Puffery & Ethics of Settlement Negotiations

Last week’s word was “woodshedding.”  This week’s: “puffery.”

As I blogged, at some point, woodshedding crosses the line.  What about puffery?  Is there a point when a lawyer violates the rules by intentionally misstating a client’s bottom line?

As most of you know, the rules prohibit dishonesty.  Indeed, Rule 4.1 states

  • “[i]n the course of representing a client a lawyer shall not knowingly make a false statement of material fact to a third person.”

With the rule in mind, here are two scenarios:

  • the plaintiff’s attorney who knows her client will accept $100,000 but who states to defense counsel that her client “won’t go below $200,000.”
  • the criminal defense attorney who knows his client will take a plea that includes jail time, but who tells a deputy state’s attorney “if your offer is anything more than probation, we’re going to trial.”

In each,  didn’t a lawyer knowingly make a false statement to a third person?

Maybe.  Or maybe not.

Per Comment [2] to Rule 4.1:

  • “This rule refers to statements of fact.  Whether a particular statement should be construed as one of fact can depend on the circumstances.  Under generally accepted conventions in negotiations, 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 tortious misrepresentation.”

I’ve often kidded, but only half-jokingly, that the rule makes it unethical to mislead others, but the Comment makes it okay to mislead other lawyers.

There’s also Rule 8.4(c), which prohibits lawyers from engaging in conduct involving dishonest, deceit, misrepresentation, and fraud.  And don’t forget about the duty of candor to a tribunal imposed by Rule 3.3.

Here’s an interesting advisory ethics opinion from the State Bar of California.  Some outlets are touting the opinion as giving the green light to puffery in negotiations.  I suppose that’s a fair reading of an aspect of the opinion. However, if that’s your only takeaway, it’s a reading that ignores the first two sentences of the opinion’s digest:

  • “Statements made by counsel during negotiations are subject to those rules prohibiting an attorney from engaging in dishonesty, deceit or collusion. Thus, it is improper for an attorney to make false statements of fact or implicit misrepresentations of material fact during negotiations.”

The opinion begins by presenting a fact pattern. Then, it describes various scenarios that might arise from the fact pattern. Finally, for each scenario, the opinin provides an “answer.”  Give it a read.  If you don’t have time, I’ve pasted in some excerpts below. Otherwise, that’s the end of this blog.


See the source image


The fact pattern presented in the California Advisory Opinion is as follows:

  • “Plaintiff is injured in an automobile accident and retains Attorney to sue the other driver (Defendant). As a result of the accident, Plaintiff incurs $50,000 in medical expenses and Plaintiff tells Attorney she is no longer able to work. Prior to the accident Plaintiff was earning $50,000 per year. Attorney files a lawsuit on Plaintiff’s behalf. Prior to any discovery, the parties agree to participate in a court-sponsored settlement conference that will be presided over by a local attorney volunteer. Leading up to and during the settlement conference, the following occurs:

Scenario 1.  In the settlement conference brief submitted on Plaintiff’s behalf, Attorney asserts that he will have no difficulty proving that Defendant was texting while driving immediately prior to the accident. In that brief, Attorney references the existence of an eyewitness to the accident, asserts that the eyewitness’s account is undisputed, asserts that the eyewitness specifically saw Defendant texting while driving immediately prior the accident, and asserts that the eyewitness’s credibility is excellent. In fact, Attorney has been unable to locate any eyewitness to the accident.

Answer:  Attorney’s misrepresentations about the existence of a favorable eyewitness and the substance of his expected testimony. Attorney’s misrepresentations about the existence of a favorable eyewitness and the substance of the testimony the attorney purportedly expects the witness to give are improper false statements of fact, intended to mislead Defendant and his lawyer. Attorney is making representations regarding the existence of favorable evidence for the purpose of having Defendant rely on them. Attorney has no factual basis for the statements made. Further, Attorney’s misrepresentation is not an expression of opinion, but a material representation that “a reasonable [person] would attach importance to . . . in determining his choice of action in the transaction in question . . .” (Charpentier v. Los Angeles Rams Football Co., Inc. (1999) 75 Cal.App.4th 301, 313 [89 Cal.Rptr.2d 115] quoting Rest.2d Torts, § 538). Thus, Attorney’s misrepresentations regarding the existence of a favorable eyewitness constitute improper false statements and are not ethically permissible. This is consistent with Business and Professions Code section 6128(a), supra, and Business and Professions Code section 6106, supra, which make any act involving deceit, moral turpitude, dishonesty or corruption a cause for disbarment or suspension.

Scenario 2.  While the settlement officer is talking privately with Attorney and Plaintiff, he asks Attorney and Plaintiff about Plaintiff’s wage loss claim. Attorney tells the settlement officer that Plaintiff was earning $75,000 per year, which is $25,000 more than Client was actually earning; Attorney is aware that the settlement officer will convey this figure to Defendant, which he does.

Answer: Attorney’s inaccurate representations to the settlement officer which Attorney intended be conveyed to Defendant and Defendant’s lawyer regarding Plaintiff’s wage loss claim. Attorney’s statement that Plaintiff was earning $75,000 per year, when Plaintiff was actually earning $50,000, is an intentional misstatement of a fact. Attorney is not expressing his opinion, but rather is stating a fact that is likely to be material to the negotiations, and upon which he knows the other side may rely, particularly in the context of these settlement discussions, which are taking place prior to discovery. As with Example Number 1, above, Attorney’s statement constitutes an improper false statement and is not permissible.

Scenario 3.  While talking privately outside the presence of the settlement officer, Attorney and Plaintiff discuss Plaintiff’s “bottom line” settlement number. Plaintiff advises Attorney that Plaintiff’s “bottom line” settlement number is $175,000. When the settlement officer asks Attorney for Plaintiff’s demand, Attorney says, “Plaintiff needs $375,000 if you want to settle this case.”

Answer:  Attorney’s inaccurate representation regarding Client’s “bottom line” settlement number. Statements regarding a party’s negotiating goals or willingness to compromise, as well as statements that constitute mere posturing or “puffery,” are among those that are not considered verifiable statements of fact. A party negotiating at arm’s length should realistically expect that an adversary will not reveal its true negotiating goals or willingness to compromise. Here, Attorney’s statement of what Plaintiff will need to settle the matter is allowable “puffery” rather than a misrepresentation of fact. Attorney has not committed an ethical violation by overstating Plaintiff’s “bottom line” settlement number.

Scenario 4. In response to Plaintiff’s settlement demand, Defendant’s lawyer informs the settlement officer that Defendant’s insurance policy limit is $50,000. In fact, Defendant has a $500,000 insurance policy.

Answer:  Defendant’s lawyer’s representation that Defendant’s insurance policy is for $50,000 although it is really $500,000. Defendant’s lawyer’s inaccurate representations regarding Defendant’s policy limits is an intentional misrepresentation of fact intended to mislead Plaintiff and her lawyer. (See Shafer v. Berger, Kahn, Shafton, Moss, Figler, Simon & Gladstone (2003) 107Cal.App.4th 54, 76 [131 Cal.Rptr.2d 777] [plaintiffs “reasonably relied on the coverage representations made by counsel for an insurance company”].) As with Example Number 1, above, Defendant’s lawyer’s intentional misrepresentation about the available policy limits is improper.

Scenario 5. Defendant’s lawyer also states that Defendant intends to file for bankruptcy if Defendant does not get a defense verdict. In fact, two weeks prior to the mediation, Defendant consulted with a bankruptcy lawyer and was advised that Defendant does not qualify for bankruptcy protection and could not receive a discharge of any judgment entered against him. Defendant has informed his lawyer of the results of his consultation with bankruptcy counsel and that Defendant does not intend to file for bankruptcy.

Answer:  Defendant’s lawyer’s representation that Defendant will file for bankruptcy if there is not a defense verdict. Whether Defendant’s lawyer’s representations regarding Defendant’s plans to file for bankruptcy in the event that Defendant does not win a defense verdict constitute a permissible negotiating tactic will hinge on the specific representations made and the facts known. Here, Defendant’s lawyer knows that Defendant does not intend to file for bankruptcy and that Defendant consulted with bankruptcy counsel before the mediation and was informed that Defendant is not legally eligible to file for bankruptcy. A statement by Defendant’s lawyer that expresses or implies that Defendant’s financial condition is such that he is in fact eligible to file for bankruptcy is therefore a false representation of fact. The conclusion may be different; however, if Defendant’s lawyer does not know whether or not his client intends to file for bankruptcy or whether his client is legally eligible to obtain a discharge.

Scenario 6.  The matter does not resolve at the settlement conference, but the parties agree to participate in a follow-up settlement conference one month later, pending the exchange of additional information regarding Plaintiff’s medical expenses and future earnings claim. In particular, Attorney agrees to provide additional information showing Plaintiff’s efforts to obtain other employment in mitigation of her damages and the results of those efforts. During that month, Attorney learns that Plaintiff has accepted an offer of employment and that Plaintiff’s starting salary will be $75,000. Recognizing that accepting this position may negatively impact her future earnings claim, Plaintiff instructs Attorney not to mention Plaintiff’s new employment at the upcoming settlement conference and not to include any information concerning her efforts to obtain employment with this employer in the exchange of additional documents with Defendant. At the settlement conference, Attorney makes a settlement demand that lists lost future earnings as a component of Plaintiff’s damages and attributes a specific dollar amount to that component.

ANSWER:  Plaintiff’s instruction to Attorney to conceal material facts from Defendant and Defendant’s lawyer prior to the follow-up settlement conference. This example raises two issues: the failure to disclose the new employment, and Plaintiff’s instruction to Attorney to not disclose the information.

First, as to the underlying fact of employment itself, it is assumed that Plaintiff would not be entitled to lost future earnings if Plaintiff found a new job. As such, including in the list of Plaintiff’s damages a separate component for lost future earnings is an implicit misrepresentation that Plaintiff has not yet found a job. This is particularly true because Plaintiff agreed to show documentation of her job search efforts to establish her mitigation efforts, but did not include any documentation showing that she had, in fact, been hired. Listing such damages, then, constitutes an impermissible misrepresentation. (See, e.g., Scofield v. State Bar, supra, 62 Cal.2d at 629 [attorney who combined special damages resulting from two different auto accidents in separate claims against each defendant disciplined for making affirmative misrepresentations with the intent to deceive]; Pickering v. State Bar (1944) 24 Cal.2d 141, 144 [148 P.2d 1] [attorney who alleged claim for loss of consortium knowing that plaintiff was not married and that her significant other was out of town during the relevant time period violated Business and Professions Code section 6068(d)].)

Second, Attorney was specifically instructed by Plaintiff not to make the disclosure. That instruction, conveyed by a client to his attorney, is a confidential communication that Attorney is obligated to protect under Rule 3-100 and Business and Professions Code section 6068(e). While an attorney is generally required to follow his client’s instructions, Rule 3-700(B)(2) requires withdrawal if an attorney’s representation would result in a violation of the ethical rules, of which a false representation of fact or implicit misrepresentation of a material fact would be. When faced with Plaintiff’s instruction, Attorney should first counsel his client against the misrepresentation and/or suppression. If Plaintiff refuses, Attorney must withdraw under Rule 3-700(B)(2), as Attorney may neither make the disclosure absent client consent, nor may Attorney take part in the misrepresentation and/or suppression. (California State Bar Form. Opn. No. 2013-189; 7 8/ see also Los Angeles County Bar Association Opn. 520).

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