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Best Practices: How to Avoid Ethical Pitfalls in Drafting Settlement Agreements

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By Holly Marie Wilson

Retail, Hospitality, and Entertainment Facilities Liability - Summer 2019 Newsletter
August 2019

An analysis of state law governing settlement terms that arguably restricting a lawyer’s right to practice.

The goal of a settlement agreement is not only to end an existing claim or lawsuit, but also to limit future exposure for the defendant. For this reason, some settlement provisions target not just plaintiff’s future conduct, but also that of her counsel. Settlement terms common in many settlement agreements between a claimant and a business owner which arguably restrict an attorney’s future conduct include (1) prohibiting plaintiff’s counsel from soliciting others to bring the same or similar claims against the same defendant in the future; (2) non-disparagement clauses; (3) prohibiting an attorney from advertising the fact that she obtained a favorable result against the business and (4) requiring the attorney to keep all information obtained during the litigation confidential. As desirable as these settlement terms may be for a business owner, depending upon the jurisdiction, such clauses may violate a state’s ethical rules. Three such states, Ohio, Kentucky and Indiana, have reached conflicting positions on this topic.

For example, Ohio places rather broad restrictions on the ability of an attorney to agree to limit her practice of law. In this state, a lawyer is prohibited from either “offering or making” an agreement that restricts the lawyer’s right to practice. This means that when an attorney settles a case on behalf of her client, there can be no agreement that restricts that attorney’s future practice. This rule applies even if the restrictive language is not explicit but, in effect, works to restrict the attorney’s legal practice.

In this regard, Ohio has gone farther than both Kentucky and Indiana in proposing four types of agreements that are impermissible under the law:


1. Restriction on representation of individuals with similar claims
Intended to prevent future exposure, a common clause in settlement agreements provides that a plaintiff’s lawyer agree to “not represent any other person who is contemplating filing the same or similar claims against defendant as those asserted in the lawsuit.” Ohio holds that this provision poses a two-part problem. First, it violates confidentiality as an attorney may have to disclose the identities of current clients. Next, if the attorney does indeed have a client with similar claims, then the restriction causes an immediate potential for a material limitation on the attorney’s practice of law arises. The provision would also impermissibly limit a lawyer’s discretion in pursuing future claims against the business, especially when comparing the settling attorney with an attorney not bound by the terms of the agreement.

2. Agreement not to solicit new clients with similar claims against the defendant
Although Ohio has several restrictions on how and when an attorney can solicit new clients, a settlement provision explicitly prohibiting any solicitation is deemed to have “the practical effect of substantially and impermissibly restricting the lawyer’s ability to practice law.”

3. Requirement to keep all information from the lawsuit confidential
Ohio disfavors broad provisions in a settlement agreement that restrict an attorney’s use of information that is public record. Recognizing that such a restriction “is not necessarily an outright restriction on the practice of a lawyer, it may have the practical effect of limiting the effective representation of future clients against the same defendants.” Ohio goes so far as to note that it is unduly restrictive to prevent a lawyer who learns of the business practices of a defendant during one litigation from using this knowledge in a subsequent case.

It is only when the provision narrowly requires that the terms and conditions of the settlement agreement be kept confidential, excluding facts in the public record, that a confidentiality provision is acceptable in Ohio.

4. Non-disparagement clauses
Although not disfavored entirely, Ohio frowns upon “overly broad non-disparagement clauses” in settlement contracts. For example, if the clause prevents the filing of a new action against the defendant, prohibits advertising of the attorney’s experience, or forbids the attorney from sharing his or her experience with a prospective client, these settlement terms represent undue restrictions on the attorney’s practice.

In contrast, if the provision merely prevents the attorney, or her clients from disparaging the defendant publicly, this is not an impermissible restriction under Ohio law.

Kentucky
Like Ohio, Kentucky inhibits settlement agreements that restrict the lawyer’s right to practice. Although not as explicit as Ohio, Kentucky recognizes that a lawyer cannot agree to forego representation of other persons in connection with settling a claim on behalf of another client.

Kentucky, notably, has modeled its rules after Model Rules of Professional Conduct, which have made clear that there can be no settlement provision prohibiting an attorney from using information learned during a current representation in a subsequent representation. This, under the model rules, would be like barring an attorney in future representations from subpoenaing certain records or fact witnesses or from using certain expert witnesses. In other words, it unduly restricts an attorney’s practice.

However, like Ohio, a clause is not prohibited if it prevents the attorney from releasing this information to public.

Indiana
Indiana’s restrictions are almost identical to Kentucky’s limitations. Similar to Ohio and Kentucky’s confidentiality/non-disparagement clause rules, Indiana reasoned that “[a]n agreement not to make statements that an attorney handles or has handled a particular type of matter would violate [its rules of professional conduct] because one of the policies behind the rule is to avoid agreements that limit ‘the access of the public to lawyers who, by virtue of their background and experience, might be the very best available talent to represent these individuals.”

Notably, however, a non-disparagement clause that limits an attorney’s public statements made outside of the legal advocacy of a client, such as advertising or promotional statements, does not raise ethical concerns and is permissible.

Takeaways:
These rules may give rise to conflicts between a client and its attorney, especially when both want to obtain as favorable of a settlement as possible.

While an attorney obviously wants to obtain the outcome desired by her client, she is constrained to obey the ethical rules promulgated by her jurisdiction. The question then becomes what is an attorney to do when the client wishes to enter into a settlement agreement that violates that state’s rules of professional conduct? Ultimately, in such a situation, an attorney must withdraw if the client insists upon entering into the settlement.

Moving forward, business owners and employers should take note that although favorable to avoiding future liability, their attorney may be restrained in drafting settlement agreements with terms deemed to prevent opposing counsel from taking part in certain conduct.