Sheppard, Mullin, Richter & Hampton, Llp v. J-M Manufacturing Company, Inc.

Facts

In 2006, a qui tam action was initiated against D on behalf of approximately 200 real parties in interest, including the United States, seven states, and other state and local government entities. It was alleged that D represented to its customers that the PVC pipe products it sold conformed to applicable industry standards for waterworks parts. It also alleged that D 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. P was eventually invited to replace D's current counsel. D retained P. In the next 16 months P represented D litigating motions, conducting discovery, reviewing documents, and conducting an extensive internal investigation at D. P billed about $3.8 million for approximately 10,000 hours of work. When retained, P ran a conflicts check to determine whether P had represented any of the real parties in interest identified in the Qui Tam Action. Jeffrey Dinkin, a P labor-and-employment partner, had done work for South Tahoe, one of the municipal intervenors in the Qui Tam Action. Dinkin stated that he began working with South Tahoe early in his career when he worked at a different firm. When he moved to P in 2002, he brought South Tahoe with him as a client. South Tahoe signed an engagement agreement with P that had a broad advance conflict waiver provision similar to the one in the D agreement. Dinkin did occasional, as-needed labor and employment work for South Tahoe between 2006 and November 2009. When the conflict appeared, P knew that South Tahoe had “agreed to an advance conflict waiver and that P had done no work for South Tahoe since November 2009. The issue was discussed by Ronald Ryland, P's general counsel, “who analyzed South Tahoe's conflict waiver and informed us that it allowed us to represent D in the Qui Tam Action.” P's waiver with P stated that 'P 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 D. We undertake this engagement on the condition that we may represent another client in a matter in which we do not represent D, even if the interests of the other client are adverse to D (including appearance on behalf of another client adverse to D in litigation or arbitration) and can also, if necessary, examine or cross-examine D personnel on behalf of that other client in such proceedings or in other proceedings to which D is not a party provided the other matter is not substantially related to our representation of D and in the course of representing D we have not obtained confidential information of D material to representation of the other client. By consenting to this arrangement, D 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.” (Second italics added.) We refer to this as the “conflict waiver provision.” D carefully reviewed the entire draft agreement. D declared that P attorneys never discussed the conflict waiver provision with her, nor did they explain it. D  also said the P attorneys assured her there were no conflicts in representing D in the Qui Tam Action. D edited other parts of the agreement but did not edit the conflict waiver provision. Between March 2010 and May 2011, P billed South Tahoe for 12 hours of work, including telephone conversations and work on employment matters. Counsel for South Tahoe in the Qui Tam Action, wrote a letter to P asserting that P had a conflict. South Tahoe informed P that South Tahoe planned to bring a motion to disqualify P from the Qui Tam Action. D asserts that P never informed it of the disqualification but learned of it on June 22, 2011. D declared that P never requested a conflict waiver from D in light of the South Tahoe conflict. The district court tentatively ruled that the advance waiver in the retention agreement was invalid. It rejected P's suggestion that it could drop South Tahoe as a client and remain counsel for D in the Qui Tam Action. P offered South Tahoe $250,000 and 40 hours of employment work in exchange for a conflict waiver, which was rejected. D rejected the proposal to bifurcate South Tahoe from the Qui Tam Action with separate counsel defending that portion of the case. P was disqualified. D did not pay its bills due and also demanded that P return all fees relating to the Qui Tam Action that D had already paid. P filed an action against D for specific performance, breach of contract, account stated, services rendered, and quantum meruit seeking $1.3 million. The trial court granted P's motion to compel arbitration. The arbitrators found the assumed ethical violation did not require automatic fee disgorgement or forfeiture. The arbitrators concluded that P's conduct was not so serious or egregious as to make disgorgement or forfeiture of fees appropriate. They also found that P's representation of South Tahoe involved a matter that was unrelated to the subject of the D representation, and therefore the conflict did not pervade the whole relationship. P got $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 D. They awarded no recovery to D. The trial court confirmed the award. The court concluded that a violation of Rule 3-310 did not render the entire retainer agreement illegal, void, or unenforceable. D appealed.

Issues

Rule of Law

Holding and Decision

Legal Analysis

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