April 2016 Vol. 16, No. 1
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Editors: David Majchrzak and Edward McIntyre
The first quarter of 2016 brings two cases that address issues of first impression. In Ardon, the California Supreme Court answered whether a City of Los Angeles records clerk’s inadvertent production of privileged documents, in response to a Public Records Act request, waived the privilege. The court of appeal had found that the Act provides no “inadvertent disclosure” exception. The Supreme Court unanimously reversed and held that such inadvertence did not waive privilege, thus upholding the requesting lawyer’s ethical obligations under Rico v. Mitsubishi Motors Corporation.
In Radcliffe II, the Ninth Circuit had to determine whether the California Supreme Court, which has not dealt with the issue, would apply the automatic disqualification rule of Flatt v. Superior Court in a class action, when class counsel had been found, in Radcliffe I, to be representing concurrent clients with direct, adverse interests — class representatives who would receive $5,000 incentive payments contingent on their approval of the settlement, and members of the class would receive substantially less. The court declined to apply the automatic disqualification rule.
Four of our cases deal with conflicts of interest: Sheppard Mullin; Ontiveras; Costello; and Radcliffe. Each presents a different context, from advance waivers to class actions to prior representations; each should be instructive.
As always, we welcome your comments and suggestions about recent decisions, authority, or issues we might address in future editions. For immediate questions, the Legal Ethics Committee maintains a hotline that SDCBA members can call at any hour: (619) 231-0781 x4145. Just follow the instructions and a Committee member will get back to you with ethics authority you might consider.
In This Issue
Among the questions answered by rulings abstracted in this issue of Ethics Quarterly are:
16.1.1 Martin Potts & Associates, Inc. v. Corsair, LLC (2016) 244 Cal.App.4th 432 — Second Appellate District, Division Two, January 28, 2016
Must a lawyer always disclose the reasons for his mistake, inadvertence, surprise, or neglect for his client to have a default judgment vacated under Code of Civil Procedure section 473, subdivision, (b)?
No. Although a statement of reasons would be helpful, and might sometimes be necessary to prove the causal link between the lawyer’s conduct and the default, default judgment, or dismissal, the statute does not mandate a statement of the reasons for the lawyer’s failure.
Martin Potts sued Corsair; when Corsair did not respond, Potts obtained Corsair’s default and then a default judgment. Corsair sought relief under Code of Civil Procedure, section 473, subdivision (b). Its managing member testified in his affidavit that he had received the complaint and other documents and, following long-time practice, had his assistant send them to the company’s lawyer of some 15 years. The lawyer testified that he had received the documents but that he had taken no action. He admitted, “[I]t was these failures on my part, as counsel for [Corsair] that allowed the default and default judgment to be entered in this matter,” and that “my failure to protect the interest of [Corsair] as its counsel is the sole reason the default was allowed to occur.” He declined, however, to “discuss the reasons for [his] failure to act in this matter.”
Potts opposed, unsuccessfully, the motion for relief from default. The court of appeal upheld the trail court’s setting aside the default and default judgment. It held that all section 473, subdivision (b), requires is a statement regarding who is to blame, not why. The court concluded that the reason for the lawyer’s mistake, inadvertence, surprise, or neglect is irrelevant because the mandatory relief provision entitles a party to relief even when the lawyer’s error is inexcusable.
The court also rejected Potts’s challenge to the adequacy of the lawyer’s statement, finding that it met the requirements of section 473, subdivision (b). It observed that the reasons for the lawyer’s failure would be helpful, and perhaps necessary to establish a causal nexus to the default, but that the lawyer’s bare-bones statement in this matter was sufficient.
16.1.2 Sheppard, Mullin, Richter & Hampton, LLP v. J-M Manufacturing Co., Inc. (2016) 244 Cal.App.4th 590 — Second Appellate District, Division Four, January 29, 2016 (modified February 26, 2016 - 2016 Cal. App. LEXIS 151)
Editors' Note: On April 27, 2016, the California Supreme Court granted review in this case. The Court of Appeal opinion is no longer citable authority.
Is a general, advance conflict-of-interest waiver sufficient to save a firm from a finding that it violated Rules of Professional Conduct, rule 3-310 in the circumstances of a simultaneous conflict between existing clients?
No and violation may result in denial of the attorney’s right to fees, requiring disgorgement. The court of appeal reversed the trial court and held that Sheppard Mullin’s advance conflict waiver did not shield it from a violation of rule 3-310 — the conflict of interest rule that requires all clients’ informed, written consent before a lawyer may represent more than one client with either potential or actual conflicting interests — and rejected the law firm’s argument that, the violation of rule 3-310 notwithstanding, it was still entitled to fees on a quantum meruit basis. Rather, the court ordered disgorgement of all fees from the date the conflict arose.
Sheppard Mullin represented J-M Manufacturing in a qui tam action for about 16 months, generating some $3.8 million in fees. A pre-engagement conflict check revealed that a Sheppard Mullin partner had previously represented one of the qui tam municipal plaintiffs in labor and employment matters.
Sheppard Mullin’s engagement agreement with J-M said:
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. We seek this consent to allow our Firm to meet the needs of existing and future clients, to remain available to those other clients and to render legal services with vigor and competence. Also, if an attorney does not continue an engagement or must withdraw therefrom, the client may incur delay, prejudice or additional cost such as acquainting new counsel with the matter.” (Italics added except for word “provided.”) We refer to this as the “conflict waiver provision.”
The firm’s in-house counsel assured the litigation partners responsible for the J-M Manufacturing representation that the advance conflicts waiver was sufficient for the firm to undertake the representation without the informed written consent of J-M Manufacturing and the municipal qui tam plaintiff. Then the labor and employment partner again resumed active representation of that municipal client in an unrelated matter.
The municipal qui tam plaintiff moved successfully for Sheppard Mullin’s disqualification. Sheppard Mullin then sued J-M Manufacturing, prevailed in arbitration and the trial court confirmed the award.
The court of appeal reversed. It found that Sheppard Mullin had violated Rule 3-310 by simultaneously representing clients with adverse interests, even though the representations were in different matters.
The court rejected the firm’s argument that the advance conflict waiver was sufficient:
[One partner] was working for [the municipal entity] while Sheppard Mullin was defending J-M against [the municipal entity] in the Qui Tam Action. It strains credulity to suggest that the Agreement constituted “informed written consent” of actual conflicts to J-M, when in fact Sheppard Mullin was silent about any conflict.
The court then declared the contract void as against the public policy that Rule 3-310 articulates.
Finally, relying on Goldstein v. Lees (1975) 46 Cal.App.3d 614 and Jeffry v. Pounds (1977) 67 Cal.App.3d 6, and cases that follow them, the court held that Sheppard Mullin was entitled to no fees, even on a quantum meruit basis, from the date the conflict existed:
We have found that Sheppard Mullin’s breach of the duty of loyalty set forth in Rule 3-310 was a violation of public policy. A finding that Sheppard Mullin was nonetheless entitled to its attorney fees as if no breach had occurred would undermine this same public policy. We therefore follow the reasoning of Goldstein and Jeffry and hold that Sheppard Mullin is not entitled to its fees for the work it did for J-M while there was an actual conflict with [the municipal entity].
Disgorgement, when sought as a tort remedy in cases not involving a serious ethical breach, may require evidence of actual damages to avoid providing the client with a windfall. But when a serious ethical breach is at issue, an attorney may not recover fees for services rendered. It makes no difference whether the fees have already been collected from the client or if the fees have yet to be paid. The court remanded the case for a determination whether an actual conflict existed from the outset of the engagement or from when the labor and employment partner again resumed work for the municipal entity.
16.1.3 Ontiveros v. Constable (2016) 245 Cal.App.4th 686 — Fourth Appellate District, Division One, February 18, 2016
May a lawyer continue to represent both a corporation and its majority shareholder and CEO in a derivative suit over the objection of a minority shareholder?
No. The lawyer may continue to represent the majority shareholder, but not the corporation. The minority shareholder alleged that corporate decisions regarding the buyback of a former shareholder’s interest and the leasing of property owned by the majority shareholder were improper.
Although the lawsuit began in December 2012, it was not until April 2014 that the minority shareholder moved to disqualify counsel from representing the corporation and the majority shareholder. He argued that disqualification was automatic since the corporation and majority shareholder had adverse interests regarding the derivative claims, and counsel could not continue to represent the majority shareholder because he had “derived sensitive confidential information” regarding the corporation’s position regarding claims against the majority shareholder. The majority shareholder disputed the minority shareholder’s standing to challenge the representation and argued that they had consented to joint representation.
Rules of Professional Conduct, rule 3-310 provides: “(C) A member shall not, without the informed written consent of each client: . . . 2) Accept or continue representation of more than one client in a matter in which the interests of the clients actually conflict . . . . (E) A member shall not, without the informed written consent of the client or former client, accept employment adverse to the client or former client where, by reason of the representation of the client or former client, the member has obtained confidential information material to the employment.”
Rule 3-600 permits a lawyer to concurrently represent an organization and its shareholders, provided they all knowingly consent to the joint representation. But the consent required by rule 3-310 “shall be given (1) by an appropriate constituent of the organization other than the individual or constituent who is to be represented, or (2) by the shareholder(s) or organization members.” Because the majority shareholder’s interests were adverse to the corporation due to the derivative action, they could not effectively consent over the minority shareholder’s objections.
But counsel could continue to represent the majority shareholder. There were only two shareholders. The majority shareholder was the CEO and was solely in charge of day-to-day operations, including selecting and working with counsel. Because there is no confidential information that a lawyer could receive from the corporation that is different than what could be received from the majority shareholder, continued representation of the shareholder posed no threat to the continuing duty of confidentiality to the corporation.
Finally, the court noted that the one-month delay in seeking disqualification of counsel did not waive the issue. Although failing to bring such a motion in a timely manner may result in delay, there was no prejudice here because the pleadings were not yet final, discovery was in progress, and no trial date had been set.
California State Bar Ethics Formal Opinion No. 1999-153 notes that, under rule 3-600(E) the consent by the shareholder or shareholders may include constituents who are part of the joint representation. But, the opinion was self-limiting. It noted that it “does not involve a derivative action,” and “joint representation of a corporation and one or more constituents in derivative actions involves different policy considerations which are beyond the scope of th[e] opinion.”
16.1.4 Costello v. Buckley (2016) 245 Cal.App.4th 748 – Fourth Appellate District, Division One, March 16, 2016
May an attorney who learns information while representing a client that is unrelated to that representation be adverse to the client in later litigation where that same information is material?
No. Attorney Robert Buckley represented his brother’s girlfriend, Leslie Costello, in an easement dispute. After Peter Buckley and Costello ended their relationship and after trial in the easement matter, Costello sued Peter Buckley for $92,000 she claimed to have loaned him. Peter Buckley asked his brother, Robert, to represent him. Robert Buckley propounded requests for admissions that Costello had given the money to Peter Buckley during a romantic relationship with no expectation of repayment. Costello successfully moved to disqualify Robert Buckley, claiming that he learned about Costello’s relationship with his brother when Robert Buckley represented her.
A lawyer may never “use against his former client knowledge or information acquired by virtue of the previous relationship.” Rules of Professional Conduct, rule 3-310(E) provides, “A member shall not, without the informed written consent of the . . . former client, accept employment adverse to the . . . former client where, by reason of the representation of the . . . former client, the member has obtained confidential information material to the employment.” Where an attorney's conflict arises from successive representation of clients with potentially adverse interests, and the former client has not consented to the current representation, disqualification follows as a matter of course.
Here, the successive representations were unrelated. So, there was no presumption that confidential information had been shared by Costello that would have precluded Robert Buckley from representing his brother in the second matter. But, Costello presented evidence that Robert Buckley, while representing her, acquired confidential information about the nature of the romantic relationship between her and his current client, Peter Buckley. Costello did not need to show that the confidential information was actually shared in the later representation, only that it could. The requests for admissions reflected that the defense was based, at least in part, on the romantic relationship and, therefore, that the confidential information could be used.
The court also discussed the potential prejudice caused by the delay in moving for disqualification. It concluded that a period of five months and the associated time and money spent on discovery do not amount to prejudice and delay so extreme as to justify toleration of a concurrent conflict of interest.
16.1.5 Ardon v. City of Los Angeles (2016) 62 Cal.4th 1176 — Supreme Court of California, March 17, 2016
Does a governmental entity’s inadvertent release of privileged documents in response to a Public Records Act request waive the attorney-client or attorney work-product privilege?
No. A unanimous court held that Government Code section 6254.5 — part of the Public Records Act that generally provides that “disclosure” of a public record waives any privilege — interpreted in light of the Act as a whole, applies only to intentional, not inadvertent, disclosure. A governmental entity’s inadvertent release of privileged documents under the Act did not waive either privilege.
In long-running litigation, the City of Los Angeles had resisted producing certain documents based on claims of attorney-client and attorney work-product privilege; it had listed them on a privilege log and had successfully quashed a third-party subpoena. Then, the plaintiff’s lawyer made a Public Records Act request that, by its terms, included some of the documents. The City produced three that, when plaintiff’s lawyer revealed she had them, the City claimed were privileged and had been inadvertently produced. Opposing counsel refused to return the documents.
The trial court and court of appeals agreed with the plaintiff that the Public Records Act provided no express “inadvertent disclosure” exception. According to the lower courts, once a document is disclosed, all privilege, without exception, is lost.
The Supreme Court reversed. It found that the Legislative history of section 6254.5 demonstrated that it was aimed at preventing “selective disclosure,” which is necessarily an intentional act, not inadvertent disclosure, which intends no disclosure at all.
The Court also reaffirmed its holding in Rico v. Mitsubishi Motors Corporation (2007) 42 Cal.4th 807, which had adopted the rule in State Compensation Insurance Fund v. WPS, Inc. (1999) 70 Cal.App.4th 644, that inadvertent disclosure during discovery did not waive attorney-client or work-product privileges. Rico also established the duties of California lawyers who receive such inadvertently disclosed documents to cease reading as soon as the lawyer reasonably knows the document is privileged and to notify the lawyer for the other party.
16.1.6 Radcliffe v. Hernandez (9th Cir. 2016) __F.3d __ 2016; 2016 U.S. App. LEXIS 5691, WL 1178732 — March 28, 2016
Does a direct, simultaneous conflict of interest between class action counsel and the members of the class require automatic disqualification of class counsel under California’s conflict of interest rules?
No. The Ninth Circuit, attempting to determine how the California Supreme Court would answer the question, decided that the automatic disqualification rule established in Flatt v. Superior Court (1994) 9 Cal.4th 275 and reiterated in People ex rel. Department of Corporations v. SpeeDee Oil Change Systems, Inc. (1999) 20 Cal.4th 1135, did not necessarily apply in class actions.
Previously, in Radcliffe v. Experian Information Solutions, Inc. (9th Cir. 2013) 715 F.3d 1157 (Radcliffe I), the court had held that a class action settlement in which $5,000 incentive awards to the class representatives conditioned on their approval of the proposed settlement created a conflict of interest between those class representatives and the members of the class who would receive substantially less. So, class action counsel had a direct conflict of interest under California Rules of Professional Conduct, rule 3-310(C) by simultaneously representing clients with conflicting interests. The court, accordingly, disapproved the proposed settlement and the attorney fee award.
On remand, a competing group of lawyers and their named plaintiffs sought disqualification of class counsel based on California’s automatic disqualification rule when a lawyer simultaneously represents clients with conflicting interests (Flatt, supra and SpeeDee Oil, supra). The district court denied the motion and the Ninth Circuit affirmed.
The circuit court acknowledged that it must apply California law in determining disqualification, following the “reasoned view of the state supreme court when it has spoken on the issue. . . . If the state supreme court has not spoken on the issue, we look to intermediate appellate courts for guidance, although we are not bound by them if we believe that the state supreme court would decide otherwise. [citation omitted].” The court acknowledged that California courts regularly apply Flatt’s automatic disqualification rule to lawsuits involving individual clients. But, no California Supreme Court or appellate court decision applied that rule to class actions; nor did any California case explicitly reject the application of the automatic disqualification rule to class actions. And neither Cal Pac Delivery, Inc. v. United States Parcel Service, Inc. (1997) 52 Cal.App.4th 1 (disqualification of class counsel who had offered to sell out the class for $8-10 million) nor Apple Computer, Inc. v. Superior Court (2005) 126 Cal.App.4th 1253 (class counsel also acting as named class representatives) explicitly applied the automatic disqualification rule.
The circuit court concluded that class actions are different from the individual actions in which Flatt and SpeeDee Oil applied an automatic disqualification rule.
In a class action, conflicts often arise not because an attorney simultaneously represents litigation adversaries but because they simultaneously represent different members of the same class who develop divergent interests regarding how to prevail on their shared claims.
Such was the case in Radcliffe I, when the court had held that the incentive payments to the class representatives conditioned on their approval of the proposed settlement created a conflict between them and other class members. i.e., a conflict among members of the same class of clients.
Because of this perceived difference, and because the California Supreme Court has never discussed the automatic disqualification rule in the context of class actions, that court, according to the Ninth Circuit, has never had to confront the ethical issues and conflicts of interest unique to class actions cases. As a consequence the Ninth Circuit is “not willing to assume that California courts would apply the same disqualification rules to a class action case as they do in individual plaintiff cases.” It agreed with the district court that California law does not require automatic disqualification for simultaneous conflicts of interest in class actions and affirmed.
American Bar Association Standing Committee on Ethics and Professional Responsibility Formal Opinion 473 – February 17, 2016
Obligations Upon Receiving a Subpoena or Other Compulsory Process for Client Documents or Information
The ABA revisited this issue that it had previously addressed more than two decades ago in Formal Opinion 94-385. Once again, the ABA concluded that lawyers should not passively comply with all requests for files. Rather, a lawyer receiving a subpoena relating to a client representation must take several steps. First, the attorney must consult with client regarding what information the client consents to be produced. The lawyer must then assert all reasonable claims to prevent disclosure of confidential information and seek to limit the subpoena or other initial demand on any reasonable ground. If the lawyer is ordered to disclose confidential or privileged information, then the lawyer must consult with the client to determine whether to produce the information or appeal. If the client is unavailable for consultation, the lawyer must make all reasonable efforts to prevent disclosure of any confidential information from the representation, but is not ethically required to appeal. When disclosing documents and information, the lawyer may reveal information only to the extent reasonably necessary, and should seek appropriate protective orders to limit access to the information.
Please note that, due to the break in continuity of publications, the volume number of Ethics Quarterly now matches the calendar year of publication and does not reflect the number of years that Ethics Quarterly has been published.