The Law on the Limits of When a Company May Pay its Employees’ Legal Fees

You’ve hired an experienced and successful sales manager and you and your employee are now faced with a potential legal claim from your employee’s former employer. Or your company is facing legal proceedings and individual employees are involved in the case or called as witnesses. Your employee cannot afford to retain separate legal counsel. May you pay for an attorney to represent your employee? Or, put another way, is a lawyer allowed to represent a client where a third party will compensate the lawyer?

The Massachusetts Rules of Professional Conduct recognizes the potential conflict of interest under these circumstances, but do permit a lawyer to be engaged and paid by a company to represent an employee of the company under certain conditions. The concern is that such a fee arrangement could compromise the lawyer’s duty of loyalty or independent judgment to the client given the risk that the third party payer could have interests that differ from those of the client, including interests in minimizing the amount spent on the representation and in learning how the representation is progressing. In general, a lawyer may be paid by a third party to represent a client; however, there appears little case law on the operation of the conflict of interest rules in this context in Massachusetts and elsewhere.

One Court has said the following with regard to this issue: A lawyer may represent a client but accept payment, directly or indirectly, from a third party provided each of the following conditions are satisfied: (1) The informed consent of the client is obtained, that is, the agreement by the client to a proposed course of conduct after the lawyer has communicated adequate information and explanation about the material risks of and reasonably available alternatives to the proposed course of conduct; (2) the third party payer is prohibited from, in any way, directing, regulating, or interfering with the lawyer’s professional judgment in representing the client; (3) there cannot be any current attorney-client relationship between the lawyer and the third party payer; (4) the lawyer is prohibited from communicating with the third party payer concerning the substance of the representation of the client, including the obligation to perform a careful redaction of all detail from any billings submitted to the third party payer; (5) the third party payer shall process and pay all such billings within the regular course of its business, consistent in manner, speed, and frequency as it pays its own counsel, and (6) once a third party payer commits to pay for the representation of another, the third party payer shall not be relieved of its continuing obligations to pay without leave of court brought on prior written notice to the lawyer and the client, with the third party payer bearing the burden of proving good cause to cease such obligation and the pursuit of a course of conduct deemed in the client’s best interests but disadvantageous to the third party payer expressly not constituting such good cause.