In Sheppard, Mullin, Richter & Hampton, LLP v. J-M Manufacturing Co., Inc. (January 29, 2016 – No B256314), Division Four of the Second Appellate District rejected an advance waiver of conflicts included in a law firm’s standard retainer agreement because when events constituting a conflict eventually arose, the firm failed to disclose such a conflict to either of the affected clients (both of which had signed retainer agreements containing the subject ‘advance’ waiver), thus negating any reasonable possibility that either of them could be viewed as having given the “informed consent” to the firm’s representation required by the California Rules of Professional Conduct (RPC).
Rule 3-310(C)(3) of the RPC provides, “A member shall not, without the informed written consent of each client . . . [r]epresent a client in a matter and at the same time in a separate matter accept as a client a person or entity whose interest in the first matter is adverse to the client in the first matter.” “‘Informed written consent’ means the client’s … written agreement to the representation following written disclosure.” (RPC 3-310(A)(2).)
Here, since 2002, Sheppard, Mullin, Richter & Hampton LLP (“Sheppard Mullin”) had represented the South Tahoe Public Utility District (“South Tahoe”) in employment matters. In 2010, Sheppard Mullin was asked to represent J-M Manufacturing (“J-M”), a defendant in a large, multi-party “qui tam” case brought by more than 200 plaintiffs seeking more than $1 billion in damages, arising out of alleged failures of PVC pipe. South Tahoe was a municipal intervenor in the qui tam case but was represented by another firm.
Sheppard Mullin’s agreement with J-M contained an advance conflict waiver provision similar to the one in the South Tahoe agreement. In relevant part, it stated:
“Conflicts with Other Clients. Sheppard, Mullin, Richter & Hampton LLP 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.”
Sheppard Mullin’s conflicts check indicated that South Tahoe was an existing client. The firm’s assistant general counsel noted that South Tahoe had agreed to an advance conflict waiver and that Sheppard Mullin had not done any work for South Tahoe for five months. Its general counsel concluded that South Tahoe’s conflict waiver allowed the firm to represent J-M. Within three weeks of J-M executing the retainer agreement, however, Sheppard Mullin resumed working for South Tahoe in an unrelated employment matter. It did not notify South Tahoe or J-M of its concurrent representation and the resulting actual conflict.
When it discovered that Sheppard Mullin was representing J-M in the qui tam case, South Tahoe moved to disqualify Sheppard Mullin, which had by that point billed J-M more than $3.8 million. The trial court agreed. In a subsequent action, Sheppard Mullin sued J-M for unpaid fees, and the matter was sent to arbitration based on the applicable clause in the retainer agreement. In relevant part, the arbitrators denied J-M’s request for disgorgement of paid fees and ordered J-M to pay Sheppard Mullin’s outstanding fees. The trial court confirmed the award, and J-M appealed.
The appellate court determined that the provision quoted above could not be construed to constitute “informed consent” to waive a conflict by J-M under RPC 3-310(C)(3), explaining, “Written consent to all potential and actual conflicts in the absence of any knowledge about the existence of such conflicts cannot comply with the requirement of ‘informed written consent.’” Accordingly, because Sheppard Mullin violated this rule, which was central to the attorney-client relationship, the court concluded that its retainer agreement with J-M was unenforceable and Sheppard Mullin was required to return to J-M any fees incurred while the conflict between J-M and South Tahoe existed. With the precise timing of the conflict unclear, the court remanded the matter to the trial court to make that determination, which would dictate the amount of fees to be reimbursed to J-M.
This decision may be the death knell for any purported “advance” conflict waiver that is not immediately updated and consented by the client when any perceived potential or actual conflict comes to the surface. Law firms that use this language must be highly attuned to recognize when circumstances arise which require direct and specific disclosures to clients and corresponding conflict waivers. Detailed and updated conflicts checks and ongoing education of firm partners in the use of such systems are by far the most effective ways to avoid the foregoing outcome, which, at the end of the day, may cost Sheppard Mullin millions of dollars in legal fees.
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