Ethics in Brief: Ethics in Settlement Negotiations

By Katie Parker

Associate Professor, USD School of Law

In Bargaining for Advantage, Wharton Professor G. Richard Shell writes: “Behaving well in negotiations gives you an opportunity to express your identity as a moral person, and this will be true even if nobody else is aware of how badly or well you have behaved.”^[1] Shell teaches business students, and his book Bargaining for Advantage is for general audiences, so he doesn’t address legal negotiation ethics. But his message rings true; we should strive for unquestionably ethical conduct in our settlement conduct. As attorneys, we are bound by the standards embodied in California’s Rules of Professional Conduct. Out of many, three key ethical considerations in legal settlement negotiations are the duty of candor, the duty of communication, and the duty to defer to the client’s settlement decision.

The Duty of Candor: What Crosses the Line?

Perhaps the most nuanced ethical obligation in settlement negotiations involves candor. Rule 4.1(a) of California’s Rules of Professional Conduct (“Rule 4.1(a)”) prohibits a lawyer from making a “false statement of material fact or law.” In the context of settlement talks, this rule draws a critical distinction between puffery and fraud. Comment 2 to Rule 4.1 states: “in negotiation, certain types of statements ordinarily are not taken as statements of material fact. Estimates of price or value placed on the subject of a transaction and a party’s intentions as to an acceptable settlement of a claim are ordinarily in this category, and so is the existence of an undisclosed principal except where nondisclosure of the principal would constitute fraud.” So, expressing an overly optimistic view of your client’s case, or exaggerating your client’s “bottom line” are not considered material misrepresentations, but rather are acceptable “puffery.”

Of course, affirmatively lying about a material fact (misrepresenting the client’s damages or falsely denying the existence of a damaging document, for example) violates Rule 4.1. This prohibition is reinforced by Rule 8.4(c), which forbids attorneys from engaging in “conduct involving dishonesty, fraud, deceit, or reckless or intentional misrepresentation.”

The greyest area with respect to Rule 4.1 and the rule against fraud is determining when an omission constitutes fraud and is therefore prohibited. A settlement agreement obtained through fraudulent concealment is invalid, and an attorney involved in that concealment may very well have violated professional ethics. In determining whether to affirmatively disclose a fact, the guiding standard is California’s rule regarding fraudulent concealment, under which two essential elements are the “materiality” of the undisclosed fact and the fact the opposing party “was unaware of the fact and would not have acted as it did had it known the fact.” Butler America, LLC v. Aviation Assurance Co., LLC, 55 Cal. App. 5th 136, 144 (2020). 

Under the fraudulent concealment rule, attorneys should be mindful of the materiality of facts they and their clients are considering concealing, and err on the side of disclosure if there is any doubt. An improperly withheld fact could be anything from marital property in divorce proceedings to a personal injury plaintiff’s changed medical prognosis. Attorneys should consider the ethical implications of concealing material facts, the risk of a settlement being set aside as fraudulently induced, the possibility of a future falling out with the client, and the possibility of gaining a reputation in the community for sharp dealing. Moreover, an attorney cannot simply sit by while a client conceals material facts; the attorney must take care not to participate in furthering a fraud. If a client insists on concealing material facts despite the attorney’s advice, the attorney must analyze whether it is possible to limit the scope of the representation such that the lawyer does not participate in the fraud. If this is not possible, the attorney must withdraw. See, e.g., Cal. State Bar Ethics Opinion 1996-146. 

The Duty to Communicate Settlement Offers 

Another fundamental obligation that applies to settlement negotiations (like all aspects of the representation) is the duty to communicate. The Rules set forth several requirements that are specific to settlement discussions. An attorney can’t, for example, just accept or reject settlement offers on the client’s behalf. Rule 1.4.1 mandates that an attorney must promptly inform the client of “all amounts, terms, and conditions of any written offer of settlement made to the client.” Moreover, the attorney should err on the side of communicating even verbal settlement offers as well, because (1) the verbal offer might be a “significant development” and therefore subject to Rule 1.4’s communication requirements and (2) whether to accept or reject that offer is entirely up to the client, as discussed below. 

The Lawyer Must Defer to the Client’s Settlement Decision

Regardless of a lawyer’s evaluation of case settlement value, the lawyer must defer to the client’s decision regarding settlement. Rule 1.2 delineates the roles of the lawyer and client with respect to representation, and leaves no room for doubt regarding settlement decisions: “A lawyer shall abide by a client’s decision whether to settle a matter.” In reality, this often means proceeding to trial when you believed the last settlement offer or demand was fair, or accepting an offer you believe does not represent the best result your client could achieve. 

Courts consistently reject attorneys’ creative attempts to work around this rule. For example, the Court of Appeal referred two attorneys to the State Bar because they settled a case over their client’s objection and relied on a retainer agreement that purported to transfer settlement authority from the client to the attorney. The Court said: “We hold an attorney may not settle a client’s case over the client’s objection and any provision of a retainer agreement purporting to give an attorney such authority violates the Rules of Professional Conduct and is void.”  Amjadi v. Brown, 68 Cal. App. 5th 383, 389 (2021). Whether the attorney likes it or not, the client decides whether and when a case settles.

Conclusion

Settlement negotiations demand that California lawyers strike a careful balance, advocating forcefully for their clients while adhering to duties of candor, communication, and fair dealing. A thorough understanding of the relevant rules is just the baseline. Conscientious attorneys should strive for negotiation behavior that will, in the words of Professor Shell, “express your identity as a moral person.” 

^[1] Shell, G. Richard. Bargaining for Advantage: Negotiation Strategies for Reasonable People (New York: Penguin Books, 2018), 177.