Monday, February 29, 2016

Undisclosed Conflicts Prevent Law Firm from Getting Paid

Sheppard, Mullin, Richter & Hampton LLP v. J-M Mfg. Co., Inc., No. B256314 (D2d4, as modified, Feb. 26, 2016)

Law Firm represented Client 1 in as a defendant in a qui tam litigation where the plaintiff/government agency intervenor was also arguably current client, albeit in totally unrelated labor and employment matters. There’s no specific waiver in Client 1
’s retainer letter permitting Law Firm to represent the agency in unrelated cases. And given the current representation of an adverse party at the time the letter was signed, the general advance waiver that was in the letter was potentially inadequate to give the requisite informed consent. 

Law Firm got DQed in the litigation. A fee dispute then ensued, which got compelled to arbitration at the Firm’s request, including the question of whether the retainer agreement was illegal for failing to make the conflict disclosure. The arbitrator awarded the Firm’s accrued fees and rejected the client’s demand for disgorgement. The trial court confirms the award. 

But the Court of Appeal isn’t having it. 

The gateway arbitrability issue touches on the “illegal contract” exception to the presumed validity of arbitration awards that was just addressed in Epic Medical case in my last post. Under long-standing California lawwhich differs from federal law under the FAAthe existence of a valid contract is a prerequisite to arbitration. So a challenge to the legality of the whole contract goes to the court in assessing arbitrability itself. Since the fee agreement expressly chose California law, that issue should have been decided by the trial court as a threshold question before any reference to arbitration was made. (In contrast, partial illegality, like in Epic Medical, can be addressed by the arbitrator, even under California law.)

Moving to the merits of the question, the Court finds that Law Firm violated Rule of Professional Conduct 3-310(C)(3) if it simultaneously represented clients who were on both sides of a litigation. Specifically, the rule says than “an attorney “shall not, without the informed written consent of each client . . . [r]epresent a client in a matter and at the same time in a separate matter accept as a client a person or entity whose interest in the first matter is adverse to the client in the first matter.” 

Since Law Firm supposedly knew at the time of Client 1’s engagement that it also represented the plaintiff/intervenor in other matters, it was incumbent on the Firm to disclose that and get Client 1’s consent before proceeding. The court notes that while a forward waiver for future engagements (which is clearly valid in California) must necessarily be general, when conflicting client relationships exist at the time of an agreement, the informed consent required under the rule needs to be more specific. The court adds that if the Firm didn’t figure out the conflict until later, it should have made a specific disclosure and gotten consent at that time, which the Firm here seems not to have done.

The court goes on to explain that the policy embodied in Rule 3-310 is so fundamental to the attorney-client relationship that agreements that violate it are facially unlawful. I.e., they are not just voidable, but void. According to the court, the conflicts rules are important not only in policing attorney conduct; they are core to protecting vulnerable members of the public in an important fiduciary relationship. Thus, although some lapses in the Rules of Professional Conduct may not be material enough to deny compensation, a breach of the substance of Rule 3-310 that pervades the whole attorney-client relationship is. Further, to deny compensation, the client needs not show that it was actually injured. Nor can the attorney recover alternatively on a theory of quantum meruit. So, it follows that Law Firm was not entitled to any fees for the work it performed while under a conflict between two current clients.

That all said, and somewhat oddly, the court ends the opinion by noting that there is apparently an unresolved fact dispute of whether the agency was, in fact, a current client at the time Client 1 retained the Law Firm. The Firm maintains that the agency was a prior client for whom an attorney-client relationship had lapsed quite awhile ago, only to be rekindled shortly after the retainer with Client 1 was signed. That gap would potentially change the analysis about whether the law firm breached Rule 3-310 as to Client 1. As noted, without a current conflct, a more general forward waiver applicable to future conflicts may have been enough. It’s not clear why this issue wasn’t previously raised with the trial court (or, for that matter, the arbitrator). But the court here nonetheless remands to the trial court to address the fact dispute and, if necessary, to calculate any fees to be disgorged if a violation is ultimately found.


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