The Rule or the Ethics Opinion: What Happens When They Differ?

The Rules of Professional Conduct set forth the duties owed by lawyers to clients and others, and provide a framework to which lawyers must adhere.  The Rules are the basis for imposing discipline against attorneys. The Comments to the Rules do not impose any additional obligations, but provide guidance as to how lawyers should comply with the Rules.  The ethics opinions (CPRs, RPC, and FEOs) are adopted by the Ethics Committee and serve to provide further interpretation of the Rules and guidance in specific scenarios.  What happens if an ethics opinion conflicts with the Rules? Well, it shouldn’t conflict.  But I can think of one instance where they do.

Rule 3.5(a)(3) provides that a lawyers shall not communicate ex parte with a judge or other official except:

(A) in the course of official proceedings;

(B) in writing, if a copy of the writing is furnished simultaneously to the opposing party;

(C) orally, upon adequate notice to opposing party; or

(D) as otherwise permitted by law[.]

(emphasis added).  This Rule appears to permit potentially unlimited written communication with a judge before whom a matter is pending, so long as opposing counsel or the opposing party is simultaneously copied.  There is, however, an ethics opinion, 98 FEO 13 that says, notwithstanding the language in Rule 3.5, there are only four (4) instances where lawyers are permitted to communicate in writing to a judge or judicial official relative to a pending matter:

1) Written communications, such as a proposed order or legal memorandum, prepared pursuant to the court’s instructions

2) Written communications relative to emergencies, changed circumstances, or scheduling matters that may affect the procedural status of a case such as a request for a continuance due to the health of a litigant or an attorney;

3) Written communications sent to the tribunal with the consent of the opposing lawyer or opposing party if unrepresented; an

4) Any other communication permitted by law or the rules or written procedures of the particular tribunal.

98 FEO 13.  The ethics opinion reasons that even though Rule 3.5(a)(3) may appear to permit unlimited communications with a tribunal so long as it is copied simultaneously to the opposing side, Rule 3.5 must be read in conjunction with Rule 8.4(d), which prohibits conduct that is prejudicial to the administration of justice.  Further, Comment [7] to Rule 3.5 says that lawyers should not communicate with a judge relative to a matter pending before the judge in a manner that “might have the effect or give the appearance of granting undue advantage to one party.”  The opinion goes on to say that these kinds of informal written communications could be used as an opportunity to introduce new evidence, argue the merits of the case, or cast the opposing party/counsel in a bad light.

In my experience, lawyers have been tripped up by this ethics opinion, because it, on its face, is contrary to the black letter of the Rule of Professional Conduct.  It is also my experience that lawyers have been disciplined for conduct which departs from this ethics opinion.  So, at least while 98 FEO 13 is on the books, you should follow its narrower requirements.  The other potential problem with the opinion is that it can be read to restrict the conduct of lawyers who are not even appearing before the tribunal if the written communication relates to a pending matter.  The Ethics Committee may be taking another look at this ethics opinion and Rule 3.5(a)(3).  Should the Rule or Comments be clarified to include some of the concerns in 98 FEO 13, or should 98 FEO 13 be stricken or redrafted?  If you have any thoughts or insights to share, please feel free to contact the State Bar ethics staff.  The more input from you, the better the result.

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With Great Power Comes Great Responsibility

These days, you literally have the power to access any document in your law office through your cell phone, table, or laptop.  Client files and communications may be accessed by touching a few characters on the keyboard.  It is very convenient and makes staying on top of things much easier, but there are also risks.  What happens if that device is lost or stolen? Will your password provide the necessary protection to keep your client data safe?

When lawyers think about the security of their computerized data, the first things to come to mind may be virus protection, firewalls, and data back-ups.  These are all very important, but the security of end-user devices is just as important.  I recently attended an excellent CLE presented by Lawyer’s Mutual that opened my eyes to additional cybersecurity issues lawyers must be aware of and reminded me of Comment No. 8 to N.C. Rule of Professional Conduct 1.1 quoted below:

[8] To maintain the requisite knowledge and skill, a lawyer should keep abreast of changes in the law and its practice, including the benefits and risks associated with the technology relevant to the lawyer’s practice, engage in continuing study and education, and comply with all continuing legal education requirements to which the lawyer is subject.

Keeping abreast of the benefits and risks associated with the technology relevant to the lawyer’s practice, likely includes being aware of how someone could gain access to mobile devices and how to adequately protect them.  Several ways to protect the data on end-user devices were discussed at the CLE, including using multi-factor identification when logging into a database with confidential information and using strong passwords.  But ultimately, best practice is to encrypt all laptops, mobile devices, and removable media, such as flash drives.  It is worth paying an IT professional to help you now, rather than facing the headache of a costly data breach later.  Along with the great power of easy and constant access to client documents comes the great responsibility as lawyers of protecting against disclosure of confidential information.

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New Year Checkup for Your Practice

It’s 2017, and many of us are already losing our battle to keep our resolutions.  Often, New Year’s resolutions are about personal growth, and that’s great.  It is hard to keep those resolutions when so many of them are not specific or concrete enough.  For example, we say we’ll go to the gym more, lose some weight, be a better person, and think more positively.  Unless your goals are specific, it can be hard to measure whether you have achieved any of these goals.  But what about your law firm? The new year is also a good time to take stock and perform a checkup of your firm.  Here is a check list with enough specificity to hopefully make it easier to stick to these resolutions:

  1. Trust Account – New rules were adopted in June of 2016.  If you haven’t already, read the new rules.  Then print out the three report forms that you will need to use from the State Bar’s website, www.ncbar.gov.  There is a monthly reconciliation report, a quarterly reconciliation report, and a quarterly review report.  Finally, vow to review the previous month’s trust records by the 15th of the following month.
  2. Insurance – Review your liability insurance, both your limits and deductible, and be sure you think they are sufficient, given the state of your practice in 2016.  Review your business/property insurance policy as well to be sure it covers any new purchases or property. Finally, with the prevalence of Ransomware, consider obtaining a cyber security insurance policy. These days, it’s becoming more a matter of when you will be hacked, rather than if. Lawyers Mutual has these kind of policies and can explain what they cover and why you may need one.
  3. Cyber Security – Make an appointment to sit down with your IT professional and ask them some questions.  How is my data being protected?  Tell me about my firewall.  Do I have two different ways to back up my data?  How can I keep client information on my computer safer? Do I need two-step authentication or encryption on laptops and other mobile devices such as employee smart phones and tablets where client information can be accessed?  What can I do to protect client information if one of those items is lost or stolen?
  4. Tax Planning – Once your CPA has a bit more time, make an appointment to talk about how your firm did last year, and whether you can do anything to save on taxes.  Discuss whether there are any employee benefits (401K, Health Reimbursement Accounts, Health Savings Accounts, etc.) that can help your business save in taxes.
  5. Marketing Assessment – List all of the ways in which you market your business.  Then figure out if any of those marketing tools is not paying off, and cut it.  Finally, think about how you can expand into at least one new market and brainstorm the best ways to reach those folks.
  6. Plan to Save – This sounds like a vague goal, but it doesn’t have to be.  Make an appointment with a financial advisor and figure out a new way to save, especially for retirement. Auto draft a certain amount monthly into a retirement account. If you are 50 years old, then you can step up savings into your 401(k) or other retirement accounts (yes, we only know this because we’re at that stage).  Consult your CPA on how you can maximize your retirement savings while saving taxes at the same time.
  7. Appreciation – Meet with your employees and let them know how much you appreciated their hard work this past year.  Start 2017 off on the right foot.
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Turning Over a Client’s File — the Safe Way

Lawyers in North Carolina know that a client’s file belongs to the client.  Even if you copy the client with all correspondence or court filings along the way, when the representation ends, the client is entitled to a copy of their entire file, if requested.  Rule 1.16(d). You need not turn over your personal notes, internal firm memoranda or unfinished work product, but just about everything else must be turned over to the client. CPR 3, RPC 169. What if the client asks that you provide the client file to a third person, a friend or a relative?  Before you simply send the client’s file with another person at the client’s direction, slow down and consider whether it is in the client’s best interest to do so.

Yes, the client has the authority to direct where his file should be sent at the termination of your representation, but you, as the lawyer, have an obligation to advise the client as to what is in his best interest.  Without your guidance, the client can’t make an informed decision. For example, suppose the client is being represented by another lawyer on appeal.  At the conclusion of your representation, the client has directed that you give his entire file to his sister.  Appellate counsel, however, will likely need your file to represent the client’s best interests.  Will the client’s sister maintain and keep the file in a manner that will assist subsequent counsel?  If the file is electronic, is this person responsible enough to keep track of the flash drive? If the sister opens the client file on her computer, which is accessible by everyone in her household, has the privilege been waived?  Certainly, confidentiality has been compromised.

Before you simply follow your client’s directive, communicate with the client, and explain why it is in the client’s interest for the file to be transferred directly to subsequent counsel or to the client.  Certainly, if there is no appeal, the client’s matter is not of a highly sensitive nature, and/or the client is unavailable to come pick up the file, there may be very good reasons to give the file to someone of the client’s choosing. But before you send the file off, have a conversation with your client.  Then, confirm the client’s directive about who gets the file in writing, after you have discussed any possible risks.

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Must We Reveal Those Skeletons?

I was reminded recently of an Ethics Decision (unpublished) that answered the question, “When must a lawyer disclose unsavory personal information” to a client or prospective client?  Ethics Decision 2003-5. If you are currently being investigated by the State Bar, are you required to disclose that fact to your clients, or any prospective clients?  What about if you are being investigated by the government?  Or if you have been charged in a criminal matter?   At what point do attorneys have an obligation to disclose this kind of personal information to clients?

The State Bar has determined that an attorney has an obligation to reveal “unsavory personal information” when the attorney reasonably believes such information is necessary for the client to make an informed decision regarding representation.  You should ask yourself, can the client give informed consent to continued representation without this information? For example, an attorney who has received a grievance for an advertising violation, can reasonably conclude that the disciplinary matter will have no bearing upon his representation of his clients or prospective clients.  The matter will likely be resolved without the attorney losing the ability to practice law.  On the other hand, a lawyer who has a complaint pending for misappropriation of trust funds, where the State Bar has evidence to support the charges, will very likely lose his license.  He should consider whether he can appropriately conclude the client’s representation in the short term, or whether it will be necessary to give clients notice and the choice of alternative counsel.  The key here is to inform the client in plenty of time so the client’s interests are not prejudiced by the need to select new counsel.

In addition, if the attorney anticipates that a pending disciplinary or criminal matter may be so time consuming that it could adversely affect the representation of his client, there likely would also be a duty to disclose to any current clients whose representation may be impacted.  The attorney in such a situation should also consider whether to undertake any new representation.  The same considerations would apply to any personal situation that may take significant time away from the practice of law, such as personal health issues or a family health crisis.

It is interesting to note that the test for whether to disclose is not whether the client would want to know that information, but rather, whether the client needs the information to make an informed decision regarding representation.  The test appears to hinge upon whether the client could be prejudiced or whether the representation may suffer due to the attorney’s personal circumstances.  Another point is that the State Bar leaves the decision to disclose to the professional judgment or the discretion of the attorney.  I find that curious because it is likely that an attorney’s professional judgment may be impaired because he may have a vested interest in not disclosing the information.

If you are ever faced with this question about whether to reveal personal information to the client, I would try to put yourself in the client’s shoes.  If you, as the client, might want to know the information, then also ask yourself whether there is any possibility that your personal circumstances could affect the client’s representation.  If either answer is yes, and you are reluctant to inform the client, get the advice of ethics counsel.  It may be prudent to get another set of eyes to review the situation.

 

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Conflict Checks: Not Just for New Clients

In evaluating conflicts, I always tell my attorney clients that it is important to have a mechanism in place to (1) Identify, (2) Assess and (3) Address conflicts of interest.  You would think the first step is obvious, but you may be surprised by how easy it can be to miss identifying a conflict of interest in the first place. Sometimes the failure to identify a conflict stems from a complicated factual scenario such as multi-party litigation with various business entities or subsidiaries or unusual facts involving representation of estates or uninsured motorist claimants.  Luckily, those kinds of conflicts are few and far between.  More often, the conflict of interest that is missed is the one that should be obvious, if only we were looking for it. Where we fail to look most often is the conflict that involves the existing client.  If there is an existing client, then you’ve already done your initial conflict check before accepting that person as a client, and you feel safe in knowing you have done your due diligence.    But what happens if the client introduces a new matter?  Or suppose it is not as clear as a new matter?  Instead, the client changes the scope of the representation so that there may be additional issues, or suppose as you get deeper into the representation, you determine the scope of the representation should be expanded or changed.  Or, what if after additional investigation, you discover or receive new information suggesting that there are other adverse or potentially adverse parties or witnesses.

In any of the above scenarios, if you notice that there are additional issues with potential additional parties or adverse interests, then you should go ahead and run another conflict check.  The Rules of Professional Conduct provide that an attorney must be vigilant about identifying conflicts of interest that may arise during the course of the representation.  Sometimes a conflict arises through the direct action of a client, and other times, a conflict can arise that no one could have anticipated.  For example, suppose you represent a client in an employment dispute.  After you have represented a client for a number of months, you discover there are a number of fact witnesses that the employer intends to call at trial.  This is an opportunity to run another conflict check.  In so doing, you learn that one of the employer’s witnesses against your client is someone your firm is currently representing in a domestic dispute.  If  this is a matter that is proceeding to trial, then you have a conflict of interest because you cannot cross-examine a current client of the firm.

There may be a number of discoveries that you make or changes that occur during the course of representation that would trigger the requirement to run conflict checks.  If you stay vigilant, and know when to look, you won’t get blind-sided by a conflict of interest.

 

 

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Targeted Direct Texting

There is a newly proposed ethics opinion (October 2016) which will supersede the information in this blog.

Lawyers are familiar with targeted direct mail solicitation, and even if you don’t do it, you know there are ethics rules that apply. Targeted direct mail presumes that you know of a particular legal need of a prospective client, and you communicate with that person about the need for services. Rule 7.3(c). Unless you’ve sent one of these letters, you may not know that there are lots of ethics requirements that govern the minutiae of sending a targeted direct mail letter, especially regarding the font size, thickness, darkness, color, placement and conspicuousness of the advertising disclaimer.  These rules are not simply to be generally adhered to; they must be followed to the letter.  They are strictly construed.  Some of the requirements are subjective (no writing more conspicuous than the advertising disclaimer), so you should go above and beyond to be sure “THIS IS AN ADVERTISEMENT FOR LEGAL SERVICES” is absolutely the most conspicuous printing anywhere on the envelope and on the direct mail letter.

What about targeted direct electronic communications?  There are rules for that too.  Like the direct mail rules, these rules are designed to inform the public that the communication is an advertisement, but also may have the effect of squashing any creative, novel, eye-catching message designed to grab the attention of your reader.  The advertising notice (think big and all caps) must be in the subject line or header of the email.  The advertising notice must also appear at the beginning and ending of any electronic communication.  Then there are restrictions about the fonts, color, and size of the disclaimer, and finally, the disclaimer must be the most conspicuous printing (think HUUUGE – for the Bernie and Trump supporters).

Do these rules allow for targeted solicitation via text?  It is unclear.  Certainly the rules permit targeted solicitation through electronic communications.  Texting, however, does not have a subject/header field to include the advertising disclaimer.  Arguably, any electronic communication lacking this field could be banned as a method of targeted advertising under the Rules.  In addition, by the time you include the advertising disclaimer at the beginning and ending of a text, it may not matter what you include in the middle because the text will be so long that you will likely have lost your reader anyway. There does not appear to be an ethics opinion on this issue, although there is a proposed ethics opinion about using texting to advertise when a recipient has signed up for an advertising service.  This kind of texting service would not require the use of the disclaimer, as there is no known need for legal services.  In addition, there appear to be some federal laws that may restrict this kind of advertising altogether.  See CFR 64.1200.  My advice: don’t use texting for targeted advertisements–at least not without asking the State Bar first.

 

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Liability Limits: Good Legal Advice, Bad Professional Practice

In my day job, I am a provider of professional services; in my other roles, I also frequently am a consumer of professional services.  As a consumer, I have noticed a disturbing trend in agreements for professional services.  More and more professionals are inserting standard clauses in their agreements with consumers prospectively limiting their liability for negligence and other mistakes or misconduct.

These limitations take various forms, but recently the trend seems to be to limit the professional’s potential liability to no more than the total fee they were paid by the consumer.  Assuming it is consistent with one’s professional obligations and is enforceable, these clauses allow a professional to commit negligence or other misconduct, potentially cause substantial damage to the consumer, but yet have no liability or financial obligation, other than to return the fee paid. That’s hardly a formula for fostering careful, diligent, and skillful professionals.

Certain professions restrict liability limitation clauses but permit them under certain circumstances. For example, lawyers are prohibited from entering into any agreement prospectively limiting the lawyer’s liability to a client for malpractice unless the client is independently represented in making the agreement, pursuant to NC Rule of Professional Conduct 1.8(h)(1).  Such a clause or agreement is considered a conflict of interest with the client.  This restriction effectively prevents the use of such clauses in form or standard contracts and agreements with lawyers but permits it when warranted and with appropriate safeguards.  Although there certainly are circumstances where such liability limitation clauses are appropriate, they should not be a routine contract clause in my view.  Restrictions, such as the one contained in the NC Rules of Professional Conduct for attorneys, prevent their widespread use in form agreements.

Unfortunately, the regulations and ethics rules for most professionals in North Carolina do not prohibit or even restrict such liability limitation clauses.  Most professionals essentially are allowed to eliminate all such liability through a contractual provision without restrictions.  Hopefully, more profession regulators will recognize that placing at least some restrictions on these types of clauses will help limit their use to circumstances where justified and with appropriate protections, not merely as part of a form contract that most consumers never bother to read before signing away important legal rights.

As a lawyer, I realize that most of these clauses are inserted upon the advice of attorneys.  Although it may be good technical, legal advice to a professional, it is misguided, bad business, and unprofessional in my opinion.   As a consumer of services, the message that such clauses send me is that the professional is not confident in his or her abilities and doesn’t want to be responsible for any mistakes or misconduct.  I have consistently refused to sign agreements or contracts containing these liability limitation provisions and instead seek out professionals who do not use them or are willing to delete them.

I encourage you as a consumer to do the same thing and, as professional, not to include such provisions in your agreements from a business and professionalism standpoint.  I want to deal with professionals who are competent, confident, careful, and diligent but also willing to accept responsibility for any mistakes that may be made.  I believe that is what most consumers want in dealing with professionals.  Liability limitation clauses send the wrong message and create misguided incentives.   Sometimes good technical legal advice is bad for business and for your profession and professionalism. Any good professional should stand behind his or her work, not hide behind a liability limitation clause.

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Money Gone Missing: When a Third Party Steals Trust Funds

Under Rule 5.3, a lawyer has an obligation to properly supervise nonlawyer assistants who have access to the trust account. Thus, if that nonlawyer assistant embezzles entrusted client funds, the lawyer has a professional responsibility to replace the funds. What about when the loss occurs through fraud by an unaffiliated third party?

Does a lawyer have a professional responsibility to replace funds stolen from his trust account by an unaffiliated third party where the bank honored counterfeit checks presented by the third party?

Formal Ethics Opinion, 2015 FEO 5, was adopted in October 2015 and provides:

…when funds are stolen from a lawyer’s trust account by a third party who is not employed or supervised by the lawyer, and the lawyer was managing the trust account in compliance with the Rules of Professional Conduct, the lawyer is not professionally responsible for replacing the funds stolen from the account.

The Opinion advises that lawyers must still investigate the matter, take steps to prevent further loss to entrusted funds, and make every effort to remedy the situation including: “…researching the law to determine if Bank is liable; communication with Bank to discuss Bank’s liability; asking Bank to determine if there is insurance to cover the loss; considering whether it is appropriate to close the trust account and transfer the funds to a new trust account; and working with law enforcement to recover the funds.”

Note that the Opinion requires that the lawyer “was managing the trust account in compliance with the Rules of Professional Conduct” before he is relieved of the duty to replace the stolen funds.  While the trust accounting rules may not be burdensome, they are specific.  One area where we see lawyers consistently missing the mark is by failing to reconcile the trust accounts quarterly and by failing to send a written accounting of funds to clients, annually and upon final disbursement.  The opinion also clarifies that “substantial compliance” would be sufficient to relieve the lawyer of the duty to reimburse the account, so it is likely that a mere technical violation of the Rules, such as failure to keep proper-sized cancelled check images, would not trigger the reimbursement requirement.

RPC 191

Compare this Opinion with RPC 191 which requires a lawyer to reimburse his trust account for any losses caused by disbursing before funds are irrevocably credited where the lawyer disburses against provisionally credited funds. In that case, if third party fraud prevented the funds from being irrevocably credited and the attorney disburses prior to that point, the attorney must reimburse the client funds.

Does a lawyer have a duty to replace stolen funds from the lawyer’s trust account when the theft occurs as a result of an unaffiliated third party gaining illegal access to lawyer’s computer and transferring the trust account balance to the third party’s account?

It depends upon whether reasonable security measures were in place.  2015 FEO 6 provides that the lawyer is not professionally obligated to replace the stolen funds as long as he has “taken reasonable care to minimize the risks to client funds by implementing reasonable security measures in compliance with the requirements of Rule 1.15.” 2011 FEO 7 provides some of those affirmative duties including:

  • educating himself regularly on the risks of online banking;
  • actively maintaining end-user security;
  • using encryption and security software;
  • hiring an IT professional to advise the lawyer and firm employees; and
  • insuring all staff members receive training and follow the security measures adopted by the law firm.

Under the above two circumstances, may a lawyer deposit his own funds into the trust account while pursuing other remedies?

As a general rule, there is a prohibition on commingling funds:  Lawyers should not deposit personal funds into the lawyer’s trust or fiduciary accounts.  There are, however, various exceptions to the rule which permit a lawyer to deposit personal funds into a trust account including funds sufficient to open or maintain an account and others which allow the lawyer to fulfill his duty to safeguard entrusted funds.

Although it is not required for a lawyer to deposit his own funds into the trust account under the circumstances described in 2015 FEO 6, the opinion permits a lawyer to do so.  A lawyer may replace the stolen funds with his own, until the funds may otherwise be recovered from the bank, insurance, or elsewhere. The opinion provides that if the lawyer decides to deposit his own funds, the lawyer must make sure the trust account reflects the:

  • source of the funds;
  • reason for the deposit;
  • date of the deposit; and
  • client name for which the funds were deposited.

In short, under these circumstances involving an unaffiliated third party, a lawyer may not have a professional responsibility to reimburse the stolen funds. However, the lawyer (1) may still have a legal responsibility to do so; and (2) must take certain steps which include reporting the theft to the NC State Bar’s Trust Accounting Compliance Counsel.

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Think Twice Before Using a Liquidated Damages Clause

NC courts generally give broad deference to parties entering into a contractual relationship to negotiate the terms of the contract, including legal remedies against each other.  One type of remedy which may be included is a liquidated damages clause.  Such a provision provides a pre-determined amount that a breaching party will owe the non-breaching party in the event of a breach.  This contractual provision has both positives and negatives.  On the one hand, it will typically be cheaper to negotiate the liquidated damages clause on the front end, as opposed to resolving the issues of damages in subsequent litigation. On the other hand, issues of the provision’s enforceability can, of course, be litigated and get very expensive.  Further, agreed upon damages at the time the contract was executed may prove insufficient at the time of a breach.

Can an attorney include a liquidated damages clause in a fee agreement with a client?  There does not appear to be any North Carolina ethics opinions or rules that expressly prohibit it.  Using such a provision, however, seems to force commercialism into the arrangement and ignores the heart of the attorney-client relationship — a relationship based on duty and trust.  Including such a provision also seems to be at odds with the fact that a client may terminate the services of an attorney at any time and for any reason.   Moreover, from a practical standpoint, clients may not appreciate these clauses, and wonder why an attorney would include the provision in a fee agreement. This provision may send the wrong message and a client may decide to go elsewhere.

Listed below are a few other considerations (but certainly not all) that weigh against using these provisions:

  • A liquidated damages clause in a fee agreement may not result in a clearly excessive attorney fee.
  • Contract provisions, to be ethical, must also be lawful.  I have not found any NC law which would indicate that such a provision in a NC fee agreement would be unlawful or against public policy.  However, this is a relatively new area. In service or consumer contracts, as opposed to employment contracts, there is not much law on whether a service provider may include this kind of language in their contracts.  You will need to keep up-to-date on this emerging area.
  • Liquidated damages provisions will generally be construed against the attorney, to the extent there is any question about interpretation.  The attorney is in a position of trust, and the attorney and the client do not have equal bargaining power. The courts will likely find the client was not given meaningful opportunity to negotiate the terms of the contract.
  • It is also important that you are certain that the client is specifically aware of this contractual provision, so that you would be able to state that the client knowingly forfeited this right if ever challenged on the provision.
  • Finally, a liquidated damages clause cannot amount to a penalty, and it is hard to see how a liquidated damages clause in your ordinary attorney fee contract could be anything else. The NC Supreme Court notes, “It is well established that a sum specified in the contract as the measure of recovery in the event of a breach will be enforced if the court determines it to be a provision for liquidated damages, but not enforced if it is determined to be a penalty.”  Brenner v. Little Red School House, Ltd., 302 N.C. 207,214, 274 S.E.2d 206, 211 (1981).

All this is to say, it is better not to treat your client fee contract like an ordinary commercial transaction.  While you can adequately protect yourself in the event of a breach by having a written fee contract, keep in mind that your fee contract is the first step in setting the tone of your relationship with your client.   It shouldn’t start out by being an adversarial one.

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