Ethics in Settlement: Lawyer Gamesmanship and Misrepresentations During Negotiations
by Karen M. Goodman

I. Introduction

Ethical rules deal with the lawyer's responsibilities to the court, the public and the clients. No ethical rules squarely deal with the lawyer's conduct in settlement negotiations. As such, settlement negotiations, including structured ADR proceedings, frequently resemble WWF wrestling matches in terms of gamesmanship, misrepresentation and coercive tactics. There exists significant tension between the idealistic "full and fair disclosure" movement promoted by the professional ethicists and the traditional "anything goes" techniques employed by many practitioners.

II. Problem: Settlement negotiations occur outside of the courtroom and are governed by few rules other than they are "confidential" and privileged.

The ethical dilemmas faced by counsel in settlement negotiations center on unconscionable terms, disclosure of critical facts or issues, conflicts and authority.

A. Unconscionable settlement terms

Frequently, one party proposes a settlement expressly conditioned upon confidentiality of the terms and all facts leading to the settlement. The ethical dilemma resulting from a confidentiality provision are illustrated in a California case, Gilbert v. National Corporation (1999) 71 Cal.App.4th 1240, where the plaintiff's attorney was disqualified because of a conflict of interest created by his simultaneous representation of the plaintiff and other clients in a different case. The attorney had successfully negotiated a settlement for several employees. "Confidentiality" was one of the terms of the settlement. The same attorney then undertook the representation of another employee against the same employer. This attorney found himself facing a motion to disqualify when he sought to call one of his clients to testify about matters governed by the confidentiality agreement. The court disqualified the plaintiff's lawyer during trial since the competing interests compromised his duty of loyalty to each client.

Settlement negotiations do not fit neatly within any ethical rule. Rules of Professional Conduct rule 5-200 deals exclusively with trial conduct. Business & Professions Code Section 6068(d) requires that an attorney shall employ "means only as are consistent with truth, and never to seek to mislead the judge or any judicial officer by an artifice or false statement of fact or law." Frequently, one counsel has superior knowledge about critical information. A lawyer's ability to recognize and take advantage of this superior knowledge enhances his client's ability to obtain a better settlement.

Another factor removing settlement negotiations from the ethical rules is that they generally occur outside of court and as such, receive much less scrutiny than conduct in court. The ethical rules are seemingly limited to statements in a tribunal. There is no ethical prohibition against making misstatements of law in settlement negotiations. Lawyers generally acknowledge that lying, exaggeration and coercive conduct are acceptable practices in settlement negotiations.

It is improper to threaten to report a lawyer's misconduct to the state bar to gain an advantage in litigation. (Rule 5-100 A lawyer's threat of criminal prosecution may very well be unethical depending on (a) who made the threat and (b) how the threat was couched. As a general rule, it is unethical for a lawyer to threaten criminal prosecution or administrative action in an effort to induce a more favorable settlement.

This restriction can be evaded by having the client make the threat or by "veiling" the threat in such terms as to suggest the possibility of criminal charges. Settlement negotiations, particularly in mediations where the parties are directly involved, provide a perfect opportunity for these threats to be made outside of the scrutiny of any ethical constraint. The parties themselves (unless they are lawyers) are not governed by the ethical rules. The "anything goes" circus-like atmosphere of settlement negotiations does not address the prevalent practice of coercive threats and innuendo in "softening up" the other party or counsel into a favorable settlement posture.

An employee's demand for a favorable written reference may be ethically problematic. A lawyer has an obligation to refrain from misleading third parties by misstatements of fact. Obviously, truthful written references do not give rise to ethical issues. The question is whether the favorable written reference is "puffery" or a misstatement of fact.

If the lawyer has the plaintiff prepare the written reference to be attached to the settlement agreement and signed by a manager, then the lawyer may have escaped the literal reaches of the prohibition against the lawyer personally making misstatements of fact.

The lawyer for the employer faces the ethical dilemma of perhaps propounding a fraud on subsequent employers for the short-term benefit of negotiating an otherwise favorable settlement for his client. The lawyer for the employee can wipe away a negative employment reference (which may have been factually accurate) through a settlement which expressly provides for a positive reference. The former employer incurs a greater risk of liability by authoring "glowing" but inaccurate reference letters. See Randi W. v. Muroc Joint Unified School District (1997) 14 C.4th1066, where the court held that a writer of a recommendation owes a duty to prospective employers not to misrepresent the facts in describing qualifications and character of the former employee.

B. Authority to Settle

Another frequent ethical problem is the lawyer's alleged authority to enter into a settlement agreement on the client's behalf. Under rule 3-510, the lawyer is obligated to promptly communicate any written settlement offer made in a civil matter and any offer made in a criminal matter. Frequently, however, civil lawsuits are settled without direct client participation. Lawyers should attempt to keep the client informed of settlement talks. Lawyers often overlook that a client retains control over whether or not to accept a settlement.

The issue of apparent or ostensible authority arises when the attorney represents to the other side he has authority to enter into the settlement, but the client subsequently balks at signing the settlement agreement. Whether an attorney can bind his client depends on the totality of the circumstances. As a general rule, an attorney cannot settle for his client without specific authority to do so. A common settlement practice is to commit the other side to a settlement without having actual authority from the client and then subsequently persuading the client that the settlement "proposal" is the best deal possible. In some cases, the lawyer "accepts" a settlement without obtaining the actual consent from the client.

Even where the lawyer tells the other side, "we have a deal," the settlement is not binding and effective until all parties sign it. In determining whether an unsigned settlement is enforceable, courts generally examine the following factors: (1) whether there was an express reservation of the right not to be bound in the absence of a executed agreement; (2) whether there has been partial performance of the contract; (3) whether all of the terms of the alleged contract have been agreed upon; and (4) whether the agreement at issue is the type of contract that is usually committed to writing. These factors are useful whenever one of the parties refuses to sign a settlement agreement where the terms had been previously agreed upon.

C. Barriers to Mandating Ethical Settlements

Why is so little attention paid to "ethical conduct" in settlement negotiations? First, the ethical rules grew out of an era where lawyers frequently tried cases. Lawyers practiced in small, more cohesive communities and knew each other. They knew what to expect from each other in negotiations. Now, many lawyers find themselves negotiating with strangers. The proliferation of ADR, including court sanctioned mediations and settlement conferences, has meant that many more cases are resolved through the settlement process. The rules proscribing ethical conduct have not caught up with existing practice in which mediation generally occurs in most cases.

Second, settlement discussions are typically inadmissible at the time of trial and are cloaked in confidentiality. (See, e.g., Cal. Evid. Code Section 1152; see also Federal Rules of Evidence 408. Settlement demands, mediation briefs, and statements are not included in the court record and are not to be considered by the trier of fact when the matter is tried. The problem is that parties or counsel may agree to settle a case based on a misrepresentation resulting in an unjust outcome. Lawyers may feel they are immune from any repercussions for lying during settlement negotiations.

Third, the most coercive practices are verbal. Few practitioners are foolhardy enough to threaten criminal prosecution in writing. Most of the threats and coercive conduct is verbal and often carefully couched in suggestions and innuendo. Moreover, settlement negotiations (particularly face to face dealings) are not "recorded" by a court reporter. In the smoke and mirrors surrounding settlement negotiations, there is a much less accurate record of who said what.

Fourth, there is no real way to prevent coercive, unfair settlement practices. In few cases does anyone challenge an illegal threat. False representations of "fact" are seldom uncovered. The litigation privilege bars a second-generation action based on misrepresentation in negotiations in almost all circumstances. As an example, under Civil Code Section 47(b), communications in a judicial proceeding are privileged. California courts have held that this privilege protects any publication in the course of a judicial proceeding to achieve the objects of the litigation even if the publication is made outside the courtroom-such as in settlement negotiations. Silberg v. Anderson (1990) 50 Cal.3d 205, 211-212. Courts want cases settled and if all parties agree to the settlement, the courts will enforce the agreement in almost all circumstances-even if it is unfair or a new fact is uncovered. The uncovered "fact" that may have played a large role in settlement may never be discovered.

III Can this ethical chasm in settlement negotiations be bridged?

Ethics have come under increasingly sharp scrutiny as many more cases are settled through court supervised Alternative Dispute Resolution programs. Ethics scholars decry the circus-like atmosphere where few practitioners disclose "all facts", "limits on authority" or "weaknesses" in their cases. Experienced practitioners draw the lines on ethical conduct in an elastic nature: most would not "outright lie" but many would shade the truth and would expect their adversary to do the same. The problem is that as a result many settlements are so unconscionably unfair to one side or the other that the overall confidence in the profession is undermined. The competing issues are the duty of advocacy to the client against the duty of fairness to the other side.

Has the time come to revise the ethical rules to address directly the complicated issues involved in settlement negotiations? The reality is that the existing ethical rules are inadequate to deal with the behavior endemic in settlement negotiations. Moreover, the present rules may actually promote gamesmanship and misrepresentation in settlement negotiations since they only governs "material" facts and not other false statements.

Courts are slowly beginning to recognize that settlements premised on "fraudulent" conduct should be rescinded. In an example of undoing a settlement agreement due to a misrepresentation of the defendant's insurance policy limits, the Court of Appeal, in Nafsu v. Hurd (2000) 84 CA4th 1103, emphasized the public policy concerns about settlements obtained through fraud. The attorney for one of the defendants claimed the policy limits were $100,000. Nafsu accepted the offer and the parties entered into a written settlement agreement based on the purported policy limits. In subsequent indemnity litigation, discovery revealed the true limits were $300,000. The trial court granted Nafsu's motion based on the existence of extrinsic fraud. Nafsu filed an amended complaint and Hurd successfully demurred on the basis of litigation privilege.

The Court of Appeal recognized the tensions between the finality of settlements, the litigation privilege and unconscionable conduct in reversing the trial court's holding barring this claim under the litigation privilege. The Nafsu court held that where "the settlement agreement results from a misrepresentation regarding the limits of insurance policies providing coverage or potential coverage for a claim, the policy considerations in favor of allowing a rescission claim greatly outweigh the considerations underlying the litigation privilege. The court's rationale for creating this limited exception to the litigation privilege emphasizes the importance of insurance in the legal system. The California Legislature recently created an exception to the litigation privilege for communications that conceal the existence of applicable insurance policies. Civil Code section 47(b)(3). The rationale of the Nafsu court could readily be applied to other substantive issues central to settlement negotiations.

Conclusion

The absence of ethical rules for lawyers in settlement negotiations assumes that counsel and the parties are in relatively equal bargaining positions. There are strong policy reasons to encourage settlements to avoid the "winner take all" mindset of trials. Client confidentiality is critical to instilling the public's confidence in the legal system. The litigation privilege is important to protect the litigants and counsel from frivolous second and third generation lawsuits arising out of demands, comments and misinterpretation that naturally occur in settlement negotiations.

There is a growing interest in imposing clear ethical rules requiring that settlement negotiations be "fair" and that all factual and legal issues be "fully disclosed." Lawyers do need to be concerned about insisting on settlement terms that may undermine the ethical obligations they owe and may compromise one or more parties. Lawyers also need to be particularly vigilant in recognizing that the client is the decision-maker on settlements and encouraging a full and frank discourse during settlement negotiations. The specter of a disciplinary action will not improve the dialogue between lawyers during the most fluid, informal, yet vitally important period of settlement negotiations.

The settlement arena remains a wild, uncharted jungle for those lawyers who do not understand the game that is being played.