by the OCBA’s Professionalism and Ethics Committee
Throughout the year, the members of the Orange County Bar Association’s Professionalism and Ethics Committee strive to present articles of interest to the OCBA practitioners. Here, the Committee members discuss some of the most important ethics-related opinions from 2009 and two new California Rules of Professional Conduct adopted during 2009.
Scope of Lawyer’s Authority to Commit Client to Arbitration In Toal v. Tardif (178 Cal. App. 4th 1208 (2009)), the parties were involved in litigation over a real estate dispute. The lawyers for the parties signed a stipulation to arbitrate, but the parties themselves did not sign. Arbitration ensued, and an award was made in Plaintiff’s favor. Although the award stated that witnesses were sworn and testified, it did not state whether the parties themselves had appeared. The trial court later confirmed the arbitration award, and entered judgment. Opposing the motion to confirm, Defendant contended that she did not agree to arbitration, and that her attorney was not authorized to stipulate. After extensive discussion of the requirements of a valid agreement for arbitration, the Court held that an attorney does not have authority to commit to arbitration for the client without the client’s consent or ratification. The lawyer’s signature on the stipulation alone is not sufficient. The Court held that the judgment confirming the award must be vacated for lack of proof of a valid arbitration agreement, and remanded to the trial court for further consideration of the issue of whether the defendant had consented to arbitration.
Fee Arbitration Provisions In Schatz v. Allen Matkins Leck Gamble & Mallory LLP (45 Cal. 4th 557 (2009)), the California Supreme Court upheld a legal fee arbitration provision in an engagement agreement. In doing so, the Court found that the California Arbitration Act (CAA, Cal. Civ. Proc. Code § 1280, et seq.) and its provisions regarding the enforceability of arbitration agreements did not conflict with the Mandatory Fee Arbitration Act (MFAA, Cal. Bus. & Prof. Code § 6200, et seq.), which gives attorneys’ clients the right to attempt to resolve fee disputes through non-binding arbitration before seeking a trial de novo. Plaintiff retained Defendant law firm, signing an engagement agreement that contained a binding arbitration provision for which Plaintiff could have – but did not – opt-out. Later, a fee dispute arose. (While the Court initially stated that the fee dispute resulted from Plaintiff’s cessation of payment, the Court later modified its order to delete that finding, instead determining that Plaintiff paid Defendant nearly $180,000, and Defendant’s later demand for approximately $170,000 more led to the dispute.) Plaintiff initially opted for non-binding arbitration under the MFAA, but when the arbitrator found in Defendant’s favor, he sought a trial de novo rather than the binding arbitration specified in the engagement agreement. The Supreme Court reversed the lower courts and held that Plaintiff must submit to binding arbitration per his agreement with Defendant.
Flat Fee Arrangements for Appointed Criminal Defense Counsel In People v. Doolin (45 Cal. 4th 390 (2009)), the California Supreme Court considered whether a flat fee arrangement created a conflict of interest. Defendant was charged with two counts of first degree murder under special circumstances. Appointed counsel received a lump sum fee covering all attorney’s fees and costs, including investigative services. Defendant’s appointed counsel qualified for an $80,000 flat fee, and he estimated $60,000 for investigative costs. However, a final accounting showed he spent about $8,000 for the investigation. Defendant appealed his conviction and argued that his appointed counsel’s lump sum fee arrangement created a financial conflict of interest that adversely affected his case, since counsel could maximize his compensation by reducing investigative services. The Supreme Court held that conflicts of interest are inherent in any type of fee arrangement. An advance flat fee creates an incentive to dispose of the case quickly, while an hourly fee creates an incentive to drag the case out. But courts do not presume attorneys are so unethical as to neglect their clients’ interests, since most attorneys “serve their clients honorably despite the opportunity to profit by neglecting or betraying the client’s interest.” The Court also abandoned its prior test in favor of the U.S. Supreme Court’s Strickland standard, requiring that a defendant show not only deficient performance by counsel, but also a reasonable probability that, absent counsel’s deficiencies, the result of the proceeding would have been different. Here, even assuming a deficient performance, there was no indication that the outcome would have been different. Incentive Fee Arrangements in Class Actions Rodriguez v. West Publishing Corp. (563 F.3d 948 (9th Cir. 2009)), addressed whether incentive arrangements with class representatives create conflicts of interest and constitute illegal fee sharing agreements. Plaintiffs who purchased BarBri and Kaplan courses from Defendant settled an antitrust class action lawsuit for $49 million. Five class representatives had entered into “incentive agreements” entitling them to sliding-scale payments that depended on the total recovery. Objectors argued the incentive arrangements created conflicts of interest, the attorneys’ fees sought could not be recovered due to the conflicted representation, and the incentive agreements constituted impermissible fee sharing between attorneys and clients. The Ninth Circuit held the incentive fee arrangements created conflicts of interest between class counsel, the class representatives, and the other class members. The failure of the class representatives and class counsel to disclose the incentive arrangements to the court also violated the duty of candor. Because two class representatives had no incentive agreements, the Ninth Circuit did not invalidate the settlement agreement. Instead, the case was remanded to determine how the conflicts and fee sharing should impact the attorneys’ fees awarded to class counsel.
No Contact Rule with Conditionally Certified Class Members In Hernandez v. Vitamin Shoppe Industries, Inc. (174 Cal. App. 4th 1441 (2009)), the Court of Appeal determined that an attorney’s letter to class members that he did not represent violated California Rule of Professional Conduct 2-100, the “no-contact rule.” The attorney represented both plaintiff Hernandez in Perry v. Vitamin Shoppe Industries, Inc. and another plaintiff in Thompson v. Vitamin Shoppe Industries, Inc., both wage and hour class actions. After the Court conditionally approved settlement in Perry, the attorney violated Rule 2-100 by sending a letter to Perry class members, identifying himself as counsel in Thompson, and stating that Perry class members would forfeit substantial compensation if they accepted the settlement. The attorney also enclosed his retainer agreement and solicited class members to retain him as counsel. The Court held the letter violated Rule 2-100, which precludes a lawyer from contacting a “party” the member knows to be represented by another lawyer about the subject matter of the representation, unless the lawyer has the consent of the party’s lawyer. Considering whether unnamed class members are “parties” under Rule 2-100, the Court held that absent class members of a conditionally certified class are “parties” represented by class counsel. The Court additionally held that Rule 2-100 is not an unconstitutional prior restraint on speech. The Court did not address whether the letter constituted an impermissible solicitation in violation of California Rule of Professional Conduct 1-400.
Director’s Ability to Inspect Corporation’s Books and Records After Suing the Corporation In Tritek Telecom, Inc. v. Superior Court (169 Cal. App, 4th 1385 (2009)), two former friends co-owned a business with equal interests. Plaintiff shareholder sued the corporation and Defendant shareholder for a variety of alleged wrongs. In turn, Defendant claimed numerous corporate improprieties by the Plaintiff. The two parties each remained as directors of the corporation. During the course of the lawsuit, Plaintiff sought to enforce his broad rights as a director to inspect the corporation’s books and records under Sections 1602 and 1603 of the Corporations Code. Defendant objected, asserting that this right of inspection, however broad it might otherwise be, did not extend to corporate documents generated by the corporation’s attorneys to defend a lawsuit filed by the Plaintiff. Instead, these documents were protected by the attorney-client privilege and attorney work product doctrine. The Court of Appeal agreed with Defendant, restricting a director’s right of inspection in these circumstances. The Court then remanded the matter to determine whether any of the requested documents were covered by the attorney-client privilege or work product doctrine and, if so, whether an exception exists or whether privilege had been waived.
Per Se Conflict of Interest In Meza v. H. Muehlstein & Co. (176 Cal. App. 4th 969 (2009)), Plaintiff’s counsel was disqualified from a multi-defendant personal injury action. This decision was based on counsel’s hiring of an attorney who had represented a former defendant and was exposed to work product of the remaining defendants through his participation in a common interest group. At the time Plaintiff’s counsel hired the attorney, the matter had been dismissed by the trial court and was on appeal. The judgment later was reversed and the case remanded. By that time, the attorney had left Plaintiff’s counsel’s firm and the defendant that he previously represented had been dismissed from the suit. One of the remaining defendants moved to disqualify Plaintiff’s counsel, and the motion was granted. The Court of Appeal affirmed, holding that, because the attorney had represented an adverse party in “the very same suit,” he had a per se conflict of interest. Applying the doctrine of imputed knowledge/vicarious disqualification, the Court further held that the trial court did not abuse its discretion in disqualifying the entire firm. The Court so held even though the attorney was no longer employed by the firm when the matter was remanded and the motion for disqualification was filed, and even though the firm represented that it used “extensive screening procedures” while he worked there. The Court also rejected Plaintiff’s contention that only the attorney’s prior client had standing to seek disqualification, specifically acknowledging the common interest privilege as basis for a motion for disqualification. Specifically, the Court held that members of the common interest group “clearly had an interest” in protecting their attorneys’ work product exchanged pursuant to the common interest agreement, and thus had standing to bring a motion for disqualification. The Court also rejected Plaintiff’s contention that the work product privilege was waived when the moving defendant’s counsel shared the work product with defendants who had potentially adverse interests. The Court held that, for the common interest privilege to apply, it is not necessary that the litigants’ interests be aligned in every respect. Rather, an attorney can disclose work product to an attorney representing a separate client without waiving the attorney work product privilege, as long as: (1) the disclosure relates to a common interest of the attorneys’ respective clients; (2) the disclosing attorney has a reasonable expectation of confidentiality; and (3) the disclosure is reasonably necessary. Here, this test was satisfied with respect to issues such as Plaintiff’s medical condition, credibility, and other issues common to each defendant. Legal Malpractice and Judgmental Immunity In Blanks v. Seyfarth Shaw (171 Cal. App. 4th 336 (2009)), Plaintiff’s accountant, Greenfield, convinced Plaintiff to allow Greenfield to manage Plaintiff’s fitness career, and Greenfield took $10.6 million in income over the years. Because Greenfield was not a licensed talent agent, the labor commissioner, under the Talent Agent Act, could void the agreement and disgorge all funds earned for the services. Plaintiff hired Defendant law firm to pursue the matter, but Defendant did not file with the labor commissioner within the statute of limitations. Plaintiff settled with Greenfield, and sued Defendant for the remaining value of his case. Defendant argued that Plaintiff was not damaged because he could still sue Greenfield under the Unfair Competition Law, and argued that its decision to use the civil action instead of a labor petition was protected under the “judgmental immunity” doctrine. Plaintiff succeeded in his legal malpractice and fraud actions against Defendant and obtained compensatory damages, punitive damages, interest, attorneys’ fees and costs. The Court of Appeal reversed and remanded. The Court rejected Defendant’s contention that Plaintiff was not injured because he could still sue Greenfield under the Unfair Competition Law, holding the exclusive jurisdiction of the labor commissioner barred circumvention of that jurisdictional grant. However, the Court did find error in the trial court’s ruling on a motion in limine that Defendant had been negligent as a matter of law in not filing a labor petition. Specifically, the Court held that because the issue was not properly presented in a motion concerning the statute of limitations, the trial court exceeded its authority. The trial court erred by prohibiting Defendant from presenting evidence that it had not breached the standard of care and had made an informed assessment of the best course of conduct in the litigation. The Court remanded the “judgmental immunity” issue for further consideration.
Copying Inadvertently Produced Privileged Documents In Bak v. MCL Financial Group (170 Cal. App. 4th 1118 (2009)), Plaintiffs were registered representatives of the Financial Industry Regulatory Authority (“FINRA”) who had been employed by Defendant on a commission basis. Pursuant to an arbitration agreement, the trial court ordered the parties to arbitrate a commission dispute before an arbitration panel appointed by FINRA. In connection with a pre-hearing document production, Plaintiffs notified Defendants that they had inadvertently produced 112 pages of privileged documents and demanded their immediate return. Upon receipt of the demand, Defendants’ counsel made a “cursory review” of the documents, copied them, and unilaterally decided to send a copy to a staff attorney handling the arbitration for FINRA. In issuing an arbitration award, the arbitration panel awarded $7,500.00 in sanctions against Defendants’ attorney for copying the privileged documents. The Orange County Superior Court confirmed the award, and Defendants’ counsel appealed. The Court of Appeal affirmed, rejecting Appellant’s argument that there was insufficient evidence to support the sanctions. The Court noted that an arbitrator’s award cannot be reviewed for errors of fact or law, but nonetheless held that the “objector should have sought guidance from the arbitration panel rather than unilaterally copying the material and sending it to FINRA.” In so holding, the Court relied on Rico v. Mitsubishi Motors Corp. (42 Cal. 4th 807, 817-18 (2007)), which held that a lawyer in receipt of inadvertently produced privileged material “should refrain from examining the materials any more than is essential to ascertain if the materials are privileged, and shall immediately notify the sender that he or she possesses material that appears to be privileged. The parties may then proceed to resolve the situation by agreement or may resort to the court for guidance with the benefit of protective orders and other judicial intervention as may be justified.”
Confidential Client Information In Dietz v. Meisenheimer & Herron (177 Cal. App. 4th 771 (2009)), the Court of Appeal held that Defendant law firm’s due process rights were not violated by the court’s refusal to dismiss an entire action where a law firm argued an inability to present a defense without disclosing confidential information of a non-party client. In the action, Plaintiff, an attorney who had referred a client to Defendant law firm, filed a breach of contract action against Defendant for failure to pay him the full portion allegedly agreed upon of Defendant’s contingency fee with the referred client. The action included related claims for fraud, money had and received, and conversion. In the months leading up to trial, Defendant moved for a protective order on the basis that the client’s assertion of the confidentiality of certain information prevented Defendant from presenting a full and complete defense. Following an evidentiary hearing, the trial court determined that the only client information at issue was relevant solely to the client’s motive for its fee dispute with the law firm, which Defendant argued impacted the agreement involving payment to Plaintiff. In reaching its determination, the Court of Appeal stated that at least four factors must be considered before a court may dismiss a case on such grounds: (1) the evidence at issue must be confidential client information that the client insists must remain confidential; (2) the confidential information at issue must be highly material to the defendant’s defenses; (3) the court must determine whether it could effectively use other techniques to allow the action to proceed, such as protective orders, limited admissibility of evidence, restricting use of testimony in successive proceedings and in camera proceedings; and (4) whether it would be fundamentally unfair to allow the claims to proceed.
New Rules on Pro Bono Services and Malpractice Insurance Disclosure Recently adopted California Rule of Professional Conduct 1-650 provides that an attorney can provide short term limited legal services in conjunction with certain sponsored programs, under relaxed conflicts of interest standards, when there is no expectation of ongoing representation. Typical examples include legal advice hotlines and pro se clinics. The purpose of the rule is to accommodate lawyers conducting pro bono work when there is no opportunity to conduct a conflict of interest check. The new rule provides that conflicts of interest arising from such representations will not be imputed to the lawyer’s firm, as long as the lawyer has no actual knowledge of such conflicts. Nor will the individual lawyer’s conflict of interest resulting from the specified short term pro bono legal services be imputed to the other participants in the program. The comments to the rule make clear the member’s confidentiality obligations will continue to apply. California Rule of Professional Conduct 3-410, effective January 1, 2010, will require lawyers to make specific disclosure to clients at the time of hiring that the lawyer does not have malpractice insurance, where it is reasonably foreseeable that the engagement will last more than four hours, with certain exceptions for government lawyers, in-house counsel, and emergency legal services. In addition, the lawyer must advise a client within 30 days if the lawyer’s legal malpractice insurance lapses. The required disclosures may be included in a written fee agreement with a client or in a separate writing. ______________________________ The views expressed are those of the individual OCBA P&E members, and do not represent the views of the Committee as a whole, or the members’ firms and/or agencies.