Lawyer Ethics and Crypto-Currency

                Digital currency is no longer just a techno-novelty: it is ever more likely that a lawyer, no matter her practice focus, will have to tackle a question arising from the growing use of digital currency, also known as “crypto-currency”.   Here is what I’ve learned so far about digital currency, and some of the ethical issues that it presents.

 What is Crypto-Currency?

Digital currency is a method of transferring funds without reliance on a central bank.  Bitcoin is the most well-known digital currency, but not the only one.  Digital currency exists only as entries in a digital ledger, called a blockchain.  Blockchain technology permits data to be held in a secure, encrypted way that is both publicly distributed and not subject to alteration.   A blockchain records all of the transfers of ownership of every digital coin of that type.  Each owner of a “coin” or part of a “coin” is identified on the ledger by the owner’s unique private key number.  Each coin owner also has a digital “wallet” with records of the particular owner’s transactions.    A “wallet” can be created using a pseudonym, permitting the owner to engage in effectively anonymous transactions using the digital currency.

Digital currency is created by a process known as “mining”.  A “miner” deploys massive computing power to solve a complex cryptographic problem, and upon “proof of work”, is rewarded with a digital coin.  The process of solving the problem and proving the work simultaneously updates and strengthens the blockchain.

May a Lawyer Accept It?

Knowing little about digital currency, and aware that any technique for transferring value anonymously outside banks attracts criminal enterprises,   many lawyers are reluctant to accept it.  Some authorities have convincingly argued that lawyers should never accept their fees in crypto-currency. [1]  Yet small firms in the technology sector have accepted digital currency for years.  In November 2018, the Treasurer of the State of Ohio announced that Ohio would be the first state to accept crypto-currency in payment of business taxes. More recently, law firms like Frost, Brown in Cincinnati, and Steptoe & Johnson in Washington, D.C. have announced their willingness to accept payment in this form[2].

When a prospective new client proposes to pay in digital currency, or proposes a transaction that will involve digital currency, the first question is the old one—do you want to accept this person as a client, and do the work proposed?   A firm that is considering accepting digital currency or advising clients that engage in transactions involving digital currency must have “Know Your Client” protocols appropriate to its work, as well as ongoing diligence, to avoid a situation of counseling or assisting in a fraudulent or criminal transaction. [3]   Similar practices are required in response to a proposal that someone other than the would-be client will pay the lawyer’s fees.[4]

Accepting digital currency as fees, as a retainer, or as an asset held in escrow presents somewhat different ethical issues than receiving U.S. dollars or other government backed currency. At present, the value of digital currencies are volatile, digital currencies cannot be deposited in a bank, and there are no reliable or insured means to hold digital currencies. Further, the IRS regards crypto-currency as property, not currency.[5]      

It might seem that accepting digital currency in payment for past services is straightforward.   If the lawyer chose to retain the digital currency, the lawyer would bear the risk of fluctuations in value and the risk of loss.   The risk of charging an excessive fee would be avoided provided that the fair market value of the digital currency at the time of the transfer bears a reasonable relationship to the value of the legal services.  Although the late and respected legal ethics professor Ron Rotunda adopted this view[6], the only advisory opinion yet to be issued in the U.S. on the subject counsels differently.   Nebraska Ethics Opinion No. 27-03 advises  lawyers who accept digital currency as a fee to convert it into U.S. dollars  immediately on receipt,  at objective market rates,  through the use of a payment processor and crediting the client’s account accordingly at the time of payment.    The Nebraska opinion also advises that a lawyer should notify the client in advance of how the lawyer will handle digital currency, to avoid the client’s assuming that any increase in value would benefit the client.

  If a client proposes to pay digital currency to fund a flat fee or advance retainer, immediate conversion to U.S. dollars avoids the myriad issues that would attend holding the digital currency until the work is performed.  It is impossible to hold unearned digital currency in an IOLTA account. Further, because of the volatility of the value of digital currencies, it would be challenging to refund unearned fees to a client if work is not performed or not completed or avoid charging an unreasonable or excessive fee. [7]

The Nebraska opinion does not address some of the practical issues embedded in its advice immediately to convert digital currency, including selecting the payment processor and identifying who bears any transaction fee that may be associated with the required conversion.   A lawyer who intends to accept a digital currency should address these specifics, as well as the lawyer’s intent immediately to convert the currency to U.S. dollars, in her fee agreement with the client.

Holding Digital Currency for Others

The Nebraska opinion finds that a lawyer may hold bitcoins or other digital currency in escrow or trust for a client or third party pursuant to the ethics rules governing holding property for others.  The rule requirements include holding the property separate from the lawyer’s property, safeguarding it and satisfying recordkeeping requirements.[8]   The opinion suggests several possible security precautions, including encryption of the private key required to send the bitcoins, requiring multiple private keys to access them, or maintaining the wallet in a storage device that is not continuously connected to the Internet.  As in any situation in which a lawyer is holding an asset for others, there should be a written agreement signed by the payor, the payee, and the lawyer.  specifying the terms under which the asset is received and should be released. In addition, it is advisable to address bears the risk of loss or changes in value. 

Every Practitioner Needs to Know Something About Digital Currency

A competent lawyer needs baseline knowledge about digital currency even if the lawyer or his firm has resolved not to accept or hold digital currency for any purpose.   A practitioner that does any work that involves the inventory or transfer of assets must consider the possibility that a party’s assets include digital currency.   Thus both civil and criminal lawyers, and those who handle litigation, transactions, estate planning and probate, insolvency, and domestic relations should educate themselves about this form of asset.             

[1]  See, e.g., John Stark Reed, “Why Lawyers Should Never Accept Their Fees in Crypto-Currency”, https://www.linkedin.com/pulse/why-law-firms-should-never-accept-fees-cryptocurrency-john-reed-stark/ (June 5, 2018).  Reed is a former Chief, SEC Office of Internet Enforcement.

[2] https://www.bna.com/law-firms-accepting-n73014464226/  “More Law Firms Are Accepting Bitcoin Payment”, Corporate on Bloomberg Law 9/6/17.

 [3] See Ohio Rules of Professional Conduct 1.2(d)(1). For domestic Know Your Client guidelines, see https://www.americanbar.org/content/dam/aba/publishing/criminal_justice_section_newsletter/crimjust_taskforce_gtfgoodpracticesguidance.authcheckdam.pdf.  For an international perspective, see https://www.actec.org/resources/fatf-and-the-lawyers-role/. 

 [4] Payment of a lawyer’s fees by a non-client requires compliance with ORPC 1.8(f ).

 [5] Internal Revenue Service Notice 2014-21 (March 25, 2014). https://www.irs.gov/pub/irs-drop/n-14-21.pdf

 [6] R. Rotunda, “Bitcoin and the Legal Ethics of Lawyers,” https://verdict.justia.com/2017/11/06/bitcoin-legal-ethics-lawyers.

 [7] See ORPC 1.5(a), (d)(3) and Comment [6A], 1.15(a) and (c) and 1.16(e).  Fees deemed “earned on receipt” are a special case; per Ohio Board of Professional Conduct Op. 2016-1,  such fees should not be deposited into a trust account, although subject to refund under ORPC 1.5(d)(3) and 1.16(e).

[8][8] The Ohio Rule on point is ORPC 1.15.

First published in the Cleveland Metropolitan Bar Journal (Dec. 2018).

ABA Award

I am humbled to have been told that I will receive one of the American Bar Association's Pro Bono Publico Awards at the upcoming ABA Annual Meeting in Chicago.  I believe that this award recognizes my direct service work, as well as my role in in developing and promoting the innovative ACT 2 program of the Legal Aid Society of Cleveland.  This program now engages more than 100 late career and retired attorneys in providing pro bono services.  Some accept cases for individual clients referred by Legal Aid or volunteer at quick advice clinics that Legal Aid sponsors in public libraries and community centers.  Others work in-house at Legal Aid providing direct service or training staff. 

Judge4Yourself.com helps voters choose good judges

Judge4Yourself.com, a service of a coalition of bar associations here in Northeast Ohio, has published its ratings for the candidates in contested judicial primaries to help voters choose well in the upcoming May 2018 elections.  Deborah conceived of and helped found the coalition in 2001 to amplify the voices of local groups that were separately evaluating judges, but not making their opinions known.  Every candidate is evaluated for integrity, professional competence, diligence, appropriate temperament and community knowledge against the demands of the specific position sought.   Learn more at www.Judge4Yourself.com.  

CCA's Newly Updated Arbitration Guide Published

The College of Commercial Arbitrators has published a revised and expanded edition of its valued Guide to Best Practices in Commercial Arbitration, edited by  James M. Gaitis, Holt Gwyn, Laura Kaster and Jay McCauley.  Deborah Coleman was one of many CCA Fellows who contributed to the new publication. The  Guide comprehensively addresses the legal and procedural issues that may arise in commercial arbitration.  New material includes a chapter on emergency arbitrators and emergency arbitral proceedings, a new chapter on subpoenas to nonparty witnesses, discussion of developments in eDiscovery, and a new chapter on unique issues in construction arbitration.

Order the Guide on line at www.jurispub.com. 

New Guide for Protecting Client Confidences from US Border Searches

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The increased incidence of U.S. Customs and Border Protection (“CBP”) searches of electronic devices has raised concern about protecting client confidential information.   A new formal opinion issued in July 2017 by the New York City Bar provides valuable guidance for lawyers.  

In April 2017,  CBP reported that its searches of electronic devices in the first six months of its fiscal year were nearly twice as frequent as in the previous sixth month period.  Although the percentage of travelers whose devices are searched remains very small, the increase in searches prompted the ABA to ask the Department of Homeland Security to revise its directives on searching a lawyer’s electronic device at the border.  Until the Homeland Security directives change, CBP agents assert broad powers to search electronic devices with or without reasonable suspicion of wrongdoing,  to demand an owner’s password to access the device, and to retain the device for further scrutiny.

The New York City Bar opinion identifies three steps lawyers can use to protect client confidential information from review at the border.

  • First, minimize the client confidential information contained on your device, and carry as few devices as possible.  The New York City opinion suggests travelling with a blank “burner” telephone or computer, using software securely to delete information from your device, and disconnecting your device from cloud and web-based services where data is stored.  A lawyer who needs access to client confidential information during his travels must be ready to remove sensitive information and disconnect from the internet before returning to the U.S.
  • Second, if a CBP agent asks to search your device, object.  A lawyer should inform the agent that the device contains privileged information, request that such material not be searched or copied, and ask to speak to a supervisor.  Producing one’s bar card or business card may help
  •  Third, if your device is searched, notify affected clients.  A lawyer’s duty to communicate with her client dictates that a lawyer subjected to the search of her device inform affected clients of the border search, and the extent to which client confidential information may have been viewed or seized.   

Any lawyer who travels out of the U.S. should review the New York City Bar opinion   To paraphrase the old credit card commercial, “don’t leave home without reading it.” 

 

Coleman now on Silicon Valley Arbitration & Mediation Center Tech List

Deborah has been admitted to the Tech List of the Silicon Valley Arbitration & Mediation Center. 

The Center works with businesses, law firms and universities to promote the resolution of technology disputes and related complex business disputes through mediation or arbitration by knowledgeable and experienced neutrals.  Membership on the Tech List is by invitation only, after peer review, and is evaluated annually.  Members of the Center's Tech List have assisted parties throughout the U.S. and the world to negotiate practical business solutions or to secure the efficient and private adjudication of their claims. 

 

WIDR Directory a National Resource to Find Arbitrators and Mediators

The Women in Dispute Resolution (WIDR) committee of the American Bar Association's Dispute Resolution Section, of which Deborah is a member,  recently published its searchable directory.    The benefits of bringing diverse perspectives to decision-making have been widely recognized. e.g. D. Burt and L. Kaster, "Why Bringing Diversity to ADR is a Necessity."  The WIDR Directory can help you find a knowledgeable mediator or arbitrator for a variety of cases throughout the country and internationally.  

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Appointment to CMBA Professionalism Conciliation Panel

I’m honored to have been appointed to the Cleveland Metropolitan Bar’s new 9 member Professionalism Conciliation Panel, formed to help improve how lawyers in Cuyahoga County deal with each other and with the courts.  The Panel uses the Statement of Professionalism issued by the Supreme Court of Ohio in 1997 and the Lawyers' Creed of Professionalism adopted by the CMBA in 2013 as the guiding principles for the program.  

Sweating the Small Stuff

You've heard "Don't sweat the small stuff", but that's exactly what lawyers have to do daily.  A misplaced comma or missing "not" can make a sentence mean the opposite of what you intended.  One day makes the difference between filing a complaint that will be heard, and one that is time-barred.  In re Application of Jia, a recent Ohio disciplinary case, reminds lawyers and those who aspire to the bar that details matter.

Lingya Jia was a 2013 law school grad who sat for the 2014 Ohio bar exam.  On the second day, two others taking the exam saw her twice filling in answers after time was called.  Jia may only have completed two more answers than time permitted, and she passed the exam despite the 16.7% penalty that the bar examiners assessed.  The character and fitness board recognized that the stress of the bar exam might account for her denying that she broke the rules. Yet the Supreme Court of Ohio held that Jia's failure to honor the testing deadline demonstrated that she lacked the requisite character, fitness and moral qualifications to become a lawyer at the time of the bar exam.   Jia was disciplined by requiring her to wait two years before reapplying for bar admission.

While Jia will get a "do over" with respect to her bar application, a lawyer cannot count on that opportunity in the practice of law.  The Jia case reminds lawyers to manage their work to comply with deadlines and time constraints, and always to act in a way that merits the trust of clients, courts and others, and the privileges we have as members of the bar.

Deborah Coleman included on 2016 "Best Lawyers" and "Super Lawyers" lists

Once again, Deborah has been honored to be recognized for her work in dispute resolution by inclusion in the 22nd edition of The Best Lawyers in America and Super Lawyers® Magazine/Ohio & Kentucky 2016.  Deborah brings all that she learned in years of litigating complex commercial and other cases to her work as an arbitrator and mediator.

New York appellate court broadens common interest privilege.

To establish that communications between lawyers with different clients are protected by  “common interest privilege”, pending or reasonably anticipated litigation is not a required element, a New York appellate court has held.  Ambac Assur. Corp. v. Countrywide Home Loans, Inc. 2014 N.Y. Slip Op. 08510 (N. Y. App. Div. Dec. 4, 2014).   

The “common interest” or “community of interest” privilege may protect, from third party discovery, otherwise privileged information shared by counsel for separately represented parties whose clients share a common legal interest.  This “privilege” is best described as an exception to the rule that privilege is lost when attorney-client privileged information is disclosed to a stranger to the relationship.  The "community of interest privilege" is most often invoked to protect communications made under a joint defense agreement, where the participants’ common legal interest is successfully defending pending claims.  Some courts have recognized legal interests other than defense of pending or threatened litigation that can support a claim of common interest privilege.  E.g. In re Regents of the Univ. of California, 101 F.3d 1386, 1390-91 (Fed Cir. 1996), cert denied sub nom Genentech, Inc. v. Regents of the University of California, 520 U.S. 1193 (1997)( common-interest doctrine "is not limited to actions taken and advice obtained in the shadow of litigation" and applies to parties’ common interest in securing the broadest possible patent). On the other hand, it is clear that for the privilege to apply,  parties’ common interest must be legal, and not solely commercial.  Duplan v. Deering Milliken, 397 F. Supp. 1146, 1172 (D.S.C. 1975).

Notwithstanding the recent Ambac decision,  counsel must be cautious in disclosing privileged information in a transactional context.  In Ambac itself, the appellate court ruling reduced but did not relieve the burden of Countrywide and Bank of America to show that a common interest privilege protected pre-closing communications that they and their counsel made pursuant to the institutions’ merger agreement.  The case law on “common interest privilege” varies by jurisdiction and by context.   One must consider carefully whether the overlapping interests of parties to a transaction are in fact identical, legal and not solely commercial.  Disclosures of privileged information should be made only under authority of a confidentiality agreement, and the extent necessary to advance an identified and truly common legal  interest.