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Settling Claims When Representing Multiple Clients

This article is reprinted with permission from Pennsylvania Bar News.

Jeffrey P. Lewis is a member in the West Chester office of the Pittsburgh-based law firm of Eckert Seamans Cherin & Mellott, LLC. He serves on the PBA Professional Liability Committee. He can be reached at 610.738.8850, and by email at lewis@eckertseamans.com.

By: Jeffrey Lewis

From a professional liability standpoint, what must a lawyer disclose to each of his or her multiple clients about the other clients when he or she negotiates an aggregate settlement for some or all of the clients? There is no question with respect to his or her ethical duty. The pertinent part of Rule 1.8(g) of the Pennsylvania Rules of Professional Conduct states that “[a] lawyer who represents two or more clients shall not participate in making an aggregate settlement of the claims of or against the clients … unless each client gives informed consent, in a writing signed by the client. The lawyer’s disclosure shall include the existence and nature of all the claims … involved and of the participation of each person in the settlement.”

But, as to professional liability, case law has often quoted language found in the Scope section, which acts as the preamble to the Rules, that “[v]iolation of a Rule should not give rise to a cause of action nor should it create any presumption that a legal duty has been breached … They are not designed to be a basis for civil liability … Accordingly, nothing in the Rules should be deemed to augment any substantive legal duty of lawyers or the extra-disciplinary consequences of violating such a duty.”

Pennsylvania case law, however, long ago established the existence of common law duties, separate and apart from the disciplinary rules, that attorneys owe to clients. These would include, for example, duties of candor, disclosure, fidelity and loyalty. These and other such duties can be lumped together and described under the general heading of fiduciary duty. Therefore, this presents the question: To what extent, if any, does Rule 1.8(g) present a “restatement” of the common law duty owed in multiple representations? A Mississippi court revisits this issue in a recently reported decision.

In Waggoner v. Williamson, 8 So.3d 147 (Miss. 2009), three lawyers represented plaintiffs from three different states in a multi-district products liability action against a drug manufacturer. This matter was not certified as a class action. Instead, because neither attorney had disclosed that he was representing other plaintiffs, none of the plaintiffs apparently knew about the existence of any other plaintiffs (other than their spouse). As a result, each was led to believe that their counsel was representing only them.

The lawyers entered into an aggregate settlement with the drug manufacturer in the amount of $73.5 million on behalf of all 45 of their clients, but allegedly without authority. That agreement did not allocate the gross settlement figure among clients. Instead, it provides that “[t]he Settling Attorneys represent that they have complied and will comply with Rule 1.8 of the ABA Model Rules of Professional Conduct or its applicable state counterpart(s).” Because the damages claimed by each of the plaintiffs differed, the lawyers determined and applied their own criteria to allocate instead of dividing the net proceeds equally.

According to the Waggoners, the attorney who they thought was only their lawyer, met them in an airport for a 20 minute meeting at which he presented a disbursement statement for a proposed approximate $3 million settlement. The Waggoners allege that their lawyer never disclosed that this proposed settlement was actually part of an aggregate settlement, the aggregate settlement amount, the existence and nature of the other claims being settled, nor the manner of the allocation. Moreover, they contend that he represented that their settlement had been “individually negotiated and effectuated.” He also allegedly told them that they could possibly forfeit their settlement rights if they did not sign the disbursement statement at that time. As a result, they signed on the spot.

The Waggoners later discovered that their settlement was actually a small piece of a much bigger pie. As a result, they brought suit against two of the three lawyers involved, alleging breach of fiduciary duty, breach of contract and negligent misrepresentation, all contributing to an absence of informed consent. In their amended complaint, “[t]hey assert that if they had been adequately informed of the nature of the aggregate settlement, they would have demanded a larger portion of the aggregate settlement.” They suggest unfairness in the allocation because the husband plaintiff had sustained actual injuries whereas other plaintiffs, who had not sustained actual injuries, had received more.

The trial court granted the lawyers’ summary judgment motions with respect to the gross settlement amount issue, which was the largest issue dollar wise in the case. The trial court’s disposition of other issues is not germane to this column. Without citing any legal authority, it reasoned that the Waggoners had agreed to the gross settlement figure when they signed the disbursement statement regardless of their lack of knowledge of the aggregate nature of the settlement. Under Mississippi procedure the Waggoners could and did appeal to the Supreme Court.

The trial court opinion apparently offered no legal analysis on the theories of waiver and estoppel and accord and satisfaction, which had been argued by the lawyers as bases to preclude the Waggoners from challenging the settlement. Therefore, the Supreme Court itself raised and rejected these theories holding that they did not preclude the Waggoners from questioning the appropriateness of the settlement after they had signed the distribution statement and accepted the money. The court reasons that signing the settlement agreement “releases the person or entity settling with one’s client, not the attorney representing his or her client.” Seven of the nine justices voted to reverse the trial court on this issue.

The majority considered Rule 1.8 and acknowledged the content of the Scope, but considered that the Rule had been specifically cited in the settlement agreement with the drug manufacturer. The majority apparently concluded that the assumption of this duty by contract made the provisions of the Rule more relevant to its analysis than might otherwise be the case. In sum, it appears to this writer that the Court, without using the words, conferred third party beneficiary status upon the Waggoners.

Two of the justices dissented. They reason, in part, that the majority improperly relies on Rule 1.8, notwithstanding that it provides no basis for a private cause of action. They note, moreover, that compliance with the Rule was a condition in the settlement agreement between the lawyers and the defendant only and, therefore, should be irrelevant in the dispute between the lawyers and their clients.

The allegations in this case, if true, describe an extreme breach of ethical duty. And from a professional liability viewpoint, this case teaches that, under certain circumstances, the Rules of Professional Conduct may indeed constitute a “restatement” of the standard for a finding of professional liability.

Jeffrey Lewis
Philadelphia, PA

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