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1 Professional Responsibility Lawyers Volume VI, Issue No. 3 Summer 2004 Counsel s Corner A p u b l i c a t i o n w r i t t e n b y l a w y e r s f o r l a w y e r s Welcome Back to Counsel s Corner In This Issue Welcome Back... 1 Take 2: Oregon Considers New Ethics Rules Again... 2 Washington Court Applies Reasonableness Requirement for Duration of Fee Agreement... 3 New California Bar Opinion on Contract Lawyers... 4 Idaho Rules on Lawyer Authority to Settle... 5 Oregon Court Looks at Malpractice Conflict Trigger... 6 Corporate Counsel Spotlight... 7 In this issue, we focus on Oregon s possible move to a new set of ethics rules patterned on the ABA s Model Rules of Professional Conduct. If this topic sounds vaguely familiar it is. The Oregon State Bar s Board of Governors and its House of Delegates approved a comprehensive package of rule changes last year that would have replaced Oregon s disciplinary rules which date to 1970 with a set that would closely parallel those used in most of the rest of the country. The proposal, however, foundered on the steps of the Oregon Supreme Court. The OSB has with guidance from the Supreme Court retooled the specific elements of the package that gave the Supreme Court pause. The OSB s Board of Governors has approved the retooled package and its House of Delegates will consider the new version at its annual meeting in mid-october. Although the Supreme Court has not assured the OSB that the new proposal will be approved, the likelihood is higher this time around in light of the Court s direct involvement in shaping the revised package. If ultimately approved by the Supreme Court, the new rules would likely go into effect next year. Stay tuned. Briefly Noted... 8 Mark J. Fucile mjfucile@stoel.com Stoel Rives LLP

2 Take 2: Oregon Considers New Ethics Rules Again At its annual meeting in mid-october, the Oregon State Bar House of Delegates will consider adopting a new set of ethics rules patterned on the ABA s Model Rules of Professional Conduct. If approved by the House of Delegates and then by the Oregon Supreme Court, the current Oregon Disciplinary Rules would be replaced by new Oregon Rules of Professional Conduct. When the Oregon DRs were adopted in 1970 they were based on the ABA s then-current Model Code of Professional Responsibility. Although some of Oregon s rules have been revised over the years, the ABA significantly reshaped its model format in 1983 with the adoption of the Model Rules of Professional Conduct and then updated those further in Since the ABA moved to its Model Rules format, over 40 states have followed and more are considering doing so. In light of this trend, the Oregon State Bar Board of Governors appointed a committee in 2001 to study whether changes to the Oregon rules were warranted. The study committee issued a comprehensive report in January of 2003 recommending that Oregon move to the Model Rules format. Following a period of public comment, the Board of Governors in June 2003 approved the new rules and the House of Delegates followed suit in September of last year. When the package went to the Supreme Court, however, the Supreme Court had concerns over several specific rules and took the view that it could approve or reject the package only as a whole rather than fix individual rules that were not to its liking. At that point, the Bar and Supreme Court worked collaboratively to address its concerns and to develop a revised package. That revised package, in turn, was approved by the Board of Governors and will return to the House of Delegates in October. If approved there, the proposal would then move on to the Supreme Court for reconsideration. In its report accompanying the original rule package, the OSB study committee noted that it initially took the approach that if it ain t broke, don t fix it. However, after reviewing the ABA s Model Rules, the study committee concluded that they would offer Oregon lawyers two major advantages over the current ones. First, although the new rules largely retain the content of the old set, they recast them in form and format in a way that meshes better with the rest of the country. Several thousand OSB members are already members of other bars, and Oregon s reciprocity partners Washington and Idaho both use the Model Rules. For lawyers whose practices take them across state lines, moving to a more uniform system will make life simpler. Even for those lawyers whose work is solely in Oregon, the study committee noted that the value of drawing on guidance from other jurisdictions using a similar set of rules shouldn t be understated. Second, the new rules contain provisions the current set lacks that would bring additional clarity to several key areas including spelling out who the client is when representing an entity, duties to prospective clients and regularizing specific categories of temporary multijurisdictional practice. The text of the revised rules, a cross-reference table and the study committee s report are available on the Bar s web site at In key areas such as conflicts, the requirements for consent and confidentiality the biggest changes are in terminology rather than in overall content. Conflicts. Current and former client conflicts which are now found in DR would move to, respectively, RPC 1.7 and RPC 1.9. Like the current DRs, the proposed RPCs include a specific category of non-waivable conflicts prohibiting a lawyer from representing both sides of the same matter. Otherwise (and again like the current rules), the proposed rules allow for waiver of current client conflicts. The new former client conflict rule is quite similar to the present one conflicts would arise only when the new matter is the same or substantially related to one the lawyer handled for the former client or would require the lawyer to use the former client s confidential information adversely to the former client. In a related area, Oregon s lateralhire screening rule was retained and is simply moved to RPC 1.10, which deals specifically with conflicts imputed to a firm as a whole. Waivers. Mirroring the approach under the ABA Model Rules, waivers would be framed under proposed 2 Counsel s Corner Summer 2004

3 RPC 1.0(g) in terms of informed consent rather than the full disclosure currently found in DR (B). Again however, the core concepts from Oregon s well-honed definition of full disclosure are retained the lawyer must still communicate the material risks of waiver to the client, the client s consent must be confirmed in writing and the disclosure must include a recommendation to seek independent counsel. Confidentiality. The confidentiality rule would move from DR to RPC 1.6. Although in the proposed rule the scope of a lawyer s duty is framed in terms of information relating to the representation of a client, that term is then defined using the current Oregon concepts of confidences and secrets. As noted earlier, the proposed rules would contain some new features, including: RPC 1.13 would specifically define a lawyer s duty when representing an organization; RPC 1.18 would outline a lawyer s duties to prospective clients; and RPC 5.5 would permit temporary practice by out-of-state lawyers in several specific settings. Entity Representation. Proposed RPC 1.13 would make clear that a lawyer for an organization represents the entity as a whole. Although Oregon has treated this issue similarly in ethics opinions, such as OSB Legal Ethics Opinion (and the cases cited), proposed RPC 1.13 should bring additional clarity to this area by incorporating these concepts into the rules themselves. Duties to Prospective Clients. Proposed RPC 1.18 would impose a duty of confidentiality similar to the former client conflict rule on information a lawyer learned in confidence from a prospective client whom the lawyer then did not take on as a client. The lawyer s firm would still be able to take on the matter involved adverse to the prospective client if the lawyer who received the confidential information is screened from the case. The approach on confidential information is consistent with disqualification law and the screening mechanism affords a practical solution to a relatively uncommon, but still difficult, issue. Incorporating duties to prospective clients into the rules also offers a somewhat more concrete approach to this area than case-by-case development such as In re Spencer, 335 Or. 71, 58 P.3d 228 (2002), that we discussed in the Winter 2003 issue of Counsel s Corner. Multijurisdictional Practice. Proposed RPC 5.5 would regularize several kinds of temporary practice by out-of-state lawyers. This change flows from the recommendations of the ABA s special commission on multijurisdictional practice and if, as anticipated, this rule is adopted by most states in some form, it would establish a relatively uniform set of safe harbors nationally that would permit transitory practice by lawyers licensed in other jurisdictions such as when a Portland lawyer goes to Vancouver to work on a transaction there for an Oregon client and vice versa. By the same token, the transitory lawyer would be subject to the regulatory jurisdiction of the state in which the temporary work takes place. This would be a very pragmatic solution to an increasingly common situation. Overall, the proposed rules strike a good balance between retaining the core concepts that Oregon lawyers are familiar with while adding useful new features in several areas that have emerged since the DRs were initially adopted in Note: Mark Fucile was a member of the Oregon State Bar study committee that recommended the shift to the ABA Model Rules. Washington Court Applies Reasonableness Requirement for Duration of Fee Agreement In July, the Washington Court of Appeals held that the requirement that a lawyer s fee be reasonable extends over the life of the fee agreement. Holmes v. Loveless, Wn. App., 94 P.3d 338 (2004), arose under unusual circumstances. The plaintiff lawyers were two retired partners of a law firm. The defendant was a real estate developer. The lawyers and their firm had entered into a fee agreement with the developer in 1972 to provide legal services during the start-up phase of a project. Under the agreement, the law firm heavily discounted its fees (recovering no more than necessary to cover its overhead) during a two-year start-up period. After that initial period, the law firm s fees reverted to its regular rates. In return, the law firm was to receive five percent of any cash distributions generated by the project. The project turned out to be very successful and over the next thirty years generated $380,000 for the firm. The Summer 2004 Counsel s Corner 3

4 Washington Court Applies Reasonableness Requirement for Duration of Fee Agreement (continued) fee discount the law firm had effectively offered, by contrast, amounted to $8,000 (before any adjustment for inflation). By 2001, the two partners had retired and the firm had assigned its interest to them. Around that same time, the developer notified the partners that it was terminating the fee agreement. The two partners then sued the developer to enforce the agreement and continue the distributions. The trial court enforced the agreement on summary judgment, but the Court of Appeals reversed. The developer had challenged the fee agreement on the grounds that it violated the Rules of Professional Conduct and, therefore, was unenforceable as a matter of public policy. The developer s argument was rooted in two elements of the RPCs RPC 1.8(a), which regulates lawyer-client business transactions, and RPC 1.5(a), which prohibits unreasonable fees. The Court of Appeals agreed that review of the agreement under both provisions was warranted and, because the fee agreement remained in effect, it should be evaluated primarily under the current rules rather than the ones in effect at the time the agreement was entered into. Both RPC 1.8(a) and RPC 1.5(a) contain reasonableness criteria for evaluating fees. Under RPC 1.8(a)(1), a business transaction between a lawyer and a client must be fair and reasonable to the client. RPC 1.5(a), in turn, requires that [a] lawyer shall not make an agreement for... an unreasonable fee. The Court of Appeals relied on a recent fee agreement case Cotton v. Kronenberg, 111 Wn. App. 258, 44 P.3d 878 (2002), rev. denied, 148 Wn.2d 1011 (2003) in holding that the obligation to ensure that a fee is reasonable continues throughout the duration of the agreement involved. The Court of Appeals then examined the changing nature of the fee over the life of the agreement. The Court of Appeals conceded that although the arrangement may have been reasonable at the outset, the fee generated became unreasonable as time went by because the lawyer s risk diminished while the certainty and amount of the fee 30 years later became disproportionate. In line with this analysis, the Court of Appeals did not rescind the agreement or order disgorgement of the fees received. Instead, it refused to enforce the agreement going forward. In Holmes, the Court of Appeals used a very factspecific exercise to determine that the fee agreement there was no longer enforceable. But, in an era where investing in clients and alternative fee arrangements are more common with clients in a wide range of industries from high tech to project development, the impact of Holmes temporal yardstick for the reasonableness of fees remains to be seen. New California Bar Opinion on Contract Lawyers The California State Bar recently issued an ethics opinion, , dealing with many practical issues surrounding the increasing use of temporary contract lawyers to handle a variety of functions ranging from legal research to depositions and court appearances discusses the duties of both lawyers who hire contract lawyers and the contract lawyers themselves. The opinion is available on the California State Bar s web site at examines four primary duties on the part of the hiring lawyer. First, the hiring lawyer must reasonably ensure that the contract lawyer is competent to do the task assigned. Second, the hiring lawyer must inform the client that a contract lawyer is working on the client s matter if under the circumstances the use of a contract lawyer represents a significant development in how the case is being handled. Third, in most circumstances, the contract lawyer can be treated as either the functional equivalent of a firm employee for billing purposes or can be billed as a cost item rather than falling into the more formal category of co-counsel with its attendant fee division approval requirements. Finally, the hiring lawyer is responsible for ensuring that the client s confidential information is protected. 4 Counsel s Corner Summer 2004

5 On the contract lawyer s side, begins by noting that generally a contract lawyer will owe duties to the underlying client even in the face of a disclaimer to that effect provided to the hiring lawyer. As puts it when discussing court appearances: By making an appearance for [a l]awyer s client, the [contract] attorney steps into [the l]awyer s shoes to provide legal services to [the l]awyer s client, and in doing so, the [contract] attorney undertakes the ethical duties that arise from an attorney-client relationship. Id. at 5. Therefore, concludes that the rules governing both conflicts and confidentiality apply to contract lawyers. Although the opinion does not explicitly deal with the question of whether a contract lawyer s conflicts will be imputed to the hiring firm, it does conclude with the following rejoinder to both contract lawyers and the hiring firm: Both those lawyers doing the hiring and those lawyers who are hired must comply with the ethical rules concerning... confidentiality... and conflicts of interest that apply to their respective roles in any such arrangement. Id. at 8. For a relatively recent discussion by the California Supreme Court concluding that conflicts are imputed in the somewhat more formal context of of counsel lawyers, see People v. SpeeDee Oil Change Systems, Inc., 20 Cal. 4th 1135, 980 P.2d 371, 86 Cal. Rptr. 2d 816 (1999). And, for a detailed analysis of contract lawyer billing questions, see ABA Formal Ethics Opinion (2000). Idaho Rules on Lawyer Authority to Settle The Idaho Supreme Court recently addressed a lawyer s authority to enter into a binding settlement on behalf of a client. Caballero v. Wikse, Idaho, 92 P.3d 1076 (2004), arose in the context of an employment dispute between defendant Wikse and the Idaho Department of Health and Welfare. The State terminated the defendant s employment. The State later filed suit to overturn a finding by the Idaho Personnel Commission that the termination was without cause and Wikse filed two wrongful termination actions of his own against the State and various administrators. All three lawsuits were mediated on December 4, The mediation session forms the backdrop of the current decision. The parties initially met collectively with the mediator. At the initial session, the mediator covered the ground rules for the day. One of those was that a person with authority to settle had to be present at all times. The parties first reached agreement on several non-monetary issues and then moved on to potential financial terms. Late in the day when the parties were roughly $20,000 apart on an overall six-figure settlement, Wikse told his lawyer you handle it and left. Still later that day, the lawyer did just that and agreed on a settlement. Wikse later refused to go along with the settlement and the State sued for specific performance. The trial court found an enforceable agreement and held Wikse to the settlement. The Idaho Supreme Court affirmed. The Supreme Court found that a lawyer, as an agent, could bind the client-principal if the lawyer was vested with actual authority, which it defined as that authority a principal expressly grants to an agent or impliedly confers on an agent because it is usual, necessary and proper to achieve the object of the express authority granted to the agent. 92 P.3d at The Supreme Court also noted that although an agent can generally bind a principal when cloaked with apparent authority, Idaho does not apply that general rule to compromising a principal s claim. Id. In that situation, an agent needs actual authority under Idaho law whether express or implied. Id. Here, the Supreme Court found that Wikse had given his lawyer the requisite express actual authority because he knew that a person with authority to settle had to be present at all times during the mediation and had instructed his lawyer to handle it when he left. Accordingly, the Supreme Court agreed that specific performance was warranted. For a similar case and outcome farther west, see Kaiser Foundation Health Plan of the Northwest v. Doe, 136 Or. App. 566, 903 P.2d 375 (1995), adhered to on reconsideration, 138 Or. App. 428, 908 P.2d 850, rev. denied, 324 Or. 394 (1996). Summer 2004 Counsel s Corner 5

6 Oregon Court Looks at Malpractice Conflict Trigger In a pair of decisions in May, the Oregon Supreme Court looked at when a lawyer has to obtain a conflict waiver from a client before proceeding with a case in which the lawyer may have committed malpractice. The Supreme Court did not draw a bright line rule in either decision, but collectively the two cases offer useful insights into the considerations involved. In the first, In re Obert, 336 Or. 640, 89 P.3d 1173 (2004), the lawyer missed a filing date and, as a result, the client s appeal was dismissed. The lawyer researched the question of whether the appeal could be reinstated. He concluded that it could not and eventually withdrew. The Oregon State Bar charged the lawyer with violating Oregon DR 5-101(A)(1), which is the Oregon personal conflict rule and is similar to ABA Model Rule 1.7(a)(2) elsewhere, because he had not immediately obtained a conflict waiver from the client upon learning that the appeal had been dismissed. In the second, In re Knappenberger, 337 Or. 15, 90 P.3d 614 (2004), the opposing party had moved to dismiss an appeal on an asserted procedural defect in service and the appeal was later dismissed on that basis. In the meantime, the lawyer had continued to work on the appeal and a related cross-appeal. As in Obert, the Oregon State Bar charged the lawyer with violating Oregon DR 5-101(A)(1) because he had not immediately obtained a conflict waiver from the client when the other party moved to dismiss the appeal. In both Obert and Knappenberger, the Supreme Court flatly rejected the Bar s very aggressive argument that a conflict waiver is required immediately upon a problem surfacing that could possibly lead to a later malpractice claim against the lawyer. As the Supreme Court put it in Knappenberger: [T]he Bar s position sweeps broadly. Some potential for a malpractice claim exists in every case, and a lawyer s concern about malpractice liability need not await any actual or alleged error. What the Bar does not recognize is that, by its terms and taken to its logical conclusion, the Bar s approach would require a lawyer to disclose that conflict and seek consent from the client at the outset of virtually every case. 337 Or. at 28 n.3. Having rejected the Bar s proposed bright line, the Supreme Court declined to draw one itself. Instead, the Supreme Court looked to the text of DR 5-101(A)(1), which finds a conflict albeit a waivable one if the exercise of the lawyer s professional judgment on behalf of the lawyer s client will be or reasonably may be affected by the lawyer s own financial, business, property, or personal interests. The Supreme Court emphasized the impact on the lawyer s professional judgment in Knappenberger and echoed this same approach in Obert: It suffices to say that, to prove a violation of DR 5-101(A), the Bar cannot assert simply that an error occurred and, therefore, created some risk, however minimal, of impaired professional judgment as a result of the potential malpractice liability. Rather, the Bar must show by clear and convincing evidence that the lawyer s error, and the pending or potential liability arising from that error, will or reasonably may affect the lawyer s professional judgment. That conclusion will depend on the facts and circumstances of each case. 337 Or. at 29; accord 336 Or. at 648. Although Obert and Knappenberger were disciplinary cases, the conflict waiver trigger resonates well beyond that context. In Oregon and elsewhere, a lawyer s violation of the conflict rules may also signal a breach of the lawyer s fiduciary duty of loyalty to the client. See Kidney Association of Oregon v. Ferguson, 315 Or. 135, 843 P.2d 442 (1992). Further, the Supreme Court in Obert addressed another facet of the malpractice web a lawyer s failure to tell the client that an error occurred. In Obert, the lawyer waited five months before telling the client that the appeal had been dismissed. The Supreme Court found that this constituted a misrepresentation by material omission. 336 Or. at 649. In doing so, the Supreme Court cast this failure to communicate in fiduciary terms as well: [W]e think * * * that a lawyer effectively jettisons his or her fiduciary responsibility to safeguard a client s confidence and trust when the lawyer knowingly withholds from a client the allcritical fact that the court has spoken and the client s case is over. Id. In sum, while pure malpractice issues are not usually litigated in a disciplinary setting, these two cases will likely find their way into the civil liability calculus. 6 Counsel s Corner Summer 2004

7 Corporate Counsel Spotlight California Court Examines Who Owns the Attorney- Client Privilege After a Corporate Sale The California Court of Appeal recently reviewed the question of who owns the attorney-client privilege when a corporation is sold in a stock transaction or acquired through a merger of corporate stock. Venture Law Group v. Superior Court, 118 Cal. App. 4th 96, 12 Cal. Rptr. 3d 656 (2004), was painted against the backdrop of a dispute between the former minority shareholders of a high tech company and a firm which acquired the company in a stock acquisition/merger. During discovery in the case, one of the high tech company s former lawyers refused to answer deposition questions from the minority shareholder s lawyers based on the attorneyclient privilege. The trial court ordered the lawyer to answer the questions and the lawyer s firm sought an interlocutory writ. The Court of Appeal granted the writ and upheld the assertion of the privilege. In doing so, the Court of Appeal reviewed California law on who owns the privilege following a stock acquisition or merger. The answer: the successor corporation which acquired the stock. Relying on both California Evidence Code Section 953 and case law interpreting that provision, the Court of Appeal held that the successor acquired the privilege. The Court of Appeal also noted that once the privilege passes, the decision on whether to waive it also passes to the successor s management. Therefore, the Court of Appeal found that the assertion of the privilege by the law firm was proper and, absent a waiver by the successor s management, the privilege remained intact. Stoel Rives Professional Responsibility Lawyers Our professional responsibility lawyers serve lawyer-clients ranging from solo practitioners to law firms to corporate and government legal departments. We counsel lawyerclients on professional ethics, attorney-client privilege issues, loss prevention and lawyer regulatory matters. We provide training programs and expert-witness services in these areas as well. We also defend lawyers in disciplinary and related regulatory proceedings. Finally, we are available to assist with or handle the prosecution or defense of motions for disqualification and motions for sanctions. CONTACTS: Mark J. Fucile mjfucile@stoel.com E. Joseph Dean ejdean@stoel.com Brent J. Giauque bjgiauque@stoel.com This is a periodic publication of Stoel Rives for the benefit and information of its clients and friends. This newsletter is not legal advice or a legal opinion on specific facts or circumstances. The contents are intended for informational purposes only. Copyright 2004 STOEL RIVES LLP. Counsel s Corner is a registered trademark of Stoel Rives LLP. Editor: Signe L. Hills slhills@stoel.com Permission to reprint all or part of this material may be obtained from: Mark J. Fucile mjfucile@stoel.com Signe L. Hills slhills@stoel.com Additions and deletions to our mailing information should be directed to: Mark Houk mdhouk@stoel.com STOEL RIVES LLP maintains offices in: PORTLAND, OR SAN FRANCISCO, CA For other cases nationally that reach the same general conclusion as Venture Law Group, see Tekni-Plex, Inc. v. Meyner & Landis, 89 N.Y.2d 123, 674 N.E.2d 663, 651 N.Y.S.2d 954 (1996) (applying New York law), and Commodity Futures Trading Comm n v. Weintraub, 471 U.S. 343, 105 S. Ct. 1986, 85 L. Ed. 2d 372 (1985) (discussing this issue in the bankruptcy context). SEATTLE, WA SALT LAKE CITY, UT BOISE, ID VANCOUVER, WA SACRAMENTO, CA TAHOE CITY, CA FRESNO, CA Printed on recycled paper. Summer 2004 Counsel s Corner 7

8 ATTORNEYS AT LAW 900 SW Fifth Avenue Suite 2600 Portland, OR PRSRT STD U.S. POSTAGE PAID PORTLAND, OR PERMIT NO Counsel s Corner A publication written by lawyers for lawyers Briefly Noted... Washington Court Rules on Malpractice in Criminal Cases. The Washington Court of Appeals in Owens v. Harrison, 120 Wn. App. 909, 86 P.3d 1266 (2004), has reaffirmed the general rule that a criminal defendant who was convicted must have the conviction set aside and prove actual innocence to prevail on a legal malpractice claim against a lawyer who allegedly mishandled the case involved. In Owens, the former client met the first requirement, but not the second, and the Court of Appeals affirmed summary judgment for the lawyer. The Court of Appeals stressed the public policy grounds for the application of this rule in Washington. California Readies New MJP Rules. As we reported in the Spring 2004 issue of Counsel s Corner, the California Supreme Court adopted a package of rules expanding authorized practice there by out-of-state lawyers working as in-house counsel, litigators in settings not covered by pro hac vice admission and transactional lawyers temporarily in California working on a matter connected to the lawyer s home jurisdiction. The new rules address many of the issues that arose in the wake of the California Supreme Court s decision in Birbrower, Montalbano, Condon & Frank, P.C. v. Superior Court, 17 Cal. 4th 119, 949 P.2d 1, 70 Cal. Rptr. 2d 304 (1998), and are similar in many respects to the ABA s recently amended Model Rule 5.5. The new rules become effective November 15 and are available on the California Supreme Court s web site at The California Bar is working on implementing rules and fees. The final rules and fees should be posted shortly on the California Bar s web site at Washington Continues Review of Possible RPC Amendments. The Washington State Bar is continuing its examination of possible changes to its RPCs that would update them to generally reflect the current set of ABA Model Rules. The WSBA s Board of Governors completed its review of the proposals at its meeting on July The proposals, which cover topics ranging from conflict waivers to organizational clients, now move on for review by the Washington Supreme Court. More information about the status and content of the proposals is available on the WSBA s web site at Counsel s Corner 8