I’ve written before about the need for lawyers to create a "paper trail" to protect themselves from later accusations of malfeasance or negligence. Yesterday the New Jersey Law Journal gave a vivid example of where the lack of a paper trail can go:

Ex-employees of Prudential Life Insurance who say the company bribed their lawyers to keep their bias claims out of court are seeking access to thousands of documents the company asserts are privileged.

The request was made in a motion by Stephen Snyder, the attorney for 73 of the 234 plaintiffs, who told Bergen County Judge Brian Martinotti at a hearing Wednesday that the alleged collusion between Prudential and Leeds Morelli & Brown, of Carle Place, N.Y., was unprecedented.

"It is unheard of for an adversary to pay a contingency fee up front," he said, especially when $4 million of it is nonrefundable and the amount of the payment is laid out in a separate agreement not signed by the clients and allegedly hidden from them. Snyder made repeated references to Prudential’s conversion to a publicly traded company, which he said made it extra important to keep the claims — which included allegations of red-lining minorities — out of court and the public eye. …

Leeds Morelli signed an agreement with Prudential on May 5, 1999, to send the plaintiffs’ claims to alternative dispute resolution. Prudential was to pay the firm, as legal fees, a third of everything recovered. Each of the 359 claimants signed the ADR agreement on a separate page.

They were not parties, however, to a second agreement executed the same day between Prudential and Leeds Morelli, which provided that the company would pay the firm up-front fees of $5 million, with $4 million nonrefundable.

I don’t think there is anything inherently unethical about the fee agreement itself. As Prudential’s lawyer noted at the oral argument, it is not entirely unheard of for a settlement to provide plaintiff’s counsel with an initial upfront payment that functions as a "war chest" to support the counsel and their clients through what could be a very lengthy alternative dispute resolution process, but there are two problems with that analysis in this case.

First, the payment was apparently not used as a war chest:

The defendants here made a similar war-chest argument, but the plaintiffs have denied it, pointing out the claimants had to pay the out-of-pocket cost for the ADR process.

Second, and more importantly, there is no clear documentary evidence that the clients were told of this arrangement when it was made.

Let’s assume that the prior plaintiff’s lawyers (i.e., the ones getting sued here) are correct that many of the clients knew about the upfront guaranteed payment to the plaintiff’s lawyers.

If so, why is there no paper trail? The lawyer for the accused argues they didn’t want the mediators to find out about the implied value of the overall settlements, but, well, I think plaintiffs’ lawyer Kenneth Thyne is right on that one:

Thyne pointed out that Appellate Division Judge Paulette Sapp-Peterson, during argument on an appeal in the case, said that explanation did not make sense. "It still doesn’t," said Thyne, scoffing at the notion that if there were signatures, the mediators would somehow get hold of the agreement.

Frankly, the whole situation doesn’t make sense. The overall settlement — including the upfront fee paid to the plaintiffs’ lawyers — doesn’t strike me as inherently unethical or unfair, and I wonder how the former clients will be able to prove non-speculative damages at trial, since there are few numbers more subjective and amorphous than the value of a zealous lawyer versus a merely competent one. Their argument now about "the loss of their lawyers’ economic incentive" holds some water, but it’s no slamdunk. Notably, the plaintiffs’ lawyers still recovered enough through ADR to break through the guaranteed $4 million and grab another $1 million. That certainly shows some degree of incentive and zealous advocacy.

That said, if there wasn’t malfeasance, then why didn’t the prior plaintiffs’ lawyers simply communicate better with their clients about the arrangement? If they had nothing more than a single letter to each of the clients describing the settlement agreement – or even just attaching a copy of it, without explanation – they wouldn’t be in the predicament they’re in today.