June 2022 Ethically Speaking - The Ethics of Taking on New Clients

by Jeremy G. Suiter

For many lawyers, taking on a new client is rather routine. They often send a form engagement letter with appropriate conflict waivers and payment instructions. But new lawyers may not yet be familiar with the various ethics rules involving new clients. This article identifies pertinent ethics rules for new lawyers, as well as for experienced lawyers who may need a refresher.

The Scenario
Linda the lawyer has been asked to represent John and Jim, two brothers who are being sued in Orange County Superior Court by MegaBank for defaulting on a business loan. John and Jim want Linda to defend them in the lawsuit and file a crossclaim for fraud against MegaBank. Linda has a personal checking account at MegaBank but has never represented the bank as a client.

John and Jim were referred to Linda by Betty the business broker, who is good friends with Linda and sends her two or three new clients every year. Betty was involved in the loan negotiations with MegaBank and likely will be called as a witness at trial.

John said he will pay Linda’s firm all of Linda’s hourly fees and costs, as well as a retainer, on behalf of himself and Jim. John and Jim also agreed to Linda’s request for an attorneys’ lien on any recovery for their crossclaim.

So which California Rules of Professional Conduct should Linda consider before beginning the engagement?

Conflicts With the Adverse Party
The first thing Linda should do is confirm that MegaBank is not a current or former client. Rule 1.7(a) states: “A lawyer shall not, without informed written consent from each client and compliance with paragraph (d), represent a client if the representation is directly adverse to another client in the same or a separate matter.” Similarly, Rule 1.9(a) states: “A lawyer who has formerly represented a client in a matter shall not thereafter represent another person in the same or a substantially related matter in which that person’s interests are materially adverse to the interests of the former client unless the former client gives informed written consent.”

These rules may not seem to present a problem here because Linda has never represented MegaBank. However, Rule 1.10(a) imputes any conflict of interest under Rules 1.7 and 1.9 to other lawyers in the same firm: “(a) While lawyers are associated in a firm, none of them shall knowingly represent a client when any one of them practicing alone would be prohibited from doing so by rules 1.7 or 1.9 . . . .”

This means that, before proceeding with this representation, Linda should conduct a conflict check to confirm that no other lawyer at her firm (i) currently represents MegaBank in any matter, which would require informed written consent under Rule 1.7 from MegaBank and the two brothers, or (ii) previously represented MegaBank in the same or a substantially related matter, which would require informed written consent under Rule 1.9 from MegaBank.

Conflicts of Joint Representation
Linda’s next step is to address any conflicts that may arise from her joint representation of John and Jim. As noted above, Rule 1.7(a) prohibits the representation of two or more clients who are directly adverse in the same or a separate matter without the informed written consent of all such clients. Accordingly, Linda should confirm in writing with John and Jim that their interests are aligned and that there is no adversity between them regarding this matter.

Linda also should obtain informed written consent from John and Jim pursuant to Rule 1.7(b), which states:

A lawyer shall not, without informed written consent from each affected client and compliance with paragraph (d), represent a client if there is a significant risk the lawyer’s representation of the client will be materially limited by the lawyer’s responsibilities to or relationships with another client, a former client or a third person, or by the lawyer’s own interests.

Here, Rule 1.7(b) applies because Linda’s representation of John will be materially limited by her responsibilities to Jim, and vice-versa. At a minimum, there is a potential conflict. Accordingly, Linda must obtain informed written consent to her joint representation from both John and Jim, and she also must comply with Rule 1.7(d).

Rule 1.0.1 defines “informed written consent” as the client’s written agreement to a proposed course of conduct after the lawyer has communicated and explained in writing (i) the relevant circumstances and (ii) the material risks, including any actual and reasonably foreseeable adverse consequences of the proposed course of conduct. In other words, to be effective, Linda must explain the relevant circumstances and material risks in writing, and John and Jim must consent in writing. For example, Linda should disclose that the attorney-client privilege does not apply to joint clients in the same matter. Thus, if one brother tells her information that is relevant to the joint representation, even information that may disadvantage that brother, she has a duty to share that information with the other brother as a joint client.

Rule 1.7(d) states:

Representation is permitted under this rule only if the lawyer complies with paragraphs (a), (b), and (c), and: (1) the lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client; (2) the representation is not prohibited by law; and (3) the representation does not involve the assertion of a claim by one client against another client represented by the lawyer in the same litigation or other proceeding before a tribunal.

Conflicts Involving Third-Party Witnesses
Another requirement for Linda is to address her friendship with Betty, who may be a witness at trial. As noted above, Rule 1.7(b) requires informed written consent whenever there is a significant risk that the lawyer’s representation of the client will be materially limited by the lawyer’s relationships with a third person or by the lawyer’s own interests. Here, it is conceivable that Linda’s representation of John and Jim could be materially limited by her friendship with Betty, if, for example, Betty might have some liability to John and Jim for the loan transaction, but Linda declines to pursue Betty as a cross-defendant because of their friendship and/or Linda’s desire not to alienate a good referral source.

But even if such risk did not exist, Linda must disclose in writing her friendship with Betty per Rule 1.7(c)(1), which states:

Even when a significant risk requiring a lawyer to comply with paragraph (b) is not present, a lawyer shall not represent a client without written disclosure of the relationship to the client and compliance with paragraph (d) where: (1) the lawyer has, or knows that another lawyer in the lawyer’s firm has, a legal, business, financial, professional, or personal relationship with or responsibility to a party or witness in the same matter . . . .

Note that Rule 1.7(c) requires only that Linda give written disclosure of her personal relationship with Betty; it does not require Linda to obtain informed written consent from John and Jim.

Conflicts Involving Payment by Another
Linda also must obtain informed written consent from Jim allowing her to accept payment of his fees by John. Rule 1.8.6 states in relevant part:

A lawyer shall not enter into an agreement for, charge, or accept compensation for representing a client from one other than the client unless: (a) there is no interference with the lawyer’s independent professional judgment or with the lawyer-client relationship; (b) information is protected as required by Business and Professions Code section 6068, subdivision (e)(1) and rule 1.6; and (c) the lawyer obtains the client’s informed written consent at or before the time the lawyer has entered into the agreement for, charged, or accepted the compensation, or as soon thereafter as reasonably practicable.

California Business and Professions Code section 6068, subdivision (e)(1) states: “It is the duty of an attorney to do all of the following: . . . (e)(1) To maintain inviolate confidence, and at every peril to himself or herself to preserve the secrets, of his or her client.” Rule 1.6(a) states in relevant part: “A lawyer shall not reveal information protected from disclosure by Business and Professions Code section 6068, subdivision (e)(1) unless the client gives informed consent . . . .”

Disclosures Regarding the Retainer
Another task for Linda is to identify in writing whether her retainer is a “true retainer,” which is money that a client pays in advance to secure a lawyer’s availability for a specified period of time. Other forms of retainer include an advance payment, which the client pays before the performance of legal services and which is applied to fees as services are completed, and a security payment, which the lawyer holds for the duration of the engagement and which is applied to fees at the end of the engagement.

This distinction is important because Rule 1.16(e)(2) states that “[u]pon the termination of the representation for any reason: . . . the lawyer promptly shall refund any part of a fee or expense paid in advance that the lawyer has not earned or incurred. This provision is not applicable to a true retainer fee paid solely for the purpose of ensuring the availability of the lawyer for the matter.”

Conflicts Involving the Attorney’s Lien
The final conflict for Linda to address involves her request for an attorney’s lien attaching to any proceeds recovered as part of her cross-claim against MegaBank. As set forth in Rule 1.8.1:

A lawyer shall not enter into a business transaction with a client, or knowingly acquire an ownership, possessory, security or other pecuniary interest adverse to a client, unless each of the following requirements has been satisfied: (a) the transaction or acquisition and its terms are fair and reasonable to the client and the terms and the lawyer’s role in the transaction or acquisition are fully disclosed and transmitted in writing to the client in a manner that should reasonably have been understood by the client; (b) the client either is represented in the transaction or acquisition by an independent lawyer of the client’s choice or the client is advised in writing to seek the advice of an independent lawyer of the client’s choice and is given a reasonable opportunity to seek that advice; and (c) the client thereafter provides informed written consent to the terms of the transaction or acquisition, and to the lawyer’s role in it.

To comply with Rule 1.8.1, Linda’s proposed lien must be fair and reasonable to John and Jim, Linda must fully disclose the terms in writing in a manner that is reasonably understandable, John and Jim must be represented by independent counsel in the transaction or advised in writing to seek advice of such counsel, John and Jim must be given a reasonable opportunity to seek such advice, and John and Jim must give informed written consent to the transaction and the lawyer’s role in that transaction, including the reasonably foreseeable adverse consequences to the client. For example, as to that last point, Linda should explain that the lien would enable her to compel payment of any amounts owed to her from any funds recovered on the brothers’ behalf in the lawsuit, even if her representation of the brothers ended before the lawsuit concluded. She also should explain that the lien could affect the brothers’ property rights by delaying their monetary recovery if a dispute arose between Linda and the brothers, and that the brothers may need to engage counsel to represent them in any legal action that Linda may file against them to enforce the lien, which could impose a substantial burden of time and money on the brothers.

Compliance With California Business and Professions Code
Lastly, although not required by the California Rules of Professional Conduct, Linda’s fee agreement with John and Jim must comply with the State Bar Act, California Business and Professions Code, §§ 6000 et seq. Specifically, if Linda’s total fees and costs will exceed $1,000, she must prepare and sign a written agreement that contains: (1) Any basis of compensation including, but not limited to, hourly rates, statutory fees, or flat fees, and other standard rates, fees, and charges applicable to the case; (2) the general nature of the legal services to be provided to the client; and (3) the respective responsibilities of the attorney and the client as to the performance of the contract. Linda also must obtain John and Jim’s signatures on that agreement, and she must give John and Jim a copy of the fully executed agreement at the time they enter into the contract. See Cal. Bus. & Prof. Code § 6148. Notably, any failure to comply with Section 6148 renders the agreement voidable at the option of the client.

New clients are the lifeblood of most legal practices. But make sure to know—and comply with—your ethical obligations before taking on such clients.

Jeremy G. Suiter is a shareholder with Stradling Yocca Carlson & Rauth, PC in Newport Beach, California, where he specializes in business litigation and serves as the firm’s deputy general counsel. Jeremy is a member of the OCBA’s Professionalism and Ethics Committee. He can be reached at jsuiter@stradlinglaw.com. The views expressed herein are his own.