June 2013 - Floodgates Open to Civil Claims Against Attorneys and Law Firms
by Mary A. Dannelley
Most California law firms would shy away from employing an attorney who has resigned from the State Bar in the midst of pending disciplinary charges. Consequently, law firms and practitioners may dismiss the recent opinion in People v. Stender, 212 Cal. App. 4th 614 (2012), petition for review denied, 2013 Cal. LEXIS 2139 (Mar. 20, 2013), as wholly inapplicable to any circumstances they will ever face in their practice of law. However, such a narrow view of the Stender opinion may be misguided, as the conclusions of the case extend beyond the specific facts presented by the case. The court’s reasoning in Stender has potential far-reaching implications because the decision rests on the court’s conclusions that: (a) law firms are subject to the ethical rules in the same manner as “members” of the State Bar, and (b) violations of the ethical rules can form the predicate for a cause of action under California Business & Professions (B & P) Code § 17200, notwithstanding the express language of Rule 1-100(A) that the rules “are not intended to create new civil actions” and Rule 1-110 which vests disciplinary authority in the State Bar. In concluding that a law corporation has independent ethical obligations to protect its clients’ interests against the unauthorized practice of law by a former member of the State Bar, the court expanded the potential liability of attorneys and law firms under both the Rules of Professional Conduct and B & P Code § 17200.
A. Egregious Facts Presented Fertile Ground for Ground-Breaking Conclusions
A San Francisco immigration attorney resigned from the California State Bar after the State Bar brought disciplinary charges against him. As a result of his resignation, the attorney was no longer eligible to practice law in the state of California. After his resignation, another attorney acquired his law practice and became the sole shareholder of the surviving law corporation that continued to provide services to clients of the resigning attorney. The new principal of the law firm was admitted to practice before the Ninth Circuit, but was not a member of the State Bar of California. The resigning attorney continued to perform services for clients of the law firm, although the nature of those services and factual allegations were disputed.
In 2010, the “People of the State of California” filed a complaint against the resigning member, the law firm, and its principal shareholder for unfair business practices under California B & P Code § 17200. In regards to the law firm and its principal shareholder, the complaint alleged, among other things, that the following ethical violations formed the basis for the § 17200 claim: (a) the law firm and its principal violated §§ 6180 and 6180.1 of the California B & P Code by failing to provide written notice of the former attorney’s resignation to clients, courts, and the State Bar; (b) the law firm and its principal violated Rule 1-311 of the California Rules of Professional Conduct by failing to provide written notice to the State Bar of their employment of the resigning attorney, along with the activities that he would be prohibited from performing; and (c) the law firm and its principal violated § 6133 of the California B & P Code and Rule 1-300 of the California Rules of Court for aiding in the unauthorized practice of law.
Contending that the former attorney, the surviving law corporation, and its principal shareholder were perpetrating a massive fraud and taking money under false pretenses as a result of the asserted unlawful practices, the People sought and obtained a preliminary injunction. Among other things, the preliminary injunction required the law firm and its principal to give notice to the resigning attorney’s clients that he was not an attorney, the circumstances of his resignation from the State Bar, the activities he could not undertake on behalf of any clients, and the clients’ right to fire him and to request back unearned fees. The law firm and its principal shareholder appealed from the preliminary injunction, and the court of appeal affirmed.
B. A Law Firm Was Held Accountable for Ethics Violations
The law corporation and its principal shareholder raised a number of theories as to why the trial court erred in issuing an injunction against them, rather than solely against the former attorney who had resigned under threat of pending disciplinary charges.
1. Ethical Violations May Form the Basis of a Civil Action Under § 17200
The law firm and its principal initially argued that violations of the Rules of Professional Conduct cannot support a claim for unfair business practices under California B & P Code § 17200. Rule 1-100(A) provides that “[t]he following rules are intended to regulate professional conduct of members of the State Bar through discipline. . . . These rules are not intended to create new civil causes of action.” Cal. R. Prof. Conduct 1-100(A); Stender, 212 Cal. App. 4th at 631-32. The court rejected the argument that a violation of the ethical rules could not support a § 17200 claim, noting that the complaint did not allege an independent cause of action for violation of the ethical rules and stating, “[i]t is well established that a § 17200 claim may be based on violation of a statute that the plaintiff could not directly enforce with a private action.” Stender, 212 Cal. App. 4th at 632.
2. A Law Corporation Is a Member of the State Bar
Arguing that neither the law firm nor the principal were members of the State Bar, the appellants claimed that an injunction could not be issued against them for a violation of the State Bar rules because the rules did not apply to them. Again, the court rejected this argument, relying upon California B & P Code § 6167 and the California Attorney General’s interpretation of that code section. Stender, 212 Cal. App. 4th at 632 (citing 58 Ops. Cal. Atty. Gen. 665, 667 (1975)). Section 6167 provides:
A law corporation shall not do or fail to do any act the doing of which or the failure to do which would constitute a cause of action for discipline of a member of the State Bar, under any statute, rule or regulation now or hereafter in effect. In the conduct of its business, it shall observe and be bound by such statutes, rules and regulations to the same extent as if specifically designated therein as a member of the State Bar.
Cal. B & P Code § 6167. In holding that a law corporation is bound to adhere to the same ethical rules that an individual member of the State Bar is required to follow, the court of appeal specifically endorsed the logic that a law corporation is a member of the State Bar. Stender, 212 Cal. App. 4th at 632.
3. A Law Firm Has Independent Obligations Under the Ethical Rules
Multiple rules governed the duty of both the law firm and the principal to give notice both to the State Bar and to clients of the firm regarding the employment of an attorney who had resigned from the State Bar during the pendency of disciplinary charges, including notice of the specific tasks that he was not authorized to perform. Rule 1-311 of the Rules of Professional Conduct governs the employment of an attorney who is ineligible to practice law due to a resignation or suspension as a result of disciplinary charges. Rules 1-311(B) and 1-311(C) specify the legal work that such an individual may and may not perform, and Rule 1-311(D) specifically requires written notice to the State Bar prior to the employment of a former attorney who is no longer eligible to practice law and a representation that he or she will not perform certain activities. Cal. R. Prof. Conduct 1-311(D). Likewise, California B & P Code §§ 6180 and 6180.1 impose upon “the person having custody and control of the files and records of the clients” the obligation to give notice to the clients of any attorney who has ceased the practice of law. In cases of disbarment or an attorney’s resignation, the notice must provide any information required by the order of disbarment or accepting the attorney’s resignation. Having determined that the law corporation was bound to the same rules as a “member” of the State Bar, the Stender court found these rules applicable to the law firm and its principal, and required the firm itself to give the requisite notice to the State Bar and the firm’s clients. Stender, 212 Cal. App. 4th at 632-34.
4. The Firm Aided the Unauthorized Practice of Law
The appellants argued that they had not aided the unauthorized practice of law because they were authorized to sign the pleadings and appear in court and, therefore, assumed responsibility for the actions of the non-lawyer. Stender, 212 Cal. App. 4th at 638. The court of appeal rejected this contention, emphasizing the extent to which the law firm facilitated the former attorney’s continuation of the practice of law and gave him the platform from which to mislead clients into believing he was their lawyer. In fact, the court of appeal determined that signing pleadings and appearing for the former attorney were precisely the actions that facilitated the unauthorized practice of law. In this regard, the court stated:
The complaint alleges, in essence, that by assuming the legal responsibility for actions undertaken on behalf of IPG clients, Stender and other IPG attorneys provided the means for Guarjardo to continue his law practice. According to the clients’ declarations, they were told, and led to believe by the conduct they observed, that Guarjardo was their attorney, and it was Guarjardo who developed the legal strategies for their cases, gave legal advice, and discussed and collected legal fees.
C. Stender Broadens Attorney and Law Firm Liability for Ethical Violations
1. Stender Opens the Door to § 17200 Claims for Ethical Violations
Stender specifically holds that a cause of action under California B & P Code § 17200 may be predicated on a violation of the Rules of Professional Conduct. Given the express language of Rule 1-100(A) that the ethical rules were not intended to create new civil causes of action, the Stender opinion appears to be a significant departure from existing authority holding that a judicially implied cause of action cannot be predicated on the violation of an underlying statute where the legislature has espoused a specific intent not to create a private right of action. See Moradi-Shalal v. Fireman’s Fund Ins. Co., 46 Cal. 3d 287, 312 (1988) (abolishing judicially implied private cause of action for damages under Insurance Code § 790.03); Safeco Ins. Co. of America v. Superior Court, 216 Cal. App. 3d 1491, 1494 (1990) (“[W]e have no difficulty in deciding the B & P Code provides no toehold for scaling the barrier of Moradi-Shalal.”); Lu v. Hawaiian Gardens Casino, Inc., 50 Cal. 4th 592, 596, 601 (2010) (“‘[W]hen neither the language nor the history of a statute indicates an intent to create a new private right to sue, a party contending for judicial recognition of such a right bears a heavy, perhaps insurmountable burden of persuasion.’”) (citations omitted). Importantly, in Rubin v. Green, 4 Cal. 4th 1187 (1993), the California Supreme Court previously declined to recognize a cause of action under § 17200 for unlawful attorney solicitation under California B & P Code § 6153. The Rubin court limited its holding to the case at hand which involved party litigants and a perceived attempt to make an end-run around the litigation privilege, but left open the possibility of a claim under the Unfair Competition Law by a non-party litigant. Id. at 1203-04.
Stender reasons that a violation of the ethical rules can form the basis of a § 17200 claim, which means law firms and individual attorneys now face potential civil liability for ethical violations. Relying upon Stop Youth Addiction v. Lucky Stores, Inc., 17 Cal. 4th 553 (1998), the court held that “[i]t is well established that a § 17200 claim may be based on violation of a statute that the plaintiff could not directly enforce with a private action.” Stender, 212 Cal. App. 4th 614, 632 (2012). In so holding, the court did not reconcile the language in Stop Youth Addiction acknowledging that Safeco and Rubin “stand at most for the proposition the UCL cannot be used to state a cause of action the gist of which is absolutely barred under some other principle of law” with the legislative intent expressed in Rule 1-100(A) itself not to create new causes of action for violations of the Rules of Professional Conduct. Stop Youth Addiction, 17 Cal. 4th at 566; Stender, 212 Cal. App. 4th at 632. It remains to be seen whether subsequent interpretations of Stender will limit the holding to actions under § 17200 brought by an attorney general or city attorney on behalf of the public, as was the case in Stender, in order to avoid opening the floodgates to civil claims by disgruntled clients under § 17200. Notably, the legislature stands poised to consider the codification of portions of the Stender opinion under Assembly Bill 888, which would add a new provision to the B & P Code (§ 6026.6) and amend § 17206 to allow the State Bar to pursue a civil action and seek recovery of civil penalties under § 17206 for violations of the statutes prohibiting the unauthorized practice of law. For now, however, Stender opens the door to the equitable remedies available under § 17200, et seq., for individuals aggrieved by an attorney’s alleged ethical violation.
2. Law Firms Are Subject to the Ethical Rules
In Stender, the court held that the law firm that employed the former attorney bore responsibility for providing written notice of cessation of the practice of law to clients, courts, opposing counsel, and the State Bar. Again, while this conclusion appears less than earth-shattering given the specific facts of the case, the holding is novel in that it rests on the conclusion that a law corporation registered with the State Bar itself is a “member” of the State Bar, not just the individual attorneys who work for the law firm and are licensed to practice law. Not only does this holding change the landscape of the current disciplinary system applicable to members of the State Bar, but it leaves open what a law corporation is authorized to do independent of an individual attorney who has passed the State Bar exam and holds a license to practice in California.
3. Signing Pleadings and Making Court Appearances for a Non-Lawyer May Facilitate the Unauthorized Practice of Law
Stender dispels the notion that signing pleadings drafted by an individual who is not an attorney or making the court appearances for them may actually be the very conduct that gives rise to an ethical violation, providing the very means by which a non-lawyer can practice law and interact with clients in the same manner as an attorney authorized to practice. The court of appeal specifically pointed to conduct that gave clients the impression they were working with and relying upon an attorney authorized to practice law—developing strategies, giving legal advice, and discussing and collecting fees. By making court appearances and signing pleadings for such a person, the law firm takes such conduct one step further and actually facilitates and furthers the unauthorized practice of law. In other words, signing the pleadings does not immunize an attorney from a finding that he or she aided in the unauthorized practice of law. Under Stender, it may constitute precisely the conduct that is a violation of the applicable rules—specifically, Rule 1-300(b) of the Rules of Professional Conduct and California B & P Code § 6133.
Mary A. Dannelley is a sole practitioner in Irvine, California. Ms. Dannelley practices in the areas of commercial and employment litigation. Ms. Dannelley also provides employment counseling to employers and conducts independent workplace investigations. Ms. Dannelley can be reached at firstname.lastname@example.org.