Sheppard, Mullin, Richter & Hampton, LLP v. J-M Manufacturing Co., Inc., No. S232946 (Cal. Aug. 30, 2018)
Back in 2016, the Court of Appeal vacated an arbitration award in an attorney fee arbitration, holding that a law firm’s retainer agreement (and the arbitration clause within it) was completely void under Rule of Professional Conduct 3-310(C)(3) due to an undisclosed conflict of interest. At the time the client engaged the firm, the firm was adverse to the client in an unrelated matter. Thus, notwithstanding the agreement’s general forward conflicts waiver, there was no informed consent because the actual conflict was not specifically disclosed. And that meant the law firm couldn’t get paid anything and had to disgorge what it had been paid to date. The Supreme Court granted review.
There’s a threshold issue of whether the potential illegality of the contract for violating the RPCs is sufficient to merit vacation of of an arb award. That’s long been the rule in California, with courts holding that an arbitrator exceeds his or her authority, thus subjecting the award to vacation under Code of Civil Procedure § 1286.2(a)(4), by enforcing a contract that is illegal and against public policy. The Court here—in an opinion by Justice Kurger, joined by Justices Corrigan, Liu, Cuellar, and pro-tem Justice Nares—stands on that rule. It rejects the law firm’s argument that unlawfulness under the RPCs isn’t enough because the unlawfulness needs to violate a legislatively enacted statute, as opposed to a court-promulgated rule. So long as the violation renders the contract fully void—partial invalidity isn’t enough—an award can be attacked under § 1286.2(a)(4).
Which then begs the question: Did the failure to specifically disclose the conflict violate RPC 3-310 and if so, did that fully invalidate the retainer agreement? The Court holds it does. It reasons that: (1) based on the retainer agreement with the other client and the nature of the work performed, the other client counted as a current client; (2) because the representation of the other party was current at the time of the engagement, a general forward waiver wasn’t enough to give informed consent, which in the context of the duty of loyalty requires an attorney to disclose all material facts known to the attorney; and (3) that meant the representation violated Rule 3-310(C)(3) and thus that the agreement was void as against public policy.
But the Supremes part ways with the Court of Appeal on the effect of the invalidity. Unlike the Court of Appeal, the Supreme Court declines to hold that a violation of Rule 3-310 results in a per se requirement to disgorge any compensation. While forfeiture of compensation can be an appropriate remedy, that is not always the case. Relying on § 37 of the Restatement (Third) of the Law Governing Lawyers, the Court adopts a more flexible equitable rule. Whether and the extent to which the attorneys can obtain at least some compensation in quantum meruit turns on the flagrancy of the violation, the attorneys’ intent, harm suffered by the client, whether, notwithstanding the violation, the services rendered were of real value to the client, and the adequacy of other potential remedies. The trial court gets to deal with all this stuff on remand in the first instance.
Justice Chin, joined by the Chief, dissents on the fee issue. He reads the existing case law in a more pro-client fashion than the majority and would not rely so much on the Restatement. Justice Chin does not appear to require a per se rule, but it would be safe to describe his approach as almost per se. And under the facts as they exist, Justice Chin would say that the firm is not entitled to any compensation.
Court of Appeal reversed, in part.
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