Confidential Settlement Agreements: Ethical?

From time to time, I receive inquiries related to confidential settlement agreements.  My view is that nothing in the Rules of Professional Conduct prohibits such agreements.

In the latest on the topic, the South Carolina Bar Association agrees.

The SC Bar faced this question: “May a SC lawyer agree to a confidentiality clause in the settlement of claims against the proposing firm’s client?”

Short Answer:  Yes, provided that the settlement agreement (1) complies with the SC Rules of Civil Procedure; (2) is limited to prohibiting disclosure of the settlement & its terms; and (3) does not prohibit or limit the use of information gained in the course of the representation.

Takeaways:

  1. The Committee noted that settlement agreements must comply with South Carolina’s rules of civil procedure.   The Committee added that a lawyer who agrees to a settlement that does not comply with the rules of civil procedure violates the SC ethics rule that prohibits lawyers from knowingly disobeying an obligation under the rules of a tribunal.
  2. Vermont’s Rule 3.4(c) states that “a lawyer shall not knowingly disobey an obligation under the rules of a tribunal except for an open refusal based on an assertion that no valid obligation exists.”  So, a settlement agreement, confidential or not, must comply with court rules. (For example, See 14 V.S.A. § 1492(c))
  3. More interesting, from an ethics perspective, was the Committee’s conclusion that an attorney may not offer or accept a settlement agreement that limits the use of information acquired in the representation.
  • Accepting such a Term: The Committee drew a distinction between a settlement agreement that prohibits the disclosure of the agreement and its terms and one that prohibits the use of information gained during the representation.  As such, the Committee concluded that the latter violates the ethics rule that prohibits a lawyer from entering into an agreement or settlement that limits or restricts a lawyer’s right to practice.
  • Vermont has the same rule.  It’s Rule 5.6(b).  It’s not clear to me that Rule 5.6 was meant to apply to confidential settlement agreements like the one discussed in the South Carolina opinion.  However, under the SC analysis, a confidential settlement agreement that prohibits a lawyer from using information gained in the representation in a later representation would violate V.R.Pr.C. 5.6(b).
  • Offering such a Term:  The Committee concluded that not only is it unethical to accept an offer to enter into a confidential settlement agreement that prohibits use of information gained in the representation, it is unethical to make such an offer.  The theory: making the offer violates the rule that prohibits attorneys from acting “to assist or induce another” to violate the rules.
  • Again, Vermont has the same rule. It’s Rule 8.4(a).  Under the SC analysis, a lawyer violates Rule 8.4(a) by proposing a confidential settlement agreement that prohibits opposing counsel from using information gained during the representation in a later case.

The South Carolina opinion drew heavily from ABA Formal Opinion 00-417.  Also, the New Hampshire Bar Association reached a similar conclusion in 2009.  The NH opinion is HERE.

To be clear: I am not saying that an agreement with the terms at issue in the SC opinion does or does not violate Vermont’s Rules of Professional Conduct. I have no idea what disciplinary counsel would do if presented with such a scenario, nor do I have any idea how one of the PRB’s hearing panels or the Vermont Supreme Court would decide if faced with such a prosecution.  Rather, I simply bring the SC opinion to your attention.

 

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