Sheppard, Mullin, Richter & Hampton, LLP v. J-M Mfg. Co.
237 Cal. Rptr. 3d 424
| Cal. | 2018Background
- J-M Manufacturing hired Sheppard Mullin to defend a federal qui tam suit; the firm's engagement letter included a broad conflicts waiver and an arbitration clause.
- Sheppard Mullin had an existing attorney-client relationship with South Tahoe Public Utility District (an intervener in the qui tam), via employment work performed periodically since 2002; the firm did not disclose that relationship to J-M when retained.
- South Tahoe moved to disqualify Sheppard Mullin; the district court granted disqualification under Rule 3-310(C)(3) for lack of informed written consent.
- Sheppard Mullin sought unpaid fees; arbitration awarded the firm $1.3M+; the superior court confirmed the award; the Court of Appeal reversed, holding the engagement agreement unenforceable and ordering disgorgement of fees.
- The California Supreme Court granted review: it affirmed that the undisclosed conflict rendered the retainer (including the arbitration clause) unenforceable under public policy, but held that forfeiture of all compensation is not automatic—quantum meruit recovery remains a possibility for the trial court to decide on remand.
Issues
| Issue | Plaintiff's Argument (J-M) | Defendant's Argument (Sheppard Mullin) | Held |
|---|---|---|---|
| Whether a court may void an arbitral award because the underlying contract violates public policy as expressed in ethics rules | Rules of Professional Conduct violations render the retainer (including arbitration clause) unenforceable, so arbitration award must be vacated | Loving & Evans illegality exception should be limited to statutory public policy; ethics rules are not legislative | Court: Loving & Evans applies; courts may invalidate awards when entire contract violates public policy embodied in the Rules of Professional Conduct |
| Whether Sheppard Mullin violated Rule 3-310(C)(3) despite a broad advance waiver | The waiver was ineffective because the firm failed to disclose a known, existing conflict with South Tahoe | The waiver (and client sophistication) authorized the representation; no disclosure required for a former/dormant client | Court: Firm had a current attorney-client relationship with South Tahoe; nondisclosure meant J-M’s consent was not informed; rule violated; retainer unenforceable |
| Whether the arbitration clause is severable when part of contract is illegal | Arbitration clause unenforceable because the whole agreement is tainted by the conflict | Arbitration clause is severable; Moncharsh and primacy of arbitration counsel enforcement | Court: Where illegality taints the entire contract, arbitration clause is not severable under Loving & Evans; arbitration award cannot stand |
| Whether the firm is categorically disentitled to any recovery (quantum meruit) for work performed under the unenforceable retainer | Unwaived conflict should bar all recovery and require disgorgement of fees | Not every conflict requires forfeiture; quantum meruit may be available depending on equities | Court: No categorical rule of forfeiture; trial court must evaluate equitable factors (egregiousness, willfulness, harm, alternatives) to decide any quantum meruit award |
Key Cases Cited
- Loving & Evans v. Blick, 33 Cal.2d 603 (Cal. 1949) (arbitral award may be vacated when enforcement would uphold an entire contract that is illegal and contrary to public policy)
- Moncharsh v. Heily & Blase, 3 Cal.4th 1 (Cal. 1992) (distinguishes whole-contract illegality from partial illegality; normally arbitration clauses are enforceable unless entire contract is void)
- Huskinson & Brown v. Wolf, 32 Cal.4th 453 (Cal. 2004) (attorneys may sometimes recover quantum meruit when a fee agreement is unenforceable for ethics-based disclosure failures)
- Flatt v. Superior Court, 9 Cal.4th 275 (Cal. 1994) (duty of loyalty justifies disqualification for simultaneous representation even in unrelated matters)
- Chambers v. Kay, 29 Cal.4th 142 (Cal. 2002) (refusal to enforce an attorney fee division agreement that violated Rules of Professional Conduct; rules can embody public policy rendering contracts unenforceable)