January/February 2019

Ethics

Use Sharp Tools Carefully

Lucian T. Pera

As with every profession or trade, we lawyers use all manner of tools.

One tool we all have in our toolboxes is the advance waiver of conflicts of interest—a current waiver of a conflict of interest that does not currently exist but may arise in the future.

In the right situation an advance waiver can serve well the interest of both lawyer and client. It may allow the lawyer to take on a new client or matter he or she might otherwise need to decline. It might allow the lawyer to protect his or her future ability to continue to represent, or remain available to represent, an existing client in future matters. And it may also allow that new client access to his or her lawyer of choice, or protect the free choice of counsel of the lawyer’s existing or expected client.

But a recent California Supreme Court decision reminds us that many tools have to be used carefully, and for the right purpose, or the user may get hurt.

A Brief Refresher on Advanced Waivers

The first—and pretty much only—principle governing advance waivers of conflicts of interest is simple. A client can generally waive a conflict of interest that may arise in the future if that particular conflict of interest to be waived can ethically be waived and if the lawyer and client together have in their minds the conflict of interest that actually does later arise. Yes, all they have to do is predict the future and get it right. And detail does matter.

Advance waivers are particularly effective in certain areas of law. They work well in niche practice areas, for example, where many clients need help only a few practitioners can offer or areas of law with repeat players or with clients with complex and overlapping relationships. Think tax law, entertainment law and health-care law.

The most common example may be the business lawyer being hired by a bank to close its loans who asks the bank to allow her to also represent borrowers negotiating loans with the bank. That common conversation often leads to an advance waiver, limited only by the bank’s insistence that its new lawyer not sue the bank. All of this belies the notion that advance waivers are just a tool for BigLaw. That’s just not true.

Now, back to California.

The Facts of Sheppard Mullin

In Sheppard, Mullin, Richter & Hampton, LLP v. J-M Mfg. Co., 2018 WL 4137013 (Cal. Aug. 30, 2018), the court found a conflict of interest despite a firm’s efforts to rely on an advance waiver. Worse yet, all of that law firm’s fees for more than 10,000 hours of work on a complex qui tam case are now at risk. The firm billed more than $3 million and is still owed more than $1 million, and every dollar is still in play. Why?

Because the court found that the firm could not rely on what the firm thought was a valid conflict waiver, primarily because in obtaining a waiver from a second, later client—a client who was directly adverse to the first in an unrelated matter the firm was handling for the second client—the firm disclosed nothing about its representation of the first client.

PVC pipe manufacturer J-M Manufacturing hired the firm to defend a $1 billion whistleblower or qui tam suit. When J-M approached the firm, the firm’s conflict check showed it had done unrelated employment law work for a governmental entity, South Tahoe Public Utility District. South Tahoe was one of the parties adverse to J-M in the qui tam suit, represented by other counsel. The firm had done nothing for South Tahoe on the qui tam suit and had no confidential information from South Tahoe about it.

Years before, South Tahoe had given the firm a broad advance conflict waiver as part of its original engagement agreement for “general employment matters,” and the firm gave South Tahoe occasional employment law advice.

At the moment J-M approached the firm, the last work the firm had done for South Tahoe was five months before; South Tahoe called again with an issue several weeks later. Over the next year the firm did about 12 hours of employment law work for South Tahoe.

South Tahoe’s advance waiver—similar to broad general waivers found in many retainer agreements—allowed the firm to represent “another client in a matter in which we do not represent [South Tahoe], even if the interests of the other client are adverse to [South Tahoe],” as long as “the other matter is not substantially related to our representation of [South Tahoe].” Significantly, the waiver did mention “litigation,” though without mention of any case or type of case.

After reviewing this, the law firm agreed to represent J-M in the qui tam lawsuit. The firm decided that South Tahoe was a former client or, if not, they’d given an advance waiver.

J-M then signed an engagement agreement with the firm, including an advance waiver just like the one South Tahoe signed. But the firm didn’t tell J-M anything about South Tahoe or the firm’s representation of South Tahoe. And the firm didn’t tell South Tahoe about taking on J-M’s representation or seek South Tahoe’s consent. So each client was ignorant of the firm’s representation of the other.

The firm then did more than 10,000 hours of work for J-M on the qui tam lawsuit and ran up fees of more than $3 million—at least until South Tahoe became aware of the firm’s representation of J-M.

Spirited discussions with the firm ensued; South Tahoe demanded the firm withdraw from representing J-M; the firm declined, citing the advance waiver; South Tahoe moved to disqualify the firm from the qui tam suit; the firm was disqualified; and then the firm sued J-M for its unpaid fees. As often happens, J-M not only opposed that claim, but counterclaimed, here claiming the conflict meant J-M owed no fee at all.

The California Court's Decision

In an August 2018 decision, the California Supreme Court found the firm had had a conflict. South Tahoe was not a former client, as the firm argued, but a current client. (The firm had done nothing at all to disengage from South Tahoe—no file- or matter-closing letter or email, for example.) More importantly, the court harshly criticized the firm for not disclosing to J-M its representation of South Tahoe when it attempted to get informed consent from J-M to its conflict waiver. That failure meant that J-M’s consent was not informed or effective.

That led the court to void the retainer agreement entirely, including an arbitration clause.

The majority did pass up the opportunity (seized on by two dissenting justices) to hold that the firm was, based on the conflict of interest, entitled to no fee at all. Instead, they remanded the case for a trial court to determine whether the equities weighed in favor or against the firm receiving something for its work in quantum meruit, and how much, leaving open even the possibility of the firm having to refund some fees. Still, where the client did not even allege injury from the conflict, the court’s opinion suggests the firm has a good shot at some compensation.

Takeaways From the Case

Reading the Sheppard Mullin decision offers several lessons.

First, every advance waiver—even if brilliantly drafted, well presented to the client and understood by the client—must be freshly and fully evaluated in light of the facts that actually present themselves when a lawyer wants to rely on it. In retrospect, the law firm here should have made different and better disclosure to its second client—J-M—in seeking its waiver. That kind of informed consent would have supported waiver of a current conflict or an advance waiver.

Second, we all need to be clear and intentional about when our representations begin and end. Experience teaches that close questions about whether an attorney-client relationship exists or continues often get called for the client. Had the law firm here written a simple matter- or file-closing email to its first client—South Tahoe—you might not be reading this. Indeed, California case law even offers a concept of “framework” engagement agreements for on-again, off-again clients—but the firm didn’t execute on this concept as well as the court demanded.

Third, informed consent has real meaning. It requires thorough disclosure of all material facts. Lawyer prudence may mandate even fuller disclosure. If the law firm had told its second client—J-M—that it occasionally did employment work for the first client—South Tahoe—even if the firm considered it “merely” a former client at that moment, the court probably would have recognized an advance (or current) waiver as effective.

Finally, while an advance waiver is a tool every lawyer should know, most lawyers would be wise to study up a bit on its use before asking a client to sign one. More importantly, if and when the time comes to dust it off and rely on it in taking on work for another client, get help. Your local ethics nerd is never more than a phone call away.

Lucian T. Pera

Lucian T. Pera is a partner in the Memphis, Tennessee, office of Adams and Reese LLP. He counsels lawyers, law firms, clients and those who do business with lawyers and law firms on ethics and professional responsibility issues. He’s the immediate past president of the Tennessee Bar Association and a past ABA treasurer. Email him. 

Entity:
Topic: