Monday, February 1, 2016
C.A. Cites Conflict of Interest, Overturns Huge Fee Award
Justices Say Sheppard Mullin Cannot Get Paid for Work Done While Representing Adversary in Other Matters
By KENNETH OFGANG, Staff Writer
A law firm may not collect fees for representing a party in litigation if it was simultaneously handling unrelated matters for the opposing party, the Court of Appeal for this district ruled Friday.
Div. Four overturned an arbitration award in favor of Sheppard, Mullin, Richter & Hampton, which billed J-M Manufacturing Co., Inc. some $3.8 million for its defense of litigation against plaintiffs including the South Lake Tahoe Public Utility District. J-M claims it doesn’t owe the fees because firm partner Jeffrey Dinkin, a labor and employment lawyer, was representing the district at the same time the firm was representing J-M.
The Court of Appeal, in an opinion by Justice Audrey Collins, said it was unclear when the conflict actually existed, and said the issue must be resolved on remand since it was not decided in the trial court.
The ruling came in an appeal from an order of Los Angeles Superior Court Judge Stuart Rice, confirming the arbitration award, totaling about $1.7 million with post-award interest, and denied J-M disgorgement of fees it had already paid. Collins said Rice erred in allowing the arbitration panel to determine whether the alleged conflict barred Sheppard Mullin from getting paid its fees.
That decision was for the judge to make, Collins said, adding that the arbitrators got the issue wrong.
The underlying action was a qui tam suit against J-M and another defendant brought on behalf of some 200 public entities, including the federal government and seven states. The complaint sought over $1 billion in damages allegedly caused by substandard PVC pipe sold by the defendants.
The action was filed in 2006, but Sheppard Mullin didn’t enter the case until early 2010, when J-M decided to change counsel. The firm represented J-M for the next 16 months and billed approximately 10,000 hours on the case.
Prior to the firm being retained, according to evidence, Sheppard Mullin attorneys ran a conflicts check and discovered that DInkin had done work for the utility district, one of a number of local entities that had intervened in the action filed by an ex-employee of J-M. Dinkin said in a declaration that he had represented the district at his previous firm, and brought it to Sheppard Mullin as an existing client
The district signed an engagement agreement with the firm when Dinkin arrived there, and renewed it in 2006. Dinkin said he did as-needed work for the district between 2006 and November 2009.
The attorneys who did the conflicts check, however, were told by the firm’s general counsel that it could represent J-M because the district had signed an advance conflict waiver.
They advised J-M of the possibility that Sheppard Mullin might “currently or in the future represent one or more other clients” in matters involving J-M, and that it would represent J-M “on the condition that we may represent another client in a matter in which we do not represent [J-M], even if the interests of the other client are adverse to” J-M...”provided the other matter is not substantially related to our representation of [J-M] and in the course of representing [J-M] we have not obtained confidential information.”
J-M agreed to this conflict wavier, including an express waiver of Sheppard Mullin’s obligation of loyalty “so long as we maintain confidentiality and adhere to the foregoing limitations.”
J-M’s general counsel, however, subsequently declared that she was never given an explanation of the need for the conflict waiver and that she was assured there were no conflicts in representing the company in the qui tam action, although she did not offer edits to the waiver and ultimately executed the agreement on the company’s behalf.
In March 2011, the attorney representing the district in the qui tam action wrote Sheppard Mullin complaining that the firm had a conflict of interest as a result of its representation of the district, which the firm had billed for less than 12 hours of work, including telephone conversations and work on employment matters, in the previous year. The firm responded that the advance conflict waiver in its agreement with the district permitted it to represent an adverse party, as long as the matters were unrelated and there was no disclosure of confidential information.
In June 2011, U.S. District Judge George H. Wu of the Central District of California granted the district’s motion to disqualify Sheppard Mullin from the qui tam action. He held the advance waiver unenforceable and rejected the firm’s suggestion it could continue representing J-M if it dropped the district as a client.
The judge suggested that the firm could continue to represent J-M if the district’s claims were split off and J-M retained separate counsel to litigate them, but the firm said no. It also tried to get a waiver from the district in exchange for a cash payment plus 40 hours of free services in employment matters, but the district rejected the offer.
J-M then demanded that Sheppard Mullin write off its outstanding fees and return what it had already been paid. When the firm refused, J-M sued.
The Superior Court judge, in granting a motion to compel arbitration, said the issue was not one of illegality, but of fraud in the inducement, which he said was subject to arbitration under the parties’ agreement. The arbitrators concluded that Sheppard Mullin had acted in good faith and that the remedy sought by J-M would be inequitable.
In confirming the award, Rice said the arbitrators had the authority to determine not only whether there was an ethical violation, but also whether that violation rendered the entire agreement unlawful or whether counsel could collect its fees despite the violation.
Collins, however, emphasized that the issue was whether the contract was illegal in its entirety. “Under California law, a challenge to the legality of an entire contract that contains an arbitration provision must be determined by the trial court, not the arbitrator,” she said.
As to the substantive issue, she went on to say, J-M was correct. Simultaneous representation of clients with conflicting interests violates Rule 3-310(C)(3) of the Rules of Professional Conduct, absent the “informed consent of each client,” the jurist noted. An advance waiver is unenforceable, the justice said, because it isn’t “informed.”
The firm, she pointed out, didn’t apprise J-M or the district of the actual conflict created when DInkin resumed doing work for the district three weeks after the firm was retained in the qui tam suit.
The violation, she added, was sufficiently egregious to render the entire retainer agreement illegal as a matter of public policy. She cited numerous cases for the proposition that “the attorney’s duty of undivided loyalty that forms the basis of Rule 3-310 constitutes the very foundation of an attorney-client relationship.”
Attorneys on appeal were Kent L. Richardson, Barbara W. Ravitz, and Jeffrey E. Raskin of Greines, Martin, Stein & Richland for the defendant and Gibson, Dunn & Crutcher’s Kevin S. Rosen, Theane Evangelis, and Heather L. Richrardson for the plaintiff Sheppard Mullin.
The case is Sheppard, Mullin, Richter & Hamption, LLP v. J-M Manufacturing Co., Inc., 16 S.O.S. 619.
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