January 2019 Ethically Speaking - 2018 In Review

by Members of the OCBA professionalism & Ethics Committee

Led by the much-anticipated Sheppard Mullin Supreme Court decision addressing advance waivers and disgorgement, 2018 saw a number of important ethics and law of lawyering opinions—many of which came from the justices in our Fourth Appellate District, Division Three. The OCBA Professionalism and Ethics Committee offers this summary of those opinions it considers to be among the most important and interesting of the year.

Advance Waiver and Disgorgement

In Sheppard, Mullin, Richter & Hampton, LLP v. J-M Manufacturing Company, Inc., 6 Cal. 5th 59 (2018), the Sheppard Mullin law firm was disqualified from representing J-M Manufacturing a year into a federal qui tam action because the law firm was concurrently representing one of the affected and adverse public entities in an unrelated employment matter. Sheppard Mullin argued unsuccessfully that both clients had waived the conflict when they signed advance waivers as part of their engagement agreements.

After being disqualified, Sheppard Mullin filed suit against J-M, seeking to recover over $1 million in unpaid legal fees. J-M cross-complained for disgorgement of $2 million in previously paid legal fees. Over J-M’s objection, the matter was referred to arbitration in accordance with the arbitration clause in the engagement agreement. The arbitrators sided with Sheppard Mullin and awarded it all of its unpaid legal fees. The court confirmed the award. The court of appeal reversed, however, holding that the engagement agreement, including its arbitration clause, was unenforceable as against public policy because the law firm had a conflict of interest. The court remanded the case to the trial court to disgorge the fees earned by the law firm while laboring under the conflict.

The California Supreme Court affirmed much of the court of appeal’s ruling. It first agreed that the client had not effectively waived the conflict of interest, holding that Sheppard Mullin had a known, existing conflict of interest when it entered its engagement agreement with J-M. It therefore was obligated to disclose this known conflict to J-M, but failed to do so, thereby rendering the waiver ineffective. The Supreme Court expressly declined to address whether advance waivers are effective to waive unknown conflicts.

The Supreme Court next held that an attorney engagement agreement entered into under a conflict of interest is against public policy and unenforceable. Consequently, the arbitration clause contained in the engagement agreement likewise was unenforceable. On this basis, the Supreme Court vacated the arbitration award.

Finally, disagreeing with the court of appeal, the Supreme Court held that an attorney with a conflict of interest is not per se barred from recovering an equitable portion of its fee in quantum meruit. The Supreme Court emphasized that any equitable award would be less than the amount due under the contract. The Supreme Court remanded the case to determine what amount of the $3 million billed, if any, Sheppard Mullin should be awarded in quantum meruit.


In Fluidmaster, Inc. v. Fireman’s Fund Insurance Company, 25 Cal. App. 5th 545 (2018), Justice William Bedsworth of the Fourth District, Division 3, authored an opinion addressing a subrogation dispute between an insurer and a plumbing supply company. The insurer hired Crowell & Moring to represent it in the action. Thereafter, Crowell hired a discovery associate who previously had worked as lead attorney for the plumbing company while employed by an e-discovery vendor.

The associate apprised the law firm of the conflict, and the law firm erected an ethical screen prohibiting any communication between the associate and the attorneys representing the insurer in the subrogation case. After the plumbing supply company learned of the law firm’s employment of the discovery associate, it successfully moved to disqualify the law firm. The law firm appealed. During the pendency of the appeal, the discovery associate left the law firm’s employ.

The record contained no evidence that the departed associate had improperly disclosed any client secrets to the law firm. Accordingly, the court of appeal determined that Kirk v. First American Title Insurance Company, 183 Cal. App. 4th 776 (2010), controlled. Kirk held that (1) disqualification should not be automatic when an ethical screen had been erected, but should be considered on a case-by-case basis, and (2) when the disqualifying lawyer leaves the firm during the pendency of an appeal, the matter should be remanded for determination of whether confidences had improperly been disclosed.

The matter was remanded for further find­ings, which would include declarations from the disqualified attorney and each member of the team working on the subrogation case, as well as the firm’s professional responsibility unit, disclosing when they learned of the facts about the discovery associate. The trial court was directed to consider the efficacy of the ethical screen, as discussed in Kirk.

In SkyBell Technologies, Inc. v. Ring, Inc., No. 18-cv-00014 (C.D. Cal Sept. 18, 2018), Judge James Selna ordered the Orrick law firm disqualified from a patent infringement lawsuit. Before filing a patent infringement complaint against defendant Ring, plaintiff Skybell had solicited a proposal from Orrick regarding potential representation in the matter. In response, Orrick participated in several calls and a three-hour meeting, and prepared a detailed written proposal.

Ultimately, Skybell retained a different law firm and filed its complaint against Ring in January 2018. Ring retained the Durie Tangri firm to defend the action. In June 2018, however, the lead attorney representing Ring left Durie Tangri and joined Orrick. Skybell moved to disqualify, and the court considered the motion under new California Rule of Professional Conduct 1.18, “Duties to Prospective Client.” The court found that Skybell was a prospective client of Orrick to whom Skybell provided confidential information during the bidding process. Accordingly, Rule 1.18 required Orrick to demonstrate that “the lawyer[s] who received the information took reasonable measures to avoid exposure to more information than was reasonably necessary to determine whether to represent the prospective client.” The court found insufficient Orrick’s contention that it told Skybell before the first phone call to only provide reasonably necessary information, because no such admonition was given in connection with the other calls, meetings, and exchanges. The court found, “There must be some type of preceding or concurrent affirmative act that is carried out by the attorney to limit the disclosure.” Having found that Orrick did not take reasonable measures to limit disclosure, the court declined to consider the adequacy of Orrick’s ethical screen. However, the court observed that, under prior Rule 3-310(E), disqualification also would have resulted because “by rendering legal advice to SkyBell and then switching sides in what later turned out to be the same matter, Orrick would be automatically disqualified under California law.”

California Self-Insurers’ Security Fund v. Superior Court, 19 Cal. App. 5th 1065 (2018), considered whether a law firm should be disqualified where a lateral lawyer working extensively on one side of a case switched sides by joining the law firm representing an adverse party in the same lawsuit. This same lateral lawyer then left the law firm five weeks later. During the lateral associate’s tenure with the law firm, the firm erected an ethical wall. Under applicable case law, an ethical screen would not resolve a conflict of interest caused by a side-switching lawyer joining a new law firm. See Henriksen v. Great Am. Sav. & Loan, 11 Cal. App. 4th 109, 114-15 (1992). As a result, the trial court disqualified the new firm.

The court of appeal held the otherwise mandatory disqualification becomes discretionary once the lateral attorney leaves the firm, remanding the matter to the trial court to exercise such discretion, creating a “modern rule that reflects the current reality of law firm life in the 21st century.” Judicial discretion was required to balance the harm to a client from loss of counsel, the reality of lawyers switching firms, and the effectiveness of ethical screens. On remand, the trial court was directed to consider the evidence rebutting the presumption of shared confidences, taking into consideration that the lateral attorney’s tenure at the firm overlapped with the firm’s litigation of the matter, the effectiveness of the screen, and the fact that the attorneys involved worked in separate offices. In addition, statements from the attorneys working on the case would inform the court’s exercise of discretion on remand.

Legal Malpractice: Causation

In Knutson v. Foster, 25 Cal. App. 5th 1075 (2018), the Fourth District, Division 3 Court of Appeal was asked to determine the proper causation standard where a client sued her former attorney for the intentional torts of breach of fiduciary duty and fraudulent concealment. Plaintiff Knutson retained attorney Foster to represent her in an attempt to get USA Swimming to honor an oral agreement made by Schubert, a former USA Swimming employee, to pay training and living expenses. Foster did not disclose to Knutson that he had longtime relationships with USA Swimming and similar organizations. Foster also did not tell Knutson that he had represented Schubert in the past and that he had declined to represent Schubert in his own dispute with USA Swimming because of a conflict of interest. Foster negotiated a settlement on terms that were so onerous Knutson could not fulfill them, all while disclosing numerous confidential communications to USA Swimming. When Knutson could not meet the terms of the settlement agreement, USA Swimming cut off all funding.

The jury was instructed that Foster was liable if his conduct was a substantial factor in causing harm to Knutson. The jury found in favor of Knutson, but the trial court granted a new trial because Knutson failed to prove she “would have obtained a better settlement” with USA Swimming absent the misrepresentations, which is the causation standard in attorney malpractice actions based on negligence.

In an opinion by Associate Justice Richard Fybel, the court reversed and reinstated the jury verdict, holding the substantial factor causation test governs all intentional torts: “The fact that an attorney-client relationship existed between a plaintiff and a defendant does not change the method by which a plaintiff must establish causation in cases of intentional torts.” Id. at 1075.

Attorney-Client Privilege/Duty of Confidentiality

Morgan v. Superior Court, 23 Cal. App. 5th 1026 (2018), another Fourth District, Division 3 opinion penned by Justice Fybel, addressed the circumstances under which a former trustee can withhold from a successor trustee communications with the trust’s legal counsel. In a trust litigation involving allegations of misconduct by a trustee, the trial court suspended the trustee and appointed interim successor co-trustees. The trial court ordered the suspended trustee to turn over to the successor trustees his communications with any legal counsel acting on behalf of the trust, as well as billing invoices. The suspended trustee filed a petition for writ of mandate seeking to overturn the trial court’s order.

The court of appeal denied the petition for writ of mandate, holding that a “trust may not allow a former trustee to withhold from a successor trustee all communications between that former trustee and the trust’s legal counsel.” Id. at 1030. The court reasoned that, when a trustee seeks legal advice on behalf of a trust, the trustee is the client and has the right to assert or waive the attorney-client privilege. Id. at 1034. However, the attorney-client privilege vests in the office of the trustee, not in any particular individual trustee, and, therefore, the privilege transfers to a successor trustee. Id. The court held that a provision in the trust that permitted the former trustee to prevent a successor trustee from having access to documents that might establish malfeasance, bad faith, or intentional misconduct violates public policy and, on that basis, declared the provision of the trust void as a matter of public policy. Id. at 1036-37. In so holding, the court noted that, in order for a former trustee to justify withholding attorney-client communications, the former trustee must establish that he or she sought advice from legal counsel for guidance in administering the trust, hired separate counsel, and paid for the advice out of personal funds. Id. 1037-38.

Uber Techs. v. Google, 27 Cal. App. 5th 953 (2018), involves unique facts under which certain pre-acquisition due diligence materials were held neither attorney-client privileged nor attorney work product protected. Google, which had a self-driving car project, commenced arbitration against two former employees who started their own self-driving car company, Ottomotto (Otto), which was later acquired by Uber.

Uber’s negotiations to purchase Otto involved an independent investigation to determine whether Uber would indemnify the two employees from potential claims by Google. Otto’s counsel, O’Melveny, and Uber’s counsel, Morrison Foerster, jointly retained an outside expert to investigate the two former Google employees, evaluate the facts and circumstances that could give rise to certain claims against them, and prepare a report of the results. In the arbitration against its former employees, Google subpoenaed third-party Uber for the investigative report and related communications. Under a joint defense/common interest theory, Uber asserted work product protection and attorney-client privilege.

The court found these materials not privileged because the employees were independently represented and the investigative firm was not permitted by agreement to share privileged information it learned from the employees with either Uber’s or Otto’s counsel. Thus, the employees were adverse to Uber and Otto and did not share common interests. Further, the attorney-client privilege did not attach to communications related to the investigation because neither employee had an attorney-client relationship with O’Melveny or Morrison Foerster.

As to the work-product objection, the court held the investigative firm’s report did not reflect an attorney’s impressions, conclusions, opinions, legal research or theories, but rather only the results of a factual investigation. Thus, the materials were not absolutely protected as opinion work product. The materials also were not subject to the qualified protection for non-opinion work product because there was substantial evidence that the materials were relevant to Google’s claims and could not otherwise be obtained.

ABA Formal Opinion 480 (Confidentiality Obligations for Lawyer Blogging and Other Public Commentary) addresses the intersection between a lawyer’s free speech rights and client confidentiality. While recognizing lawyers have a right to free speech, including the right to blog, the opinion concludes this right must yield to a lawyer’s professional duties, including Model Rule 1.6 (Duty of Confidentiality), Model Rule 3.5 (Impartiality and Decorum of the Tribunal), and Model Rule 3.6 (Trial Publicity).

Confidential information under Rule 1.6 includes information related to the representation, including the client’s identity, irrespective of its source and whether others may be aware of or have access to the information. For example, information contained in a public document such as a court order remains subject to Rule 1.6. Rule 3.6 prohibits lawyers engaged in an investigation or litigation from making an extrajudicial statement which the lawyer knows or reasonably should know will be disseminated by means of public communication and will have a substantial likelihood of materially prejudicing a proceeding, unless an exception to Rule 3.6(a) applies. Thus, notwithstanding free speech rights, lawyers may not reveal client confidential information without consent and may not otherwise engage in public commentary that violates the lawyer’s professional obligations. The Opinion did not address the issue of lawyer advertising and solicitation, which also may be implicated by a lawyer’s blogging activity.

Litigation Privilege

In Herterich v. Peltner, 20 Cal. App. 5th 1132 (2018), the court found common law fraud claims based on allegedly fraudulent statements made in underlying probate proceedings barred by the litigation privilege. Those statements allegedly were made by the executor of the plaintiff’s purported father’s estate and the executor’s attorney, who stated under penalty of perjury in the petition to administer the probate that the decedent had no children. Plaintiff alleged that he was the decedent’s son and that the defendants knew their statement to the contrary was false. Plaintiff further alleged that, as a result of their false statements, the defendants wrongfully deprived him of his inheritance and caused him to incur expenses.

The court of appeal affirmed summary judgment in favor of the defendants, finding that the litigation privilege barred the plaintiff’s claims. All of the wrongful representations that were the basis for the plaintiff’s claims “were made in the course of a judicial proceeding, by participants authorized by law to achieve the objects of the litigation, and have a logical relation to the action,” and thus could not serve as the basis for liability. Id. at 1147. While the court recognized “the necessary harsh result in extending a privilege to false and fraudulent statements made in the course of a judicial proceeding,” it expressly “accept[ed] that result . . . on account of the overriding importance of the competing public policy in favor of enhancing the finality of judgments and avoiding unending postjudgment derivative litigation—a policy which places the obligation on parties to ferret out the truth while they have the opportunity to do so during litigation.” Id. at 1142 (internal quotations omitted) (emphasis in original).

Anti-SLAPP and Settlement Agreements

Under Monster Energy Co. v. Schechter, 26 Cal. App. 5th 54 (2018), attorneys who sign their client’s settlement agreement merely “approving as to form and content” cannot be sued for breach of the confidentiality provisions of that agreement. Where the attorney has signed the settlement agreement in that capacity “means only that the document has the attorney’s professional thumbs-up. It follows that it does not objectively manifest the attorney’s intent to be bound.” Id. at 69. Here, the settlement agreement specifically provided that the settling party “and their counsel of record . . . agree and covenant” not to publicly disclose the settlement and negotiations, but the signature block for counsel identified the attorneys as signing only in their capacity as counsel for the contracting party. The court acknowledged that confidentiality is often a material term in a settlement agreement; however, if the parties wish to bind the attorneys personally then it is “easy enough” to draft an agreement that explicitly makes the attorneys party to the confidentiality provisions. Id.

Importantly, the court makes the qualifying statement that here the attorneys were being sued directly for breach of contract and that “[a]rguably [plaintiff] could state a cause of action as a third-party beneficiary” of the contract between the attorneys and their client. Id. at 69-70. The court also observed that an attorney who discloses confidential settlement terms “faces practical and ethical risks,” and agreed with the attorney’s concession in his testimony that he had a duty not to cause or create potential litigation for his clients. Id. at 69-70 & n.2.

The opinion also addresses the applicability of the “commercial speech” exception to the anti-SLAPP statute, finding that the attorney’s discussions with a reporter were not “advertising” and therefore did not fall within the exception. Id. at 64.