California Bar Journal
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Taking an ethical piece of the action
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Diane KarpmanSeveral out-of-state legal newspapers have telephoned recently regarding the propriety of lawyers taking a “piece of the action.” Do I think that it is appropriate? You bet.

I urged the callers to look at California’s booming economy, the impact of our IPOs on the nation’s financial picture, the amazing new products that obtain patents, and lawyers going in-house with stock options. I suggested that but for lawyers’ belief in innovation and willingness to incur risk, our economy might still be in the doldrums of the late 1980s. This is actual evidence of the “propriety.” Really, do you think those proverbial kids, starting thriving businesses in garages, could “talk” a language federal regulators could understand? Speak to your own young adults (whose comments sometimes cause you to seriously think “switched at birth) to find the hidden answer to this question.

Rule 3-300 (Avoiding Interests Adverse to a Client) is a guide on how to ethically take stock or a percentage of the action. It requires strict and literal compliance, but it is definitely doable. Caution, prudence and absence of greed are the keys to successful lawyer-client business ventures.

Rule 3-300 mandates that the circumstances are substantively “fair and reasonable,” and communicated in writing in a manner that the client should reasonably understand. Client state of mind is important, sophisticated or naive. The client must be advised in writing to consult with independent counsel and be given an opportunity to do so. Finally, the client must consent in writing to the terms of the “transaction or acquisition.” The rule is applied broadly and does not require a current attorney-client relationship.

The client need not actually seek independent counsel, but the advice in writing is critical. It may be prudent for you personally to pay someone else (not a partner or associate) to bless the deal. Anecdotally, if the deal goes south, the finger will usually be pointed at the lawyer, who will be deemed to be holding the bag.

Problems especially occur if there is mutual and concurrent ownership, coupled with the lawyer’s ability to summarily extinguish the client’s interest. This is sometimes generically known as greed and is characterized by excessive power in the lawyer’s hands.

Remember, just as it is the cli-ent’s cause of action, even if you have an interest, it is still the client’s business. Clients do not have to follow your sage wisdom, even if your judgment is sophisticated and obviously correct because you are the lawyer. At the turn of the century (the other century, the 20th), lawyers were encouraged to go into business with their clients. Justice Brandeis almost did not get confirmed, due to 17 or 18 cases where he had just too much control to be the lawyer for the deal.

Be prudent, and only take a tiny, de minimis slice, much less than 10 percent. Check to see if your errors and omissions coverage permits this, and please, be nice.

Diane Karpman can be reached at 310/887-3900 or