The New York City Bar Association (“NYCBA”) issued Formal Opinion 2020-3 analyzing New York Rule of Professional Conduct (“N.Y. Rule”) 1.8(g), which prohibits a lawyer who represents two or more clients from “participating in making” an aggregate settlement of the claims of or against the clients, absent court approval, absent informed written consent by each client. N.Y. Rule 1.8(g) is identical to ABA Model Rule 1.8(g), and virtually all states’ rules of professional conduct contain a similar rule. Thus, Formal Opinion 2020-3 is good guidance for all lawyers.
The opinion defines “participate in making” broadly to include “any discussions, negotiations, offers, or counter-offers pertaining to interdependent settlements where an attorney represents multiple parties.”
An “aggregate settlement” is defined as: “a settlement of claims of multiple commonly represented clients in the same lawsuit as well as interdependent settlements of separate lawsuits for multiple clients.” Interdependent settlements are settlements of separate lawsuits where the settlement of one lawsuit is made dependent on the negotiation of a settlement of an entirely separate lawsuit, these settlements qualify as aggregate settlements.
Four scenarios are provided in the opinion, each one highlighting the possible issues that can arise when negotiating aggregate settlements.
A lawyer representing several plaintiffs has filed Cases A, B, and C against the same defendants based upon injuries that allegedly were caused by the same or similar harmful products or occurrences. Defense counsel proposes to settle Case A that is close to trial if the plaintiffs’ lawyer will settle Cases B and C as well. The Defense counsel believes that the plaintiffs’ lawyer does not want to take Case A to trial, and has concluded that, by offering to settle the case, he can induce the plaintiffs’ lawyer to lower her settlement demands on Cases B and C. Is this an aggregate settlement and, if so, what does Rule 1.8(g) require the lawyers to do?
Yes. Although the clients are not plaintiffs in the same case, this scenario is the classic example of an interdependent settlement, which nevertheless qualifies as an aggregate settlement. Here, defense counsel is proposing to settle case A with the plaintiff in return for plaintiffs’ lawyer settling cases B and C. The lawsuits here are separate but related and defense counsel is proposing to group them together for purposes of settlement. The plaintiffs’ lawyer cannot even participate in negotiating such a settlement, without first obtaining written informed consent from each client.
The analysis would remain the same had defense counsel specified the amount offered for each of the three cases and conditioned the offers on acceptance by all three plaintiffs. Similarly, it would make no difference if defense counsel made an offer to settle all three cases for an aggregate amount, forcing plaintiffs’ lawyer to obtain an agreement from her clients as to how to divide the settlement amount. Informed written consent is required in both instances.
Had the plaintiffs’ lawyer engaged in negotiations with defense counsel for the settlement of these matters without advising her clients, it would be inconsistent with the plaintiffs’ lawyer’s duty to communicate significant developments, including settlement offers. (See, N.Y. Rule 1.4(a)(1)(iii); ABA Model Rule 1.4). In effect, Rule 1.4 requires that attorneys disclose issues and potential problems related to aggregate settlements with their clients as those issues come up. In this scenario, settlement of case A could possibly impact the settlement of cases B and C. Under Rule 1.4 the plaintiffs’ attorney would need to disclose this potential issue to the extent reasonably necessary for her clients to make informed decisions regarding the representation.
Furthermore, Rule 1.8(g) is concomitant with other conflict of interest rules. (See, N.Y. Rule 1.7(a)(1); ABA Rule 1.7). That is, there is likely a “significant risk that the representation of one or more clients will be materially limited by the lawyer's responsibilities to another client, a former client or a third person or by a personal interest of the lawyer,” arising from this scenario because the compromise may favor one client over another. Informed written consent is also required for this reason, and it should be obtained as soon as the potential for an aggregate settlement materializes.
The facts are the same as in Scenario 1, except the plaintiffs’ lawyer states that she will not settle Case A that is ready to go to trial unless the defendant will agree to settle Cases B and C at the same time. The plaintiffs’ lawyer is content to settle with the defendant in Case A because she knows that she has collected or is likely to obtain substantial settlements from other defendants. Plaintiffs’ lawyer, however, now wants to use Case A, which the defendant wants to settle, as an opportunity to force settlement of Cases B and C, for which the defendant has refused to offer anything other than nominal settlement amounts. Is this an aggregate settlement and, if so, what does Rule 1.8(g) require the plaintiffs’ and defense lawyers to do?
Yes. Similar to scenario 1, this scenario also involves an interdependent settlement. Here, the plaintiff’s lawyer is making the settlement of case A dependent on defense counsel settling cases B and C. Neither the plaintiffs’ nor defendants’ lawyers, assuming defense counsel is representing more than one of the defendants, could begin negotiations for such a settlement, without first disclosing issues and problems related to the interdependent settlements with their clients and obtaining written informed consent from their respective clients.
Scenario 2 also raises the same conflicts issues noted above. The plaintiffs’ lawyer is willing to settle case A, which defense counsel wants to settle, but only if defense counsel settles the other two cases. The plaintiffs’ lawyer is potentially sacrificing some of the settlement funds that the plaintiff in case A may have received, in order to settle cases B and C, who will receive more settlement funds than they otherwise would.
Rule 1.8(g) would also apply to defense counsel, if the defense attorney in this scenario is representing more than one defendant involved in the settlement. Like the plaintiffs’ attorney, defense counsel also has possible conflicts issues if the defendants represented by defense counsel in case A were different than those he represents in cases B and C. Defense counsel would have to disclose the potential conflicts associated with such settlements and obtain informed consent, confirmed in writing prior to entering into such negotiations.
The facts are the same as in Scenario 1 and Scenario 2, except instead of the attorneys suggesting the settlement of more than one of the cases at the same time, the judge makes the suggestion and urges the settlement of multiple cases to relieve the court’s heavy docket. Does this change the conclusions about Rule 1.8(g)?
Court-approval exception to N.Y. Rule 1.8(g)
N.Y. Rule 1.8(g) unlike the ABA Model Rule 1.8(g), allows an attorney to participate in the making of an aggregate settlement without each client consenting if a court approves of such action. (See also, Cal. Rules of Professional Conduct, Rule 1.8.7(b): “This rule does not apply to class action settlements subject to court approval.”)
A lawyer should seek court approval for this exception only in those instances where a lawyer is unable to obtain informed written consent. The reasoning behind this exception is that lawyers may not have a full client-lawyer relationship in situations where they are representing a class of plaintiffs or defendants, or those in a derivative suit. Obtaining written informed consent from each member of a class may not be feasible. Aside from the class or derivative action context, there are very few circumstances where disclosure cannot be made and consent obtained.
However, lawyers obtaining court-approval should still remain cognizant of their duties under Rule 1.4 and Rule 1.7. If a court has approved an aggregate settlement, the lawyer would still have to keep their client informed about the settlement agreement and obtain a waiver of the lawyer’s conflict, unless the court also specifically relieves the lawyer of those obligations as well.
Scenario 3 does not involve a class action or derivative suit, nor would it be impracticable to provide disclosure and obtain consent. Therefore, the court-approval exception does not apply and the attorneys would have to abide by their obligations under Rule 1.8(g).
In event of a class or derivative action, the judge would need to do more than “suggest” or “urge” collective settlements to qualify as “court approval.” That is, the court must provide the attorneys with a formal order, in writing or on the record, permitting them to participate in the negotiation and making of an aggregate or independent settlement. The court must also approve of the lawyers proceeding in light of their potential conflicts of interest. Moreover, the court cannot just approve the aggregate settlements themselves, instead, the court must explicitly approve such discussions, including the lawyer’s conflict of interest, after full disclosure to the court of the ethical issues. This is consistent with Rule 1.8(g) which restricts even the “participation” in the making of an aggregate or interdependent settlement.
The plaintiffs’ lawyer has filed separate complaints against the same defendants based upon injuries that allegedly were caused by the same or similar harmful products or occurrences. The plaintiffs’ lawyer wants to settle Case A with a particular defendant, but is not prepared yet to discuss settlement of Cases B and C because sufficient discovery has not yet been performed for those cases. The plaintiffs’ lawyer learns in the course of representing one client that the defendant has cash flow issues and so payment of a large settlement in Case A may mean that the defendant will not want to settle Cases B and C until its next fiscal year or may have to pay less to settle Cases B and C. Is Settlement of Case A and, later, separate settlements of Cases B and C an aggregate settlement to which N.Y. Rule 1.8(g) applies and if not, what do N.Y. Rules 1.4 and 1.7 require the plaintiffs’ lawyer to do?
This scenario does not present an aggregate settlement or interdependent settlement issue. Instead, the plaintiffs’ lawyer is seeking to settle case A by itself, and waiting for more discovery in cases B and C. The settlement of case A is not linked to the settlement of case B or C, even though the settlement of case A may limit the settlement amounts available to plaintiffs in cases B and C.
This scenario concerns a “limited pool” situation, where the defendant has limited resources that cannot satisfy all the claims filed and thus one settlement will limit the funds available for subsequent settlements.
While Rule 1.8(g) is not applicable in this situation, a lawyer would still need to consider Rules 1.4 and 1.7. Plaintiffs’ lawyer here would have to disclose the issues associated with the limited pool and the potential problems related to an aggregate settlement with each client. Had the plaintiffs’ lawyer been aware of the issues prior to being retained, the lawyer should have disclosed those issues to the client at that time. If the prospect of a “limited pool” arises later in the representations, then a conflict waiver should be obtained as soon as practicable and certainly before the lawyer engages in settlement negotiations.
If the plaintiffs’ lawyer is tasked with allocating the potential settlement proceeds among his clients, the clients may become adverse such that a conflict is nonwaivable. For example, if the clients do not all agree on a solution after disclosure is made, the plaintiffs’ lawyer cannot negotiate with one of the clients on behalf of the others even with a waiver. The clients can negotiate directly with each other to resolve the issue, however, they cannot obtain the advice of their common counsel. Additionally, one or more of the plaintiffs can obtain separate counsel to assist them in resolving the issues.
The limited pool scenario also presents another issue related to disclosure of a client’s confidential information to another. The lawyer here learned of the defendant’s cash flow problems while representing the client in Case A. Rules 1.4 and 1.7 require disclosure of the potential issues of one settlement on the cases. Rule 1.6(a), however, generally forbids a lawyer from knowingly disclosing a client’s confidential information without the client’s informed consent. How should the plaintiffs’ lawyer to proceed?
Rule 1.6(a) must be complied with. Consequently, the plaintiffs’ attorney cannot make the disclosures under Rule 1.4 and 1.7 unless the attorney obtains informed consent from each client to do so. If the client in Case A refuses to provide consent under Rule 1.6, then the lawyer would unable to comply with Rules 1.4 and 1.7 and she may need to withdraw from all three representations.
As illustrated in these scenarios, aggregate or interdependent settlements present thorny ethical issues. If an attorney is tasked with negotiating such a settlement, the attorney must provide full disclosure and obtain written informed consent from each client, prior to even discussing such a settlement with opposing counsel.
The court-approval exception to Rule 1.8(g) should only be used in limited contexts, such as class action or derivative suits. Furthermore, the court must provide explicit approval of such settlement discussions and must also approve of the lawyer’s conflicts after full disclosure is given.
For sample conflict waivers, see Model Letters and Other Documents