Sheppard Mullin vs. J-m Manuf.: a Lesson in Undisclosed Conflicts
| Publication year | 2019 |
| Author | By Steven Krongold |
By Steven Krongold
Steven L. Krongold specializes in business litigation. For the past 30 years, Mr. Krongold has litigated disputes involving trademarks, copyrights, trade secrets, invasion of privacy, cybersquatting, investment fraud, defamation, and other business-related torts. Mr. Krongold can be reached at the Krongold Law Corp., P.C., located in Orange County, CA.
In Sheppard, Mullin, Richter & Hampton, LLP v. J-M Manufacturing Co., Inc., 6 Cal. 5th 59 (2018), the supreme court ruled that a panel of arbitrators exceeded its powers and therefore vacated a $1.3 million award of attorney's fees obtained by a large, national law firm against its former client. The decision addresses an important and recurring issue facing the solo and small firm lawyer: enforceability of advance conflict of interest waivers and the potential forfeiture of fees for violation of ethical rules. Sheppard involved former Rule 3-310(C)(3) (concurrent or simultaneous representation of clients with conflicting interests). The issue is now governed by Rule 1.7. Nonetheless, Sheppard provides insight and guidance on advance waivers and when fees can be recovered despite the rule violation.
Sheppard Mullin is a large, national law firm that agreed to defend J-M Manufacturing Co. in a qui tam case. The plaintiffs alleged that J-M had misled customers, over 200 public entities around the country, on the strength of PVC pipes used in water and sewer systems. After performing a conflicts check, the firm learned that it represented one of the public entity interveners, the South Tahoe Public Utility District (South Tahoe), in employment-related disputes. Since South Tahoe had signed an advance waiver of conflicts in cases unrelated to employment matters, the firm concluded it could represent J-M in the qui tam action. The firm therefore entered into a retainer agreement with J-M which contained the following conflict waiver: "[Firm] 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 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."1
Sheppard Mullin did not tell J-M about its representation of South Tahoe before or at the time the engagement agreement was signed.
The engagement agreement contained an arbitration clause, providing that any dispute over fees that was not resolved through arbitration under the auspices of the California State Bar, would be resolved in "mandatory binding arbitration" conducted in accordance with the California Arbitration Act (CAA), California Code of Civil Procedure section 1282 et seq.2
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A few weeks after Sheppard Mullin began representing J-M, and over the course of the following year, the firm billed South Tahoe for about 12 hours of work.
A year after the engagement, South Tahoe's attorneys in the qui tam action (plaintiff's counsel) wrote to Sheppard Mullin asking why the firm had failed to inform South Tahoe of the adverse representation of J-M. Sheppard Mullin reminded South Tahoe of its earlier conflicts waiver. Dissatisfied, South Tahoe filed a motion to disqualify Sheppard Mullin in the qui tam proceeding. In July 2011, the district court granted the disqualification motion, ruling that Sheppard Mullin's simultaneous representation of South Tahoe and J-M had been undertaken without adequately informed waivers in violation of Rule 3-310(C)(3).3
Prior to its disqualification, Sheppard Mullin had performed 10,000 hours of work in the qui tam action and a related state court action. The firm's billings totaled more than $3 million, of which more than $1 million remained unpaid.
Despite being disqualified for violating Rule 3-301(C), Sheppard Mullin sued J-M for the unpaid fees. J-M cross-complained for breach of contract, accounting, and breach of fiduciary duty; it also sought disgorgement of fees previously paid.
The dispute was sent to a panel of three arbitrators who ruled in Sheppard Mullin's favor. They observed that "the better practice" would have been for the firm to disclose its representation of South Tahoe and seek J-M's specific waiver of the conflict.4 However, the arbitrators concluded...
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