December 2017 Ethically Speaking - The Surprising Consequences of Appealing an Order Disqualifying Counsel

by Paul A. Stewart

For over half a century, the California courts have allowed parties to file an immediate appeal of orders disqualifying their attorneys from representing them in litigation in state court. Meehan v. Hopps, 45 Cal. 2d 213, 214-18 (1955). The rationale for this rule is twofold. First, the California courts have characterized disqualification orders as injunctions, which are immediately appealable by statute. Id.; see also Cal. Civ. Proc. Code § 904.1(a)(6). Second, the California courts have also characterized disqualification orders as final orders “upon a collateral issue,” which are immediately appealable under case law. Meehan, 45 Cal. 2d at 216.

This rule may come as a surprise to those who practice primarily in federal court or who have practiced in other states. The federal courts do not permit immediate appeals of orders disqualifying counsel. Firestone Tire & Rubber Co. v. Risjord, 449 U.S. 368, 369-70 (1981). Similarly, courts in many other states do not permit immediate appeals of orders disqualifying counsel. See, e.g., Musgrave v. French, 166 Ill. 2d 95, 99-100 (1995); Vaccone v. Syken, 587 Pa. 380, 382 (2006). However, the California rule is not a complete outlier. Massachusetts, for example, permits immediate appeals. PCG Trading v. Seyfarth Shaw, 460 Mass. 265, 269 n.6 (2011).

What may be surprising to many practitioners, though, are the recently held consequences of the filing of an interlocutory appeal of an order disqualifying counsel in California state court. In URS Corp. v. Atkinson/Walsh Joint Venture, 15 Cal. App. 5th 872 (2017) (tentative ruling available at http://www.occourts.org/tentativerulings/dchaffeerulings.htm), the Fourth Appellate District found that the mere filing of an interlocutory appeal automatically stays enforcement of a disqualification order. Id. At the same time, the appeal does not stay most other trial court proceedings. Id. As a result, disqualified counsel is permitted to continue representing their client on the merits in the trial court pending final resolution of the disqualification issue on appeal. Similarly, disqualified counsel may continue representing their client on the disqualification issue in the court of appeal. In short, a trial court’s disqualification order has no meaningful effect pending appeal.

The ramifications of this appear to be far reaching. An attorney found by a trial court to be violating his or her ethical duties may continue to engage in the same presumptively unethical conduct until the disqualification issue is resolved on appeal. For example, in URS itself, a law firm had acquired its opposing party’s confidential information solely for use in pre-litigation mediation proceedings. Id. The mediation was unsuccessful, and the law firm then proceeded to represent its client in the resulting litigation. The opposing party moved to disqualify, arguing that the law firm was using its confidential information that was intended solely for use in the mediation. Id. The trial court concluded that this likely had occurred, and therefore disqualified the law firm from the litigation. Id. The appellate court’s ruling allowed the disqualified firm to continue representing its client pending appeal, despite the seemingly inevitable risk that the firm’s attorneys would be unable to erase from their memories the confidential information they had acquired during mediation.

Similarly, it is not hard to imagine a law firm filing suit against its own client and then being promptly disqualified by the trial judge on a motion by the defendant. Under URS, it appears that the law firm would be able to continue prosecuting the case against its client until the appellate court—and perhaps the California Supreme Court—resolved the disqualification issue.

The URS court based its holding in large part upon Section 916(a) of the California Code of Civil Procedure. That section provides that, subject to certain inapplicable exceptions, “the perfecting of an appeal stays proceedings in the trial court upon the judgment or order appealed from or upon matters affected thereby, including enforcement of the judgment or order, but the trial court may proceed upon any other matter embraced in the action and not affected by the judgment or order.” Cal. Civ. Proc. Code § 916(a). The URS court held that this statute stays enforcement of all orders disqualifying counsel pending appeal, whether those orders are characterized as appealable collateral orders or appealable injunctions. URS, 15 Cal. App. 5th at 883.

The court reasoned that “[a] straightforward application of the text of section 916, subdivision (a), suggests that enforcement of an order disqualifying counsel is automatically stayed by an appeal, particularly when analyzed narrowly under the collateral order rubric.” Id. In particular, the statute stays all trial court proceedings on the order appealed, including all enforcement proceedings. Id at 887. Thus, the court reasoned, the statute stays enforcement of appealed orders disqualifying counsel. Id at 888.

The URS court also concluded that it would reach the same result if it characterized the disqualification order as an injunction. Id at 884. The analysis, however, was more complex. The court again turned to Code of Civil Procedure section 916(a), but recognized that this statute has never been applied literally to all orders granting injunctive relief. Id. Instead, the California Supreme Court has long held that “[a]n appeal stays a mandatory but not a prohibitory injunction.” Id. at 884 (quoting Kettenhofen v. Superior Court, 55 Cal.2d 189, 191 (1961)). Thus, the issue before the court was whether an order disqualifying counsel was mandatory or prohibitory in nature.

“An order enjoining action by a party is prohibitory in nature if its effect is to leave the parties in the same position as they were prior to the entry of the judgment. On the other hand, it is mandatory in effect if its enforcement would be to change the position of the parties and compel them to act in accordance with the judgment rendered.” Id. (quoting Musicians Club of Los Angeles v. Superior Court, 165 Cal. App. 2d 67, 71 (1958)). The URS court recognized that the distinction between a mandatory and a prohibitory injunction is sometimes elusive, and that “[r]easonable arguments can be mustered for either conclusion” in the present case. Id. at 885. Ultimately, the court concluded that “[a]n order disqualifying an attorney from continuing to represent a party in ongoing litigation is a mandatory injunction because it requires affirmative acts that upset the status quo at the time the disqualification motion was filed.” Id. at 886.

In support, the court reasoned as follows:

If the order is not stayed, appellants will need to move on without [their current law firm] and hire replacement counsel. Even if the disqualification order is ultimately reversed, appellants will have already suffered the financial burden of replacing counsel in the middle of a case. Appellants may even decide that the appeal is not worth pursuing because it will not make sense to reinstate [their original counsel] into the proceedings even if the order is reversed. The lack of a stay is not merely a short-term inconvenience for disqualified attorneys and their clients. It (probably) sounds the death knell of the representation in the matter at hand, and it (potentially) will affect the attorney-client relationship more broadly.

Id. Based upon this analysis, the court concluded that an order prohibiting a law firm from representing its client was mandatory, not prohibitory. Therefore, the order was automatically stayed pending appeal.

The final issue before the URS court was whether Code of Civil Procedure section 916(a) automatically stays the entire trial court case pending appeal, or just the disqualification order. Section 916(a) stays not only the appealed order, but “matters affected thereby.” Cal. Civ. Proc. Code § 916(a). In discussing the meaning of this language, the court returned to the Supreme Court’s holding in Meehan, 45 Cal.2d at 216-17, that a disqualification order is “collateral to trial proceedings on the merits.” URS, 15 Cal. App. 5th at 888. The URS court then concluded that proceedings in the trial court, by definition, are not “affected” by collateral matters. Id. The court did not address the seemingly obvious argument that every aspect of trial court proceedings may be affected by the presence or absence of counsel of a party’s choice. Thus, the URS court allowed pre-trial proceedings and even the trial on the merits to proceed with disqualified counsel still representing its client.

The court did note, however, that the trial court has discretion to stay its own proceedings pending appeal to prevent this from occurring. Id. at 887. This may be the likely outcome in most cases involving appealed disqualification orders. It seems likely that most trial court judges would be inclined to grant a stay motion in these circumstances. After all, the trial court judge has already ruled that counsel has breached its ethical duties. The trial court judge has every interest in seeing to it that this ethical breach is not allowed to persist in his or her own courtroom. Similarly, the party who filed the disqualification motion has every interest in ensuring that the disqualified opposing counsel is not allowed to continue representing its client. That is why the moving party filed its motion in the first place. Even the party represented by the disqualified counsel has an interest in a stay. That party may not wish to invest hundreds of thousands or even millions of dollars in the work of its counsel, only to have the appellate court affirm the disqualification of that counsel on the eve of trial. That party may prefer to have the issue resolved before any substantial attorneys’ fees are expended. The disqualified lawyer, too, has an incentive to let the appeal play out, rather than risk incurring additional fees that ultimately may be subject to a disgorgement order.

Thus, either by stipulation or by motion, the trial court proceedings in most disqualification cases may very well be stayed. As a result, the ultimate ramification of the URS decision may be simply that cases in which disqualification motions are granted will proceed far more slowly than ordinary cases. All appeals of the disqualification issue must be exhausted before litigation on the merits begins in earnest. Whether that is a good result is debatable. But it certainly seems preferable to allowing disqualified counsel to continue to represent its client.

Paul A. Stewart is a partner in the law firm of Knobbe Martens based in Irvine, California. His practice focuses on intellectual property litigation. In addition, he serves as Chairman of Knobbe Martens’ Ethics Committee. Paul can be reached at paul.stewart@knobbe.com.