Lately I have noticed more instances of clients asking
lawyers to sign nondisclosure agreements (“NDAs”) like this:
Confidential Information
Law Firm shall treat as confidential and not reveal to any third party (including any current or future client) any Confidential Information of Paranoid Partners LLC (“Paranoid”), its affiliated investment advisers or broker-dealers, or any of its current or future subsidiaries, sponsored funds, or other investment products. “Confidential Information” means any and all confidential and proprietary information of Paranoid’s current or proposed business, past, present, or future products or services, marketing plans, business plans, regulatory or other strategies, or any other information that Paranoid identifies as confidential or which by its nature would reasonably be deemed to be confidential, including all communications or documents subject to attorney-client privilege. This confidentiality provision shall not limit or diminish, in any way, any duties owed by Law Firm to Paranoid under any applicable model rules of professional conduct. This confidentiality provision shall survive in perpetuity. Bwahaha!
Apart from the usual sins of redundancy and verbosity, why
are some (other) lawyers advising clients to request such provisions in
attorney engagement agreements? Even nascent
attorney-client relationships – including those never consummated – are protected
by the Rules of Professional Conduct. See, e.g.,
Colo. RPC 1.6(a)
(Confidentiality of Information) and 1.18 (Duties to Prospective
Clients). Further, Rule 1.9(c) (Duties to
Former Clients) expressly prohibits “us[ing] information relating to the
representation to the disadvantage of [a] former client except as these Rules
would permit or require with respect to a client, or when the information has
become generally known.” The NDA above
expressly recognizes the existence of
“model rules of professional conduct,” so we should presume the lawyers
drafting such clauses passed the Multistate Professional Responsibility Examination
and are aware of the confidentiality protections the Rule of Professional
Conduct already provide.
So what advantage do these clients, or their lawyers,
believe is gained by obtaining an express contractual remedy for
nondisclosure? Have they been so scarred
or scared by Sarbanes-Oxley, or conditioned by HIPPA and other privacy laws,
that they deem the remedy of an attorney’s potential disbarment an inadequate
deterrent to disclosure? In asking its
lawyers to sign an NDA is Paranoid Partners being paranoid or prudent?[1]
There is at least one argument to be made for requesting
such a provision – Rule 1.6 has exceptions:
A lawyer may reveal information
relating to the representation of a client to the extent the lawyer reasonably
believes necessary:
(1) to prevent reasonably certain
death or substantial bodily harm;
(2) to reveal the client's
intention to commit a crime and the information necessary to prevent the crime;
(3) to prevent the client from
committing a fraud that is reasonably certain to result in substantial injury
to the financial interests or property of another and in furtherance of which
the client has used or is using the lawyer's services;
(4) to prevent, mitigate or rectify
substantial injury to the financial interests or property of another that is
reasonably certain to result or has resulted from the client's commission of a
crime or fraud in furtherance of which the client has used the lawyer's
services;
. . . .
(7) to comply with other law or a court order.
Colo. RPC 1.6(b) (emphasis
added).
The financial whistleblower exceptions of Rule 1.6(b) were a
direct response to Sarbanes-Oxley. In
August 2003 the ABA House of Delegates, by a 218-201 vote, amended Rules 1.6
and 1.13 to accommodate the noisy withdrawal and up-the-ladder provisions
created by Sarbanes-Oxley, provisions many states had already adopted in their
attorney professional codes.[2] Because
the language Rule 1.6 is merely permissive, a confidentiality provision of the
kind set out above ostensibly plugs a gaping hole in a client’s security
defenses. But does such a provision
provide any real protection? I doubt it.
First, a client seeking such protection must find a lawyer
willing to hamstring herself by signing such an agreement. Rule 1.6(b) is permissive, so there is no
obvious legal impediment to an attorney agreeing to its terms. Still, such a request should, at a minimum,
cause any attorney to whom it is proffered to raise at least one eyebrow.
Second, a client seeking counsel’s contractual silence needs
be certain that, should push come to shove, the threat of a civil suit for
breach of contract will be adequate to gag a lawyer willing to sign it. This is more problematic. If ordered to disclose information by a
court, will a capitulating counselor really be willing to rot in jail for
Bernie Madoff? Self-interest, if not
ethical considerations, weigh heavily against the efficacy of such provisions
under these circumstances.
Third, if the reason for proffering or threatening to
enforce such a provision is to further a criminal purpose, or to conceal a
crime which the lawyer was duped into assisting[3], one hopes that the lawyers
advising their clients to seek NDAs from other lawyers are also counseling
their clients that the prospect of such an agreement being enforced is slightly
less than that of the Colorado Rockies and the CU Buffs winning the World
Series and the College Football Playoff in the same year.
Fourth, assuming the client’s lawsuit against the lawyer for
breach of the NDA survives a motion to dismiss, just imagine the reaction of a
jury empaneled to hear such a case to the plaintiff-client’s opening
statement:
Ladies and gentlemen of the jury, Plaintiff
concedes that it engaged Defendant to enlist its unwitting legal assistance in furtherance
of committing crimes that were certain to cause substantial injury to the
financial interests of widows, orphans, and cripples. The court will instruct you, however, that
you must completely disregard
Plaintiff’s confessed criminal intent. This . . . this . . . lawyer breached a contractual
obligation to keep her mouth shut. As a
consequence my client’s evil plan was foiled and its officers are going to
jail. Justice must be done! Damages must be awarded!
Yeah. Right.
If the jury does not immediately leap out of the box, set upon the
plaintiff’s representative and its lawyer,
and lynch them both from the courtroom’s rafters, it is easy to envision the
damages award rivaling that of the jury in Dering vs. Uris – the libel action brought by Dr. Wladislaw
Dering, one of the butchers of Auschwitz, against Leon Uris for his description
of Dering’s atrocities in Exodus
(and
memorialized in the second television mini-series
to air in the United States, QB VII): One ha'penny – the smallest coin of the
realm.
Lawyer NDA provisions are simply too
clever by half. An honest client has
nothing to fear from an honest lawyer – the protections of the Rules of
Professional Conduct and the attorney-client privilege are ample fortification
against disclosure. The law of professional
malpractice and agency already provide civil damages remedies in the event of
breach. Moreover, lawyers are not predisposed
to capriciously jeopardize their professional licenses or fortunes. On the other hand, a dishonest client should
place little or no stock in such contractual provisions as a bulwark against
whistleblowing for the reasons noted above.
There is a far greater chance such a provision will hang a dishonest
client than save it.
The presentation of an NDA to an
attorney should send red flags soaring, and trigger a full and frank discussion
of why the client feels it is necessary, as well as a due diligence
investigation of the would-be client before accepting an engagement on such
terms. While it may be the client is
simply acting on the advice of other counsel, or because “everyone else is
doing it,” such advice and rationale are dubious. If a client genuinely believes such a
provision is necessary to remind an attorney of its existing legal obligations
of confidentiality, the client should be interviewing smarter lawyers, or, if
the client expects an NDA will effectively gag an ethical attorney, dumber
ones.
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[1] I don’t mean to pick on the financial industry; I have
reviewed similar agreements from clients in other, less regulated
industries. However, most of these
requests emanate from businesses in the financial industry.
[2] For an exhaustive and fascinating history of the
political machinations surrounding the ABA’s reversal of its position regarding
Rule 1.6 in the face of Sarbanes-Oxley
see Roger C. Cramton, George M. Cohen, and Susan P. Koniak, Legal
and Ethical Duties of Lawyers after Sarbanes-Oxley, 49 Vill. L. Rev. 725
(2004). A searchable version of this
article is available on the Boston University Law School website (BU
School of Law Working Paper Jan. 12, 2012)
[3] Although the exceptions of Rule 1.6(b)(1)-(3) apply
only to disclosures made to prevent a client’s future misconduct, Rule
1.6(b)(4) expressly permits a lawyer to reveal otherwise protected client
information “to . . . mitigate or rectify substantial injury to the financial
interests or property of another that . . . has resulted from the client's commission of a
crime or fraud in furtherance of which the client has used the lawyer's
services.”
