V. Lawyers' Duty of Honesty to Third Persons
The In re Potts story is as much about honesty as it is about confidentiality. Honesty in negotiations is a sensitive subject. Some mediators assert that lawyers lie in negotiations nearly all the time. Scholars studying alternative dispute resolution lament that lawyers seem unable to recognize that dishonesty in negotiation is unhelpful, because the most effective negotiators are perceived by opponents as honest and trustworthy. Other scholars contend that the central issue is the type or level of deception that may be ethically employed to enhance bargaining positions. To them, lawyers who believe that no prevarication is ever proper during negotiations place their clients at a disadvantage, because they permit less candid opponents to achieve results that exceed the terms to which those opponents are objectively entitled. In short, the trickiest ethics and liability issues arising out of negotiations involve lawyers' broad duty of honesty.
A. Applicable Rules of Professional Conduct
Honesty in negotiations may be enforced under several rules of professional con-duct,113 starting with Model Rule 1.2(d), which provides that a lawyer cannot "counsel a client to engage, or assist a client, in conduct that the lawyer knows is criminal or fraudulent."114 It was Montana's version of Rule 1.2(d) that ensnared the lawyer in In re Potts.115 Chief among the applicable rules, however, is Model Rule 4.1(a), which states that in the course of representing a client, "a lawyer shall not knowingly . . . make a false statement of material fact or law to a third person."116
Although Model Rule 4.1(a) refers to false statements by a lawyer, it is a bit broader than it appears, in that a lawyer may violate Rule 4.1(a) by knowingly affirming or ratifying another person's false statement,117 or by failing to correct it.118 As for the audience, the reference to "a third person" in Model Rule 4.1(a) clarifies that the rule relates to lawyers' communications with people other than their clients.119 In State of Nebraska ex rel. Counsel for Discipline of the Nebraska Supreme Court v. Kruger,120 for example, the Nebraska Supreme Court relied on Rule 4.1(a) to discipline a lawyer who lied to a Medicaid claims examiner in the course of resolving his client's personal injury claim.121 In In re McGrath,122 the Alaska Supreme Court determined that a lawyer violated Rule 4.1(a) when, at all times unbeknownst to his client, he negotiated the settlement of the client's personal injury claim with the tortfeasor's insurer premised on the client's approval of the settlement.123
Rule 4.1(a) certainly applies to lawyers' statements to opposing counsel.124 In In re Filosa,125 for example, the court relied heavily on New York Rule 4.1 to discipline a plaintiff's lawyer who knowingly served on defense counsel a misleading report by an expert economist and then relied on the incorrect damages calculation in the report in attempting to negotiate a settlement.126 In In re Hubbard,127 a California federal court found that the plaintiff's lawyer in an Americans with Disabilities Act lawsuit, Lynn Hubbard, violated Model Rule 4.1(a) when he sent opposing counsel settlement agreements purportedly signed by his client who had, in fact, died three weeks earlier.128 He did so in an attempt to mislead the other lawyers into believing that his client was alive and thus to consummate a settlement. The court suspended Hubbard from practice in the judicial district for one year as a sanction for his dishonesty.129
A lawyer must knowingly make a false statement to violate Rule 4.1(a). "Knowingly" in this context, as elsewhere in the Model Rules, denotes actual knowledge.130 Although lawyers' knowledge may be inferred from circumstances,131 the fact that a lawyer should have known something does not equal knowledge of that fact.132 Likewise, speculation and suspicion do not equate to knowledge. Furthermore, "knowledge" does not describe "evil intent or bad purpose" on the lawyer's part.133 Indeed, Rule 4.1(a) does not require any intent to deceive by the lawyer; the lawyer's knowledge that a statement is false when made will support a violation.134 A lawyer's intent to deceive, if any, goes to the discipline or sanction to be imposed for the violation.
Model Rule 4.1(a) applies only to statements of fact or law; lawyers' statements of opinion will not violate the rule.135 Innocent misstatements do not implicate the rule,136 although statements made with reckless disregard for the truth may.137
In addition, a lawyer's false statement must be material for there to be a violation. A statement of fact or law is "material" if it is significant or essential, if it could have influenced the hearer,138 if it affected the outcome of the proceedings,139 or if it "reasonably may be viewed as important to a fair understanding of what is being given up and, in return, gained" in an agreement.140 Courts evaluate materiality on a case-by-case basis.141
Rule 4.1(a) does not include a causation or reliance element. In other words, a lawyer violates the rule simply by making a prohibited statement. The listener does not have to act or detrimentally rely on the statement to perfect the violation.142
Most Rule 4.1(a) disputes pivot on whether a statement expresses "fact." A comment to Model Rule 4.1 provides some guidance on this subject related to negotiations:
Whether a particular statement should be regarded as one of fact can depend on the circumstances. Under generally accepted conventions 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. Lawyers should be mindful of their obligations under applicable law to avoid criminal and tor-tious misrepresentation.143
Various other forms of disingenuousness are also ethically permissible. For professional responsibility purposes, lawyers' statements about a party's willingness to compromise or resolve a dispute, a party's willingness to compromise or resolve a criminal matter, a party's willingness to concede something or a value placed on a concession, the strength or weakness of a party's factual or legal positions, the strengths or weaknesses of a party's case, the value or worth of the subject of the parties' negotiation, and a party's goals or objectives all qualify as puffery or posturing rather than as statements of fact.144
Consider, for example, a situation in which two lawyers are negotiating the settlement of a personal injury claim. The defense lawyer has $100,000 in settlement authority. When the plaintiff's lawyer offers to settle for $85,000, the defense lawyer responds, "I can't do that, but if you'll get your client to take $75,000, I'll make my client accept it." Is the defense lawyer's statement a false statement of fact within the meaning of Rule 4.1(a)? No, it is puffery, posturing, or an invitation to negotiate further. The plaintiff's lawyer understands that and will either counsel her client to accept $75,000 or, more likely, stand on $85,000 or counteroffer.
Model Rule 4.1(b) addresses lawyers' nondisclosures rather than false statements.145 It states that "[i]n the course of representing a client a lawyer shall not knowingly . . . fail to disclose a material fact when disclosure is necessary to avoid assisting a criminal or fraudulent act by a client, unless disclosure is prohibited by Rule 1.6."146 A client's act is fraudulent for Rule 4.1(b) purposes if "it is fraudulent under the substantive or procedural law of the applicable jurisdiction and has a purpose to deceive."147 In some cases, Rule 4.1(a) and 4.1(b) may overlap. In Florida Bar v. Burkich-Burrell,148 for example, the Florida Supreme Court relied on Rules 4.1(a) and (b) in suspending a lawyer who knowingly failed to reveal her client's prior injuries and medical treatment in response to an interrogatory calling for that information.149
Finally for now, lawyers' duty of honesty may also be enforced under Model Rule 8.4(c), which makes it professional misconduct for a lawyer to "engage in conduct involving dishonesty, fraud, deceit or misrepresentation."150 The standard by which a lawyer's alleged dishonesty is to be judged varies. Many courts hold that a lawyer's false statement must be knowingly made to violate Rule 8.4(c).151 Other jurisdictions hold that lawyers may violate Rule 8.4(c) through statements made with reckless disregard for their truth or falsity,152 or, similarly, through grossly negligent misstatements.153 A very few courts hold that a lawyer may negligently violate Rule 8.4(c).154 Whether either of the first two possibilities represents the majority rule is a close call, but the view that a lawyer may violate Rule 8.4(c) through simple negligence is a distinctly minority position.
Rule 8.4(c) is exceedingly broad; it applies to lawyers' dealings with anyone, including adverse parties, clients, courts and other tribunals, opposing counsel, members of the public, government agencies, and lawyers' own firms. Rule 8.4(c) does not require a statement; deceit and dishonesty can also be based on the concealment or omission of facts or information.155 Conduct that may not legally be characterized as deceit or fraud, or which would not count as a misrepresentation as a matter of criminal or tort law, may still evince dishonesty for purposes of discipline under Rule 8.4(c).156
As with Rule 4.1(a), lawyers violate Rule 8.4(c) even if their dishonesty misleads no one or causes no harm.157 Unlike Rule 4.1, Rule 8.4(c) has no materiality requirement, although courts occasionally graft one onto it.158 Even in jurisdictions where courts have not injected materiality into...
