September 01, 2014

Scruples: Letters of Protection

Michael Downey

“What is a letter of protection?” Paradox interrupted Ethox. “And can I provide one to a doctor?”

“A letter of protection is a guarantee of payment from a law firm to a doctor,” Ethox responded. “The lawyer promises to make sure the doctor is paid for medical services provided to the lawyer’s client—the doctor’s patient—from any recovery the lawyer obtains for the client.”

“Are such letters ethical?” Paradox pressed.

“Generally, a letter of protection does not pose serious ethical problems,” Ethox reassured Paradox. “In fact, several jurisdictions—notably Arizona and Wisconsin—have issued ethics opinions authorizing lawyers to issue letters of protection. But there are still some risks.”

“Such as . . . ?” Paradox waited.

“If we provide a letter of protection,” Ethox answered, “we need to make sure the doctor gets paid from any recovery we obtain in the lawsuit. In most jurisdictions, we could be held liable civilly for any amounts the doctor was supposed to recover from our client’s recovery. A few jurisdictions have precedent that a lawyer’s failure to honor a letter of protection may result in discipline. Sometimes lawyers even get in trouble for failing to tell a third party that funds have been received.

“Also, letters of protection can create problems with a client,” Ethox added. “A client may forbid a lawyer to pay the doctor or even to tell the doctor that funds are available. Then the lawyer may find himself or herself in a mess.

“If we are going to offer the letter,” Ethox reflected, “there are several things we can do to protect ourselves. First, some plaintiffs’ lawyers include authorization in their engagement agreement to enter letters of protection and to provide notice to doctors who receive such letters that funds have been recovered for the client. An authorization can head off a client’s claims the letter was not authorized and also avoid requests not to tell the doctor funds have been received.”

“We don’t have the authorization in our engagement letter,” Paradox considered, “but I can get written authorization now.”

“That should suffice,” Ethox answered, adding, “We also want to make sure that our client is comfortable with our offering the guarantee to this doctor. You might as well get both authorizations at the same time.”

Then Ethox resumed the explanation of ethics issues that may arise. “A lawyer also must be careful to maintain a record of letters of protection that have been issued and the status of those letters, so the lawyer understands to which doctors obligations are owed and for what type of procedures.”

“I would imagine that is very important,” Paradox agreed. “A client may receive a lot of treatment from a particular doctor, and the client and doctor may disagree about what the lawyer is obligated to pay.”

“You are right,” Ethox agreed. Ethox added a warning. “When a client disagrees about payments owed to third parties, and the third party’s claim for payment is not patently frivolous, the lawyer should pay out any amounts not subject to dispute but hold any funds in dispute—usually in the lawyer’s trust account—until the dispute is resolved. If the client and doctor seem unable to reach an agreement in a reasonable period, the lawyer would likely need to interplead the disputed funds and allow a court to determine an appropriate distribution.”

“So the letter of protection basically establishes a doctor’s lien, a lien the lawyer needs to honor?” Paradox asked.

“Exactly. If the firm instead pays the disputed funds directly to the client,” Ethox warned, “the lawyer may be liable to the doctor for moneys the doctor was entitled to receive. And if the lawyer improperly pays a third party, the lawyer might be liable to the client for any funds improperly disbursed.”

Finally, Ethox cautioned, “A letter of protection does not authorize a lawyer to pay a client’s medical bills. Rather, when representing a client on a litigation matter, ABA Model Rule of Professional Conduct 1.8(e) still generally prohibits a lawyer from paying non-litigation expenses of a client, including medical bills.”

Michael Downey

The author is with Armstrong Teasdale LLP, St. Louis. He also teaches legal ethics at Washington University School of Law.