Source: https://www.lacba.org/news-and-publications/lacba-update/july-2017-update/2017-july-ethics-article
Timestamp: 2019-04-20 15:08:37+00:00

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Ellen A. Pansky is a founding partner of the Southern California law firm Pansky Markle Ham LLP. She specializes in the defense of attorneys and bar applicants in regulatory and licensure proceedings, represents defendants and plaintiffs in legal malpractice proceedings, serves as an expert witness in legal ethics, and advises lawyers in legal ethics and risk management. The opinions expressed here are the author's own.
When is an advance waiver not an advance waiver? The answer will likely be forthcoming when the California Supreme Court decides Sheppard, Mullin, Richter & Hampton, LLP v. J-M Manufacturing Co., Inc., which will clarify whether a lawyer may ethically request and later enforce a general agreement that a client will irrevocably waive a future conflict of interest, even if the precise nature of the future conflict is yet unknown. At its core, this case will determine whether a written consent by a client that the lawyer may accept representation adverse to the client in a future unrelated matter, even if the specifics of future representation cannot be predicted when the consent is given, is enforceable against the client.
Question presented: Does the lawyer's duty of loyalty to a current client supersede that client's prior written, presumably informed, consent to permit the lawyer to later concurrently represent any opposing party in an unrelated legal matter, with interests that are adverse to those of the pre-existing client?
The California Supreme Court has previously defined the duty of loyalty in broad terms. In Flatt v. Superior Court, the Supreme Court held that a conflict is presented if a lawyer is simultaneously representing a client and the client's adversary, even if the matters are completely unrelated, reasoning that a client cannot maintain confidence and trust in counsel who is also representing a litigation adversary, even in a wholly unrelated matter; and that it would violate the duty of loyalty for the attorney to enter into an attorney-client relationship that might even potentially influence the attorney to prefer the interests of one client over the other.
To reconcile the duty of loyalty with the now widespread practice of obtaining advance waivers, the bottom line is: Did the client provide full, intelligent, informed, and free consent to the yet unknown—even unknowable—future conflict of interest?
It should be noted that the definition of the term "disclosure" that is contained in California Rules of Professional Conduct, Rule 3-310(A)(1) is: "…informing the client or former client of the relevant circumstances and of the actual and reasonably foreseeable adverse consequences to the client or former client."
More than 20 years ago, the Sixth Appellate District of the California Court of Appeal issued Zador Corp. v. Kwan, which accepted that a lawyer is ethically permitted to obtain an advance waiver of a prospective conflict of interest, so long as the client provides informed written consent. The court found that the client's contractual agreement not to seek to disqualify the lawyer based on "any adversity that may develop," was sufficient to constitute informed consent.
The decision refers with approval to State Bar Formal Ethics Opinion 1989-115, which concluded that the subject matter of subsequent conflicts may range from unrelated matters to opposite sides of the same dispute. The ethics opinion also concluded that a lawyer may withdraw from representation of one client and continue to represent the client who had provided the advance consent to waive a future conflict, even if confidential information provided by the consenting client would be used against the consenting former client.
A primary holding in Zador was that the determination of whether the lawyer is disqualified based on a future conflict of interest depends upon the scope of the client's advance consent to a future conflict. In Zador, the consenting client expressly acknowledged that a conflict might arise between himself and the concurrently represented client, and expressly consented that, in the case of future dispute between the two clients, the lawyer would be free to represent the other client against the consenting client.
Other older cases, such as Klemm v. Superior Court, recognized that the concurrent representation of opposing parties in litigation by a single lawyer may not constitute an unwaivable conflict. In Klemm, the appellate court affirmed that the determining factor is whether the consent is full and informed, and held that even divorcing spouses who had fully resolved their marital property issues might be able to provide adequate consent.
Additionally, in Visa U.S.A., Inc. v. First Data Corp, a federal court found that there is no ethical requirement that counsel must outline every conceivable possibility of potential conflicts in order to establish that the client provided informed consent to waive the conflict. Moreover, the case held that it was not required that the attorney obtain a second disclosure and consent agreement after an actual conflict arose in order for an advance waiver to be valid, and that an ethical wall that the law firm had unilaterally constructed was sufficient to rebut the presumption of shared client confidences.
Indeed, sometimes a violation of the disciplinary rule requiring written consent will not result in a finding that the violation constituted a breach of fiduciary duty. In Pringle v. La Chapelle, the court found that disclosures in a fee agreement to the effect that an actual conflict had arisen between joint clients and advising the clients of the right to seek independent legal counsel was sufficient to constitute informed written consent in compliance with California's conflict of interest rule, and held that a violation of the Rules of Professional Conduct does "not automatically preclude an attorney from obtaining fees."
Recent cases seem to be retreating from the view that advance waivers of unknown conflicts will be enforced. In Western Sugar Coop. v. Archer-Daniels-Midland Co., the court found an advance waiver of a future conflict to be unenforceable, where the general conflict disclosure and consent provision had failed to identify particular potential adverse clients or the nature of any potential conflicts covered by the waiver. The court also found that the law firm's representation of the plaintiff in one case while concurrently representing defendants in litigation on the same issues in an unrelated case required disqualification because the matters were substantially related and there was insufficient evidence to rebut the presumption that confidential information had been received by the firm.
With these cases as a backdrop, Sheppard, Mullin, Richter & Hampton, LLP v. J-M Manufacturing Co., Inc. is being determined. As many conflict of interest cases do, this case arose from a fee dispute. During the law firm's representation of J-M Manufacturing in a qui tam action, a separate office of SMRH began representation of one of the intervenors in the qui tam action in an unrelated matter.
In its defense to SMRH's fee claim, J-M asserted that SMRH's breach of the duty of loyalty vitiated J-M's obligation to pay outstanding fees to SMRH and that SMRH should disgorge fees previously paid. In arbitration, the arbitrators awarded Sheppard Mullin its unpaid fees; the trial court confirmed the award, and J-M appealed.
The appellate court overturned the trial court's order, concluding that the advance waiver included in J-M's retainer agreement did not constitute informed written consent, and that the firm's violation of the duty to refrain from representing an adverse party against a client disqualified the firm from receiving any attorney fees once the conflict arose. The appellate court cited approvingly to the Visa U.S.A. and Western Sugar cases and found the facts in J-M to be in "sharp contrast" to the facts in Zador. The appellate court in J-M implicitly assumed that a second, supplemental conflict disclosure and a new waiver were required once Sheppard Mullin decided it wished to represent the qui tam intervenor in a new matter while representing a litigation adversary in a separate matter. The appellate court found the initial advance waiver, which the appellate court referred to as a "boilerplate waiver" to be inadequate to constitute informed consent to waive the conflict.
If the California Supreme Court upholds the appellate court's analysis, the effect on lawyers in specialty areas will be pronounced. In practice, how can a law firm obtain informed consent if the consent is invalid unless the conflict disclosure specifically identifies the yet-unknown specific future adverse party and the precise nature of the future conflicting case or matter?
When a lawyer is one of a few who practice in a particular industry or area of law, competitors in the marketplace may be willing to waive future conflicts in order to hire that lawyer when a particular matter presents itself. Should the client—particularly a sophisticated client or an organizational client that has the benefit of independent legal counsel—be able to raise a conflict-of-interest defense to a fee claim, notwithstanding a prior written consent to a then-unknown conflict of interest, of whatever nature? In California, we will soon find out.
 Sheppard, Mullin, Richter & Hampton, LLP v. J-M Manufacturing Co., Inc., 244 Cal.App.4th 590 (2016).
 Flatt v. Superior Court, 9 Cal. 4th 275, 285-289 (1994).
 Zador Corp. v. Kwan, 31 Cal. App. 4th 1285 (1995).
 Klemm v. Superior Court, 75 Cal.App.3d 893 (1977).
 Visa U.S.A., Inc. v. First Data Corp., 241 F. Supp. 2d 1100, 1104 (N.D. Cal. 2003).
 Pringle v. La Chapelle, 73 Cal. App. 4th 1000, 1005-1006 (1999).
 Western Sugar Coop. v. Archer-Daniels-Midland Co., 98 F.Supp.3d 1074 (C.D.Cal. 2015).

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