State Bar of Arizona Ethics Opinions

06-04: Disclosure; Third Parties; Prepaid Legal Services; Conflict
7/2006

In the context of a prepaid legal services program, attorneys may not release confidential or privileged information to a third-party auditor without the client's informed consent.  Because billing information often contains confidential information, contractual provisions requiring an attorney to allow, without exception, third parties to review the client file and billing records violate ER 1.6(a).

An attorney may agree to represent a client under a prepaid legal services agreement that limits the presumptive compensation allowable for "basic" legal services if the attorney complies with ER 1.8(f)(2), including determining that the limit on payment does not interfere "with the lawyer's independence of professional judgment or with the client-lawyer relationship."  When agreeing to accept third-party payments, the attorney must be careful to abide by the client's "decisions concerning the objectives of representation and ... whether to settle a matter."  ER 1.2(a).  An attorney's agreement to limit compensation from a third party does not limit the attorney's duty provide a diligent and thorough representation of the client.

Provisions in a prepaid legal services contract between a client and the issuing trust do not excuse a lawyer's compliance with applicable ethical rules. An attorney may not enter into a contract that requires the attorney to violate his or her ethical duties.



FACTS

The inquiring attorneys are considering participating in a prepaid legal program (the "Program") whereby public school districts pay a fixed premium to a non-profit trust (the "Trust") in exchange for an agreement to provide the school districts with certain legal services.  The panel of attorneys providing the legal services must agree to the terms of a prepaid legal services contract (the "Contract").

The Contract identifies legal services as either "basic" or "special."  "Basic" services include correspondence, most contracts, leases, document reviews, and meeting attendance.  "Special" services include non-routine legal issues such as intellectual property, health care, tax, real estate, zoning and adversary proceedings.

The Contract authorizes payment of no more than six hours for "basic" services unless the attorneys receive prior express authorization from the Trust.  Toward this end, attorneys agree to use standardized contracts and documents as the attorneys deem appropriate.  "Special" services have no presumptive billing limitations, but instead allow payment for those hours that are "reasonable and necessary to render" the legal services.  If the attorney agrees to provide the requested "basic" or "special" legal services, the attorney must first obtain a legal service billing number.

Attorneys are compensated for time billed and costs incurred in accordance with the billing guidelines.  The Trust reserves the right to decline compensation for time billed in excess of the hourly limit on "basic" services without advance authorization.  The Contract expressly states that it is not meant "to direct or regulate Counsel's independent professional judgment."

By signing the Contract, attorneys contractually agree to allow the Trust or its outside auditors to examine accounting records, time and expenses charged, and all payments received.  However, the Contract specifies that these requirements are not "intended to cause Counsel to violate any attorney-client privilege or other obligation of confidentiality."

The Contract requires that the attorneys comply with generally recognized standards for attorneys practicing in Arizona.

QUESTIONS PRESENTED

1.  Can an attorney participate in a program that requires the firm to allow the Trust or its outside auditors to examine accounting records, time and expenses charged, and all payments received, if such examination does not "violate any attorney-client privilege or other obligation of confidentiality"?
2.  Can an attorney participate in a program that contains presumptive limits on reimbursement for time spent on "basic" legal services?

RELEVANT ETHICS RULES

ER 1.0  Terminology

(e)  "Informed consent" denotes the agreement by a person to a proposed course of conduct after the lawyer has communicated adequate information and explanation about the material risks of and reasonably available alternatives to the proposed course of conduct.

....

ER 1.1  Competence

A lawyer shall provide competent representation to a client.  Competent representation requires the legal knowledge, skill, thoroughness and preparation reasonably necessary for the representation.

ER 1.2  Scope of Representation and Allocation of Authority between Client and Lawyer

(a)  Subject to paragraphs (c) and (d), a lawyer shall abide by a client's decisions concerning the objectives of representation and, as required by ER 1.4, shall consult with the client as to the means by which they are to be pursued.  A lawyer may take such action on behalf of the client as is impliedly authorized to carry out the representation.  A lawyer shall abide by a client's decision whether to settle a matter....

....

ER 1.3  Diligence

A lawyer shall act with reasonable diligence and promptness in representing a client.

ER 1.5  Fees

(b)  The scope of representation and the basis or rate of the fee and expenses for which the client will be responsible shall be communicated to the client in writing, before or within a reasonable time after commencing the representation, except when the lawyer will charge a regularly represented client on the same basis or rate.  Any changes in the basis or rate of the fee or expenses shall also be communicated in writing.

....

ER 1.6  Confidentiality of Information

(a)  A lawyer shall not reveal information relating to the representation of a client unless the client gives informed consent, the disclosure is impliedly authorized in order to carry out the representation or the disclosure is permitted or required by paragraphs (b), (c) or (d) or ER 3.3(a)(3).

....

ER 1.8  Conflict of Interest: Current Clients: Specific Rules

(f)  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 ER 1.6.

....

ER 5.4  Professional Independence of a Lawyer

(c)  A lawyer shall not permit a person who recommends, employs, or pays the lawyer to render legal services for another to direct or regulate the lawyer's professional judgment in rendering such legal services.

....

RELEVANT ABA OPINIONS

ABA Formal Op. 01-421

RELEVANT ARIZONA ETHICS OPINIONS

Ariz. Ethics Ops. 99-08, 01-06, 05-06

OPINION

When an attorney agrees to accept payment for services from someone other than the client, it must be cognizant of applicable ethical obligations.  In such situations, the attorney (1) "must preserve the insured/client’s confidences"; (2) "must not allow any interference with the exercise of his independent professional judgment ... regardless of who is paying for the lawyer’s services"; and (3) "cannot ethically allow [anyone other] than the client to direct or regulate the lawyer's professional judgment in rendering ... legal services."  Ariz. Ethics Op. 01-06 at 3.[1]

Regardless of contractual agreements, Arizona-licensed attorneys must comply with ethical obligations.  The requirement to diligently and thoroughly serve one's client applies regardless of the source of payment.  Once an attorney agrees to represent a client, he continues to do so, in accordance with all ethical duties, until such representation legally ends.  However, the Committee's previous opinions have made it clear an attorney may not enter into a contract that would require violation of ethical duties.  The issue then is whether the Contract requires attorneys to violate these duties.

A.  Confidentiality

Under ER 1.6(a), an attorney may not disclose a client's confidential information unless "the client gives informed consent, the disclosure is impliedly authorized in order to carry out the representation or the disclosure is permitted or required by" the Rules of Professional Conduct.[2]   Billing information often contains confidential information.  Thus, audit provisions requiring an attorney to allow, without exception, third parties to review the client file and billing records violates ER 1.6(a).

This Committee previously addressed a similar situation in the context of an insurance defense agreement.   Ariz. Ethics Op. 99-08 at 1, 4.  In that opinion, this Committee concluded that the audit review program violated ER 1.6(a) because it required the attorney to allow a third party to review the client file.  An attorney may not ethically comply because the program did not allow for the necessity that the attorney must secure the informed consent of the client for the release of confidential information.

It is possible, although not clear, that the transmission of confidential information to the Trust from the attorney "is necessary to advance the interests of both the [Trust and the client] and is, therefore, impliedly authorized in order to carry out the representation ..."  ABA Formal Op. 01-421.  However, the potential necessity of transmitting confidential information does not equally apply to third-party auditors.  Auditors might not confine their review to hourly rates and background information.  Instead, they might also review raw data, interviews, and original time records.  Id. (citing John Toothman, Surviving a Legal Bill Audit, 15 Compleat Lawyer 45 (Winter 1998)).  Disclosure of the information sought by an auditor very well may waive attorney-client privilege or work product protections.

Thus, before releasing client confidential, much less privileged, information to a third-party auditor, the attorney must: (1) discuss the nature of the information sought with the client; (2) inform the client of the risks entailed with disclosing the information; and (3) secure the client’s consent to disclose the information.  An attorney may not ethically allow a third-party auditor access to the client's confidential information without first obtaining the client's informed consent.

The issue then is whether the Contract requires attorneys to act unethically.  The Contract explicitly acknowledges that the auditor disclosure requirement is not "intended to cause Counsel to violate any ... obligation of confidentiality."  This language is not clear.  If the language is aspirational only, the attorney may not enter into the Contract.  However, if the language excuses the attorney's duty to cooperate with an audit in order to protect client confidentiality, then the Contract does not impose an unethical requirement on the attorney.  To the extent that a situation arises where a contractual obligation conflicts with the attorney's ethical obligation, the ethical obligation must prevail.  The attorney bears the risk of breaching a contractual obligation.[3]

B.  Independent Professional Judgment

In addition to ER 1.6's duty of confidentiality, another cornerstone of an attorney's ethical duties is that of independent professional judgment.  ER 5.4(c).  This duty requires that an attorney may not agree to accept compensation from a third party if doing so would interfere "with the lawyer's independence of professional judgment or with the client-lawyer relationship."  ER 1.8(f)(2).[4]   The issue here is whether the Contract's presumptive limitation on compensation to the attorney violates this duty.

There is no doubt that the attorney represents the public school district and not the Trust.  Therefore, the attorney must abide by the district's "decisions concerning the objectives of representation and ... whether to settle a matter."  ER 1.2(a).  Similarly, ER 1.3 requires an attorney to "act with reasonable diligence and promptness in representing a client."  The Trust cannot control the legal representation in any way and the attorney cannot allow the Trust to do so.  See ER 1.1; Op. 05-06.

The services deemed "basic" by the Contract's terms are defined as routine issues of legal representation that require no highly specialized knowledge outside of that already possessed by the attorney.  The Contract assumes that "basic" services can typically be provided through the use of standardized contracts and documents previously created by the attorney, the Trust, or other attorneys working with the Trust.

Although the client may contact the attorney directly regarding "basic" services, the attorney must first obtain a billing number before accepting the matter.  This mechanism provides attorneys with the opportunity to request authorization from the Trust in excess of the presumptive six hours.  If the Trust refuses to authorize additional hours, then the attorney has the choice of either declining the matter or agreeing to accept a maximum compensation six hours of compensation from the Trust regardless of the time spent on the matter.

Although not using the clearest of language, the Contract supports the attorney's need to comply with the ethical requirements.  The Contract explicitly states that the presumptive limits are not "intended to direct or regulate Counsel's independent professional judgment."  The language contained in footnote 4, supra, would better clarify the attorney's ethical obligations.

As with the duty of confidentiality, the Contract does not relieve attorneys of their ethical duty to provide competent legal representation without interference from the Trust.  The attorney's obligation to provide competent, diligent representation to a client does not evaporate after six hours, even if that is all the Trust will pay for the work.

The tension between the obligation to provide competent, diligent representation and compensation limits imposed by the Trust may create a conflict between the attorney's obligations to the client and the attorney's personal interests.  The attorney must analyze the possibility of such a conflict before undertaking the representation and discuss the issue with the client as required by ER 1.8(f).

CONCLUSION

This Contract may not, on its face, require attorneys to violate their ethical duties.  Attorneys must address their ethical duties to the client where they receive compensation from the Trust.  Attorneys may not release client confidential information to third-party auditors without the client's consent.  Attorneys must also be careful to avoid any interference from the Trust regarding their representation of the client.  Attorneys bear the risk of contractual disputes with the Trust and must not violate their ethical duties in order to appease a contractual partner.

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 2006

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[1]The legal issue of whether this situation creates an insurance relationship is beyond the jurisdiction of this Committee.

[2]ER 1.6(a)-(c) allows or requires disclosure of confidential information in certain situations where criminal activity may be involved. ER 3.3(a)(3) addresses situations where the disclosure of confidential information may be necessary to comply with the attorney's obligation of candor to the tribunal. These exceptions are not relevant here and are not addressed by this opinion.

[3]However, the Committee would recommend stronger language in any such contract. A more appropriate, and accurate, statement of the attorney's obligations would be: "Notwithstanding any provision of this Contract, attorneys shall not act in any manner inconsistent with the Rules of Professional Conduct." Such a clause would clarify that the attorney's duty to comply with ethical rules supersedes any contractual obligation to the contrary.

[4]Lawyers may not receive compensation from third parties without first securing informed consent from the client. ER 1.8(f)(1). Also, as in other representations, the lawyer must communicate to the client information related to the representation as required by ER 1.5(b).