Just as we tend to think of doctors as impervious to sickness, lawyers rarely come to mind as potential targets for litigation. But the dangers posed to lawyers and law firms by representing dishonest clients are clear.
In the last decade, there were at least 21 publicly reported settlements by or verdicts against law firms between $3 million and $20 million, and nine of those are attributable to the firm’s representation of a dishonest client. The typical allegation in such cases is that the law firm aided and abetted the dishonest client’s breach of fiduciary duty, fraud, or other misconduct, thus harming third parties.
“The danger for lawyers is that jurors often tend to exaggerate the extent to which known events could have been anticipated or detected,” says Richard Hager, Jr., vice president and senior account executive in the Pittsburgh office of Aon Risk Services Central Inc., who counts several law firms as clients.
“Many fine law firms have choked down unpalatable settlements in aiding and abetting cases in which they believed they did nothing wrong out of the concern that they would fall victim to jurors’ hindsight bias.”
Smart Business spoke with Hager about how law firms can protect themselves from this professional risk.
What steps can law firms take to prevent themselves from becoming exposed to aiding and abetting liability?
The surest way for firms to avoid potential aiding and abetting liability is to decline to represent unworthy clients. That is easier said than done — especially given the pressure that many lawyers feel to bring in new business — but it is a generally attainable goal.
Most sophisticated law firms have in place measures designed to identify unworthy clients at the intake stage, including limited background checks, standard searches of particular databases, reviews of SEC filings or annual reports, and policies prohibiting the acceptance of particular classes of business or clients. Most firms also vest final decision-making authority concerning the acceptance of new business in senior lawyers other than the lawyer who proposes the new matter. This injects some measure of objectivity into the business acceptance process.
What if a client’s potential mischief does not manifest itself until representation is already underway?
It is important for firms to adopt policies requiring lawyers and staff who suspect possible misconduct by a client, or by an employee or agent of an organizational client, to report it to the firm’s general counsel, loss prevention partner, or similar senior lawyer as soon as practicable. It should not be the reporting person’s responsibility to determine whether the degree of possible misconduct triggers ethical or legal obligations on the part of the firm or its lawyers; that is the role of the firm’s general counsel or loss prevention partner, perhaps in consultation with others. Thus, the threshold for reporting possible misconduct to the general counsel or loss prevention partner should be low.
