Newsletter – October 2018
When law firms sign up clients, many frequently include blanket “conflict of interest waivers’ in the fee agreements. The California Supreme Court found that lawyers cannot rely on blanket waivers to avoid providing clients full information about ongoing conflicts of interest. Clients must have specific information about conflicts to give informed consent to conflicted representation. Sheppard, Mullin, Richter & Hampton, LLP v. J-M Manufacturing Co., (2018) 6 Cal.5th 59.
Facts of the Sheppard Mullin Case
A manufacturing company hired a large law firm, Sheppard, Mullin, Richter & Hampton, LLP, to represent it in a whistleblower lawsuit filed by several public entities. The company signed a fee agreement with the law firm that included a conflict of interest waiver. Without disclosing any specific conflicts, the document attempted to waive all conflicts of interest – ongoing or in the future – related to the law firm’s representation of the company.
The law firm never told the manufacturing company that it also represented one of the public entities involved in the whistleblower lawsuit, the City of South Tahoe, on unrelated legal matters. Like the company, the City had signed a fee agreement with the law firm that included a broad conflict of interest waiver.
When the City discovered the ongoing conflict, it objected to Sheppard Mullin’s continued representation of the manufacturing company and the law firm was disqualified from representing the manufacturing company due to the prohibition of simultaneously representing adverse parties. . The company then refused to pay the law firm’s fees, totaling over $1 million. After an arbitration award in the law firm’s favor on the fees question and a Court of Appeal decision in the company’s favor, the case made its way to the California Supreme Court.
No Informed Consent When Conflict Is Not Specifically Disclosed
The Court found that the law firm’s conflict of interest between the manufacturing company and the City made the entire fee agreement signed by the company unenforceable because it was against public policy. While acknowledging that the company did sign the conflict of interest waiver, the Court emphasized that the company could not give informed consent to the conflict with the City. To give informed consent, the company would have needed to know about the conflict. But despite a professional responsibility requirement for lawyers to disclose ongoing conflicts of interest, the law firm never brought it up to the company or the City.
In its decision, the Court explained why law firms must disclose ongoing conflicts of interest. Clients do not have access to law firms’ lists of their other clients and should not have to investigate whether firms have conflicts of interest. If a client finds out that a law firm has hidden that it represents an adversary in a lawsuit — even if representation of the other client is for totally unrelated matters – the client “cannot long be expected to sustain the level of confidence and trust in counsel that is one of the foundations of the professional relationship.” The Court rejected Sheppard Mullin’s argument that both clients were “sophisticated,” essentially finding that the lawyer’s ethical duties aren’t diminished because a client is considered to be “sophisticated.”
Importantly, the Court did not strike down use of blanket conflict waivers in fee agreements altogether. The law firm here erred when it did not disclose the obvious conflict at all, whether in the fee agreement or elsewhere. It is clear that any blanket conflict waiver needs to accurately reflect the material facts concerning the representation and that law firms cannot ignore conflicts arising from representation of other parties—even in unrelated actions.
Do Clients Still Have to Pay Legal Fees When Conflicts Come to Light?
The Court did not decide whether the law firm could recover any legal fees for its representation of the manufacturing company. Instead, it sent the case back to the trial court for more consideration of this issue. The trial court has not yet determined if the company has to pay the law firm.
Since this case began with an attempt by the law firm to recover fees, the Court’s decision may seem like a sidestep of the original question – whether a client who discovers an undisclosed conflict has to pay for legal services rendered during the conflicted representation. In truth, the case drives home how important it is for law firms to affirmatively identify and disclose conflicts of interest to clients so that they can give informed consent to legal representation.