Of Bullet Fees and In House Counsel Fees In FINRA Employment Arbitration

April 18, 2018

I'm not sure whether it's fact or fiction, but I've heard that in Iran and China there's a "bullet fee," which is a bill sent by the government to the families of executed prisoners. Be that as it may, there is a practice among some employers to try and charge former employees for advice and counsel rendered during so-called exit interviews, particularly when a lawyer from the General Counsel's office is sitting in on the proceedings and urges you to pay a past-due bill or reimburse the firm for a disputed charge. Sometimes that in-house lawyer's advice is presented with the intent to smooth things along and avoid litigation -- you may even appreciate the counsel. Other times, the advice is a not-so-subtle threat tantamount to we can do it the easy way or we can do it the hard way. In a recent FINRA arbitration pitting a former employer against a former employee, we are presented with an interesting issue about the employer Claimant's effort to obtain reimbursement, in part, for advice provided by its in-house counsel to an employee who eventually became the Respondent. 

Case In Point

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in November 2017, Claimant Cambridge Investment Research, Inc. asserted hat Respondent Blythe Respondent had failed to ensure that his clients received appropriate rollover discounts. As a consequence of that alleged failure, Respondent Cambridge allegedly reimbursed Respondent Blythe's clients $14,134.51, so as to place them in the position that they should have been had the eligible discounts been provided. Citing Respondent's July 14, 2008, Registered Representative Agreement, Claimant asserted that he was obligated to repay the firm for the client reimbursements and, having failed to do so, he was unjustly enriched. Additionally, Claimant alleged that Respondent had a $72.54 deficit in his compensation account upon his termination. In the Matter of the FINRA Arbitration Between Cambridge Investment Research, Inc., Claimant, vs. Richard David Blythe, Respondent (FINRA Arbitration 17-03195, April 11, 2018)

In-House Legal Fees

In seeking damages, Claimant Cambridge sought. in part, the following as set forth in the FINRA Arbitration Decision:

2. Attorneys fees for in-house counsel's reasonable efforts to advise Respondent of the circumstances, determine whether arbitration would be required, and prepare and submit this claim, so long as this matter continues without hearing, and without discovery, in the amount of $2,500.00; 


The sole FINRA Arbitrator found Respondent Blythe liable to and ordered him to pay to Claimant Cambridge $13,522.93 in compensatory damages, $2,000.00 in attorneys' fees, and $1,050.00 in reimbursed filing fees.

Bill Singer's Comment

Sins of Omission or Comission?

FINRA Arbitration Decisions typically state that a Respondent has denied the allegations in the claim and asserted various affirmative defenses. Such a representation is absent from this Decision. In the event that the standard denials/assertions were made, FINRA needs to be more attentive when it comes to quality control over its published decisions. If the standard denials/assertions were not made, then the Decision should have noted that unusual fact.

ABA Model Rules of Professional Conduct

The cited Paragraph #2 above presents an unusual request for $2,000 in "in-house counsel" fees. As characterized in the FINRA Arbitration Decision, Claimant sought $2,500 "for in-house counsel's reasonable efforts to advise Respondent of the circumstances, determine whether arbitration would be required, and prepare and submit this claim . . ."  Let's reference  the American Bar Association's "Model Rules of Professional Conduct," which often serves as the basis for what a given state enacts as part of its laws governing the legal profession: 

Transactions With Persons Other Than Clients

Rule 4.2 Communication With Person Represented By Counsel

In representing a client, a lawyer shall not communicate about the subject of the representation with a person the lawyer knows to be represented by another lawyer in the matter, unless the lawyer has the consent of the other lawyer or is authorized to do so by law or a court order.

Transactions With Persons Other Than Clients

Rule 4.3 Dealing With Unrepresented Person

In dealing on behalf of a client with a person who is not represented by counsel, a lawyer shall not state or imply that the lawyer is disinterested. When the lawyer knows or reasonably should know that the unrepresented person misunderstands the lawyer's role in the matter, the lawyer shall make reasonable efforts to correct the misunderstanding. The lawyer shall not give legal advice to an unrepresented person, other than the advice to secure counsel, if the lawyer knows or reasonably should know that the interests of such a person are or have a reasonable possibility of being in conflict with the interests of the client.

Assuming that Blythe was not a "client" of Claimant's in-house lawyer during the periods of time covered under the purported provision of legal counsel, the provisions of Model Rules 4.2 and 4.3 would be applicable. It may well be that the in-house lawyer viewed Blythe as a client. prior to his departure from the firm or during the periods when the cited counsel was provided. Personally, I would find that "client" assumption troubling but there may be facts and circumstances that I am unaware of that could justify the belief. Regardless, consider me a skeptic of such a position at this point based upon what I know.

Lawyered Up

If Blythe was not deemed a "client" by Claimant's in-house lawyer during the relevant times during which the "reasonable efforts to advise" were going on, then pursuant to Model Rule 4.2, the in-house lawyer should not have been communicating with Blythe if he was represented by his own lawyer (absent his lawyer's permission). Although the FINRA Arbitration Decision asserts that Respondent Blythe was represented by legal counsel, we are not informed whether he was so represented during the dates when Cambridge's in-house counsel was allegedly providing him advice about what is expansively characterized as "circumstances."  


If Blythe was not represented by his own lawyer during the relevant times, then Claimant's in-house lawyer's conduct would likely have been guided by Model Rule 4.3, which obligates a lawyer to ensure that the unrepresented party is clear that the in-house lawyer is not a "disinterested" party; and, further, if there is a "reasonable possibility" that Blythe will have a conflict with Cambridge, then the firm's in-house lawyer "shall not give legal advice to an unrepresented person, other than the advice to secure counsel. . ." As set forth in the FINRA Arbitration Decision, Paragraph #2 isn't a pristine statement of all the dispositive facts required under Rule 4.3 but it does seem clear that the in-house counsel was providing legal opinion to a potential Respondent in an arbitration contemplated by Cambridge -- all of which implies the existence of an actual, likely, or potential adversarial, conflicted relationship between Blythe and Cambridge. 


To be clear and fair, I am NOT stating that the in-house attorney did anything improper or violated any professional ethical standards. What I am stating is that the FINRA Arbitration Decisions needed to be more precise in addressing the issue of reimbursing for in-house legal fees because of the two ethical considerations noted above. 

I would argue that it is better practice for a FINRA member firm to not seek any reimbursement for in-house counsel rendered to a employee or former employee prior to the institution of litigation against that individual. Claimant Cambridge was represented at the FINRA Arbitration by its in-house counsel and, as such, the firm could have simply sought reimbursement for its in-house counsel's time spent on filing the arbitration claims and trying the case. Perhaps that accounts for the discrepancy between the $2,500 sought and the $2,000 awarded, which, again, should have been explained in the Decision.

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