Law Firm Engagement Agreement Void as Against California Public Policy: Sheppard Mullin (Part II)

Generally, contracts entered into by San Diego businesses will be enforced by the California courts. However, a few exceptions exist to this general rule. One exception includes situations in which the contract is contrary to “public policy.” If a contract violates or runs counter to a public policy, then the contract will be deemed void and unenforceable. This is codified in the California statutes at Cal. Civil Code, §§ 1667 and 1668. “Contrary to public policy” means

• Contrary to an express provision of a law/statute or
• Contrary to the spirit or policy of a law/statute or
• Contrary to “good morals”

In general, public policy is found in the statutes enacted by the California State Legislature. But the courts do not limit themselves to policies that are only expressed in statutes. One recent example involves policies that are set forth in the Rules of Professional Conduct for attorneys. The Rules of Professional Conduct are not technically statutes since they are not enacted by the Legislature. They are written and compiled by the State Bar and are approved by the Supreme Court. In a case decided earlier this summer, the California Supreme Court held that public policies can be found in the Rules of Professional Conduct. Furthermore, the court held that violations of the Rules of Professional Conduct with respect to client legal service agreements can render said agreements void as against public policy. See Sheppard, Mullin, Richer & Hampton, LLP v. J-M Manuf’g Co., Inc., Case No. S232946 (Cal. Supreme Court August 30, 2018). Here is a quick discussion.

San Diego Corporate Law: Facts of Case and Court’s Decision

Generally speaking, lawyers must avoid conflicts of interest. First, in general, the same law firm cannot represent parties on two different sides of a lawsuit or transaction. This is considered a conflict of interest and is not allowed unless the clients make an informed waiver.

Second, a conflict of interest also exists when the same law firm provides legal services for one client in, for example, a lawsuit against Company ABC and then also provides legal services for Company ABC in some other legal matter unrelated to the lawsuit. This is a conflict of interest even if the simultaneous legal representations have nothing in common. These prohibitions apply to large law firms where attorneys may work in different offices in different cities. These prohibitions against conflicts of interest are set out in, for example, Rule 3-310(C)(3) of the RPC. That rule provides that an attorney “shall not, without the informed written consent of each client … [r]epresent a client in a 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.” Other parts of Rule 3-310 require “informed consent” from the clients, which generally means disclosing to the clients all the details that might be important.

To avoid these sorts of conflicts, all attorneys should (and most, but not all do) conduct a “conflict check” when a new client is obtained. If there is a conflict, efforts are made to get waivers and, if both waivers cannot be obtained, then the new client must be declined.

Sheppard Mullin concerned this problem. Sheppard Mullin is a large law firm headquartered in Los Angeles. In 2006, the client — J-M Manufacturing (“J-M”) — was sued for various claims under whistleblower statutes concerning alleged fraud with respect to the manufacturing specifications of water and sewer piping. In 2010, J-M was seeking to hire new attorneys for the case and interviewed Sheppard Mullin. On the other side of the case were about 200 public utilities that had purchased and used the piping.

Following the interview, Sheppard Mullin conducted a conflict check. They discovered that one attorney — Jeffrey Dinkin — had done employment-related work for one of the 200 public utilities, the South Tahoe Public Utility District (“South Tahoe”). South Tahoe had previously signed an advance waiver of conflicts for attorney Dinkin for cases unrelated to the employment matters. Based on the waiver from South Tahoe, Sheppard Mullin determined internally that it could provide legal services for J-M. However, Sheppard Mullin did not tell J-M that Sheppard Mullin was currently representing South Tahoe. Sheppard Mullin had J-M sign an engagement agreement that contained a general waiver of conflicts.

The California Supreme Court held that Sheppard Mullin had violated Rule 3-310 because it did not disclose that it was representing South Tahoe. The waiver signed by J-M was deemed ineffective since J-M did not have all the information necessary to make an “informed” decision. As such, since Sheppard Mullin had gotten J-M to sign a legal services engagement agreement while violating Rule 3-310, the engagement agreement was deemed void as against public policy. This had important implications for what fees could be recovered by Sheppard Mullin and for what legal forums were available.

The legal lesson here is that good corporate counsel is needed when drafting and signing business contracts to ensure that the parties and the contracts are in compliance with the law. Otherwise the contracts can be deemed void and unenforceable.

Contact San Diego Corporate Law

If you would like more information, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard provides a full array of legal services for businesses including contract review and drafting, mergers and acquisitions, corporate formations, private placement memorandums, and employment-related services like crafting employee handbooks. Mr. Leonard can be reached at (858) 483-9200 or via email.

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