California Rules of Professional Conduct (CRPC), rule 1.8.6 is the rule that governs attorneys and acceptance of payments on behalf of the client from third parties or third-party payors. The rule involves both the attorney’s duties to their client and conflicts of interest considerations.
Who is a third-party payor? And when does this occur?
For some lawyers, a third-party payor may never be an issue for their practice, but for other lawyers third-party payors may present ethical issues throughout their legal careers. A third-party payor arises any time a non-client pays the legal fees to an attorney on behalf of a client. Rule 1.8.6 does not involve instances where a third party gives or lends the client legal fees to then pay the attorney for a retainer or for work performed. In this circumstance, the attorney is not directly involved with the financial transaction between the third party and the client. An example is where a friend directly loans the client $5,000, who then directly pays the attorney for the retainer fee.
For many reasons, an attorney may receive legal fees or retainer fees directly from a third party. Sometimes, the third party would prefer to pay the lawyer directly on behalf of the client. Other times, as in the case of a minor, the only way to pay for the legal fees is for the third party (parent, guardian, or other person) to pay the attorney directly. No matter the reason, rule 1.8.6 states that “A lawyer shall not…charge or accept for representation for a client from one other than a client unless…”, meaning that a lawyer has an absolute obligation to comply with rule 1.8.6 when receiving funds from a third party on behalf of a client. (Emphasis added.)
What are the attorney’s ethical obligations when accepting payment from a third party?
First, the acceptance of payment from a third party shall not interfere with either the attorney’s independent judgement or the attorney-client relationship. (Rule 1.8.6(a).) This subsection incorporates an attorney’s duty to exercise independent judgement, or CRPC, rule 2.1 — meaning the attorney must always act in the best interests of their client, no matter who is paying their legal fees. This can be a problem when a parent pays on behalf of a child or a spouse pays on behalf of another spouse. Sometimes these non-client payors are well-meaning but wish to be more involved in the legal matter beyond being a financial backer of the client. Other times, the third party may have nefarious reasons for paying on behalf of a client — and sometimes, in the case of a spouse, there may be issues of control and abuse. Thus the attorney must protect the attorney-client relationship and make clear to the third party that all communications will be between only the client and the attorney. Legal decisions and strategy will also be communicated only to the client. One difficult wrinkle occurs when the payor is also the primary contact with the client; this situation arises most often in criminal law or cases where the client lacks capacity.
Second, rule 1.8.6 (b) requires an attorney to comply with both Business and Professions Code section 6068(e)(1) and CRPC, rule 1.6. Put simply, the attorney must maintain the attorney-client privilege and client confidences. A third-party payor may want updates regarding a matter, or a client may even want the third party to participate in meetings and phone calls or receive email communications. Better practices advises against this. The attorney should advise the client against including third parties in their communications because sharing those communications will destroy the attorney-client privilege. Additionally, the inclusion of the third party even for “updates” can cloud a client’s ability to make independent decisions when the attorney must seek client consent to proceed with a settlement or negotiation. An attorney may provide sanitized billing to a third party who wishes to receive an invoice of work performed, meaning the billing would be limited to time spent without additional details that could disclose confidential client information. Again, an attorney must practice caution when delivering an invoice to a third party, as billing to a client is generally a confidential communication.
Finally, rule 1.8.6(c) requires informed written consent from the client. Ideally, the consent occurs prior to the receipt of payment from the third-party payor. But realistically, an attorney may not learn of the third party payment until after the payment is tendered, e.g., an electronic payment is made using a parent’s credit card, or the client mails a check from a third party for legal fees. The rule allows for an attorney to receive consent after receipt of the payment. The rule also has some limited exceptions which include by operation of law or court order, and when the attorney renders services to a nonprofit or public agency.
Attorney’s duty to the third party and safekeeping of funds
Rule 1.8.6 emphasizes the attorney’s duties to the client when accepting payment from a third party (think conflicts of interest issues). Yet the attorney has a duty to preserve the third party’s property, especially in circumstances where the third party pays a retainer on behalf of a client. CRPC, rule 1.15 requires an attorney to preserve funds or property held on behalf of a client or third party. In a situation where the attorney-client relationship ends and funds remain in trust, the attorney cannot deliver the funds directly to the client or deliver the funds in a manner that the client wishes. The attorney must either seek direction of the third party or deliver the funds directly back to the third party. When a client terminates the attorney-client relationship and wishes the attorney to deliver remaining funds to their new counsel, it’s especially important for the attorney to seek direction from the third-party payor. Simply put, the funds do not belong to the client — the funds belong to the third-party payor.
Better practices tips:
- Ask prospective clients how they intend to pay for their legal fees.
- Obtain written informed consent from the client and third-party payor.
- Clearly explain to both the client and third-party payor who you will communicate with and how you will communicate.
- Explain the role of the third-party payor to the client, and make clear to the client that if the third-party payor does not pay their legal fees the client will be responsible for the fees.
- Obtain third-party payor consent in a separate agreement from the attorney-client agreement.
- Create a protocol for third-party payors, and instruct non-attorney staff how to comply with rule 1.8.6, especially those staff responsible for assisting with firm finances and invoicing.
Mary Grace Guzmán of Guzmán Legal Solutions advises lawyers, law firms, and law students on their professional responsibilities and risk management needs. She also teaches legal ethics and professional responsibility at JFK Law School. She works with lawyers and law firms regarding legal ethics issues such as conflict of interest issues, fee disputes, and advises lawyers and law firms as outside ethics counsel to manage risk. Ms. Guzmán recognizes that a lawyer’s or law firm’s needs are best met by preventing legal ethical issues before they arise or managing an ethical issue once identified.