Ethical Rules in Flux: Advancing Costs of LitigationAuthor(s): Mark LynchSource: Litigation, Vol. 7, No. 2, SEARCHING FOR CONFLICTS (Winter 1981), pp. 19-21, 59Published by: American Bar AssociationStable URL: http://www.jstor.org/stable/29758600 .

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Ethical Rules in Flux:

Advancing Costs of Litigation

by Mark Lynch Can a lawyer ethically pay some of the costs of litigation for a client with only modest means? Can a lawyer advance the costs of a lawsuit for a public interest group when he ex?

pects to receive a minimal fee for his services? Must a small class member assume the risk of paying his lawyer's disbursements when those costs will far outstrip any possi? ble individual recovery?

These are the kinds of questions that the legal profes? sion is now addressing. Under the ABA's Code of Profes? sional Responsibility, lawyers may not advance the costs of

litigation unless the client remains ultimately liable for such expenses. Bar association and public interest groups agree that this rule restricts a lawyer from fulfilling his

responsibility to provide legal services to people with limited resources and to public interest causes.

There is considerable disagreement, however, on the

appropriate extent of reform. The ABA Commission on Evaluation of Professional Standards (the "Kutak Com mission,,), charged with developing new rules, has vacil? lated. A draft revised code released unofficially in August 1979 differed widely from the current official draft releas? ed in January 1980. The current Kutak proposal, while in some respects a step forward, leaves serious problems unresolved.

Until 1969, Canon 42 of the Canons of Professional Ethics prohibited a lawyer from providing a client with any financial assistance for litigation, including reimbursable advances. One principal reason for this rule was to

discourage lawyers from stirring up frivolous or specula? tive litigation designed to enrich lawyers?either through nuisance settlements or "lucky strikes"?rather than to vindicate genuine claims of interested clients. Another

purpose was to diminish the risk that the lawyer's personal investment in a case would color his judgment. Finally, the rule was designed to provide an incentive for a client ac?

tively to supervise the litigation.

Mark Lynch is an attorney with the Center for National Securities Studies in Washington, D.C.

It gradually became clear that these purposes could be served by a rule that fell short of an absolute ban on finan? cial assistance from lawyer to litigant. The current Code of Professional Responsibility, which the ABA adopted in

1969, authorizes attorneys to advance litigation costs so

long as the client remains ultimately liable to repay them. Under the code's Disciplinary Rule 5-103(B), a lawyer "shall not advance or guarantee financial assistance to his client except that a lawyer may advance or guarantee the

expenses of litigation, including court costs, the expenses of investigation, expenses of medical examination, and costs of obtaining and presenting evidence, provided the client remains ultimately liable for such expenses."

Fraught with Problems Although an improvement over Canon 42, this rule is

fraught with problems. On its face, it appears to pro? scribe practices that many lawyers and law firms regard as commonplace. For example, a strict reading of the rule would require a lawyer who represents an indigent on a contingent fee basis in an unsuccessful personal injury action to collect the costs from his still-impover? ished client. A lawyer who defends an indigent without fee in a landlord-tenant or small claims proceeding ap? parently must hold the client responsible for the costs.

Similarly, a lawyer who represents without fee a nonin

digent?but not wealthy?group of citizens in environ? mental litigation must hold his clients responsible for costs. The disciplinary rule might even prevent the

lawyer's participation if he is a member or employee of ?

public service organization that agrees to pay the costs of

litigation. In short, does this rule mean that some of the profes?

sion's finest public service accomplishments may involve violations of the Code of Professional Responsibility?

Not surprisingly, there are three well-recognized ex?

ceptions to the broad sweep of the rule's plain language. In fact, these exceptions were recognized even under the

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more restrictive Canon 42. Under these exceptions, the situations described above involve no impropriety.

Ethical opinions interpreting both DR 5-103(B) and its predecessor have recognized that a lawyer may bear

litigation costs when the client is indigent. See, e.g., ABA Informal Opinion 1361 (1976); ABA Formal Opin? ion 259 (1943); Association of the Bar of the City of New

York, Opinion 650 (1944). This exception makes self evident good sense. If the client is without funds, the

lawyer cannot collect costs and the obligation would be

meaningless. Moreover, lawyers have an ethical respon? sibility to provide legal services to those who cannot afford them, as Canon 2 and the code exhort.

The second recognized exception enables a lawyer to

pay litigation costs in cases where he will not under any circumstances receive a fee for his work. See, e.g., ABA Informal Opinion 889 (1965); ABA Formal Opinion 259 (1943); Association of the Bar of the City of New York,

Opinion 650 (1944). The purpose of the prohibition against paying costs is to reduce the lawyer's financial interest in litigation; this policy is not jeopardized when the lawyer absolutely forsakes a fee. Furthermore, this

exception is consistent with and even necessary to the

policy of fostering public service expressed both in Canon 2 and in a resolution adopted by the ABA House of Del?

egates in August 1975.

Public Service The third recognized exception covers cases where a

public service organization pays costs. If the lawyer han?

dling the case is a contributor, member, or employee of the

organization, it could be said that he is advancing costs in?

directly or that he has a financial stake in the outcome of the litigation. Nonetheless, ethical decisions have ap? proved these cost arrangements. See, e.g., ABA Informal

Opinion 1361 (1976); ABA Informal Opinion 889 (1965); ABA Formal Opinion 259 (1943).

The recognized exceptions, however, do not protect the full range of public service litigation as we know it today. In its present form, DR 5-103(B) is a serious deterrent to

litigation in the public interest. The middle-income person with a meritorious claim

may retain a lawyer on a contingent fee basis to press his

claim, but DR 5-103(B) requires that the client remain

ultimately liable for the costs of the effort. If the case fails, the burden of litigation expenses can be crushing. The

litigation costs alone, for depositions and court

transcripts, can be very high; when they are combined with the costs of investigation and experts, the overwhelming expense can deter people with modest resources from

undertaking the risk of such liability. In cases where the amount of individual recovery may be

small?particularly in class actions?the rule operates even more harshly. One well-known example is the named

plaintiff in Eisen v. Carlisle & Jacqueline, 417 U.S. 156

(1974), who had a claim for $70 in a securities class action.

Quite understandably, Mr. Eisen was unwilling to assume

responsibility for the $225,000 required to notify 2,250,000 class members, or even the $22,000 cost of a modified notification scheme the district court devised.

Since the code recognizes that contingent fee arrange? ments may be the only way for many people to afford litiga? tion, the code should also allow contingent cost

arrangements. In reality, the practice flourishes?lawyers either do not require the client to assume liability for costs, or, if the obligation is in the retainer agreement, they do not try to collect. But the code should be brought into line with reality, particularly when one of the most serious criticisms of the profession is its failure to provide afford? able legal services. Furthermore, as long as the rule re? mains in the code, it invites opponents to take discovery of the expense arrangements between lawyers and their

clients, a time-wasting process that intrudes upon the

attorney-client relationship. The current rule also creates serious problems in those

cases where Congress has authorized attorney fee awards to encourage litigation. More than 100 federal statutes authorize fee recoveries from public officials and private parties in a wide range of areas. These laws include the civil rights statutes, the Freedom of Information and

Privacy Acts, environmental protection statutes such as the Water Pollution and Control Act, consumer protec? tion statutes such as the Truth in Lending Act and the Fair Credit Reporting Act, and older statutes regulating finan? cial transactions such as the Clayton Act and the Securities Act of 1934.

The congressional judgment to encourage members of the public to act as private attorneys-general under these statutes indicates that such litigation is in the public interest. The possibility of a fee recovery, however, re

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moves these cases from the traditional exception to the

disciplinary rule against lawyers bearing litigation costs.

Thus, if a law firm agrees to handle a section 1983 civil

rights case for a nonindigent client, it must either forswear the possibility of recovering fees under the Civil Rights At?

torneys Fees Award Act of 1976, or it must require the

plaintiff to bear the costs.

Cost Burden This is an absurd result. Before the passage of the attor?

neys fees statute, a lawyer could take a civil rights case on a

pro bono basis without requiring client liability for costs. But now that Congress has acted to encourage lawyers to take such cases by holding out the possibility of recovering fees, the code requires the cost burden to shift to the client.

Whether this result is one step forward and two steps backward or two steps forward and one step backward, it

plainly is undesirable. There are many lawyers who advance costs in fee award

cases without demanding ultimate client responsibility, just as there are many lawyers who advance costs for per? sonal injury or class action cases on a contingent basis in

disregard of the rule. Nevertheless, the mere existence of a rule?even one that is widely disregarded? must be a deterrent to worthwhile litigation. It is no secret that pro bono cases are not universally accepted, even at firms that do a lot of them. However removed, a potential ethical pro? blem can raise an argument for declining a case, and the current prohibition against advancing costs in cases where there may be a statutorily authorized fee is precisely such a

problem. The Board of Governors of the District of Columbia Bar

recently petitioned the District of Columbia Court of Ap? peals to amend DR 5-103(B) in a way that would solve these problems. Under this proposal, "a lawyer shall not advance or guarantee financial assistance to his or her client, except that a lawyer may pay, advance, or guaran? tee the expenses of litigation or administrative proceed? ings, including court costs, expenses of investigation, ex?

penses of medical examination, and costs of obtaining and

presenting evidence." The crucial change in this proposal is the elimination of

the proviso that "the client remains ultimately liable for such expenses." Deleting the code's proviso on ultimate client liability and retaining the words "advance or

guarantee" would be ambiguous, since those words con?

template repayment. Adding the phrase "a lawyer may pay" makes it absolutely clear that the attorney, rather than the client, may bear the expenses. The amendment also sensibly expands the coverage of the rule to include administrative proceedings as well as litigation.

The Legal Ethics Committee of the District of Columbia Bar identified four reasons to eliminate the current pro? scription against lawyers' bearing costs. First, the present rule is widely ignored.

Second, other provisions of the code serve purposes similar to that of the disciplinary rule. For example, DR 2-109(A)(l), DR 2-110(B)(l), and DR 7-102(A)(l) prohibit lawyers from taking actions that serve merely to harass or maliciously to injure another party. DR 5-101

(A) prohibits a lawyer from accepting employment where "the exercise of his professional judgment on behalf of his client will be or reasonably may be affected by his own financial interests," although it permits such employment where the client consents after the lawyer fully discloses real or potential conflicts. DR 7-101(A) implements the

principle of client control over litigation. Third, the Legal Ethics Committee saw no significant

difference between contingent fee arrangements and con?

tingent cost agreements. DR 5-103(B)'s prohibition against contingent cost arrangements is anomalous in view of the contingent fee arrangements DR 5- 103(A) con? dones.

Fourth, public interest litigation is developing and

expanding rapidly. A rule permitting payment of costs

only in these cases would require an unworkable defi? nition. The committee concluded: "A definition broad

A rule permitting payment of costs only in "public interest" litigation is unworkable.

enough to encompass everyone's ideas of such cases would eviscerate the rule, but narrower definitions would ex? clude cases that one or another member of the Bar may reasonably feel should not be subject to prohibition."

Memorandum of the D.C. Bar Legal Ethics Committee in

Support of Petition for Amendment of DR 5-103(B) of the Code of Professional Responsibility, 14-15.

The committee is correct. The "public interest" is an elusive concept. The controversies over affirmative action

programs, environmental policy and energy policy, for

example, suggest how difficult it is to identify the public interest with any precision.

The Kutak Commission's unofficially released draft

nearly matched the District of Columbia Bar's approach. Section 1.12(d) of that draft provided that a lawyer "shall not provide financial assistance to a client in con? nection with pending or contemplated litigation, except that a lawyer may advance expenses of litigation, includ?

ing court costs, expenses of investigation, medical and other experts, and obtaining and presenting evidence." See Legal Times of Washington, Aug. 27, 1979, p. 27.

The comment accompanying this rule made its intent clear: "The code permitted assistance but required it to be in the form of a loan. The rule herein permits the law?

yer to provide the assistance without an obligation of

repayment." The current Kutak proposal, however, retreats from

this position, prohibiting the lawyer's financial assis? tance to a client in connection with pending or contem?

plated litigation, "except that (1) a lawyer may advance (Please turn to page 59)

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fellowman, and a strong faith in the

power of knowledge and experience to

conquer the maladies of men. The forum of the lawyers may then grow smaller, the courthouse may lose its

spell, but the world will profit a thousandfold by a kindlier and more

understanding relation toward all humankind.

Advancing

Costs

(Continued from page 21) court costs and expenses of litiga? tion, repayment of which is con?

tingent on the outcome of the mat? ter; (2) a lawyer or legal services

organization representing a client without fee may pay court costs and expenses of litigation on behalf of a client."

Under this version, apparently, a

lawyer can advance the costs of

litigation on a contingency basis, but may pay costs only if he is serving without a fee.

The draft's retention of a repay? ment obligation is unfortunate, and the language is ambiguous. The

phrase "contingent on the outcome of the matter" is vague and there is no explanation in the commentary. It is unclear whether repayment is

contingent only on recovery of costs or must be contingent on prevailing on the merits, even if costs are not recovered.

The Kutak approach raises prob? lems primarily in cases where the

principles involved in the litigation may be important but the amount of recovery modest. A suit for damages against a government official for violation of constitutional rights, for

example, can involve a substantial

outlay of litigation expenses far in excess of the recovery in damages or court-awarded costs. Thus, the cli? ent's costs may devour his recovery.

In cases where recovery of at?

torneys' fees and costs is authorized

by statute, there is always the pos? sibility that the court will not award the full costs of the litigation or a fee at the lawyer's normal rate. See, e.g.,

Copeland v. Marshall, 594 F.2d 244 (D.C. Cir. 1978), vacated and deci? sion en banc pending. Under the Kutak proposal, the liability of a client appears to be contingent not

only on the merits of the case but also on the discretion of the judge in

awarding fees. Straightforward re?

peal of the repayment obligation, as the District of Columbia Bar and the earlier Kutak draft propose, is vastly preferable to the confusion of the cur? rent proposal.

There also is room for debate on whether to retain the prohibition against paying or advancing expenses in addition to costs directly connected

with the litigation. Indeed, when the District of Columbia Bar's Legal Ethics Committee considered amend?

ing DR 5-103(B), five out of sixteen

voting members proposed modifica? tion of this prohibition. Two of the five favored abolition of the limitation

altogether; the others would have per? mitted a lawyer to advance living ex?

penses where necessary to permit the client to institute or maintain an ac? tion. This approach would permit a

lawyer to support a disabled client

during the pendency of a personal in?

jury case so that the client does not ac?

cept an unfavorable settlement be? cause of economic necessity. The ra? tionale for this position is that the dif? ference between litigation costs and other costs is negligible.

Far-Fetched Fear Those who oppose repeal of the

maintenance prohibition fear that its absence might encourage lawyers to "bid" for clients?clients would take their cases to the lawyer who offered the most luxurious living arrange?

ments during the pendency of the

litigation. While this fear may seem a bit far-fetched, probably it is incum? bent on the advocates of total repeal to develop empirical data on the number of cases improvidently settled for lack of living expenses.

Abolition of the prohibition against attorneys paying litigation expenses would solve the bulk of the present

problems. Given the inherently cautious and compromise-oriented nature of the profession, the politics of reform probably require that some?

thing be left for another day.

Solicitation

Rules

(Continued from page 24) The comments accompanying the

Kutak draft urge the profession to formulate solicitation limitations that "strike a proper balance between the interest of making persons aware of the need of legal services and the interest of preventing the evils of unrestricted solicitation." These comments are not illuminating.

The "evils of unrestricted solicita? tion" is rhetorical overkill. Certainly a lawyer can be annoying and can overreach. People can be injured by fraudulent or misleading solicitation. But these problems are not unique to the legal profession. There is no

justification for a uniquely restrictive solution. To many lawyers, the main "evil of unrestricted solicitation" is its

pro-competitive potential. The Attorney General pointed out

that a preferable approach to

regulating such a potentially beneficial activity is to define the evils to be avoided, and to permit solicitation under all other cir? cumstances. Regulating solicitation should begin with the Supreme Court's premise in Bates that "most

lawyers will behave as they always have: They will abide by their solemn oath to uphold the integrity and honor of their profession and the

legal system," 433 U.S. at 379.

The organized bar's reluctance to

accept lawyer advertising was a

public relations disaster for lawyers. The stakes are still high. The Kutak Commission's work, and its recep? tion by the various state bars and courts, is a watershed test for the bar. This is an opportunity to win back public trust and support.

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