Clients get notice, period

Last week, the California Supreme Court filed its opinion in Sheppard, Mullin, Richter Hampton, LLP v. J-M Manufacturing Company, Inc., 2018 DJDAR 8765 (Au. 30, 2018). The main issue was whether an advance waiver of unknown conflicts was enforceable against an aggrieved client. At stake was whether or not Sheppard Mullin would be required to forfeit its $4 million fee. At the end of the day, the advance waiver, as well as the rest of the fee agreement, were void as against public policy, but the case was remanded to determine what fee, if any, Sheppard Mullin was ultimately entitled to.

While this decision is likely to raise more issues than it resolved, the unmistakable takeaways are these: (1) Clients get notice. Period. No exceptions. And (2) attorneys, like everyone else, ought to get paid for the work they legitimately and competently perform.

Sheppard Mullin defended J-M Manufacturing in a qui tam action in which a pre-existing Sheppard Mullin client (on unrelated matters), South Tahoe Public Utility District, was a plaintiff. Sheppard Mullin relied, and ultimately doubled-down, on its advance-waiver provision in both the J-M Manufacturing and the South Tahoe fee agreements. Nevertheless, South Tahoe was successful in disqualifying Sheppard Mullin from the qui tam action. Then J-M sued for disgorgement of Sheppard Mullin's fee. J-M lost at an arbitration compelled by the same fee agreement, but ultimately won at the Court of Appeal.

Preserving the Sanctity of the Attorney-Client Relationship

There are no shortage of published cases declaring that the attorney-client relationship is one of the highest trust and fidelity. The J-M court reiterated that proposition when it held that South Tahoe was a current client of Sheppard Mullin, at the time Sheppard Mullin entered into its fee agreement with J-M Manufacturing. The entire case turned on this point: If South Tahoe were merely a former client on unrelated matters, then Sheppard Mullins' duty of confidentiality was at stake. But because South Tahoe was a current client, their duty of client loyalty was implicated. In the former instance, Sheppard Mullin might never have been disqualified in the first place because there was no "substantial relationship" between the South Tahoe and J-M Manufacturing representations. In the latter case, which the court found, disqualification was compelled absent South Tahoe and J-M Manufacturing's informed written consent.

The oral argument showcased this issue. Sheppard Mullin's counsel continually recited, in almost talismanic fashion, that the South Tahoe fee agreement was a so-called "framework agreement", which the Court of Appeal has held does not establish a current attorney-client relationship, but rather creates a current understanding about how future attorney-client relationships will be conducted on an as-needed basis. (After today, though, the "framework agreement" may become as much of a unicorn as the fabled "true retainer.")

All of the justices demurred on the grounds that client notice is cheap, easy, transparent and, by the way, an express requirement of the concurrent representation conflicts rule of Rule of Professional Conduct 3-310(C)(3).

And the opinion bears this out: Clients get notice. Period. Indeed, when this case was accepted for review, one of the court's three issues was whether a sophisticated consumer of legal services who is represented by counsel, could give informed written consent to an advance conflicts waiver. But the opinion ultimately relegates this to a non-issue: Every client, sophisticated or not, is entitled to actual notice of actual conflicts, without exception.

Basic Fairness

Nature abhors a vacuum, and the law abhors forfeitures. As unpopular a proposition as it may be, lawyers ought to get paid for the work they legitimately and competently perform. While it rightly offends public policy for the attorney to perform services for a client whom the attorney serves under divided loyalties, "[t]he Rules of Professional Conduct ... were not intended as a protection for clients who wrong their lawyers." In re Kirsh, 973 F.2d 1454, 1461 (9th Cir. 1992). The Court of Appeal in J-M blanked Sheppard Mullin from its entire $4 million fee. The Supreme Court reversed and remanded, relying on a familiar approach: A finder of fact must distinguish which work, if any, the attorney performed that was not performed under the cloud of the unconsented-to conflict, and what that work is worth.

Hardly new territory. Attorneys who have performed work under an illegal fee-splitting agreement can recover their quantum meruit. So can attorneys who have an illegal clause requiring the attorney's consent for the client to settle her case. So can attorneys who commit the unauthorized practice of law in California, at least for the services they have legitimately provided to a California client in their home state. Incidentally, none of those cases precipitated the bugbear of the "flood of litigation" Sheppard Mullin warned would occur in this case, either.

Does it matter that Chief Justice Tani Cantil-Sakauye joined in the dissent on this issue, or that the dissent was nearly as long as the majority opinion? Probably not, although that fact does punctuate the rising popularity of stripping lawyers of their fee. And while the dissent itself may not gain traction in the appellate courts, the chief justice's point of view will likely have some influence on setting policy in the State Bar Court, where the chief justice has recently signed orders appointing a new trial judge in the San Francisco office, and re-appointing the current presiding judge in the Review Department, which operates statewide.

Samuel was one of the attorneys who wrote an amicus brief on behalf of the Association of Discipline Defense Counsel, at which time he was the organization's president.