From the attorney-client privilege to conflicts to supervision of paralegals, 2010 was another active year for California ethics cases. Here are some of the highlights, as prepared by the OCBA Professionalism and Ethics Committee. . . .

The federal case of Continental Casualty Company v. St. Paul Surplus Lines Insurance Company, 265 F.R.D. 510, 519 (E.D.Cal. 2010), applied California law in a wrongful death lawsuit arising from a fatal forklift accident. Insurers Continental and St. Paul both provided coverage for defendant Crown. Continental agreed to defend Crown, but under a reservation of rights; it thus secured independent Cumis counsel for Crown. St. Paul did not participate in Crown’s defense. In related cross-claims to determine the proportionate liability of the two insurers, Continental sought discovery of communications between and among Crown, Crown’s Cumis counsel, and St. Paul. St. Paul resisted the discovery, claiming to be part of a tripartite relationship between the insured (Crown), and the insured’s Cumis counsel. The court explained this tripartite relationship: “When there is a single, common goal shared by an insurer and its insured of minimizing or eliminating liability to a third party, California courts have recognized that a unique tripartite relationship exists among those parties (the insurer and the insured) and the defense counsel hired to defend against third-party liability. In that tripartite relationship, both the insurer and the insured are considered the clients of the defense counsel, and an attorney-client privilege is shared among all of them.”

Rejecting application of the attorney-client privilege in this instance, the court found that this tripartite relationship did not exist between and among Crown, Crown’s Cumis counsel, and St. Paul because St. Paul did not defend Crown in the lawsuit. The court observed that the attorney-client privilege is not even extended to communications between an insured, an attorney, and an insurer who is defending with a reservation of rights, let alone to one not defending at all. Moreover, the court rejected St. Paul’s argument that the insured’s contractual obligation to share certain information with its insurer somehow extended the attorney-client privilege to those communications.

In Hernandez v. Tanninen, 604 F.3d 1095 (9th Cir. 2010), plaintiff brought workplace discrimination claims against the City of Vancouver and Mark Tanninen. During his investigation, plaintiff’s attorney, Gregory Ferguson, spoke with Tanninen, who agreed to provide a corroborating statement. Tanninen later reneged after talking with the Deputy Fire Chief. As a witness to Tanninen’s prior statements and alleged conspiratorial cover-up, Ferguson referred the case to another attorney, and the complaint was amended to add a conspiracy claim. In opposition to the City’s motion for summary judgment, plaintiff submitted affidavits from both plaintiff and Ferguson, which included communications between plaintiff and Ferguson about Tanninen, portions of Ferguson’s communications with Tanninen, and certain of Ferguson’s notes regarding those communications. The district court granted the motion, and the appellate court reversed. Thereafter, the City moved to compel production of Ferguson’s entire working file, arguing that any privilege had been waived as a result of plaintiff’s reliance on Ferguson’s testimony. The district court agreed and ordered the file be produced. Upon interlocutory appeal, the Ninth Circuit granted a petition for writ of mandamus.

The Ninth Circuit held that the district court did not clearly err in concluding plaintiff waived the privilege as it pertained to discussions with Tanninen. However, it concluded there was clear error “in finding a blanket waiver of the attorney-client and work product privileges as to the entire case.”Id. at 1101. The court stated that disclosure of protected communications results in a waiver “only as to communications about the matter actually disclosed” or, as it pertains to work product, “with respect to matters covered in . . . testimony.” Id. at 1100 (citation omitted).

In United States v. Ruehle, 583 F.3d 600 (9th Cir. 2009), the Ninth Circuit tackled the scope of the attorney-client privilege in a public company’s internal investigation relating to its financial disclosure obligations. The government brought criminal charges against William Ruehle, the Chief Financial Officer of Broadcom Corporation, and others, arising from alleged backdating of stock options. The company brought in outside counsel to conduct an internal investigation, which included interviewing Ruehle. The intent of the outside law firm was to turn over its findings to Broadcom’s outside independent auditors, which the law firm ultimately did.

In subsequent criminal proceedings, the government sought to use Ruehle’s statements from the interviews, which he claimed were protected by the attorney-client privilege. The district court held that the statements were privileged. The Ninth Circuit reversed and remanded. First, it noted that the trial court committed a “fundamental flaw” in its analysis by relying on California law to determine the scope of the attorney-client privilege. The court reiterated the well-established rule that issues relating to the scope of the attorney-client privilege in federal cases are determined by federal common law. Id. at 608. Then, applying federal common law—which is narrower and more strictly construed than California law—the court found that Ruehle’s statements were not privileged because the intent always was for those statements to be disclosed to the company’s outside auditors; thus, they were not made in confidence.

Kirk v. First American Title Insurance Company, 183 Cal.App.4th 776 (2010), was probably the most discussed ethics case of 2010. In connection with a series of class action lawsuits against First American, attorney Cohen consulted with plaintiff’ counsel and, in so doing, indisputably obtained confidential information relating to the class actions. Cohen later joined the Sonnenschein firm (the Firm), who subsequently became counsel for defendant First American in the class action when other lawyers representing First American joined the Firm. When plaintiffs’ counsel objected to the Firm’s representation of First American, the Firm set up an ethical screen around Cohen prohibiting him from working on or discussing the class actions, barring his access to non-public class action documents, and precluding him from receiving any fees generated by the defense of the class actions.

Notwithstanding the ethical screen, the trial court disqualified the Firm based on the presumption that Cohen had shared plaintiffs’ confidential information with other lawyers at the Firm. The appellate court reversed. It explained that, once a party seeking disqualification demonstrates that an attorney has confidential information, a presumption arises that the attorney shared such information with his firm. That presumption, however, can be rebutted by evidence of an effective screen.

The court affirmed that the “typical elements” of an ethical screen should include: 1) the physical, geographical, and departmental separation of attorneys; 2) prohibitions against and sanctions for discussion of confidential matters; 3) rules and procedures preventing access to confidential information; 4) procedures preventing a disqualified attorney from sharing profits from the representation; 5) continuing education in professional responsibility; and 6) notice to the former client, to enable enforcement and permit challenge of any breaches. Notably, the court opined that not all elements are required in all cases. The court also confirmed that the consent of the interested party (typically the former client) to the screen is not required.

It remains to be seen whether other California courts will follow the lead of the Second Appellate district in Kirk.

In California Earthquake Authority v. Metropolitan West Securities, LLC, No. S-10-291-FDC/GGH, 2010 U.S. Dist. LEXIS 44016 (E.D.Cal. May 5, 2010), the court granted plaintiff’s motion to disqualify defendants’ counsel, finding that defendants’ counsel still had an ongoing attorney-client relationship with plaintiff, notwithstanding that he had not performed work for plaintiff in six years. Pursuant to the engagement agreement, the attorney-client relationship could be terminated only by written notice, and it was undisputed that no such notice had been given. The court thus rejected defendants’ counsel’s argument that the attorney-client relationship had terminated through inaction.

In Henderson v. Pacific Gas & Electric Company, 187 Cal.App.4th 215 (2010), a sole practitioner claiming to be busy on other matters entrusted a paralegal (who had just taken the California Bar exam) to prepare and file an opposition to a motion for summary judgment. Through a series of events that included the paralegal leaving for a cruise and having her computer crash, the opposition was not timely filed. The court ultimately granted the motion for summary judgment and denied a motion for relief from the judgment under Civil Procedure Code §473(b), which provides that a judgment may be set aside if entered as a result of the lawyer’s mistake, inadvertence, surprise, or neglect. The court found that the paralegal’s failures did not excuse the lawyer’s conduct, and thus did not support relief under §473(b). As the court stated, “[t]he responsibility for preparing the opposition, however, ultimately was [the lawyer’s].” Id. at 232. The court also stated that, “[a]lthough an attorney cannot be held responsible for every detail of office procedure, it is an attorney’s responsibility to supervise the work of his or her staff members.” Id. at 218.

The court also referred in its opinion to ABA Model Rule 5.3, which requires attorneys to competently supervise subordinate employees and agents, both attorneys and non-attorneys alike, independently of the general duty to act competently. Id. at 232. Currently, there is no California counterpart to Model Rule 5.3, although a similar rule recently has been submitted to the Supreme Court for approval. Whether or not the new rule ultimately is adopted, Henderson confirms that a lawyer who negligently supervises his subordinate faces potentially serious consequences, even if those consequences are liability for legal malpractice rather than State Bar discipline.

In Plummer v. Day/Eisenberg, LLP, 184 Cal.App.4th 38 (2010), a contingency fee retainer agreement between a law firm and a client provided that another lawyer, Plummer, would receive 50% of the fees and an independent lien on any recovery. Later, a new law firm replaced Plummer. When the settlement check—which included Plummer as a payee—was received, it was negotiated without Plummer’s signature.

Plummer sued the law firm for conversion and interference with prospective economic advantage. The law firm argued, among other things, that Plummer had no direct contractual relationship with the clients, and thus had no right of possession. The law firm also argued that Plummer’s lien violated Rule 3-300’s requirement that the clients be advised that they may seek independent counsel before granting a lien to secure legal fees. The trial court granted the law firm summary judgment, finding no direct contractual relationship between Plummer and the client.

On appeal, the court found a triable issue as to whether there was a direct contractual relationship between the client and Plummer, in light of the rights granted to Plummer on the second page of the retainer agreement. More significantly, the court held that the lien did not violate Rule 3-300, notwithstanding Plummer’s failure to advise the clients that they may seek independent counsel. In so holding, the court adopted the reasoning of the State Bar Standing Committee on Professional Responsibility and Conduct Formal Opinion 2006–170, which concluded that liens in initial contingency fee agreements—in contrast to charging liens in hourly fee matters—do not create an adverse interest subject to Rule 3-300. Because such liens are inherent to contingency fee agreements, the requirement of advising clients of their right to seek independent counsel would be futile since other lawyers would say that inclusion of such a clause was accepted practice.

In Chan v. Lund, 188 Cal.App.4th 1159 (2010), the court addressed Rule of Professional Conduct 3-300, which prohibits a lawyer from entering into a business transaction with a client absent certain disclosures to and protections for the client. In Chan, the client contended that the lawyer had made a threat to withdraw from trial in order to induce the client to participate in mediation and make settlement concessions. The lawyer also agreed to discount his fees if the client entered into the settlement. In denying the client’s subsequent contention that the settlement was induced by his own lawyer’s coercion, the court found no basis to rescind the settlement, as the opposing party was not even aware of the lawyer’s supposed coercion.

The client also contended that the lawyer breached his ethical duties under Rule 3-300 by not making the required disclosures in advance of agreeing to discount his fees. In denying this claim, the court determined that a lawyer’s offer to discount his fees in order to encourage his client to settle litigation did not constitute a “business transaction” with his client within the meaning of Rule 3-300, and thus did not require these safeguards. The Court’s analysis was based upon an official comment to the Rule, which provides that the Rule is not intended to apply to the agreement by which the lawyer is retained, unless the lawyer acquires an ownership, possessory, security, or other pecuniary interest in client property, adverse to the client. The court reasoned that, while the Rule would apply to a situation where the lawyer obtains a security interest, it does not apply where the lawyer merely discounts his fee without acquiring an interest in the client’s third party claims or the settlement proceeds.

In Simpson Strong-Tie Company v. Gore, 49 Cal.4th 12 (2010), attorney Pierce Gore placed a newspaper advertisement informing the public that those with wood decks built after a certain date with galvanized screws manufactured by Simpson Strong-Tie (among others) may have legal rights and may be entitled to compensation. Gore’s information was based on television reports, other complaints, and Simpson’s own website. In early 2006, after writing letters to Gore complaining that his advertisement was defamatory and misleading, Simpson filed a lawsuit for defamation, trade libel, false advertising, and unfair business practices. Gore moved to strike the lawsuit under the anti-SLAPP statute, Cal.Civ.Proc. Code §425.16, and Simpson Strong-Tie responded by arguing that its lawsuit fell under the “commercial speech” exemption to the anti-SLAPP law, California Civil Procedure Code §425.17(c), which permits lawsuits for certain statements and conduct related to commercial transactions or made in the course of “delivering” goods or services.

The trial court dismissed the case. The Court of Appeal affirmed, finding that Simpson failed to meet its burden to prove the exemption applied. The court also found the exemption did not apply because Gore was seeking business, not “delivering” services. The Supreme Court affirmed, agreeing that Simpson had failed to meet its burden of proof. The Court found the exemption did not apply because, even if Gore’s advertisement implied that Simpson’s screws were defective (which the parties disputed), the advertisement was not “about” Gore’s or a competitor’s goods or services. Therefore, the SLAPP suit was properly dismissed.

In Thomas v. Girardi, 611 F.3d 1027 (9th Cir. 2010), two law firms filed a complaint on behalf of Nicaraguan plaintiffs in Los Angeles Superior Court to enforce a foreign money judgment allegedly obtained against Dole Food Company and Shell Chemical Company. The complaint attached a notary affidavit that was identified as the writ of execution from the Nicaraguan court; it named these entities as the judgment debtors although the actual judgment entered in Nicaragua was against Dole Food Corporation (a non-existent entity) and Shell Oil Company. The notary affidavit was actually a Spanish transcription of the original writ by a Nicaraguan notary public, and the paragraph explaining that the document was a transcription had been omitted from the version attached to the complaint.

Following removal to the Central District of California, the law firms maintained throughout motions to remand and to dismiss that the complaint attached the actual document. The District Court denied the motion to remand on the basis that the local defendant, Dole Food Company, was not a party to the judgment, and dismissed the action, noting that the notary affidavit was suspect.

The law firms appealed, reiterating in their brief that the judgment and writ identified Dole Food Company and Shell Chemical Company as defendants and judgment debtors, respectively. While drafting the reply brief, a junior associate at one of the firms expressed concerns about the viability of their position and the potential consequences. Two of the attorneys dissuaded the associate, and the reply was filed asserting that a money judgment existed against Dole Food Company. Ultimately, after defendants were able to obtain and augment the record with the original writ, the law firms dismissed the appeal.

Upon the findings of a Special Master in connection with an order to show cause, the Ninth Circuit imposed sanctions of $390,000 and analyzed whether the attorneys involved should be subject to suspension or disbarment. The court noted that Rules 3.1 and 3.3(a) of the ABA Model Rules of Professional Conduct and Rule 5-200 of the California Rules of Professional Conduct precluded attorneys from bringing an action for which there is no basis in fact or law and from making false statements of fact or law to a tribunal or otherwise seeking to mislead a judicial officer. The court found that an attorney from one of the firms did not take an active role in preparing the briefs, but rather developed a practice of joint representation with the other firm and permitted his name to be signed on briefs. Based on this practice, the court determined that a formal reprimand was appropriate for the lawyer’s recklessness in determining whether statements or documents central to an action on which his name appeared were false. In contrast, the court found that suspension was appropriate discipline for the three attorneys from the firm that filed the briefs, albeit the suspensions were limited due to mitigating factors, and the associate received only a private reprimand because he had raised his concerns with more senior attorneys.

The article was prepared by the OCBA Professionalism and Ethics Committee.