Firm’s Restrictive Agreement With Opposing Party Created Non-Waivable Conflict of Interest Second Circuit Rules

Hello everyone and welcome to this edition of the JACPA Ethics Alert.  This Alert will discuss the recent United States Second Circuit Court of Appeals case which ruled that a law firm representing employees in discrimination claims had an non-waivable conflict when it entered into an agreement wherein Nextel would pay the law firm $2 million if the law firm could persuade the employees to drop their claims and agree to resolve their dispute under the terms and procedures set out in a Dispute Resolution and Settlement Agreement (DRSA).  The case is: Johnson v. Nextel Communications, ___F.3d___, 2011 WL 4436263 (2d Circuit, September 26, 2011).

In Johnson, employees of Nextel retained the defendant/law firm to bring employer discrimination claims against Nextel.  The law firm subsequently entered into the DRSA with Nextel.  Under the DRSA, Nextel was to pay $2 million the law firm if the firm could persuade the employees to drop their claims and agree to resolve the dispute under the terms and procedures set out in the agreement.  Nextel was required to pay additional amounts to the law firm contingent upon how quickly litigation progressed.

The DRSA also required that the employees be represented by the law firm throughout the litigation.  Interestingly enough, the agreement also required Nextel to retain the firm as a legal consultant for two years following resolution of the employees’ claims.  The value of the DRSA to the law firm was potentially $7.5 million.  The law firm provided an outline of the DRSA’s terms to the employees and asked them to agree to the DRSA’s terms.  The firm also simultaneously obtained conflict waivers from each client.  Some of the clients did not agree to the DRSA (and waiver) and the initial $2 million payment was reduced.

The employees later filed a lawsuit alleging, inter alia, breach of contract, fraud in the inducement, and legal malpractice.  A U.S. District Court Judge granted the law firm’s motion to dismiss for failure to state a claim.  On appeal, the Federal Second Circuit vacated the trial court’s dismissal of the lawsuit and held that the DRSA created a non-waivable (unconsentable) conflict and was a breach of the fiduciary duty of the law firm to each of the clients.

The Second District’s opinion held that the clients could not consent to a waiver of the conflict for two reasons:  1) the class-protection provisions of Fed. R. Civ. P. 23 did not apply and, 2) the law firm had a duty to represent the employees’ interests individually and not collectively.  The DRSA also created a clear incentive for the firm to handle its clients’ claims in the aggregate rather than individually and the additional incentives in the DRSA beyond the initial $2 million payment severely aggravated the already non-waivable conflict.  Finally, the conflict was non-waivable because it was too complex for the clients to give informed consent without hiring another attorney and the law firm failed to advise the clients that, in order to make an informed decision, an independent lawyer should/must be retained to review the agreement.

The opinion found that the employees had viable claims for breach of contract and fraud in the inducement since the retainer agreements called for individual and not collective representation; however, the DRSA required the aggregation of the employees’ claims.  Without discussion, the opinion also stated that the employees had a viable claim for legal malpractice.  Finally, the opinion held that the employees had adequately alleged a cause of action against Nextel for aiding and abetting the firm’s breach of fiduciary duty and remanded the case to the District Court for further proceedings.

Bottom line:  This opinion is interesting to say the least.  The law firm now apparently has serious civil (and potentially Bar disciplinary) liability for entering into the agreement with an opposing party/employer with an apparently clear and non-waivable conflict and then asking the clients/employees to agree to it and waive the conflict without consulting with an independent lawyer.

Be careful out there!

As always, if you have any questions about this Ethics Alert or need assistance, analysis, and guidance regarding these or any other ethics, risk management, or other issues, do not hesitate to contact me.

If you have any questions or comments, please call me at (727) 799-1688 or e-mail me at jcorsmeier@jac-law.com.  You can find my law firm on the web at www.jac-law.com. In addition to handling individual cases, matters, problems and issues for my clients, I also am on retainer to provide ethics advice to numerous lawyers and law firms throughout the state of Florida.  I also provide legal assistance and advice to numerous individuals and non-legal entities to help insure compliance with the law and rules related to UPL and other issues.

THE LAW OFFICE OF JOSEPH A. CORSMEIER, P.A.

PROVIDES ETHICS ADVICE AND EXPERT OPINIONS TO LAWYERS AND LAW FIRMS

DEFENDS LAWYERS IN BAR ADMISSION AND DISCIPLINE CASES

(AND MUCH MORE!)

                My law firm focuses on review, analysis, and interpretation of the Rules Regulating The Florida Bar, advice and representation of lawyers in Bar disciplinary matters, defense of applicants for admission to The Florida Bar before the Board of Bar Examiners, defense of all Florida licensed professionals in discipline and admission matters before all state agencies and boards, expert ethics opinions, and practice management for lawyers and law firms.

                If there is a lawyer or other Florida professional license involved, I can defend it or help you get it!

If you have any questions or comments, please call me at (727) 799-1688 or e-mail me at jcorsmeier@jac-law.com.  You can find my law firm on the web at www.jac-law.com. In addition to handling individual cases, matters, problems and issues for my clients, I also am on retainer to provide ethics advice to numerous lawyers and law firms throughout the state of Florida.  I also provide legal assistance and advice to numerous individuals and non-legal entities to help insure compliance with the law and rules related to UPL and other issues.

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