Sheppard, Mullin, Richter & Hampton, LLP v. J-M Mfg. Co.

• Decision Date: 29 January 2016
• Docket Number: B256314
• Citation: 244 Cal.App.4th 590,198 Cal.Rptr.3d 253
• Court: California Court of Appeals Court of Appeals
• Parties: SHEPPARD, MULLIN, RICHTER & HAMPTON, LLP, Plaintiff and Respondent, v. J–M MANUFACTURING CO., INC., Defendant and Appellant.

244 Cal.App.4th 590

198 Cal.Rptr.3d 253

SHEPPARD, MULLIN, RICHTER & HAMPTON, LLP, Plaintiff and Respondent,

v.J–M MANUFACTURING CO., INC., Defendant and Appellant.

B256314

Court of Appeal, Second District, Division 4, California.

Filed January 29, 2016

As Modified on Denial of Rehearing February 26, 2016

Greines, Martin, Stein & Richland, Kent L. Richardson, Barbara W. Ravitz, and Jeffrey E. Raskin, Los Angeles, for Defendant and Appellant.

Gibson, Dunn & Crutcher, Kevin S. Rosen, Theane Evangelis, and Heather L. Richardson, Los Angeles, for Plaintiff and Respondent.

COLLINS, J.

INTRODUCTION

Appellant J–M Manufacturing Company, Inc. (J–M) appeals from a judgment in favor of its former attorneys, Sheppard, Mullin, Richter & Hampton, LLP (Sheppard Mullin). Sheppard Mullin sought recovery of attorney fees relating to litigation in which Sheppard Mullin represented J–M. Sheppard Mullin was disqualified from that litigation because, without obtaining informed consent from either client, Sheppard Mullin represented J–M, the defendant in the litigation, while simultaneously representing an adverse party in that case, South Tahoe Public Utility District (South Tahoe), in unrelated matters. J–M argued that its engagement agreement with Sheppard Mullin was unenforceable because it was illegal and it violated the public policy embodied in the California Rules of Professional Conduct Rule 3–310 (Rule 3–310 ),¹ which bars simultaneous representation of adverse clients. J–M argued that as a result of Sheppard Mullin's violation, J–M did not owe Sheppard Mullin outstanding attorney fees and Sheppard Mullin should return to J–M all attorney fees paid pursuant to the agreement.

The trial court ordered the case to arbitration based on the parties' written engagement agreement. A panel of three arbitrators found that the agreement was not illegal, denied J–M's request for disgorgement of fees paid, and ordered J–M to pay Sheppard Mullin's outstanding fees. The trial court confirmed the award and J–M appealed, arguing that the trial court enforced an illegal contract in violation of public policy.

Under California law, because J–M challenged the legality of the entire agreement, the issue of illegality was for the trial court, rather than the arbitrators, to decide. The undisputed facts establish that Sheppard Mullin violated the requirements of Rule 3–310 by simultaneously representing J–M and South Tahoe. Sheppard Mullin failed to disclose the conflict to either J–M or South Tahoe, and it failed to obtain the informed written consent of either client to the conflict. The representation of both parties without informed written consent is contrary to California law and contravenes the public policy embodied in Rule 3–310. Because Sheppard Mullin's representation of J–M violated Rule 3–310 and public policy, the trial court erred by enforcing the contract between the parties and entering judgment on the arbitration award based on that contract. We therefore reverse the judgment.

J–M also seeks disgorgement of all fees paid to Sheppard Mullin. Sheppard Mullin, on the other hand, argues that under principles of quantum meruit, it is entitled to attorney fees despite its violation of the Rules of Professional Conduct. We follow established California law and find that Sheppard Mullin is not entitled to fees for the work it did while violating Rule 3–310, which exemplifies the inviolate duty of loyalty an attorney owes a client. Because the point at which the actual conflict arose is unclear from the record, however, we remand for a factual finding on that issue.

FACTUAL AND PROCEDURAL BACKGROUND

We take portions of our factual history from the declarations submitted to the arbitration panel, which are in the record on appeal.

A. The underlying litigation: the Qui Tam Action

In 2006, a qui tam action was initiated against J–M and Formosa Plastics Corporation U.S.A. on behalf of approximately 200 real parties in interest, including the United States, seven states, and other state and local government entities. (United States ex rel. Hendrix v. J–M Manufacturing Company, Inc., United States District Court for the Central District of California, case No. 5:06–cv–00055–GW–PJW (Qui Tam Action).) J–M manufactures polyvinyl chloride (PVC) pipe. The Qui Tam Action alleged that J–M falsely represented to its customers that the PVC pipe products it sold conformed to applicable industry standards for water works parts. It also alleged that, contrary to this representation, J–M was aware of numerous tests proving that its PVC pipe regularly failed to meet the minimum longitudinal tensile-strength requirements. The complaint demanded over $1 billion in damages.

Another law firm represented J–M in the initial phases of the Qui Tam Action. By February 2010, the complaint was unsealed, and numerous governmental entities were filing notices of intervention. Camilla Eng, J–M's general counsel, invited Sheppard Mullin attorneys Bryan Daly and Charles Kreindler to meet with her and J–M chief executive officer Walter Wang to discuss replacing J–M's current counsel. They discussed the experience of the Sheppard Mullin attorneys in qui tam actions and their proposed defense strategy. J–M retained Sheppard Mullin shortly thereafter.

Sheppard Mullin represented J–M in the Qui Tam Action for sixteen months, litigating motions, conducting discovery, reviewing documents, and conducting an extensive internal investigation at J–M. It billed J–M nearly $3.8 million for approximately 10,000 hours of work.

B. Conflict waiver provision

In March 2010, before J–M retained Sheppard Mullin, Daly and Kreindler ran a conflicts check to determine whether Sheppard Mullin had represented any of the real parties in interest identified in the Qui Tam Action. They discovered that Jeffrey Dinkin, a Sheppard Mullin labor-and-employment partner, had done work for South Tahoe, one of the municipal intervenors in the Qui Tam Action. Dinkin stated in a declaration that he began working with South Tahoe early in his career when he worked at a different firm. When he moved to Sheppard Mullin in 2002, he brought South Tahoe with him as a client. South Tahoe signed an engagement agreement with Sheppard Mullin in 2002, and it renewed that agreement in 2006. The agreement had a broad advance conflict waiver provision similar to the one in the J–M agreement, discussed below. Dinkin did occasional, as-needed labor and employment work for South Tahoe between 2006 and November 2009.

When Sheppard Mullin's conflict check for J–M revealed that South Tahoe was a client, Daly and Kreindler consulted with an assistant general counsel to Sheppard Mullin. That unidentified attorney informed them that South Tahoe had "agreed to an advance conflict waiver and that Sheppard Mullin had done no work for [South Tahoe] for the previous five months (since November 2009)." In addition, Daly and Kreindler discussed the issue with Ronald Ryland, Sheppard Mullin's general counsel, "who analyzed [South Tahoe's] conflict waiver and informed us that it allowed us to represent J–M in the Qui Tam Action."

Daly met with Eng for two hours on March 4, 2010, to discuss a draft engagement agreement. The draft contained the advance conflict waiver provision that ultimately was included in the final engagement agreement. 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 . 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."

According to Daly, Eng carefully reviewed the entire draft agreement with him, and she "did not ask me any questions or express any concern about the advance conflict waiver." Eng declared that Sheppard Mullin attorneys never discussed the conflict waiver provision with her, nor did they explain it. Eng also said the Sheppard Mullin attorneys assured her there were no conflicts in representing J–M in the Qui Tam Action. J–M's practice was to ensure that its outside attorneys had neither potential nor actual conflicts of interest. Although Eng made a number of handwritten edits related to the fee provisions, and also edited the paragraph preceding the conflict waiver provision, she did not edit the conflict waiver provision. She ultimately executed the engagement agreement (the Agreement) on March 8, 2010, and sent it to Daly by email.

C. South Tahoe raises the conflict of interest in the Qui Tam Action

Dinkin began actively working for South Tahoe again on March 29, 2010. Between March 2010 and May 2011, Sheppard Mullin billed South Tahoe for 12 hours of...