The Securities and Exchange Commission (“SEC”) has recently brought several enforcement actions that directly or indirectly involved lawyers. These actions provide reminders to lawyers of their professional responsibility in representing clients, including in connection with giving legal opinions and responding to auditors. The professional responsibility of lawyers has recently been the focus of both the SEC and the Delaware courts.^[1]

Synchronoss and Its General Counsel

On June 7, 2022, the SEC announced a settled enforcement action against Synchronoss Technologies, Inc. charging it and several of its senior employees with accounting fraud for improperly recognizing revenue on multiple transactions and misleading the company’s auditors.^[2] The employees charged included the company’s general counsel, who also settled charges that he misled the auditors regarding two of the transactions.^[3]

One of the transactions involved a purported sale of a license to a customer that the company booked as revenue despite the customer’s communicating several times that there was no agreement and no commitment on its part. The SEC order states that the general counsel reviewed the communications and responses that did not dispute the customer’s statements and remained silent at an audit committee meeting when the CFO explained to the audit committee and the auditors that issues with unbilled receivables were due to “management changes” at the customer but did not advise them that the customer disputed having any commitment. According to the order, the general counsel also prepared and signed the minutes of the meeting that he knew or should have known would be shared with the auditors.

The other transaction involved an acquisition and a sale of a license on the same day, with the accounting issue being whether the license sale was a separate transaction under the applicable accounting standard. If a separate transaction, the license sale could be accounted for under generally accepted accounting principles for that type of transaction (e.g., revenue could be recognized); if not, it would be considered part of the acquisition consideration and accounted for under acquisition accounting as a reduction of purchase price. Although the license sale purported to be to settle claims of infringing Synchronoss’s patents, the SEC order states that the general counsel knew or should have known that the acquisition and license were negotiated together, with the acquisition contingent on the license sale, and that Synchronoss had not identified patent infringement claims until after negotiation of the acquisition began. The SEC states that the general counsel made misleading representations to the auditor to support treating the license sale as a separate transaction without providing the information that would have been material to determining to treat the license sale not as revenue but as an adjustment to the purchase price of the acquisition.

Unlike the SEC action against RPM International Inc. and its general counsel,^[4] this action did not involve an audit response letter addressing a loss contingency. Instead, this action raises the question of the extent to which a lawyer is responsible for other accounting determinations, such as a complex subject like revenue recognition. We should bear in mind that this was a settled action, with the sanctions being such that the general counsel’s agreeing to a settlement, as in the RPM matter, is understandable. Nevertheless, the action emphasizes the importance of the need for lawyers to be sensitive to the information provided to the audit committee and the auditors in connection with their involvement in accounting decisions made by their companies.

Ernst & Young Order Involving Cheating on CPA Exams

On June 28, 2022, the SEC announced the settlement of charges against Ernst & Young LLP (“EY”) for cheating by its audit professionals on CPA exams and for withholding evidence of misconduct from the SEC during its investigation of the matter.^[5] EY agreed to pay a $100 million penalty, the largest ever against an audit firm, and to undertake remedial measures to fix the firm’s ethical issues and deficient quality controls.

The SEC action is based upon a significant number of EY audit professionals, over multiple years, cheating on CPA exams by using answer keys and sharing them with colleagues. Ironically, the cheating took place on the ethics exams required of CPAs to confirm that they understand their ethical responsibilities in performing their essential role as gatekeepers in the public interest. In addition, many other EY professionals who knew of the cheating failed to report it. EY had experienced a similar though less widespread problem several years earlier, which it had sought to address.

To make matters worse in the SEC’s view, EY withheld the misconduct from the SEC during its investigation by giving the impression in its response that it did not have any current issues with cheating and then by failing to correct that misleading response.

The actions of EY in responding to the SEC cannot be fully understood, however, without also reading SEC Commissioner Peirce’s dissenting statement.^[6] Although she supported the enforcement action against EY for the cheating, she was concerned about some of the remedial measures imposed on EY for its failure to correct a response to an SEC voluntary information request, especially when the response appeared to be correct when given. According to Commissioner Peirce’s statement, following a June 19, 2019, settlement with KPMG relating to cheating on CPA exams using information improperly shared by former Public Company Accounting Oversight Board (“PCAOB”) personnel, the SEC launched a general industry inquiry, with EY receiving a voluntary request for information about any ethics or whistleblower complaints regarding testing. In accordance with the SEC’s aggressive deadline, EY responded the next day, June 20, disclosing five past incidents but no current issue. On the same day as receipt of the SEC request (June 19), an EY employee reported to a manager that an EY professional had emailed that employee answers to a CPA ethics exam. The report was escalated to EY’s human resources group, but the senior EY attorneys who reviewed EY’s June 20 response to the SEC were apprised of the report “no later than June 21,” which was after the June 20 response. EY commenced an internal investigation that uncovered the cheating and significant misconduct and, nine months later, when it completed the internal investigation and developed a plan to address the problem, informed the PCAOB, which in turn notified the SEC.

The issue identified by Commissioner Peirce is the responsibility of lawyers responding to an SEC voluntary request for information to correct previously provided information based on later-learned information while an internal investigation is underway to determine the extent of the problem and develop solutions. She also was troubled by the settlement’s remedy that EY conduct an independent review, overseen by an independent consultant, of EY’s disclosure failures relating to the SEC’s June 19 information request, including whether any member of EY’s executive team, General Counsel’s Office, compliance staff, or other employees contributed to EY’s failure to correct its misleading submission, with the independent consultant to have full access to EY’s privileged information. The independent consultant also is to have final authority as to any employment actions (i.e., disciplining or firing) or other remedial steps. Commissioner Peirce characterizes this remedial provision as an “implicit directive to find attorneys and compliance personnel to blame for not complying with a non-existent obligation to correct the June 20 submission.”

There obviously are lessons in the EY order on how to respond to and deal with the SEC during the course of an investigation, especially when the response is voluntary. The order also highlights the challenge of dealing with information while the nature and scope of that information is evolving, for example because an internal investigation initiated as a result of a whistleblower complaint is ongoing. This is a similar situation to the one faced when responding to auditors about government investigations, such as one initiated by a whistleblower qui tam complaint under the False Claims Act, which was the situation involved in the RPM enforcement matter.^[7]

Hamilton Investment Counsel and its Chief Compliance Officer

On June 30, 2022, the SEC announced a settled enforcement action against Hamilton Investment Counsel, LLC, a registered investment advisor, and its principal and chief compliance officer (“CCO”) for failure to adequately implement its compliance program in connection with one of Hamilton’s investment advisor representatives engaging to the detriment of customers in undisclosed outside business activities that were required to be reported under Hamilton’s compliance policy.^[8]

In supporting the settled enforcement action, Commissioner Peirce took the opportunity to outline the considerations relevant, in her view, to charge a CCO with responsibility for compliance violations by the CCO’s firm, which is the party with the compliance obligation. In doing so, she referenced that New York City Bar Association Compliance Committee’s proposed Framework^[9] that focused on whether the CCO’s conduct was not just “debatably inappropriate” but rather was “wildly inappropriate” or demonstrated a “wholesale failure” to carry out compliance responsibilities.^[10] Commissioner Peirce analyzed the Hamilton CCO’s conduct against the following questions identified in the Framework:

• Did the CCO not make a good faith effort to fulfill his or her responsibilities?
• Did the wholesale failure relate to a fundamental or central aspect of a well-run compliance program at the registrant?
• Did the wholesale failure persist over time and/or did the CCO have multiple opportunities to cure the lapse?
• Did the wholesale failure relate to a discrete specified obligation under the securities law or the compliance program at the registrant?
• Did the SEC issue rules or guidance on point to the substantive area of compliance to which the wholesale failure relates?
• Did an aggravating factor add to the seriousness of the CCO’s conduct?

It is not the purpose of this article to assess whether the particular facts in this SEC enforcement action justified the charges against the Hamilton CCO as measured under the Framework. Rather, the enforcement order and Framework should be helpful in considering the professional responsibility of lawyers and their exposure to SEC enforcement actions, especially by having in mind the questions included in the Framework. This is both because CCOs often are lawyers and because those questions can be relevant in assessing more generally the professional conduct of lawyers in connection with a client’s compliance with legal requirements. That assessment relates to the concerns noted above raised by SEC Commissioner Lee in questioning whether lawyers are adequately fulfilling their professional responsibilities when they engage in “goal-directed” lawyering as illustrated, according to Commissioner Lee, by the conduct of the lawyers who gave the opinion described in the Bandera decision.^[11]

This article originally appeared in the Summer 2022 issue of In Our Opinion, the newsletter of the ABA Business Law Section’s Legal Opinions Committee. Read the full issue and previous issues on the Legal Opinions Committee webpage.

1. In addition to the recent enforcement actions described in this article, SEC Commissioner Lee in remarks on March 5, 2022, focused on whether lawyers were fulfilling their professional responsibilities and suggested that the SEC should consider doing more to establish minimum standards for lawyers practicing before the SEC, as authorized by section 307 of the Sarbanes-Oxley Act of 2002 in addition to the SEC’s Part 205 Rules adopted in 2003 requiring up-the-ladder reporting. See Commissioner Allison Herren Lee, Send Lawyers, Guns and Money: (Over-) Zealous Representation by Corporate Lawyers (remarks at PLI’s Corporate Governance – A Master Class 2022, March 4, 2022), available at https://www.sec.gov/news/speech/lee-remarks-pli-corporate-governance-030422. In her remarks, Commissioner Lee referred to the legal opinion addressed in the Delaware Court of Chancery Bandera decision as an example of “goal-directed” lawyering. See Bandera Master Fund LP v. Boardwalk Pipeline Partners, LP., 2021 WL 5267734 (Del. Ch. Nov. 12, 2021), on appeal to the Delaware Supreme Court (No.1, 2022). For articles discussing the Bandera decision, see Fotenos & Keller, Delaware Court Finds Legal Opinion Fails to Meet Opinion Standards, In Our Opinion (ABA Bus. Law Section Legal Ops. Comm.), Spring 2022, at 7, and Field and Smith, Observations on the Delaware Chancery Decision in Bandera Master Fund LP v. Boardwalk Pipeline Partners, LP, In Our Opinion (ABA Bus. Law Section Legal Ops. Comm.), Spring 2022, at 20. ↑

2. In the Matter of Synchronoss Technologies, Inc., Release No. 34-95049 (June 7, 2022), avail. at https://www.sec.gov/litigation/admin/2022/34-95049.pdf. ↑

3. In the Matter of Ronald Prague, Esq., Release No. 34-95055 (June 7, 2022), avail. at https://www.sec.gov/litigation/admin/2022/34-95055.pdf. ↑

4. For prior discussions of the RPM enforcement action, see Alan J. Wilson, Settlement Reached in Long- Running RPM Enforcement Action, In Our Opinion (ABA Bus. Law Section Legal Ops. Comm.), Winter 2020-2021, at 14; Stanley Keller, Update on Dealing with Government Investigations in Audit Responses,, In Our Opinion (ABA Bus. Law Section Legal Ops. Comm.), Spring 2018, at 17, and Stanley Keller, Dealing With Government Investigations in Audit Responses, In Our Opinion (ABA Bus. Law Section Legal Ops. Comm.), Fall 2016, at 14. ↑

5. In the Matter of Ernst & Young LLP, Release No. 34-95167 (June 28, 2022), avail. at https://www.sec.gov/litigation/admin/2022/34-95167.pdf. ↑

6. Commissioner Hester M. Peirce, When Voluntary Means Mandatory and Forever: Statement on In the Matter of Ernst & Young LLP (June 28, 2022), avail. at https://www.sec.gov/news/statement/peirce-statement-ernst-and-young-062822. ↑

7. Release Nos. 33-11042; 34-94478 (March 21, 2022). ↑

8. In the Matter of Hamilton Investment Counsel, LLC and Jeffrey Kirkpatrick, Release No. 34-95189 (June 30, 2022), avail. at https://www.sec.gov/litigation/admin/2022/34-95189.pdf. ↑

9. New York City Bar Association Compliance Committee, Framework for Chief Compliance Officer Liability in the Financial Sector (June 2, 2021), avail. at https://www.nycbar.org/member-and-career-services/committees/reports-listing/reports/detail/framework-for-chief-compliance-officer-liability. ↑

10. Commissioner Hester M. Peirce, Chief Compliance Officer Liability: Statement on In the Matter of Hamilton Investment Counsel LLC and Jeffrey Kirkpatrick (July 1, 2022), avail. at https://www.sec.gov/news/statement/peirce-statement-hamilton-investment-counsel-070122. ↑

11. See supra, note 1. ↑

In today’s legal marketing landscape, establishing a practice specialty, focus, or emphasis is the most effective way to create a draw for your expertise. Becoming a known expert in a niche relevant to your target audience is how you can build credibility and focus marketing efforts in a way that makes them have the most impact.

Thought leadership, a term that includes all forms of professional writing and speaking, is the most scalable way to educate clients, prospects, referral partners, colleagues, and peers on exactly when to think of you for the distinctive value you provide.

Reasons to Incorporate Thought Leadership into Business Development Efforts

Boost your credibility. As a frequent author/speaker on a niche subject, you will position yourself as an authority. This is further amplified when you align and distribute your thought leadership through platforms your target audience respects. Early career attorneys with a shorter list of representative matters may be especially interested in the credibility built through thought leadership.

Build your reputation and online profile. Your prospects are looking for answers to questions, and the best return on investment on your marketing is when those prospects turn to the internet and your thought leadership provides insight to those answers. Further, when referred prospects inevitably conduct an internet search on you, you can make it easy for them to understand your area of expertise through a variety of links to podcast episodes, bylined articles, presentations, and media commentary about the very topic they seek. These educational pieces are also easy for contacts to forward on to decision makers.

Command a premium for your services. Professionals known for their unique expertise are less likely to compete for work based on price.

Grow your audience. Writing and speaking are great ways to expand the number of people who become familiar with your work. Internet search engines, individuals sharing articles or videos, and third-party distribution channels are all ways new prospects and contacts can find your written or recorded thought leadership.

Bolster and initiate key relationships. Most professionals are flattered to be invited to collaborate on thought leadership projects, especially if they don’t require much time and preparation on their end and can create visibility for them. Inviting someone to participate on a panel discussion, provide commentary in an article you are writing, or be a guest on your podcast are all ways you can initiate or expand a valuable professional relationship.

Improve your visibility. Creating regular and consistent thought leadership is a great opportunity to reach out to your existing target network. You can provide something of value while reminding them about you and your expertise. Increased activity leads to engagement, and better top-of-mind interactions with your target audiences lead to new opportunities.

Strengthen your expertise. Researching and developing topics is a great way to further develop your insights and understanding, deepening your expertise on a subject.

Create value. Sharing thought leadership on public platforms provides value to your clients and prospects and is also a valuable contribution to your profession.

Decide What to Focus on

Random acts of marketing are not a wise approach to business development. Determine your longer-term professional goals before getting started.

Go narrow. Select a topic to develop that demonstrates your sophistication in your practice area, even if there is limited application. If you show a high level of expertise in a complex arena, it will be assumed that you are capable of handling more commonplace issues.

Be intrigued. It is wise to choose a topic that is interesting to you, something you are excited about. To see the best results from a business development perspective, you will need to discuss a topic repeatedly; make sure you choose something you like talking about.

Collaborate. Consider working with a colleague, client, prospect, or professional in a complementary space on a marketing opportunity. When you partner with someone else on thought leadership, you can bolster your credibility through theirs, strengthen the relationship with the collaborator, gain exposure to additional networks, and lighten your workload. Plus, it is often a lot more fun to collaborate with someone who has complementary expertise.

Be consistent. Always aim for topics that are of interest to your ideal client and directly related to the type of work you want more of.

Hire assistance when needed. Consider working with a copywriter or ghostwriter. Hiring a professional legal writer to help you initiate a topic or to flesh out an outline can be a considerable time-saver and can create the momentum you need to get moving on a piece.

Securing Opportunities with Complementary Platforms

While many people choose to self-publish their thought leadership on firm blogs or LinkedIn, usually you can make a greater impact on your business development if a credible third party will provide a platform for your expertise. Consider which platforms are highly regarded by your key contacts and which will increase the exposure to your target audiences when deciding where to seek to publish or distribute your writing or speaking. If your ideal prospects attend an annual conference, consider speaking there; if your target referral sources belong to a professional association, consider writing for the association’s newsletter or offering to give an educational webinar. Having your thought leadership published or promoted by a third party can take a few more steps than self-promotion, but the rewards are worth the effort.

• Start by creating a list of target publications and platforms that you would like to align with.
• Create a brief, compelling description of your article or presentation that you can use to pitch to organizations to secure opportunities.
  • Include a few sentences describing the issue, how you plan to approach the topic, and the key takeaways the audience will walk away with. Prepare a short bio highlighting your experience, and include links to previous writing and speaking engagements.
  • If an organization is interested in working with you, they will give you the specifications they are looking for, such as presentation requirements or guidelines for the types of writing they are interested in. This method ensures that you approach a piece within the parameters of the publication, for example, which could reduce your editing time or the chances you work on something no one is interested in publishing.
• Alternatively, if you know exactly what you would like to write about, write your article first, then send it to your target publications asking if they are interested in publishing it.
• Reach out to the organization’s leadership. Let them know you are interested in being a contributing author or speaker and ask what the submission process is.
• Your firm’s marketing department or an outside public relations resource can help you pitch your article and presentation ideas or your finished pieces for publication. Make sure you are clear with your marketing resources on what your goals are with your thought leadership, specifically who your target audience is, and which platforms would be ideal.

Making the Most of Your Efforts

Developing a topic into an article or presentation takes a lot of time and energy, so make sure to take full advantage of your work. Ways to leverage your work include:

Individual outreach. Once your piece is available, reach out to your clients and top contacts directly with a personal note inviting them to watch or read, and include a link or copy. If you are giving a live presentation, consider personally and individually inviting your key contacts to attend.

Update your website. Add your thought leadership to your firm or practice area’s list of such highlights, such as an “Insights” or “Resources” tab on the website. Update the sections of your firm bio related to publications and speaking engagements to include the title of your piece or presentation and when and where it was published, with a link.

Post on social media. Post your thought leadership on social media, including LinkedIn, with a thoughtful comment.

Repurpose the content. Consider new ways to use your thought leadership. You might want to turn your article into a presentation, video vignettes, an infographic, or posts on social media. Similarly, you could turn the transcript of your presentation into an article or white paper.

Adjust for a different audience. Consider writing a follow-up piece or a new version of your thought leadership for a different target audience. If you wrote an article for corporate attorneys working in biotech, consider rewriting the piece for CPAs in the same niche.

Lean on marketing resources. Make sure your firm’s marketing department or outside resources know about your thought leadership engagements so they can post them on firm platforms, promote them internally, and offer additional visibility ideas and opportunities.

To be effective in your marketing, you need to be consistent. It is easier to be consistent if you find your business development activities to be enjoyable. If you are in the advantageous position of not needing to bring in business to stay busy, you can focus on developing relationships with people you truly enjoy and respect and build your reputation and expertise around matters and issues that are interesting and exciting to you.

“Oh, you need to speak with an attorney about that.” After nearly twenty-five years trying to assist members of the local Asian American community facing various challenges, I was getting tired of hearing that common response. My efforts included but were not limited to securing social services and appealing mom-and-pop business matters with state or county agencies. In 2013, at the very young age of forty-seven, I decided to do something about it by going to law school!

I had not initially anticipated law school being part of my career path. I graduated from the University of Washington with a Bachelor of Science in Mechanical Engineering in 1990. I spent the next ten years at Boeing’s Commercial Airplane Group, working with international aircraft leasing companies and flying all over the world. By my rough calculation of total miles flown, I circled by globe almost three hundred times. In 1995, my sister and I had this crazy idea to open up a coffee and gift shop. We did, and the shop failed, but I learned some valuable lessons that are useful in my current practice advising mom-and-pop business owners. I earned an MBA from the University of Washington’s Foster School of Business in 2001. I joined Microsoft, and for the next eleven years, I led efforts involving international marketing, product management, and enterprise business development. That period of my career included a two-year stint in Microsoft’s Asia Pacific regional office in Singapore working with global partners Samsung and LG. After losing my father to cancer, I contemplated long and hard about how I wished to live out the rest of my life. I wanted my legacy to be that of someone who lived an impactful and influential life assisting my community and concluded that could be accomplished by being a lawyer. I returned to Seattle from my assignment in Singapore and began preparing for the LSAT. I enrolled in the University of Washington School of Law and earned my JD and passed the bar in 2016.

As a child of immigrants, I remained very active with community involvement and assisting other immigrant families to “pay back” for all the help my parents and I received from others upon our arrival. In 1997, when residents decided to incorporate Shoreline, Washington, as its own city, I ran for a position on the founding City Council, where I served for two terms, incorporating the city and directing foundational policy for all of the infrastructure and services the city now provides. It was quite challenging and demanding to serve on the Shoreline City Council while working full time at Boeing, but it was an incredibly rewarding opportunity to serve my community. Today, I serve on the board of Shoreline Community College Foundation and Seattle City Symphony and am the board chair of Korean Community Service Center (“KCSC”), a nonprofit serving the Seattle metropolitan area that promotes the health and well-being of the Korean American community through a wide range of services. I am also the founding president of the Washington Chapter of the Korean American Coalition (KAC-WA), now a 4,500-member community empowerment and development organization. I advocated fiercely on behalf of my local community and still do.

Taking that advocacy into the realm of legal work has felt powerful and satisfying, as I’ve been able to use my expertise to support others in new ways. As soon as I was eligible to do pro bono work in law school, I jumped at every opportunity and loved it. I volunteered with intake efforts for the Moderate Means Program, which helps moderate income individuals obtain legal services in key areas. I assisted a U-Visa applicant and assisted DACA applicants under the supervision of a practicing lawyer. Upon passing the Washington State Bar, I quickly signed up to volunteer with one of the King County Neighborhood Legal Clinic programs, a pro bono legal clinic run by the Korean American Bar Association of Washington (“KABA”). I even served as president of KABA. During my presidency, I helped raise the most funds KABA has ever raised and more than doubled the amount of scholarships awarded to law students. After the conclusion of my presidency, I am continuing to serve as the chair of KABA’s pro bono clinic, directly delivering pro bono services as well as soliciting and managing volunteers. During the pandemic, I coordinated with KCSC, which hosts the pro bono clinic at its office, to fit the office with clear plastic shields. With these and other precautions in place, we opened the legal clinic for up to four hours each day to aid mom-and-pop business owners struggling with the challenges of the pandemic. The appreciation expressed by the clients made all of the time and effort, including risk during the pandemic, worth it.

My years of professional experiences prior to becoming an attorney provide great foundation and context as I assist clients in my current practice, which is focused on real estate transactions and advising small, family-owned businesses. The opportunity to deliver pro bono services alongside that practice is incredibly rewarding; it affirms that I made the right decision to go to law school and become a lawyer as my fourth career. Was it worth leaving my job as a marketer at Microsoft and leaving thousands of shares of unvested stock? Would I do it again? Probably not. Do I regret it? Definitely not, because I am able to help those who are in need of legal assistance but unable to afford it. No one can tell me that I “need to go talk with an attorney” when I am trying to help those in need.

In September 2022, a Virginia resident’s wages were wrongfully withheld, and they needed immediate legal advice for which they could not pay. The client submitted their legal question on ABAFreeLegalAnswers.org and quickly received a response from a qualified pro bono attorney licensed and in good standing in Virginia. After the employer was told that a labor attorney had been consulted, they admitted the error, changed their position, and provided the full wages to which the client was entitled. The client reported that their ABA Free Legal Answers attorney aided them in better understanding their legal rights and options, and they greatly appreciated the services provided by the portal.

This is just one example of the thousands of legal issues that are addressed on ABA Free Legal Answers (ABA FLA), an online virtual legal clinic through which income-eligible clients can post civil legal questions to be answered by pro bono attorneys.

Providing Pro Bono Legal Advice to Clients Where They Are: Online

According to a 2022 Legal Services Corporation survey, low-income Americans do not get any or enough legal help for 92% of their substantial civil legal problems, resulting in an gap in access to justice. Given that legal advice is increasingly sought online and, according to a recent report from the Pew Research Center, nearly 90% of households with low-moderate income and 90% of adults in rural communities use the internet, the solution is clear.

ABA Free Legal Answers seeks to narrow the “justice gap” by offering access to legal advice online. Modeled after a legal advice portal created in Tennessee, the ABA Standing Committee on Pro Bono and Public Service launched the first and only online national pro bono legal advice portal in 2016, providing non-incarcerated adults with income generally under 250% of the federal poverty level and assets under $10,000 with access to brief civil legal advice from attorneys who are licensed and in good standing in their jurisdiction. ABA FLA provides access to legal advice to those who are often screened out by existing legal services due to conflicts, income or asset eligibility, or citizenship status. It offers a resource to those who are unable to utilize traditional walk-in clinics or hotlines due to geographic or temporal limitations. For those who have nowhere else to turn yet cannot afford an attorney, ABA FLA often serves as the sole resource.

ABA FLA is designed to allow any eligible user with an internet connection to access civil legal advice and resources at any time from across their state. The goal is ultimately to prevent larger legal crises from developing and to allow existing legal services staff attorneys to focus on full representation.

Since ABA FLA’s launch in 2016, forty-two jurisdictions have committed to participate, and nearly 11,000 pro bono attorneys have registered to respond to the nearly 250,000 civil legal questions that have been posted on ABA FLA—primarily in areas such as family law, housing, and consumer rights.

“Thank you so much for helping me,” said a recent client from Florida. “The gentleman attorney who assisted me was kind, understanding, clear in speech, and very knowledgeable about the subject. I appreciate this service very much.”

“Free Legal Answers is a godsend,” said Jim Sandman, President Emeritus of the Legal Services Corporation. “It is critically important in expanding the services available to people who otherwise have nothing.”

Offering Solutions During Disasters

Disasters produce, among other challenges, a variety of legal issues for disaster survivors, including lease terminations, Federal Emergency Management Agency (FEMA) applications, insurance claims, property damage, bankruptcy, document loss, and guardianship. These legal issues persist for weeks, months, or even years following the initial impact.

ABA FLA responds to post-disaster crises by providing wider access to pro bono legal advice and allowing more volunteer attorneys to meet the needs of disaster survivors. For instance, when disaster strikes, ABA FLA may temporarily lift the income and asset cap in impacted states, add disaster-specific categories for clients to select, populate category-specific auto-emails for users, and add alerts for attorneys to select those questions. In addition, ABA FLA provides access to out-of-state attorneys who are permitted by court order to temporarily practice law to assist in disaster relief.

Throughout the COVID-19 pandemic, ABA FLA has served as a valuable pro bono resource for attorneys and clients, as it is entirely virtual and can address many basic legal questions that arise, both typical and pandemic-based. Since March 2020, ABA FLA has received more than 137,000 submitted questions, representing an 85% increase over the same pre-pandemic period. Users indicated that these questions were specifically related to the pandemic in more than 12,000 instances. Overall, legal questions in categories commonly associated with the pandemic increased as well. For instance, more than 25,000 housing-related questions and more than 7,000 employment-related questions were submitted, representing a 111% and 151% increase, respectively, over the same pre-pandemic period.

ABA FLA attorney registrations have also increased since the onset of the pandemic. Since March 2020, over 4,100 volunteer attorneys registered to answer civil legal questions on the state FLA site in which they are licensed, increasing the number of registrations by 71%.

Attorneys Provide Brief Legal Advice at Their Convenience

In addition to its success as a much-needed legal assistance resource for low-income populations, ABA FLA has been useful for attorneys in search of convenient, short-term pro bono opportunities. ABA FLA provides for partnerships between the private bar, law firms, corporate law departments, government attorneys, and law schools that wish to provide their members with firsthand pro bono experiences in their own settings. Attorneys can sign up to receive notifications when questions are posted in their areas of interest as well as sort by subject matter and for questions that are submitted by those with senior or veteran status.

“It is so easy to just take a five- or ten-minute break and do something so positive,” praised a volunteer attorney in Arkansas. “I go on the site every few days plus have a clinic with law students twice a month. I can provide help to so many more people all over the state [and] find most clients are very appreciative and just glad to have someone answer.”

As part of this year’s ABA FLA Summer Associate Challenge, created by ABA Past President Patricia Lee Refo to instill a commitment to pro bono early on in an individual’s legal career, at least forty-three summer associates and twenty-six volunteer attorneys from nine states answered more than 150 civil legal questions posted by income-eligible individuals. For the second consecutive year, Koley Jessen of Nebraska was the firm that answered the most questions (thirty-one), and other participating law firms included Alston & Bird, Baker & Hostetler LLP, Faegre Drinker, Husch Blackwell, Jackson Lewis P.C., Johnson Flodman Guenzel & Widger and Taft Stettinius & Hollister LLP.

“This project is really great,” said Abbie Widger, partner at Johnson Flodman Guenzel & Widger. “It gets everyone out of their comfort zone and allows associates to explore and research various areas of law. They have to ask lots of questions to every attorney in the office! It also requires that I do a little research to verify the accuracy of the answers. Thank you for offering this community service. People really do appreciate the guidance.”

How to Volunteer

The majority of questions submitted to ABA FLA are related to family and housing law issues, typically requiring only brief research to answer. Approximately 10% of all questions submitted are related to consumer and financial matters, followed by 5% related to employment law issues and 2% income maintenance–related matters. ABA Business Law Section members and attorneys licensed in most U.S. jurisdictions can sign up to get involved at FreeLegalAnswers.org under “Attorney Registration.” The ABA provides legal malpractice insurance to all volunteer attorneys for their communications on the site.

Learn more about ABA Free Legal Answers and support ABA Free Legal Answers here.

“The [corporation][LLC] shall indemnify its agents to the full extent permitted by law.”

Is it wise for corporate documents and limited liability company (“LLC”) operating agreements to provide such broad indemnification coverage in these or similar words?

The separate statutes that govern corporations and LLCs authorize indemnification of agents, in some cases imposing a mandatory requirement, but essentially permitting the entity to craft the indemnification terms. The risks in providing indemnification are similar, but the statutory applications are different. When drafting indemnification provisions, thought should be given regarding to whom coverage is being provided and for what actions.

A.
Why Indemnification

Corporations and LLCs are inanimate entities that act through human beings, individuals who risk personal liability in making policy, taking action, or not taking action. By providing a degree of protection from financial loss, indemnification encourages wise and intelligent men and women, acting in good faith and placing the entity ahead of personal considerations, to serve as the entity’s decision makers. This not only benefits the investors who place their trust in the decision makers, but it is also good public policy. When, however, an agent acts adversely to the corporation or LLC for pure personal benefit, the concept of the wronged entity being required to provide that agent with indemnification is an anathema.

B.
The Difference in Statutory Application

(i)
Corporations

Originally, the privilege of forming a business endowed with limited liability was granted sparingly. Corporations were feared as encroachments upon the liberties of individuals. Whereas an individual may do whatever is not prohibited by law, an artificial entity is permitted to do only what is authorized by law and its charter.^[1] Modern corporate statutes authorize corporations to indemnify corporate agents and permit, subject to any mandatory requirement, the corporation to expand or limit the scope of indemnification. State statutes vary. Each subsection of an indemnification statute provides for a different result depending on the circumstance.

(ii)
LLCs

LLC agents may also seek the comfort of being indemnified, and members may provide for it in the operating agreement. The Revised Uniform Limited Company Act (RULLCA) contains a section providing for mandatory indemnification, but because it is one of the statutory sections that may be altered by an operating agreement, it is a default provision that applies only when the operating agreement is silent on the subject. Hence members can write their own terms or agree that there shall be no indemnification unless determined by the members as situations arise.

In short, corporate indemnification, where mandatory, is not subject to change, and where permissive is subject to the terms provided in the corporate documents. LLC indemnification, if not spelled out in the operating agreement, is governed by the default terms of the statute.

C.
Risks

When it works properly, indemnification benefits both the entity and its protected agents. When drafting its permitted terms, counsel must consider to which of the entity’s “agents,” a term often defined by the governing statute, the client desires to extend coverage. For example, if coverage extends to “officers,” does that term include nominal vice presidents who have been given a title but no executive authority? Should all or only some employees to be covered? What about others remotely serving the entity?^[2]

The entity undoubtedly desires to protect whomever falls within the scope of coverage from actions brought by unhappy investors or aggrieved third parties, but should coverage extend to actions initiated by the entity itself against a wrongdoing agent or to a counterclaim made against the entity by the alleged wrongdoer defending that action?^[3] Courts enforce indemnification as written. In one case where a former officer was both indicted and sued civilly because of his actions which the company claimed, “were motivated by personal greed that resulted in his receipt of $1.5 million,” the officer’s claim for advancement of expenses was nevertheless granted because of the broad language adopted by the corporation in its documents.^[4]

What about the agent that is not sued but is the plaintiff suing the entity?^[5]

D.
A Modest Proposal

What future legal actions may be brought by whom for whatever reasons against which entity agents are unknown. Owners and investors, at the very least, will want their decision makers to enjoy the security of indemnification. Beyond that, could it not be left to the decision makers to decide whom to indemnify for what as the situation arises? Would not the purpose of indemnification be served by (i) providing full permissive indemnification to the governing body (directors, managers, members) against direct and derivative actions by investors and claims by third parties, but not against claims made by the entity itself, and (ii) authorizing the governing body to indemnify officers, employees, and other agents by contract or resolution as the situation arises?

1. Railroad Company v. Harris, 79 U.S. 65, 81 (1871). ↑

2. See Vergopia v. Shaker, 383 N.J. Super. 256 (App. Div. 2006), granting indemnification to a lawyer and distinguishing Cohen v. Southbridge Park, Inc., 369 N.J. Super. 156 (App. Div. 2004), where indemnification was not granted. ↑

3. See MVW Mgmt., LLC v. Regalia Beach Developers LLC, 230 So.3d 108 (Fla. App. 2017). ↑

4. Homestore, Inc. v. Tafeen, 888 A.2d 204 (Del. 2005). See also, Senior Tour Players 207 Mgmt. Co. LLC v. Golftown 207 Holding Co., 853 A.2d 124 128 (Del. Ch. 2004). ↑

5. Compare Hibbert v. Hollywood Park, Inc., 457 A.2d 339 (Del. 1983), with Hydro-Dynamics, Inc. v. Pope, 708 P.2d 70 (Ariz. 1985). ↑

A firmwide initiative founded in 2001, Goodwin Procter’s Neighborhood Business Initiative (NBI) promotes equity and supports wealth creation in communities that face discrimination based on race, ethnicity, immigration status, gender, and/or LGBTQ+ status by providing pro bono legal services to entrepreneurs and small business owners who are members of, or whose businesses positively impact, such communities. Started in Boston, Goodwin’s NBI is active in California, Massachusetts, New York, London, and Washington, D.C.

Here are five lessons learned over twenty years on building pro bono opportunity in business law.

Be lawyer led. Since NBI’s grassroots beginnings, attorney teams working with Goodwin’s pro bono team have sourced and grown relationships in the community; run client intake; and staffed clinics, workshops, and individual representations, engaging more than 1,000 Goodwin lawyers and professionals over twenty years. Attorneys roll on and off local NBI committees on an ad hoc basis, as it resonates with the trajectories of their personal lives and professional practices. Local committee priorities shift over time, reflecting their members’ interests and priorities, and so NBI remains dynamic and evolving.

Be values driven. NBI attorneys discuss, in both local and national (cross-office) forums, their values and the opportunities and the practicalities of practicing at a big firm—and how those translate into providing pro bono business legal services. The project was founded on the values of access to justice and community development. Since its beginnings, though, NBI has served entrepreneurs and business owners who face discrimination. In 2020, through a unanimous vote, NBI explicitly reaffirmed its values to reflect this focus.

• Access to Justice: Providing access to all law for all people
• Community Development: Supporting small businesses that promote diverse and vibrant neighborhoods
• Equity for All: Dismantling systemic bias based on race, ethnic background, immigration status, gender, and LGBTQ+ status

Be client focused. An NBI client is a founder, an owner, and an entrepreneur. NBI attorneys connect with their NBI clients and constituencies first by meeting them where they are and listening with an open mind. Through conversations attorneys work with our community organizations to identify the legal services most needed for the constituents they serve. Each potential engagement begins with an assessment with our potential client to assess their goals, priorities, and specific need. To staff new engagements, NBI attorneys identify, through conversations with colleagues, who is excellent in the specific legal areas a constituency or a client needs. From these conversations, and tapping talent across legal practices and industries, NBI fields teams that are focused on and deliver targeted, specific services and resources. NBI has represented more than 450 individual small businesses and entrepreneurs through direct representations and has provided business legal resources to thousands of additional low-income entrepreneurs and small business owners throughout the United States through its programming.

Be real. NBI provides opportunities to business law attorneys in full acknowledgement of the realities of their practices and lives. From “bite size” to “full blown,” NBI works with community partners, legal service organizations, and people we know to provide pro bono opportunities that vary by industry, business law practice, activity, and time commitment. For example, in any given month, opportunities may range from three hours advising at a virtual clinic or two hours on a panel at virtual town hall, to representing a new business in its initial capital raise, developing relationships with community partners to connect with potential clients, or preparing FAQs on legal topics for an industry such as early education and childcare. This menu for involvement has created opportunity for more than 35,000 hours of pro bono legal services provided through NBI—all on business law topics.

Be visible. Branding and visibility are key tools in the NBI toolbox to connect with small businesses and entrepreneurs, who are often isolated with limited access to resources. NBI uses branding and marketing—a snappy logo, a clear mission statement, compelling client stories, interesting volunteer stories, a social media presence, and more—to recruit volunteers, reach potential clients, and support dissemination of the resources we seek to provide. When in person is an option, NBI shows up in the neighborhoods we serve. NBI also provides business legal services to our community partners themselves and other resources where and when we can. A material part of our work is to be visible, strong supporters for the work of our community partners and the value of the constituents they serve.

The views expressed herein are the author’s own and are not necessarily those of any organization with which the author is affiliated.

Fenwick’s lawyers are passionate about representing ambitious entrepreneurs, and throughout our history we have had the privilege of working with some of the technology sector’s most legendary founders as they grew their companies from start-ups to global leaders.

We are equally inspired by the small-business-owner clients whom we represent on a pro bono basis, including the hard-working entrepreneurs we have met through Start Small Think Big. The organization is a nonprofit that helps small businesses with high potential by connecting their founders to the organization’s network of volunteer professionals who provide free legal, finance, and marketing services. Given that Fenwick has placed the highest priority on giving back to our communities and serving those who are less fortunate, the firm is proud to support Start Small Think Big—one of dozens of organizations with which we partner through our contribution programs—and Fenwick lawyers coast to coast have enthusiastically signed on to help guide and counsel entrepreneurs as they grow their businesses.

To spotlight Start Small Think Big clients, we reached out to Tami Treadwell of Harlem Seafood Soul and Shaun Best of JumpShots Over GunShots, two incredible Harlem-based entrepreneurs, about their stories and the legal support that they’ve received.

Harlem Seafood Soul

Tami Treadwell, better known as Chef Tami, is the chef and owner of Harlem Seafood Soul, a staple food truck in Harlem since 2016. As noted on her website, Chef Tami takes immense pride “in both her passed-down recipes and her roots in the NYC neighborhood where she was born and raised.” Chef Tami is known for her garlic butter shrimp and creamy grits, fried mac and cheese bites, fish tacos, and seafood po’boys—“all of which she serves to her beloved Harlem community with great pride.”

Chef Tami was in negotiations to become a tenant at the new Brooklyn, New York–based Williamsburg Market, a highly curated food hall and market featuring up-and-coming chefs changing the face of food, when she realized that she needed more professional support. Fenwick was introduced to Chef Tami via Start Small Think Big.

“In the first initial conversation I had with [Fenwick corporate associate] Lauren Christine Gonzalez,” said Chef Tami, “her words to me were, ‘From this point forward, we will be taking over all negotiations; we have your back. I’m going to bring in my partner and colleague, and we are going to make sure you are well protected.’” Chef Tami continued: “[A]nd now, I can only tell you that after having really smart people, Lauren and [Fenwick corporate partner] Morgan Sawchuk, going over every single detail, even engaging my accountant—they have projections and reports. It is like Harlem Seafood Soul is now a real business.”

“She has this amazingly successful food truck and catering business and a lot of vitality, and we got to step in and partner with her right as she was figuring out what’s next for her and Harlem Seafood Soul,” Sawchuk said. “To help her with the Williamsburg negotiations, we had to really understand what Harlem Seafood Soul is and where Chef Tami wants to go. It’s such an honor to have someone who has worked so hard to build something so wonderful and personal trust us with that kind of advice.”

After continuing her business through the pandemic, Chef Tami was featured on the Netflix series Street Food: USA, which catapulted her to fame overnight. The Fenwick team helped Chef Tami navigate trademark issues the week before the show was released. Gabrielle Simon, a Fenwick intellectual property associate based in New York, worked with Chef Tami to identify the trademark needs and opportunities of the business so that Chef Tami could protect the business’s name and logo. Simon advised her on the ways that a person can accrue trademark rights in the United States and the benefits of doing so. “The biggest role I played was giving Chef Tami some peace of mind about her existing trademark rights before the show was released and helping make a plan to protect her trademarks for the future,” Simon noted.

Chef Tami sees Harlem Seafood Soul making a name for itself in all the boroughs of New York and then going national, and she already has had offers for a first franchise.

“Harlem is my home and where my heart is, but Harlem Seafood Soul resonates with everyone. It’s love—and I want as many people [as possible] in this world to experience that,” she said.

JumpShots Over GunShots

Harlem native Shaun Best started nonprofit JumpShots Over GunShots nine years ago after seeking a low-cost or free basketball program for his seven-year-old son. Most of the programs offered nearby were cost-prohibitive for most area families.

Best began playing basketball with his son informally, finding space at nearby gyms and community centers when they were available. Through word of mouth among his son’s friends and classmates and their parents, a group of young players formed—and Best started JumpShots Over GunShots. In the summertime, the basketball program includes up to 40 preteen youth.

The mission of JumpShots Over GunShots is “empowering disadvantaged youth with life skills through basketball to evade prison, gangs and gun violence.” Best, who was already a youth mentor at a nearby juvenile center, took some of the ideas from that job and incorporated them into JumpShots Over GunShots, including therapeutic crisis intervention and methods to help youth deescalate situations. Best has helped those in the program get jobs and hone their skills off the court and, most importantly, avoid a life of violence and gun violence.

“Fenwick called me, and ever since then, everything I have needed, they have been just a phone call away. I have shared ideas with them, and they can execute,” said Best.

“Shaun—like most of our small-business start-up clients—was supercharged with ambition and creative ideas, including an array of potential trademarks and logos,” said intellectual property of counsel R.J. Heher. “It was fun and rewarding to help him hone in his business plans, explain the role trademarks could play, and help him narrow his trademark alternatives to those he could protect.” The firm first worked on protecting the organization’s logo via registering it. The trademark application was approved, giving Best peace of mind as he seeks to expand the organization’s reach by applying for grants and fundraising.

“The most rewarding thing was a parent telling me, ‘My son didn’t have any friends until he joined the program,’” said Best. “That is bigger than winning any championship.”

***

Fenwick’s pro bono practice is dedicated to ensuring that disadvantaged people and communities have representation and access to justice. Every year, our lawyers strive to donate three percent of their total billable hours to pro bono legal services for a broad range of clients and causes. The firm is proud to have received the 2022 National Public Service Award from the American Bar Association’s Business Law Section.

The successful pursuit of claims against directors and officers of bankrupt companies is a complicated and multi-faceted challenge requiring a hybrid skill set possessed only by practicing trial attorneys with a solid understanding of bankruptcy and insurance law. As these experienced counsel can attest, even when dealing with a prima facie meritorious claim, thorough due diligence—both legal and factual—can make the difference between a favorable outcome and a satisfied client or, what legal scholars sometimes refer to technically as, a mess.

Before one even addresses the bankruptcy-specific issues, one must of course confront the general authorities around the duty of due care (which requires management to make decisions with reasonable diligence and prudence) and the duty of loyalty (i.e., acting in the best interests of the organization rather than oneself). A careful review of exculpation clauses and the legal authorities that may limit the scope of these duties is also essential. One must understand the entire universe of potential defendants in a D&O claim including sponsors, lenders, joint venture partners, and others whose nominees occupied board positions during the time periods preceding the bankruptcy.

For plaintiff’s counsel the long list of bankruptcy-specific challenges often begins with questions of standing. Does the client creditor or a committee have standing to pursue D&O claims that at first instance belong to the estate (i.e., derivative actions)? The Delaware LLC Act, for instance, may cast doubt on whether a creditor or committee has the requisite standing to pursue such claims depending on the characteristics of the committee or creditor. If the answer is unclear, are there tactical and strategic choices around venue that can improve the odds?

An almost equally important question is whether any assets are likely to be available to satisfy a judgment. In many cases, the primary asset will be the proceeds of a directors and officers insurance policy claim. The potential value of such proceeds will depend not only on the face amount of the policy, but also on the interaction of a myriad of exclusions, including bankruptcy-specific exclusions, and on the success of other claims (i.e., the burning candle or wasting policy problem). A thorough understanding of the relevant policy and notice period(s), the availability of tail coverage, and the status of outstanding premiums are each essential.

Discovering and establishing the facts to support one’s case can be challenging at the best of times and may be all the more so when access to documents, electronic records, or individuals with firsthand knowledge of historic events can be adversely impacted by the bankruptcy itself, including hurdles like operational restructuring (i.e., layoffs) and/or the cessation of operations. Obtaining access to privileged legal advice and opinions delivered to the company prior to bankruptcy can also be uniquely problematic. Effective and creative responses to these challenges, such as third-party discovery, can make the difference between success and failure.

The calculation of damages may also be complicated by the bankruptcy. For example, should the business be valued as a going concern, or does the fact of bankruptcy make liquidation the presumptive or baseline outcome? What is the appropriate measure of damages where it is alleged that the directors and officers resulted in a debtor becoming more deeply insolvent?

Those who practice and resolve cases against current and former directors and officers of bankrupt companies possess a unique skill set and knowledge base. Developing a better understanding of each of the considerations noted above will benefit any bankruptcy attorney whether they aspire to join the ranks of plaintiff or defense counsel or simply to better understand the dynamics at play in their cases.

This article is based on a CLE program that took place during the ABA Business Law Section’s 2022 Hybrid Spring Meeting. To learn more about this topic, view the program as on-demand CLE, free for members.

At the ABA’s Business Law Section (BLS) meeting in Washington, DC, last month, Penny Christophorou, immediate past president of BLS, honored Donald R. Kirk, shareholder with Carlton Fields, with the Section Chair’s Award. This award is given to members who have made outstanding contributions to the Section and to the legal profession.

According to Christophorou, the selection of Kirk for this award was based on two areas of distinction: his committee work on the Business Bankruptcy Committee and his chairmanship of the BLS Publications Board.

“Donald’s work on the Business Bankruptcy Committee is a template for every committee member aspiring to be a strong committee leader,” said Christophorou. “Donald added to the stature of the Business Bankruptcy Committee, which in turn, has added to the stature of the Section as a whole.”

Donald Kirk at the 2019 Business Law Section Annual Meeting.

Kirk, who is based in Tampa, has demonstrated time and again his commitment to the Section and has mentored many BLS members in their legal careers.

“Donald is that rare leader who sets a goal, conceives a plan, motivates his team, and then stays out of their way as they all do their part to achieve that goal,” said Norm Powell, BLS Secretary. “Working with him is a pleasure.”

In her remarks, Christophorou also noted that Kirk achieved new heights for the BLS Publications Board, which is responsible for the development of the Section’s books—a major source of non-dues revenue for the Section. “During Donald’s tenure as chair of the Publications Board, he was responsible for producing more books than any other three-year period in the Section’s history.”

Juliet Moringiello, associate dean for Academic Affairs and professor of law at Widener University Commonwealth Law School, who has worked side by side with Kirk on the Publications Board, had this observation: “Publications Board meetings chaired by Don Kirk were always a delight. His knowledge of the Section, preparation for the meetings, and commitment to the role motivated all of us as board members to continue to build the Business Law Section book brand.”

L. Collin Cooper, who is now chair of the Publications Board, valued Kirk’s skills and characterized him as the “consummate leader.”

“I have certainly learned some valuable lessons that I intend to carry forward,” said Cooper. “Donald’s style of leadership is effective, as he always seeks to ensure that all thoughts and ideas are heard, while also safeguarding the quality of the Section’s thought leadership. The Business Law Section—and, indeed, the ABA is very lucky to have driven members like Donald who inspire others and act with a sense of urgency, while expertly guiding others to achieve quality results.”

Lawsuit settlements and judgments are taxed based on the origin of the claim, essentially the item for which the plaintiff is seeking to recover. The basic idea is, if you didn’t have to sue but had been paid in the ordinary course of events, your taxes should be the same. Claims arising in and about employment are one of the most common kinds of legal disputes.

Some disputes go to verdict, but many more eventually settle. Perhaps an even greater number of disputes are resolved pre-filing and never make it to court. Disputes may be resolved with demand letters or a draft complaint, in mediation, etc. But no matter how the dispute is resolved, there will be a settlement agreement. And no matter what, there are going to be tax issues, for both the employer and the employee.

Ideally, each side thinks about taxes in advance and tries to implement what they want in the settlement agreement. That doesn’t always happen, however, and even if the parties try, they often fail to hammer out how they want the arrangement to be taxed. The parties may misunderstand the tax issues, or they may fail to consider them entirely until the following year when IRS Forms 1099 arrive. Most employees know that they will receive an IRS Form W-2 for their wages in January for the previous calendar year.

But January is also when Forms 1099 arrive. Many litigants panic when unexpected tax forms land in their mailbox. Here are some common misconceptions about how taxes apply to employment case legal settlements.

Misconception #1: Plaintiffs Can Only Be Taxed on Their Net Recoveries, After Legal Fees

The idea that plaintiffs can only be taxed on net recoveries is a big issue, and not just for employment cases. Most plaintiffs use contingent fee lawyers, and many assume that they are only responsible for the net money they collect, after contingent legal fees. If you settle for $1 million, and your lawyer takes $400,000 off the top, isn’t your tax problem always limited to $600,000?

Hardly. Just because a portion of your recovery is paid to your attorney does not mean you do not owe tax on that portion. In Banks v. Commissioner,^[1] the U.S. Supreme Court ruled that plaintiffs must include contingent legal fees in their gross income. Hopefully they can find a way to deduct or offset the fees, which in some kinds of cases can be tough.^[2]

Fortunately, in employment cases, you should not need to pay taxes on the legal fees your lawyer receives if you use a contingent fee lawyer. However, you still have to report them on your tax return as gross income, or the IRS will think you are shorting them. After all, the Banks case on legal fees is from the U.S. Supreme Court.

The mechanics of claiming the deduction have been tough until recently. For 2021 tax returns, the tax return form was improved so there will hopefully be fewer problems with claiming it.^[3] However, if you are using an hourly lawyer and the case spans multiple tax years, there’s no easy answer to avoid paying tax on the legal fees.^[4] Historically, most legal fees could be claimed as a miscellaneous itemized deduction even if there was no related income. But miscellaneous itemized deductions were suspended by Congress starting in 2018 and continuing through the end of 2025.^[5]

Misconception #2: Employment Settlements Are Exclusively Wages

Not really. A better statement would be that most—perhaps nearly all—involve some wages. That does not mean that 100 percent of the money is wages, though. Usually, a portion of the claim is for lost wages, back pay, front pay, or both, but some amount usually represents a payment for emotional distress or other non-wage damages.

The IRS recognizes not all of a settlement may be wages, making clear in its instructions to Form 1099-MISC that non-wage damages should be reported on a Form 1099, not on a Form W-2. Some employers seem surprisingly unconcerned about withholding, though their withholding obligation for at least some of the funds seems clear. On the other extreme, some employers insist on withholding on most or even all of a settlement, even though a big share of the settlement should arguably not be subject to withholding.

In my experience, if there is something reasonable in the wage category, the IRS rarely disturbs it. That is one reason it is wise for plaintiff and defendant to come to an agreement. In 2009, the IRS released a memorandum entitled ‘‘Income and Employment Tax Consequences and Proper Reporting of Employment-Related Judgments and Settlements.’’^[6] It is not technically authority, but it is still interesting reading about IRS views on employment-related settlements and judgments.^[7]

Misconception #3: All Employment Settlements Have Tax Withholding

The fact that the case arises out of an employment setting does not necessarily mean that some of the settlement must represent wages. Even if the case is between a current or former employee, the case may not be about wages. The parties may agree that all wages have been paid. If you were to sue your employer for defamation and receive a settlement or judgment, the fact that your employer is the defendant (rather than some third party) should not necessarily make the payment wages.

However, 99 percent of the time, treating a portion of the settlement as wages is wise, and an agreed allocation is best. Plaintiff and defendant should arrive at a wage figure that is large enough to make the employer comfortable that it is complying with its withholding obligations. The wage component should not be so large to cause the plaintiff to refuse to settle. In a $1 million settlement, a plaintiff and defendant might agree that $300,000 is wages subject to employment taxes, while $700,000 is non-wage damages. The wages split might be 50-50, 80-20, 90-10, or any other figure. It all depends on the facts and on the relative bargaining power of the parties.

Misconception #4: Emotional Distress Damages Are Tax-Free

Be careful with this one. Section 104 of the tax code shields damages for personal physical injuries and physical sickness. The exclusion used to be much broader. Before 1996, “personal” injury damages were tax free—so emotional distress, defamation, and many other legal injuries also produced tax-free recoveries. That changed in 1996, and since then, an injury or sickness must be physical to give rise to tax-free money.

Unfortunately, in the more than twenty-five years since section 104 was amended, there is still substantial confusion. In large numbers of tax cases that arise post-settlement, taxpayers, the IRS, and the courts continue to struggle with exactly what “physical” means. It is clear that emotional distress alone is not enough. In fact, emotional distress damages—even with physical consequences such as headaches, stomachaches, and insomnia—are taxable.

In contrast, if there are physical injuries or physical sickness first that produce related emotional distress damages, those emotional distress damages are also entitled to tax-free treatment. Many plaintiffs struggle with the chicken-or-egg issue of what comes first. But theoretically, once you have a qualifying physical injury or physical sickness, all the compensatory damages can be tax free, even though most of the damages may be for emotional distress.

Claims of post-traumatic stress disorder (PTSD) are increasing common in employment litigation, and PTSD arguably should be viewed as physical sickness. There is no definitive tax authority stating that PTSD is or is not within the scope of the section 104 exclusion. However, there is now reliable medical evidence that PTSD is a type of readily observable physical sickness and is not merely a variety of emotional distress. A diagnosis of PTSD and the appropriate assertions of PTSD claims should enough for the parties to treat it as within the section 104 exclusion.

Misconception #5: Tax-free Damages in Employment Settlements Are Impossible

Not true. Even in employment cases, some plaintiffs win on the tax front. For example, in Domeny v. Commissioner,^[8] Domeny suffered from multiple sclerosis (MS). Her MS got worse because of workplace problems, including an embezzling employer. As her symptoms worsened, her physician determined she was too ill to work. Her employer terminated her, causing another spike in her MS symptoms.

She settled her employment case and claimed some of the money as tax free. The IRS disagreed, but Domeny won in Tax Court. Her health and physical condition clearly worsened because of her employer’s actions, so portions of her settlement were tax free.

In Parkinson v. Commissioner,^[9] a man suffered a heart attack while at work. He reduced his hours, took medical leave, and never returned to work. He filed suit under the Americans with Disabilities Act (ADA), claiming that his employer failed to accommodate his severe coronary artery disease. He lost his ADA suit, but then sued in state court for intentional infliction of emotional distress and invasion of privacy.

His complaint alleged that the employer’s misconduct caused him to suffer a disabling heart attack at work, rendering him unable to work. He settled and claimed that one payment was tax free. When the IRS disagreed, he went to Tax Court. He argued the payment was for physical injuries and physical sickness brought on by extreme emotional distress.

The IRS said that it was just a taxable emotional distress recovery, and the fact that the state court case was brought for intentional infliction of emotional distress gave the IRS good arguments. But the Tax Court said that damages received on account of emotional distress attributable to physical injury or physical sickness are tax free. The court distinguished between a “symptom” and a “sign.” 

The court called a symptom a “subjective evidence of disease of a patient’s condition.” In contrast, a “sign” is evidence perceptible to the examining physician. The Tax Court said the IRS was wrong to argue that one can never have physical injury or physical sickness in a claim for emotional distress. The court said intentional infliction of emotional distress can result in bodily harm.

Misconception #6: It is Better for Plaintiffs to Have Little or No Wages

It depends. Many plaintiffs want little or no wages. In part, it may be to save their share of employment taxes. After all, employment taxes are partially borne by the employee and partially by the employer. For the employee, the taxes at stake are 7.7 percent of the pay (for the entire year) up to the wage base of $147,000, and 1.45 percent of amount over $147,000.

Another reason plaintiffs may favor reduced wages is to get a bigger net check at settlement time. If the check is not reduced by tax withholdings, the settlement may look better. Sometimes, their lawyers are the ones pushing for little or no withholding. If the plaintiff is upset that he is settling for only $400,000 when he thinks he should get more, his lawyer may push for little or no withholding to make the current check larger.

Some plaintiffs have the sense that they are better off if they receive gross pay rather than net pay. Sometimes they even think the wage versus non-wage fight is about tax versus no tax. The plaintiff may also want to pay his own taxes, later. But the plaintiff may end up worse off at tax return time the following year if they have trouble paying their taxes. A plaintiff who has always been a wage earner may never have made estimated tax payments and may be undisciplined when it comes to financial management.

Finally, getting a Form 1099 may allow for more opportunities to claim an exclusion for physical injury or physical sickness damages. It is not easy to take this position with a Form 1099, but it is vastly easier to claim it with a Form 1099 than it is with a Form W-2. It is effectively impossible with a Form W-2. Sometimes the wage allocation issue comes down to the plaintiff trying to position physical sickness money.

Misconception #7: If You Receive a Form 1099, You Must Treat It as Taxable

Not necessarily. You certainly should address the Form 1099 on your tax return, but on the right facts, you can explain that the payment was non-taxable. I have occasionally even seen serious physical injury cases for compensatory damages reported on a Form 1099. In such a case, it is easy to explain that the payment should not be taxable. Many payments are reported on Form 1099 as part of the general default reaction that companies have when making payments.

If a payment is $600 or more, most businesses will issue the form. Indeed, if the settlement agreement is not explicit on the point, someone in the defendant’s accounting department is likely to send out a Form 1099 in January. Plaintiffs routinely object to Forms 1099 once issued, but if the settlement agreement does not expressly say that the form will not be issued, the odds of getting the defendant to correct it (with a corrected Form 1099 that zeroes out the income) are slim.

In the employment context, many plaintiffs argue that their employer caused them physical injuries or physical sickness. Sometimes there is a physical or sexual assault in the workplace. Sometimes the employee claims that the employer caused physical sickness or exacerbated an existing physical sickness. Sometimes the employee claims that the workplace gave them PTSD.

The evidence from the pleadings and correspondence, and the medical documentation of such claims varies widely, from voluminous to non-existent. Employer responses vary widely too. Often, the employer and employee reach a compromise on the wording of the settlement agreement.

That wording may stop short of a clear agreement that a payment is for physical injuries and physical sickness. However, a compromise on wording may be the best the plaintiff can do at the time. The issuance of a Form 1099 is another matter. The Form 1099 regulations and form instructions say that a payment of compensatory damages for physical injuries or physical sickness should not be reported on a Form 1099.

However, the employer may not agree with that characterization. Even the settlement agreement may be inconsistent. The employer might agree to physical injury or sickness wording in the settlement agreement, but still insist on issuing a Form 1099. The issuance of the form certainly does not help the plaintiff’s tax position, but the issuance of the form does not foreclose the plaintiff’s argument that it should not be taxed.

Misconception #8: You Don’t Need to Agree on Tax Treatment

As a legal matter, it is true that a settlement agreement is not required to address taxes. A few courts have suggested that taxes are such an essential part of the legal settlement that an agreement may fail if it does not include it.^[10] In general, however, a legal settlement agreement can be enforceable even if it does not say if there will be tax withholding on some or all of the funds, and even if the agreement does not say anything about the particular IRS forms that will be issued.

Some defendants may like that, if talking about taxes before the plaintiff signs a release seems like asking for trouble. That way, the theory goes, the defendant can handle taxes however it wants, withholding on some or all, issuing Forms 1099 for some or all, etc. But why would any plaintiff or defendant want to sign a settlement agreement only to have yet another dispute about taxes later, one that could go back to court?

The risk may seem worse for plaintiffs, but it might be no fun for the defendant either. It is not merely theoretical. In Redfield v. Insurance Company of North America,^[11] a man sued for age discrimination and wrongful termination. Redfield won a judgment, affirmed on appeal. The company withheld taxes, so Redfield refused to sign a satisfaction of judgment. The employer brought an action in District Court for a judicial acknowledgment that the employer had satisfied its obligations under the judgment. The employer won in District Court, but Redfield appealed to the Ninth Circuit.

The appellate court reversed, saying that withholding was not proper. Because the employer withheld when withholding was not required under tax law, the employer had not yet satisfied the judgement. So, after years of litigation, and countless dollars of expense, Insurance Company of North America remained on the hook for the settlement for the time being. To obtain its satisfaction of judgment on remand the employer would need to show that Redfield had gotten the improperly withheld amount refunded to it from the IRS and state tax authorities, or otherwise had the withheld amount credited to its account. There are a handful of other huge messes like this too.

In Josifovich v. Secure Computing Corporation,^[12] an employment settlement was put on the record. The idea, they agreed, was for these basic terms to later be embodied in a formal settlement agreement to be executed by Josifovich and Secure. But while reducing the settlement to writing, the parties were unable to reach agreement on tax withholding. The court later pointed out with frustration that neither party had mentioned taxes during a seven-hour settlement conference.

Josifovich contended that none of the settlement should be subject to withholding, and yet another hearing was needed where the question of how much is wages could be fully briefed. Would anyone be happy with their lawyers in such a mess? Consider the inconvenience and cost of the plaintiff and defendant having to argue about withholding issues when one or both thought the case was resolved.

Misconception #9: The IRS Doesn’t Care About Settlement Agreement Wording

Nothing could be further from the truth. In fact, the IRS and the Tax Court both place enormous focus on what the settlement agreement says. The intent of the payor is a phrase that features prominently in tax cases, and there is no better statement of the payor’s intent in legal settlement than the wording of the settlement agreement. There are numerous cases where bad or neutral wording doomed a plaintiff’s tax claim.

For example, in Blum v. Commissioner,^[13] a woman sued her lawyer for allegedly botching her personal physical injury suit. As a practical matter, it appeared that Blum was trying to get her lawyer to pay her money she failed to collect for her physical injuries because of the alleged legal malpractice. Even so, her malpractice recovery was held to be taxable.

The Blum case is a poignant reminder that settlement agreement wording is very important, an opportunity a plaintiff should never let slip by. It is worth saying this again and again before the settlement agreement is signed. In IRS audits or queries, the IRS may well be satisfied with the settlement agreement and may not ask for additional documentation. If your wording is poor or even neutral, it is almost a certainty that the IRS will ask to see more information in an audit.^[14]

Misconception #10: If You Don’t Receive a Form 1099, the Payment Isn’t Taxable

This is a dangerous one. Most people know that if they receive a Form 1099 reporting a payment, they need to report it on their tax return. It is presumptively income; that’s what the IRS will think. Sometimes, you can explain if it is not income, but you at least must deal with the Form 1099 on your return.

But what if you do not receive a Form 1099? Is it like a tree falling in the forest with no one there to hear it? Hardly. Many people seem to think that if there is no Form 1099, there is no income, but that’s not true. Numerous kinds of payments are not required to be reported on a Form 1099. And even if the payment is clearly required to be the subject of a Form 1099, the fact that the defendant fails to issue one does not mean that it is not income.

There are hundreds of pages of tax rules about when companies must issue Forms 1099 for a wide array of payments. The forms come in many varieties, including for legal settlements. However, if you do not receive the form, you still must consider whether it is income, capital gain, etc.

Even if you negotiate with the defendant for no Form 1099 for physical sickness money, you should still evaluate what evidence you have and whether you should disclose the payment on your tax return, etc. The language of the settlement agreement does not bind the IRS or state taxing authorities.

Misconception #11: Employers Can Withhold Taxes on Legal Fees

I have never seen this happen and have only heard it threatened a few times. If the cause of action brought by the plaintiff requests solely lost wages, and nothing else, it is harder to argue that the settlement is not all wages. Specific claims under the Fair Labor Standards Act may be the best example of an all-wage case.

In Commissioner v. Banks, the Supreme Court held that legal fees are usually income to plaintiffs first, though they are income to lawyers too. In a pure wage case, could that mean withholding on the lawyer money too? Despite its age, the best guidance on this issue remains Rev. Rul. 80-364.^[15] There, the IRS considered whether attorney fees and interest awarded with back pay are wages for employment tax purposes.

The ruling describes three situations, which are worth reading if you want to get into the weeds. In 2009, the IRS released more discussion in PTMA 2009-035.^[16] Ominously, the memo states that if this issue (attorney fees as wages) arises, the IRS National Office should be contacted for guidance. More happily, in TAM 200244004, addressing an ADEA claim, the IRS concludes that the fees are not wages.

In large part, the issue seems to be ignored by tax practitioners and certainly by employment lawyers. Over many years, I have heard only a small handful of defendants even argue for withholding on fees, and I have never seen one make good on the threat. In my view, no case will settle if the lawyers are going to be shorted fees and have to try to get them back from the IRS or from their clients.^[17]

Misconception #12: Most Plaintiffs Get a Tax Gross-Up for Additional Taxes

Actually, the reverse is true. Tax gross-ups are commonly requested, but not commonly awarded by courts or by agreement. Even so, some plaintiffs succeed. Eshelman v. Agere Systems, Inc.^[18] is an important case about the negative tax consequences of a lump sum. Eshelman was receiving pay in one year that should have been payable over multiple years. The court was persuaded that Eshelman needed extra damages to make up for the bad tax hit she would take on a lump sum, as compared with the lower taxes she would have paid on each annual salary amount.

Conclusion

Many employment disputes are emotional and difficult, perhaps even more so than with many other kinds of legal disputes. Whenever possible, plan ahead for the tax issues, especially if you are a plaintiff or plaintiff’s lawyer. Whichever side you are on, whenever possible, be specific about taxes so there is no dispute later. And whenever possible, get some tax advice before the settlement agreement is signed.

Robert W. Wood practices law with Wood LLP (www.WoodLLP.com) and is the author of Taxation of Damage Awards and Settlement Payments and other books available at www.TaxInstitute.com. This discussion is not intended as legal advice.

1. 543 U.S. 423 (2005). ↑

2. See Wood, “12 Ways to Deduct Legal Fees Under New Tax Laws,” Vol. 165, No. 1, Tax Notes Federal (October 7, 2019), p. 111. ↑

3. See Wood, “Writing Off Legal fees Just Got a Little Easier,” Vol. 174, No. 6, Tax Notes Federal (2022), p. 835. ↑

4. See Wood, “Can Employment Plaintiffs Deduct Legal Fees Paid in Prior Years?,” Vol. 168, No. 7, Tax Notes Federal (August 17, 2020), p. 1263. ↑

5. See Wood, “New Tax on Litigation Settlements, No Deduction for Legal Fees,” Vol. 158, No. 10, Tax Notes (March 5, 2018), p. 1387. ↑

6. ‘‘Service Explains Tax Consequences and Reporting Obligations for Employment-Related Settlement Payments,’’ Program Manager Technical Advice (PMTA), 2009-035, Oct. 22, 2008, Doc 2009-15305, 2009 TNT 129-19. ↑

7. For full discussion of this IRS memo, see Wood, “IRS Speaks Out on Employment Lawsuit Settlements,” Vol. 124, No. 11, Tax Notes (September 14, 2009), p. 1091. ↑

8. FN T.C. Memo. 2010-9. ↑

9. FN T.C. Memo. 2010-142. ↑

10. See Josifovich v. Secure Computing Corporation, 2009 U.S. District Lexis 67092 (D.N.J. July 31, 2009); and Sheng v. Starkey Laboratories, Inc., 53 F.3d 192 (8th Cir. 1995), after remand, rev’d in part and aff’d in part 117 F.3d 1081 (8th Cir. 1997). ↑

11. 940 F.2d 542 (9th Cir. 1991). ↑

12. 2009 U.S. District Lexis 67092 (D.N.J. July 31, 2009). ↑

13. T.C. Memo. 2021-18. ↑

14. For other cases of failed section 104 arguments, see Stassi v. Commissioner, T.C. Summ. Op. 2021-5; and Collins v. Commissioner, T.C. Summ. Op. 2017-74. ↑

15. 1980-2 C.B. 294. ↑

16. FN Doc 2009-15305, 2009 TNT 129-19. For further discussion, see Wood, ‘‘IRS Speaks Out on Employment Lawsuit Settlements,’’ Tax Notes, Sept. 14, 2009, p. 1091. ↑

17. For further discussion, see Wood, “Should Employers Withhold on Attorney Fees?,” Vol. 133, No. 6, Tax Notes (November 7, 2011), p. 751. ↑

18. 554 F3d 426 (3rd Cir. 2009). See also Wood, “Getting Additional Damages for Adverse Tax Consequences,” Vol. 123, No. 4, Tax Notes (April 27, 2009), p. 423. ↑