant's lawyer attempts to compromise the compensation carrier's lien claim so as to increase the amount of the worker's recovery. Knowledge of the carrier's “philosophy” on compromising such claims may benefit the injured worker at the expense of the carrier, or vice versa. Confidences obtained from the injured worker respecting his or her willingness to satisfy the carrier's lien in full or partially might benefit the carrier. And, confidences on the same subject received from the carrier could benefit the injured worker at the expense of the carrier. The prospect of additional employment by the carrier may color the lawyer's judgment. If there is any dispute over the amount of the lien -- which there frequently is -- the law firm clearly could not represent both parties.
When a law firm is retained by an insurer to represent an insured, the law firm owes its undeviating and single allegiance to the insured. It does not represent the insurance company, but the insured, even though it is being paid by the insurance company. E.q., Parsons v. Continental National American Group, 113 Ariz. 223, 227, 550 P. 2d 94, 98 (1976); see ER 1.7, Comment. Here, the law firm would be representing both the compensation carrier and the injured worker. It would owe an undeviating duty of loyalty to both. Because of the inevitable divergence of interests, it could not concurrently discharge that duty fully to both. Hence, the conflict. This conflict would substantially dissolve if the law firm had not represented the compensation carrier in the underlying compensation case, and was contacted by the carrier solely to pursue the potentially liable third party.
Assuming that the responsible lawyer in the law firm reasonably believes that: (1) representation of the compensation carrier will not adversely affect the injured worker's interests; (2) representation of the injured worker will not adversely affect the compensation carrier's interests; and (3) representation of one of those clients would not be materially limited by responsibilities to the other, the law firm could solicit professional employment from the injured worker in writing in accordance with ER's 7,1, 7.2 and 7.3. Both clients would have to consent to the dual representation after a full consultation and explanation. However, the concurrent representation of both a workers' compensation carrier and an injured worker who brings a civil action against a third-party wrongdoer results in a conflict of interest in virtually every case where the law firm represented the carrier in the underlying compensation case. In such cases, the law firm cannot ethically represent both parties.
Formal Opinions of the Committee on the Rules of Professional Conduct are advisory in nature only and are not binding in any disciplinary or other legal proceedings.
©State Bar of Arizona 1990