Avoiding Ethical Issues with Third Party Payors
Ethics, Fees, Firm ManagementConsider the following hypothetical. You represent a client in a child custody dispute. The client’s parents offer to cover your legal expenses. As you delve into the case, you realize that the grandparents’ interests may not align with the best interests of the client or the client’s child.
While third-party payors are generally permissible, this practice presents several ethical challenges that require examination. In this Article, we discuss some of the ethical issues implicated by third-party payors and provide some practical tips to avoid violating the Texas ethics rules (“Texas Rules”).
TEXAS ETHIC RULE 1.08(e)
Third-party payor arrangements are discussed in Texas Rule 1.08(e). Under Texas Rule 1.08(e), a lawyer may accept compensation for legal services from one other than the client if: (1) the client consents, (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 Rule 1.05 (Confidentiality).
It’s essential to review this rule prior to accepting payments from someone other than the client. If you find yourself in an ethical quandary when accepting payments from third-parties, you may have glossed over the guidance under Texas Rule 1.08.
ETHICAL CONSIDERATIONS
Conflicts of Interest
When accepting third-party payments for legal services, you need to assess whether the financial arrangement may prevent you from exercising your independent professional judgment or otherwise providing zealous representation to your client. In the hypothetical above, the grandparents may have requested a visitation schedule that doesn’t align with the best interests of the child or client, or expressed an interest in minimizing legal expenses.
Recommendation: Draft an agreement with the payor explaining that the payor is not the client notwithstanding the fact that she is covering the legal expenses, and that the payor has no right to instruct the lawyer in the matters in which the lawyer is representing the client.
Confidentiality
Third-party payor arrangements also implicate the lawyer’s duty of confidentiality under Texas Rule 1.05. For example, the grandparents in our hypothetical may ask to be kept apprised of case developments to track what they’re paying for, but your duty of confidentiality extends to your client, not the payors. Accordingly, information regarding the representation may only be disclosed to the payor if the lawyer obtains the client’s consent “after consultation,” or if another exception to Rule 1.05 applies. Notwithstanding client consent, the impact of any such disclosure on the attorney-client privilege must be considered.
Recommendation: In the agreement with the payor, explicitly state that confidential information shall not be disclosed to the payor without the client’s prior permission and cover the necessity of preserving attorney-client privilege. Also, consider providing two separate billing statements with differing levels of detail, and explain that the client will receive a detailed invoice and the payor will receive a more general statement.
Scope of Representation
Looking again at the hypothetical, what if the grandparents offered to cover the legal fees but limited such coverage to negotiation and mediation, but your client believed you had agreed to take on the matter without any such limitation? What if the dispute could not be resolved in mediation, and litigation is necessary?
Under Texas Rule 1.02(b), an attorney may limit the scope of representation if the client consents after consultation. The client engagement letter must be explicit regarding any limitations on the scope of representation. If the engagement letter is silent (or ambiguous) regarding any such limitations, what the client might reasonably have expected under the circumstances will be taken into consideration. Of note, any communications with the payor regarding the scope of payor’s payment obligations are not considered.
Recommendation: If the payor limits the scope of services she is willing to pay for, explain to the client what those limitations are and any potential legal ramifications of such limitations. Additionally, take the time to carefully draft the agreements with the client and the payor to ensure everyone is on the same page with respect to the scope of services you’ve agreed to provide and the payor has agreed to pay for.
Safekeeping Property and Payments
Under Texas Rule 1.14(b), an attorney has a duty to promptly notify a client or third party upon receipt of funds in which a client or third party has an interest. Additionally, under the same provision, a lawyer has a duty to deliver to the client or third party any funds or other property that the client or third party is entitled to receive. All property in which two or more persons claim an interest must be kept separate and secure until the dispute over ownership is resolved under Texas Rule 1.14(c).
Recommendation: The agreement with the client and the agreement with the payor should provide that if the payor pays a retainer, how any unused portions will be refunded and to whom. In the client engagement letter, you may want to consider providing that you may look to the client for payment should the payor stop paying.
CONCLUSION
While common, accepting payments for legal services from third-party payors can present some tricky ethical dilemmas. It’s crucial to never lose sight of the fact that your professional responsibilities are owed to the client, regardless of who pays. Conflicts of interest must be carefully assessed, confidentiality must be preserved, and the scope of representation and payment obligations should be clearly defined and reduced to a written agreement signed by the client and a separate agreement signed by the payor.
