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June/July 2001
Published in CBA Record
©Chicago Bar Association. Used with permission.
Can Lawyers Protect, and Sell at Premium, a Secret and Valuable Idea?
by Michael L. Shakman and Marc O. Beem
You have a great idea for a tax-saving structure for your client’s transaction or some other idea that is novel, unknown and valuable to clients. Can you base your fee on selling the idea instead of your time? You might want to sell the same idea to more than one client; can you require your own client and the lawyers for other parties to the transaction to treat your idea as confidential?
In an era when collecting fees based on hourly work seems to drive the profession and vex the lives of lawyers, many will undoubtedly view the opportunity to be compensated on a basis other than billable hours as very attractive.
In fact, sometimes lawyers and other professionals do attempt to sell their services by seeking to be compensated for the value of their ideas, coupled with an agreement that the parties who receive their novel solution to a problem will keep it confidential, except to the extent disclosure is necessary to accomplish the transaction. A recent ISBA opinion throws some light on the ethical issues that arise from such an effort, but also leaves many questions unresolved.
The ISBA Opinion
The opinion arose from an accountant’s request to a lawyer to keep confidential a package of ideas developed by the accountant to reduce their common client’s taxes. ISBA Advisory Opinion 00-01. The Opinion concludes that the lawyer could not agree to the request because doing so would run afoul of the prohibition in Illinois Rule of Professional Conduct 1.7(b) that a lawyer not represent a client if the representation “may be materially limited by the lawyers’ responsibilities to another client. . .” Agreeing to the confidentiality restriction as part of the representation of client A, the Opinion reasons, “would Ômaterially limit’ [the lawyer’s] responsibilities to Clients B, C and D because Lawyer would be prohibited from providing beneficial tax information” to those clients.
Rule 1.7(b) has an exception, however, that permits the lawyer to take on a representation where his own interest or that of a third party may be a materially limiting factor if (i) the lawyer reasonably believes that the representation will not be adversely affected, and (ii) the clients consent after disclosure. The Opinion concludes that it would never be possible to satisfy either of these requirements in the situation presented because the interests of other clients would be materially affected and they would not consent.
The Opinion also draws support from Rule 5.6, which prohibits employment and partnership agreements, as well as settlement agreements, that limit a lawyer’s ability to practice law. While not literally applicable because no such agreement was sought, the Opinion finds that the proposed confidentiality agreement is contrary to the spirit of Rule 5.6. It reasons that “the terms of the Confidentiality Agreement would create a conflict between the interest of Lawyer’s current Client A and those of future clients who could benefit from the knowledge gained by Lawyer from Accounting Firm.”
Unanswered Questions
The questions left unanswered by the Opinion are at least as interesting as those it addresses. They include the following:
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What if the lawyer did not have other clients similarly interested in the same confidential information? Could the lawyer have agreed to the accountant’s request for secrecy? If the lawyer could not, is the lawyer required to tell the client to look elsewhere for legal services?
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What if the lawyer had created the idea? Then could the lawyer impose a secrecy rule on the accountant working for their common client? Could the lawyer impose it on another lawyer working on the transaction for another party?
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What if the lawyer had several clients interested in the same problem, and the lawyer treated all equally? Could the lawyer do so?
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Could the lawyer charge a premium, non-hourly fee for the ideas if the lawyer were the creator?
Agreeing to Keep Information Confidential to Aid a Present Client
If the lawyer did not have other clients similarly interested in the accountant’s idea when the accountant sought the lawyer’ agreement to confidentiality, most of the reasoning of the Opinion suggests that the lawyer could agree. The Opinion expressly states that the lawyer has other clients who have an interest in knowing the confidential information, but won't be able to get it if the lawyer signs the confidentiality agreement.
Rule 1.7(b), on which the Opinion relies, deals with impermissible conflicts between clients, and precludes a lawyer from taking on one representation when it will conflict with another. If this were the only principle on which the Opinion relied, and if there were presently no other clients with the same interest, it seems that the lawyer should be able to sign the accountant’s confidentiality agreement.
The reference in the Opinion to the spirit of Rule 5.6 clouds this conclusion, for it focuses upon the “conflict between the interest of Lawyer’s current Client A and those of future clients who could benefit from the knowledge.” Rule 5.6 should not control if the lawyer is to give proper weight to the interest of the lawyer’s present client. That client wants immediate access to the accountant’s presumably beneficial ideas, and is prepared to pay. That client will be immediately prejudiced if use of the idea is withheld. It seems difficult to justify such harm to a current client because of an ethical rule focused on the interest of a potential future client, who may or may not ever approach the lawyer at a time when the idea is still relevant.
To the extent the Opinion can be read to state a general rule that a lawyer can never sign a confidentiality agreement to obtain confidential information needed by a present client because the lawyer may have to turn away a future client to whom he cannot disclose the information, the Opinion seems wrong. In any case, the Opinion can be distinguished on the basis that its result is required by Rule 1.7(b) because the lawyer has present clients who can use the information, but can’t get it under the accountant’s proposed restrictive agreement.
There are some bizarre consequences if the Opinion is read to preclude a lawyer from signing a confidentiality agreement because of the potential interest of future clients. A premise of the Opinion is that if the lawyer has other present clients for whom the idea is useful, the lawyer will likely have to tell Client A that the lawyer can no longer represent that client in connection with the transaction because the lawyer would be in breach of the lawyer’s duty to other clients as a result of signing the required confidentiality agreement. Therefore, Client A will be required to retain a different lawyer who is not burdened by other clients in need of the confidential information.
This is bad enough in terms of Client A’s interests, but perhaps is defensible given the interests of other current clients. If the Opinion also applies whenever a future client might need the information, even if no other present client does, then no lawyer (except one about to retire) could ever sign a confidentiality agreement in this situation. Such a rule would prejudice all present clients who might have a need for the confidential information and are willing to pay for it. These clients would have to do without either the valuable information or the assistance of a lawyer in the matter. The Opinion does not consider this issue.
Requiring a Client to Keep a Lawyer’s Idea Secret
The Opinion also does not address the rules that apply if the lawyer is the creator of the secret idea and seeks to require the client and others (accountants and other lawyers for other parties in the relevant transaction) to protect his secrets. If the lawyer presents the request for secrecy after the lawyer-client relationship was created, the client could reject the lawyer's after-the-fact effort to limit the client’s freedom to use the advice he or she obtains as a result of the relationship. See Restatement of the Law Governing Lawyers § 18 (client may reject terms added by lawyer after creation of relationship if not reasonable.)
If the lawyer requests an agreement to confidentiality from the client at the outset of the representation, there is no apparent reason in Rule 1.7(b) or in Rule 5.6 to foreclose the request. There is no conflict with a present client (or even a future client, because the lawyer can offer all such clients the same arrangement), nor is there any limitation on the lawyer’s ability to practice law. If a lawyer really has an idea that is uniquely valuable, the Opinion and the Rules it relies upon don’t provide a reason why the lawyer shouldn’t be able to ask all his or her clients to keep the idea secret. (If the other lawyer in the transaction refuses, however, this could generate a conflict between the interests of the lawyer who created the idea and that lawyer's client; the client would want to do the transaction with or without confidentiality protection for the lawyer while the lawyer wants the protection.)
For the reasons discussed above, the lawyer should also be able to request another lawyer working on the transaction to keep the information secret, so long as that lawyer does not have other clients for whom the information would be useful.
Can the Lawyer Impose Confidential Requirements on All Clients?
If the lawyer has a group of existing clients, all of whom could benefit from the lawyer’s novel and valuable idea, can the lawyer ask them all to keep it secret? In this situation, concerns based on Rule 1.7(b) are likely to come into play. In the absence of a pre-retention agreement to the contrary, all the clients are entitled to expect the lawyer to give them the benefit of all the lawyer’s ideas for whatever fee has been agreed. For the lawyer to do otherwise would violate a premise of the lawyer-client agreement and generate or encourage differing treatment based on one client’s willingness to pay more for the same service. Rule 1.7(b) would seem to be implicated.
As noted above, if all the client relationships are created on the same terms -- that each client must keep the lawyer's idea secret, and the fee is agreed to on the basis that the secret idea will be shared at a non-hourly or premium fee, such an arrangement does not violate any Rule, provided that the fee is reasonable. Different rules apply to pre-retention and post-retention agreements about secrecy. Therefore, the lawyer may want to ask all clients to agree in advance to keep the ideas secret. The lawyer would have to inform the prospective client in advance that by doing so the client might limit the client’s ability to use the lawyer’s ideas if other parties to the transaction or their lawyers would not agree to keep them secret as well. As a practical matter, this necessary pre-retention disclosure may so discourage prospective clients that no lawyer can realistically make the request.
Can the Lawyer Charge a Premium Fee for a Great Idea?
The reason for all the discussion about ethical limitations is that the lawyer has an idea, concept or information that is so clearly of special value that a client will rationally agree to pay a premium for it. If this assumption is correct, are there any limits on what a lawyer may charge for the great idea?
Rule 1.5 requires that a lawyer’s fees be “reasonable” and lists eight factors bearing on reasonableness. None clearly precludes a premium or transaction-based fee. Such a fee may or may not be supported by the first factor listed, “the time and labor required.” It may, however, find support in the reference to the “novelty and difficulty of the questions involved, and the skill requisite to perform the legal services properly.” Although the “novelty” under Rule 1.5 apparently attaches to the “questions involved”, while the novelty on which the lawyer relies for the premium fee is in the solution. This should come to the same thing because a solution to a difficult question must be part of the factors that determine the reasonable value of the services under the Rule..
Several additional factors listed in Rule 1.5 probably will have no relevance. These include the likelihood of precluding other employment, the time limitations imposed by the client and the nature or length of the attorney-client relationship.
The remaining factors that may apply to the reasonableness of the premium fee include (i) “the fee customarily charged in the locality for similar legal service.” (ii) “the amount involved and the results obtained,” (iii) “the. . . ability of the lawyer” and (iv) “whether the fee is fixed or contingent.”
The first of these factors will likely cut against the premium fee because it is not likely to be customary. Factors (ii) and (iii) may support a premium fee because it is likely that a lawyer who develops a valuable and novel idea has some special ability. The “amounts involved” in the transaction or event must be substantial to justify an extraordinary fee on economic grounds. The last factor, whether the fee is contingent, may well come to apply if the lawyer agrees with the client that the premium fee will only be paid if the novel idea passes muster with the IRS (if it relates to taxes) or if the idea is otherwise successfully used.
While it is impossible to determine the reasonableness of a fee apart from the specific facts to which all of the factors listed in Rule 1.5 can be applied, there is enough flexibility in those factors (which the Rule states are not all the relevant factors) to suggest that in some instances a premium fee would be sustained as reasonable.
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