Securities Fraud Attorney Profile
News Video
About the Firm
Investor Alert
Recent Arbitration Awards
Contact Us
Tepper Talk
Investor Rights
Financial Glossary
Se Habla Español

Brokerage Settlement Agreements - Ethical or Unethical?

PIABA BAR JOURNAL Spring 2007 (Vol. 14 No. 1)

Brokerage Settlement Agreements – Ethical or Unethical? 

By Mark A. Tepper

Florida Securities Fraud Attorney

To settle or not to settle: that is the question1.  Whether ‘tis nobler to sign a settlement agreement which includes one or more unethical provisions or be forced to proceed to hearing. 

Ethics issues frequently come up in the context of confidentiality and indemnification provisions in settlement agreements.  Various state ethics committees have determined that over broad confidentiality provisions are unethical because they indirectly affect an attorney’s ability to represent other clients against the same opposing party.  They also agree that, generally, attorneys may not agree to be liable for indemnification to the defendant.

Recently, a customer’s arbitration claim was settled with New York in-house counsel (“in-house counsel”) from one of the big wire houses.  In-house counsel proposed a settlement agreement with a broad confidentiality clause that required the Claimant’s counsel to keep the facts of the case confidential as well as the terms of the settlement.  Fortunately, the New York State Bar Association Committee on Professional Ethics had written an opinion, directly on point, which was shared with in-house counsel.  He said that “reading it was an eye opening experience.”  

He was referring to NY Ethics Opinion 730 (2000) which is discussed below. 


New York’s controlling rule DR2-108(B) provides:  “In connection with the settlement of a controversy or suit, a lawyer shall not enter into an agreement that restricts the right of a lawyer to practice law.”  NY Ethics Opinion 730 (2000).  This rule is intended (1) to preserve the public’s access to lawyers who, because of their background and experience, “might be the best available talent to represent these individuals,” (2) to prevent parties from “buying off” the opposing lawyer and (3) to prevent a conflict between a lawyer’s present client and the lawyer’s future ones.  ABA Op. 93-371 (1993).  Id.  “This rule applies equally to a lawyer who would propose or offer such an agreement and the lawyer who would accept it.”  Id.

As New York recognized, confidentiality provisions are properly applied to the terms of the settlement. However, an ethics violation occurs when those same confidentiality provisions are applied to the underlying facts, because those facts may be needed to represent future clients against the same opposing party; thus, creating a conflict of interest.

The New York opinion focused on the scope of the confidentiality provision: 

“. . . confidentiality provisions that . . .  prohibit the parties and their lawyers from disclosing the terms of a settlement are common and do not violate DR2-108(B).  NY Ethics Opinion 730 (2000).  The obligation to preserve the confidentiality of settlement terms does not effectively restrict the lawyer from representing other clients.  Further, the terms of confidential settlement are client “confidences” or “secrets” within the meaning of DR4-101, which establishes the lawyer’s ethical duty of confidentiality.    Therefore, the lawyer may not disclose settlement terms without client consent and, conversely, the client may insist that the lawyer keep this information confidential.  Since lawyers may not disclose confidential settlement terms without client consent, it is not an impermissible restriction on the right to practice law to require, as a condition of settlement, that the party’s lawyer will not disclose this information.   
. . . however, terms of a settlement agreement may violate DR2-108(B) if their practical effect is to restrict the lawyer from undertaking future representations and if they involve conditions or restrictions on the lawyer’s future practice that the lawyer’s own client would not be entitled to impose.
See, e.g., ABA Op. 417 (2000)(limitation contained in settlement agreement would effectively bar future representation because the lawyer’s inability to use information could materially limit and adversely affect representation of future clients);”

“. . . the proposed settlement term that would prohibit disclosure of “any information concerning any matters relating directly or indirectly to the settlement agreement or its terms” appears to be overbroad. 

These provisions would restrict the lawyer’s right to practice law by requiring the lawyer to avoid representing future clients in cases where the lawyer might have occasion to use information that was not protected as a confidence or secret under DR 4-101 but nevertheless covered by the settlement terms.  A settlement proposal that calls on the lawyer to agree to keep confidential, for the opposing party’s benefit, information that the lawyer ordinarily has no duty to protect, creates a conflict between the present client’s interests and those of the lawyer and future clients – precisely the problem at which DR 2-108(B) is aimed.”

Similar agreements have also been considered by ABA Formal Opinions 00-417 and 93-371.  ABA Opinion 00-417 concludes that a lawyer may not seek or agree to a settlement term prohibiting the lawyer’s future use of information obtained during the representation as it violates Model Rule 5.6(b).  The committee found that while this might not be a direct ban on future representation, “[a]s a practical matter, however, this proposed limitation effectively would bar the lawyer from future representations because the lawyer’s inability to use certain information may materially limit his representation of the future client and, further, may adversely affect that representation.”

The Florida Professional Ethics Committee has reached a similar conclusion.  Fla. Opinion 27070 (2006).  In that matter, the confidentiality:

“clause generally required the attorney and the claimants to keep everything confidential, regarding all negotiations, claims, and facts and circumstances of the action.  . . . the confidentiality provision shall not prevent the attorney or the claimants from responding to subpoenas or otherwise being legally compelled to provide information, including providing information necessary for filing tax returns, responding to SEC inquiries, etc.  The clause does not make any reference to prohibiting the attorney from using information gained through this representation in later representations against the same opposing party.”  Emphasis added.

The confidentiality clause that the attorney was asked to sign is governed by Rule 4-5.6(b) which states as follows: “A lawyer shall not participate in offering or making . . . an agreement in which a restriction on the lawyer’s right to practice is part of the settlement of a controversy between private parties.”  The test for determining whether a particular agreement violates that rule is “how does a particular settlement provision affect an attorney’s ability to represent another client in a matter involving the same or a related opposing party.”  Fla. Opinion 27070 (2006). 

“Based on the above authority, [the Florida Professional Ethics Committee advised] that the confidentiality portion of the clause appears to be overbroad and therefore may restrict the inquirer’s right to practice under Rule 4-5.6(b).”  Id.

Often times a brokerage firm will insert an indemnification clause into the settlement agreement requiring an attorney to sign it to obtain a settlement.  A typical indemnification clause may read as follows:

“Claimants and their attorneys expressly agree to indemnify and hold the brokerage firm harmless from all costs, expenses, and damages of any kind, including litigation expenses and attorney’s fees, caused by any breach of the confidentiality provisions.”

The proponent of such a restriction might argue that it is needed to prevent the lawyer’s improper use or disclosure of information learned in the course of the representation, that the lawyer may have a duty to keep confidential.  However, an attorney indemnification clause may not be justified on this ground.  

The Florida Professional Ethics Committee advised an attorney that he “may not indemnify and hold harmless the opposing party caused by any breach [of the above mentioned indemnification clause] in the settlement agreement.”

The Tennessee Board of Professional Responsibility determined that an attorney’s signature on a release:

“should vouch only for the fact that the client releases the defendant.  A requirement that a Plaintiff’s attorney become a party to a release might create a conflict of interest between Plaintiff’s attorney and the Plaintiff in violation of DR5-101(A).  Therefore these clauses are prohibited except in cases where the Plaintiff’s attorney releases a claim for attorney fees.” 

Tennessee Ethics Opinion 97-F-141.  Additionally, the North Carolina Bar Ethics Committee has issued an opinion stating that an attorney may not accept a settlement on the behalf of a personal injury client that requires the attorney to indemnify the defendant for all outstanding medical liens.  North Carolina Ethics Opinion 228 (1996).  See also, Arizona Opinion 03-05.


After in-house counsel discussed the New York Ethics Opinion 730 with his wife (also a lawyer) she asked him:  do attorneys actually signed these restrictive, unethical, confidentiality agreements? 

“Sure,” he replied, “they all do.  No one ever objected before.”

 Ethics rules protect attorneys from unethical confidentiality and indemnification provisions in a settlement agreement.  Don't accept the Hobson's choice to sign an unethical agreement or go to hearing.  Insist on an ethical settlement agreement.
  1 My apologies to William Shakespeare.