April 2016 - Forfeiture of Fees Due to Conflict of Interest

by Carole J. Buckner

Suppose that during a lawyer’s representation of a client, a conflict becomes apparent because the lawyer’s firm is representing an adverse client in a separate unrelated matter. If the clients will not consent to waive the conflict, can the lawyer simply fire one of the two clients in order to resolve the conflict? Can the firm offer to pay the client to waive the conflict? Will a general advance waiver of conflicts resolve the situation? Assuming that these options fail, may the lawyer recover fees as agreed in the fee agreement? If not, is the reasonable value of services recoverable based upon quantum meruit? Most importantly, will invalidation of a flawed advance waiver “upend countless agreements between lawyers and their clients and wreak havoc on the practice of law in the [s]tate”? These questions are addressed by the recent decision in Sheppard, Mullin, Richter & Hampton, LLP v. J-M Manufacturing Co., 244 Cal. App. 4th 590 (2016).

Conflicts of Interest
Rule 3-3101 addresses conflicts of interest. Rules 3-310(C)(1) and (2) provide that a lawyer cannot, without informed written consent, represent more than one client in a matter in which their interests potentially or actually conflict. Rule 3-310(C)(3) provides that a lawyer cannot, without informed written consent, represent a client in one matter, and at the same time, in a separate matter, accept as a client a person or entity whose interest in the first matter is adverse to the client in the first matter. Rule 3-310(E) provides that a lawyer cannot, without informed written consent, accept employment of a client adverse to a client or former client, where, by reason of the representation of the client or former client, the member has obtained confidential information material to the employment. Any of these rules may result in a conflict that may cause the disqualification of the lawyer absent informed written consent.

Informed written consent is defined as the client’s or former client’s consent following “disclosure,” which in turn is defined as informing the client of the relevant circumstances and of the actual and reasonably foreseeable adverse consequences to the client or former client. Rule 3-310(A). Firms may obtain informed written consent as permitted by these rules. In some cases, firms may obtain an advance waiver of future conflicts of interest, which may or may not be enforceable, depending upon the waiver and the circumstances. See Robert K. Sall, Advance Waivers Continue to Draw Criticism From Courts, Orange County Lawyer, February 2016, at 56.

A California lawyer cannot recover for services rendered in contradiction of the requirements of professional responsibility. Goldstein v. Lees, 46 Cal. App. 3d 614, 618 (1976). Conscience and good morals require that a lawyer conduct his or her practice so as not to be open to temptation to violate his duties of fidelity and confidence. Anderson v. Eaton, 211 Cal. 113, 117 (1930). Clients are entitled to vigorous and determined representation by counsel. Goldstein, 46 Cal. App. 3d at 620.

In J-M Manufacturing, the court addressed a request for disgorgement of all fees due to failure to disclose a conflict of interest involving concurrent representation of clients in separate matters. While representing J-M in a qui tam action alleging false representations by J-M to customers, seeking over $1 billion in damages, the firm charged $3.8 million for 10,000 hours of work. Previously the firm had represented South Tahoe in employment-related matters beginning in 2002. South Tahoe was a municipal intervenor in the qui tam action, and adverse to J-M in that matter.

Before J-M hired the firm, a conflict check revealed that South Tahoe had been a client of the firm. Based on a broad advance conflict waiver by South Tahoe, the firm determined that the firm could represent J-M in the qui tam action, and that there was no need to disclose the attorney-client relationship with South Tahoe to J-M.

The agreement with J-M included what the court characterized as a boilerplate waiver allowing the firm to represent current and future clients in matters involving J-M as long as the firm did not represent J-M in the same matter and the matter was not related to the representation of J-M. The agreement further provided that J-M waived the duty of loyalty, as long as the firm maintained confidentiality. The provision was not discussed with J-M’s in-house general counsel, who reviewed and otherwise revised the fee agreement, and the representation of South Tahoe was not disclosed to or discussed with J-M at the time the fee agreement was entered into with J-M.

Whether South Tahoe was a former or current client when the firm’s agreement with J-M was signed is disputed. But, three weeks later, the firm again began actively working for South Tahoe, creating an actual conflict at that point in time. Neither client was informed of this. So, the firm was representing clients who were adverse to each other at the same time, in two separate and unrelated matters. The specifics of this had not been disclosed in writing to either client, nor had either client waived the conflict of interest, other than through the broad language of the advance waiver, which did not in either case identify the specific adverse client.

South Tahoe moved to disqualify the firm, alleging a conflict of interest as a result of the joint representation of South Tahoe in employment matters, and representation of J-M in the qui tam action in which South Tahoe was adverse to J-M. At the hearing, the court tentatively indicated that the waiver was not fully informed, and rejected the firm’s argument that it could drop South Tahoe as a client to resolve the conflict. The so-called “hot potato rule” provides that a lawyer cannot avoid automatic disqualification due to concurrent representation of conflicting interests by unilaterally converting a present client into a former client. See American Airlines, Inc. v. Sheppard, Mullin, Richter & Hampton, 96 Cal. App. 4th 1017, 1037 (2002).

During a continuance of the hearing on the disqualification motion, the firm offered South Tahoe $100,000 and forty hours of free labor and employment advice in exchange for consent to the firm’s continued representation of J-M. The offer, later increased to $250,000, appears to have been rejected. In addition, J-M also rejected a proposal to bifurcate South Tahoe from the qui tam action, with separate counsel. Ultimately the court disqualified the firm from representation of J-M. Fee litigation followed.

At the fee arbitration, a panel of three arbitrators assumed an ethical violation had occurred. The arbitrators determined that, because the representation involved separate matters, and the South Tahoe matter was unrelated to the J-M representation, the conflict did not pervade the whole relationship and did not go to the heart of the firm’s representation of J-M. The arbitration panel awarded just over $1 million and the court confirmed the award.

Contract Unenforceable
On appeal, the court found that the boilerplate waiver in the fee agreement between the firm and J-M did not provide informed written consent because the firm did not disclose the circumstances regarding the conflict to either J-M or South Tahoe. The court said that to construe the waiver as informed “strains credulity,” when in fact the firm was silent about the conflict. J-M, 244 Cal. App. 4th at 611. The court distinguished prior cases permitting advance waivers because the firm here knew about South Tahoe, but the conflict waiver presented to J-M did not mention South Tahoe. Id. at 613.

The appellate court differentiated between cases involving “serious ethical violations such as conflicts of interest, in which compensation is prohibited, and technical violations or potential conflicts, in which compensation may be allowed.” Id. at 617. The court held that the firm’s “violation of Rule 3-310 precludes it from receiving compensation for services provided to J-M in the Qui Tam Action.” Id.

Quantum Meruit Denied
Quantum meruit refers to the principle that the law will imply a promise to pay for services that are performed, when the services were not conferred gratuitously, based on the expectation of payment by the parties. Fair v. Bakhtiari, 195 Cal. App. 4th 1135 (2011) (lawyer breached fiduciary duty to his client by engaging in business transactions with the client in violation of conflict of interest rules). Whether quantum meruit recovery is available to a lawyer found to have violated an ethical duty depends on the seriousness of the ethics violation at issue. Some case law indicates that attorneys who violate a rule of professional conduct may recover in quantum meruit (Huskinson & Brown v. Wolf, 32 Cal. 4th 453, 464 (2004) (violation of fee sharing rule)), or that an attorney’s breach of a rule of professional conduct does not automatically preclude recovery of fees (Pringle v. LaChappelle, 73 Cal. App. 4th 1000, 1006-07 (1999) (affirming a fee award despite violation of Rule 3-310(E) in part due to an inadequate record)).

Fair held that “violation of a rule that constitutes a serious breach of fiduciary duty, such as a conflict of interest that goes to the heart of the attorney client relationship, warrants denial of recovery of quantum meruit.” Fair, 195 Cal. App. 4th at 1169. Quantum meruit recovery was also denied where an attorney undertook representation of a wife in her marital dissolution proceedings against her husband, then a current client of the attorney’s law firm, in violation of the conflict of interest rule. Jeffry v. Pounds, 67 Cal. App. 3d 6, 12 (1977). In J-M, the firm also sought recovery of fees based on a quantum meruit theory. The court denied the request, finding that a conflict of interest is a serious breach of fiduciary duty that goes to the heart of the attorney-client relationship, warranting denial of quantum meruit.

Having determined that the firm was not entitled to fees, the appellate court remanded the case for a determination of the date the conflict of interest began. On remand, the court must determine whether the conflict began when the firm resumed its representation of South Tahoe, three weeks after signing the agreement with J-M, or whether the firm already had an ongoing relationship with South Tahoe. Although the firm had represented South Tahoe for nine years, the firm had not done work for South Tahoe for five months at the time the firm signed the J-M fee agreement. Even so, if South Tahoe was a former client, failure to disclose that potentially violated Rule 3-310(B)(1). J-M, 244 Cal. App. 4th at 620 at n. 9.

Presumed Discipline for Conflicts of Interest
Historically, the State Bar rarely has disciplined attorneys based on conflicts of interest, perhaps regarding the sanction of disqualification and fee disgorgement as sufficient. Effective July 2015, actual suspension is the presumed disciplinary sanction where a lawyer accepts or continues simultaneous representation of clients with actual adverse interests, where the lawyer fails to obtain informed written consent from each client and causes significant harm to any of the clients. State Bar of Cal., Rules of Proc., Rule 2.5(a). Where a lawyer accepts employment actually adverse to a client or former client, actual suspension is the presumed sanction if the lawyer fails to obtain informed written consent, breaches the duty of confidentiality, and causes significant harm to the client. State Bar of Cal., Rules of Proc., Rule 2.5(a).

The potential adverse consequences make conflict management a continuing critical concern at the inception of every new matter. Re-examination of advance waivers and additional disclosure may be required when taking on new clients throughout ongoing litigation.


  1. Unless otherwise noted, all rule references are to the Rules of Professional Conduct of the State Bar of California.

Carole J. Buckner co-chairs the OCBA’s Professionalism and Ethics Committee. She is Dean of St. Francis School of Law in Newport Beach, and principal at Buckner Law Corp. in Irvine. She recently was appointed to the State Bar’s Committee on Mandatory Fee Arbitration. Carole can be reached at carole.buckner@stfrancislaw.com.