April 2016

Attorney Beware: Conflicts of Interest May Still Be Costly Despite the Limited Review of Arbitration Awards

By Andrew Servais

Wingert, Grebing, Brubaker & Juskie, LLP

Fee disputes between attorneys and clients are frequently arbitrated rather than litigated in court.   Many disputes are submitted to the San Diego Bar Association’s Fee Dispute Arbitration Program, where any award is non-binding unless the parties agree otherwise.  (Bus. & Prof. Code § 6204.)

When arbitration is binding, Code of Civil Procedure section 1286.2 provides the award may be vacated only if the trial court finds the award was “procured by corruption, fraud or other undue means;” there “was corruption in any of the arbitrators;” the “rights of the parties were substantially prejudiced by the actions of the arbitrators;” or “the arbitrators exceeded their powers and the award cannot be corrected without affecting the merits of the decision upon the controversy submitted.” (Code of Civil Procedure § 1286.2(a)(1-4).)

A recent Court of Appeal decision illustrates that even with the limited review of arbitration awards that is permitted, an award of attorney fees may not be preserved if earned while laboring under a conflict of interest.  

In Sheppard, Mullin, Richter & Hampton, LLP v. J-M Mfg. Co., Inc. (2016) 244 Cal.App.4th 590, the firm assumed the representation of a corporation (“J-M”) being sued by numerous governmental entities after a conflict check disclosed that another partner had represented a municipal entity (“South Tahoe”) on an as-needed basis in unrelated employment matters. Sheppard Mullin eventually lost a disqualification motion and could not represent J-M based on the conflict, but successfully compelled arbitration with J-M over a substantial amount of unpaid fees.

The “arbitrators awarded Sheppard Mullin $1,118,147 in unpaid fees, pre-award interest of $251,471, and interest of $302 per day from January 8, 2014 until the date of the award against J-M.” (Id. at p. 603.) 

The firm successfully confirmed the award with the trial court over J-M’s request to vacate it based upon an argument the conflict of interest rendered the “entire agreement illegal, void, or unenforceable.” (Ibid.

The Court of Appeal agreed with J-M, finding the “trial court erred in holding that the Agreement was valid and enforceable.”  (Id. at p. 616.)  Although the governmental entity had previously signed an “advanced conflict waiver” before J-M retained the firm, the Court of Appeal found the “boilerplate waiver that included no information about any specific potential or actual conflicts” did not constitute “informed written consent” under Rules of Professional Responsibility, Rule 3-310(c)(3). (Id. at p. 610.) 

The Court of Appeal further found “the attorney’s duty of undivided loyalty … forms the basis of Rule 3-310 [and] constitutes the very foundation of an attorney-client relationship. The Agreement, which violated Rule 3-310(C), therefore violated an expression of public policy.” (Id. at p. 616.) 

With the agreement voided, the Court of Appeal found Sheppard Mullin was “not entitled to its fees for the work it did for J-M while there was an actual conflict with South Tahoe.” (Id. at p. 619.)  The matter was remanded to the trial court “to determine the amount of fees that Sheppard Mullin must reimburse to J-M” for fees already paid. (Id. at p. 620.)  

What cannot be lost is that an actual conflict may render an entire fee agreement void, precluding an attorney’s ability to initiate a fee arbitration. If the conflict is serious enough, it may serve to prohibit the attorney from collecting the “reasonable value” of the services provided, despite having done the work. 

This decision is a reminder to take conflict checks seriously. If there is a potential conflict, do not take on the matter without obtaining the client’s informed written consent compliant with Rule 3-310.  Even with such consent in place, an attorney must remain vigilant from the outset regarding conflicts and what impact they may have on a given representation.