Verdict proves lesson on risk from ‘accidental clients’

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A hefty $34.5 million legal malpractice verdict against Massachusetts law firm Holland & Knight is a wake-up call to lawyers about the pitfalls of creating an “accidental client” relationship.

The firm claimed it represented only the business entity it helped construct – not the individual investors who formed that entity. But two of the individual investors sued for malpractice, fraud and breach of fiduciary duty, claiming the lawyers worked against their interests by encouraging them to sign personal loan guarantees for the business.

After a jury hit the firm with the 8-figure verdict in April, Holland & Knight reached a confidential agreement before the jury could impose punitive damages. The agreement allows the firm to appeal the verdict.

For lawyers who represent closely held businesses, partnerships, LLC’s or start-ups, identifying who is and is not your client is an important but sometimes overlooked step.

“One of the great pitfalls of working on creating contracts is people believing they are being represented by the attorney when the attorney has no such belief,” said Josh J.T. Byrne, a partner with Swartz Campbell in Philadelphia.

Lawyers in other practice areas like family law and estate planning can also experience problems with third parties, such as a spouse or an heir, mistakenly thinking they are represented by the attorney.

“Who is the client is a tricky business, and accidental clients are from time to time a source of concern, a nag – or worse,” said Henry Bryans, senior vice president of the Professions Group of Aon Risk Solutions, a liability insurer in Radnor, Pa.

Mr. Money, Ms. Idea & Mrs. Sales

Like the stock joke that starts, “A priest, a rabbi and an imam walk into a bar…,” legal ethics attorney Lucien Pera uses this stock hypothetical when advising attorneys on accidental clients: “Three people walk into your law office – Mr. Money, Ms. Idea and Mrs. Sales. They want to start a business. Who do you represent?”

Some say it’s Mr. Money, who is paying the legal bills; others say Mrs. Sales, your longtime client who brought in the business; others say the real client is the not-yet-formed entity.

While very smart lawyers can disagree on the answer, the point is to ask the question, said Pera, a partner with Adams and Reese in Memphis, Tenn., who advises lawyers on ethics, professional responsibility and malpractice. A careful lawyer will state in the engagement letter who is the client and who is not.

Although this is useful, some or all of the listed “non-clients” may well never see that document, Bryans said.

To address that, some lawyers recommend making liberal use of the “I’m not your lawyer letter.”

Also known as a non-engagement letter, this document states clearly that you do not represent the party and that they may wish to get their own lawyer.

According to Pera, the law in nearly every jurisdiction says that an attorney-client relationship is either expressly formed if both parties agree or is implied if a reasonable person in the accidental client’s shoes would reasonably believe an attorney-client relationship was formed.

The “I’m not your lawyer” letter helps protect lawyers from the latter scenario.

A cautious approach would be to send a non-engagement letter “anytime you think an individual might be confused about representation,” said Nancy J. Moore, a law professor at Boston University School of Law who teaches professional responsibility.

But she noted that sometimes it’s not just a question of communication, but a matter of whether the lawyer has thought about who are his or her potential accidental clients.

“A lawyer has got to be constantly aware of whom he or she represents and make sure everybody understands,” said Moore, adding that lawyers may have to reassess this question from time to time depending on developments in a case or between the parties.

A typical example is where a lawyer believes he or she represents the majority shareholder of a company until a dispute between the majority and minority shareholders breaks out, calling into question whether you can continue to represent either.

‘Corporate Miranda’ warnings

A burgeoning area of the law, and one that can be fraught with misunderstandings about whom a lawyer represents, is the field of corporate investigations.

A lawyer representing a company may be brought in to interview employees for an investigation into anything from financial misdeeds to government allegations to a workplace sex harassment complaint.

“It’s a big, big deal … in any kind of investigation where lawyers are talking to employees up or down the line who may have done something wrong,” Pera said. “For example, a lawyer is hired to investigate charges of stock option back-dating. The CFO talks, spills his guts. At the end of the road, he is charged with crimes based on notes the lawyers turn over. He says ‘Wait, those were my lawyers, not the company’s lawyers.’”

Those were the facts in a notorious case, U.S. v. Ruehle, 583 F.3d 600 (9th Cir. 2009), in which the 9th Circuit said such communications were not confidential and could be turned over to prosecutors.

Lawyers conducting internal investigations are advised to give interviewees a “corporate Miranda” warning, also known as an “Upjohn” warning, named after a U.S. Supreme Court case, Upjohn Co. v. U.S., 449 U.S. 383 (1981).

“What you do is at the beginning of the interview, you tell the employee, ‘I don’t represent you. Anything you disclose will be privileged, but the privilege belongs to my client, the company – not you. Therefore the company could waive it and disclose what you tell me to the [authorities] but it’s not something that you will have control over,’” Bryans said.

According to Pera, it’s becoming more common to also use a written corporate Miranda warning and ask an employee to read it and initial it before the interview begins.

The downside to a written warning is that it can have a chilling effect on the information an employee is willing to disclose, Bryans said.