January 2012 - Ethics in Review 2011
by the OCBA Professionalism and Ethics Committee
The past year saw another steady stream of ethics cases and opinions in California addressing a wide range of fascinating ethics issues. Below, the OCBA Professionalism and Ethics Committee of summarizes some of the more significant ethics developments over this past year.
Duty of Loyalty v. Free Speech—Oasis West Realty, LLC v. Goldman, 51 Cal.4th 811 (2011)
A lawyer and his firm represented a client in seeking approval of a redevelopment project with the City. Following the termination of the representation, the lawyer acted in a personal capacity to oppose the project. The client sued, alleging breach of fiduciary duty, professional negligence, and breach of contract, asserting a breach of confidentiality and duty of loyalty. The defendants claimed that their rights to freedom of speech protected the activities of the lawyer in opposing the project. However, the California Supreme Court found there was a probability that the plaintiff would prevail on the merits of its claims that the lawyer had used confidential information to the detriment of the former client. The duty of loyalty precluded the lawyer from doing anything to injuriously affect his former client regarding the subject matter of the representation, the Court said, and also prohibited the lawyer’s use of any client information obtained in the prior relationship to the client’s detriment, even after the termination of that relationship.
The Court said the duty of loyalty extended to situations involving use of client information even where no confidential information is disclosed. The lawyer also failed to comply with the requirements of California Rule of Professional Conduct 3–310(B), which generally requires lawyers to disclose any personal interests or relationships that are known or reasonably should be known, and that could substantially impact the lawyer’s professional judgment.
Confidentiality—Fremont Reorganizing Corp., 198 Cal.App 4th 1153 (2011)
This Anti-SLAPP decision addresses an attorney’s duty of confidentiality and establishes that litigation privilege (Civil Code §47) will not shield an attorney in an action by a client based upon the attorney’s communicative conduct. It further establishes that the “illegal as a matter of law” exception to Anti-SLAPP protection, established by Flatley v. Mauro, 39 Cal.4th 299 (2006), applies only to conduct that is actually criminal, not to conduct that may violate ethical standards of the legal profession.
Faigin, a former general counsel for Fremont Investment & Loan (FRC) brought a wrongful termination lawsuit against FRC following liquidation and reorganization proceedings. FRC cross-complained against Faigin, alleging that he had represented parties with conflicting interests without making proper disclosure or obtaining informed consent. FRC also accused Faigin of breach of certain duties of confidentiality. Faigin admitted reporting confidential information to the State Insurance Commissioner regarding the client’s intent to sell off assets that were subject to restraining orders, but claimed that his report to a state agency was protected activity, and that Civil Code §47 litigation privilege was a complete defense. FRC contended that Faigin’s statements to the state agency violated his duties of loyalty and confidentiality, and were therefore “illegal,” thus not subject to Anti-SLAPP protection. FRC also contended that litigation privilege cannot protect an attorney from liability to a client.
The Court extensively reviewed prior cases including Oasis, supra, on the duty of confidentiality, and made several important holdings. Among other things, the Court held that the exception created by Flatley is limited to criminal conduct, and that lawyer’s breach of the duties of confidentiality and loyalty, violating ethics rules, are not illegal as a matter of law, it may violate ethics rules. While the Court concluded that Faigin’s statements would be eligible for Anti-SLAPP protection, it decided that FRC had met its burden of establishing a probability of prevailing as to the causes of action for breach of the duty of fiduciary duties. The Court concluded that the litigation privilege is inapplicable to a client’s claims of breach of duty based upon the lawyer’s communicative conduct. Thus, where a lawyer breaches confidence, the litigation privilege provides no protection.
Standing to Seek Disqualification—Blue Water Sunset, LLC v. Markowitz, 192 Cal.App.4th 477 (2011)
Generally, a party must prove a past or present attorney-client relationship with the attorney or that the attorney owed a duty of confidentiality to the complaining party and breached it in order to seek disqualification. Here, the court held that a plaintiff who was not an attorney’s client had standing to seek the attorney’s disqualification in the plaintiff’s derivative lawsuit.
Plaintiff Blue Water and defendant Markowitz were 50% members of three LLCs. Plaintiff sued Markowitz for dissolution of the LLCs and fraud. Because certain causes of action were derivative, Blue Water also named the LLCs as nominal defendants.
On behalf of Markowitz and the LLCs, attorney Kurtz filed demurrers, and later a responsive brief on appeal. Blue Water moved to disqualify Kurtz for concurrently representing clients with adverse interests (Markowitz and the LLCs), without obtaining conflict waivers. Markowitz argued Blue Water lacked standing because it was never represented by Kurtz.
The Court disqualified Kurtz, finding that Markowitz and the other named defendants had adverse interests to the LLCs since the LLCs stood to benefit if Blue Water prevailed. Though nominally named as defendants, the LLCs were actually plaintiffs in the eyes of the law. The Court also noted that CPRC 3-600(E) specifies that if an LLC’s consent to a dual representation is required, the consent must be given by a constituent other than the one who is to be represented. Thus, a rule of vicarious standing would permit Blue Water (a 50% member of the LLCs) to enforce that unilateral right.
Attorney-Client Privilege (Inadvertent Disclosure)—Clark v. Superior Court, 196 Cal.App. 3d 37 (2011)
In Clark, the court affirmed the disqualification of a lawyer who had received and made use of improperly obtained attorney-client communications of the opposing party. While prosecuting a lawsuit on behalf of Clark against Clark’s former employer, the Higgs law firm received from Clark documents that on their face appeared to be confidential communications between the employer and its counsel. Despite the employer’s demand, Higgs refused to return the documents and, instead, continued to make use of them. The employer moved to disqualify Higgs, which the trial court granted.
In affirming, the court relied on Rico v. Mitsubishi Motors Corp., 42 Cal.4th 807 (2007), and State Comp. Ins. Fund v. WPS, Inc., 70 Cal.App.4th 644 (1999), which held that a lawyer receiving inadvertently produced work product or attorney-client privilege communications has a duty to notify the other side and, upon demand, to return the documents, and that a failure to do so could lead to disqualification. The Clark court rejected Higgs’ effort to distinguish Rico and State Fund on the ground that the production in those cases was inadvertent, while Clark inappropriately took the documents from the employer and intentionally provided them to his lawyers.
Significantly, the court rejected the argument that a determination of whether the documents were privileged could only be made after an in camera review, instead finding that the court need only consider “the dominant purpose of the relationship between the client and the lawyer.” Id. at 51, citing Costco Wholesale Corp. v. Super. Ct., 47 Cal.4th 725, 739–40 (2009).
Attorney-Client Privilege (Privacy at Work)—Holmes v. Petrovich Development Co., 191 Cal.App.4th 1047 (2011)
In Holmes, an employee sued her employer and supervisor for sexual harassment, and related claims. After defendants prevailed, the employee argued on appeal, that the trial court abused its discretion in denying her motion for the return of privileged communications she had with her attorney that resided on her work computer and permitting the introduction of such documents at trial. Affirming the trial court, the appellate court concluded that emails the employee sent to her attorney on her work computer were not privileged because she had been advised of the company’s policy against personal use of the computers, its monitoring and inspections for compliance with the policy, and that employees engaging in such use would “have no right of privacy with respect to that information or message.” The appellate court found that the employee’s use of the work computer for such communications despite these warnings would be inconsistent with the requirement in §952 of the Evidence Code that the information not be disclosed to third persons other than those present to further the interest of the client in the consultation or where disclosure is reasonably necessary for the transmission of information or the accomplishment of the purpose of the legal consultation. In light of the company’s policy and warnings, the appellate court determined that her use of a password for her email and her deletion of the emails after they were sent did not support a belief that the communications were private. The appellate court also rejected the argument that she had a reasonable expectation of privacy because she incorrectly contended, in contradiction to the policy, that there was no auditing of the computers.
Attorney-Client Privilege and Work Product—Fireman’s Fund Ins. Co. v. Super. Ct., 196 Cal.App.4th 1263 (2011)
Stemming from a discovery dispute in an insured’s action against its insurer for the alleged bad faith handling of its claims, the trial court ordered that the insurer’s former attorney answer certain deposition questions over objections of attorney-client privilege and work product protections on the bases that the client had not been involved in the at-issue communications and the attorney’s work product had not been reduced to writing. The insurer petitioned for a writ of mandate to vacate the trial court’s order.
The court of appeal granted the insurer’s petition, rejecting outright the trial court’s narrow view of the attorney-client and work product privileges. First, recognizing the broad language set forth in California Evidence Code §§952 (defining “confidential communications”) and 954 (codifying the “attorney-client privilege”), the court held that the attorney-client privilege extends beyond confidential communications between a client and his or her attorney to confidential communications between and among other attorneys in a law firm as well as to other non-attorney agents retained to assist in the client’s representation. Second, the court held that, despite the seemingly contradictory language of Civil Procedure Code §2018.030 (codifying the “attorney work product privilege”), the absolute work product privilege protects an attorney’s impressions, conclusions, opinions, legal research, and theories regardless of whether or not reduced to writing.
Mediation Privilege—Cassel v. Super. Ct., 51 Cal.4th 113 (2011)
The California Supreme Court held that there is no exception to the mediation privilege in California Evidence Code section 1119(a)-(b) that would allow a client to use communications with his attorney during mediation against that attorney in a later malpractice action. In so holding, the Cassel Court relied upon the plain language of §1119(a), which states that “[n]o evidence of anything said or any admission made for the purpose of, in the course of, or pursuant to, a mediation . . . is admissible or subject to discovery.” 51 Cal.4th at 128. The Supreme Court rejected the Court of Appeals’ ruling that §1119 was only intended to protect communications between disputants, not between a party and his own attorney, finding that no statutory exception supported this interpretation. The Court refused to create an exception, noting that “[w]e have repeatedly said that these [mediation] confidentiality provisions are clear and absolute. Except in rare circumstances, they must be strictly applied and do not permit judicially crafted exceptions or limitations, even where competing public policies may be affected.” Id. at 118.
Arbitration Agreements in Attorney Fee Agreements—Desert Outdoor Advertising v. Super. Ct., 196 Cal.App.4th 866 (2011)
The decision addressed the enforceability of arbitration clauses in attorney fee agreements where the client fails to read the arbitration clause. The client in this case, Desert Outdoor Advertising (DOA), retained an attorney and his firm to represent him in litigation with the City of Oakland. The retainer agreement did not include an arbitration clause. During the lawsuit, the attorney switched firms, and presented DOA with a new retainer agreement that did include an arbitration clause. DOA’s president signed the retainer agreement without reading it carefully enough to notice the arbitration clause. The litigation against the City of Oakland was resolved adversely to DOA. DOA subsequently filed a suit for professional negligence against its attorney and the attorney’s new firm. The defendants in the professional negligence action filed a motion to compel arbitration, which the trial court granted. DOA sought review by writ of mandate.
The Court of Appeal affirmed the trial court’s decision ordering the parties to arbitration, relying upon the “cardinal rule of contract law . . . that a party’s failure to read a contract, or to carefully read a contract, before signing it is no defense to the contract’s enforcement.” The court rejected on the facts of the case DOA’s argument that an attorney has a fiduciary duty to separately explain to its clients the existence and significance of an arbitration clause in a fee agreement. The court explained that DOA and its president were sophisticated parties, and the scope of a fiduciary’s duties decreases with the sophistication of the parties. The court also was not persuaded that the addition of an arbitration clause during an existing attorney-client relationship gave rise to a duty to explain. The new retainer agreement was clearly different from the original retainer agreement, and thus DOA had no reason to assume that its terms relating to arbitration were the same.
Conflict of Interest—Banning Ranch Conservancy v. Super. Ct., 193 Cal.App.4th 903 (2011)
In Banning Ranch, the Court of Appeal issued a peremptory writ of mandate setting aside a the trial court’s order disqualifying a law firm from representing Banning Ranch Conservancy (“Conservancy”) against the City of Newport Beach (“City”). The City brought the motion to disqualify due to conflict of interest based on two theories: That the City was the firm’s former client in at least eight different matters by the firm in years prior; and that the City was the firm’s current client based on two retainer agreements never terminated by either party. The retainer agreements provided that the firm would provide legal services to the City on an “as requested” basis, conditioned on the firm’s “ability to take on the matter.” Finding that the City remained the firm’s current client under the retainer agreements, the trial court disqualified the firm from representing the Conservancy.
On appeal, the court focused on whether the open-ended retainer agreements between the City and the firm created a current attorney-client relationship. The court determined that these “framework” retainer agreements, unlike “classic” retainer agreements, did not create a current attorney-client relationship when there was no evidence that the firm currently represented the City in ongoing matters, and because the agreements provided that the parties agree to new attorney-client relationships on a matter-by-matter basis. The court found that there was no need to “terminate” the agreements because any future representation under the terms of the agreements required actions by both the client, “as-requested” and the attorney, “as confirmed.”
Modification of Fee Arrangements During Representation—ABA Formal Opinion 11–458
The ABA Opinion indicates that modification of existing fee agreements is permissible under certain circumstances, but is often suspect because of the fiduciary relationship between an attorney and a client. Modifications are subject to the general principle that a lawyer may not charge or collect a fee that is unreasonable under the circumstances. The reasonableness of a modified fee agreement should be assessed based upon the circumstances at the time of the modification. In addition, a lawyer should explain the proposed modification to the client, including the advice that the client need not agree to pay the modified fee in order for the lawyer to continue the representation, such that the client can make an informed decision with respect to agreeing to the modification.
Modifications of hourly billing rates are permissible generally where the client has been adequately informed of the billing practice and has consented to it, the periodic rate increases are reasonable under the circumstances, and the periodic rate increases are timely and clearly communicated to the client in advance. A modification of a fee agreement from an hourly fee arrangement to a contingent fee arrangement also may be permissible. The general rules pertaining to a contingent fee arrangement will apply to the modification, including the requirement that the agreement is in writing and signed by the client.
Social Networking—San Diego County Bar Association Legal Ethics Opinion 2011–2; Judicial Ethics Committee Opinion 66
Social media has had widespread impact on modern society, including, recently, in the legal profession. In 2011, we saw a number of ethics opinions involving issues raised by social media, two of which deserve mention here.
In its Legal Ethics Opinion 2011–2, the San Diego County Bar Association concluded that an attorney may not make an ex parte friend request with high-ranking employees of a represented party. The SDCBA stated that “[t]he rule barring ex parte communication with a represented party is designed to avoid disrupting the trust essential to the attorney-client relationship.” The undergirding concern is that the friending party will use the contact to elicit information about the subject of the representation. The SDCBA went further, however, concluding that even a friend request to a non-represented party may be an ethical violation unless the purpose of the request is made clear.
In its Judicial Ethics Committee Opinion 66 on Online Social Networking, the California Judges Association concluded that the Code does not per se prohibit Judges from participating in social networking. The content of this participation, however, is subject to the various judicial canons that govern a Judge’s conduct. A participating judge also has affirmative obligations to monitor the social network to ensure it does not violate any of various potentially applicable Canons. Judges may not network with attorneys who have a pending case before the Judge. If an attorney has a pending case before a judge, the Judge must cease social networking with (or unfriend that) attorney and disclose as much. The opinion concludes with the truism: “judges who choose to participate in online social networks should be very cautious.”
Prepared by the Professionalism and Ethics Committee of the OCBA.