New California case – the consequences to the attorney for failing to disclose a conflict can be significant – possible disqualification and possible denial of fees

In Sheppard, Mullin, Richter & Hampton v. J-M Manufacturing Company, Inc. a motion to disqualify the law firm from representing a client was granted. The firm represented a manufacturing company in a federal qui tam action brought on behalf of a number of public entities, while at the same time also represented one of those public entities in matters entirely unrelated to the qui tam suit.

Although both clients executed engagement agreements that contained blanket waivers of all conflicts of interest, both current and future, the waivers failed to list the specific then existing actual conflict. Note, there was no evidence that the conflict in any way prejudiced either client, or that the firm breached any duty of loyalty, or that there was any intent to not disclose the conflict. The issue was simply that the firm failed, inadvertently, to satisfy a Rule of Professional Conduct, in this case the disclosure of an actual conflict involving current clients. The case pertained to Rule of Professional Conduct 3-310(C)(3), which is now Rule 1.7 as of November 1, 2018. The case is Sheppard, Mullin, Richter & Hampton (2018) 6 Cal. 5th 59, and is a California Supreme Court case.

In relevant part, the Court held that “To be informed, the client’s consent to dual representation must be based on disclosure of all material facts the attorney knows and can reveal.” The fact that the client was sophisticated, and also had corporate counsel who was involved, were irrelevant. “The transaction [i.e., the engagement agreement] was entered under terms that undermined an ethical rule designed for the protection of the client as well as for the preservation of public confidence in the legal profession.”

As a result, the law firm was disqualified from representing the manufacturing company client, and the engagement agreement was rendered unenforceable because when the client executed the conflict waiver the client had not been sufficiently informed of the conflict(s). The entire engagement agreement (including the arbitration clause therein) was held to be unenforceable.

The firm was then stuck in the position of having to prove entitlement to recovery of attorneys’ fees under quantum meruit. The case was remanded to the trial court on the quantum meruit issue – the attorneys’ fees issue had already been determined in a prior arbitration proceeding; however, that ruling was vacated because the arbitration clause which was in the engagement agreement also was invalid. Although the case was remanded on the quantum meruit issue, the decision contains a good discussion about quantum meruit and possible recovery thereunder, and what is required to establish recovery of attorneys’ fees under quantum meruit in a situation such as this, which isn’t a simple walk in the park.

Although in Sheppard, Mullin the existence of the actual, then existing conflict in was self-evident, you should be mindful that actual or potential conflicts can be numerous and need to be carefully considered in proceedings involving estate planning, or trust and estate administration, or the probate court. And you should also consider the possible applicability of not only Rule 1.7, but also Rules 1.9, 1.10, 3.7, 1.6, and possibly others. See also other posts on this blog pertaining to the revised Rules of Professional Conduct as of November 1, 2018.

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Every case situation is different. You do need to consult with professionals about your particular situation. This post is not a solicitation for services inside of or outside of California, and, of course, this post only is a summary of information that changes from time to time, and does not apply to any particular situation or to your specific situation. So . . . you cannot rely on this post for your situation.

Best to you, David Tate, Esq. (and inactive California CPA) – practicing in California only

Blogs: California trust, estate, and elder abuse litigation and contentious administrations; D&O, audit committee, governance and risk management