November 12, 2012 Articles

Settlement Agreements, Restrictions on Right to Practice Law

Any settlement provision that potentially affects an attorney's ability to practice or represent clients must be carefully drafted to comply with Rule 5.6(b)

by Terri L. Mascherin and Michael L. Cebula

While settling one lawsuit, a defendant may simultaneously be facing several similar lawsuits or may anticipate facing several similar lawsuits in the future, all brought by the same plaintiffs' attorney. The defendant therefore may wish to include a provision in the settlement agreement limiting that attorney's ability to bring lawsuits against the defendant in the future. Such circumstances implicate Rule of Professional Conduct 5.6(b).

Direct Restrictions on a Lawyer's Ability to Practice Law
Rule 5.6(b) states that a lawyer shall not participate "in offering or making" an agreement "in which a restriction on the lawyer's right to practice is part of the settlement of a client controversy." R. Prof'l Conduct 5.6(b) [membership required]. Therefore, as part of settling a client's case, a lawyer may not agree to restrict his or her own practice of law, or propose that opposing counsel restrict a practice. See, e.g., ABA Eth. Op. 00-417 (2000); ABA Eth. Op. 95-394 (1995) [membership required]. For example, a settlement provision stating that plaintiff's counsel "agrees not to represent any person or entity in any related litigation or dispute against [the defendant] or its affiliated entities" plainly violates Rule 5.6(b).

The rule applies not just to litigation between private parties, but also to litigation involving the government and disputes that have not yet resulted in litigation. See, e.g., ABA Eth. Op. 95-394 (1995); ABA Eth. Op. 00-417 (2000) [membership required]. However, Rule 5.6(b) does not apply to a lawyer who is acting as a party to the litigation, rather than as a legal representative of a party. ABA Eth. Op. 95-394 (1995) [membership required]. For example, a lawyer facing disciplinary charges may agree to suspend her practice of law for a certain period of time.

In addition, the subjective intent and desires of the client and the attorney are irrelevant in this context. Although generally the client controls whether, when, and how to settle a dispute, it is well-settled that even if a client wants his attorney to offer or accept a settlement provision that imposes a restriction on counsel's ability to practice law, Rule 5.6(b) prohibits the attorney from doing so. See, e.g., ABA Eth. Op. 93-371 (1993); see also ABA Eth. Op. 00-417 (2000) [membership required]. Similarly, counsel's willingness to accept a restriction on his or her right to practice law is irrelevant—Rule 5.6(b) prohibits restrictions on an attorney's right to practice law, even if the restrictions are acceptable to all of the attorneys involved. See N.C. Eth. Op. 9 (2003).

Indirect Restrictions on the Right to Practice Law
Rule 5.6(b) does not apply only to direct restrictions on the right to practice law, such as the example provided above. Rather, ethics authorities have found that a wide variety of settlement provisions that indirectly restrict an attorney's right to practice law violate Rule 5.6(b).

Confidentiality Provisions
Some confidentiality provisions in settlement agreements have been found to violate Rule 5.6(b). The American Bar Association's Ethics Opinion 00-417 concluded that a provision in a settlement agreement that prohibits a lawyer's future "use" of information learned during the litigation violates Rule 5.6(b), but a provision that prohibits a lawyer's future "disclosure" of that information is permissible. ABA Eth. Op. 00-417 (2000) [membership required].

The ABA's opinion explained that certain rules governing client confidentiality (such as Rule of Professional Conduct 1.6) already prohibit a lawyer from disclosing information relating to a client's representation absent the client's consent. A settlement provision prohibiting the disclosure of information relating to the litigation therefore is simply duplicative of those rules, and thus is not an impermissible restriction on the right to practice law. However, with respect to the use of information learned during the representation of a client, the ethical rules generally only prohibit a lawyer from using such information against the client. This means that a settlement agreement that prohibits a lawyer from using information against the opposing party is more than what is required by the ethical rules and thus is an undue restriction on the right to practice law.

On the other hand, some authorities have determined that whether a settlement provision restricting a lawyer's disclosure of information violates Rule 5.6(b) depends on the nature of the information at issue. Numerous ethics committees have held, for example, that settlement provisions may prohibit a party's lawyer from disclosing the amount and terms of the settlement (provided that information is not publicly known) because that information is a client secret, and thus under the applicable ethical rules, already is required to be kept confidential unless the client consents to its disclosure. See, e.g., D.C. Eth. Op. 335 (2006); N.Y. Eth. Op. 730 (2000) [membership required]; N.D. Eth. Op. 97-05 (1997); Col. Eth. Op. 92 (1993); N.M. Eth. Op. 1985-5 (1985). However, some authorities have concluded that a settlement agreement may not contain a confidentiality provision that prohibits a party's lawyer from disclosing information that is publicly available or that would be available through discovery in other cases. See, e.g., D.C. Eth. Op. 335 (2006); N.Y. Eth. Op. 730 (2000) [membership required]; N.D. Eth. Op. 97-05 (1997). Under that line of authority, for example, a settlement agreement may not prohibit a party's lawyer from disclosing information about the opposing party's business because that information is not a client secret; it is publicly available, and it could be learned through discovery in other cases.

Restrictions on Advertising
Ethics authorities also have found that some settlement provisions restricting an attorney's ability to advertise violate Rule 5.6(b). For example, according to the District of Columbia ethics committee, a settlement agreement may not prohibit counsel from using public information about the case (such as the parties' names, the allegations of the complaint, and the fact that the case had settled) on the firm's website or in advertising materials. D.C. Eth. Op. 335 (2006). The committee noted that such information is publicly available, and stated that it believed that settlement provisions seeking to limit the use of such information in advertising were intended to prevent potential clients from being able to identify talented and experienced attorneys, thus undermining a key purpose of Rule 5.6(b).

Similarly, another ethics committee held that a settlement agreement may not prohibit plaintiffs' counsel from soliciting third-parties who might have claims against the defendant. Tex. Eth. Op. 505 (1994). According to that opinion, the solicitation of clients is part of the practice of law, and such a settlement provision would interfere with the public's access to legal representation.

Restrictions on Future Litigation Strategy
Settlement agreements may not place restrictions on an attorney's future litigation strategy in cases brought on behalf of non-settling clients. See, e.g., ABA Eth. Op. 00-417 (2000) [membership required]; Col. Eth. Op. 92 (1993). Ethics opinions have held that a variety of such settlement provisions violate Rule 5.6(b), including provisions that prohibit counsel from subpoenaing certain records or witnesses in future cases brought on behalf of non-settling clients, as well as provisions that impose forum or venue restrictions in future cases brought on behalf of non-settling clients.

Requiring Counsel to Return Litigation Materials
Several ethics committees have held that it is permissible for a settlement agreement to contain provisions requiring plaintiffs' counsel to return to the defendant the documents produced by the defendant during litigation, as well as deposition transcripts and correspondence between the parties. See, e.g., N.D. Eth. Op. 97-05 (1997); Col. Eth. Op. 92 (1993). Those authorities have reasoned that the return of those materials does not unduly impair the attorney's ability to represent other clients in the future.

Furthermore, some authorities have concluded that, at least in some circumstances, it may be permissible to include a provision in a settlement agreement that requires plaintiffs' counsel to turn over to the defendant (or place under seal) materials that are protected by the attorney work-product doctrine. See, e.g., N.M. Eth. Op. 1985-5 (1985); N.D. Eth. Op. 97-05 (1997). Those authorities held that whether such a provision violates Rule 5.6(b) is a fact-dependent question. If the attorney believes that turning over his or her case file would affect his or her ability to represent other clients in the future, then he or she may not agree to include such a provision in the settlement agreement. For example, it is possible that materials in the case file may reveal a client's position, or weaknesses in a client's case, that could affect the attorney's representation of clients who have similar claims. It also is possible that if the attorney turned over the file, he or she would lose key research that could not be re-created in the event it was needed in the future. According to those ethical authorities, in such circumstances the attorney may not agree to turn over his or her case file.

Conditions on the Defendant's Payment of Litigation Costs
In certain circumstances, placing conditions on the defendants' payment of plaintiffs' litigation costs violates Rule 5.6(b). See, e.g., Phila. Eth. Op. 95-13 (1995). In Opinion 95-13, the Philadelphia ethics committee considered a settlement agreement pursuant to which the defendant agreed to pay plaintiffs' counsel $50,000 as "reimbursement" for plaintiffs' litigation costs and fees. The settlement agreement did not expressly prohibit plaintiffs' counsel from representing other clients against the defendant in the future, but it required counsel to return the fee reimbursement if his or her firm did so. According to the Philadelphia ethics committee, the settlement agreement violated Rule 5.6(b) because it impaired the law firm's ability to accept representation of new clients.

Consulting Arrangements
One way parties have attempted to avoid the restrictions of Rule 5.6(b) is by the defendant retaining plaintiffs' counsel as a consultant when the settlement agreement is finalized. By entering into such an arrangement, the defendant would become a current client of plaintiffs' counsel, which under the applicable ethical rules would limit plaintiffs' counsel ability to represent another party against the defendant in the future. Such consulting arrangements may violate Rule 5.6(b). See Adams v. BellSouth Telecomm., Inc., 2001 WL 34032759 (S.D. Fla. Jan. 29, 2001) [membership required]. In BellSouth, as part of reaching settlement, the defendant proposed that it retain plaintiffs' counsel as a consultant with the consulting fee to be taken out of the proposed settlement offer. The parties believed that this arrangement would not implicate Rule 5.6(b), but would prevent plaintiffs' counsel from representing other parties against the defendant in the future. However, the court strongly disagreed and held that the arrangement violated Rule 5.6 because it was plainly "a payoff to Plaintiffs' counsel to make them go away and never come back."

Sanctions and the Enforceability of Settlement Provisions Violating Rule 5.6(b)
Rule 5.6(b) is not simply a technical rule that courts do not care about. Rather, sanctions for violation of Rule 5.6(b) have been substantial, and have included disgorgement of fees and suspension from the practice of law. For example, the court in BellSouth ordered plaintiffs' lead counsel to disgorge $300,000 in legal fees and suspended counsel from practicing law before the district court for three years. Similarly, a court in another case suspended counsel from the practice of law for one year, in part due to the violation of that jurisdiction's version of Rule 5.6(b). In re Hager, 812 A.2d 904 (D.C. 2002) [membership required].

A separate question is whether a settlement provision that violates Rule 5.6(b) is enforceable. Generally, this question arises when a defendant moves to disqualify plaintiffs' counsel, based on the fact that plaintiffs' counsel agreed, as part of settling a prior case, either that he or she would not represent other clients against the defendant in the future or that he or she would not use information from the prior litigation in future lawsuits against the defendant.

Courts are split on this issue. Some courts have denied motions to disqualify in such circumstances and have held that settlement provisions that violate Rule 5.6(b) are not enforceable. See, e.g., Hu-Friedy Mfg. Co. v. Gen. Elec. Co., 1999 WL 528545 (N.D. Ill. July 19, 1999); Tradewinds Airlines, Inc. v. Soros, 2009 WL 1321695 (S.D.N.Y. May 12, 2009) [membership required].

Other courts have enforced provisions in settlement agreements that violated Rule 5.6(b) (or at least arguably violated the rule). See, e.g., Feldman v. Minars, 230 A.D.2d 356 (N.Y. App. Div. 1997); Blue Cross & Blue Shield v. Philip Morris, Inc., 53 F. Supp. 2d 338 (E.D.N.Y. 1999) [membership required]. Those courts criticized Rule 5.6(b) as "an anachronism, illogical, and bad policy" and held that parties should be able to settle their disputes in the manner they wish, even if part of the settlement agreement limits counsel's right to practice law.

Conclusion
Rule 5.6(b) has been applied to a variety of settlement provisions, including provisions that only indirectly limit an attorney's right to practice law. Any settlement provision that potentially affects an attorney's ability to practice or to represent clients in the future therefore must be viewed with caution, and carefully drafted to comply with Rule 5.6(b) and applicable ethical authorities.

Keywords: litigation, commercial, business, Rules of Professional Conduct, Rule 5.6


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