Attorney Cannot Enforce Agreement Due To Failure To Comply With Rule 1.8(a)

A decision issued today by the North Carolina Court of Appeals

This case presents as an issue of first impression the question of whether an attorney who enters into a business transaction with a client as compensation for a legal representation can be barred from enforcing the terms of their agreement based on the attorney’s failure to comply with the explicit requirements of Rule 1.8(a) of the North Carolina Rules of Professional Conduct.

The attorney represented the client in a patent matter. After a period of time, he took an interest in the client’s patent.

On 19 March 2010, shortly after the Notice of Allowance was issued, Priest and Coch met to discuss entering into an agreement (“the Agreement”) regarding how to generate revenue through licensing the patent. Given Coch’s concerns that he and IP were financially unable to pay the same rate Priest had charged to file the patent application, the two men also discussed how best to compensate [attorney] Priest for the work his firm had already performed without pay since 2009. Eventually, they agreed in principle that going forward, Priest and his law firm would continue to prosecute and maintain IP’s patent and pay 25% of the actual costs of doing so, with the remainder split evenly between Coch, Knight, and Smith, in return for Priest receiving 25% of the proceeds Priest helped to generate from the patent. Coch’s contemporaneous emails to Knight and Smith demonstrate that Coch believed the Agreement’s terms would make Priest “an equal partner in pushing the Patent forward” based on the rationale that “there is still work to be done, of which I don’t know anything and [Priest] is willing to do it for his equity portion.” At the end of the meeting, Priest agreed to draft the Agreement and send it to Coch for his input and signature. 

The attorney sued to enforce the eventual agreement.

The court

we agree with the trial court’s observation that the Rule itself reflects the special obligation the attorneys of this State have when dealing with their clients, and we share the trial court’s conclusion that, for the sake of maintaining the public’s trust, attorneys should be held to abide by Rule 1.8(a)’s explicit requirements as a condition of their own recovery when that recovery is based on business transactions with their clients. While this may be an issue of first impression in our State, we note that courts in other jurisdictions have reached the same conclusion as we reach here.

The court affirmed the lower court judgment refusing to enforce the agreement due to the ethical violation. The attorney also failed to recover on a quantum meruit theory. (Mike Frisch)