United States: Requisite Disclosures For Enforceable Advance Conflict Waivers

IN BRIEF

  • A recent California Supreme Court decision addresses the disclosures required under California law to make a client's advance conflict waiver enforceable.
  • The decision is not a repudiation of "advance" waivers generally, but a reminder that any client consent to waive a conflict must be an informed one.

On August 30, 2018, the California Supreme Court rendered a long-awaited decision in Sheppard, Mullin, Richter & Hampton, LLP v. J-M Manufacturing Co., Inc.1 Primarily, the case considers what disclosures are required under California law to make a client's "advance" conflict waiver enforceable. The decision also addresses when a dormant client is a "current" client and the extent to which a law firm may be entitled to payment for legal services rendered even in the face of a violation of the Rules of Professional Conduct.

Facts

J-M Manufacturing Co., Inc. (J-M) was sued in a qui tam lawsuit alleging misrepresentations about products sold to approximately 200 public entities nationwide. When the qui tam complaint was unsealed, some of those entities intervened as plaintiffs in the lawsuit.

During the litigation, J-M decided to replace its litigation counsel with Sheppard, Mullin.2 A conflicts check revealed that an attorney in a different Sheppard Mullin office had represented one of the plaintiffs, South Tahoe Public Utility District (South Tahoe), periodically over the previous eight years but only on employment matters.

The 2002 South Tahoe engagement letter, renewed in 2006, contained a prospective or "advance" waiver provision similar to what the court quoted from the J-M engagement letter:

Conflicts with Other Clients: Sheppard Mullin . . . has many attorneys and multiple offices. We may currently or in the future represent one or more other clients (including current, former, and future clients) in matters involving [J-M]. We undertake this engagement 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] (including appearance on behalf of another client adverse to [J-M] in litigation or arbitration) and can also, if necessary, examine or cross-examine [J-M] personnel on behalf of that other client in such proceedings or in other proceedings to which [J-M] is not a party 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 of [J-M] material to the representation of the other client. By consenting to this arrangement, [J-M] is waiving our obligation of loyalty to it so long as we maintain confidentiality and adhere to the foregoing limitations. We seek this consent to allow our Firm to meet the needs of existing and future clients, to remain available to those other clients and to render legal services with vigor and competence. Also, if an attorney does not continue an engagement or must withdraw therefrom, the client may incur delay, prejudice or additional cost such as acquainting new counsel with the matter.

Sheppard Mullin's general counsel analyzed the work the law firm had done for South Tahoe and determined that such employment-law-related legal work was not "substantially related" to the qui tam litigation. This standard, mentioned in the advance waiver provision, might be relevant under the Model Rules of Professional Conduct3 if South Tahoe had been a former, not a current, client (a question litigated in the case).

Note also that the language at the beginning of the quoted conflicts provision accomplishes nothing: Model Rule 1.10(a) (and now new California Rule 1.10(a)) provides that if one attorney in a law firm has a disqualifying conflict of interest, that attorney's conflict is imputed to every other lawyer in the firm, regardless of how many attorneys and how many offices the law firm may have.

Sheppard Mullin's general counsel also concluded that that the advance conflict waiver signed by South Tahoe would authorize the firm to undertake a representation adverse to South Tahoe. The firm did not, at that time, disclose its representation of South Tahoe to J-M but assured J-M that there were no conflicts preventing it from undertaking the proposed representation.

Procedural History

After commencing its representation of J-M, Sheppard Mullin provided additional employment-law-related legal services to South Tahoe. Thereafter, attorneys representing South Tahoe in the qui tam litigation became aware of Sheppard Mullin's representation of South Tahoe, and in March 2011 wrote Sheppard Mullin to assert the conflict. Sheppard Mullin responded by invoking the advance conflict waiver provision and arguing the adequacy of the firm's screening procedures (which apparently were established only after being contacted by South Tahoe's attorneys about the conflict).

When South Tahoe's counsel moved to disqualify Sheppard Mullin, the firm informed J-M about the alleged conflict for the first time. The disqualification motion argued that a general advance waiver was inadequate under California ethics rules because it did not constitute informed consent. Sheppard Mullin countered that (1) South Tahoe did not carry its burden of proving that it was a "current" client when Sheppard Mullin accepted the representation of J-M; (2) even if South Tahoe was a "current" client, it had signed a prospective waiver to future litigation against it; and (3) even absent the prospective conflict waiver, laches and waiver should preclude South Tahoe from succeeding on its disqualification argument. Sheppard Mullin also noted that in retaining its current law firm in the qui tam litigation, South Tahoe had agreed to a similar prospective waiver provision.

South Tahoe replied that it remained a current client. The scope of the engagement letter encompassed general employment matters, and the attorney-client relationship thereunder terminated only upon (1) written notice from either party or (2) completion of the "Matter," which by its nature was recurring. Notably, whether Sheppard Mullin's representation of South Tahoe is properly viewed as continuous or as a series of discrete, sequential engagements, there were many times when the firm was simultaneously representing both, including the representation of J-M adverse to South Tahoe. Furthermore, the putative waiver was arguably inapplicable to the qui tam matter in that Sheppard Mullin had pursued a California Public Records Act (CPRA) request against South Tahoe, while simultaneously providing legal advice to South Tahoe about how to respond to CPRA requests, thereby constituting a "substantially related representation."

On July 14, 2011, the federal court granted, without opinion, South Tahoe's motion to disqualify Sheppard Mullin.

Meanwhile, Sheppard Mullin had billed J-M approximately $3 million in the qui tam matter, with approximately $1 million uncollected. When the firm sued to collect the outstanding amount, J-M counterclaimed for breach of contract, breach of fiduciary duty, and fraudulent inducement and sought both an accounting and disgorgement of the $2 million already paid to Sheppard Mullin. Pursuant to the engagement letter, Sheppard Mullin sought compulsory arbitration. J-M resisted, arguing that Sheppard Mullin's conflict of interest rendered the engagement letter illegal and unenforceable, but the trial court ordered the parties to arbitration, where Sheppard Mullin prevailed.

The arbitrators concluded that the firm's failure to disclose its representation of South Tahoe and to obtain a specific waiver from J-M was an ethics violation, but not sufficiently serious or egregious to warrant forfeiture or disgorgement of Sheppard Mullin's fees. The conflict had not caused J-M any damage, and the services Sheppard Mullin rendered to J-M were not "less effective or less valuable."4 The arbitrators accordingly awarded Sheppard Mullin $1.3 million in fees and interest.

The Superior Court rejected J-M's objections and, holding that a violation of the ethics rules does not render a retainer agreement unenforceable, confirmed the award. The California Court of Appeals reversed, however, holding that concurrent representation of J-M and South Tahoe violated Rule 3-310(C)(3), notwithstanding the scope of the conflict waivers in the parties' respective engagement agreements, and this violation rendered the entire engagement agreement unenforceable. The Court of Appeals remanded the case for a finding as to when that concurrent representation began.

The California Supreme Court Decision

Sheppard Mullin petitioned for review on the following issues: (1) whether a court may invalidate an arbitration award on grounds that the agreement containing the arbitration agreement violates the public policy of the state as expressed in the Rules of Professional Conduct, as opposed to statutory law; (2) whether Sheppard Mullin violated the Rules of Professional Conduct in view of the broad conflicts waiver signed by J-M; and (3) whether any such violation automatically disentitles Sheppard Mullin from any compensation for the work it performed on behalf of J-M. The California Supreme Court granted review and rejected most of Sheppard Mullin's arguments. "California law holds that a contract may be held invalid and unenforceable on public policy grounds even though the public policy is not enshrined in a legislative enactment."5

Addressing the advance waiver provision, the court interpreted Rule 3-310(C)(3)'s requirement (essentially comparable to Model Rule 1.7(a)(1)) of informed written consent, confirmed in writing, to mean "informing the client of the relevant circumstances and of the actual and reasonably foreseeable adverse consequences to the client. . . ."6

The court rejected Sheppard Mullin's argument that when it began representing J-M, South Tahoe was a "former client" or a "dormant client" of the law firm, and that South Tahoe did not again become a "current client" until after its representation of J-M began. Sheppard Mullin's engagement letter with South Tahoe was open-ended, with the scope of the representation being described as "in connection with general employment matters (the 'Matter')" and, absent an earlier termination by either South Tahoe or Sheppard Mullin, the representation of South Tahoe would terminate "upon completion of the Matter."7 Sheppard Mullin had provided employment-law-related legal services to South Tahoe since 2002 and had done so as recently as November 2009, and again on March 29, 2010, less than a month after taking on the qui tam matter.

Under comparable circumstances, where a law firm and a client have had a long-term course of business calling for occasional work on discrete assignments, courts have generally held the fact that the firm is not performing any assignment on a particular date and may not have done so for some months—even years—does not necessarily mean the attorney-client relationship has been terminated. . . . Absent any express agreement severing the relationship during periods of inactivity, South Tahoe could reasonably have believed that it continued to enjoy an attorney-client relationship with its longtime law firm even when no project was ongoing.8

This conclusion became the linchpin for the rest of the decision.9

This result creates practical difficulties. Applying the current client conflict rules and the rule with respect to imputation of such conflicts makes enforceability of "advance" waiver provisions in engagement letters in the context of the realities of contemporary law practice a matter of grave concern.

The typical "advance" waiver—similar to the one in both the South Tahoe and J-M engagement letters—provides that the client is agreeing, at the outset of representation, that the law firm may undertake other representations adverse to the client so long as that other adverse representation is not "substantially related" to the matter for which the client is retaining the firm. This "substantially related" caveat is not adventitious; rather, it allows a firm to treat a "current client" as a "former client" for conflict-of-interest purposes vis-à-vis ABA Model Rule 1.9, whereby lawyers can be directly adverse to a former client without the need separately to secure the latter's consent, if the new matter adverse to the former client is not "substantially related" to the matter for which the attorney previously represented the former client. As such, an "advance" waiver is, and should be, a reasonable compromise between the attorney and the occasional or "dormant" client.

Nonetheless, if the California Supreme Court's conclusion that South Tahoe remained a "current client" of Sheppard Mullin from 2002 to May 2011 is accepted, the court's rejection of the application of the "advance" conflict waiver in the J-M engagement letter makes sense. That waiver provision attempted to cover both ongoing and future matters adverse to J-M; however, more disclosure was necessary to satisfy the requirements of informed consent.

The court's assessment of what constitutes informed consent had consequences of long-range significance:

  • First, the Sheppard Mullin advance waiver provision was inadequate. By not apprising J-M that a conflict was not merely possible in the abstract, but actually existed at the very moment the firm was asking J-M to waive any current or future conflicts, Sheppard Mullin had failed to disclose all relevant information. Disclosure that an actual conflict might exist but not that a concurrent conflict of interest actually exists is inadequate. "Simply put, withholding available information about a known, existing conflict is not consistent with informed consent."10
  • Second, the court held that "Sheppard Mullin's concurrent representation of J-M and South Tahoe violated rule 3-310(C)(3) and rendered the engagement agreement between Sheppard Mullin and J-M unenforceable."11 The court rejected the argument that violation of ethics rules regarding the obtaining of informed consent did not invalidate the entire engagement letter, which addressed many other issues.

It is true that Sheppard Mullin rendered J-M substantial legal services pursuant to the agreement, and J-M has not endeavored to show that it suffered damages as a result of the law firm's conflict of interest. But the fact remains that the agreement itself is contrary to the public policy of the state. The transaction 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. The contract is for that reason unenforceable.12

  • Third, the arbitral award was null and void because it arose from a mandatory arbitration provision in an unenforceable contract.

Nevertheless, the California Supreme Court rejected the conclusion of the court of appeals that because of the ethics violation Sheppard Mullin was "categorically barred" from recovering any fees. Although the Restatement13 contemplates that violating a duty to a client may require fee forfeiture, not all violations of the rules of professional conduct rise to that level. "The Restatement instructs, and we agree, that the egregiousness of the attorney's conduct, its potential and actual effect on the client and the attorney-client relationship, and the existence of alternative remedies are all also relevant to whether and to what extent forfeiture of compensation is warranted."14 Despite the stigma of an ethics violation, the decision allowed that recovery in quantum meruit might be possible if Sheppard Mullin could "show that the conduct was not willful, and its departure from ethical rules was not so severe or harmful as to render its legal services of little to no value to the client."15 Accordingly, the case was remanded to the trial court with these admonitions:

To be entitled to a measure of recovery, the firm must show that the violation was neither willful nor egregious, and it must show that its conduct was not so potentially damaging to the client as to warrant a complete denial of compensation. And before the trial court may award compensation, it must be satisfied that the award does not undermine incentives for compliance with the Rules of Professional Conduct. For this reason, at least absent exceptional circumstances, the contractual fee will not serve as an appropriate measure of quantum meruit recovery. Although the law firm may be entitled to some compensation for its work, its ethical breach will ordinarily require it to relinquish some or all of the profits for which it negotiated.16

Conclusion

The Sheppard Mullin litigation is not a repudiation of "advance" waivers generally, as some might have apprehended. It is, however, a reminder that any client consent to waive a conflict must be an informed one. Thus, when asking a client to sign an engagement letter with an "advance" waiver, lawyers should scrupulously disclose any known conflicts upfront.

Some uncertainty remains as to the treatment of "dormant" clients. Such dormant clients may or may not have a reasonable belief that they are still "current" clients. That places a premium on adequate disclosure to ensure enforceability of engagement letters in general and advance waivers in particular.

Footnotes

1 425 P.3d 1 (Cal. 2018).

2 The facts set forth herein are derived from the California Supreme Court's majority opinion, the concurring and dissenting opinions, the underlying California Court of Appeals decision, 244 Cal. App. 4th 590, 198 Cal. Rep. 2d 253 (Cal. Ct. App. 2016), and pleadings in the qui tam action, U.S. v. J-M Manuf., Inc. d/b/a JM Eagle, et al., Case No. 5:06-cv-00055-GW-PJW (C.D. Cal., filed Jan. 17, 2006). Except for key holdings of the California Supreme Court, citations to these documents will, in the interests of space, generally be omitted.

3 The "substantially related" language appears in Model Rule 1.9 (Duties to Former Clients) but not in Model Rule 1.7 (Conflicts of Interest: Current Clients). The same dichotomy holds true under Rules 1.7 and 1.9 of the new California Rules of Professional Conduct adopted in November 2018. No "substantially related" language appeared in the language of the prior California Rules of Professional Conduct in force at the time this matter arose (Rule 3-310(C)(3)).

4 Sheppard Mullin, 425 P.3d at 7.

5 Id. at 12.

6 Id. at 13 (quoting Cal. R. Prof. Conduct 3-310(A)(2), (1)).

7 Id. at 14.

8 Id. at 14–16. The California high court expressly linked an attorney's duty of loyalty to a current client to the requirement that a conflict waiver, to be informed, requires the attorney to disclose "all material facts the attorney knows and can reveal." Id. at 16. "An attorney or law firm that knowingly withholds material information about a conflict has not earned the confidence and trust the rule is designed to protect." Id.

9 But cf. Ky. Bar Assoc. Ethics Op. E-148 2–3 (July 1976) (internal citations omitted) (expressing doubt whether, absent special circumstances, frequency or length of time of prior employment of a lawyer should be dispositive of current versus former client status, unless the client pays a continuing retainer).

10 Sheppard Mullin, 425 P.3d at 17.

11 Id. at 14 (emphasis added).

12 Id. at 18.

13 See Restatement (Third) of the Law Governing Lawyers § 37.

14 Sheppard Mullin, 425 P.3d at 20.

15 Id. at 20. The court went on to say, "The law firm may have been legitimately confused about whether South Tahoe was [Sheppard Mullin's] current client when it took on J-M's defense, or it may in good faith have believed the engagement agreement's blanket waiver provided J-M with sufficient information about potential conflicts of interest, there being at the time no explicit rule or binding precedent regarding the scope of required disclosure. The conflict was, moreover, not one in which Sheppard Mullin represented another client against J-M." Id. at 24 (internal citations omitted).

16 Id. at 23–24 (internal citations omitted).

Author by: Keith Fisher, Shannon "A.J." Singleton

Originally publish in Business Law Today

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions