Benjamin Franklin’s wise words — “Three people can keep a secret when two of them are dead” rang through my ears as a dénouement to a recent case against a once high profile plaintiff ’s lawyer. High on the adrenaline rush of a hard fought, sizable, settlement against a disgraced lawyer (who had blown the statute of limitations on a police abuse case in which a cop had broken a man’s jaw), I received the promised settlement checks along with a “more formal agreement” from the Professional Liability Fund (PLF) adjuster. A curious new term was added to the agreement that had never been discussed during the mediation nor included in the written agreement signed in the mediator’s office by both the PLF and the plaintiff. The PLF’s cover letter stated, “You are not authorized to negotiate the checks until you and your client sign off on the enclosed agreement which includes onerous terms to which you did not agree and which give the PLF and the defalcating lawyer claims against you, the lawyer, and your client in perpetuity.”
The PLF was attempting to coerce a freebie that it did not negotiate: confidentiality. The PLF attorney argued that this was a “standard term in all PLF settlements.” I replied that a minimum of a $10,000 payment by a defendant is a standard term in all Perriguey settlements. What the PLF did not know is that I anticipated this old defense trick and had, immediately after the conclusion of the mediation, emailed a copy of the settlement agreement to the Willamette Week newspaper, which printed the terms. Touché!
Though the PLF lawyer accused me of “clearly violating Oregon law” by breaching “mediation confidentiality,” I reminded him that ORS 36.220 applies to communications made during media- tion but that “the terms of any mediation agreement are not confidential.”
Given that the defense was so certain about this, and so wrong, I thought it important to remind OTLA members about the public value that inures in a settlement even after a confidential mediation.
In this case, my particular client recognized that shining a light on police abuse through the justice system helps ensure that the police have better training when there are consequences for their intentionally or negligently harmful actions. This client felt similarly about lawyers whose negligence harms the consumer. Keeping the terms of the settlement confidential would have run counter to my client’s goals.
Tax implications to secrecy
Plaintiff’s alleged damages were associated with his pain and suffering at the hands of the police, and the lawyer’s failure to secure the recovery, related solely to pain and suffering. There would normally be no taxation on the settle- ment funds. 26 U.S.C. 104(a)(2). (This might not be true if income received was considered, in part, as payment for a confidentiality agreement.)
If we had allowed the PLF to slip into the settlement agreement the unnegotiated confidentiality clause, the plaintiff could have been subject to unexpected and unadvised taxation on part of his recovery.
Such was the outcome of a United States Tax Court opinion Amos v. IRS (2003). This was the case where Dennis Rodman, a Chicago Bulls basketball star with a multi-colored coif, kicked a courtside TV cameraman in the groin. The court held that if a portion of a settlement is attributable to a confidentiality agreement, that portion of the funds is taxable.
Since a confidentiality clause is normally something that benefits the defendant and for which, at least when nego- tiating in good faith, the defendant would pay, the IRS considers it income, as opposed to remuneration for a loss associated with pain and suffering, and can tax the recovery proportionately.
If I had failed to counsel the plaintiff about this, and the slippery confidentiality clause became part of the agreement, I might be calling the PLF to indemnify myself for the unexpected taxation caused by the PLF’s own actions. Prudent counsel will discuss early in the case the costs (financial, psychological and ethical), that agreeing to remain silent can create.
If the plaintiff agrees to confidential- ity, he or she should insist that the defendant who is demanding the secret indemnify and hold plaintiff harmless from income tax liability in pain and suffering cases.
Confidentiality clauses in settlements against “public bodies” are forbidden by statute. ORS 17.095(1) prohibits a pub- lic body, officer or employee from entering into a settlement that “requires that the terms of the settlement or compromise be confidential.” The only exception is where “the court determines, by writ- ten findings, that specific privacy interests of a private individual outweigh the public’s interest in the terms of the settlement or compromise.” ORS 17.095(2). All settlements of claims against a public body, officer or employee must be filed with the court before dismissal of the action and must include “a full and complete disclosure of the terms and conditions.” ORS 17.095(3).
This legal prohibition does not stop defense lawyers who represent public bodies in claims out of court from drafting settlement agreements, often after the deal is negotiated, that include limitations on the plaintiff’s right to discuss the case. Many of these lawyers may not know about this statutory prohibition. It is our job to educate them and to resist these agreements.
Mitigating the effects
Some have suggested that tax implications of confidentiality clauses may be
mitigated, or eliminated, if the confidentiality agreement is mutual. I have been unable to locate any authority from ei- ther the tax court or an appellate court to support this proposition.
If the defense is insisting on a confidentiality clause, consider negotiating a limitation on damages to a portion of the settlement amount and a term that the defendant must establish proof of actual damages. Allow for disclosure to courts, therapists, CPAs and other attorneys. Include a clause that the plaintiff will not be vicariously liable for disclosures by third parties. Refuse clauses that bind “plaintiff and his/her agents or representatives” or other language that could create exposure to the legal team.
Some defendants propose extraordinarily broad confidentiality agreements, which include the articulation of facts within the public record.
Lawyers should be very circumspect about signing any confidentiality agreement that binds them to secrecy. While most clients will have limited opportunities to enter into such an agreement, a successful lawyer will have many over the course of a career. The lawyer may have a difficult time recalling which cases he or she agreed to keep confidential, and err on the side of complete secrecy. This limits the corrective effects of plaintiff litigation in society by overcompensating in a way that favors the wrongdoers. Furthermore, a lawyer may want to use the large settlement amount as a way to market his or her effectiveness.
Oregon Rule of Professional Conduct 5.6 provides that a lawyer shall not participate in “an agreement in which a direct or indirect restriction on the lawyer’s right to practice is part of the settlement of a client controversy.” A secrecy provision from a prior case would limit the lawyer’s ability to speak about prior cases, arguably limiting his or her right to practice law.
ORPC Rule 5.4(c) states: “a lawyer shall not permit a person who recommends, employs or pays the lawyer to render legal services for another to direct or regulate the lawyer’s professional judgment in rendering such legal services.” In a contingent fee case, the lawyer is receiving payment from the defendant. An onerous confidentiality can limit the lawyer’s ability to render future legal services for others. If a plaintiff’s lawyer has experience litigating cases against a specific defendant, the lawyer could be inhibited from sharing this information with the plaintiff. This forces the lawyer to keep important information about the defendant from the plaintiff, creating a conflict.
I resist signing confidentiality agreements to avoid claims from my clients and from defendants due to some per- ceived statement or disclosure that I may make in the future. It is vital to discuss this with clients early in the litigation.
Don’t agree to secrets you can’t keep
If Benjamin Franklin was correct, and three people can keep a secret only when two of them are dead, confidentiality agreements are a dangerous folly. As plaintiff ’s lawyers, our clients should not be unwittingly saddled at the tail end of their case with a potential cause of action served up to the defense. Secret settlements often conceal important information from the public, creating a permissive system where tortfeasors avoid additional public scrutiny and accountability. There are uncertain tax consequences. Formal secrets limit information sharing between plaintiffs’ lawyers and their clients. Instead of resolving litigation, confidentiality agreements create a trigger for future litigation.