Defensive use of Rule 1.8 permitted by NC Court of Appeals
NC Court of Appeals Holds that a Client May Use a Violation of the Rule 1.8 of the Rules of Professional Conduct Defensively Against Claims by the Attorney.
In North Carolina, violations of the Rules of Professional Conduct cannot provide the basis for a legal malpractice claim and are not admissible as evidence of the standard of care in a legal malpractice case. That rule remains intact, but a recent decision of the North Carolina Court of Appeals holds that violations of some ethics rules may permit a client to resist an attorney’s claim.
In Law Offices of Peter H. Priest, PLLC v. Gabriel Coch and Information Patterns, LLC (No COA15-254, November 17, 2015), the court held that an attorney’s failure to comply with the explicit requirements of Rule 1.8(a) of the North Carolina Rules of Professional Conduct before entering into a business arrangement with his clients was fatal to his claims to enforce the terms of the agreement .
As is so often the case, this is a tale of no good deed going unpunished. By way of background, after the defendants exhausted their resources in registering a patent and were unable to pursue it further, the attorney entered into an agreement with defendants to prosecute and maintain the patent and pay 25% of the actual costs of doing so (the other 75% was paid by the defendants). In return, and in lieu of legal fees for the work, the attorney was to receive 25% of the proceeds generated from licensing of the patent. the attorney drafted the agreement, but he did not comply with requirements of Rule 1.8(a)(2) and (a)(3) of the Rules of Professional Conduct by that he advise the defendants in writing to seek review by independent counsel (although he testified that he orally told them that they should have another attorney review the Agreement) and he did not obtain defendants’ written informed consent to the agreement’s essential terms. Defendants, through a patent broker, ultimately sold the patent for $1,000,000.00. After the close of the sale, the attorney sought to recover the amounts that he believed he was owed under the agreement. Defendants argued that the agreement was not enforceable due to the attorney’s failure to comply with Rule 1.8(a).
The court agreed with the defendants. Under the court’s analysis, whether an attorney’s violation of an ethics rule can be used defensively requires a determination of the public policy that the specific rule aims to promote, or what harm it seeks to prevent. The court distinguished Robertson v. Steris Corp., _ N.C. App. __, 760 S.E.2d 313 (2014), disc. review denied, __ N.C. __, 768 S.E.2d 841 (2015), in which an attorney was permitted to recover fees in quantum meruit where he had been fired by his clients on the eve of their acceptance of a lucrative settlement offer. The former clients in Robertson argued that because the contingent fee contract was never put in writing as required by Rule 1.5(c), the court should vacate the award. The Court of Appeals rejected the former clients’ argument reasoning that the violation at issue was one of form rather than one of content and allowed the attorney to recover.
On the other hand, in Priest, the court found a strong public policy in Rule 1.8 and its comment #1, that “for the sake of maintaining the public’s trust, attorneys should be held to abide by Rule 1.8(a)’s explicit requirements as a condition for their own recovery when that recovery is based on business transactions with their clients.” Priest, No COA15-254, slip op. at 23. Therefore, the court held that defendants could utilize the attorney’s violation of Rule 1.8(a) as a procedural weapon in defense of the attorney’s claim. See id. at 23-24.
Thus, although the Rules of Professional Conduct cannot give rise to an independent cause of action against an attorney, in North Carolina, the public policy behind certain rules may permit them to be used defensively when an attorney seeks damages from a former client.