Source: https://www.lacba.org/news-and-publications/lacba-update/past-ethics-articles/2016-may-ethics-arden
Timestamp: 2019-04-20 14:58:54+00:00

Document:
By James Arden, a member of LACBA’s Professional Responsibility and Ethics Committee, a member of the Association of Professional Responsibility Lawyers, and a member of the State Bar Committee on Professional Liability Insurance. The opinions expressed are his own.
Businesses of all kinds force their customers to arbitrate disputes. The U.S. Supreme Court has issued several rulings in recent years upholding forced arbitration.
Attorneys, too, are ethically permitted to require clients to submit disputes to binding arbitrationand can have such provisions apply to legal malpractice claims.
And yet, that arbitration is a “favored method of resolving disputes” is a perplexing irony—because arbitrators don’t have to follow the law. Isn’t that incongruent with the public’s obligation to act in conformity with the law, as well as an attorney’s usual duty to urge compliance with the law?
Because California has a strong public policy favoring arbitration, and because an error of law is not a ground for vacating or correcting an arbitration award, the courts cannot review the validity of an arbitrator’s reasoning except where the award violates “an explicit legislative expression” or some other public policy. That clear distinction means an attorney conflict or breach of duty of loyalty may justify vacating an arbitration award, because overlooking an attorney’s serious ethical breach is not a typic error of law for an arbitrator.
The rule, that an arbitrator’s mistakes of law or facts is not a normal basis for refusing to confirm an arbitration award, took an interesting turn recently in Sheppard, Mullin, Richter & Hampton, LLP v. J-M Manufacturing (2016) 244 Cal.App.4th 590. The court of appeal there found a violation of Rule 3-310 to be a violation of an expression of public policy.
Sheppard Mullin was disqualified for simultaneously representing J-M and another client in a qui tam action without having either client’s informed written consent, in violation of Rule 3-310(C)(3) of the Rules of Professional Conduct. J-M then declined to pay any fees that were outstanding at the time of the disqualification, and it demanded a refund of all fees already paid for the qui tam action. Sheppard Mullin responded by doing what lawyers do. It sued for fees; and it petitioned to compel arbitration.
Opposing arbitration, J-M argued the court had to first determine whether the fee agreement was enforceable. The trial court ordered arbitration nevertheless.
A three-arbitrator panel found the fee agreement was not illegal, denied J-M’s request for disgorgement of fees paid, and ordered J-M to pay Sheppard Mullin’s $1.3 million in outstanding fees. The trial court confirmed the award.
[W]hen a conflict of interest is asserted as a defense in the attorney’s action to recover fees or the reasonable value of services, a violation of the fiduciary obligation will defeat recovery.
California cases distinguish serious ethical violations such as conflicts of interest (in which compensation is prohibited) and technical violations or potential conflicts (in which compensation may be allowed). Two seminal cases set out the governing principles: Goldstein v. Lees (1975) 46 Cal.App.3d 614, in which a corporate attorney sought fees for representing a minority shareholder and director in a proxy fight against the corporation, and Jeffry v. Pounds (1977) 67 Cal.App.3d 6, in which a law firm represented a husband in a personal injury action but also agreed to represent his wife in a marriage dissolution action against him. The lawyers breached the rule precluding attorneys from representing conflicting interests unless all parties provide informed written consent.
Given Sheppard Mullin’s ethical misconduct here, it is irrelevant whether J-M suffered damage. "It is the general rule in conflict of interest cases that where an attorney violates his…ethical duties to the client, the attorney is not entitled to a fee for his…services. [Citations.]" J-M’s actual damages as result of Sheppard Mullin’s breach are irrelevant.
Sheppard Mullin is important because lots and lots of lawyers require arbitration of client disputes. Trial courts grant more petitions to compel arbitration than they deny. But unlike yesteryear, when clients’ malpractice claims were typically based on blown statutes of limitation or other missed deadlines, today’s malpractice claims—meritorious or not—commonly allege conflicts of interest and other serious ethical violations. Courts, not arbitrators, must decide such issues.
 Madden v. Kaiser Foundation Hospitals (1976) 17 Cal.3d 699, 706.
 Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 11, 14, 32.
 See Pour Le Bebe, Inc. v. Guess? Inc. (2003) 112 Cal.App.4th 810, Hernandez v. Paicius (2003) 109 Cal.App.4th 452, Tsakos Shipping and Trading, S.A. v. Juniper Garden Town Homes (1993) 12 Cal.App.4th 74.
 Sheppard, Mullin, Richter & Hampton, LLP v. J-M Manufacturing (2016) 244 Cal.App.4th 590, 597.
 Id. at 616, internal quote marks, brackets and citation omitted.
 Id. at 618-619, citation omitted.

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