AN ATTORNEY'S RESPONSIBILITY FOR HIS CLIENT'S REPUTATION AND SELF-ESTEEM IN THE SETTLEMENT

CONTEXT

With the increasing volume of litigation, the role of settlements in the litigation process has also increased. Negotiation and compromise are critical components in the area of dispute reso1ution.l The impor- tance of settlements is reflected in the fact that "approximately ninety percent of all cases in the United States are settled before a trial be- g in~ . "~ The area of settlement and compromise also creates numerous potential ethical problems for the attorney. This Comment will examine some of the attorney's ethical considerations including authority to set- tle and the responsibility for the client's reputation and self-esteem in the settlement context.

11. THE SETTLEMENT CONTEXT

As noted above, settlements play an extremely important role in the United States' judicial system. The American Bar Association's Ca- nons of Professional Ethics call for the encouragement of compromise, stating that "[wlhenever the controversy will admit of fair adjustment, the client should be advised to avoid or end the litigati~n."~ Despite a firm commitment to the notion that the lawyer is employed to exercise his professional judgment in zealously representing the client, it is virtu- ally undisputed that the client has the sole power to settle a case.. Consequently, the attorney has no power to settle the action without having been granted that specific authority by the ~ l i en t .~ The Model Code of Professional Responsibility EC 7-7 states:

In certain areas of legal representation not affecting the merits of the cause or substantially prejudicing the rights of the client, a law-

1. See generally G. BELLOW & B. MOULTON, NEGOTIATION 158 (1981). 2. H. CLICK, COURTS, POLITICS, AND JUSTICE 16 (1983). 3. H. DRINKER, LEGAL ETHICS 101 (1953). 4. See Clarion Corp. v . American Home Products, 494 F.2d 860 (7th Cir. 1974);

Johnson v. Tesky, 57 Or. App. 133, 643 P.2d 1344 (1982); Carter v. Peotrowski, 452 A.2d 632 (R.I. 1982).

5. Id.

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yer is entitled to make decisions on his own. But otherwise the authority to make decisions is exclusively that of the client and, if made within the framework of the law, such decisions are binding on the lawyer. As a typical example, in civil cases, it is for the client to decide whether he will accept a settlement offer.=

There is no implied authority to settle solely on the basis of an employment contract between the attorney and the client.' Further, an ambiguity in the employment contract does not imply the authority to ~ e t t l e . ~ Despite the lack of prior judicial precedent, the United States Court of Appeals for the Third Circuit in Edwards V. Born, Inc.,O held that an attorney may receive the implied authority to settle.1° In reach- ing its decision the court relied upon the Restatement (Second) of Agency Section 26, which provides "that actual authority (express or implied) may be created by . . . 'conduct of the principal which, rea- sonably interpreted, causes the agent to believe that the principal desires him to act on the principal's account.' "I1 The Restatement fur- ther provides that:

. . . apparent authority may be created "as to a third person by written or spoken words or any other conduct of the principal which, reasonably interpreted, causes the third person to believe that the principal consents to have this act done on his behalf by the person purporting to act for him."12

The court remanded the case to determine if there was implied actual authority or apparent authority to settle the claims, stating that the stan- dard to be applied is one of "reasonableness."13

6. MODEL CODE OF PROFESSIONAL RESPONSlBRlTY EC 7-7 (1980) [hereinafter cited as MODEL CODE]. See also Edwards v. Born, Inc., 792 F.2d 387 (3d Cir. 1986) (in which the lower court relied on this provision, restricting it to imply only that the client decide whether or not to accept the settlement offer, not that the attorney was required to have constant contact with the client).

7. Galbraith v. Monarch Gold Co., 160 Or. 282, , 84 P.2d 1110, 1113 (1938). Cf United States v. Beebe, 180 U.S. 343, 45 L.Ed. 563, 21 S. Ct. 371 (1901) (in which the United States Supreme Court recognized a rebuttable presumption in favor of an attorney's authority to settle on behalf of his client).

8. See Bursten v. Green, 172 So. 2d 472 (Fla. App. 1965). 9. 792 F.2d 387 (3d Cir. 1986). 10. Id. at 390. 11. Id. at 389-390 (citing Restatement (Second) of Agency 5 26 (1958)). 12. Id. at 390 (citing Restatement (Second) of Agency 5 27 (1958)). 13. Id. at 392. Cf. Johnson, 57 Or. App. at , 643 P.2d at 1344 (in which the

court held there was insufficient evidence that the plaintiff did or said anything to con- vey the impression that her attorneys had any more than the usual power to represent

Attorney's Responsibility in Settlement 193

The attorney also has an affirmative obligation to disclose to his client all settlement offers and all facts surrounding such offers.14 The reason for this is simple. The attorney should keep the client apprised of the status of his claim at all times to insure that the client is fully aware of all options. Such options include settlement, termination of the litigation, and even dismissal of counsel.15 In the case of Rice v. Perl,16 the Supreme Court of Minnesota recognized that this disclosure rule is almost uniformly recognized across the United States." The court stated that "the fiduciary obligations which are the premise of trust may be simply stated."18 The court also noted that "[tlhe attorney is under a duty to represent the client with undivided loyalty, to pre- serve the client's confidences, and to disclose any material matters bearing upon the representation of these obligations."lQ

Despite the general rule that a lawyer may not settle a case with- out the authority of his client, an exception to this rule has been recog- nized. When an attorney has been given a valid "power of attorney" by a client who cannot be reached at the time of the settlement offer, the attorney may accept the offer if he believes that the failure to ac- cept would prejudice his client's rights.20 After the acceptance of any offer under these circumstances, the attorney, pursuant to Model Code DR 9-102(A) and (B)(1), is required to hold the funds in a separate, iden- tifiable bank account and to take all steps to notify the client and in- form him of the ~ettlement.~' An Alabama ethics opinion took this no- tion a step further and held that even in the absence of a power of attorney, when the attorney is unable to locate the client after a dili-

her in the case). 14. See In re Ratzel, 108 Wis. 2d 447, 321 N.W.2d 543 (1982); Rice v. Perl, 320

N.W.2d 407 (Minn. 1982); Law. Man. on Prof. Conduct (ABA/BNA) 801:1085 (1986) (reporting Ala. B. Op. 84-122 (1984)) (stating that the client must be informed of all relevant details regarding settlement offers and that the lawyer does not have to pro- vide the client with a copy of the letter from the opposing attorney containing the settlement offer) [hereinafter cited as Law. Man.].

15. See Rogers v. Robson, Masters, Ryan, Brumund & Belom, 74 111. App. 3d 467, 392 N.E.2d 1365 (1979); Rice, 320 N.W.2d at 410.

16. 320 N.W.2d 407 (Minn. 1982). 17. Id. at 410 (quoting R. Mallen & V. Levit, Legal Malpractice, 5 121 at 208 (2d

ed. 1981)). 18. Id. 19. Id. 20. See Law. Man., supra note 14, at 801:6321 (reporting N.Y.C. Bar Op. 81-23

(1984)). 21. Id.

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gent search and an emergency situation has developed, the attorney may settle the case when failure to do so would be prejudicial to the rights of the client.22

A Los Angeles ethics opinion took a more restrictive view of the effect of a power of attorney and prohibited the use of general re- tainer agreements containing a power of attorney which substituted the client's decision-making authority with that of the lawyer.?= The opinion states that "the authority to make decisions is exclusively that of the client and such decisions are binding on the lawyer."24 While "an attorney may ask a fully informed client for the power to settle a case, an attorney may not ask the client to waive his decision-making authority."2* Further' in a contingency fee arrangement, when the power to disburse funds is coupled with the discretion to settle a case because a power of attorney has been executed, the appearance of impropriety is created.26

Additional problems are created in settlement negotiations when an attorney is employed by an insurer to represent the insured. The majority rule on this point is reflected in an ethics opinion from Michi- gan which states that an attorney-client relationship exists between the attorney and the insured even when the attorney is hired by the in- surer.27 The opinion further notes that despite the general rule that an attorney must have the client's authority to settle a case, authority of the insured is not required when there is a contrary provision in the insurance contract.2B The opinion concludes by stating that the attorney in such a situation "should avoid any conflicts of interest and impaired loyal tie^."^^

22. See Law. Man., supra note 14, at 801:1093 (reporting Ala. B. Op. 84-780 (un- dated)). Cf. id. at 801:4839 (reporting Mich. B. Op. Cl-748 (1982) (stating that even failure to locate a client does not vest the attorney with authority to settle; decisions affecting the merits of a case are solely those of the client; and the attorney may be able to withdraw from the case if it would not be feasible to proceed with the trial in the client's absence).

23. See Law Man., supra note 14, at 801:1705 (reporting L.A. County B. Op. 393 (1981)).

24. Id. 25. Id. 26. Id. (relying upon MODEL CODE DR 9-101 (which discourages the appearance of

impropriety). 27. See Law. Man., supra note 14, at 801:4857 (reporting Mich. B. Op. Cl-876

(1983)). 28. Id. 29. Id.

Attorney's Responsibility in Settlement 195

The scope of the attorney's obligations to the insured party was also addressed in Rogers v. Robson, Masters, Ryan, Brumund and Be10rn.~~ In that case, the Illinois Supreme Court held that the defendant law firm wrongfully settled the plaintiff's case. The settlement was wrongful because the firm failed to notify its client, the insured party, of its intent to settle, even though a provision in the insurance policy authorized settlement without the written consent of the in~ured.~' The court stated that the client was entitled to be informed of an intent to settle and that the attorney represented both the insurer and the in- sured.S2 The court imposed liability on the attorney because, although he represented both, no less duty was owed to the insured than to the insurer.33 However, this case represents a minority rule which has been widely criti~ized.~'

111. PROTECTING THE CLIENT'S REPUTATION AND SELF-ESTEEM

Once the question of authority has been resolved, other issues must be considered by the attorney when settling a case. One such consideration is the attorney's obligation, if one exists, to protect the reputation of his client. In Zalta v. a California court refused to impose liability on the defendant law firm for failing to assure that the public record clearly exonerated its clients who were not required to contribute to the ~ettlement.3~ This action arose out of a medical mal- practice action3' in which the attorneys represented several defend-

30. 74 111. App. 3d 467, 392 N.E.2d 1365 (1979). 31. Id. See also Tybor, Client Consent Ordered for Settlement, NAT'L L.J., July 7,

1980, at 3. 32. Note, The Code of Professional Responsibility in Attorney Malpractice: Illinois

Attorneys Have a Duty to Inform Clients of an Intent to Settle-Rogers v. Robson, Masters, Ryan, Brumund and Belom, 30 DEPAUL L. REV. 499, 507 (1981).

33. Id. at 508. 34. See generally Note, 30 DEPAUL L. REV. 499 (criticizing the court's use of the

Illinois Code of Professional Responsibility "to define the standards of care in profes- sional negligence and justify the imposition of tort liability" in Illinois). See also Tybor, supra note 31 (stating that some lawyers were distressed over the erosion of authority under contract); Note, Attorney Malpractice- Wrongful Settlement by the Insured's and the Insurer's Joint Defense Attorney, 45 MO. L. REV. 739 (1980) (analyzing the deci- sion and criticizing the court's departure from traditional principles of negligence to determine liability).

35. 144 Cal. Rptr. 888 (1978). 36. Id. at 889. 37. Id. at 890.

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ants, including ZaIta.38 A settlement was reached in the case, but Zalta and another defendant were not required to contribute.39 Subse- quently, after the media reported that Zalta and the other defendant had to contribute to the settlement, Zalta and that defendant brought suit against their attorneys for failing to maintain their clients' reputa- ti0ns.~0 The court refused to impose a duty to maintain one's client's reputation, stating that "[nlo case holds counsel liable for damages re- sulting from the reaction of persons outside the court system, such as proceedings at a settlement conference."41 Further, the court stated,

It seems clear that while counsel has a duty to represent his client to the best of his ability, he does not become an insurer of either his client's self-esteem or his public reputation, liable for every mis- understanding of his client's position and responsible for every am- biguity in court proceedings susceptible to interpretation by

Applying a negligence analysis, the court determined that the element of causation was lacking.43 The settlement proceedings in court and the newspaper reports, which allegedly damaged the plaintiff's reputation, failed to have a sufficient nexus to form a causal link.44 The court also found a substantial likelihood of an independent, intervening cause.45

Conversely, the Minnesota Supreme Court in Rice v. PerP6 seemed to hold that damage to a client's reputation as a result of misfeasance or nonfeasance by the client's attorney may be a legitimate ground for a malpractice claim against the attorney.47 This case arose out of a pre- vious tort action in which Perl's law firm represented Rice.48 However, unknown to Rice during that suit, the law firm had an on-going business relationship with Browne, a claims adjuster for Aetna Casualty and Surety C O . ~ ~ Aetna was the defendant in Rice's tort action.50 During the

38. Id. 39. Id. 40. Id. 41. Id. at 891. 42. Id. at 892. 43. Id. at 893. 44. Id. 45. Id. 46. 320 N.W.2d 407 (Minn. 1982). 47. Id. at 411. 48. Id. at 408-409. 49. Id. at 408. 50. Id.

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period of settlement negotiations, Rice was never informed of Perl's association with Browne, and not until after the settlement of the ac- tion did Rice learn of the relation~hip.~' It was then that Rice initiated suit against Perl alleging fraud, legal malpractice, and breach of a fiduci- ary relation~hip.~~ The court noted that the attorney owed his client a fiduciary duty and that "the existence of the 'business relationship' cre- ated, at the very least, a substantial appearance of impropriety with respect to Perl, and a serious conflict of interest for B r o ~ n e . " ~ ~ The court stated that Rice should have been told of all relevant circum- stances surrounding the settlement negotiations so that she could have determined the necessary actions to take; for example, whether she should replace her attorney." The court also found that Perl's action placed Rice's reputation in jeopardy, stating that "an attorney has an obligation to prevent placing his client in a position which might well taint a settlement transacti~n."~~ It should be noted, however, that the court never actually imposed an affirmative duty on the attorney to maintain his client's reputation." The court simply acknowledged that the attorney risked an injury to his client by breaching the fiduciary relation~hip.~~

IV. CONCLUSION

Whether or not courts will be willing to enlarge the scope of an attorney's obligation in this area is an open question. Nevertheless, it is a consideration that should not be overlooked by the attorney, given Model Code EC 3-4's statement that "[tlhe entrustment of a legal mat- ter may well involve a confidence, the reputation, the property, the freedom and even the life of the client."% Protection of the client's reputation is yet another important component in settlement negotia- tions which must be considered when attempting to settle a client's cause of action.

Richard D. Mink

51. Id. at 409. 52. Id. 53. Id. at 411. 54. Id. at 410. 55. Id. at 411. 56. Id. 57. Id. 58. MODEL CODE EC 3-4.