II. Lawyer Liability to Co-counsel and Third-party Practice

• Library: Professional Responsibility in Litigation (ABA) (2016 Ed.)

II. Lawyer Liability to Co-counsel and Third-Party Practice

To analyze lawyers' potential liability to co-counsel, it is necessary to understand lawyer liability arising out of clients' representations more broadly. Most lawyer liability cases are premised on two theories: legal malpractice, or professional negligence; and breach of fiduciary duty. Although variously phrased by courts, a plaintiff alleging legal malpractice must prove that (1) her lawyer owed her a duty; (2) the lawyer breached that duty; and (3) the lawyer's breach of duty proximately caused (4) actual damages. The lawyer's duty of care flows from the attorney-client relationship. It is accordingly the general rule that, in the absence of fraud or other improper motives, lawyers are liable for professional negligence exclusively to those with whom they have an attorney-client relationship.⁵ This is sometimes referred to as the "strict privity rule."⁶ Lawyers' liability for breach of fiduciary duty similarly requires proof of an attorney-client relationship giving rise to a fiduciary duty; breach of that duty; and actual damages proximately caused by the breach. Because the lawyer's fiduciary duty flows from the attorney-client relationship, lawyers are generally liable on this theory only to clients.

Courts are reluctant to expand lawyers' potential liability for malpractice or breach of fiduciary duty to non-clients because doing so "could result in potential ethical conflicts for the attorney and compromise the attorney-client relationship, with its attendant duties of confidentiality, loyalty, and care."⁷ Nonetheless, lawyers may owe duties to non-clients in limited circumstances, such as where a client hires a lawyer specifically to benefit a third party,⁸ or the non-client is otherwise the direct and intended beneficiary of the lawyer's services.⁹ Incidental beneficiary status, on the other hand, will not support liability.¹⁰ Determining whether a non-client is a direct and intended beneficiary of a lawyer's services is necessarily a fact-dependent inquiry.

A. Co-counsel's Direct Liability to One Another

Given courts' reluctance to permit non-clients to sue lawyers, it should be no surprise that they generally prohibit suits between co-counsel alleging legal malpractice or breach of fiduciary duty.¹¹ After all, while co-counsel represent a common client, they do not share an attorney-client relationship with each other. Other courts, when asked to decide whether to permit contribution or indemnity actions between co-counsel, have rejected them and thus could be expected to reject direct claims between co-counsel as well.¹²

There are at least two common policy reasons for courts' refusal to recognize legal malpractice and breach of fiduciary duty actions between co-counsel. First, allowing co-counsel to sue each other would imperil client confidences. A lawyer sued for malpractice or breach of fiduciary duty would be permitted to reveal the client's confidences in defending against co-counsel's allegations.¹³ While it is true that a lawyer's duty of confidentiality and the attorney-client privilege are impliedly waived in a legal malpractice or breach of fiduciary duty case brought by the client, in a suit between co-counsel there is no implied waiver, and the client's confidences may be exposed against its will.¹⁴ The thought of lawyers asking clients to waive confidentiality or the attorney-client privilege so that they may pursue claims against co-counsel is equally unappealing to courts.¹⁵

Second, allowing co-counsel to sue one another would spawn numerous conflicts of interest.¹⁶ Recognizing duties running between co-counsel would dilute the lawyers' duty of undivided loyalty to their common client.¹⁷ Rather than considering only the client's best interests, co-counsel would have to consider their obligations to one another when making decisions related to the client's representation.¹⁸ Co-counsel would thus be forced to serve multiple masters in any given case.¹⁹

Mazon v. Krafchick²⁰ is an illustrative case. In Mazon, Tahar Layouni was seriously injured in an electrocution accident when a drilling company struck a buried electric line. Layouni retained Michael Mazon to represent him in an action to recover for his injuries. With Layouni's consent, Mazon involved Steven Krafchick, a lawyer with expertise in this type of case. Mazon and Krafchick entered into "a 'joint venture agreement,'" whereby Mazon would draft the complaint and locate the defendants to serve, and Krafchick would file and serve the complaint.²¹ They agreed to split fees and costs equally. Unfortunately, Krafchick's legal assistant did not serve the complaint until three days after the statute of limitations ran. Krafchick told Mazon of the error approximately one month later and acknowledged his responsibility for serving the complaint.²²

Layouni sued both Krafchick and Mazon for legal malpractice. Both lawyers had the same professional liability carrier, which settled Layouni's malpractice suit for $1.3 million, allocating $1.25 million of the settlement to Krafchick and $50,000 to Mazon. Mazon then sued Krafchick for breach of contract, breach of fiduciary duty, professional negligence, and indemnification. He sought damages for the loss of the $325,000 fee he had expected to earn from Layouni's case, $465 in costs he advanced, his $2,500 insurance deductible, and his insurer's $50,000 settlement payment. Mazon's lost contingent fee obviously was the centerpiece of his suit against Krafchick.

The trial court granted Krafchick summary judgment on Mazon's malpractice and breach of fiduciary duty claims, reasoning that allowing lost-fee claims would be potentially inconsistent with co-counsel's overriding duties to clients.²³ The trial court did, however, award Mazon his out-of-pocket expenses and insurance deductible. Both parties appealed. The Washington Court of Appeals affirmed the trial court's denial of Mazon's recovery for his expected contingent fee and adopted a bright-line rule prohibiting co-counsel from suing one another for lost or reduced prospective attorney's fees.²⁴ In doing so, it reasoned that although Mazon's claim did not impair his or Krafchick's duties of undivided loyalty to Layouni, public policy dictated a blanket prohibition of suits between co-counsel to recover lost prospective fees because of the potential conflicts of interest such suits would spawn.²⁵ The court of appeals determined that a bright-line rule was preferable to a case-specific approach "because it prevents conflicts from arising at any point during the representation, assures [that] the client's interest is paramount regardless of the issue, and is easy to administer."²⁶ The court of appeals also allowed Mazon to recover his insurer's $50,000 settlement payment. Both parties sought review by the Washington Supreme Court.

The Washington Supreme Court in Mazon agreed with the lower appellate court's reasoning and adopted a bright-line rule that no duties exist between co-counsel that would allow recovery for lost or reduced prospective fees.²⁷ As the court explained:

As co-counsel, both attorneys owe an undivided duty of loyalty to the client.

The decision about how to pursue a case must be based on the client's best interests, not the attorneys'. The undivided duty of loyalty means that each attorney owes a duty to pursue the case in the client's best interests, even if that means not completing the case and forgoing a potential contingency fee.

If we were to recognize an attorney's right to recover from co-counsel . . . potential conflicts of interest that harm the client's interests may arise. Co-counsel may develop an impermissible self-interest in preserving the claim for the prospective fee, even when the client's interests demand otherwise. Additionally, the question of whether an attorney's claim conflicts with the client's best interests may be difficult to answer. Discretionary, tactical decisions, such as whether to advise clients to settle or risk proceeding to trial and determining the amount and structure of settlements, could be characterized by co-counsel as a breach of the contractual duties or general duties of care owed to one another and provide a basis for claims seeking recovery of prospective fees.²⁸

Mazon countered that prohibiting suits between co-counsel would undermine public confidence in the legal system because under that regime co-counsel could not be held accountable to one another.²⁹ According to Mazon, the court's bright-line rule would encourage co-counsel to collude to conceal malpractice from clients because innocent lawyers exposed to substantial liability to clients could never be made whole through suits against negligent co-counsel.³⁰ Faced with the loss of prospective fees and potential liability to clients, lawyers with no means of recovering from co-counsel are more likely to elevate their interests above their clients'.³¹ The supreme court was not persuaded.

[W]e find this argument unpersuasive because it presumes that allowing cocounsel to recover prospective fees will eliminate attorneys' incentive to collude and protect themselves from liability. Instead, we believe that allowing co-counsel to recover prospective fees would create the opposite incentives to overemphasize the informal divisions of responsibilities between cocounsel, overlook any failings of cocounsel, and later claim that cocounsel's failures were not their responsibility. Prohibiting cocounsel from suing each other for prospective fees arising from an attorney's malpractice in representing their mutual client provides a clear message to the attorneys: each cocounsel is entirely responsible for representing the client.³²

The supreme court reasoned that prohibiting suits between co-counsel encourages lawyers in such relationships "to back each other up" and cooperate to reduce the chance of errors or misjudgments in pursuing the best result for the client.³³...