Misrepresentation by Omission in Settlement Negotiations: Should There Be a Silent Safe Harbor?

Georgetown Journal of Legal Ethics, The, Fall 2004 by Temkin, Barry R

I. INTRODUCTION

Mark Twain once wrote, "[o]ften the surest way to convey misinformation is to tell the strict truth."1 Indeed, a lawyer negotiating on behalf of a client often will mislead an adversary by half-truths, partial truths, misdirection, and, it has been increasingly held, by omissions.

The ethical constraints on a lawyer's misleading statements and omissions during settlement negotiations have been largely defined on a patchwork and intuitive level. Practitioners seeking guidance in navigating the largely uncharted waters in this area are likely to find themselves bewildered by an internally inconsistent tangle of ethics opinions, rules, moral principles, and precedents that are more likely to reflect judicial viscera and intuitive notions of fairness than any coherent system of legal or ethical principles.

This Article will explore the parameters of factual representations and omissions in the context of settlement negotiations from a legal and ethical perspective. Among other issues, this Article will address the following questions: May a lawyer, acting on behalf of a client, ethically make factually accurate representations which are nonetheless misleading because they are half-truths or because they omit other important facts, and have the effect of misleading one's adversary? Are there some situations in which a lawyer who says nothing at all may be guilty of misrepresentation by omission, either by operation of substantive law or ethical rule? Are these situations broader than the traditional crime/fraud exception contained in the American Bar Association ("ABA") Model Rules of Professional Conduct ("Model Rules")?2

The current trend in ethical analysis among courts, academic commentators, and bar association ethics committees tends to suggest that a lawyer may in some circumstances have a duty to correct a misapprehension on the part of an adversary which did not emanate from any statement by the attorney or anyone acting on the attorney's behalf. There is, according to many jurists and commentators, a general duty of fairness that trumps the adversary system of justice in general and the attorney's duty of zealous advocacy to clients in particular. The Model Rules, the negotiation guidelines of the ABA section of Litigation, and the ABA Standing Committee on Professional Ethics all suggest that a lawyer may, in some circumstances, have an affirmative duty to correct an adversary's own self-inflicted misperception of fact or law, even when the disclosure is not necessary to avoid assisting a criminal or fraudulent act by a client.3 At least two state bars have disciplined attorneys who made no affirmative misrepresentations, but merely remained silent under circumstances in which their adversaries labored under incorrect assumptions.4

Analogies drawn from the standards of disclosure required in criminal prosecutions add perspective to the debate on whether a civil litigator should have an ethical duty to disclose the death of a client whose testimony may be critical to the case. And the ethical duties of lawyers have been further complicated by recent developments in substantive law, including the passage into law of the Sarbanes-Oxley Act of 20025 and the rules promulgated by the U.S. securities and Exchange Commission ("sec") thereunder. On August 11, 2003, the ABA amended its Model Rules to require corporate lawyers more aggressively to report internal wrongdoing up the corporate ladder. The ABA also relaxed the confidentiality provisions of Model Rule 1.6 to permit disclosure of client confidences to prevent or mitigate injury caused by financial fraud.

This Article suggests that the current trend toward disclosure in settlement negotiations, and in particular, the ABA position, has been overextended. Laudable as general concepts of fairness and decency may be, clients are entitled to expect their attorneys to reconcile those concepts with the duty of zealous advocacy. Equally important, it is difficult for an ordinary practitioner to anticipate and comply with each of the myriad individualized senses of fairness and fair dealing that various judges or ethicists may hold. A lawyer who discloses client information in seulement negotiations in the belief that doing so is morally correct may have to contend with an angry client who paid for and expected more zealous advocacy, more scrupulous preservation of client secrets, and fewer lectures on morality. On the other hand, a lawyer who says nothing misleading but merely stands by silently while an adversary proceeds on a misunderstanding derived from an exogenous source may be exposed to judicial ire, a grievance proceeding, and the potential unraveling of an erstwhile advantageous settlement agreement.

Accordingly, this Article introduces a simplified proposal for analyzing attorney omissions which is derived from principles of substantive securities laws and is consistent with the literal text and, hopefully, the spirit of the Model Rules. Specifically, the Article suggests that, absent court rule, principle of substantive law, or prior factual representation, an attorney should have no duty to make any affirmative factual representations in the course of settlement negotiations, subject only to the crime/fraud exception contained in the Model Rules. In short, there should be a silent safe harbor. An attorney who makes no representations (and does not condone or repeat those of a client) makes no misrepresentations. Once an attorney speaks, what is said should be truthful, consistent with the attorney's duty to preserve client secrets and confidences.