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Proposed Opinion Sees Breathing Room for Some ‘Puffing’ in Settlement Banter

Wednesday, March 12, 2014

By Joan C. Rogers  

March 4 — Attorneys negotiating on behalf of a client do not act unethically by overstating the client's settlement goals or downplaying the client's willingness to compromise, according to a proposed opinion from the California bar's ethics committee (Cal. State Bar Standing Comm. on Prof'l Responsibility & Conduct, Proposed Formal Op. 12-0007, 1/24/14).

These inaccurate statements qualify as allowable “puffing” rather than false statements of material fact, the opinion says. It makes clear, however, that lawyers must not lie about any major relevant facts, such as falsely claiming to have a favorable eyewitness, inflating a personal injury client's past earnings or understating the amount of available insurance coverage.

The committee is asking for comment on the proposed opinion through May 19.


Authorities Try to Describe What Statements Are Ethically Out of Bounds in Settlement Negotiations

Other authorities on the subject of ethics in negotiations include:  

▸ABA Formal Ethics Op. 06-439, 22 Law. Man. Prof. Conduct 235 (2006) advised that, in the context of a negotiation, a lawyer may not make a false statement of material fact to a third person. It also said that “statements regarding a party's negotiating goals or its willingness to compromise, as well as statements that can fairly be characterized as negotiation ‘puffing,' ordinarily are not considered ‘false statements of material fact' within the meaning of the Model Rules.” The committee emphasized that lawyers must choose their words with care to steer clear of affirmative misrepresentations.

▸Comment [2] to Model Rule 4.1 states in part: “Under generally accepted conventions in negotiation, certain types of statements ordinarily are not taken as statements of material fact. Estimates of price or value placed on the subject of a transaction and a party's intentions as to an acceptable settlement of a claim are ordinarily in this category, and so is the existence of an undisclosed principal except where nondisclosure of the principal would constitute fraud.”

▸The ABA Litigation Section's Ethical Guidelines for Settlement Negotiations address misrepresentation and concealment during settlement negotiations. For example, the notes to Section 4.1.1 explain that the prohibition against misrepresenting material facts is not intended to cover statements of opinion or those that merely reflect the speaker's state of mind. The notes also say that the community's known negotiating tactics are relevant in determining whether a particular statement is one of fact.

The guidelines were officially recommended by the ABA in 2002 as a resource designed to promote ethical conduct in settlement negotiations. See 18 Law. Man. Prof. Conduct 346. They are available at http://www.abanet.org/litigation/ethics/settlementnegotiations.pdf.

▸Comment c to Section 98 of the Restatement (Third) of the Law Governing Lawyers (2000) states in regard to negotiation practices that “Certain statements, such as some statements relating to price or value, are considered nonactionable hyperbole or a reflection of the state of mind of the speaker and not misstatements of fact or law.”

Whether a misstatement should be so characterized depends on whether it is reasonably apparent that the nonclient would view the statement as one of fact rather than an expression of state of mind, and that assessment in turn depends on the circumstances, according to the comment.

▸See also “Ethics Rule Prohibits Lies, but Recognizes Room for Negotiating Tactics,” 29 Law. Man. Prof. Conduct 136, which collects numerous cases, ethics opinions and law review articles on the subject of truthfulness in negotiations.


ABA Guidance Embraced

The opinion considers the broad question of what conduct in settlement negotiations constitutes permissible puffing as opposed to improper false statements of material facts.

The committee noted that Sections 6068(d) and 6128(a) of the California Business and Professions Code prohibit attorneys from engaging in deceit or collusion. Moreover, California lawyers have been disciplined for deceiving opposing counsel, and state bar rules on attorney sanctions provide that disbarment or actual suspension is appropriate for dishonesty, the committee said.

The opinion also mentions the state bar's Attorney Guidelines of Civility and Professionalism. Section 18 of those guidelines addresses an attorney's conduct when negotiating a written agreement on behalf of a client, but the guidelines are nonbinding and are not an independent basis for disciplinary charges, the committee said.

In the absence of direct California authority on ethics in negotiations, the committee embraced the guidance provided by ABA Formal Ethics Op. 06-439, 22 Law. Man. Prof. Conduct 235 (2006). Drawing on that opinion, the committee advised that

[I]t is improper for an attorney to make false statements of material fact during the course of a negotiation. However, statements about a party's negotiating goals or willingness to compromise may include allowable “puffery” provided those statements do not contain false statements of material fact.

 

The ABA opinion was based largely on Model Rule 4.1, which prohibits a lawyer from making a false statement of material fact or law to a third person or failing to disclose a material fact when disclosure is necessary to avoid assisting a criminal or fraudulent act by a client, unless disclosure is prohibited by the rule on lawyer-client confidentiality.

Although the California Rules of Professional Conduct do not contain a corresponding rule, Model Rule 4.1 is consistent with California cases involving tort suits against attorneys for fraud, the committee pointed out.

What's Proper and What's Not

The committee fleshed out its views on prohibited and permissible conduct by discussing several statements in hypothetical negotiations to settle a personal injury claim arising from an automobile accident:

  • Plaintiff's lawyer tells defense counsel that an eyewitness saw the defendant texting at the time of the accident, when actually no eyewitness has been located. This assertion is an improper false statement of fact, intended to mislead the defendant and his lawyer, the committee advised. It is not an expression of opinion but a material statement that a reasonable person would consider important in making settlement decisions, the panel said.
  • Plaintiff's counsel informs the mediator that the plaintiff was making $75,000 per year when he was actually earning $50,000. This remark is not an expression of opinion but an intentional misstatement of a verifiable fact that is material to the negotiations, the committee found.
  • Plaintiff's lawyer overstates the client's “bottom line” settlement number. This statement is allowable “puffery” that is not deceitful or fraudulent, according to the proposed opinion. A negotiating party should expect that its adversary will not reveal its true negotiating goals or willingness to compromise, the committee said. It also noted that an attorney could violate the statutory duty of confidentiality in Business and Professions Code Section 6068(e) by revealing the client's actual bottom line.
  • Defense counsel states that the defendant's insurance policy is $50,000 when it is really $500,000. This statement is improper, the committee said, because it is an intentional misrepresentation of a material fact intended to mislead the plaintiff and his counsel.
  • Defense lawyer insists that the defendant will file for bankruptcy if the plaintiff wins at trial. If defense counsel knows that the defendant does not qualify for bankruptcy protection, this statement is improper, the committee said, because it is an intentional misrepresentation aimed at misleading the opponent about the defendant's ability to pay. But if defense counsel believes that bankruptcy is an available option, even if unlikely, a statement that the defendant could or might consider filing for bankruptcy would probably be a permissible negotiating tactic, it added.
  • Plaintiff instructs his lawyer not to reveal his new, better-paying job to the other side even though the parties have agreed to exchange additional information about the plaintiff's wage loss claim. Failure to disclose the plaintiff's new job would suppress a material fact and amount to a material misrepresentation, the committee advised. It said that even though a lawyer is generally required to follow a client's instructions, the plaintiff's lawyer must counsel the client that the lawyer may not take part in misrepresenting or suppressing evidence.
  • To contact the reporter on this story: Joan C. Rogers in Washington at jrogers@bna.com

    To contact the editor responsible for this story: Kirk Swanson at kswanson@bna.com

    Full text of the proposed opinion at http://www.calbar.ca.gov/Portals/0/documents/publicComment/2014/2014_PuffinginNegotiations.pdf.

    The public comment notice is at http://www.calbar.ca.gov/AboutUs/PublicComment/201402.aspx.

    The ABA/BNA Lawyers’ Manual on Professional Conduct is a joint publication of the American Bar Association Center for Professional Responsibility and Bloomberg BNA.

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