Patty was hit by a car, whose driver did not notice her because he was texting. Joe, a journalist, wrote a story about Patty’s “texting” accident. Patty contacted Tom, a real estate attorney, and asked him to represent her in a claim against the driver. Tom agreed, and entered into a valid and proper contingency fee agreement. Tom later told Patty that he had referred her case to Alan, an experienced personal injury attorney, and she did not object. Unknown to Patty, Alan agreed to give one-third of his contingency fee to Tom. Thereafter, Alan sent a $200 gift certificate to Joe with a note stating: “In your future coverage of the ‘texting’ case, you might mention that I represent Patty.” Patty met with Alan and told him that Walter, a homeless man, had seen the driver texting just before the accident. Alan then met with Walter, who was living in a homeless shelter, and said to him: “Look, if you will testify truthfully about what you saw, I’ll put you up in a hotel until you can get back on your feet.” 1. What ethical violation(s), if any, has Tom committed? Discuss. 2. What ethical violation(s), if any, has Alan committed? Discuss. Answer according to both California and ABA authorities.
(1) What ethical violations, if any, has Tom (T) committed? Lawyer/Client relationship A lawyer owes duties to his client as soon as the relationship is formed. The relationship is formed even if the client never retains the lawyer but approaches him regarding legal representation. Here, the relationship between P and T began as soon as she contacted him and asked him to represent her in a claim against the driver who hit her. Even though P never retained or ultimately ‘hired’ T, he owes her duties as his client from this point forward. Duty of Competence Under ABA and CA, a lawyer (L) owes his client the duty of competence, which requires using the requisite skill, preparation, thoroughness, and knowledge to adequately represent his client’s interests. If an L is not competent in an area of law, he must become competent without undue expense or delay upon the client; otherwise, he should associate with an L who is competent in that area. Here, T is a real estate attorney who was contacted by P regarding an injury she suffered after a car hit her. P’s cause of action is a tort, likely negligence or battery, which is entirely unrelated to real estate. T should not have taken the case if he had no knowledge in this area of law. In fact, T ‘later’ told P that he referred the case to Alan. This is not ‘associating’ with an attorney to help with an area of law, nor is it becoming up to speed on the requisite area of law. T has breached his duty of competence to P because he was not able to represent her interests in a tort claim and did not adequately respond by not taking the case or by the steps noted above. Referring P’s Case to Alan Duty of Confidentiality ABA: A lawyer has the duty to maintain all confidential communications acquired in the course of representation. In CA, there is no delineated duty of communication; however, the Attorney’s Oath requires lawyers to maintain the client’s secrets and confidences. Here, T has contacted another attorney regarding information he has obtained from P in the course of representation – specifically that she was hit by a car and needs a lawyer, as well as her personal information. T has breached his duty of confidentiality by revealing this information to Alan. Exceptions to duty of confidentiality – consent If a client consents, a lawyer may reveal her confidences. Here, T told P only afterwards that he was referring her case to Alan, an experienced personal injury attorney. While she ‘did not object’ she certainly did not consent to the disclosure in the first place because she was entirely unaware of it. Second, a nonresponse will not be considered affirmative consent to disclose. T will not be able to use P’s failure to object as evidence of consent. Duty of Communication A lawyer has the duty to communicate with his client regarding all stages of representation, to return phone calls and inquiries promptly, and to communicate the ultimate strategy decisions to the client for her decision. Here, T failed to communicate to P that he did not have the requisite experience to represent her and that he had referred her case to Alan. This is an important juncture for communication that T owed to P; he should have let her know he was unable to take the case but would be able to refer her to someone else. Referrals & Referral Fees Under the ABA and CA, a lawyer may refer a client to another lawyer with the informed consent of the client and as long as the referral agreement is ‘non-exclusive.’ Under the ABA, referral fees are prohibited; under CA, they are permitted as long as the client gives informed consent and the total fees are not increased due to the referral agreement. Here, T has referred P to A but failed to tell P about the referral, beaching his duty to obtain her consent. Further, it appears T has obtained a referral fee for this referral paid by 1/3 of the contingency fees in this case (see below) which is absolutely prohibited under the ABA. In CA, fees are permitted if the total fees to P did not increase; however, without P’s consent this was an improper referral. Further, if A and T have an ‘exclusive agreement’ to refer to each other, the referral agreement also breaches their duties. Fee splitting among lawyers Fee splitting is prohibited by both the ABA and CA with non-lawyers. However, under the ABA, a lawyer may split fees with another lawyer if (i) it is in proportion to the services rendered or both L’s are jointly and severally liable, (ii) the total fee is reasonable, (iii) the client gives informed consent, and (iv) the total fee is not increased. In CA, an L may split fees with a non-lawyer if (i) the total fee is not unconscionable, and (ii) the client gives written consent. Here, T has entered into a fee sharing agreement with A to give 1/3 of a contingency fee to T. Under the ABA, this is not going to be ‘in proportion’ to the services rendered by T because it is likely he will not be engaging in the litigation that is outside of his practice area. However, if T remains jointly and severally liable, he may rebut this requirement. However, there was no consent given by P per this fee splitting arrangement so the agreement violates the rules under the ABA regarding splitting. The total ‘fee’ will be determined reasonable because it is not ‘increased’ as a contingency fee. This arrangement under the ABA is a violation of fee splitting because it was not consented to in writing by P and it is not in proportion to the efforts to be made by T. In CA, lawyers may split fees in the fashion A and T did as long as the total fee is not unconscionable and there is written disclosure to P. While the total fee will be determined as a percentage of the contingency, it is clear that P did not consent to this arrangement because “unknown to P” A agreed to give 1/3 of the fee to T. T has breached the fee splitting rules under CA as well. Contingency Fees Contingency fees are fees to be paid as a percentage of a successful judgment. Under the ABA and in CA, contingency fee agreements must be (i) in writing, (ii) signed by the client, (iii) describing the duties of the lawyer and client, (iv) the percentage of fees to be taken for the lawyer, and (v) whether these fees are before or after legal fees have been paid. CA additionally requires the L to note that the fees are negotiable and to indicate how legal fees not covered by the contingency will be paid. Here, T has entered into a contingency fee agreement with A, the subsequent attorney, not P, the client. P has not signed any agreements, no agreement in writing has been made, there is no description of duties and a percentage has not been indicated. This is a violation of a lawyer’s duties regarding fees. (2) What ethical violations, if any, has Alan (A) committed? Attorney-Client Relationship See above. Here, A has obtained P’s information from T regarding representing her in his capacity as a personal injury attorney. Therefore, because this is related to legal representation, A owes P duties as his client. A and T’s fee arrangement Unknown to P, A agreed to give T 1/3 of the contingency fee to T, violating many of the same rules as T under this agreement. Referral fees See above. A breached his duty related to referral fees under the ABA in relation to giving part of the contingency to T which is likely a ‘fee’ and under CA because this was without the consent of P. Fee splitting See above. For the same reasons noted above, the fee-splitting arrangement between A and T is prohibited by both CA and ABA. Fees Generally Under the ABA, fees must be reasonable and agreed upon by the client (consented to) in writing. In CA, the fees must be ‘not unconscionable’ and agreed upon (consented to) by the client in writing. Here, it is unclear whether the contingency fee that A will be taking for this case is either reasonable or ‘not unconscionable’ under the ABA and CA respectively; however, because the fee was likely determined in advance of A ever meeting with P, A breached his duty to P regarding fees because they were not consented to by P. Contingency Fees See above. For the reasons noted above, A also breached his duty regarding contingency fees to P for failure to get them in writing, with the required terms under both ABA and CA. $200 gift from A to Joe Duty of Fairness A lawyer owes the duty to the legal profession to maintain the public confidence, dignity, and efficiency of the legal system and the profession. Additionally, even those actions by an attorney that are not specifically prohibited by the ABA or CA professional conduct rules, or the law, may still be prohibited if they reflect poorly on the profession. Here, A sent money to a journalist asking him to write in his newspaper coverage of the ‘texting case’ that A represents P. While it is generally public information as soon as a case is filed who is being represented by whom, this is an improper action by A to have a news organization write something in his favor so he gets public notoriety or even advertisement for his services. This reflects poorly on the profession because not only did A ask to be mentioned, he seems to have ‘bribed’ the journalist by sending a $200 gift certificate. This is an unethical move that will be looked down upon as not maintaining the public confidence in the profession. Advertisements Solicitation Out-of-court statements regarding a case A lawyer may not make public statements that are substantially likely to materially prejudice the case. He may comment on those topics that are generally public knowledge (who the parties are, what the cause of action is) and he may conduct ‘damage control’ if his client has been prejudiced. Here, A is looking to have information publically noted about his case in Joe’s news organization. He has requested only the fact that he represents P to be printed; therefore, this will not be considered an improper public statement if published because it is public knowledge and does not risk prejudicing the case. A’s meeting with Walter (W) Meeting with unrepresented persons A lawyer, if meeting with a person who is not represented by an attorney, must not make any indications that he represents that person’s interests or is impartial. Here, A met with W after finding out he is a potential witness in the P’s personal injury case. Upon meeting him, he must indicate that he does not represent W and is not impartial in the case, but rather represents the best interests of his client. It is not clear whether A clearly indicated his position, but by offering W a hotel until he gets back on his feet, W may feel his interests are being represented by A, in which case A has breached his duty to express partiality. Duty of Fairness See above. A lawyer has the duty to refrain from altering or obstructing access to legally discoverable evidence. Here, A has contacted a witness with personal knowledge of the accident and indicated he would put him up in a hotel. This may make W harder to find for the opposing party and unfairly influence his testimony, in effect, altering the evidence. A’s actions also reflect poorly on the legal profession because it is not an honest or ethical action to pay homeless individuals to testify by baiting them with a hotel room until they are back on their feet – something that A may not ultimately do for W and creating a significant risk of biased testimony. Improperly influencing a witness A lawyer may not pay a witness for their testimony. If it is an expert witness, the expert witness’s expenses for travel and time away from work may be paid for. Here, A has effectively ‘paid’ a witness in this case by offering to pay W’s hotel until he ‘gets on his feet.’ W is living in a homeless shelter, so moving to a hotel is a very serious and significant ‘bribe’ for W to do as A wants and W will be regarded as being paid to testify for P because he is receiving a direct benefit for his testimony. This is a violation of A’s duty of fairness to opposing counsel and the legal profession by improperly influencing a witness and paying a non-expert witness to testify. Perjury ABA and CA: In a civil case, a lawyer must not call a witness whom he knows will perjure himself. An L may not encourage perjury as this violates both his ethical duty and the law. Here, it is not clear that W will ‘perjure’ himself, as A has indicated that he wants him to “testify truthfully.” However, A has made it seem that if W gives him the testimony that A desires, he will have a hotel until he gets back on his feet – a very big incentive for the witness to do as A desires. By A calling W as a witness whom he has in effect bribed, even with the caveat he told him to testify truthfully, A may be regarded as having suborned perjury should W state anything that is untruthful but bodes well for P and A.
What are the most common mistakes entrepreneurs make?
1. Spending Too Much Time Keeping Your “Unique” Idea Top Secret. Some founders attempt to have everyone within 25 feet of them sign an NDA. Instead of spending time drafting and then obtaining signatures on a NDA, a founder should use that time to implement the unique idea. It’s highly likely the idea isn’t unique, and a founder could turn off some good investors/partners/mentors by asking for a NDA signature. 2. Not Vesting Founders’ Shares. It’s easy to believe that vesting your own founder shares doesn’t help you, but take a look around the founder table. Now think how you’ll feel if your co-founder decides to try out for American Idol and take his 33% of his vested ownership with him to Hollywood while you and the rest of the founders pound keyboards all day and night. 3. Forgetting to Make the 83(b) Election. If you decide to vest your founder shares, don’t forget to make an 83(b) election with the IRS. You have 30 days to do so after purchasing your founder shares, but there’s not reason to wait more than 1 day post-purchase. 4. Issuing Preferred Stock to Minor Seed Investors Like Your Uncle Bob. Sure, Y Combinator and TechStars get preferred stock for their $18,000 seed investment, but your Uncle Bob (probably) is not Paul Graham or David Cohen, Uncle Bob is not running a startup mentorship program for your team, nor does Uncle Bob have a massive amount of relevant startup industry connections.
How Many Shares Should be Issued to Founders at Incorporation?
I typically advise issuing 50% to 80% of the authorized shares of Common Stock to the initial founders upon incorporation. Thus, if the certificate of incorporation authorizes 10,000,000 shares of Common Stock, an aggregate of 5,000,000 to 8,000,000 share should be issued at incorporation. If the startup plans to bring on additional founders in the very near future, or for some reason wants a large option pool, then that initial number should be closer to 50% than 80%. While your startup can always authorize additional common stock (upon appropriate board and stockholder consent), keeping a good-sized reserve of unissued, but authorized shares means that you will not have to incur the transaction costs associated with increasing the authorized shares. In order to increase the authorized shares, your startup will have to file a certificate of amendment with the secretary of state which has filing fees associated with it.