Are lawyers permitted to lie in business negotiations on behalf of their clients? What about exaggerating, puffing, or bluffing? Under the ABA Model Rules of Professional Conduct, a lawyer may not make a false statement of material fact or law. Professor Carrie Menkel-Meadow of UC Irvine Law explains the gray areas of the black letter rule and explores the ethical boundaries of lawyer truthtelling and misstatements in negotiations.
Carrie Menkel-Meadow is the Distinguished and Chancellor's Professor of Law at UC Irvine School of Law and an expert in the dispute resolution field.
Rule 4.1 Truthfulness In Statements To Others – American Bar Association Model Rules of Professional Conduct
In the course of representing a client a lawyer shall not knowingly: (a) make a false statement of material fact or law to a third person; or (b) fail to disclose a material fact to a third person when disclosure is necessary to avoid assisting a criminal or fraudulent act by a client, unless disclosure is prohibited by Rule 1.6.
Rule 4.1 Truthfulness In Statements To Others - Comment – American Bar Association Model Rules of Professional Conduct. The comment includes three examples of practices that are permitted under Rule 4.1. (summarized):
Lawyers before a Tribunal.
Rule 3.3 Candor Toward the Tribunal – Additional obligations apply to lawyers involved in a matter before a court or tribunal.
An Interview with Legal Ethics Expert – Professor Carrie Menkel-Meadow
Joel Cohen (host): Are lawyers in negotiations, are we permitted, or when are we permitted to lie on our client’s behalf?
Model Rules of Professional Conduct: Rule 4.1: Truthfulness in Statements to Others
Professor Carrie Menkel-Meadow (CMM): My favorite question. The rule is Model Rule Professional Conduct 4.1, which says a lawyer shall not make a material statement that is false with respect to any material fact or law. So, notice the lawyer wiggle worms in that, right? What is “material''? What is a “material fact,” and what is “material law”? And to a “third person.” So does that mean anybody on the other side of a negotiation, someone who's not involved in the case? So, I'll quickly review what we can do. One of my favorite issues. So, the black letter rule is what I just told you: you can't make a material misstatement of law or fact, but the comments to Rule 4.1, this is my favorite line, "what the rule giveth, the comment taketh away." And the comment says, there are three specific things that you don't need to be truthful about. You can puff or bluff, believe it or not, in the rules, meaning that nobody expects you to honestly say what your bottom line is, or what value you place on an item if you're selling something or buying something.
Generally Accepted Conventions of Negotiation
Host: So we won't settle for anything less than 10 million dollars here, even though you know for a fact your client would be happy with half a million.
CMM: Exactly right, and that is the kind of classic example that's always given. And one of the reasons I say this is my favorite comment, is the comment says generally accepted conventions of negotiation are such that we know that lawyers and people exaggerate when they are negotiating. That phrase that I've just given you, "generally accepted conventions of negotiation," was put forth by another professor, J.J. White, now retired but a former professor at Michigan, who said we know lawyers do all these things, they puff, and they bluff, and they won't tell us what they really value, what their bottom lines are. And the ethical rules can't change that behavior. Because, very important, negotiations are conducted in private, and there are no witnesses. There's you and me, we're negotiating a deal together. And I may say that you lied to me, and then you'll deny it. And it's "he said, she said" about lawyer behavior. So in 2000, twenty years ago, the ABA said oh, you're right, we can't possibly monitor this. So we're going to put in our rules and an acceptability of generally accepted behavior which we know is puffing and bluffing and not representing the true value.
Materiality Threshold for Truthfulness
Host: So, in the rules that says you can't lie about a material fact or material law, what is a material fact?
CMM: Well, material fact– believe it or not– is a fact. There's a lot of case law on this, but for example, what's not a fact that you're allowed to misrepresent or puff or bluff about, is your opinion about the value of something. So, if I tell you I have this great necklace or I have a great wonderful company that I'm going to sell you, and I tell you in my opinion, this necklace is worth this much or my company is worth this much, that's my opinion. And a lot of case law says that's my opinion and I have no obligation to say exactly the value. It's your job as the person on the other side of the negotiation to investigate what the facts are, and to determine what you think the value is. I have no obligation to honestly state it.
Host: So I could say that Joel Co. is worth 10 million dollars, even though we don't particularly have any revenue. But in my mind it's worth a whole lot of money, and 10 million dollars sounds right.
When Lying Is Fraud
Host: But how about with relation to projections? Can I say we'll be worth 15 million dollars next year if, you know, my numbers when I've done internal audits suggests that will still be worth much less?
CMM: If you have done an internal audit, and you know what the actual facts are, but you say something else, you have now affirmatively and assertively stated an untruth, meaning you know what the truth actually is. That is actionable under state fraud law. So, the ethical rules may say you may not make a misstatement of material fact. If you have done that, you've probably committed an act of fraud. That can, in some cases, wind up in criminal fraud. But in a sales situation, it's more likely to be civil fraud.