Top 2018 cases involving attorneys as defendants

While 2018 may not have distinguished itself as a landmark year for cases concerning attorneys as defendants, it did lay the groundwork for some fundamental changes which will affect attorneys in the years to come. As has been common in recent years, appellate courts in 2018 dealt with the causation standard in cases involving malpractice claims, the question of when the statute of limitations for claims against attorneys are triggered, the extent to which an undisclosed conflict may diminish the right of counsel to receive fees, and the reach of the civil conspiracy statute in claims alluding to conspiracy between attorney and client. The litigation privilege both in and outside the context of the anti-SLAPP statute also remained a common subject addressed by the appellate courts in 2018.

However, it was developments with respect to the rules of professional conduct applicable to attorneys and its related creation of new disclosure rules regarding mediation confidentiality, and fresh consideration of standard settlement agreement language which will perhaps have the most direct and long lasting influence on attorney conduct in coming years.

Causation Standard for Intentional Torts Attendant to Professional Liability Claims

In Knutson v. Foster, 25 Cal. App. 5th 1075 (2018), the court refused to apply the more strict, but-for causation test to claims rising beyond mere malpractice, holding that to the extent intentional conduct on the part of the attorney could be established, the lesser substantial factor test applied. Knutson involved claims by a collegiate swimmer who hired her attorney to enforce an oral promise of financial support made by the coach of a national swimming organization, which she relied on in abandoning a scholarship. According to the Knutson court, the attorney she hired fraudulently concealed his close ties to the organization and prior representation of the coach who made the promise, and correspondingly negotiated a settlement not in the best interest of his client, revealing confidential attorney-client communications along the way.

After the jury found in plaintiff's favor on her claims for fraudulent concealment and breach of fiduciary duty, the trial court ordered a new trial, concluding plaintiff had failed to prove she would have secured a better result with an unconflicted attorney, the burden she would have had to meet to prove a malpractice claim. Not so fast, explained the Court of Appeal, which held that the trial judge improperly applied the but-for causation test to the intentional claims. The Knutson court declared that the method of proving causation for claims of fraudulent concealment and intentional breach of fiduciary duty is the substantial factor test, rather than the but-for "trial within a trial method" typically associated with legal malpractice claims, because these torts, unlike claims for legal malpractice, are based on intentional, rather than negligent conduct.

Time will tell if that distinction will take root, as it may be equally likely that Knutson will be regarded as sui generis given the unusual fact pattern from which it emerged. (For a more detailed discussion of Knutson, see our Aug. 27, 2018. Daily Journal article).

Conflict Waivers

Disregarding conflicts is a good way for an attorney to not get paid, although as the California Supreme Court held in Sheppard, Mullin, Richter & Hampton, LLP v. J-M Manufacturing Co., Inc., 6 Cal. 5th 59 (2018), quantum meruit may still be available to recoup some amount of fees earned. In Sheppard, Mullin, the law firm was defending a manufacturer in a federal court matter initiated by numerous utility companies while simultaneously representing one of the utility companies in an unrelated state court matter. Although engagement agreements containing arbitration provisions and a waiver of conflicts were signed by both clients, the firm did not disclose the actual known conflict to either of its clients. When the conflict was revealed and the firm was disqualified in the federal matter, the firm sued the manufacturer for unpaid legal fees and moved for an order compelling arbitration. The manufacturer's cross-complaint asserted breach of contract and requested disgorgement of legal fees already paid to the firm.

The Supreme Court affirmed the Court of Appeal's reversal of the arbitration award in the law firm's favor, determining it to be an ethical violation for the firm to hide an existing conflict known at the time it sought a conflict waiver, and holding that the arbitration provision was therefore unenforceable. At the same time, in declining to establish a bright-line rule that would bar all compensation for services performed subject to an improperly waived conflict of interest, the Supreme Court pronounced it was up to the trial court to address the non-contract claims to determine whether the firm was entitled to any compensation at all. It held that -- at the trial court's discretion and depending on the circumstances -- some portion of the contractual fee might be available in quantum meruit for legal services performed that are otherwise unrecoverable due to a breach of an ethical duty to the client. The firm has the burden of demonstrating a lack of willfulness or egregiousness.

In a lengthy concurrence, Justice Ming Chin agreed with the majority that the conflict rendered the agreement entirely unenforceable , but argued that the known conflict should have precluded the firm from obtaining any recovery whatsoever in order to incentivize attorneys to comply with the Rules of Professional Conduct.

Statute of Limitations

The statute of limitations as a defense for attorneys remains as effective as ever. In Genisman v. Carley, 29 Cal. App. 5th 45 (2018), the court underscored that the limitations period applicable to malpractice claims against attorneys commences as soon as any inkling of the need for further investigation arises, and that even incurring nominal attorney fees is sufficient injury to trigger the limitations period. On those bases, the Genisman court affirmed summary judgment for the defendant in a malpractice action arising out of accusations that an attorney failed to properly disclose the nature of a transaction involving the sale of the plaintiff's ownership interest in two companies. The plaintiff alleged that defendant negligently omitted that the sale had been restructured in a way that exposed plaintiff to lawsuits, causing him to incur legal fees in defending himself. Despite plaintiff's plea that he did not understand how the attorney structured the transaction that created the exposure in the first instance, the Genisman court nevertheless held that plaintiff was put on inquiry notice (and should have conducted further investigation) as early as when he was threatened with a lawsuit by a former business associate based on the restructuring of the sale.

The mere threat that a lawsuit could arise from the attorneys' legal services was sufficient constructive notice, in the view of the Genisman court, to commence the one year within which the plaintiff must sue the attorney who handled the transaction. The court then found that the attorney fees plaintiff incurred to separate counsel in connection with the threatened lawsuit sufficed to constitute adequate actual injury even though the fees amounted to only a couple thousand dollars.

Meanwhile, in Austin v. Medicis, 21 Cal. App. 5th 577 (2018), the statute of limitations barred claims arising out of an attorneys' representation of the plaintiff in criminal proceedings. In a holding which the Austin court characterized as a matter of first impression, the court rejected the plaintiff's argument that the limitations period was tolled due to legal disability because he was held in pre-trial detention when the alleged misconduct by the attorney occurred. The Austin court distinguished pre-trial incarceration from post-conviction imprisonment for purposes of applying tolling, recognizing that legislative changes in recent years had expanded inmate access to the courts and yet had plainly not indicated any intent to extend tolling to those who had not yet been convicted of a crime.

Civil Conspiracy Claims Against Attorneys

Along the way, the court in Cortese v. Sherwood, 26 Cal. App. 5th 445 (2018), seemingly breathed new life into the attorney-client conspiracy statute, Civil Code Section 1714.10, which requires the plaintiff to first demonstrate a reasonable probability of prevailing, and obtain a prefiling order before pursuing an attorney for conspiring with a client. The trend had generally been to cast doubt on its application to most alleged conspiracy claims, but in Cortese, the court reinforced its viability, even extending the statute to causes of action not specifically referencing conspiracy.

In Cortese, the plaintiff alleged her stepfather breached fiduciary duties to her mother, and to her mother's trust, which reduced the plaintiff's eventual inheritance, "assisted" by her stepfather's attorney who she claimed "joined the wrongful conduct." While the trial court overruled the attorney's demurrer on grounds that plaintiff was not required to comply with prefiling requirements of Section 1714.10 since she did not "facially" bring a conspiracy claim, the Cortese court reversed, holding that the nature of the allegations implicated a conspiracy under the statute sufficiently to trigger the prefiling requirement despite the absence of any direct reference to the term "conspiracy."

Litigation Privilege

The importance of the public policy rationale underpinning the litigation privilege as a defense for attorneys embroiled in litigation filed by an underlying adverse party was again reinforced in Herterich v. Peltner, 20 Cal. App. 5th 1132 (2018), in which an alleged pretermitted son of the decedent sued counsel for the executor for representing in a petition to administer probate that the decedent did not have a son and for not providing the plaintiff with notice, which plaintiff contended deprived him from an inheritance. Although it clearly took a dim view of plaintiff's characterization of the probate filing, the Herterich court in any event emphasized that "[e]ven if these allegations are true, we join other courts that 'recognize the necessarily harsh result in extending a privilege to false and fraudulent statements made in the course of a judicial proceeding' because "'of the overriding importance of the competing public policy in favor of enhancing the finality of judgments and avoiding unending postjudgment derivative litigation -- a policy which places the obligation on parties to ferret out the truth while they have the opportunity to do so during litigation.'" In affirming summary judgment in favor of the attorney, the Herterich also left no doubt that an attorney's handling of probate matters falls well within the protection offered by the litigation privilege.

The court in MMM Holdings, Inc. v. Reich, 21 Cal. App. 5th 167 (2018), reached a similar conclusion to that in Herterich, likewise explaining that the litigation privilege may even apply to conduct deemed "unlawful." MMM Holdings arose out of the granting of an anti-SLAPP motion by an attorney accused of disseminating and refusing to return allegedly stolen, confidential and/or privileged company documents his client retained after being terminated, which were used to facilitate his client's pursuit of a number of actions against his former employer. The attorneys' client was the company's former President, who after his termination, alleged in a qui tam action, among others, that the company was involved in a massive fraud through its operation of Medicare Advantage plans in Puerto Rico.

The MMM Holdings court affirmed the anti-SLAPP order, determining, like in Herterich, that the litigation privilege is broad in reach, encompassing even allegedly "unlawful" conduct, and further, that because the plaintiffs provided access to Medicare for thousands of Puerto Ricans, the dissemination of the documents for purposes of exposing the alleged fraud was sufficiently related to matters of "public interest" to invoke the anti-SLAPP protection, as, at a minimum, "private conduct that impacts a broad segment of society and/or that affects a community in a manner similar to that of a governmental entity."

Conversely, the anti-SLAPP statute was not the way out of a case for the attorney in Yeager v. Holt, 23 Cal. App. 5th 450 (2018), sued by a former client for both malpractice and misappropriation of the likeness of the plaintiff, a famous World War II veteran who the attorney cited as a client on his website. At the same time it upheld the well settled principle that garden variety malpractice does not implicate the anti-SLAPP statute, the Yeager court further explained that "the fact that General Yeager is famous does not mean his claim of misappropriation of his name or likeness is itself a matter of public interest."

Although there were no published malicious prosecution cases in 2018 where an attorney was a defendant (often the type of case which elicits an anti-SLAPP motion in response), Lane v. Bell, 20 Cal. App. 5th 61 (2018), is worth noting because of its extensive analysis of the favorable termination element of the tort. In Lane, the court relied heavily on Crowley v. Katelman, 8 Cal. 4th 666 (1994), in affirming the granting of a summary judgment motion because the underlying action was not entirely resolved in favor of the underlying defendant.

"Approved as to Form and Content" in Settlement Agreements

The court in Monster Energy Co. v. Shechter, 26 Cal. App. 5th 54 (2018), recently interpreted the meaning of the ubiquitous phrase found in settlement agreements, "Approved as to form and content," and whether an attorney signing under this clause is bound by the agreement's confidentiality provisions if they explicitly prohibit both the parties and their attorneys from discussing the settlement. In holding that the attorneys were not parties to the settlement agreement, nor to its confidentiality provisions, the Monster Energy court interpreted the phrase to mean merely the attorneys "had reviewed the settlement agreement and had given their clients professional approval to sign it," but not that attorneys were necessarily bound to confidentiality themselves. That said, the Monster Energy court suggested an attorney who discloses confidential terms of a settlement agreement may still be liable under a third-party beneficiary theory or even derivatively through a claim by his or her client. In any event, that guidance will apparently be considered by the Supreme Court in 2020, as review was granted on Nov. 1.

New Rules of Professional Conduct, Including Mediation Confidentiality Disclosure

New rules of professional conduct also took effect on that same day, Nov. 1, affecting all facets of practice, from confidentiality, conflicts of interest, to the daily operations of a law firm and to having sex with one's client. A plethora of articles have been written on the new rules in this publication; suffice it to say, the new rules closely resemble the ABA rules. Still, it is a lawyer's professional responsibility to consult each of California's revised rules and their accompanying comments.

Turning to disclosure rules in the context of mediation, a lawyer is now required to make sure the client understands the implications of mediation confidentiality before the client agrees to mediation, including the possibility that malpractice committed during the course of mediation may not be actionable in a malpractice case because the communications that occur during a mediation are confidential (in the interest of promoting candor in mediated settlement negotiations, as detailed in Cassel v. Superior Court, 51 Cal. 4th 113 (2011) and its progeny). New Evidence Code Section 1129 requires a signed disclosure containing a detailed description of the confidentiality restrictions for statements made during mediation. A sample "Mediation Disclosure Notification and Acknowledgment" is included in Section 1129. The failure to comply with Section 1129 is not likely to lead to civil liability (because of mediation confidentiality itself), however the failure to comply with the disclosure requirement could possibly constitute a basis for attorney discipline, in which mediation confidentiality may not apply.

Have a happy, healthy and prosperous 2019, but be careful out there.