In the last decade, there were at least 21 publicly reported settlements by or verdicts against law firms between $3 million and $20 million, and nine of those are attributable to the firm’s representation of a dishonest client. The typical allegation in such cases is that the law firm aided and abetted the dishonest client’s breach of fiduciary duty, fraud, or other misconduct, thus harming third parties.
“The danger for lawyers is that jurors often tend to exaggerate the extent to which known events could have been anticipated or detected,” says Richard Hager, Jr., vice president and senior account executive in the Pittsburgh office of Aon Risk Services Central Inc., who counts several law firms as clients.
“Many fine law firms have choked down unpalatable settlements in aiding and abetting cases in which they believed they did nothing wrong out of the concern that they would fall victim to jurors’ hindsight bias.”
Smart Business spoke with Hager about how law firms can protect themselves from this professional risk.
What steps can law firms take to prevent themselves from becoming exposed to aiding and abetting liability?
The surest way for firms to avoid potential aiding and abetting liability is to decline to represent unworthy clients. That is easier said than done especially given the pressure that many lawyers feel to bring in new business but it is a generally attainable goal.
Most sophisticated law firms have in place measures designed to identify unworthy clients at the intake stage, including limited background checks, standard searches of particular databases, reviews of SEC filings or annual reports, and policies prohibiting the acceptance of particular classes of business or clients. Most firms also vest final decision-making authority concerning the acceptance of new business in senior lawyers other than the lawyer who proposes the new matter. This injects some measure of objectivity into the business acceptance process.
What if a client’s potential mischief does not manifest itself until representation is already underway?
It is important for firms to adopt policies requiring lawyers and staff who suspect possible misconduct by a client, or by an employee or agent of an organizational client, to report it to the firm’s general counsel, loss prevention partner, or similar senior lawyer as soon as practicable. It should not be the reporting person’s responsibility to determine whether the degree of possible misconduct triggers ethical or legal obligations on the part of the firm or its lawyers; that is the role of the firm’s general counsel or loss prevention partner, perhaps in consultation with others. Thus, the threshold for reporting possible misconduct to the general counsel or loss prevention partner should be low.
Are there other situations in which lawyers might find themselves exposed to aiding and abetting liability?
Aiding and abetting liability is not limited to client situations. For example, a lawyer representing an organization, such as a corporation or partnership, might be accused of aiding and abetting an officer’s or partner’s typically a non-client breach of fiduciary duty to the entity the lawyer’s client. Where the business has failed, it is commonly a bankruptcy trustee or receiver who is suing the lawyer.
Many states, including Pennsylvania, now recognize aiding and abetting liability in some form, and the theory provides a difficult and dynamic battleground for even the finest and most cautious law firms.
What other risk management advice can you offer to lawyers and law firms?
Prudent lawyers also should strive to understand the context in which their services are being used and the purposes for the tasks or transactions with which they are being asked to assist. Again, very few matters will be troublesome. In most cases, context and purpose will be apparent.
In other instances, the timing of a transaction, the nature of a task, the absence of any apparent economic substance to a deal, or other factors may raise a red flag or at least a pink one. In those cases, the lawyers involved should reasonably consult with the client to understand the matter’s full context and the client’s objectives. If that inquiry raises doubts in the lawyers’ minds about the nature of the matter or their role in it, they should raise the issue with appropriate lawyers in their firm who are positioned to objectively analyze the situation and evaluate the firm’s position.
Although there is authority for the proposition that a lawyer need not probe beneath the surface of a representation when doubt ripples, but can instead strictly adhere to the engagement terms, this approach is not necessarily advisable. Indeed, there is a substantial risk that it will appear unreasonable or worse in the bright light of hindsight.
While following a ‘heads down’ approach may still permit a firm to extricate itself from litigation in which it has been wrongly targeted, the more cautious approach we advocate may enable a firm to avoid being sued in the first place.
Richard Hager jr. is a vice president and senior account executive in the Pittsburgh office of Aon Risk Services Central Inc. Reach him at (412) 594-7574 or firstname.lastname@example.org.