ETHICS QUARTERLY

A Service of the SDCBA Legal Ethics Committee

July 2004 Vol. 1, No. 2

INTRODUCTION This is the second edition of the Ethics Quarterly, covering cases from March 15 to June 15, 2004. It was prepared by Committee members Gino Serpe, of the Serpe law firm, and Luis Ventura, of Epsten Grinnell & Howell. Committee Chair Dan Eaton, of Seltzer Caplan McMahon Vitek, prepared the Commentary. Thank you to those who commented on the last issue. From the favorable feedback we received, it is clear the Bar membership values this service. In this issue, you will note a number to the left of each entry. The first two numbers indicate the volume and issue of the Quarterly. The third number indicates the order in which the case analysis appears. It will enable the Committee to index the Quarterly by topic at the end of the year, making it still more useful. The Ethics Committee is presenting a seminar entitled “The Ethics of Experts” on October 14 at 5:00 p.m. at the Bar Center. Attendees will receive 1.5 hours of MCLE credit in Ethics. For more details, please contact Ed West at the Bar Center. Comments or inquiries about the Ethics Quarterly or about the Committee’s other services, such as the Committee’s availability to provide Ethics seminars to individual practice sections at no cost, should be directed to Committee Chair Dan Eaton at eaton@scmv.com.
CASE NOTES
1.2.1	Rule: 3-700(D)(2): Termination of Employment/ Return of Unearned Fees
Case:	In the Matter of Roger M. Lindmark (Review Dept. 2004) __ Cal. State Bar Ct. Rptr. ___
Issue:	May a lawyer be subject to a public reproval for failure promptly to return unearned portions of sums he claims the client advanced for fees where the client contends the sums were advanced for costs and where the original fee agreement was never modified in writing to identify the purpose of the additional sums?
Holding:	Yes. Absent proper modification of a fee agreement that required any modifications to be in writing, the attorney was required to return the additional sums advanced and public reproval was warranted. The attorney “had a duty to execute the modification as prescribed by the [fee] agreement if he wished to earn extra sums as fees. Proper modification would have avoided any ambiguity and perhaps even the litigation surrounding the fee agreement and this disciplinary proceeding.”
1.2.2	CCP § 128.5: Monetary Sanctions
Case:	Olmstead, et al, v. Arthur J. Gallagher & Company (2004) 32 Cal. 4^th 804
Issue:	Does CCP § 128.5, which permits the recovery of monetary sanctions and attorneys’ fees, apply to bad faith litigation actions or tactics for lawsuits commenced after December 31, 1994?
Holding:	No. The Court unanimously held that § 128.5 does not apply to lawsuits or proceedings initiated after December 31, 1994. CCP §128.7 alone applies to all claims commenced after 12/31/1994, at least until its stated sunset date of January 1, 2006. “Section 128.6, which mimics the sanctions scheme set forth in section 128.5, only takes effect if section 128.7 is repealed. (§128.6, subd. (f).) The dates chosen for the operation of each of these statutes suggest that the Legislature did not intend for them to apply concurrently. Rather, they appear to establish a tripartite scheme, with section 128.5 governing in claims filed on or before December 31, 1994, section 128.7 governing in claims filed after that date, and section 128.6 governing in the event that section 128.7 is repealed.” Id., p. 813
1.2.3	B & P § 6200: Mandatory Fee Arbitration Act
Case:	Liska v. The Arns Law Firm (2004) 117 Cal. App. 4^th 275
Issue:	May a client who agrees to and loses a binding fee arbitration conducted pursuant to the Mandatory Fee Arbitration Act, Business and Professions Code § 6200 et seq., file a subsequent action for fraud and breach of contract against the attorney predicated on the same allegations of misconduct that formed the basis of the fee dispute?
Holding:	Yes. The client may file the subsequent action, but may not seek to recover as damages fees awarded to the client’s attorney in the binding MFAA arbitration. The client’s subsequent action was limited to damages that could not have been decided in the MFAA arbitration, such as the amount his recovery from the defendant in the underlying action was reduced because of the attorneys’ misconduct. “If the alleged misconduct of the attorneys based on which the client challenged the amount of fees that were due should support a claim for some other form of relief or measure of damages, the award does not preclude an action nor establish the facts [under principles of collateral estoppel] for purposes of such an action. On the other hand, no such action can be maintained if the only alleged damages are the very fees that the arbitrators have established the attorneys are entitled to receive.” Id., p. 287.
Note:	The client contended that the attorneys were not prepared for the mediation and as a consequence the settlement of $600,000.00 was far less than the approximately $1,600,000.00 the attorney told the client he could expect to receive.
1.2.4	State Bar Jurisdiction Over Misconduct Occurring in a Federal Proceeding
Case:	Gadda v. Ashcroft (9th Cir. 2004) 363 F.3d 861
Issue:	Does federal law preempt the California Supreme Court from disbarring an attorney for misconduct committed in his exclusively federal law practice, i.e., immigration law and are federal courts and agencies prohibited from using that disbarment as the basis of reciprocal disbarment in those federal forums?
Holding:	No. Federal law does not preempt California Supreme Court from disbarring attorney despite fact disciplinary violations occurred in attorney’s practice before federal courts and agencies. Because the Supreme Court of California had jurisdiction to disbar the attorney, the reciprocal disbarments by the Board of Immigration Appeals and the Ninth Circuit based on the state disbarment were valid.
Note:	The Ninth Circuit further held that even if the California Supreme Court had not disbarred the attorney, the Ninth Circuit itself had the power to disbar or suspend him from practicing before the Ninth Circuit and that it would have exercised that power because of the nature of the attorney’s misconduct. That power stems from Federal Rule of Appellate Practice 46(b)(1)(B), which allows disbarment for “conduct unbecoming” a member of the Court. The power also stems from the Court’s “inherent authority” over the regulation of attorneys who appear before the Ninth Circuit.
1.2.5	Evid. Code §§ 953(d) & 954(c): Attorney-Client Privilege
Case:	Venture Law Group v. Superior Court (2004) 118 Cal.App.4th 96
Issue:	Can individual former directors/ former majority shareholders of a merged corporation, who are defendants in a lawsuit brought by minority shareholders, cause a waiver of the merged corporation’s attorney-client privilege by asserting advice of counsel as a defense to the claims against them?
Holding:	No. The successor corporation of a merged corporation is the holder of the attorney-client privilege with respect to legal services a firm previously rendered for the merged corporation. The attorneys to the corporation that was merged could not be compelled to answer deposition questions about legal advice given to the corporate client about the merger. Neither the merged corporations’ minority shareholders nor its former directors/ majority shareholders hold the privilege. “After a merger, the attorney-client privilege of the corporation no longer in existence belongs to the successor corporation. That is because section 953, subdivision (d), provides that the successor of a disappeared corporation becomes the holder of the attorney-client privilege. . . . Thus, as long as there is a holder of the privilege in existence at the time disclosure is sought, the attorney has the duty to exercise the privilege unless the holder of the privilege instructs her not to do so.” Id., p. 103. (Citations and internal quotation marks omitted.)
Note:	When asked in a deposition to reveal the advice previously given to the now merged corporation, the attorney invoked the privilege on behalf of her former client (as an attorney is permitted to do by Evid. Code § 954(c)), and the Court of Appeal agreed noting that the attorney “had a duty to assert the privilege....” In its reasoning, the Court also noted that Rule of Professional Conduct 3-600(A) requires an attorney who represents an organization to conform his/her representation to the concept that the client is the organization itself acting through its highest authorized managing body and/or officer.
1.2.6	Rule: Evid. Code §§ 912, 956 Waiver of Attorney-Client Privilege/ Crime-Fraud Exception
Case:	Jasmine Networks, Inc. v. Marvell Semiconductors, Inc. (2004) 117 Cal.App.4^th 794
Issue:	Does a party waive the protection of the attorney-client privilege by inadvertently disclosing communications between the party and its attorney on the voicemail system of the opposing party?
Holding:	Yes. “The language of section 912, subdivision (a) is clear that the holder of the privilege . . . may waive it by disclosing the privileged information. . . . There is no requirement in the statute itself, nor in the cases interpreting the statute that the privilege holder intend to disclose the information when that [sic] the holder makes an uncoerced disclosure.” Id., p. 804.
Note:	This case arose from a trade secret dispute. Three executives of the defendant company with the defendant’s attorney on the line left a voicemail message for the plaintiff’s senior director of legal and business affairs. After leaving the message, the three executives failed to hang up the speakerphone and the ensuing conversation with their attorney that was recorded on voicemail. Because the executives discussed with their attorney possible theft of the plaintiff’s trade secrets, the Court of Appeal’s alternative holding was that the crime-fraud exception would have defeated the privilege, even if there had been no waiver. Id., pp. 805-808. “In an era where corporate fraud and boardroom misconduct is front-page news as well as prosecutions of accountants and lawyers in connection with such conduct, our courts are required to ensure that the attorney-client privilege is not used to promote or further any such conduct.” Id., p. 808.
1.2.7	Rule: Duty To Avoid Prosecution of Case Without Probable Cause
Case:	Zamos v. Stroud (2004) 32 Cal.4th 958
Issue:	Assuming the other elements of malicious prosecution are established, may an attorney be held liable for continuing to prosecute a lawsuit after s/he learned it is not supported by probable cause?
Holding:	Yes. The California Supreme Court unanimously held that even if a lawsuit was properly commenced, an attorney may be held liable for malicious prosecution for continuing to prosecute a claim after s/he discovered it lacked probable cause. “Continuing an action one discovers to be baseless harms the defendant and burdens the court system just as much as initiating an action known to be baseless from the outset. (Citation). As the Court of Appeal in this case observed, ‘It makes little sense to hold attorneys accountable for their knowledge when they file a lawsuit, but not for their knowledge the next day.’”
Note:	The facts of this case were very strong, complicated, and somewhat unusual. In the underlying fraud action, the plaintiff-client therein (the defendant in the subsequent malicious prosecution action), claimed that her defendant-lawyer (the plaintiff in the malicious prosecution case) had committed fraud by making certain misrepresentations about, inter alia, an agreement to continue to represent her in a prior legal matter. However, during hearings in the prior matter, including a hearing to be relieved as counsel, the client expressly acknowledged that the attorney was no longer going to represent her and consented to such withdrawal. In the separate fraud action brought by client, the attorney-defendant sent the transcripts from these proceedings to client’s new attorney. In arriving at its holding in the malicious prosecution case that the plaintiff-attorney had made out a prima facie claim, the Supreme Court quoted from these transcripts. Consequently, the client and her attorneys sought to prosecute an underlying claim for fraud that directly contradicted the client’s own statements in reported court proceedings.
	The Court noted that a party and/or attorney can avoid liability by dismissing a claim discovered to lack merit, by advising a client to dismiss such a claim, and/or by moving to withdraw as counsel, if necessary. Finally, the Court also noted, by way of example, that despite receipt of interrogatory answers appearing to present a complete defense, an attorney might act reasonably by going forward with the defendant's deposition in light of the possibility that the defense will, on testimonial examination, prove less than solid. The Court noted, however, that such a question presents a factual issue, and that further development of the rule will have to await another date.
1.2.8	B & P § 6200, et seq.: Mandatory Fee Arbitration Act
Case:	Aguilar v. Lerner (2004) 32 Cal. 4^th 974
Issue:	Does a plaintiff who files a legal malpractice lawsuit waive his rights to arbitration under the procedural protections of B & P § 6200, the Mandatory Fee Arbitration Act (MFAA)?
Holding:	Yes. Plaintiff waived his rights under the MFAA by filing a legal malpractice action. “At the time the parties entered into their agreement to arbitrate [in 1994], section 6201, subdivision (d) provided: ‘A client’s right to request or maintain arbitration under the provisions of this article is waived by . . . (2) seeking affirmative relief against the attorney for damages or otherwise based upon alleged malpractice or professional misconduct.’ That plaintiff filed a lawsuit against [his attorney] . . . is undisputed. Consequently, pursuant to the plain language of the statute, he waived his rights under the MFAA.” (Citations and footnote omitted, emphasis in the original.) In a footnote, the Court noted that the waiver language was retained, though “slightly reworded”, when the MFAA was amended in 1996.
Note:	The parties in this case arbitrated their dispute pursuant to the retainer agreement and the California Arbitration Act (CCP §1280, et seq.) after the attorney successfully petitioned to compel arbitration of the malpractice claims as well as the attorney’s own claim for unpaid fees and costs. Plaintiff was held to have waived the procedural protections accorded clients under the MFAA, i.e., the right to invoke arbitration at the client’s election. The attorney prevailed in the CAA arbitration, leading to the client’s appeal to the Supreme Court. The Court expressly did not decide three key questions: (1) “whether or to what extent an arbitration agreement [in a retainer agreement] is enforceable if a client properly invokes the right to arbitrate under the MFAA but subsequently exercises his statutory right to reject the arbitrator’s decision and have a trial de novo” (see, id., note 6); (2) whether the Federal Arbitration Act (9 U.S.C. § 1) preempts all or part of the MFAA (see, id., note 8); (3) because the arbitration agreement at issue was entered in 1994, any issues concerning the effect of the 1996 amendments to the MFAA, including an amendment limiting the parties’ ability to agree to binding arbitration under the MFAA to any time after the fee dispute arose. (see, id., note 8). In a concurring opinion, Justice Chin, joined by Justices Baxter and Brown, opined that, where a retainer agreement had a valid arbitration agreement, any “trial de novo” following a non-binding MFAA arbitration would itself be by binding arbitration. Were a Court of Appeal decision to the contrary good law, “that would mean that a client who agreed to binding arbitration could evade that agreement simply by requesting nonbinding arbitration. The lesson future clients who had agreed to binding arbitration would learn from this case is that if they want to evade their agreement, they must demand nonbinding arbitration whether or not they want it. . . . [I]t would require, as a prerequisite to evading the arbitration agreement, that the client pursue nonbinding arbitration. This would result in many sham nonbinding arbitrations that neither party wanted nor accepted.”
1.2.9	Rule 3-310(E): Avoiding the Representation of Adverse Interests
Case:	Derivi Construction & Architecture, Inc. v. Wong (2004) 118 Cal.App.4th 1268
Issue:	Must an attorney and law firm automatically be disqualified where the attorney is married to an attorney at a law firm that was previously disqualified in the same case?
Holding:	No. Courts, under certain circumstances, will impute knowledge of confidential information for purposes of disqualification of an attorney and his/her entire law firm under the presumption that confidential information has been shared where successive legal matters are substantially related. However, marriage alone does not create an additional presumption of the sharing of confidential information under RPC 3-310(E) and the petitioning party did not rebut the sworn declaration that the attorney at the substituted firm had not received confidential information from his wife.
Note:	Court refuses to adopt presumption of double imputation of confidential knowledge for vicarious disqualification based merely on the marital relationship of two attorneys. Under the petitioning party’s theory of disqualification, first, the wife’s colleague’s presumed confidential knowledge of the petitioning party gained through prior representation of the petitioning party was imputed to the wife. Second, the wife’s vicarious disqualification would extend to her husband, an attorney at another firm, based entirely on their marital relationship. In the Court’s view. “that carrie[d] the concept of vicarious disqualification too far.” The Court pointed out that the petitioning party offered no authority to support its theory of disqualification.
	Prior case law supported the contrary rule, i.e., it will be presumed that despite a marital relationship, attorneys will maintain client confidences. “Attorneys are members of an ancient, honorable and deservingly honored profession. We call them officers of the court. Let’s practice what we preach and treat them with the respect they have earned.”
1.2.10	Rule 3-300 : Avoiding Interests Adverse to a Client
Case:	Fletcher v. Davis (2004) 33 Cal. 4^th 61
Issue:	When an attorney wishes to secure payment of hourly legal fees and costs of litigation by obtaining a charging lien against a client's future recovery, must the attorney obtain the client's consent in writing?
Holding:	Yes. The California Supreme Court unanimously ruled that Rule 3-300 of the Rules of Professional Conduct, requiring the client's informed written consent to the attorney's acquisition of an interest adverse to the client, applies to a charging lien to secure payment of an hourly fee. “[A] charging lien grants the attorney considerable authority to detain all or part of the client’s recovery whenever a dispute arises over the lien’s existence or its scope. That would unquestionably be detrimental to the client. (Citation). A charging lien is therefore an adverse interest within the meaning of rule 3-300 and this requires the client’s informed written consent.”
Note:	The Court explained that Rule 3-300 merely requires the attorney who wishes to obtain such a lien to explain the transaction fully, to offer fair and reasonable terms, to provide a copy of the agreement, to give the client an opportunity to seek independent legal advice, and to secure the client's written consent. “This is not a great deal more than is now required for most fee agreements. . . .” The Court found that it is reasonably foreseeable the charging lien could become detrimental to a client. For example, a charging lien could significantly impair the client's interest by delaying payment of the recovery or settlement proceeds until any disputes over the lien can be resolved. The Court in footnote 3 also limited its holding to liens securing hourly fees and thus did not decide whether Rule 3-300 applies to a contingency-fee arrangement coupled with a lien on the client's prospective recovery in the same proceeding.
1.2.11	Rule 3-310 (E): Avoiding the Representation of Adverse Interests
Case:	City & County of San Francisco v. Cobra Solutions, Inc. (2004) 2004 Cal.App.LEXIS 882; 2004 Daily Journal DAR 6962
Issue:	“Does the City Attorney’s prior representation [in private practice] of the target of a public investigation in matters substantially related to that investigation require vicarious disqualification of the entire City Attorney’s office?”
Holding:	Yes, by a divided Court. “[T]his case involves a unique subset of private-public migration in which the attorney leaves private practice to become the head of a public law office. Where the attorney leaves private practice to become the head of a public law office, we hold that vicarious disqualification of the entire public law office generally is required in all matters substantially related to the head of the office’s prior representation. . . . [¶] When the disqualified attorney is the head of a public law office, it raises special concerns that an ethical screen cannot adequately address.” (Emphasis in the original).
Note:	The Court of Appeal noted that automatic disqualification of an entire public law office might be inappropriate where the conflicted attorney is someone else and where “an assiduously observed ethical screen” might suffice to address the important competing public and private concerns such questions present. The Court also qualified its holding to “exclude the situation where the former client has inexcusably postponed making a motion to disqualify its former counsel, resulting in prejudice to the current client. In that situation, the trial court must have discretion to deny the motion.” Id., note 8.
	The Court started its analysis by quoting from Rule 3-310(E) of the Rules of Professional Conduct, which as noted in the analysis of the Derivi Construction & Architecture, Inc. case in this issue of the Ethics Quarterly, generally prohibits representation of a new client in a subsequent matter against a former client where the matters are substantially related, without first obtaining the written informed consent of the opposing clients. In this case, the court reasoned that where the conflicted attorney is the head of a public law office, an ethical screen will not suffice to address the concern that the public’s faith in the integrity of the legal system will be compromised, in that the public will be left to wonder whether the city attorney’s former client will be treated more leniently because of its connections, or whether it will be treated more harshly because of past confidences. “Neither perception is consistent with the notion that the power of the state to prosecute fraud will be exercised in an even-handed and impartial manner.” Among other points, Justice Simons’s dissent called for a reassessment of “the rigid vicarious disqualification rule in successive representation cases and eliminat[ion of] the conclusive presumption that the disqualified attorney will share confidences with current members of his or her firm.” “The current set of categorical rules that rigidly apply vicarious disqualification in certain contexts were developed decades ago. The realities of a modern law practice compel a more flexible approach. Lawyers are increasingly mobile, and mid-career shifts between the public and private sectors and within the private sector are common.” Justice Simons also questioned whether the majority holding could be limited as a matter of principle to the head of a public office. “The [majority’s] rule rests on policy grounds that, in large offices, would seem to apply to any supervisor with authority over hiring, firing, and promotions that could be abused.” Dissent, note 4.

IMPORTANT UPDATE: On June 9, 2004, the California Supreme Court unanimously granted review in Rico v. Mitsubishi Motors Corp., abstracted in the last issue of Ethics Quarterly, and previously reported at (2004) 116 Cal.App.4^th 51. Rico held that disqualification was required where counsel received an opposing counsel’s work product summary of technical evidence, used those notes to impeach opposing experts, and distributed copies of the notes to his associates and his own experts.

Disclaimer: Counsel should read the full text of the cases discussed before relying on the necessarily limited discussion of them here. Counsel also should be mindful that some of the Court of Appeal cases addressed may be subject to depublication or review by the California Supreme Court. All cases should therefore be checked to confirm they are citable.

COMMENTARY: THE UNINTENDED CONSEQUENCES OF

A CLIENT’S BALK

Daniel E. Eaton[1]

In baseball, where a pitcher balks, by making a feint or illegal motion, the runners on the opposing team advance. The pitcher, of course, does not intend that result, but the consequences flow from the pitcher’s observed actions rather than his asserted intention. Two cases addressed in this issue of Ethics Quarterly show the consequences from client actions equivalent to a balk.

In Aguilar v. Lerner (2004) 32 Cal. 4^th 974, the California Supreme Court held that a client relinquished his right to the procedural protections of the Mandatory Fee Arbitration Act (MFAA) when he sued his attorney for malpractice. The consequence of the client’s filing a lawsuit – whether the client intended it or not – is that the former attorney may advance his claims for fees unencumbered by the procedural advantages the MFAA otherwise gives to the client.

The client in Jasmine Networks, Inc. v. Marvell Semiconductors, Inc. (2004) 117 Cal.App.4^th 794 relinquished the protections of the attorney-client privilege when three of the client’s employees inadvertently communicated with the client’s attorney in the virtual presence of the other side. The three employees of a defendant accused of the theft of trade secrets made a call with their attorney on the line to the plaintiff’s director of legal and business affairs. When the director was not there, they continued talking to their attorney after leaving an intended voice mail but before hanging up. The consequence of this unintended “motion” by the clients and their attorney was an outright waiver of the attorney-client privilege over their communication and the unencumbered right of the opposing side to use that communication to advance their trade secrets claim.

The lesson of these cases for clients and counsel advising them is to be attentive, be very attentive when making a move. A wrong move could lead to the unintended consequence that the adversary is placed in a position to score unearned procedural points.

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[1] Daniel E. Eaton is a shareholder at the law firm of Seltzer Caplan McMahon Vitek and is Chairman of the SDCBA Legal Ethics Committee. The views expressed are his alone and are not necessarily those of the SDCBA or SCMV.