By Alara Chilton
Lawyers frequently draft demand letters with the intention of settling a dispute. These communications can be an effective tool for settlement by explaining the strength of a client’s position and what is requested to resolve the dispute. These actions are consistent with a lawyer’s duty of zealous advocacy. However, ethical considerations place restrictions on what lawyers can and cannot communicate in a demand letter. This article will examine some of the ethical considerations specified in California Rule of Professional Conduct, 4.1 (Truthfulness to Others).
Rule 4.1(a) requires truthfulness when making material statements of facts or law to others.
Rule 4.1(a) bars a lawyer, during the course of representing a client, from “knowingly. . . mak[ing] a false statement of material fact or law to a third person . . . .”
Rule 1.0.1(f) defines “knowingly” as “actual knowledge of the fact in question. Knowledge may be inferred from the circumstances.” The California Rules of Professional Conduct, however, do not define the term “material.” Hence, whether a statement is “material” will be evaluated on a case-by-case basis.
Comment 1 to Rule 4.1 provides “[a] lawyer is required to be truthful in dealing with others on a client’s behalf . . . .” Thus, in the context of demand letters¾ and all other communication with others¾ a lawyer is required to be truthful regarding any material statement of fact or law. It follows that while an attorney may include legal theories and conclusion of law in a demand letter, a lawyer may not knowingly falsely assert a violation of law, or knowingly allege false facts to support a violation.
For example, in a Maryland federal case, Ausherman v. Bank of America Corp. (D. Md. 2002) 212 F.Supp.2d 435, counsel for plaintiffs sent a written settlement demand to Bank of America alleging employees of the Bank improperly disseminated plaintiffs’ credit reports without identifying all the employees. (Ausherman at 339.) After plaintiffs filed a complaint, Bank of America learned plaintiffs’ counsel had lied about knowing an employee’s identity and did so “for the purposes of maximizing [his] clients’ settlement position.” (Ausherman at 440.) The district Judge sanctioned plaintiffs’ counsel and referred him for disciplinary action regarding the “untruths he communicated to Defendants’ counsel” in his demand letter. (Ausherman at 437.)
A lawyer “generally has no affirmative duty to inform an opposing party of relevant facts . . . .” (Comment 1 to Cal. Prof. Rule of Conduct, Rule 4.1.) Thus, a lawyer is not required to do the work of her opposing counsel and educate her on the weaknesses of her case in her demand letter.
Additionally, comment 1 to Rule 4.1 concludes by stating “lawyers remain bound by Business and Professions Code section 6106 and Rule 8.4.” (Id.) Section 6106 warns practitioners that “[t]he commission of any act involving moral turpitude, dishonesty or corruption, whether the act is committed in the course of his relations as an attorney or otherwise . . . constitutes a cause for disbarment or suspension.” Additionally, Rule 8.4 contains various provisions that describe professional misconduct, including, for a lawyer to “engage in conduct involving dishonesty, fraud, deceit, or reckless or intentional misrepresentation.”
Thus, a lawyer who uses a demand letter to commit an act of “moral turpitude, dishonesty or corruption” or of “fraud, deceit, or reckless or intentional misrepresentation” risks being disciplined for professional misconduct and could potentially face disbarment or suspension.
Rule 4.1 makes an exception for bluffing and puffing during negotiations.
Comment 2 to Rule 4.1 makes an exception for bluffing and puffing during negotiations. Such statements refer to “a party’s negotiation goals or willingness to compromise.” (See Cal. State Bar Form. Opn. 2015-194 [construing former rule 3-700(b)(2)].).
Comment 2 states in pertinent part:
[I]n negotiation, certain types of statements ordinarily are not taken as statements of material fact. Estimates of price or value placed on the subject of a transaction and a party’s intentions as to an acceptable settlement of a claim are ordinarily in this category, and so is the existence of an undisclosed principal except where nondisclosure of the principal would constitute fraud.
A demand letter¾ to the extent it is used as a negotiating tool¾ may request a greater amount of money to settle the dispute than the client may be willing to settle for. However, a lawyer should avoid using a false factual basis for the amount requested. (See People v Pestas, (1989) 214 Cal.App.3d 70, 78–79 [finding attorney made a knowing false representation in a demand letter asserting his client’s injuries resulted from a sole collision when he knew (1) his client had been involved in two collisions on the same date, and (2) the treating chiropractor could not “segregate” the injuries to just one collision].)
Rule 4.1(b) requires disclosure of a material fact when disclosure is necessary to avoid assisting a criminal or fraudulent act by a client, unless disclosure is barred by the duty of confidentiality.
Rule 4.1 requires disclosure of a material fact to a third party “when disclosure is necessary to avoid assisting a criminal or fraudulent act by a client, unless disclosure is prohibited by Business and Professions code section 6068 Subdivision (e)(1)[1] or Rule 1.6.[2]” (Cal. Prof. Rule of Conduct, Rule 4.1(b).) This means a lawyer has a duty to disclose a material fact to a third party if the disclosure is necessary to avoid assisting the client’s fraud or criminal act unless the lawyer’s duty of confidentiality prevents disclosure.
Consider the following hypothetical: Client discloses in confidence to her lawyer that the claims asserted in her demand letter are based on falsely fabricated evidence. The client directs lawyer to pursue the claims without disclosing this confidence to opposing counsel. Additionally, client requests lawyer’s advice regarding the best way to ensure the claims asserted in the demand letter result in a quick settlement.
Here, the lawyer’s obligation to disclose this material fact (i.e., that the claims are based on falsely fabricated evidence) is most likely barred by the lawyer’s duty to keep her client’s confidences under Business and Professions code section 6068 Subdivision (e)(1) and Rule 1.6. So then what may the lawyer do? Comment 3 and Rule 1.16 discussed below offers guidance.
Comment 3 to Rule 4.1 references Rule 1.2.1 (Advising or Assisting the Violation of Law).
Comment 3 to Rule 4.1 references Rule 1.2.1 (Advising or Assisting the Violation of Law) and provides:
Under rule 1.2.1, a lawyer is prohibited from counseling or assisting a client in conduct that the lawyer knows is criminal or fraudulent. See rule 1.4(a)(4) regarding a lawyer’s obligation to consult with the client about limitations on the lawyer’s conduct. [Rule 1.4(a)(4) imposes a duty to advise the client about ethical limitations upon the lawyer when the client expects assistance not permitted by the Rules or other law.] In some circumstances, a lawyer can avoid assisting a client’s crime or fraud by withdrawing from the representation in compliance with rule 1.16.
Furthermore, Rule 1.16(a)(2) (Declining or Terminating Representation) provides for mandatory withdrawal “where the lawyer knows or reasonably should know that the representation will result in a violation of the these rules or the State Bar Act.” Permissive withdrawal is allowed where “the client either seeks to pursue a criminal or fraudulent course of conduct or has used the lawyer’s services to advance a course of conduct that the lawyer reasonably believes was a crime or fraud, as well as where “the client insists that the lawyer pursue a course of conduct that is criminal or fraudulent.” (Cal. Prof. Rule of Conduct, Rule 1.16(b)(2) and (b)(4).)
Further, “[a] lawyer shall not terminate a representation until the lawyer has taken reasonable steps to avoid reasonably foreseeable prejudice to the rights of the client, such as giving the client sufficient notice to permit the client to retain other counsel . . . .” (Cal. Prof. Rule of Conduct, Rule 1.16(d).)
Thus, in the aforementioned hypothetical, the lawyer is barred under Rule 1.2.1 from counseling or assisting the client regarding advancing the fraudulent claims asserted in the demand letter. Moreover, under Rule 1.4(a)(4), the lawyer has a duty to advise her client that lawyer cannot continue to pursue the demand letter’s claims because the lawyer would be assisting the client in committing fraud. The attorney should advise her client to stop pursuing the claims asserted in the demand letter. In the event the client would remain steadfast in her desire to pursue them, however, the lawyer would face mandatory withdrawal from representation under Rule 1.16(a)(2).
In summary, above are just a few of the ethical considerations of Rule 1.4 in the context of communications in demand letters. These written communications require not only zealous advocacy, but adherence to the Rules of Professional Conduct and the State Bar Act so that disputes can be resolved through trust and credibility¾ not just in the parties themselves¾ but also in the integrity of our legal system.
[1] Business and Professions Code section 6068 imposes a duty on lawyers “[t]o maintain inviolate the confidence, and at every peril to himself or herself to preserve the secrets, of his or her client.” (Bus. & Prof. Code § 6068, subd. (e)(1).) “Client secrets means any information obtained by the lawyer during the professional relationship or relating to the representation which the client has requested to be inviolate or the disclosure of which might be embarrassing or detrimental to the client.” (Cal. State Bar Formal Opn. No. 2016-195; internal citations omitted.)
[2] Rule 1.6 (b) states: “A lawyer may, but is not required to, reveal information protected by Business and Professions Code section 6068, subdivision (e)(1) to the extent that the lawyer reasonably believes the disclosure is necessary to prevent a criminal act that the lawyer reasonably believes is likely to result in death of, or substantial bodily harm to, an individual, as provided in paragraph (c).” (Cal. Prof. Rule of Conduct, Rule 1.6(b).)