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

• Decision Date: 30 August 2018
• Docket Number: S232946
• Citation: 6 Cal.5th 59,237 Cal.Rptr.3d 424,425 P.3d 1
• Court: California Supreme Court
• Parties: SHEPPARD, MULLIN, RICHTER & HAMPTON, LLP, Plaintiff and Respondent, v. J-M MANUFACTURING COMPANY, INC., Defendant and Appellant.

6 Cal.5th 59

425 P.3d 1

237 Cal.Rptr.3d 424

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

v.J-M MANUFACTURING COMPANY, INC., Defendant and Appellant.

S232946

Supreme Court of California.

Filed August 30, 2018

Greines, Martin, Stein & Richland, Kent L. Richland, Barbara W. Ravitz, Robert A. Olson and Jeffrey E. Raskin for Defendant and Appellant.

Steven W. Murray as Amicus Curiae on behalf of Defendant and Appellant.

Litigation Law Group, Gordon M. Fauth, Jr., and Rosanne L. Mah for Exponential Interactive, Inc., Halston Operating Company, LLC, Herbalife International of America, Inc., JDI Display America, Inc., Kimberly-Clark Corporation, Leaf Group Ltd., NETGEAR, Inc., Newegg Inc., Turo Inc., Varian Medical Systems, Inc., and VidAngel, Inc., as Amici Curiae on behalf of Defendant and Appellant.

Reuben Raucher & Blum, Stephen L. Raucher, Pokuaa M. Enin ; Karpman & Associates and Diane L. Karpman for Beverly Hills Bar Association as Amicus Curiae on behalf of Defendant and Appellant.

Amar D. Sarwal, Mary L. Blatch ; Liang Ly, John K. Ly and Jason L. Liang for Association of Corporate Counsel as Amicus Curiae on behalf of Defendant and Appellant.

Gibson, Dunn & Crutcher, Kevin S. Rosen, Theane Evangelis, Bradley J. Hamburger, Andrew G. Pappas, Heather L. Richardson and Jeremy S. Smith for Plaintiff and Respondent.

Spertus, Landes & Umhofer, James W. Spertus and Jennifer E. LaGrange for Amici Legal Scholars as Amicus Curiae on behalf of Plaintiff and Respondent.

Holland & Knight, Paul C. Workman, Peter R. Jarvis and Marissa E. Buck for Amici Law Firms as Amicus Curiae on behalf of Plaintiff and Respondent.

Samuel Bellicini ; Fishkin & Slatter, Jerome Fishkin ; Rogers Joseph O'Donnell and Merri A. Baldwin for The Association of Discipline Defense Counsel as Amicus Curiae on behalf of Plaintiff and Respondent.

Sidley Austin, Mark E. Haddad, Joshua E. Anderson and David R. Carpenter for Professional Liability Insurers, AF Beazley Syndicate 623/2623 at Lloyd's, CNA Financial Corporation, Endurance US Holdings Corp., and W.R. Berkley as Amici Curiae on behalf of Plaintiff and Respondent.

KRUGER, J.

A large law firm agreed to represent a manufacturing company in a federal qui tam action brought on behalf of a number of public entities. During the same time period, the law firm represented one of these public entities in matters unrelated to the qui tam suit. Both clients had executed engagement agreements that purported to waive all such conflicts of interest, current or future, but the agreements did not specifically refer to any conflict and the law firm did not tell either client about its representation of the other. This arrangement fell apart when the public entity discovered the conflict and successfully moved to have the firm disqualified in the qui tam action. A fight over the manufacturer's outstanding law firm bills followed, and the dispute was sent to arbitration in accordance with an arbitration clause in the parties' engagement agreement.

The arbitrators ruled in the law firm's favor and the superior court confirmed the award, but the Court of Appeal reversed. That court concluded that the matter should never have been arbitrated because, notwithstanding the broad conflict waiver in the engagement agreement, the law firm's undisclosed conflict of interest violated rule 3-310(C)(3) of the Rules of Professional Conduct. This ethical violation, the court ruled, rendered the parties' agreement, including the arbitration clause, unenforceable in its entirety. The Court of Appeal further held that the conflict of interest disentitled the law firm from receiving any compensation for the work it performed for the manufacturer while also representing the utility district in other matters.

We agree with the Court of Appeal that, under the framework established in Loving & Evans v. Blick (1949) 33 Cal.2d 603, 204 P.2d 23, the law firm's conflict of interest rendered the agreement with the manufacturer, including its arbitration clause, unenforceable as against public policy. Although the manufacturer signed a conflicts waiver, the waiver was not effective because the law firm failed to disclose a known conflict with a current client. But we conclude, contrary to the Court of Appeal, that the ethical violation does not categorically disentitle the law firm from recovering the value of the services it rendered to the manufacturer; whether principles of equity entitle the law firm to some measure of compensation is a matter for the trial court to address in the first instance.

I.

In 2006, a qui tam action was filed against J-M Manufacturing Company, Inc. (J-M), a pipe manufacturing company, in federal court in California. John Hendrix, the relator in the action, alleged that J-M had misrepresented the strength of polyvinyl chloride pipe it had sold to approximately 200 public entities around the country for use in their water and sewer systems. In early 2010, the complaint was unsealed, and many of these public entities intervened in the case.

As these events were unfolding, J-M began to consider replacing the law firm that had been representing it in the action. In February 2010, shortly after the complaint was unsealed, J-M's general counsel, Camilla Eng, invited attorneys from the law firm of Sheppard, Mullin, Richter & Hampton, LLP (Sheppard Mullin), to discuss taking over the representation from the other law firm. The attorneys, Bryan Daly and Charles Kreindler, ran a conflicts check to determine whether Sheppard Mullin had represented any of the public entities identified as the real parties in interest in the qui tam action. The conflicts check revealed that another Sheppard Mullin attorney, Jeffrey Dinkin, had done employment-related work for a public entity intervener, South Tahoe Public Utility District (South Tahoe), on and off since at least 2002, and most recently in November 2009. South Tahoe had, however, signed an advance waiver of conflicts in cases unrelated to the employment matters on which Dinkin had provided assistance. After internal consultation, Sheppard Mullin's general counsel opined that because of this advance conflict waiver, the firm could take on representation of J-M in the qui tam action.

On March 4, 2010, Sheppard Mullin and J-M signed an engagement agreement. Under the heading "Scope of Representation," the agreement recited that Sheppard Mullin was engaged to represent J-M in the qui tam action. The agreement provided that the representation would terminate on completion of the lawsuit and "any related claims and proceedings," unless the law firm agreed separately to provide J-M other legal services. The agreement recited the terms of the representation, including payment of fees, and provided that these terms would also apply to other engagements for J-M that Sheppard Mullin might undertake, except as the parties otherwise agreed.

The engagement agreement also contained a conflict waiver much like the one South Tahoe had signed. The waiver provision provided:

"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."

Although Eng revised certain portions of the engagement agreement before signing, she made no changes to the conflict waiver provision. Sheppard Mullin did not tell J-M about its representation of South Tahoe before or at the time the engagement agreement was signed.

The engagement agreement also contained an arbitration clause, providing that any dispute over fees or charges that was not resolved through voluntary arbitration under the auspices of the California State Bar, and any other type of dispute between the parties, would be settled by "mandatory binding arbitration" conducted in accordance with the California Arbitration Act (CAA; Code Civ. Proc., § 1282 et seq. ). The arbitration clause also stated the agreement would be governed by California law.

Dinkin, the Sheppard Mullin employment partner, again began actively working for South Tahoe later in March 2010, a few weeks after Sheppard Mullin began representing J-M. Over the course of the following year, Sheppard Mullin billed South Tahoe for about 12 hours of work. During this period, South Tahoe's attorneys in the qui tam action became aware that Sheppard Mullin was now representing J-M in that action. In March 2011, South Tahoe's attorneys in the qui tam action wrote to Sheppard Mullin asking for an explanation for the firm's failure to inform South Tahoe of the adverse representation.

Sheppard Mullin responded by reminding South Tahoe of its earlier conflicts waiver. Dissatisfied with this...