When Does a Demand Letter Cross the Line?

By Joshua Walthall, former State Bar prosecutor and current professional licensing attorney in Raleigh; Christian Smith-Bishop, Editor in Chief of Volume 45 of the Campbell Law Review; and Lucy Harrill, Campbell Law student and Special Assistant to North Carolina Supreme Court Chief Justice Paul Newby.

After obtaining a $20.7 million class-action verdict from Kimberly-Clark^[i] and making over a hundred appearances on various television talk shows^[ii], attorney Michael Avenatti’s once-rising star plummeted. While facing allegations of domestic violence and charges for tax evasion, wire fraud, and identity theft, Avenatti decided to leverage “the power of his platform” to extort Nike by demanding money in exchange for silence on the company’s allegedly illegal practices.^[iii]  This scheme eventually landed Avenatti in jail for 30 months. 

At the outset, I followed Avenatti’s rise and fall with frank indifference and even boredom; it was a rather common tale. But when he was charged with and later convicted of extortion for making demands on behalf of a client, I decided to care (at least a little) about his story, with one key question in mind: Have any of my rather nasty demand letters—many of which have demanded money—risen to the level of extortion?  Even with almost a decade’s worth of experience as an attorney prosecuting misconduct as a Deputy Counsel at the State Bar, I didn’t know where the line was, and I decided, with Avenatti’s situation in mind, to find it. This article is the result.

Applicable Rules of Professional Conduct

The North Carolina Rules of Professional Conduct govern the lawyers of North Carolina, and the North Carolina State Bar enforces those Rules.^[iv] Four Rules may impact a lawyer’s demand letter: Rules 3.1, 4.1, 4.4, and 8.4.^[v] 

Rule 3.1 requires that all claims or contentions be meritorious, and not frivolous.^[vi]  A claim is “frivolous” when “the lawyer is unable either to make a good faith argument on the merits of the action taken or to support the action taken by a good faith argument for an extension, modification or reversal of existing law.”^[vii]  Further, “good faith” is measured by an objective, rather than subjective, standard.^[viii]

Rule 4.1 provides that during “the course of representing a client a lawyer shall not knowingly make a false statement of material fact or law to a third person.”^[ix]  Rule 4.1 deals with the lawyer’s actual knowledge rather than his or her intent.^[x]  It applies to statements of facts or law, rather than to mere opinions.^[xi]  Materiality is determined by whether the statement of fact or law “will not mislead the opposing party.”^[xii]

Rule 4.4(a) provides that during representation “a lawyer shall not use means that have no substantial purpose other than to embarrass, delay, or burden a third person, or use methods of obtaining evidence that violate the legal rights of such a person.”^[xiii]  This Rule is not focused on the effect of the lawyer’s conduct; instead, the focus is on the purpose of the lawyer’s conduct.^[xiv]

Rule 8.4(b) applies whenever a lawyer commits a criminal act that is grounds for a disciplinary offense.^[xv]  No actual “criminal complaint, prosecution, or conviction” is required.^[xvi]  In the context of demand letters, Rule 8.4(b) effectively requires a “nexus” between any threatened criminal complaint and the civil matter to avoid “compounding a crime.”^[xvii] Because compounding a crime “reflects adversely on the lawyer's honesty, trustworthiness or fitness as a lawyer,” it triggers a Rule 8.4 violation.^[xviii]  This would clearly apply to a lawyer engaging in extortion using a criminal matter as leverage.^[xix]

The prohibition in Rule 8.4(c) applies to statements made with reckless disregard for truth or falsity and to grossly negligent misstatements.^[xx]  Moreover, Rule 8.4(d) provides that “it is professional misconduct for a lawyer to . . . engage in conduct that is prejudicial to the administration of justice.”^[xxi]  The North Carolina Court of Appeals has invoked this subsection to cover misconduct that does not fall only within the realm of litigation^[xxii]; the conduct need only have “a reasonable likelihood of prejudicing the administration of justice.”^[xxiii]

Case Law

In North Carolina, the crime of extortion^[xxiv] occurs when one “threatens or communicates a threat . . . to another with the intention [of] wrongfully obtain[ing] anything of value or any acquittance, advantage, or immunity[.]”^[xxv]  “Wrongful,” in this context, is defined by the manner in which an individual attempts to obtain information.^[xxvi]  In 2012, the court of appeals noted that “an individual . . . commit[s] extortion when he is seeking to obtain something to which he may be entitled in an unlawful or unjust manner as well as when he seeks something that he is not entitled to obtain.”^[xxvii] 

North Carolina courts have recognized that the use of a demand letter to threaten litigation is not by itself extortion.^[xxviii]  The North Carolina Court of Appeals explained in Harris v. NCNB Nat’l Bank of North Carolina that enclosing within a demand letter an unfiled complaint to induce a settlement “whether the claim be ultimately determined to be well founded or not” is not “in itself” duress or coercion sufficient to constitute extortion because the enforcement of “one’s claimed legal rights” is not wrongful or coercive conduct.^[xxix]  More pointedly, courts have held that even if such a threat is made with “distasteful” language, it is not extortion.^[xxx]  

For example, in Georgia, an attorney sent a demand letter on behalf of his client that threatened to use a video depicting an allegedly nonconsensual sexual encounter between a homeowner and his housekeeper as evidence in possible “public litigation” unless the homeowner settled.^[xxxi]  The Georgia Supreme Court held that because the demand letter did not allege any threat (express or implied) to release the video to anyone outside of the potential litigation if the homeowner did not settle, the fact that the evidence to be used in the litigation would be embarrassing did not change the fact that the threat of litigation, by itself, was not unlawful or extortionate.^[xxxii]

            In contrast, Flatley v. Mauro is a prime example of a demand letter crossing the line.  In that case, the California Supreme Court held that Mauro, an attorney representing an alleged rape victim, was guilty of extorting a dance performer named Flatley.^[xxxiii]  Shortly after the victim had called police to report a rape, Mauro sent a demand letter on the victim’s behalf to Flatley.^[xxxiv] In the letter, Mauro requested a settlement of at least one million dollars, and he warned that a failure to pay within the time limit would result in both a lawsuit and the transmission of the legal filings to numerous national and international news outlets—strategically selected to coincide with Flatley’s dance company’s scheduled performances.^[xxxv]  The letter also included the police report number.^[xxxvi]  After this, Mauro made repeated phone calls to Flatley’s counsel threatening to publicize the alleged rape as well as additional unspecified violations of various laws if payment was not forthcoming.^[xxxvii]  Flatley’s counsel sued Mauro for civil extortion.^[xxxviii] 

The California Supreme Court stated that “a threat that constitutes criminal extortion is not cleansed of its illegality merely because it is laundered by transmission through the offices of an attorney.”^[xxxix]  The court reviewed Mauro’s conduct beginning with the letter itself.^[xl]  The letter, attached to the court’s opinion, did not leave anything to the imagination: In bold, capitalized letters in an enlarged—and sometimes underlined—font, Mauro proclaimed variously that the details of the lawsuit would “become a matter of public record, as it must be filed with the court,” and that other “information [would] be exposed.”^[xli]  At the bottom of the letter, beneath Mauro’s signature, was a final paragraph that contained the nearly fifteen specific news outlets he threatened to notify at the filing of the lawsuit, along with the not-so-subtle warning that “[w]e are positive the media worldwide will enjoy what they find.”^[xlii]

If the events in Flatley occurred in North Carolina, Mauro’s conduct would probably have violated Rules 4.1, 4.4, and 8.4.  The letter’s inclusion of a police report number, “as if to hold a police investigation over” the alleged wrongdoer,^[xliii] would almost certainly be a Rule 4.1 violation.  Mauro’s scheme was to file just enough of a “report” to lead Flatley to believe he was under a police investigation and yet to not destroy Mauro’s leverage of going public.  The threat of the publication to news media outlets where Flatley was touring would be sufficient to subject Mauro to a Rule 4.4(a) violation because the purpose of the publication had no substantial purpose but to embarrass and burden Flatley.  Moreover, Mauro would have violated Rules 8.4(a) and (b) because he violated other Rules and would likely be criminally liable for extortion.^[xliv]

One final case from North Carolina also provides some guidance.  In N.C. State Bar v. Livingston, attorney Livingston entered a contractual arrangement with a company called Credit Collections Defense Network (CCDN).^[xlv]  Under the agreement, Livingston was to provide legal services to debt-laden customers of CCDN in exchange for a portion of the fees CCDN collected from these customers.^[xlvi]  CCDN’s practice of preparing court documents for pro se litigants apparently troubled Livingston.  Several months later, without disassociating from the company, Livingston filed four lawsuits against the various entities associated with CCDN on behalf of former CCDN customers alleging numerous violations of law.^[xlvii]   All four lawsuits were ultimately dismissed.^[xlviii]  In his fifth and sixth lawsuits, Livingston targeted the law firms that defended CCDN.^[xlix]  Eventually, Livingston sent a demand email to the law firms, stating he was willing to settle for $3 million dollars but that if the firms failed to settle, Livingston would continue filing lawsuits at the rate of one per month for the remainder of the year.^[l]  Livingston was careful to note in the email that each lawsuit would have its own written discovery and depositions.^[li]

Ultimately, the court of appeals concluded that Livingston’s conduct was a violation of Rule 4.4 because Livingston’s “substantial purpose” was to coerce a settlement, rather than to make a legitimate use of the legal process.^[lii]  The court stated that by “threatening to join and joining the defendant lawyers in the federal action when there was no basis in law or fact to do so, Livingston used means that had no substantial purpose other than to embarrass or burden a third person in violation of Rule 4.4(a), [and] brought claims for which there was no basis in law or fact”—in clear violation of Rule 3.1.^[liii]

Conclusion

Perhaps the best way to avoid extortion is by simply remembering that any threat made in a demand letter must be well-founded (see, e.g., Rules 4.1, 8.4(d)) and not an abuse of the criminal process (see, e.g., Rules 3.1, 4.1, 4.4, 8.4(a), (b), (d)).  To avoid a Rule 8.3(a) violation, “the lawyer and client must actually intend to present the criminal charges if the civil claim is not resolved to their satisfaction.”^[liv]  Moreover, as held by the Georgia Supreme Court, the threat of negative publicity is not of itself improper ^[lv]—but there are limits.  In the context of extortion, the primary concern for the lawyer centers on the way in which the threatened publicity occurs.^[lvi]  And as with criminal or disciplinary threats, threats of multiple lawsuits are problematic if the underlying claim(s) are without merit, per Rules 3.1 and 4.4. 

To summarize:

• If a demand letter contains a threat of a criminal complaint, then the lawyer making the threat must actually intend to present the criminal charges if the demand is not satisfied.
• Further, a threatened criminal complaint itself must:
  1. be well-founded in fact or law;
  2. arise from the same operative facts as the civil demand; and
  3. not be an abuse of the criminal process.
• Generally, a demand letter should not convey threats of consequences—or of professional discipline, in the case of a lawyer-recipient—unless a reasonable, good faith basis to believe the conduct warrants it, and a substantive purpose exists for the threat. The same requirements apply to demands for financial renumeration: such demands are not in and of themselves improper, but the demanding party should have a plausible right to the renumeration in law and fact. 
• Neither a demand letter—nor its threatened consequences—can be used for the sole purpose of embarrassing the other party.
• Don’t lie in demand letters, period—whether about the facts, law, consequences, evidence, damages, next steps, or your intentions.
• And, though it goes without saying, never send demand letters that contain threats of civil lawsuits that are objectively without merit.

ENDNOTES:
[i] Dani Kass, Kimberly-Clark, Halyard Get $450M Punitives Slashed, Law360 (Apr. 2, 2018 5:29 PM) https://www.law360.com/articles/1028650/kimberly-clark-halyard-get-450m-punitives-slashed (on file with author).

[ii] Joe Concha, Michael Avenatti has Appeared on CNN and MSNBC 108 Times Since March 7, Says Free Beacon, The Hill(May 11th, 2018 3:31 PM), https://thehill.com/homenews/media/387325-michael-avenatti-has-appeared-on-cnn-and-msnbc-108-times-since-march-7-says [https://perma.cc/8J8L-64ST].

[iii] Kim Mustian & Larry Neumeister, Avenatti Sentenced to 2 ½ Years in Prison for Extortion, The Associated Press (Jul. 8, 2021) https://apnews.com/article/michael-avenatti-nba-sentencing-sports-health-30982af5b85ce95fc8baf9704191f5ed (last visited May 11, 2022).

[iv] In North Carolina, “the State Bar and the courts of North Carolina ‘share concurrent jurisdiction over matters of attorney discipline’ and . . . ‘questions relating to the propriety and ethics of an attorney are ordinarily for the consideration of the North Carolina State Bar.’”  North Carolina State Bar v. Sutton, 250 N.C. App. 85, 94, 791 S.E.2d 881, 890 (2016) (quoting N.C. State Bar v. Randolph, 325 N.C. 699, 701, 386 S.E.2d 185, 186 (1989) (citation omitted)).

[v] Immigration Prosecution to Gain an Advantage in a Civil Matter, 2005 Formal Ethics Op. 3, N.C. State Bar (Jul. 14, 2005).

[vi] N.C. Rule Pro. Conduct 3.1.

[vii] Id.

[viii] Douglas R. Richmond, Saber-Rattling, and the Sound of Professional Responsibility, 34 Am. J. Trial Advoc. 27,, at 31–32 (footnotes omitted).

[ix] N.C. Rule Prof. Conduct 4.1.

[x] Richmond, supra note viiiat 32 (footnote omitted).

[xi] Id.

[xii] 2 Geoffrey C. Hazard Jr., W. William Hodes, & Peter R. Jarvis, The Law of Lawyering,  § 40.03at 40-11 (4th ed. 2016).

[xiii] N.C. Rule Pro. Conduct 4.4(a).

[xiv] Richmond, supra note viii at 34 (footnote omitted); see also Hazard Jr. et al, supra note xii at § 43.04, at 43-9.

[xv] Hazard Jr. et al, supra note xii at § 43.04, at 43-9.

[xvi] See N.C. Rule Pro. Conduct 8.4 cmt. 3 (“If it is established by clear, cogent, and convincing evidence that a lawyer committed a criminal act that reflects adversely on the lawyer's honesty, trustworthiness, or fitness as a lawyer, the lawyer may be disciplined for a violation of paragraph (b) although the lawyer is never prosecuted or is acquitted or pardoned for the underlying criminal act.”)  See also Richmond, supra note viii at 37 (footnote omitted).

[xvii] Compounding a crime is when consideration is received in exchange for not reporting a crime.  Richmond, supra note viiiat 49 n.176.  Clearly, forgoing a criminal complaint in exchange for a settlement would qualify.  Id.

[xviii] N.C. Rule Pro. Conduct 8.4(b).

[xix] Richmond, supra note viii at 50.

[xx] N.C. Rule Pro. Conduct 8.4(c); Richmond, supra note viii at 37 (footnote omitted).

[xxi] N.C. Rule Pro. Conduct 8.4(d).

[xxii] See Richmond, supra note viii at 36–37 (footnotes omitted).

[xxiii] North Carolina State Bar v. Livingston, 257 N.C. App. 121, 133, 809 S.E.2d 183, 192 (2017) (quoting Sutton, 250 N.C. App. at 105, 791 S.E.2d at 897).

[xxiv] The tort of extortion does not appear to be recognized in North Carolina, see Godfredson v. JBC Legal Grp., P.C., 387 F.Supp.2d 543, 555 (E.D.N.C., 2005), but neither the North Carolina Supreme Court nor the North Carolina Court of Appeals has definitively foreclosed recognition.  See Free Spirit Aviation, Inc. v. Rutherford Airport Auth., 191 N.C. App. 581, 586 n.3, 664 S.E.2d 8, 12 (2008); Hester v. Hubert Vester Ford, Inc., 239 N.C. App. 22, 32, 767 S.E.2d 129, 137 (2015) (“we decline to use this case to recognize a cognizable tort of common law extortion under North Carolina law.”).

[xxv] N.C. Gen. Stat. Ann. § 14-118.4 (West, Westlaw through S.L. 2022-75 of the 2022 portion of Legis. Sess.).  See also Harris v. NCNB Nat’l Bank of North Carolina, 85 N.C. App. 669, 675, 355 S.E.2d 838, 843 (1987).

[xxvi] See Flatley v. Mauro, 139 P.3d 2, 20 (Cal. 2006) (noting that in the crime of extortion “[i]t is the means employed [to obtain the property of another] which the law denounces” (citing California v. Beggs, 172 P. 152, 154 (Cal. 1918)).); see also Falcon Brands, Inc. v. Mousavi & Lee, LLP, (2022), reh'g denied (Feb. 17, 2022), review denied (May 11, 2022) (“[I]t is the threat to reveal damaging information, not any subsequent revelation, that makes the conduct illegal when the threat is linked to a monetary demand.”)

[xxvii] State v. Privette, 218 N.C. App. 459, 476, 721 S.E.2d 299, 312 (2012).

[xxviii] Indeed, “[a] statement of intention to file suit to enforce one's claimed legal rights is neither a threat nor the exercise of unlawful or wrongful coercion [sufficient for attempted extortion].”  Harris v. NCNB Nat’l Bank of North Carolina, 85 N.C. App. 669, 676, 355 S.E.2d 838, 843 (1987).  Also, creative attempts to characterize a demand letter sent in anticipation of litigation naming plaintiff in a proposed complaint as defamation, or extreme and outrageous conduct sufficient for intentional infliction of emotional distress fail too.  Id. at 676, 355 S.E.2d at 844. 

[xxix] Harris, 85 N.C. App. at 676, 355 S.E.2d at 843.  In this North Carolina case where plaintiff was referred to in a communication from one lawyer to another regarding a lawsuit with plaintiff’s employer, the plaintiff sued the first lawyer for, inter alia, “attempted extortion.”  Id.  The court of appeals dismissed this argument.  Id. at 670, 355 S.E.2d at 840.

[xxx] Various Markets, Inc. v. Chase Manhattan Bank, N.A., 908 F. Supp. 459, 468 (E.D. Mich. 1995) (citing Harris and noting that even alleged threats to “destroy[]” a person through litigation, there was no extortion because such threats are “not unlawful coercion” (emphasis in original)).  Note, however, that such threats may be ethical violations under Rule 4.4(a).  See infra.

[xxxi] State v. Cohen, 807 S.E.2d 861, 866 (Ga. 2017).

[xxxii] Id. at 868.

[xxxiii] Flatley, 139 P.3d at 24.

[xxxiv] Id. at 5.

[xxxv] Id. at 8, 24.

[xxxvi] Id. at 23.

[xxxvii] Id. at 8–9, 22–23.

[xxxviii] Flatley, 139 P.3d at 5.

[xxxix] Id. at 21.

[xl] Id. at 19–22.

[xli] Id. at 21.

[xlii] Id. at 8. The repeated phone calls only served to buttress the conclusion that Mauro extorted Flatley because, as the court noted, “any doubt as to the extortionate character of the letter is dispelled” by Mauro’s disinterest in negotiations and objection to Flatley’s counsel’s reasonable investigation of the rape allegations. Flatley, 139 P.3d at 23–24.

[xliii] Id. at 23.

[xliv] Whether Rule 3.1 would be violated is a closer question, and on the facts of the case, only two brief observations will be made.  First, by its terms, Rule 3.1 does not readily apply outside of litigation. See Richmond, supra note viii at 30–31.  Here, the subject of the litigation was not strictly whether the victim was in fact raped; instead, the question turned on Mauro’s defense that the Anti-SLAPP statute should shield Mauro’s demand letter and phone calls.  Flatley, 139 P.3d at 5–6.  It is in fact irrelevant to Rule 3.1 that the fact of the rape was disputed, id. at 6, because this fact alone would not make a claim “frivolous”; the question of a Rule 3.1 violation would here turn on whether Mauro had a “good faith” claim for his argument of the application of the anti-SLAPP statute to his extortionate conduct.  It may, if the “reasonable attorney” standard would have demonstrated that “a complete absence of actual facts or law that a reasonable person could not have expected the court to rule in his favor.”  Richmond, supra note viii at 31 (footnote omitted). 

[xlv] Livingston, 257 N.C. App. at 122, 809 S.E.2d at 186.

[xlvi] Id., 809 S.E.2d at 186.

[xlvii] Id. at 123, 809 S.E.2d at 186.

[xlviii] Id. at 123 n.1, 809 S.E.2d at 186.

[xlix] Id. at 124, 809 S.E.2d at 186–87.

[l] Livingston, 257 N.C. App. at 124, 809 S.E.2d at 187.

[li] Id. at 141–142, 809 S.E.2d at 196.

[lii] Id. at 145, 809 S.E.2d at 198.

[liii] Id. at 138-39, 809 S.E.2d at 195.

[liv] Richmond, supra note viii. at 44 (emphasis added) (footnote omitted).

[lv] See, e.g., Cohen, 807 S.E.2d at 868–69 (discussed supra).

[lvi] Id.