restrictive settlements
TRANSCRIPT
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Restrictive Settlement Agreements: A Critique of Model Rule 5.6(b)
Yvette Golan Ney*
I. BACKGROUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 A. Scope of Rule 5.6(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 B. Extensions of Rule 5.6(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8 1.
Consulting Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 2. Restricting the Disclosure or Use of Information . . . . . . . . . . . . . . . . . . . . . .10
C. Enforcement of Rule 5.6(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 D. Rule 5.6(a) Compared . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13 E. Secrecy Agreements Compared . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
II. PROFFERED RATIONALES FOR RULE 5.6(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 A. Conflict of Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
1. Conflict Between the Lawyer and the Present Settling Client . . . . . . . . . . . . 16 2. Conflict Between the Lawyer and the Present Non-Settling Client . . . . . . . . 21 3. Conflict Between Present and Future Clients . . . . . . . . . . . . . . . . . . . . . . . . .22
B. Rewards with Less Relationship to the Merits . . . . . . . . . . . . . . . . . . . . . . . . . . .22 C. Preventing the “Buy Out” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
1. When Restrictive Settlement Agreements will be Offered and Accepted . . . . 27 a. Plaintiffs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 b. Defendants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 c. Plaintiff’s counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33
2. When Restrictive Settlements will Not Injure Future Plaintiffs . . . . . . . . . . . 35 a. No possibility of future representation by the plaintiff’s attorney . . . . . . 35 b. No representation by the plaintiff’s attorney . . . . . . . . . . . . . . . . . . . . . . 36 c. Future plaintiff consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37 d. Greater or equivalent benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
III. PROFFERED JUSTIFICATIONS FOR RESTRICTIVE SETTLEMENT AGREEMENTS . . . . . . . . 40 A. Protecting Against Unauthorized Use of Private Information . . . . . . . . . . . . . . . 40
1. Types of Secrecy Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 2. Protective Orders Barring Subsequent Use . . . . . . . . . . . . . . . . . . . . . . . . . . 45 3. Defendants’ Preference for Court-Imposed Protective Orders . . . . . . . . . . . 50
B. Consulting Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .52 C. Promoting Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .54 D. Zealous Representation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .54 E. Freedom of Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .55
IV. PROPOSAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
* Law Clerk to the Honorable J. Clifford Wallace, Senior Judge, United States Court of Appeals for the Ninth Circuit; J.D., Cornell Law School, 2002; B.A., University of Texas at Austin, 1999. Warmest thanks to Professor Emily Sherwin for her insightful comments and suggestions, and to W. Bradley Ney for his intellectual and moral support.
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A defendant settling a lawsuit may later encounter several, hundreds, or even thousands
of similar claims. In litigating some of these claims, it may meet again the same plaintiff’s
attorney. The defendant may want to offer a more generous settlement on the condition that the
plaintiff’s counsel promises to never again bring a similar suit against the defendant. Such
“restrictive settlement agreements” are most common in product liability actions,1 though they
appear in many other areas of the law.2
While these restrictive settlement agreements may be attractive to plaintiffs and, at times,
to plaintiffs’ counsel, they are deemed unethical.3 ABA Model Rule 5.6(b) prohibits a lawyer
from “offering or making . . . an agreement in which a restriction on the lawyer’s right to
practice is part of the settlement of a controversy between private parties.”4 The Restatement,5
the Model Code,6 and every state7 has adopted similar8 rules.
1 ANN. MODEL RULES OF PROF’L CONDUCT R. 5.6; see also In re Hager, 812 A.2d 904 (D.C. 2000) (class action suit against shampoo manufacturer); In re Conduct of Brandt, 10 P.3d 906 (Or. 2000) (suit against hand tool manufacturer). 2 See, e.g., Feldman v. Minars, 658 N.Y.S.2d 614 (1997) (breach of fiduciary duty by general partner, restriction accepted in case alleging security violations); Jarvis v. Jarvis, 758 P.2d 244 (Kan. Ct. App. 1988) (custody battle). 3 Though restrictive settlement agreements are usually offered to plaintiff’s counsel, they are sometimes instead offered to the defendant’s counsel. For convenience and consistency with the prevailing trend, this Article refers to the offeree as the plaintiff’s counsel, and the offeror as the defendant. 4 MODEL RULES OF PROF’L CONDUCT R. 5.6(b) (2002). 5 RESTATEMENT (THIRD) OF LAW GOVERNING LAWYERS § 13(2) (1998) (“In settling a client claim, a lawyer may not offer or enter into an agreement that restricts the right of the lawyer to practice law, including the right to represent or take particular action on behalf of other clients”). 6 MODEL CODE OF PROF’L RESPONSIBILITY DR 2-108(B) (1983) (“In connection with the settlement of a controversy or suit, a lawyer shall not enter into an agreement that restricts his right to practice law”). 7 Several states adopt the language of the Model Code. IOWA R.32 DR 2-108(B); NEB. CODE OF PROF’L RESPONSIBILITY DR 2-108(B); N.Y. CODE OF PROF’L RESPONSIBILITY DR 2-108(B); N.C. STATE BAR RULES, CH. 2, R. 5.6(b); OHIO CODE OF PROF’L RESPONSIBILITY DR 2-108(B); OR. CODE OF PROF’L RESPONSIBILITY DR 2-108(B); TENN. CODE OF PROF’L RESPONSIBILITY DR 2-108(B). Most states and the District of Columbia adopt the Model Rule’s language. ALA. RULES OF PROF’L CONDUCT R. 5.6(b); ALASKA RULES OF PROF’L CONDUCT R. 5.6(b); ARIZ. RULES OF PROF’L CONDUCT R. 5.6(b); ARK. RULES OF PROF’L CONDUCT R. 5.6(b); COLO. RULES OF PROF’L CONDUCT R. 5.6(b); CONN. RULES OF PROF’L CONDUCT R. 5.6(b); DEL. RULES OF PROF’L CONDUCT R. 5.6(b); D.C. RULES OF PROF’L CONDUCT R. 5.6(b); FLA. ST. BAR R. 4-5.6(b); GA. BAR R. 4-102, 5.6(b); HAW. RULES OF PROF’L CONDUCT R. 5.6(b); IDAHO RULES OF PROF’L CONDUCT R. 5.6(b); ILL. RULES OF PROF’L CONDUCT R. 5.6(b); IND. RULES OF PROF’L CONDUCT R. 5.6(b); KAN. RULES OF PROF’L CONDUCT R. 5.6(b); KY.
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Despite the ethics rules’ prohibition, a startling number of lawyers continue to offer and
accept restrictive settlement agreements.9 Scholarly treatment of the prohibition is scant, and
judicial application rare. Contributng to the confusion, some courts enforce the agreements,10
RULES OF PROF’L CONDUCT R. 5.6(b); LA. RULES OF PROF’L CONDUCT R. 5.6(b); ME. CODE OF PROF’L RESPONSIBILITY R. 3.2(g)(2); MD. RULES OF PROF’L CONDUCT R. 5.6(b); MASS. R. SUP. CT. R. 5.6(b); MICH. RULES OF PROF’L CONDUCT R. 5.6(b); MINN. RULES OF PROF’L CONDUCT R. 5.6(b); MISS. RULES OF PROF’L CONDUCT R. 5.6(b); MO. BAR R. 4-5.6(b); MONT. RULES OF PROF’L CONDUCT R. 5.6(b); NEV. RULES OF PROF’L CONDUCT R. 190(2); N.H. RULES OF PROF’L CONDUCT R. 5.6(b); N.J. RULES OF PROF’L CONDUCT R. 5.6(b); N.M. RULES OF PROF’L CONDUCT R. 16-506(B); N.D. RULES OF PROF’L CONDUCT R. 5.6(b); OKLA. RULES OF PROF’L CONDUCT R. 5.6(b); PA. RULES OF PROF’L CONDUCT R. 5.6(b); R.I. RULES OF PROF’L CONDUCT R. 5.6(b); S.C. RULES OF PROF’L CONDUCT R. 5.6(b); S.D. St. T. 16, ch. 16-18, APP, RULE 5.6(b); TEX. RULES OF PROF’L CONDUCT R. 5.06(b) (permitting restrictive settlement agreements “as part of the settlement of a disciplinary proceeding against a lawyer”); UTAH RULES OF PROF’L CONDUCT R. 5.6(b); VT. RULES OF PROF’L CONDUCT R. 5.6(b); WASH. RULES OF PROF’L CONDUCT R. 5.6(b); W. VA. RULES OF PROF’L CONDUCT R. 5.6(b); WIS. SUP. CT. R. 20:5.6(b); WYO. RULES OF PROF’L CONDUCT R. 5.6(b). California uses its own language. CAL. RULES OF PROF’L CONDUCT R. 1-500(A) (“A member shall not be a party to or participate in offering or making an agreement, whether in connection with the settlement or a lawsuit or otherwise if the agreement restricts the right of a member to practice law.”). 8 However, Virginia and Alabama permit some restrictive settlement agreements. Alabama State Bar Op. 85-115 (1986) (permitting a class action settlement provision that plaintiff's lawyer would not prosecute similar actions against the defendant, concluding that such a provision did not “broadly” restrict the lawyer's right to practice law); VA. RULES OF PROF’L CONDUCT R. 5.6(b) (“A lawyer shall not participate in offering or making . . . an agreement in which a broad restriction on the lawyer’s right to practice is part of the settlement of a controversy, except where such a restriction is approved by a tribunal or a governmental entity”). See also Va. Legal Ethics & Unauthorized Practice Op. 1715 (1998) (explaining when an agreement “broadly” restricts the right to practice law). 9 Marilyn Lindgren Cohen, A Threat to the Profession? Unethical Restrictions in Settlement Agreements are Increasingly Common, 54-MAR OR. ST. B. BULL. 36 (1994); ABA/BNA, LAWYER’S MANUAL ON PROFESSIONAL CONDUCT §51:1201 (Supp. 1996) (“It is pretty much taken for granted that some lawyers use restrictive covenants in settlement agreements despite the ethics’ rules prohibition”); Joanne Pitulla, Co-Opting the Competition, 78 A.B.A. J. 101 (Aug. 1992) (“[I]t appears to be fairly common in certain types of litigation to condition settlement offers on agreements by counsel not to file similar suits or bring claims against a particular defendant”); ANN. MODEL RULES OF PROF’L CONDUCT, R. 5.6 (“Settlement agreements of this sort are particularly common in class actions or cases involving mass product liability of disaster claims”); Application of Mosher, 25 F.3d 397, 402-03 (6th Cir. 1994) (lawyer erroneously believed that such agreements are “absolutely proper” in Texas); Walter W. Steele, Jr., Ethical Considerations for Catastrophe Litigators, 55 J. AIR L. & COM. 123, 164 (1989) (referring to 1970s survey of Boston area lawyers in which 17 percent said they would enter into such agreements); Thomas W. Henderson, A Trial Lawyer’s Commentary on One Jurist’s Musing of the Legal Occult: A Response to Judge Weinstein, 88 NW. U. L. REV. 592, 601-02 (1994) (“Despite the clear language of the rule and the Formal Opinion, attorneys still seek ways to evade the spirit, if not the letter, of the rules”); Paul D. Rheingold, MASS TORT LITIG. § 21:17 (“[B]uyouts go on all the time and will continue, notwithstanding the various ABA opinions”). 10 See infra text accompanying notes 57-64.
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and some disciplinary committees punish violators with a mere slap on the wrists.11 And yet,
every state ethics committee continues to embrace the prohibition against restrictive settlement
agreements with devout intensity. Given this clear discord among courts, lawyers, ethics
committees, and disciplinary committees, a careful study of Rule 5.6(b) is long overdue. This
Article endeavors to provide this study, and offers an answer to the silent debate.
Part I examines Rule 5.6(b), its exceptions, and its extensions. It explains how and why
some courts will enforce restrictive settlements despite the ethics rules. It then compares Rule
5.6(b) to its close cousin, Rule 5.6(a), and its frequent neighbor, the secrecy agreement.
Part II moves to the Rule’s many proffered rationales. Part II gives special attention to
the feared conflict of interest between the attorney and his present settling client, and explains
why the possible conflict of interest cannot justify prohibiting restrictive settlement agreements.
Part II also gives special attention to the risk that the restriction enables the defendant to “buy
out” a class of claimants, thus injuring future plaintiffs. Part II uses economic analysis to
determine when restrictive settlement agreements will be offered and accepted, and when and
how much they will injure future plaintiffs. Part II demonstrates that in at least four situations,
restrictive settlement agreements will not cause future plaintiffs harm.
Part III examines the arguments for permitting restrictive settlement agreements. It
begins by demonstrating that restrictive settlements cannot be justified as being necessary to
protect the defendant from the unauthorized use of its private information. Part III also considers
how consulting agreements may be used to sidestep Rule 5.6(b)’s prohibitions. Part III argues
that while consulting agreements are not perfect substitutes for restrictive settlement agreements,
11 In Georgia, the maximum penalty for a Rule 5.6(b) violation is a public reprimand. GA. BAR R. 4-102, 5.6(b). See also Cynthia Cotts, May a Lawyer Deal Away Right to Practice? Promise Never to Take on Suits Against NYMEX Produces Conflicting Views, NAT’L L. J., March 30, 1998, at A1 (col. 1) (“Two
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the ready availability of the evasive technique undermines the wisdom of the Rule. Part III then
reminds readers that restrictive settlement agreements further three values that underlie our legal
system: they promote settlements, enable zealous representation, and effectuate the freedom of
contract.
Finally, Part IV argues that Rule 5.6(b) underestimates the value of freedom of contract
and zealous representation, and overestimates the importance of future plaintiffs’ injuries. Part
IV concludes that Rule 5.6(b) represents misguided assumptions, empty rhetoric, and ill-
reasoned conclusions.
I. BACKGROUND
A. Scope of Rule 5.6(b)
Not every agreement that might limit an attorney’s freedom to practice law is a restrictive
settlement agreement prohibited by Rule 5.6(b) (and its analogues). Most obviously, to come
within Rule 5.6(b)’s prohibitions, the agreement must be “part of the settlement of a
controversy.”12 Though a few ethics committees consider restrictive provisions violative of the
“spirit” of Rule 5.6(b) even if they are not made in connection with a settlement,13 this approach
is the minority view.14
lawyers familiar with the actions of the Disciplinary Committee say they cannot remember a single instance when a violation of this sort resulted in a serious sanction.”). 12 MODEL RULES OF PROF’L CONDUCT R. 5.6(b); compare CAL. RULES OF PROF’L CONDUCT R. 1-500(A) (“A member shall not be a party to or participate in offering or making an agreement, whether in connection with the settlement or a lawsuit or otherwise if the agreement restricts the right of a member to practice law.”). 13 For instance, suppose that an accounting firm offers to sell to a corporation a package of tax reduction ideas, conditioning the sale on the corporation and its attorney agreeing not to divulge the ideas to others. Recognizing that the confidentiality agreement does not fall within Rule 5.6 because it is not part of a settlement of a controversy under Rule 5.6(b), and it is not part of a partnership or employment agreement under Rule 5.6(a), Illinois nevertheless deemed such a confidentiality agreement improper because it violated the “spirit” of Rule 5.6(b). Ill. Adv. Op. 00-1 (2000). 14 See, e.g., ABA Formal Op. 00-417, n. 4 (2000) (“Rule 5.6(b) applies only to restrictions imposed as part of settlement of a controversy. Thus, the rule and this opinion have no application to agreements restricting the use of information where the agreement is entered into as a condition of receiving the
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Rule 5.6(b) is also limited to situations where the lawyer is settling a claim on behalf of a
client.15 The Rule does not apply to settlements where the lawyer is a party, as opposed to the
legal representative of a party.16 For example, an attorney may settle his ethical violations with
the appropriate disciplinary authorities by agreeing to suspend his practice for a term.17 As
another example, if the Office of Thrift Supervision sues a law firm, the firm may agree not to
practice before the agency, and even not to represent any savings associations and banks that
carry federal deposit insurance.18
Some courts interpret Rule 5.6(b) narrowly. For instance, in Lee v. Florida Department
of Insurance and Treasurer,19 the court interpreted Florida’s State Bar Rule 4-5.6(b), which is
identical to Rule 5.6(b), as permitting a restriction on the lawyer’s representation of future claims
“that involve the same facts, transactions, and events as does the case settled for the client.” The
court held that the rule prohibits merely restrictions on “a lawyer’s right to practice generally, for
example, in the sense that an attorney agrees as part of a settlement not to represent any persons
who may have interests adverse to the client regardless of the events and issues involved.”20
Georgine v. Amchem Products, Inc., the largest class action suit of its time, also
interpreted Rule 5.6(b)’s prohibition narrowly.21 In exchange for a tolling of the statute of
limitations, the plaintiffs’ attorneys agreed to advise future asbestos claimants to defer their
information. Nor does the rule apply to protective orders imposed during litigation.”); N.Y. Comm. on Prof’l Ethics, Op. 730 n.1 (2000). 15 MODEL RULES OF PROF’L CONDUCT R. 5.6(b) cmt. 2 (2002). 16 ABA Formal Op. 95-394 (1995); Musslewhite v. State Bar of Texas, 786 S.W.2d 437, 444 (Tex. App. 1990). 17 ABA Formal Op. 95-394 (1995); see also TEX. RULES OF PROF’L CONDUCT R. 5.06(b) (permitting restrictive settlement agreements “as part of the settlement of a disciplinary proceeding against a lawyer”). 18 ABA Formal Op. 95-394, n. 4 (1995). 19 586 So. 2d 1185 (Fla. 1991). 20 Id. at 1190. The ethics committees of Virginia and Alabama also permit narrow restrictions on the right to practice. See supra note 8.
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claims until their condition satisfied certain medical criteria.22 The agreement allowed the
attorneys to recommend otherwise in unforeseen circumstances and to represent the future client
even if he rejected the attorneys’ recommendation.23 After considering the opinions of five legal
ethics experts,24 the court concluded that the settlement provision did not violate Rule 5.6(b),
reasoning that the parties intended the agreement memorialize the attorneys’ good faith
commitment to recommend the fair and reasonable medical criteria to future clients.25 As
Professor Hazard testified, the futures provision was merely a statement about how the lawyers
would screen the cases they handle.26 Finally, the court found that the contracting attorneys did
not intend the provision obligate them not to represent clients who wished to sue the defendants
but had not yet met the medical criteria.27 In so holding, Georgine interpreted Rule 5.6(b) to
permit a restriction on the advice to be given, inexplicably divorcing legal practice from legal
advice.28
By its express terms, Rule 5.6(b) applies only if the controversy is “between private
parties.”29 Despite this language, ABA Formal Opinion 95-394 concluded that the Rule extends
to controversies in which a governmental entity is a party.30 The ABA reasoned that if the
drafters intended the Rule not to apply when the government is a party to the suit, “they would
21 157 F.R.D. 246 (E.D. Pa 1994), rev’d on other grounds, 83 F.3d 610 (3d Cir. 1996), aff’d sub nom., Amchem Prods. Inc. v. Windsor, 521 U.S. 591, 117 S.Ct. 2231, 138 L.Ed.2d 689 (1997). 22 157 F.R.D. at 300-301. 23 Id. at 300-01. 24 Id. at 301-303 (considering the opinions of Professors Freeman, Hazard, Dash, Cramton, and Koniak). 25 Id. at 303. 26 Id. at 302. 27 Id. at 303. 28 Susan P. Koniak, Feasting While the Widow Weeps: Georgine v. Amchem Products, Inc., 80 CORNELL L. REV. 1045, 1130 (1995); Georgine, 157 F.R.D. at 302 (Professor Koniak’s testimony). Additionally, at least one commentator interpreted Georgine as requiring a finding of intent to violate Rule 5.6(b). Carrie Menkel-Meadow, Ethics and the Settlements of Mass Torts: When the Rules Meet the Road, 80 CORNELL L. REV. 1159, 1199 (1995). 29 MODEL RULES OF PROF’L CONDUCT R. 5.6(b) (2002). 30 ABA Formal Op. 95-394 (1994).
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clearly have said so.”31 A few other states have dealt with the matter more convincingly by
simply omitting the “private parties” language from the Rule.32
B. Extensions of Rule 5.6(b)
Many states extend Rule 5.6(b) to prohibit agreements which have the effect of limiting
the lawyer’s right to practice by rendering his future representation more onerous.33 These ethics
committees attempt to keep a vigilant eye on evasive techniques that would allow defendants to
accomplish through the backdoor what they cannot do through the front.34
For example, Texas prohibits settlement agreements that require the attorney not to share
fees in future suits against the defendant.35 Texas also prohibits settlement agreements that
impose greater limits than the ethics rules on an attorney’s ability to solicit clients.36 Colorado
prohibits settlement restrictions that bar a lawyer from subpoenaing certain records or fact
witnesses, bar a lawyer from using certain expert witnesses, or impose forum or venue
31 Id. 32 COLO. RULES OF PROF’L CONDUCT R. 5.6(b) (deleting “private parties”); D.C. RULES OF PROF’L CONDUCT R. 5.6(b) (deleting “private”); TEX. RULES OF PROF’L CONDUCT R. 5.06(b) (deleting “private parties”); MASS. S. CT. R. 5.6(b) (deleting “private parties”). 33 See generally Colo. Bar Ass’n Ethics Comm., Formal Op. 92 (1993) (opining that a settlement provision violates Rule 5.6(b) if “it would restrain a lawyer’s exercise of independent judgment on behalf of other clients to an extent greater than that of an independent attorney not subject to such a limitation. Material restrictions obtained with an eye towards thwarting a non-settling claimant from obtaining counsel of choice fail this test”); N.Y. Comm. on Prof’l Ethics, Op. 730 (2000) (“In general, conditions of settlement that require conduct on the part of a lawyer are permissible if they do not effectively restrict the lawyer from continuing or undertaking other representations”). 34 N.M. Advisory Opinions Comm., Adv. Op. 1985-5 (1985) (“If this were to occur, defense counsel would accomplish indirectly what they cannot accomplish directly . . . . The lawyer cannot agree to any condition that restricts her right to practice law”); In re Conduct of Brandt, 10 P.3d 906, 918 (Or. 2000) (holding that indirect restrictions of the right to practice law are also prohibited by the rules); Colo. Bar Ass’n Ethics Comm., Formal Op. 92 (1993) (“the rationale for the prohibition against such lesser restrictions is that they too are ‘restriction[s] on the lawyer’s right to practice’ ”). 35 Tex. Prof’l Ethics Comm., Op. 505 (1995). 36 Id. Compare Feldman v. Minars, 658 N.Y.S.2d 614, 616-17 (App. Div. 1997) (suggesting that an agreement not to solicit clients is not against public policy, and is not barred by applicable disciplinary rules). Colorado permits a lawyer to state in the context of settlement that he has no present intention to accept related cases against the defendant, since such a restriction would not “materially” restrict a lawyer’s right to practice. Colo. Bar Ass’n Ethics Comm., Formal Op. 92 (1993) (calling it “close, but permissible”).
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limitations in future suits against the settling defendant.37 Philadelphia considered a settlement
provision that gives a “reimbursement of fees and costs” directly to the plaintiff’s attorney, to be
returned if the attorney later represents a client pressing similar claims against the defendant.38
The Committee that its disguise as a reimbursement of fees and costs does not avoid the Rule
5.6(b) violation.39
In New Mexico, it is unethical to offer or accept a settlement provision that requires the
attorney to disclose her work product to opposing counsel.40 If the attorney must disclose her
entire work product, it would inhibit her representation of other clients whose weaknesses and
settlement positions are similar to those of the settling clients.41 However, in some
circumstances, Colorado permits settlements that require the attorney to return documents
obtained in discovery, reasoning that such settlement provisions would legitimately bear on the
claim being settled.42
1. Consulting Agreements
Some states also attempt to curtail the use of consulting agreements as an evasive
maneuver past the Rule’s prohibition. Suppose that after a suit is settled or tried, the defendant
hires the plaintiff’s attorney for counseling in the subject-matter of the suit. Normally, the
attorney can accept so long as he obtains the former client’s consent.43 In this manner, the
37 Colo. Bar Ass’n Ethics Comm., Formal Op. 92 (1993); accord ABA Formal Op. 00-417, n. 9 (2000). 38 Philadelphia Bar Ass’n Prof’l Guidance Comm., Ethics Op. 95-13 (1995). 39 Id. 40 N.M. Advisory Opinions Comm., Adv. Op. 1985-5 (1985). See also Marcia L. Proctor, Restrictive Covenants in Settlement Agreements, 72 MICH. BAR J. 824 (1993) (stating that it is unethical for a lawyer to agree to a settlement provision prohibiting him from using evidence or work product for the benefit of another client). 41 N.M. Advisory Opinions Comm., Adv. Op. 1985-5 (1985). 42 Colo. Bar Ass’n Ethics Comm., Formal Op. 92 (1993). 43 See MODEL RULES OF PROF’L CONDUCT R 1.9(a) (1983) (“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 consents after consultation”).
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defendant would create a conflict of interest between the plaintiff’s former attorney and future
claimants against the defendant.44 A defendant can also try to retain the leading attorney in the
field before a suit is even filed, obviating the need to obtain client consent.45 Some states permit
these contracts so long as the resulting consultation agreement creates a bona fide attorney-client
relationship.46 Some will permit these contracts so long as the consultation agreement was made
after the settlement,47 but will prohibit such agreements if made as a condition to, or in
connection with, the settlement agreement. 48
2. Restricting the Disclosure or Use of Information
Most ethics committees permit settlement agreements conditioned upon an agreement not
to disclose information that would normally be the plaintiff’s confidential secrets. Thus,
agreements not to disclose the facts of the case or the amount and terms of the settlement are
permitted under the ethics rules.49 Because a lawyer may not disclose such information without
client consent, his right to practice law is not impermissibly restricted by a settlement condition
barring disclosure.50 However, Rule 5.6(b) is violated if the settlement is conditioned upon the
44 Stephen Gillers, A Rule Without Reason: Let the Market, Not the Bar, Regulate Settlements that Restrict Practice, 79 A.B.A. J. 118 (1993). 45 Id. at 118. 46 CAL. PRAC. GUIDE PROF. RESP. § 1:338.1 (stating that the rule does not bar such evasive consulting agreements); Va. Legal Ethics & Unauthorized Practice Op. 1715 (1998) (“The committee necessarily takes the settlement agreement on its face and cannot speculate about, let alone analyze, the motive or subjective intent of the parties.”). 47 GEOFFREY C. HAZARD, JR. & W. WILLIAM HODES, 2 THE LAW OF LAWYERING § 5.6:301 (Supp. 1997) (“[T]he defendant could retain the plaintiff’s lawyer, after the settlement, as consulting counsel on any claims arising out of the same transaction. By operation of the conflict of interest rules, that arrangement would preclude the lawyer from representing any new plaintiffs in such cases.”) (emphasis added). 48 In re Conduct of Brandt, 10 P.3d 906, 918 (Or. 2000); Adams v. Bellsouth Telecomms., Inc., No. 96-2473-CIV (S.D. Fla. Jan. 29, 2001); Marcy G. Glenn, Settlement Ethics, 30 COLO. LAW. 53, 54 (2001). 49 N.Y. Comm. on Prof’l Ethics, Op. 730 (2000), ABA Formal Op. 00-417 (2000); ABA Comm. on Ethics & Prof’l Responsibility, Formal Op. 93-371 (1993); Colo. Bar Ass’n Ethics Comm., Op. 92 (1993). 50 N.Y. Comm. on Prof’l Ethics, Op. 730 (2000); see also ABA Formal Op. 00-417 (2000) (“A proposed settlement provision, agreed to by the client, that prohibits the lawyer from disclosing information relating to the representation is no more than what is required by the Model Rules absent client consent,
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lawyer’s agreeing not to disclose information that the lawyer has no duty to keep confidential,
such as information about the defendant’s business.51
While the ethics rules permit agreements to refrain from disclosing certain confidential
information, agreements to refrain from using this information present a different matter. A
lawyer may not enter into a settlement agreement that prohibits his use of the information for the
benefit of future clients if the subsequent use would not disadvantage the present client.52
Limiting the attorney’s future use of information “effectively would bar the lawyer from future
representations because the lawyer’s inability to use certain information may materially limit his
representation of the future client and, further, may adversely affect that representation.”53
Where restrictions on the use of confidential information yield a conflict of interest between the
attorney and his subsequent client, the result is the near equivalent of a restrictive settlement
agreement. Once the lawyer determines that his representation of the future client would be
materially limited by the bar on using the information, a conflict of interest is created that even
client consent cannot rectify.54 However, protective orders that prohibit an attorney’s use of
and does not necessarily limit the lawyer’s future practice in the manner accomplished by a restriction on the use of information relating to the opposing party in the matter”). 51 N.Y. Comm. on Prof’l Ethics, Op. 730 (2000); ABA Formal Op. 00-417 (2000); ABA Comm. on Ethics & Prof’l Responsibility, Formal Op. 93-371 (1993). 52 ABA Formal Op. 00-417 (2000); J. Anthony McLain, Restrictions on a Lawyer’s Right to Practice Law, 58 ALA. LAW. 294 (1997); Colo. Bar Ass’n Ethics Comm., Op. 92 (1993); N.M. Advisory Opinions Comm., Adv. Op. 1985-5 (1985). See also MODEL RULES OF PROF’L CONDUCT R. 1.9(c)(1) (“A lawyer who has formerly represented a client in a matter or whose present or former firm has formerly represented a client in a matter shall not thereafter use information relating to the representation to the disadvantage of the former client except as Rule 1.6 or Rule 3.3 would permit or require with respect to a client, or when the information has become generally known”). 53 ABA Formal Op. 00-417 (2000); N.Y. State Bar Ass’n Comm. on Prof’l Ethics, Op. 730 (2000) (stating that a confidentiality agreement requiring an attorney not to use information relating directly or indirectly to the settlement agreement would require the attorney to avoid representing future clients in cases where the lawyer might have occasion to use the information). 54 Id.; MODEL RULES OF PROF’L CONDUCT R. 1.7(b) (client consent is ineffective because the lawyer does not “reasonably believe[] that the lawyer will be able to provide competent and diligent representation to each affected client”).
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information will not force the attorney to breach his ethical obligations because Rule 5.6(b) does
not apply to protective orders imposed during litigation.55
C. Enforcement of Rule 5.6(b)
Some courts will refuse to enforce a restrictive settlement agreement that violates Rule
5.6(b).56 Yet other courts will enforce restrictive settlement agreements despite the ethics rules.57
After all, ethics rules do not create a cause of action and do not bind courts in disqualification
motions.58 “The purpose of the rules can be subverted when they are invoked by opposing
parties as procedural weapons.”59
Some courts are openly hostile to Rule 5.6(b). For example, in Feldman v. Minars,60 the
defendants moved to disqualify a law firm, relying on a restrictive settlement agreement between
the defendant and the firm from a prior action. In dicta,61 the court quoted Professor Stephen
55 ABA Formal Op. 00-417 n. 4 (2000). 56 See, e.g., Jarvis v. Jarvis, 758 P.2d 244 (Kan. Ct. App. 1988); Wolt v. Sherwood, 828 F.Supp. 1562 (D. Utah 1993). 57 See, e.g., Shebay v. Davis, 717 S.W.2d 678 (Tex. Ct. App. 1986) (enforcing restrictive settlement agreement, though stating the state bar grievance committee should determine whether the agreement violated the ethics rules); 4 FLA. JUR. 2d Attorneys at Law § 8 (1994) (“A lawyer may not participate in offering or making an agreement in which a restriction on the lawyer’s right to practice is part of the settlement of a controversy between private parties. However, this Rule may not be applied to invalidate or render void a provision in a private contract between two parties which restricts an attorney’s right to represent a specified party or participate in specified administrative proceedings, because to do so is beyond the stated scope of the Rules Regulating the Florida Bar and their intended legal effect.”). 58 See generally, Peter A. Joy, Making Ethics Opinions Meaningful: Toward More Effective Regulation of Lawyers’ Conduct, 15 GEO. J. LEGAL ETHICS 313 (2002); Lee v. Fla. Dep’t of Ins. & Treasurer, 586 So. 2d 1185, 1188 (Fla. 1991) (voiding a contract for violation of an ethical rule “is beyond the scope and purpose of the Rules.”). 59 Lee, 586 So. 2d at 1188; Blue Cross & Blue Shield of N.J. v. Philip Morris, 53 F.Supp.2d 338, 343 (E.D. N.Y. 1999) (dicta) (“The sparse case law interpreting . . . Rule 5.6(b) suggests a judicial reluctance to interpret these rules as a bar to restrictive covenants in settlement agreements.”). 60 658 N.Y.S.2d 614 (App. Div. 1997). 61 The law firm also agreed not to “encourage any other parties or attorneys to commence such action or proceeding.” The court disqualified the firm because it violated the no-solicitation provision, and the ethics rules do not prohibit the agreement not to solicit clients. Id. at 617.
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Gillers’s terse attack of the Rule as “an anachronism, illogical and bad policy.”62 The court then
concluded:
[A]n agreement by counsel not to represent similar plaintiffs in similar actions against a contracting party is not against the public policy of the State of New York. At the least, failure to enforce a freely entered into agreement would appear unseemly, and the “clean hands” doctrine would preclude the offending attorneys from using their own ethical violations as a basis for avoiding obligations undertaken by them.63
The court further noted that even if the agreement is against public policy, the ethical violation
can be addressed by the appropriate disciplinary authorities, not the courts.64
D. Rule 5.6(a) Compared
Rule 5.6(b)’s prohibition of restrictive settlement agreements must not be confused with
Rule 5.6(a)’s prohibition of restrictive covenants. Rule 5.6(a), a close cousin of Rule 5.6(b),
prohibits restrictions of a lawyer’s right to practice in the context of employment or partnership
agreements.65 Rule 5.6(a) is implicated in various types of agreements, including employment
agreements that expand the conflict-of-interest rules by restricting counsel’s ability to represent
62 Id. at 617, citing Gillers, supra note 44, at 118. 63 658 N.Y.S.2d at 617. Recognizing Feldman’s serious disagreement with the rule, the Committee took “no position as to whether DR 2-108(B) should be revised or eliminated. However, the rule’s clear command must be followed so long as it remains part of the Code.” N.Y City’s Comm. on Prof’l and Judicial Ethics, Op. 1999-3. See also N.Y. Comm. on Prof’l Ethics, Op. 730 (2000) (reiterating that despite Feldman’s view, “the Appellate Division made no change to DR 2-108(B) when it amended the code, effective June 30, 1999”). 64 Feldman, 658 N.Y.S.2d at 617. 65 MODEL RULES OF PROF’L CONDUCT R. 5.6(a) (2002) (“A lawyer shall not participate in offering or making . . . a partnership or employment agreement that restricts the right of a lawyer to practice after termination of the relationship, except an agreement concerning the benefits upon retirement”). See also RESTATEMENT (THIRD) OF LAW GOVERNING LAWYERS § 13(1) (1998) (“a lawyer may not offer or enter into a law-firm agreement that restricts the right of the lawyer to practice law after terminating the relationship, except for a restriction incident to the lawyer’s retirement from the practice of law”); MODEL CODE OF PROF’L RESPONSIBILITY DR 2-108(A) (1983) (“A lawyer shall not be a party to or participate in a partnership or employment agreement with another lawyer that restricts the right of a lawyer to practice law after the termination of a relationship created by the agreement, except as a condition to payment of retirement benefits”).
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others against the client,66 non-competition agreements between an attorney and a non-attorney,
such as a records search company,67 agreements that allocate clients to lawyers who are
departing from a firm,68 and non-competition agreements between a departing attorney and her
former firm.69 The rule does not prohibit retirement benefit agreements that restrict the lawyer’s
right to practice,70 since the restriction “only minimally interferes with the ability of clients to
choose counsel freely, given the lawyer’s intent to retire from practice.”71
The difference between Rules 5.6(a) and 5.6(b) is not limited to the fact that one prohibits
those restrictions in the context of an employment agreement, whereas the other prohibits
restrictions in the context of a settlement agreement. In regard to Rule 5.6(a), the offeror of the
restriction is motivated by a desire to protect itself from competition. In regard to Rule 5.6(b),
the motive is commonly considered to be to protect itself from litigation, i.e., to “buy out” a class
of future claimants. In the context of Rule 5.6(a), the restriction burdens the current client, who
66 See ABA Formal Op. 94-381 (1994) (“While ethical standards already in place (in Model Rule 1.9) prohibit a lawyer from undertaking some representations adverse to former clients, an agreement denying the lawyer the opportunity to represent any interest adverse to a former client is an overbroad and impermissible restriction on the right to practice”); ABA Informal Op. 1301 (1975) (“To further limit the lawyer’s future employment, by contract, cannot be reconciled with his professional standing and position”); Pennsylvania Ethics Op. 99-150 (concurring with ABA Formal Op. 94-381). 67 See South Carolina Adv. Op. 82-05 (1984). 68 See Dwyer v. Jung, 336 A.2d 498, 501 (N.J. Super. Ct. Ch. Div.) aff’d mem., 348 A.2d 208 (N.J. Super. Ct. App. Div. 1975) (characterizing such agreements as “an unwarranted restriction on the right of the lawyer to choose his clients in the event they seek his services, and an unwarranted restriction on the right of the client to choose the lawyer he wishes to represent him”); Corti v. Fleisher, 417 N.E.2d 764 (Ill. App. Ct. 1981) (declaring void an employment agreement that made the files of the departing attorney’s clients the “sole and absolute property” of that attorney). 69 See Ind. State Bar Ass’n Legal Ethics Comm., Op. 1 (1988); Iowa State Bar Ass’n Comm. on Prof’l Ethics, Op. 89-48 (1990). But compare Haight, Brown & Bonesteel v. Superior Court, 285 Cal.Rptr. 845 (Cal. Ct. App. 1991) (distinguishing between covenants containing outright bans on competition from agreements anticipating competition, which are valid if not punitive). 70 MODEL RULES OF PROF’L CONDUCT R. 5.6(a) (2002); see also RESTATEMENT (THIRD) OF LAW GOVERNING LAWYERS §13(1) (1998) (“except for a restriction incident to the lawyer’s retirement from the practice of law”); MODEL CODE OF PROF’L RESPONSIBILITY DR 2-108(A) (1983) (permitted “as a condition to payment of retirement benefits”). 71 RESTATEMENT (THIRD) OF LAW GOVERNING LAWYERS §13 cmt. b (1998). See also, Charles H. Oates, A New Twist for an Olde Code: Examining Virginia’s New Rules of Professional Conduct, 13 REGENT U.
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loses the attorney he has already chosen. In the context of Rule 5.6(b), the restriction burdens a
future, unknown client, who loses an attorney that he has not chosen. Thus, the hardship to
clients in the Rule 5.6(a) situation is certain, since a present existing client is injured, whereas the
hardship to future clients in the Rule 5.6(b) situation is speculative; we do not know if the future
client exists, nor whether he would want the restricted attorney’s representation.
E. Secrecy Agreements Compared
Secrecy is often the price of settlement agreements.72 More to the point, secrecy is often the
price of restrictive settlement agreements.73 Perhaps because of their frequent proximity,
restrictive settlement agreements have sometimes been blamed for the evils of secrecy
agreements. However often they appear together, the two are distinct creatures. While secrecy
agreements hide information from the public eye, restrictive settlement agreements bar the
attorney from certain future representations. So long as he does not accept a secrecy provision,
an attorney limited by a restrictive settlement agreement may give the information to other
attorneys, and he may publish it in the news media (assuming, of course, that he is not barred
from doing so by other ethics rules).
II. PROFFERED RATIONALES FOR RULE 5.6(b)
Ethics committees justify Rule 5.6(b) on a number of grounds. Restrictive settlement
agreements purportedly yield a conflict of interest between the lawyer and his settling client,
between him and his non-settling client, and between his current client and his “future clients.”
In addition, restrictive settlement agreements are faulted for giving plaintiffs rewards that bear
less relationship to the merits of their claims. Lastly, they are feared to injure future plaintiffs by
L. REV. 65, 106 (2000-01) (“a departing lawyer’s receipt of full retirement benefits from a firm creates the presumption that he or she is actually retiring from practice.”). 72 Jack B. Weinstein, Ethical Dilemmas In Mass Tort Litigation, 88 NW. U. L. REV. 469, 511 (1994). 73 Paul D. Rheingold, MASS TORT LITIG. § 21:17 (1996).
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enabling defendants to “buy out” a class of claimants. This Part examines these proffered
rationales and concludes that only the last withstands scrutiny.
A. Conflict of Interest
1. Conflict Between the Lawyer and the Present Settling Client
One oft-cited rationale for Rule 5.6(b) is that the proposed restriction creates a conflict of
interest between the restricted lawyer and his settling client.74 Presumably, when a restrictive
settlement agreement is offered, the client would want to accept the restrictive settlement, but the
attorney would not. In this way, restrictive settlement agreements are thought to impermissibly
drive a wedge between the attorney and her client. However, though restrictive settlement
agreements may yield a conflict of interest, they should not be sweepingly condemned.
Some perspective is first in order. Almost every fee arrangement between an attorney
and a client may yield a conflict of interest. A conflict may result whenever the defendant
conditions settlement upon a waiver of statutory attorney’s fee awards,75 since the plaintiff might
prefer accepting the offer and the attorney might prefer declining it, especially if he otherwise
would not be paid. Because statutory fees are the right of the client, not the attorney,76 the
decision of whether to settle, and whether to waive statutory attorney’s fees, is exclusively the
client’s.77 Thus, the ethics rules permit these waivers to be offered (and accepted), despite the
74 RESTATEMENT (THIRD) OF LAW GOVERNING LAWYERS, § 13, cmt. c (1998); George M. Cohen, When Law and Economics Met Professional Responsibility, 67 FORDHAM L. REV. 273, 284 (1998); J. Anthony McLain, Restrictions on a Lawyer’s Right to Practice Law, 58 ALA. LAW. 294, 294-95 (1997); Colo. Bar Ass’n Ethics Comm., Op. 92 (1993); Cal. Standing Comm. on Prof’l Responsibility & Conduct, Op. 1988-104 (1988); ABA Comm. on Prof’l Ethics, Informal Op. 1039 (1968). 75 Typically, each party is responsible for its own attorney’s fees, and the settling defendant usually offers a sum and leaves it to the plaintiff and his attorney to determine the fee. However, in certain actions, the unsuccessful defendant is liable for the reasonable fees of the plaintiff’s attorney. See, e.g., 42 U.S.C. § 1988; 42 U.S.C. § 2000e-5(k). 76 Evans v. Jeff D., 475 U.S. 717, 730 n.19 (1986); RESTATEMENT (THIRD) OF LAW GOVERNING LAWYERS § 38(3)(b) (1998). 77 MODEL RULES OF PROF’L CONDUCT R. 1.2.
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conflict.78 A conflict of interest also exists in statutory attorney’s fee cases if the defendant
specifies the amount given to the plaintiff and her attorney, raising a conflict of interests if the
attorney is given a handsome offer in comparison to a measly sum to the client. Yet courts
permit defendants to specify the amounts so long as the resulting settlement was not tainted by
counsel’s conflict.79 Similar conflicts exist in structured settlements, because the plaintiff may
prefer the award be structured in time, but the attorney prefers her fees to be paid immediately,
or vice versa. Ethics committees have adopted solutions to resolve the conflict of interest, rather
78 If the client chooses to accept the proffered waiver, the attorney may not reject the settlement. Conn. Comm. on Prof’l Ethics, Informal Op. 97-31 (1997); N.Y. City’s Comm. on Prof’l & Judicial Ethics, Formal Op. 1987-4 (1987). If the attorney accepted the suggested waiver of statutory attorney fee awards, there is no ethical dilemma. Evans, 475 U.S. at 728. Some ethics committees advise attorneys to avoid the situation altogether by executing an appropriate attorney-client fee arrangement addressing the possibility. Utah Ethics Advisory Opinion Comm., Op. 98-05 (1998) (noting also that “[i]t would be unethical for an attorney to contract in advance with a client that the client may not accept or that the attorney may veto a particular offer in settlement of a case. An attorney must convey all offers of settlement to a client, and the client must always have final say whether or not it will be accepted”) (internal citations omitted); Cal. Standing Comm. on Prof’l Responsibility & Conduct, Formal Op. 1994-136 (1994) (opining that an attorney may, at the outset of the attorney-client relationship, contract with a client so that the client’s rights to apply for and receive an award of statutory attorney’s fees are irrevocably conveyed to the attorney); David W. Garland, Ethical Conflicts and Professional Consideration: Selected Issues, CA35 ALI-ABA 505, 536-37 (1996) (recommending that plaintiff’s counsel “enter into a retainer agreement with the client that (1) provides that the client is ultimately responsible for payment of fees and out-of-pocket expenses, (2) conditions representation on a nonwaiver of fees by the client, or (3) assigns the client’s interest in fees to the attorney”). 79 See, e.g., Gen. Motors Corp. v. Bloyed, 916 S.W.2d 949 (Tex. 1996) (in a class action suit alleging that defendant’s trucks were unreasonably dangerous, plaintiffs sought only economic damages of diminished market value and received, in settlement, a certificate towards purchasing a new truck from defendant); Cisek v. Nat’l Surface Cleaning, Inc., 954 F.Supp. 110, 111 (S.D.N.Y. 1997) (in action to recover for nonpayment of overtime wages, the parties settled for $10,002.20 to the plaintiffs, and $13,943.47 for attorney’s fees and costs); Ramirez v. Sturdevant, 26 Cal.Rptr.2d 554 (Cal.App. 1994) (in wrongful termination action where settlement awarded the plaintiff $150,000, costs of $35,000, and attorney’s fees of $215,000, a settlement as to the plaintiff that “appears to have been reasonable, perhaps even generous,” yet remanding to the trial court to determine whether the conflict of interest between the plaintiff and her attorney “tainted the ultimate settlement”). In class actions, the court must usually determine that the settlement award of attorney’s fees “does not unfairly diminish the value of the settlement fund generated for the class’s benefit.” Bloyed, 916 S.W.2d at 959, 961; accord In re Agent Orange Prod. Liab. Litig., 818 F.2d 216, 224 (2d Cir. 1987) (“The test to be applied is whether, at the time a fee sharing agreement is reached, class counsel are placed in a position that might endanger the fair representation of their clients and whether they will be compensated on some basis other than for legal services performed”). When possible, the parties should abstain from discussing attorney’s fees until the plaintiff’s award is negotiated, or to agree upon a lump sum payment and allow the court to allocate the
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than hiding behind a ban on structured settlements.80 Merely attempting to settle a claim when
the attorney is entitled to a contingent fee also can create a conflict of interest. An attorney may
prefer the client accept a stingy settlement early in litigation, when the attorney has not devoted
many hours to the case and his resulting return on a per-hour basis is higher than what it would
be if he devoted more time to his client’s claim and later received a higher settlement offer.81
Yet the Model Rules expressly permit contingent fee arrangements.82 In all of these situations,
there can be a conflict of interest, and yet all of these situations are permitted by the ethics rules.
As Professor Geoffrey Hazard, Jr., put it, “Friend, there is always a conflict. Welcome to the
real world.”83
When a restrictive settlement agreement is offered, there are four possibilities: (1) both
the client and the attorney desire the agreement, (2) both the client and attorney want to reject
the agreement, (3) the attorney desires the agreement but the client does not, and (4) the client
desires the agreement but the attorney does not. In the first two situations, there is no conflict of
funds between client and counsel. Cisek, 954 F.Supp. at 111; MANUAL FOR COMPLEX LITIGATION (THIRD) § 23.24 (1995). 80 Several states adhere to the general rule that it is the client’s prerogative to accept the structured settlement offer and require the attorney to recommend the client obtain independent legal advice regarding the settlement. Tenn. Bd. of Prof’l Responsibility, Formal Op. 85-F-96 (1985); Cal. Standing Comm. on Prof’l Responsibility & Conduct, Formal Op. 1994-136 (1994) (adding that if the client and attorney disagree as to whether the settlement offer should be accepted, the attorney may be required to withdraw from representation). 81 Terry Thomason, Are Attorneys Paid What They’re Worth? Contingent Fees and the Settlement Process, 20 J. LEGAL STUD. 187, 221-22 (1991) (“[A] contingent-fee structure alters attorney incentives so as to create a conflict of interest between the attorney and his or her clients”); N.Y. City Comm. on Prof’l & Judicial Ethics, Formal Op. 1986-1 (1986) (“We recognize that every contingent fee arrangement poses a potential conflict of interest,” but the “Code expressly permits such arrangements”). 82 MODEL RULES OF PROF’L CONDUCT R. 1.5(c). 83 Josh Fitzhugh, To Win Your Case, Waive Your Fees, 71-Dec. A.B.A. J. 44, 47 (1985) (quoting Professor Geoffrey Hazard, Jr., on the conflicts presented by the waiver of statutory fees). See also Garland, supra note 78, at 534-35.
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interest. The client’s and attorney’s interests do not conflict, but are aligned. When both the
attorney and client want the restriction, the conflict of interest rationale is useless.84
In the third and fourth situations, where the client and attorney disagree on whether to
accept the restrictive settlement, there is a conflict of interest because there might be a
“significant risk that the lawyers’ ability to consider, recommend or carry out an appropriate
course of action for the client will be materially limited as a result of the lawyer’s other
responsibilities or interests.”85 However, there is not necessarily a violation of the conflict of
interest rules.86 If the conflict of interest rules requires the attorney’s and client’s interests to
always be aligned, the only permitted representation would be self-representation.
When the client wants to reject the restrictive settlement agreement, but the attorney
wants to accept it, the attorney’s duty is plain. Under Rule 1.2(a), the attorney cannot force the
client to give up his claim, and the attorney must set aside her own interests and refuse the
restriction.87 Rule 5.6(b) adds nothing to the analysis.
When the client wants to accept the restrictive settlement agreement, but the attorney
wants to reject it, the analysis is a bit different. Rule 1.2(a) states that a lawyer “shall abide by a
client’s decision whether to settle a matter.”88 From this, some ethics committees concluded that
84 Gillers, supra note 44, at 118 ((“[i]t’s excessive, isn’t it, to say that no lawyer can ever say yes because some lawyers may occasionally wish to say no. Let’s let each lawyer choose freely,” and adding that “lawyers should explain to new clients that they may (as opposed to must) refuse any such request. The client is no worse off.”). 85 MODEL RULE OF PROF’L CONDUCT R. 1.7 cmt. [8] (2002). 86 GEOFFREY C. HAZARD, JR., SUSAN P. KONIAK & ROGER C. CRAMTON, THE LAW AND ETHICS OF LAWYERING 574 (3d ed. 1999) (“The rules on conflicts of interest do not aim at elimination of all possible conflicts; this is impossible.”). 87 MODEL RULE OF PROF’L CONDUCT R. 1.2(a) (2002) (“A lawyer shall abide by a client’s decision whether to settle a matter.”). 88 ID.
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the attorney would be required to accept the restriction.89 The ABA thus concluded that to
protect an attorney’s professional autonomy, Rule 5.6(b) must forbid the client to even consider
the restrictive settlement offer.90
However, even without Rule 5.6(b), Rule 1.2(a) does not require the attorney to accept a
restrictive settlement agreement. Rule 1.2(a) gives the client the right to settle his case with or
without the consent of counsel. Rule 1.2(a) does not, however, give the client the right to
dispose of the attorney’s property without the attorney’s consent.91 The right of future practice is
a right of the attorney, not the client.92 Just as a client could not insist on accepting a settlement
that required his attorney to give up his house, the client cannot force the attorney to give up his
right to future practice under the guise of Rule 1.2(a).
Because Rule 1.2(a) is no obstacle, the ordinary conflict of interest rules operate. When
the client wants to accept the restriction, but the attorney does not, there is a conflict of interest
because there is a significant risk that the attorney’s personal financial interests would materially
limit his representation.93 If the client insisted on the restriction, the conflict of interest would
compel the attorney to withdraw from representing the client because the lawyer could not
reasonably believe that he would be able to provide competent and diligent representation to the
89 ABA Formal Op. 00-417 (2000); ABA Comm. on Ethics & Prof’l Responsibility, Formal Op. 95-394 (1995); Philadelphia Bar Ass’n Prof’l Guidance Comm., Guidance Op. 95-13 (1995); ABA Comm. on Ethics & Prof’l Responsibility, Formal Op. 93-371 (1993). 90 ABA Comm. on Ethics & Prof’l Responsibility, Formal Op. 93-371 (1993). 91 Recall that the ethics rules permit the client to waive statutory attorney’s fees even without the attorney’s consent because the right to statutory fees is a right of the client, not the attorney. See supra note 76. If the client transfers the right to the fees to the attorney, however, then the attorney must consent to the waiver. See supra note 78. 92 Thus, this situation is unlike Evans v. Jeff D., 475 U.S. 717, 719 n.19 (1986), where the right to statutory attorneys’ fees was the right of the client, and the client may waive statutory fees without the attorney’s consent. Because the right to future practice is the right of the attorney, it may be restricted only upon her consent. 93 MODEL RULES OF PROF’L CONDUCT R. 1.7(a) (2002).
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client.94 The attorney need not withdraw if the client does not insist on the restriction. If the
client believes that the defendant would be unlikely to offer the restriction to the client’s second
attorney, the client would see that insisting on the restriction yields no benefit, and he might thus
change his mind about insisting on the restriction. Because there is no conflicting interest, the
attorney need not withdraw.
Existing conflict of interest rules—and a more accurate interpretation of Rule 1.2(a)—
already guarantee that restrictive settlement agreements will be accepted only when both the
attorney and client desire its terms. Rule 5.6(b) does not aid but hinders the analysis,
unnecessarily preventing agreements beneficial to the plaintiff, his attorney, and the defendant.
2. Conflict Between the Lawyer and the Present Non-Settling Client
Another asserted rationale for Rule 5.6(b)’s prohibition is that when the lawyer
contemporaneously represents settling and non-settling clients who have claims against the
settling defendant, the proposed restriction creates a conflict of interest between the lawyer and
her present non-settling clients.95 If the attorney accepts a restrictive settlement agreement, the
restriction would require her to withdraw from representing her non-settling clients’ claims
against the defendant, forcing her to breach her duty of loyalty.96
However strong this rationale is, it cannot support the entire Rule. First, some lawyers who
would accept the restriction do not have non-settling clients with claims against the settling
defendant. To lawyers who lack such clients, this rationale is inapplicable. Second, even if a
lawyer did have a non-settling client with claims against the defendant, the settling parties could
94 ID. at 1.7(b). 95 ABA Comm. on Ethics & Prof’l Responsibility, Formal Op. 93-371 (1993); Colo. Bar Ass’n Ethics Comm., Formal Op. 92 (1993); ABA Comm. on Prof’l Ethics, Informal Op. 1039 (1968). 96 MODEL RULES OF PROF’L CONDUCT R. 1.7 cmt. 4 (2002) (“Loyalty to a client is also impaired when a lawyer cannot consider, recommend, or carry out an appropriate course of action for the client because of the lawyer’s other responsibilities or interests”).
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simply carve out from the restriction the current non-settling clients so that the restricted attorney
may continue representing them. These carve-out provisions have even been used before. For
example, while settling a claim for his client, an attorney agreed not to sue the New York
Mercantile Exchange (NYMEX) again, but a carve-out provision in the settlement agreement
permitted him to continue working on a pending suit against NYMEX for another client.97
3. Conflict Between Present and Future Clients
A particularly peculiar rationale for Rule 5.6(b) is that restrictive settlement agreements
form a conflict of interest between present clients and future clients.98 This rationale yields an
absurdly unworkable guide. What are the interests of future clients? Does not every
representation create a conflict of interest between present clients and future clients? Does not
every representation make an attorney less available for future clients, if only by the time
commitments she has already made?99 The ethics opinions citing this vague rationale assumedly
mean that the attorney has some sort of duty to remain available to future clients, a rationale
examined in Parts II.C and IV.
B. Rewards with Less Relationship to the Merits
In addition to the rationales premised on conflict of interest, the ABA also attempts to justify
Rule 5.6(b) by claiming that restrictive settlement agreements “may provide clients with rewards
that bear less relationship to the merits of their claims than they do to the desire of the defendant
to ‘buy off’ plaintiff’s counsel.”100 A rational defendant will offer a settlement amount that is
97 Cotts, supra note 11, at A1. 98 “[T]he offering of such restrictive agreements places the plaintiff’s lawyer in a situation where there is conflict between the interests of present clients and those of future clients.” ABA Comm. on Ethics and Professional Responsibility, Formal Op. 93-371 (1993). 99 Weinstein, supra note 72, at 519 (“What is the lawyer’s obligation to a client who does not yet exist and who he or she may never represent? Does a lawyer have a duty to future clients by virtue of having once offered his or her services?”). 100 ABA Comm. on Ethics and Prof’l Responsibility, Formal Op. 93-371 (1993).
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less than its expected costs of trial.101 The defendant usually will not settle for more than this
amount, since it would be cheaper to litigate. However, in a restrictive settlement agreement
situation, the defendant must pay a premium to convince the attorney to restrict his practice of
law. When the restrictive settlement offer is the lump sum arrangement, e.g. $300,000 to
plaintiff, the plaintiff will generally get a reward higher than what would be offered if the
restriction was not proposed. This reward, in turn, will bear less relationship to the merits of the
plaintiff’s claim, and more to the plaintiff’s lawyer’s skill.
There are two problems with this argument. First, it is hardly unethical for the defendant
to give the plaintiff more money than he “deserves.” It is certainly not unethical for the
plaintiff’s attorney to counsel him to accept an offer more generous than expected. Are ethics
committees and attorneys now to police the economic efficiency of settlement awards?
Second, a rational defendant would prefer to restructure restrictive settlement agreements
to pay the premium directly to the plaintiff's attorney, rather than to the plaintiff. As discussed
more fully in Part II.C.1.c, the plaintiff’s attorney will accept the restriction only for an
additional sum that would compensate him for relinquishing part of his right to practice, here,
$100,000. If the attorney represented the plaintiff under a 33% contingency fee agreement, the
defendant would have to pay the plaintiff an additional $300,000 for the funds to trickle down so
the attorney would receive his $100,000 premium. Clearly, a rational defendant would prefer to
pay directly the attorney $100,000 than pay the plaintiff $300,000.
101 In other words, the defendant will settle for an amount less than (PD)(D) + CD, where PD is the defendant’s estimate of the plaintiff’s probability of success at trial, D is the damages the successful plaintiff will win at trial, and CD is the litigation costs to the defendant. John J. Donohue III, Opting for the British Rule, Or If Posner and Shavell Can’t Remember the Coase Theorem, Who Will?, 104 HARV. L. REV. 1093 (1991); RICHARD POSNER, ECONOMIC ANALYSIS OF LAW 607-15 (5th ed. 1998); Steven Shavell, Suit, Settlement, and Trial: A Theoretical Analysis Under Alternative Methods for Allocation of Legal Costs, 11 J. LEGAL STUD. 55 (1982).
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If this alternative form of the restrictive settlement agreement is used, the plaintiff’s attorney
may need to satisfy the requirements of Model Rule 1.8(f):
A lawyer shall not accept compensation for representing a client from one other than the client unless: (1) the client consents after consultation; (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 1.6.102
The plaintiff’s attorney may also need to satisfy Model Rule 5.4(c): “A lawyer shall not permit a
person who recommends, employs, or pays the lawyer to render legal services for another to
direct or regulate the lawyer’s professional judgment in rendering such legal services.”103
Technically, these provisions should not apply because the defendant is not compensating the
attorney for representing a client; the defendant is instead compensating the attorney for not
representing future clients. However, at least one Ethics Committee opined that Rule 1.8(f)
would apply in such a situation.104
C. Preventing the “Buy Out”
The strongest (though ultimately inadequate) rationale for Rule 5.6(b) is that “permitting
such agreements restricts the access of the public to lawyers who, by virtue of their background
and experience, might be the very best available talent to represent these individuals.”105 If we
102 MODEL RULES OF PROF’L CONDUCT R. 1.8(f) (2002). See also RESTATEMENT (THIRD) OF LAW GOVERNING LAWYERS § 215(1) (1997) (“A lawyer may not represent a client under circumstances in which someone other than the client will wholly or partly compensate the lawyer for the representation, unless the client consents under the limitations and conditions provided in § 202 [regarding client consent to a conflict of interest], with knowledge of the circumstances and conditions of the payment”). 103 MODEL RULES OF PROF’L CONDUCT R. 5.4(c). See also MODEL CODE OF PROF’L RESPONSIBILITY DR 5-107(B) (“A lawyer shall not permit a person who recommends, employs, or pays him to render legal services for another to direct or regulate his professional judgment in rendering such legal services.”). 104 Philadelphia Bar Ass’n Prof’l Guidance Comm., Op. 95-13 n.2 (1995). 105 ABA Comm. on Ethics & Prof’l Responsibility, Formal Op. 93-371 (1993). Accord RESTATEMENT (THIRD) OF LAW GOVERNING LAWYERS § 13 cmt. c (1998) (“The agreement would also obviously restrict the freedom of future clients to choose counsel skilled in a particular area of practice.”); Patrick Emery Longan, Ethics in Settlement Negotiations: Foreword, 52 MERCER L. REV. 807, 819 (2001)
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allow restrictive settlement agreements, it is feared, plaintiffs would have no opportunity to
secure experienced and knowledgeable attorneys, as they would have all been snatched up by
defendants. Professor Geoffrey Hazard traces the Rule to the old British principle analogizing
attorneys to cabbies: “The barrister should be available to anyone who might want him.”106 This
rationale finds its source in Canon 2, “a lawyer should assist the legal profession in fulfilling its
duty to make legal counsel available.”107 This concern is particularly acute when the restriction
is offered in areas of the law which require a high level of specialization that relatively few
attorneys possess.108
In the end, this argument fails to provide adequate support for Rule 5.6(b). First, not
every restrictive settlement agreement injures future plaintiffs. Second, the mere possibility of
injuring future plaintiffs cannot justify barring attorneys from selling their services in a
restrictive settlement. Here, the focus is on the extent to which restrictive settlement agreements
injure future plaintiffs. In Part IV, the focus is on whether the future plaintiffs’ possible injury
matters.
(stating that the rule “protects the supply of lawyers available for those future parties”); McLain, supra note 52, at 295 (“Lastly, the overall concept of settling claims would be clouded by the subterfuge provision which in essence is an attempt to “buy off” the lawyer(s) in question.”); Cohen, supra note 74, at 283-84 (stating that “the purported purpose of [Rule 5.6(b)] is to make legal services available to more people”); Neil W. Hamilton, Are We a Profession or Merely a Business? The Erosion of Rule 5.6 and the Bar Against Restrictions on the Right to Practice, 22 WM. MITCHELL L. REV. 1409, 1413 (1996) (“affected clients have the right to decide for themselves which lawyer they wish to handle their affairs without interference by commercial arrangements among the lawyers.”); Marcia L. Proctor & Julie Hill, Restrictive Covenants in Settlement Agreements, 72 MICH. B.J. 824, 824 (1993) (“Where there is a finite number of lawyers who have expertise in that area of law, such restrictive covenants interfere with delivery of legal services”); ABA Comm. on Ethics & Prof’l Responsibility, Formal Op. 93-371 (1993); Colo. Bar Ass’n Ethics Comm., Formal Op. 92 (1993); Cal. Standing Comm. on Prof’l Responsibility & Conduct, Formal Op. 1988-104 (1988); ANN. MODEL CODE OF PROF’L RESPONSIBILITY 115 (1979). 106 Cotts, supra note 11. 107 MODEL CODE OF PROF’L RESPONSIBILITY Canon 2 (1980). 108 The ABA was particularly concerned with the limited number of attorneys who specialized in certain fields. ABA Comm. on Prof’l Ethics, Informal Op. 1039 (1968).
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Critics of the “buy out” rationale rely heavily on the power of market forces to remedy any
evils brought by the restrictive settlement agreement. For instance, Richard Painter and Stephen
Gillers argue that as more attorneys are bound by the settlement restrictions, other attorneys will
see a lucrative opportunity and take their place.109
Surely this is no answer to the “buy out” rationale, since defendants would not pay more for a
restrictive settlement agreement when market forces will nullify their effect. But the question
remains: how much and how often are future plaintiffs injured? To answer this, economic
analysis demonstrates how and why restrictive settlement agreements will be offered, and how
and when they will harm future plaintiffs. Though economic analysis is not the ultimate answer
to all (or any) ethical dilemmas, it is a potent tool that allows us to understand what, when, and
why parties and their lawyers do what they do.
Applying economic principles to analyze professional responsibility rules is ever-
expanding.110 It aids in determining whether an act imposes costs to society, and if so, how
much. That is, economic analysis can highlight the externalities that form the root of the evils
that ethical rules seek to prevent. It is true that economic analysis proceeds on the assumption of
self-interested behavior, while the ethics rules proceed on the need to resist some self-interested
behavior.111 However, the ethics rules must analyze what self-interested attorneys do before
109 Richard W. Painter, Rules Lawyers Play By, 76 N.Y.U. L. REV. 665, 714 (2001) (“[T]he argument assumes that the plan can work, that enough good lawyers will agree to forgo lucrative work and that the defendant will be willing and able to make it financially worthwhile.”); Gillers, supra note 44, at 118 (“these untested assumptions are dubious. They ignore the market. If a claim has merit and elimination of one lawyer creates a vacancy, the market will produce a replacement. Undoubtedly, some lawyers will accept a restriction, but surely not enough to deprive worthy claimants of all counsel.”). 110 Cohen, supra note 74; Robert Parker, Non-Compete Agreements Between Lawyers: An Economic Analysis, 40-OCT RES GESTAE 12 (1996) (applying economic analysis to Rule 5.6(a)). 111 Anthony T. Kronman, Legal Professionalism, 27 FLA. ST. U. L. Rev. 1, 5 (1999) (“those who make the law, those who build the house of law . . . cannot be acting in the same self-centered way that Adam Smith’s tradesmen do. They must have an eye out for the good of the whole.”); Cohen, supra note 74, at 276-77.
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discovering what rules are needed.112 “After all, legal rules are largely the fossilized remains of
prior misconduct.”113 Furthermore, ethics rules must analyze what self-interested attorneys do
before discovering which rule will successfully inhibit their wrongdoing.
1. When Restrictive Settlement Agreements will be Offered and Accepted
Here, I make some classical economic assumptions to simplify the model. For instance, I
assume rationality.114 I assume the litigants are risk-neutral.115 I also assume no transaction
costs in offering, considering, or accepting a restrictive settlement agreement.116 I ignore the
effect of taxes. However, I do not assume plaintiffs, defendants nor plaintiffs’ attorneys have
perfect information.
a. Plaintiffs.
Current plaintiffs will accept the restrictive settlement offer whenever the terms would result
in an attractive settlement. That is, the plaintiff will accept any settlement offer that exceeds his
expected benefits at trial, which is the plaintiff’s perceived probability of his success at trial,
multiplied by the stakes, minus his litigation costs.117 If the plaintiff is presented with two
settlement offers, one a restrictive settlement proposal with a higher settlement award to the
plaintiff and the other the typical settlement proposal with a smaller award to the plaintiff, the
plaintiff will almost certainly prefer the restrictive settlement proposal.118 If the plaintiff is
112 Cohen, supra note 74, at 276-77 (arguing for the need to apply economic analysis to professional responsibility). 113 Id. at 277. 114 POSNER, supra note 101, at 17. 115 ID. at 609 (assuming risk neutrality to determine whether parties will settle rather than go to trial). 116 A. MITCHELL POLINSKY, AN INTRODUCTION TO LAW AND ECONOMICS 4 (1989). 117 See supra note 101. 118 There may be a few eccentric plaintiffs who would not accept a restrictive settlement proposal irrespective of how generous the terms. Such plaintiffs might, for example, have a desire for the attorney to be available for other litigants who have suffered injuries similar to his own. Such oddball situations, however, may safely be left to the side.
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presented with two settlement offers, one restrictive and the other not, and both offers give the
plaintiff an identical sum,119 the plaintiff will be indifferent to which offer to accept.
b. Defendants
In deciding whether to offer a restrictive settlement agreement, the defendant will consider
the following:
(1) its estimate of the probable number of future suits the plaintiff’s attorney would bring against the defendant if no restriction is made (N1D);
(2) of N1D, its estimate of the probable number of future suits another attorney would bring against the defendant if the plaintiff’s attorney is restricted (N2D);120
(3) its estimate of the probability of the future suits’ success if the plaintiff’s attorney represents the future plaintiffs (P1D);
(4) its estimate of the average121 probability of the future suits’ success if another attorney represents the future plaintiffs (P2D);
(5) its estimate of the judgment to the successful future plaintiffs if they are represented by the plaintiff’s attorney (D1);
(6) its estimate of the average judgment to the successful future plaintiffs if they are represented by another attorney (D2);
(7) its estimate of its litigation costs in future suits if the future plaintiffs are represented by the plaintiff’s attorney (C1D); and
(8) its estimate of its average litigation costs in future suits if the future plaintiffs are represented by another attorney (C2D).
The defendant will offer a restrictive settlement agreement only if its expected costs if the
plaintiff’s attorney represents the future plaintiffs is greater than its expected costs if another
attorney represents the future plaintiffs. The expected cost to the defendant if the plaintiff’s
attorney represents the future plaintiffs (EC1D) is:
N1D [(P1D x D1) + C1D]
119 E.g., if the plaintiff was presented with a $1 million dollar settlement with restrictions, and an additional $300,000 to be paid directly to the attorney, or a $1 million dollar settlement with no restrictions, the plaintiff will generally be indifferent to which version of the settlement offer to accept. 120 Thus, suppose that if the plaintiff’s attorney was not restricted, he would bring ten similar suits against the defendant, and other attorneys would bring twenty. N1D equals ten. Suppose that if the plaintiff’s attorney was restricted, other attorneys would bring twenty-six similar suits against the defendant, the other available attorneys picking up only some of the opportunity that the restricted plaintiff’s attorney left behind. N2D equals six.
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That is, the expected cost to the defendant if the plaintiff’s attorney represents future plaintiffs is
its estimate of the probability of the plaintiffs’ success, multiplied by their damages, increased by
the defendant’s expected litigation costs, all multiplied by the number of suits the defendant
expects the plaintiff’s attorney will bring in the future.
Similarly, the expected cost to the defendant if another attorney (or group of attorneys)
represents the future plaintiffs (EC2D) is:
N2D [(P2D x D2) + C2D]
The defendant will make a restrictive settlement offer whose premium (the amount exceeding
the settlement the defendant would offer absent a restriction) is less than its expected cost if the
plaintiff’s attorney represents the future plaintiffs, minus its expected cost if another attorney
represents the future plaintiffs. In other words, the restrictive settlement offer’s premium will be
less than EC1D – EC2D. Otherwise, the defendant would be better off to let the plaintiff’s attorney
represent future plaintiffs.
For example, suppose the plaintiff sues the defendant for damages caused by the defendant’s
asbestos products. The plaintiff’s estimate of his probability of success at trial is 70%, and the
defendant’s estimate of the plaintiff’s probability of success at trial is 40%. If the plaintiff wins
at trial, he would recover $200,000 in damages. The plaintiff’s expected trial costs are $30,000,
and the defendant’s expected trial costs are $40,000. Because the expected benefit to the
121 Each individual attorney would quite likely have a different probability of success from other attorneys. P2D uses the average probability of success.
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plaintiff of going to trial is $110,000,122 and the defendant’s expected cost of going to trial is
$120,000,123 the parties will settle for an amount greater than $110,000 but less than $120,000.124
Further assume that the defendant believes that if the plaintiff’s attorney were permitted to
represent other claimants against the defendant, the defendant will be sued in eleven actions
before the statute of limitations expired (N1D = 11). The defendant also believes that if the
plaintiff’s attorney accepted a restrictive settlement agreement, of these eleven suits, the
defendant will be sued only in nine actions (N2D = 9), a plausible situation if the plaintiff’s
attorney was planning on soliciting asbestos plaintiffs through the mails. Suppose that the
plaintiff’s attorney and the next attorney are equally skilled, so that the probability of the future
plaintiff’s success is the same whether the plaintiff’s attorney or the next attorney represented the
future plaintiffs (P1D = P2D), and the expected damages for the successful future plaintiff at trial
were the same irrespective of who represented the future plaintiffs (D1 = D2). Further suppose
that the defendant’s expected litigation costs would remain constant, irrespective of who
represented the future plaintiffs (C1D = C2D). On these facts, the defendant would offer a
restrictive settlement agreement. Since the defendant would be sued more often if the attorney
was not restricted, the defendant’s expected cost if the plaintiff’s attorney was not restricted is
greater than the defendant’s expected cost if the plaintiff’s attorney was restricted. The
defendant will be willing to offer a restrictive settlement agreement whose premium is no greater
122 The expected benefit to the plaintiff of going to trial is the successful plaintiff’s damages at trial, offset by the plaintiff’s estimate of his own probability of success, minus the plaintiff’s expected trial costs. See sources cited in supra note 101. Thus, in the asbestos example, the plaintiff’s expected benefit of going to trial is $110,000, or ($200,000 x 70%) - $30,000. 123 The expected cost to the defendant of going to trial is the successful plaintiff’s damages at trial, offset by the defendant’s estimate of the plaintiff’s probability of success, plus the defendant’s expected trial costs. See sources cited in supra note 101. Thus, in the asbestos example, the defendant’s expected cost of going to trial is $120,000, or ($200,000 x 40%) + $40,000. 124 The expected benefits to the plaintiff of going to trial are less than the expected costs to the defendant of going to trial. Thus, the parties will settle. See sources cited in supra note 101.
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than $240,000. That is, the defendant will be willing to offer an amount less than its expected
costs if the plaintiff’s attorney was not restricted (EC1D), minus its expected costs if the
plaintiff’s attorney was restricted (EC2D).
EC1D - (EC2D = N1D [(P1D x D1) + C1D] – N2D [(P2D x D2) + C2D].
EC1D - EC2D = (11) [(40% x $200,000) + $40,000] – (9) [(40% x $200,000) + $40,000]
EC2D - EC2D = $240,000
Suppose, however, that a plaintiff was suing a defendant for damages caused by a molesting
schoolteacher. Suppose the same facts posited in the asbestos example, except that the defendant
expects to be sued just as often irrespective of whether the plaintiff’s attorney accepted the
restrictive settlement offer (N1D = N2D). Further suppose that the plaintiff’s attorney was prone to
filing creative motions that require much legal research to respond, so that the defendant expects
its litigation costs to be higher if the plaintiff’s attorney was not restricted (C1D > C2D). Despite
the expected increase in litigation costs, the defendant expected the probability of the plaintiff’s
success and the amount of a successful plaintiff’s judgment at trial to be the same regardless of
whether the plaintiff’s attorney was restricted. Again, the defendant would offer a restrictive
settlement agreement, because a restrictive settlement agreement would permit the defendant to
avoid the greater expected litigation costs.
Now suppose that the probability of success, the number of future suits, the expected
litigation costs, and the judgment for a successful plaintiff at trial, in short, all the factors, were
the same irrespective of whether the plaintiff’s attorney was restricted. In this situation, the
expected cost to the defendant would be the same whether the plaintiff’s attorney accepted a
restrictive settlement agreement or not (EC1D = EC2D). The defendant would not offer a
restrictive settlement agreement; there is simply no benefit to the defendant in offering it. A
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rational defendant would offer a restrictive settlement agreement only if it expected the
agreement to have financial benefit.
However, suppose that the next attorney was more skilled, so that the probability of the
future plaintiff’s success or the judgment of a successful future plaintiff at trial was greater with
a restriction than without it. Or suppose that the litigation costs of the defendant would be higher
if the plaintiff’s attorney was restricted. All else remaining equal, the defendant would not offer
a restrictive settlement agreement; the defendant is financially better off if the plaintiff’s attorney
represented future plaintiffs against the defendant.
Why would a defendant believe the plaintiff’s attorney will be more successful than another
attorney? First, the plaintiff’s attorney may have a gift of persuasion. It is only natural for
defendants to want to avoid suits brought by legendary trial attorneys. Second, and perhaps
more likely, the attorney may have obtained critical information about the claims. For example,
suppose that the plaintiff sues the defendant for a wrong that is not obvious. Unlike an exploding
soda bottle or sexual harassment, where all future plaintiffs know the fact and the cause of the
harm, some cases involve hidden harms, such as a cluster of cancers caused by the illegal
dumping of toxic wastes, or a prescription drug that eventually causes heart problems. In these
latter cases, information is key. If the plaintiff’s attorney does not solicit similar clients, similar
claims may not come. By offering a restrictive settlement agreement, the defendant tries to
immunize itself from suit by attempting the classic “buy out.”
To the extent that the information is worthy of protection through some confidentiality
agreement or protective order, the defendant would have no reason to offer a restrictive
settlement agreement, as will be proven in Part III.A. To the extent that the defendant would
want to keep the information from the public, but the information is not worthy of court-ordered
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protection, the defendant might want to offer a restrictive settlement agreement. Through a
restriction, the defendant can ensure that the plaintiff’s attorney will not solicit similar clients.
Through a restriction, the defendant may hope that the incident will quietly die, and no more
cases will be filed. Though the attorney could disclose the information to other attorneys or the
press despite a restrictive settlement agreement (and absent a secrecy agreement), the defendant
may reasonably rely on the forces of inertia and hope that the attorney will keep his mouth shut.
c. Plaintiff’s counsel
In deciding whether to accept a restrictive settlement agreement, the plaintiff’s lawyer will
consider the following:
(1) his estimate of the probable number of future suits he would bring against the defendant if no restriction is made (N1L);
(2) his estimate of his legal fees in representing a future plaintiff against the defendant, contingent or otherwise (C1P);
(3) his estimate of his alternative sources of income if he foregoes representing a future plaintiff against the defendant (CXL);125 and
(4) his share of the restrictive settlement offer’s premium (SL).
The plaintiff’s lawyer will accept a restrictive settlement agreement only if his share of the
restrictive settlement premium exceeds his probable fee in representing the future plaintiff
against the defendant, minus his probable fee in representing another client, all multiplied by the
probable number of future suits he would bring if no restriction is made. Any offer lower than
this amount would not be economically attractive. Thus, the plaintiff’s attorney will accept a
restrictive settlement agreement only if:
SL > (C1P – CXL) (N1L)
If the attorney firmly decided to retire from the practice of law, to not represent asbestos
plaintiffs, to represent a client whose interests were adverse to the future plaintiffs,126 to instead
125 If the attorney did not represent the future plaintiffs, he would have the time to take other cases. If the attorney has highly lucrative clients who would pay higher fees than the future plaintiffs, then CXL > C1P.
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devote his time to more attractive fee-producing clients,127 or made other similar decisions, the
attorney would accept even a peppercorn in return for his agreeing not to represent future
plaintiffs against the defendant. Because the attorney’s estimate of the probable number of
future suits he would bring against the defendant if no restriction is made (N1L) is zero, any offer
above that would be attractive.
But suppose that the attorney in the asbestos example believes that, absent a restrictive
settlement agreement, he would represent future plaintiffs in eight similar asbestos actions
against the defendant (N1L = 8).128 Further suppose that the attorney expects that his fees in these
future cases would be $30,000 (C1P = $30,000), and he expects that if he were to forego
representing these future plaintiffs, he would earn $10,000 in fees from other clients (CXL =
$10,000). Under these circumstances, the attorney would accept a restrictive settlement premium
only above $160,000:
(C1P – CXL) NIL = ($30,000 - $10,000) (8) = $160,000
$160,000 represents the attorney’s costs in foregoing representing the future plaintiffs, and he
will not accept a restriction on his right to represent these plaintiffs for any amount less than this.
The higher the attorney’s expected fees from the future plaintiffs with claims against the
defendant (C1P), the higher the premium must be. The lower the attorney’s expected fees from
other clients (CXL), the higher the premium must be. Thus, an attorney with few clients or few
opportunities to obtain other clients, e.g., an attorney in a small town or an attorney with a
126 The attorney could represent the client even if his interests are materially adverse to the former plaintiff’s, so long as the former plaintiff consents to the representation. MODEL RULES OF PROF’L CONDUCT R. 1.9(a). 127 Thus, a rational defendant should determine the attorney’s C1P and CXL in determining the ratio between N1D and N2D. 128 Notice that N1L does not always equal N1D. The plaintiff’s attorney and the defendant will not always agree how many suits the attorney would bring absent a restriction. Neither have perfect information.
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specialty in a small corner of the market, will require a heft premium before agreeing to restrict
his practice.
It is possible that the attorney will receive more from the restrictive settlement premium than
his client would through the settlement. However, the premium the attorney will receive does not
amount to an excessive fee. First, the premium may not be excessive since it would generally
compensate the attorney only for the work he will forego in the future. The client is not similarly
foregoing future opportunities, and thus the higher compensation to the attorney may be justified.
Second, and perhaps more importantly, the premium is not even a fee. Attorney’s fees are “[t]he
charge to a client for services performed for the client.”129 When a defendant offers an attorney a
restrictive settlement premium, the money is not in exchange for legal services, but in exchange
for the absence of legal services.
2. When Restrictive Settlement Agreements will Not Injure Future Plaintiffs
The common assumption is that defendants offer restrictive settlement agreements only when
the next attorney will be unable to procure as high a settlement or judgment as the plaintiff’s
attorney. In turn, many conclude that restrictive settlement agreements injure these future
plaintiffs by ensuring that the most experienced and able attorney will be unavailable to represent
them, resulting in a lower judgment or settlement offer for these future plaintiffs. Yet when we
analyze when restrictive settlement agreements will be offered, when they will be accepted, and
when they will injure the future plaintiffs, we see that sometimes, the defendant will offer and
the plaintiff’s attorney will accept a restrictive settlement, and yet future plaintiffs will not be
harmed.
a. No possibility of future representation by the plaintiff’s attorney
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Perhaps most obviously, restrictive settlement agreements will not injure any future plaintiff
if, even without the restriction, the plaintiff’s attorney would not represent any future plaintiff
against the defendant. Recall that if the plaintiff’s attorney knew he did not wish to represent
future claimants against the defendant again (e.g., he wished to retire or pursue more lucrative
clients), he would accept the restriction with a premium as small as a peppercorn. In such a
scenario, future plaintiffs are not injured because the restriction places them in no worse position.
The defendant should not have offered the restriction at all. Yet, because defendants lack perfect
information, they will sometimes miscalculate how many suits the plaintiff’s attorney would
bring absent a restriction (N1D).
b. No representation by the plaintiff’s attorney
Just because an attorney is not restricted does not mean that he will represent every client
who may come his way. Similarly, just because an attorney is available does not mean that all
future plaintiffs will seek his representation. Restrictive settlement agreements do not injure
those future plaintiffs who would not gain the attorney’s representation even absent a restriction,
whether because of the attorney’s limited time or because the future plaintiff would not seek his
representation. These future plaintiffs are not better off absent the restriction.
Though some individual future plaintiffs are no worse off, it may be that the class of future
plaintiffs are, on the whole, worse off. Some future plaintiffs, for instance, would have gained
the attorney’s representation absent a restriction, and they might have been more successful
against the defendant (see Part II.C.2.d, below). Thus, the defendant does not necessarily err in
offering the restriction. So long as enough other plaintiffs are worse off, the defendant is better
off.
129 BLACK’S LAW DICTIONARY 125 (7th ed. 1999). See also ABA Comm. on Ethics & Prof’l Responsibility, Formal Op. 93-379 (1993) (distinguishing attorney’s fees from general overhead,
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c. Future plaintiff consents
The third situation in which restrictive settlement agreements will not injure a future
plaintiff is when he personally consents to the restrictions. For instance, suppose that a husband
and wife agree to settle a tortuous custody battle with the condition that the wife’s attorney not
represent her in future custody proceedings. The wife can surely waive her right to counsel of
choice. She would not be harmed by the restrictive settlement agreement, especially if she
obtained a sweet deal in exchange. Applying Rule 5.6(b) to prohibit the restriction would be
illogical,130 but a path that at least one court took.131
d. Greater or equivalent benefits
Restrictive settlement agreements do not necessarily harm those future plaintiffs who would
have been represented by the attorney absent the restriction and who do not consent to the
restriction. If these future plaintiffs would be just as well off, or better off, by gaining the
representation of another attorney, they are not injured by the restriction. Whether they suffer
injury depends upon the following:
(1) the judgment or settlement (if any) to the future plaintiff if represented by the plaintiff’s attorney (D1);
(2) the judgment or settlement (if any) to the future plaintiff if represented by another attorney (D2);
(3) the attorney’s fees if represented by the plaintiff’s attorney (C1P); and (4) the attorney’s fees if represented by another attorney (C2P).
disbursements, or additional charges). 130 RESTATEMENT (SECOND) OF CONTRACTS § 179 cmt. c (1981) (“In some instances, refusal to enforce a term may frustrate rather than further public policy. This is likely to be the case where legislation was enacted to protect a class of persons to which the promisee belongs in transactions of the kind involved.”). 131 In Jarvis v. Jarvis, 758 P.2d 244 (Kan. Ct. App. 1988), Nancy Jarvis promised not to hire Bernis Terry to represent her in any future divorce action against her husband. Id. at 245. Later, she filed several motions regarding child support and visitation rights, retaining Mr. Terry. Id. On the basis of Rule 5.6(b), the court voided the agreement “because it indirectly restricts Bernis Terry’s right to practice law . . . and because it limits Nancy’s freedom in choosing an attorney.” Id. at 247.
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Unlike the analysis of when the plaintiff, defendant, or plaintiff’s attorney will offer or accept
a restrictive settlement agreement, the analysis here is retrospective. Thus, the future plaintiff’s
“expected” benefits do not matter, only his “actual” benefits matter. Future plaintiffs are injured
by a restrictive settlement agreement even if they do not expect it.
The analysis here compares the benefit the future plaintiff would have received if represented
by the plaintiff’s attorney with the benefit he will receive if represented by the attorney the
plaintiff selects in his stead. If the plaintiff would select no attorney, e.g., if no attorney is
available or if the plaintiff would not know that he has suffered an actionable wrong, then his
judgment or settlement if another attorney represents him (D2) is zero.
A future plaintiff is not harmed by a restrictive settlement agreement if his actual benefit in
future litigation when represented by the plaintiff’s lawyer (AB1P) is equal to or less than his
actual benefit when represented by another attorney (AB2P). In other words, an offered and
accepted restrictive settlement agreement will not harm a future plaintiff if he would benefit
more or just as much if represented by another attorney than the plaintiff’s attorney. The actual
benefit to the future plaintiff in future litigation when represented by the plaintiff’s lawyer is:
AB1P = D1 – C1P
In other words, his benefit when represented by the plaintiff’s lawyer is his judgment or
settlement, less the litigation costs. Conversely, the actual benefits to the future plaintiff in
future litigation when represented by another attorney is:
AB2P = D2 – C2P
The extent of his injury is the difference between AB1P and AB2P.
Though future plaintiffs would benefit as much or more by obtaining another attorney’s
representation, the defendant does not necessarily err in offering the restriction. For instance, a
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defendant may offer the plaintiff’s attorney a restriction because the plaintiff’s attorney causes
the defendant’s own litigation costs to spiral upward, though the added expense does not affect
the plaintiff’s net benefit from litigation. Because some future plaintiffs will hire the plaintiff’s
attorney (being indifferent to the two attorneys or not realizing which was better), the defendant
may prefer to restrict the plaintiff’s attorney if the plaintiff’s attorney would cause the defendant
to spend more in its own litigation costs (higher C1D).
It is quite possible that the plaintiff’s attorney would cause the defendant to spend more on
litigation costs compared to other attorneys, and yet would not increase the plaintiff’s benefit.
Generally, each party will spend on litigation costs until one dollar spent increases the expected
value of litigation by one dollar.132 For example, the plaintiff will spend $1 more on attorney’s
fees to increase his probability of obtaining a $100,000 award from 50% to 50.0001 percent,
since without the increased expenditure, his expected value of litigation is $50,000 ($100,000
times 50%), but with the $1 expenditure, he increases his expected value of litigation by $10.
However, every expenditure decision of one party affects the expenditure decision of the
other.133 Litigation costs can thus spiral upward while having no real effect on the relative
expected value of litigation. For instance, if the plaintiff spent the additional $1 to increase his
chances of success, the defendant will similarly spend more to increase his chances of success.134
So, the plaintiff’s attorney spends $1 more to increase his chance of success from 50% to
50.0001%. The defendant responds, spending $1 to increase his chance of success from
49.9999% to 50%. The parties end up exactly where they began, but $2 poorer. Because of this
132 POSNER, supra note 101, at 620. 133 ID. 134 ID. This is because the probability of each party’s success at trial is a function of what each party spends on litigation (as well as other exogenous factors such as precedents and the evidence). ID. These increased expenditures may seem wasteful from a private standpoint, yet not necessarily from a social
40
inefficiency, many litigants agree not to incur a particular litigation expense, e.g., by stipulating
to a certain fact so as to obviate the need to establish it through testimony.135 But some attorneys
may not agree to curtail these litigation costs. For these attorneys, the defendant might wish to
offer a restrictive settlement agreement to avoid needlessly spiraling litigation costs.
That future plaintiffs are indifferent to obtaining the representation of the plaintiff’s attorney
does not necessarily mean that their likelihood of success, nor even their expected judgment at
trial, need be the same. The plaintiff’s attorney can even be more likely to secure the plaintiffs a
higher award, but the expected benefit from the plaintiff’s attorney may be offset by his higher
litigation costs. So, the plaintiff’s attorney could even be a more skilled attorney, yet the future
plaintiffs would still be indifferent to his, as opposed to another’s, representation.
III. PROFFERED JUSTIFICATIONS FOR RESTRICTIVE SETTLEMENT AGREEMENTS
Freely permitting restrictive settlement agreements would serve several noble ends, such
as promoting settlements, enabling zealous representation, and furthering the paramount policy
of freedom of contract. Before turning to these strong justifications, this Part addresses the
unsuccessful argument that restrictive settlement agreements protect the defendant from the
plaintiff’s attorney’s unauthorized use of private information.
A. Protecting Against Unauthorized Use of Private Information
One proffered justification for offering and accepting restrictive settlement agreements is
that they protect the defendant from the plaintiff’s attorney’s subsequent use of private
information learned during the suit.136 While the defendant can condition the settlement terms
standpoint, since the increased expenditures tends to give the tribunal more information, hopefully increasing the probability of a correct decision. ID. at 620-21. 135 ID. at 620. 136 N.Y. Comm. on Prof’l Ethics, Op 730 (1989). (“Although the proponent of such a restriction might argue that it is needed to prevent the lawyer’s improper use or disclosure of information learned in the course of representation that the lawyer may have a duty to keep confidential, such a restriction is far
41
on the attorney’s promise to not disclose the information, it is argued that only a restrictive
settlement agreement can fully stop the attorney from using the information in subsequent
litigation.
However, the law already safeguards the defendant’s information worthy of protection; a
restrictive settlement agreement is an inferior and unnecessary alternative. To explain why, this
Article first compares the different types of secrecy provisions, and then explains when
protective orders barring the use of confidential information would lead a court to prohibit
plaintiff’s counsel from representing future claimants against the defendant. This Article then
argues why a defendant would prefer obtaining court-imposed restrictions through the protective
order rather than a restrictive settlement agreement.
1. Types of Secrecy Agreements
While the wisdom of liberally permitting secrecy agreements has received a substantial
amount of both criticism and support, it is generally agreed that secrecy agreements can have a
proper, even necessary, role in today’s liberal discovery regime.137 The purpose of this section is
not to weigh these arguments, but to discuss the different types of secrecy agreements: protective
orders, sealing court settlements, and secret settlements. Each type varies in its formation, scope,
and effect.
broader than necessary to serve this purpose and may not be justified on this ground.”); Painter, supra note 109, at 715. 137 Discovery is not limited by the rules of admissibility at trial. FED. R. CIV. P. 26(b)(1). The only limitation on the scope of discovery is that the matter sought must be relevant, ID., must not be privileged, ID., and must not be an attorney’s work product. Hickman v. Taylor, 329 U.S. 495 (1947). The extremely broad scope of discovery is a mixed blessing. While the generous discovery rules make trials “less a game of blind man’s bluff and more a fair contest with the basic issues and facts disclosed to the fullest practicable extent,” U.S. v. Procter & Gamble Co., 356 U.S. 677, 683 (1958), parties have misused and overused the discovery rules. Protective orders and other secrecy agreements seek to prevent some of these abuses by protecting the parties from the disclosure or use of some types of information.
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The first type of secrecy agreement is the protective order, a court order that prohibits the
dissemination of discovery materials that have yet to be filed with the court.138 When protective
orders are contested, Federal Rule of Civil Procedure 26(c)139 requires the party requesting the
protection, the defendant in our discussion,140 to make a factually particularized showing of good
cause for the issuance of a protective order.141 The defendant must show that the information
implicates privacy, property, or other rights (such as, but not limited to,142 a “trade secret or other
confidential research, development, or commercial information”)143 worthy of protection,144 and
that disclosure would create a “clearly defined and serious injury.”145 If the defendant succeeds
in establishing good cause, the burden shifts to the plaintiff to show that the information is
138 While discovery must usually be filed with the court within a reasonable time after service, “the court may on motion of a party or on its own initiative order that depositions upon oral examination and interrogatories, requests for documents, requests for admission, and answers and responses thereto not be filed unless on order of the court or for use in the proceeding.” FED. R. CIV. P. 5(d); see also FED. R. CIV. P. 1980 Amendments to Rule 5(d) advisory committee’s notes. 139 In relevant part, the rule states:
Upon motion by a party or by the person from whom discovery is sought, accompanied by a certification that the movant has in good faith conferred or attempted to confer with other affected parties in an effort to resolve the dispute without court action, and for good cause shown, the court . . . may make any order which justice requires to protect a party or person from annoyance, embarrassment, oppression, or undue burden or expense . . .
FED. R. CIV. P. 26(c). 140 Protective orders may be requested by either the plaintiff or the defendant, just as restrictive settlement agreements may restrict either the plaintiff’s attorney or the defendant’s attorney. For the sake of simplicity and consistency, I will assume that the defendant seeks the protective order. 141 FED. R. CIV. P. 26(c); Laurie Kratky Dore, Secrecy by Consent: The Use and Limits of Confidentiality in the Pursuit of Settlement, 74 NOTRE DAME L. REV. 283, 330 (1999); accord Arthur R. Miller, Confidentiality, Protective Orders, and Public Access to the Courts, 105 HARV. L. REV. 427, 433 (1991) (citing cases). 142 Phillips ex rel. Estates of Byrd v. Gen. Motors Corp., 307 F.3d 1206, 1211 (9th Cir. 2002) (holding that district courts’ broad latitude to grant protective orders is not limited to trade secrets or other confidential research). 143 FED. R. CIV. P. 26(c)(7). 144 Many states disallow protective orders that would conceal public hazards. See, e.g., LA. CODE CIV. PROC. art. 1426(C) (1995); VA. CODE ANN. § 8.01-420.01 A. (1991). 145 See, e.g., Pansy v. Borough of Stroudsburg, 23 F.3d 772, 786-77 (3d Cir. 1994); Zenith Radio Corp. v. Matsushita Elec. Indus. Co., 529 F.Supp. 866, 889 (D.C. Pa. 1981).
43
relevant and necessary to the action.146 If the plaintiff succeeds, the court must then compare the
burden on the defendant if protection is not granted with the burden on the plaintiff if the
protection is granted.147
In comparison, stipulated protective orders (protective orders that both parties agree to) often
protect discovery materials wholesale, instead of document-by-document, in an effort to expedite
discovery.148 Many stipulated protective orders are issued without determining whether there is
a genuine need for confidentiality.149 Stipulated protective orders suspend the need to
demonstrate good cause; once the confidential status of the documents is challenged, the
protected party must demonstrate that the information is worthy of protection.150 Lately, some
courts have become increasingly suspicious of stipulated protective orders and will require the
party protected to demonstrate the need for confidentiality at the outset.151
Another type of secrecy agreement concerns sealing court records.152 These agreements
typically occur when confidential discovery finds its way into the public record, often by being
146 Dore, supra note 141, at 331; Miller, supra note 141, at 433 n.16 (citing cases). A court may also determine “that the disclosure or discovery not be had.” FED. R. CIV. P. 26(c). 147 Dore, supra note 141, at 331. 148 Id. at 329. MANUAL FOR COMPLEX LITIGATION (THIRD) § 21.432 (1995). 149 Jack H. Friedenthal, Secrecy in Civil Litigation: Discovery and Party Agreements, 9 J.L. & POL’Y 67, 81 (2000); Dore, supra note 141, at 332, 333; MANUAL FOR COMPLEX LITIGATION (THIRD) § 21.432 (1995); Weinstein, supra note 72, at 512-13. 150 Dore, supra note 141, at 333; MANUAL FOR COMPLEX LITIGATION (THIRD) § 21.432 (1995). 151 Dore, supra note 141, at 343-44. Interestingly, the “good cause” standard of Federal Rule of Civil Procedure 26(c) does not reach stipulated protective orders. The rule is limited to contested protective orders, since it only applies if the movant has attempted but failed to reach agreement without court action. See Friedenthal, supra note 149, at 77-78 (noting this and other limitations of Rule 26(c)). However, courts nonetheless invoke the good cause requirement of Rule 26(c) when examining stipulated protective orders. See, e.g., Jepson, Inc. v. Makita Elec. Works, Ltd., 30 F.3d 854, 858-59 (7th Cir. 1994) (reversing because the record revealed “no indication that the Magistrate Judge made an independent determination that ‘good cause’ existed before issuing the [protective order]”). See also Dore, supra note 141, at 339-44 (arguing that courts should use the same “good cause” standard in stipulated protective orders as they do in contested protective orders). 152 See Dore, supra note 141, at 374-78 (discussing the difficult question of what constitutes a “judicial record”).
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attached to a motion.153 Courts frequently employ a strong presumption that such motions and
their attachments are to remain open and publicly accessible.154 Some states have adopted this
presumption by statute.155
The last type of secrecy agreement is the very common156 secret settlement, a private contract
between the litigants that includes secrecy provisions that are as varied as the litigants’
imaginations. For instance, the secret settlement may merely reiterate the secrecy obligations of
prior protective orders, or the settlement may bind the litigants not to reveal the existence or the
amount of the settlement, or the settlement may bind the litigants not to disclose the factual
information underlying the suit.157 Several state statutes create a presumption that secret
settlements that conceal public hazards or are similarly injurious to the public are contrary to
public policy.158 Aside from these statutes (and the ethics rules), litigants usually have a free
hand in crafting secret settlements159 and generally need not obtain court approval.160
However, secret settlements are more limited than protective orders and sealing orders.
Secret settlements are contracts, binding only the contractual parties from voluntarily revealing
153 Id. at 373. 154 Id. at n.356. 155 MICH. ADMIN. CODE R. 8.105(D) (1999); TEX. CIV. PROC. R. 76a; WASH. REV. CODE § 4.24.601 (1994). Washington’s statute is not limited to sealing of court records, but could also conceivably be extended to protective orders and other secrecy agreements. Id. 156 See David Luban, Settlements and the Erosion of the Public Realm, 83 GEO. L. J. 2619, 2656 (1995) (“Some settlements will break down if secrecy is unavailable . . .”); Weinstein, supra note 72, at 510-11 (“Secrecy often has been, in fact, the price of settlement.”); Miller, supra note 141, at 429 (confidentiality is “not only acceptable, but essential” to settlement). But see Barry C. Schneider, Sealing of Records and Other Secrecy Problems, C949 ALI-ABA 95, 111 (Aug. 1994) (predicting that eliminating secret settlements will not affect settlement frequency or amount); Laleh Ispahani, Note, The Soul of Discretion: The Use and Abuse of Confidential Settlements, 7 GEO. J. LEGAL ETHICS 111, 119 (1992) (contending that settlements will occur even absent confidentiality because they benefit all parties). 157 See Dore, supra note 141, at n.398-400 (citing various examples of secret settlement provisions). 158 ARK. CODE ANN. § 16-55-122 (1995); FLA. STAT. §§ 69.081(4), (8)(a) (1996); LA. CODE CIV. PROC. art. 1426(D) (1995); WASH. REV. CODE § 4.24.611 (1996). 159 Dore, supra note 141, at 387. 160 Some settlements must be approved by a court. For example, a court must approve settlements of class actions. FED. R. CIV. P. 23(e).
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the information. Such settlements do not bind third parties, create evidentiary privileges, nor
justify withholding information contrary to a freedom of information request or court order
compelling disclosure.161 Because of these limitations, many litigants often choose to obtain
court-approval of the secret settlement.162
The ethics rules do not prohibit the restrictions imposed by court-approved protective
orders.163 As to other secrecy provisions, the ABA and other ethics committees state that a
lawyer may enter a settlement agreement that prohibits the lawyer from disclosing its client’s
secrets.164 Unless approved by a court order, ethics committees prohibit secrecy provisions that
restrict the attorney’s disclosure of non-secrets or his subsequent use of information.165
2. Protective Orders Barring Subsequent Use
When granting a protective order, numerous courts will not only bar the subsequent
disclosure of the protected information, but also its subsequent use by opposing counsel,166
161 Dore, supra note 141, at 387-88. 162 Id. at 389, 390–401 (arguing how a court should exercise its discretion in approving confidentiality provisions in settlement agreements); Phillips, 307 F.3d at 1212 (“If the district court decision was based on a failure to recognize that lower courts have the authority to grant protective orders for confidential settlement agreements, it was erroneous”). Additionally, litigants may elect to seek a judicial sanction of their secrecy agreement in the dismissal order if they foresee complications in contractual enforcement of their agreement or for a myriad of other reasons. Dore, supra note 141, at 389. 163 ABA Formal Op. 00-417, n. 4 (2000). 164 ABA Formal Op. 00-417 (2000). N.M. Advisory Opinions Comm., Adv. Op. 1985-5 (1985). Clients’ secrets are protected by MODEL RULES OF PROF’L CONDUCT R. 1.6, 1.9(c). 165 See supra notes 51-55 and accompanying text. 166 In re Waitz, 567 S.E.2d 87 (Ga. Ct. App. 2002) (affirming civil and criminal contempt for attorney’s violation of a protective order after plaintiff’s attorney used the protected information in a subsequent suit against the defendant where the attorney was the named plaintiff); Blumenthal v. Kimber Mfg., Inc., 795 A.2d 1288 (Conn. Super. Ct. 2002) (issuing protective order prohibiting the disclosure or use of a document inadvertently sent to opposing counsel); Bonin v. World Umpires Ass’n, 204 F.R.D. 67 (E.D. Pa. 2001) (issuing a protective order barring attorney’s subsequent use, as well as disclosure, of the defendant union’s confidential financial documents, reasoning that without such a protective order, the attorney’s subsequent clients would gain an unfair bargaining advantage); Johnson v. Eugene Emergency Physicians, P.C., 974 P.2d 803 (Or. Ct. App. 1999) (holding that physician violated protective order by using protected documents to file a complaint against another physician); Plant Genetic Sys. v. DeKalb Genetics Corp., 183 F.R.D. 360 (D. Conn. 1998) (issuing protective order that bars both the disclosure and use of discovery materials in patent infringement action, but allowing the use of the materials in a pending action); Gohler v. Wood, 162 F.R.D. 691 (D. Utah 1995) (compelling production of defendant’s
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preventing the attorneys and their subsequent clients from gaining inside information and a
resulting unfair bargaining advantage.167 If the court grants a protective order that bars both the
disclosure and use of the protected information, and if the attorney subsequently represents a
client against the defendant, courts will disqualify the attorney upon proof of a reasonable
possibility that the attorney has or will violate the protective order by disclosing or using the
information in the suit.168 The required proof is intimidating,169 but not insurmountable.170
trade secrets because, among other things, “these parties may use this information only for purposes of litigating this case”); Poliquin v. Garden Way, Inc., 154 F.R.D. 29 (D. Me. 1994) (sanctioning attorney for violating protective order by assisting co-counsel in obtaining protected material for use in another case against the defendant); Sasu v. Yoshimura, 147 F.R.D. 173 (N.D. Ill. 1993) (prohibiting plaintiffs and their attorneys from using discovery materials in police misconduct action in other similar cases); In re Shell Oil Refinery, 143 F.R.D. 105 (E.D. La. 1992) (prohibiting plaintiffs from “making any use” of documents improperly obtained from defendant’s employee through ex parte contact); Harris v. Amoco Prod. Co., 768 F.2d 669 (5th Cir. 1985) (upholding protective order which limited the Equal Employment Opportunity Commission’s use of discovery material to the present litigation). Nevertheless, courts will not necessarily prohibit the use of information whenever they prohibit its disclosure. See, e.g., WLIG-TV, Inc. v. Cablevision Sys. Corp., 879 F.Supp. 229 (E.D.N.Y. 1994). 167 Bonin, 204 F.R.D. at 69. 168 While the ethics rules prohibit an attorney from representing a client whose interests conflict with the lawyer’s other responsibilities, courts will not disqualify an attorney upon the mere showing of a conflict of interest. Research Corp. Techs., Inc. v. Hewlett-Packard Co, 936 F.Supp. 697, 702 (D. Ariz. 1996); SWS Fin. Fund A v. Saloman Bros. Inc., 790 F.Supp. 1392, 1400 (N.D. Ill. 1992); see also Kitchen v. Aristech Chem., 769 F.Supp. 254, 257 (S.D. Ohio 1991) (holding that disqualification is appropriate “only when there is a ‘reasonable possibility that some specifically identifiable impropriety actually occurred and, in light of the interests underlying the standards of ethics, the social need for ethical practice outweighs the party’s right to counsel of his choice”); In re Infotechnology, 582 A.2d 215, 216 (Del. 1990) (holding that disqualification is warranted only if the lawyer’s conduct “adversely affected the fair and efficient administration of justice”); Internat’l Elecs. Corp. v. Flanzer, 527 F.2d 1288 (2d Cir. 1975) (holding that a court must “examine afresh the problems sought to be met by that Code, to weigh for itself what those problems are, how real in the practical world they are in fact, and whether a mechanical and didactic application of the Code to all situations automatically might not be productive . . .”). 169 First Impressions Design & Mgmt., Inc. v. All That Style Interiors, Inc., 122 F.Supp.2d 1352 (S.D. Fla. 2000) (recommending the denial of plaintiff’s motion to disqualify defense counsel who had obtained confidential and trade secret information subject to a prior protective order, holding that the plaintiff failed to show that there was a “reasonable probability that some specifically identifiable impropriety occurred,” which the plaintiff admitted was impossible to verify); Nordictrack, Inc. v. Consumer Direct, Inc., 158 F.R.D. 415, 421 n.11 (D. Minn. 1994) (refusing to disqualify defense counsel, despite the risk that defense counsel’s representations would violate a former protective order that prohibited the defense counsel from using information “for any purpose other than in the current litigation”); Morgan v. N. Coast Cable Co., 586 N.E.2d 88, 91 (Ohio 1992) (refusing to disqualify attorney due to his access to and potential misuse of information obtained in a prior case protected by a stipulated confidentiality order,
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By stringently requiring proof of a realistic possibility that the attorney will use the protected
information, courts may underestimate the difficulty of not using protected materials in a
subsequent case. There are countless ways in which an attorney might use protected
information. Some uses are deliberate, such as an attorney using a certain piece of information
as evidence to buttress a later claim.171 Yet there are also inadvertent and non-evidentiary uses of
information, imperceptible to outsiders without extrasensory perception.172 Protected materials
may infiltrate the attorney’s thought processes or litigation strategies. Protected materials may
assist the attorney in focusing on a particular claim, or on particular potential clients for
solicitation. Protected materials may provide insight in interpreting evidence in a subsequent
case and may aid in segregating helpful from unhelpful evidence or planning cross-examinations.
Protected materials may drive the discovery of later actions.173 Protected materials may also
motivate the attorney to hold out for a higher settlement. When plaintiff’s counsel are privy to
confidential settlement agreements, for instance, “they can say ‘I got a lot of money in the first
case; now I want a lot of money in the second case.’ It does make for some unfair advantage for
the plaintiff.”174 Courts that demand the movant to show that the attorney has or will violate the
protective order should be cautious and appreciate the difficulty in verifying that the attorney has
because, inter alia, there was no evidence to suggest that the attorney “has breached or will breach the confidentiality orders”). 170 See infra notes 177-185 and accompanying text. 171 See, e.g., Waitz, 567 S.E.2d at 89. 172 Such “non-evidentiary uses” of information also present a problem in using immunized testimony in criminal investigations. See United States v. Serrano, 870 F.2d 1, 16 (1st Cir. 1989); United States v. McDaniel, 482 F.2d 305, 311 (8th Cir. 1973). 173 Such was the concern of the plaintiffs in First Impressions Design, 122 F.Supp.2d 1352. 174 Stephanie Francis Cahill, New Plaintiff, Same Defendant: Courts Split on Whether a Lawyer Who Negotiates a Confidential Settlement May Handle Serial Suits, 1 No. 25 ABA J. E-REPORT 7 (June 28, 2002).
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used the information in his thought processes, something the attorney himself may not even
realize.175
Yet if the defendant does have a truly legitimate interest in protecting against the use of
its information, and if restricting opposing counsel from representing future claimants against the
defendant is not too drastic a means to achieve this end, courts will include in the protective
order a provision that restricts the attorney from subsequently representing similarly situated
claimants against the defendant.176 This court-ordered restriction is just as valuable to the
defendant as a restrictive settlement, if not more so.
Court-ordered restrictions have been imposed when the need was sufficient. For
instance, in patent or trade secret disputes, parties may fear that opposing counsel will misuse
175 In the field of criminal procedure, the Fifth Amendment privilege against compelled self-incrimination requires courts to take very seriously their obligation to ensure that prosecutors do not inadvertently use the compelled testimony of an immunized witness in his later prosecution. The compelled testimony may not be directly used against the witness in a future prosecution, nor may the testimony be used to uncover other evidence against the witness. Counselman v. Hitchcock, 142 U.S. 547 (1892) (holding unconstitutional an immunity statute that permitted the use of compelled testimony to search out other evidence to be used in a later prosecution of the immunized witness); cf. Kastigar v. United States, 406 U.S. 441 (1972) (upholding an immunity statute which granted immunity from use and “derivative use” of compelled testimony). If the government seeks to prosecute a previously immunized witness, it bears the “heavy burden of proving that all of the evidence it proposes to use was derived from legitimate independent sources.” Kastigar, 406 U.S. at 461-62. Mere representations that a prosecutor or agent did not use the immunized testimony is insufficient to meet the government’s burden. United States v. Schmidgall, 25 F.3d 1523, 1528 (11th Cir. 1994); United States v. Harris, 973 F.2d 333, 337 (4th Cir. 1992). Some cases go even further, holding that once a prosecuting attorney is exposed to the immunized testimony, he is barred from thereafter participating in the witness’s trial – even if it is shown that all the evidence is derived from legitimate independent sources. See, e.g., United States v. Semkiw, 712 F.2d 891 (3d Cir. 1983); United States v. McDaniel, 482 F.2d 305 (8th Cir. 1973). Other courts disagree and allow a prosecutor to participate in the subsequent prosecution upon a showing of a legitimate independent source. Harris, 973 F.2d at 337; Serrano, 870 F.2d at 16 (dicta); United States v. Mariani, 851 F.2d 595, 600-01 (2d Cir. 1988); United States v. Crowson, 828 F.2d 1427, 1429 (9th Cir. 1987); United States v. Byrd, 765 F.2d 1524, 1530 (11th Cir. 1985); United States v. Pantone, 634 F.2d 716, 720 (3d Cir. 1980). An interesting question is whether courts should expand these Fifth Amendment rules to disqualify attorneys who have learned information subject to a protective order. However, this question is beyond the scope of this Article. 176 If appropriate under Rule 26(c), the court may “make any order which justice requires to protect a party or person from annoyance, embarrassment, oppression, or undue burden or expense.” FED. R. CIV. P. 26(c).
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confidential technical information obtained through discovery.177 Patent attorneys who learn
confidential information about a competitor’s new products or research during litigation might
use the information, however unconsciously, to draft or prosecute patent applications for their
clients.178 In re Papst Licensing thus restricted Papst’s counsel, who had access to the
competitor’s confidential materials, from representing Papst in future similar suits for one
year,179 reasoning that Papst counsel’s “ability to file new claims in existing and pending patents
based on the confidential information discovered during the course of this litigation poses an
unacceptable opportunity for inadvertent disclosure and misuse. . . . [T]he difficulty of
distinguishing the source of the Papst parties’ basis for filing new claims are great.”180
Similarly, in Interactive Coupon Marketing Group v. H.O.T.! Coupons, the court
prohibited the attorneys who had access to the adversary’s confidential information from
subsequently prosecuting patent applications for their client for one year.181 Though
disqualification is not always appropriate, it was necessary here because the law firm’s
“prosecution activities are likely to be shaped by confidential information about competitors’
technology obtained through the discovery process.”182 The primary inquiry is whether the law
firm’s strategy will be “informed by such information to the competitors’ detriment.”183
177 Julia S. Ferguson, Charles F. Haisch, & Alan H. MacPherson, Conflicts in Intellectual Property Law: A Brief Survey, 616 PLI/Pat 539, 580 (Sept. 2000). 178 Id. 179 2000 WL 554219, at *5 (E.D. La. May 4, 2000). 180 Id. at *4. See also Mikohn Gaming Corp. v. Acres Gaming, Inc., 50 U.S.P.Q.2d 1783, 1786 (D. Nev. 1998) (stating similar concerns). 181 1999 WL 409990, at *4 (N.D. Ill., June 7, 1999), clarified by 1999 WL 618969 (N.D. Ill., Aug. 9, 1999). Some attorneys did not have access to the confidential information, but these attorneys were also barred access to quell the fears of improper subsequent use. Id. at *5. 182 1999 WL 618969, at *3. 183 Id.
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Court-ordered restrictions are imposed in non-patent actions, as well. For example, in
Gilbert v. National Corp. for Housing Partnerships,184 an attorney represented Franklin in her
discrimination suit against her employer. The suit was settled, and a protective order barred the
attorney’s subsequent use of information relating to Franklin’s settlement. The attorney then
sought to represent Gilbert, another employee, against the same employer. The trial court
disqualified him, and the appellate court affirmed, stating that even if the attorney could prevent
Franklin from testifying about the confidential matters in Gilbert’s suit, a conflict of interest
would nevertheless exist. As Gilbert’s attorney, his duty was to call available witnesses to
support her claim. But as Franklin’s attorney, his duty was to avoid breaching the protective
order. “Under the circumstances presented, this conflict of interest was irreconcilable.”185
3. Defendants’ Preference for Court-Imposed Protective Orders
The availability of protective orders and confidentiality agreements demonstrates that,
insofar as defendants are legitimately concerned with protecting against the subsequent use of
their private information, restrictive settlement agreements are unnecessary. Anytime a
restrictive settlement agreement would be justified, the defendant may obtain a protective order
barring the subsequent use of information. When appropriate, the court can even restrict the
plaintiff’s attorney from representing future clients pressing similar claims against the defendant.
Moreover, a defendant would prefer to obtain a use-protective order instead of a
restrictive settlement agreement. The defendant need not pay the plaintiff’s attorney a handsome
premium when obtaining a use-protective order. Instead, the defendant need only obtain court-
approval, which would be granted when appropriate. If a protective order is unavailable for
procedural reasons, the defendant can negotiate confidentiality provisions in the settlement
184 84 Cal.Rptr.2d 204 (Ct. App. 1999).
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agreement. The defendant can even prohibit the attorney from subsequently using the private
information so long as the defendant obtains court approval of the agreement.186
It may be argued that the defendant would prefer obtaining a restrictive settlement
agreement so that it may bypass the high transaction costs of obtaining court approval of the
protective order or secret settlement. However, the costs of court approval is almost certain to be
substantially less than the costs of the restrictive settlement agreement. First, the defendant must
pay the plaintiff’s attorney a premium to accept the restriction; not so with the protective order.
Second, not all restrictive settlement agreements are necessary to safeguard information worthy
of protection, and so some tribunal must separate the wheat from the chaff. To justify permitting
restrictive settlement agreements to protect information, a court or tribunal must determine
whether the information is worthy of protection and whether barring its use would effectively bar
subsequent representations against the defendant. In short, to permit the restrictive settlement
agreement, the defendant must prove the same things it must prove to obtain a use-protective
order, and thus the transaction costs should be the same. Adding the necessary premium to the
costs of the restrictive settlement, we may safely assume that obtaining a use-protective order
will invariably be cheaper than obtaining a justifiable restrictive settlement agreement.
Additionally, a court (or other tribunal) is just as likely to permit a protective order as it is
to permit a restrictive settlement agreement. For the protective order to be issued, the
information must be worthy of protection,187 and for the court to bar the plaintiff’s attorney from
future representations against the defendant, there must be a reasonable possibility that the
185 Id. at 213. Compare McPhearson v. Michaels Co. 117 Cal.Rptr.2d 489 (Cal. Ct. App. 2002) (stating that “Gilbert exaggerated the conflict of interest posed by such a confidentiality provision”) 186 ABA Formal Ethics Op. 00-417 n.4 (2000) (prohibiting agreements that restrict an attorney’s ability to use information in subsequent cases if the use does not disadvantage the attorney’s former client, but stating that the ethical prohibitions do not apply to court-approved protective orders). 187 See supra notes 141-147 and accompanying text.
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attorney would use the information in a subsequent suit.188 The exact same questions inform a
court or tribunal in determining whether a restrictive settlement agreement would be justified; a
restrictive settlement would not be justified if the information is not worthy of protection or if the
restriction would be unnecessary to protect the defendant from the unauthorized use of its
information.
Thus, even if a restrictive settlement agreement would prevent the improper use of
confidential information, this salutary end is better and more efficiently furthered by a restrictive
protective order. Allowing restrictive settlement agreements could do no more.
B. Consulting Agreements
One serious failing of Rule 5.6(b) is that its prohibition can be easily avoided.189 Recall that
a defendant can evade Rule 5.6(b) by hiring the plaintiff’s attorney, thus creating a conflict of
interest so that the attorney may not represent future plaintiffs against the defendant. A
sophisticated defendant can obtain the same benefits of a restrictive settlement agreement
through a consulting agreement that flies below a court’s radar. As discussed in Part I.B.1, some
states will permit consulting agreements without inquiring to the defendant’s motivations.190
Other states will permit consulting agreements so long as they are not made as a condition to or
in connection with the settlement.191 The defendant could offer the restricting consulting
agreement before a suit is even filed. The defendant could wait a week after the settlement
188 See supra notes 168-169, 176-185, and accompanying text. 189 Gillers, supra note 44, at 118. 190 CAL. PRAC. GUIDE PROF. RESP. § 1:338.1 (permitting consulting agreements that evade Rule 5.6(b); Va. Legal Ethics & Unauthorized Practice Op. 1715 (1998) (refusing to speculate or analyze the motive or subjective intent of parties entering into a questionable consulting agreement). 191 In re Conduct of Brandt, 10 P.3d 906, 918 (Or. 2000); Adams v. Bellsouth Telecomms., Inc., No. 96-2473-CIV (S.D. Fla. Jan. 29, 2001); Marcy G. Glenn, Settlement Ethics, 30 COLO. LAW. 53, 54 (2001).
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before offering the consulting agreement.192 Yet the future plaintiffs would be injured just as
much when the attorney accepts the restrictive consulting agreement as they would be in
restrictive settlement agreements.
The law is ill-equipped to prevent all restrictive settlement agreements disguised as
consulting agreements. Courts, disciplinary committees, and ethics boards cannot inquire into
the potential client’s motives each time an attorney-client relationship is formed. Does this mean
that prohibiting restrictive settlement agreements is useless? No, but the Rule is not as useful as
the ethics committees would hope. Though Rule 5.6(b) cannot catch all consulting agreements, it
can catch those restrictive settlement agreements where a consulting agreement would be an
inadequate substitute.
Sometimes, a defendant would not offer a restrictive consulting agreement, but would want
to offer a restrictive settlement agreement. (Without the benefit of empirical data, however, the
frequency with which this would occur remains a mystery.) For a consulting agreement to create
the desired conflict of interest, there must be a genuine attorney-client relationship between the
attorney and the defendant. Because the attorney must give the defendant legal services, the
defendant must offer the attorney more money to secure his agreement. The attorney has to do
more than merely refrain from suing the defendant; the attorney also has to render legal aid. Yet
these legal services may be useless to the defendant, or may not be worth the attorney’s price.
Thus, because of the higher cost to the defendant of restrictive consulting agreements than
restrictive settlement agreements, some defendants will not offer a restrictive consulting
agreement, though they would offer a restrictive settlement agreement.
192 GEOFFREY C. HAZARD, JR. & W. WILLIAM HODES, 2 THE LAW OF LAWYERING § 5.6:301 (Supp. 1997) (opining that a consulting agreement would be permitted if entered after the settlement).
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It is also conceivable that some restrictive consulting agreements will run afoul of Model
Rule 1.5, prohibiting attorneys from collecting unreasonable fees or expenses.193 Because the
“fees” the attorney receives in the restrictive consulting agreement represents legal fees plus a
premium sufficient to compensate the attorney for restriction, these total fees may prove to be
excessive.
C. Promoting Settlements
Wisely or not, our legal culture, rules, and values place great emphasis on encouraging
settlement.194 Judges are encouraged to convince parties to settle,195 enabling adversaries to
reach mutual satisfaction and facilitating “efficient institutional management: clearing dockets,
reducing delay, eliminating expense, unburdening the courts.”196 While restrictive settlement
agreements might harm future plaintiffs, prohibiting restrictive settlements impedes settlement
efforts, in turn burdening the courts, the litigants, and taxpayers.
D. Zealous Representation
Lawyers have a fundamental duty to zealously represent their clients.197 Though zealous
representation must sometimes give way to competing considerations, does Rule 5.6(b) impose
limits without reason? As one commentator asked:
193 MODEL RULES OF PROF’L CONDUCT R. 1.5. 194 See Samuel R. Gross & Kent D. Syverud, Don’t Try: Civil Jury Verdicts in a System Geared to Settlement, 44 UCLA L. REV. 1, 2-3 (1996) (citing “the rules of procedure and evidence, to appellate opinions, to legal scholarship, to the daily work of trial judges.”). 195 FED. R. CIV. P. 16(c)(7) advisory committee’s note. 196 Marc Galanter, The Emergence of the Judge as a Mediator in Civil Cases, 69 JUDICATURE 257, 257 (1986). But compare, Owen M. Fiss, Against Settlement, 93 YALE L.J. 1073, 1075 (1984) (arguing that settlement muzzles justice and “should be neither encouraged nor praised”). 197 MODEL RULES OF PROF’L CONDUCT R. 1.3 cmt. 1 (2002) (“A lawyer must also act with commitment and dedication to the interests of the client and with zeal in advocacy upon the client’s behalf.”); MODEL CODE OF PROF’L RESPONSIBILITY Canon 7 (1980) (requiring a lawyer to act zealously for her client, including advocating settlement terms which protect the client from future suits and damage to his reputation); but see ABA Formal Op. 00-417 (2000) (noting that despite Model Rule 1.3, the lawyer is also has a “special responsibility for the quality of justice”).
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If one can get considerably more money for one’s current clients by entering into an agreement, solicitude for clients who may come your way seems hypertechnical. What if the attorney were to give his clients the following informed consent: “You are getting less money than the defendant would otherwise offer since I am ethically obligated to hold myself open for cases which may never come and which I don’t want?”198
E. Freedom of Contract
Each attorney has an almost unfettered right to refuse to represent potential clients.199 Each
attorney has the right to sell his experience. He can gamble by waiting for future clients to come
his way, or he can “cash out” through the defendant’s restrictive settlement agreement. It is his
right to contract.200 Freedom of contract reflects the proud spirit of individualism,201 and it is a
necessary condition to the very purpose of ethics codes: to ensure that a lawyer is an upright
servant worthy of trust and respect.202
198 MASS TORT LITIG. § 21:17 (2002) (but not explicitly agreeing or disagreeing with Rule 5.6(b)’s prohibitions); but see ID. at § 21:15 (concluding that “someone should look out for the rights of the futures”). 199 Robert M. Wilcox, Enforcing Lawyer Non-Competition Agreements While Maintaining the Profession: The Role of Conflict of Interest Principles, 84 MINN. L. REV. 915, 936 (2000) (“The lawyer may decline to represent a client for any number of reasons within the lawyer’s discretion, ranging from economic considerations to a desire to limit the areas in which the lawyer practices. . . .”); Gillers, supra note 44, at 118 (“Surely, it cannot be true that the profession’s duty to help make counsel available requires individual lawyers to keep themselves free to serve clients. Absent court order, lawyers may reject clients outright and without a reason. Less directly, every time lawyers accept a case they reduce their availability, if only by virtue of the conflict rules.”); HENRY S. DRINKER, LEGAL ETHICS 139 (1953) (“Canon 31 provides: ‘No lawyer is obligated to act either as adviser or advocate for every person who may wish to become his client. He has the right to decline employment.’ Except where assigned by the court to defend those who cannot afford to pay counsel, the lawyer may choose his own cases and for any reason or without a reason may decline any employment which he does not fancy.”). 200 Contracts are nothing but the mutual transferring of rights. THOMAS HOBBES, LEVIATHAN, 94 (Cambridge University Press, 1991). 201 Friedrich Kessler, Contracts of Adhesion – Some Thoughts About Freedom of Contract, 43 COLUM. L. REV. 629, 629-31 (1943). 202 Citizens “should not be slaves of the state, nor slaves of other citizens, for this degrades individuality and destroys human dignity.” ROBERT S. SUMMERS, ESSAYS IN LEGAL THEORY 331 (2000). See also Wilcox, supra note 199, at 937 (“The lawyer’s liberty – moral liberty – to take up what kind of practice he chooses and to take up or decline what clients he will is an aspect of the moral liberty of self to enter into personal relations freely”).
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Of course, freedom of contract is not an absolute right. It is limited – and even eliminated –
if the contract is contrary to public policy. However, this unruly203 public policy doctrine must
be invoked carefully:
you are not to extend arbitrarily those rules which say that a given contract is void as being against public policy, because if there is one thing which more than another public policy requires it is that men of full age and competent understanding shall have the utmost liberty of contracting, and that their contracts when entered into freely and voluntarily shall be held sacred and shall be enforced by Courts of justice. Therefore, you have this paramount public policy to consider – that you are not lightly to interfere with this freedom of contract.204
With respect to contracts in restraint of trade, courts adopt a fact-intensive reasonableness
balance and consider the circumstances of the transaction, the promisee’s legitimate interests, the
hardship the contract imposes on the promisor, and the likely public injury.205 There is no reason
to adopt a different balance for lawyers: the law enforces reasonable restrictive covenants by
accountants, physicians, and dentists, even though the duties these professionals owe to their
clients are similar to the duties owed by lawyers.206 Rule 5.6(b) should not be allowed to cast
aside freedom of contract without a sufficiently grave public injury.
IV. PROPOSAL
Once we set aside the rhetoric of conflicts of interest and exaggerated dangers of buy outs,
the question Rule 5.6(b) answers is whether casting aside freedom of contract and zealous
203 Richardson v. Mellish, 130 Eng. Rep. 294, 303 (1824) (J. Burrough) (public policy doctrine is “a very unruly horse, and when once you get astride it you never know where it will carry you. It may lead you from the sound law. It is never argued at all but when other points fail.”). 204 Printing and Numerical Registering Co. v. Sampson, 19 L.R.Eq. 462, 465 (1875). 205 See RESTATEMENT (SECOND) OF CONTRACTS § 178; ID. 186 cmt. a; ID. § 188 (“[a] promise to refrain from competition . . . is unreasonably in restraint of trade if (a) the restraint is greater than is needed to protect the promisee’s legitimate interest, or (b) the promisee’s need is outweighed by the hardship to the promisor and the likely injury to the public.”). 206 See generally, Serena L. Kafker, Golden Handcuffs: Enforceabilty of Noncompetition Clauses in Professional Partnership Agreements of Accountants, Physicians, and Attorneys, 31 AM. BUS. L. J. 31 (1993) (arguing that the law should not absolutely prohibit restrictive covenants by attorneys, though these contracts violate Model Rule 5.6(a)).
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representation is worth the possibility of injuring future clients. By answering “yes,” Rule 5.6(b)
overestimates the importance of future plaintiffs and their possible injury.
In comparison to the paramount policy of freedom of contract, future plaintiffs have no
right to the attorney of their choice. Attorneys may freely refuse proffered employment.
Attorneys have the power to charge rates that are not affordable by most members of society, so
long as the rates are reasonable.207 Attorneys can retire from their law practice, indefinitely
refusing to represent future clients.208 State rules further limit clients’ access to attorneys by
requiring attorneys to be licensed in the state in which they practice.209
The attorney’s skill and experience are his alone, not the property of hypothetical future
claimants. Future plaintiffs have no right to the higher judgment they might expect from the best
attorney. Just as a criminal defendant has no right to appear before the judge who tends to give
lower prison sentences, a plaintiff has no right to the legal services of whom he believes to be the
best attorney.
Future plaintiffs are not, therefore, injured at all, because they have not been deprived of
something they may lay a claim to. The “injury” that plaintiffs might suffer by restrictive
settlement agreements is no more than what they would suffer from permissible consulting
agreements or from the simple fact that an attorney can refuse legal services to whomever she
207 MODEL RULES OF PROF’L CONDUCT R. 1.5 (requiring that fees charged be reasonable). 208 MODEL RULES OF PROF’L CONDUCT R. 5.6(a) (stating that agreements may restrict the right of a retiring lawyer to practice). See also ID. R. 1.17 (requiring an attorney not practice law in the jurisdiction for a period following the sale of his law practice, restricting even the right of present clients to the attorney they have already chosen). Rule 5.6 does not prohibit restrictions “included in the terms of the sale of a law practice pursuant to Rule 1.17.” ID. R. 5.6. 209 RESTATEMENT (THIRD) OF LAW GOVERNING LAWYERS §§ 2, 3 (recognizing that a lawyer must comply with the requirements of a jurisdiction before being qualified to practice law in the jurisdiction). See also Birbrower, Montalbano, Condon & Frank, P.C. v. ESQ Bus. Servs., 949 P.2d 1 (Cal. 1998) (holding that out-of-state attorney not licensed to practice law in the state cannot recover compensation for in-state services); Ranta v. McCarney, 391 N.W.2d 161 (N.D. 1986) (same).
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wishes. If the attorney chose to retire, the future client’s injury is no greater. If the restriction
was not made “in connection with” a settlement, the future clients’ injury is again no greater.
In regards to the restrictive settlement agreement, there is no empirical data demonstrating
how much the agreements “injure” future plaintiffs. There is no empirical data demonstrating
that the restrictions are not usually made in one of those four situations where future plaintiffs
are not injured. There is only mere conjecture of injuring future plaintiffs. This is wholly
insufficient to support the Rule.
Not only is it quite possible that future plaintiffs are not injured as often as many seem to
assume, but their injury must be compared with the systemic injury society suffers when
settlements are impeded. Who is injured more? Without empirical data, the ethics rules can only
guess. Because of the availability of consulting agreements that permit sophisticated parties to
evade Rule 5.6(b)’s prohibition, many future plaintiffs will be injured just as much with as
without the Rule. How many future plaintiffs does Rule 5.6(b) save? Again, the ethics rules can
only guess.
Admittedly, the availability of legal counsel is a strong public concern, especially in today’s
seemingly overlawyered and underrepresented world. “[T]here is far too much law for those
who can afford it and far too little for those who cannot.”210 While the ethics rules cannot
transform attorneys to cabbies by imposing a duty to be available to anyone who might want
him, ethics rules can, as instruments of social change and vehicles for enlightened professional
conduct, encourage attorneys to be more free to those who need them. The ethics rules can
encourage pro bono work, or it can encourage attorneys to decline restrictions on their right to
practice even when economically attractive. But what the ethics rules should not do is bar
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attorneys from exercising their freedom of contract under the guise of helping future plaintiffs
who may not exist and who may not need help.
If lawyers were always barred from entering into agreements that might produce some
externalities (like possibly injuring future plaintiffs), they would be a rather impotent bunch.
After all, lawyers are professionals, not slaves to potential clients who just might exist. Future
plaintiffs’ injuries are speculative and unverifiable. Its rhetoric is without limit, and naively
bowing to it spells trouble.
210 Derek C. Bok, A Flawed System of Practice and Training, 33 J.LEGAL EDUC. 570, 571 (1983). But compare, Parker, supra note 110, at 14-15 (arguing that restrictive covenants, prohibited by Rule 5.6(a), generally do not affect the supply of legal services).