Conflicts Over Conflicts Waivers = Opportunities For Solo & Small Firms

Just as desperate times deserve desperate measures, overly broad advance waivers of conflicts  deserve overly broad relief in the form of disgorgment of legal fees, held the California Court of Appeals (Second District) earlier this year Sheppard, Mullin v. JM Manufacturing, 244 Cal. App. 4th 590 (January 2016). The dispute arose after Sheppard Mullin agreed to defend J-M Manufacturing in a qui tam action where South Tahoe Water District — another Sheppard client that the firm advised on employment matters — was an adverse party. Sheppard discovered the potential conflict in advance after running a conflicts check, but that didn’t stop the firm from entering into a representation agreement with JM Manufacturers with broad, open-ended conflict waiver without ever disclosing its ongoing relationship with South Tahoe.

When South Tahoe’s qui tam counsel learned of the conflict, it filed a motion to disqualify. Desperate to save a $3.8 million matter, Sheppard tried to persuade South Tahoe to drop the disqualification motion by offering it $250,000 and 40 hours of free employment work if it would agree to waive the conflict – but South Tahoe refused. Subsequently, the court granted South Tahoe’s motion to disqualify Sheppard Mullin.

But the disqualification was merely the start of Sheppard’s problems. Understandably miffed that Sheppard hadn’t been open about its conflicts, J-M took the position that it was entitled to a refund of all fees. Sheppard initiated fee arbitration and won, but the Court of Appeals vacated the decision, finding that the conflict of interest was against public policy and therefore, voided the contract. The court wasn’t as upset about the broad conflicts clause per se as it was by Sheppard’s failure to disclose a known conflict when entering into the representation agreement, which meant that the client lacked informed consent.

Now, the case has moved on to the California Supreme Court, with other law firms and academics throwing support to Sheppard Mullin, as reported by Law 360. The brief by legal scholars is most troubling as they argue that:

an “inflexible conflict waiver” will likely lead to an increase in legal costs to consumers and possibly less available attorneys, given attorneys’ fees “depend, in large part, on whether a particular engagement will preclude a lawyer or law firm from representing other clients.”

Needless to say, corporate clients support the California decision, arguing that “companies must not be left to foot legal bills if the firms they hire are secretly playing dual roles,” reports American Lawyer. According to Amar Narwal, vice president of the Association of Corporate Counsel, quoted in the article, the Sheppard Mullin case is:

an “egregious” example of what has become a larger trend of law firms seeking to represent companies that are either adverse to each other in separate litigation or clear economic competitors. It’s a dynamic that companies have watched with a great deal of unease, Sarwal added.

“In-house counsel don’t want to see their lawyers on the other side of the ‘v.’ They just don’t,” he said in an interview Monday. “What the law firms are trying to do in this context is prevent their clients from even knowing that the law firm could be on the other side from them.”

There’s an easy solution to all of this, of course. Corporate clients should refuse to sign broad advanced waiver provisions. There are plenty of law firms – particularly solo and small firms – with the skills to handle many of these matters. Moreover, many solos and smalls won’t demand advance waivers because in contrast to biglaw, their business model doesn’t depend upon cross-selling in order to represent a client on as many matters as possible, thereby increasing the chances of a conflict.

At the end of the day, corporate clients have a choice: say no to broad conflicts by law firms who think nothing of playing both sides of the fence while your company’s future is at stake, and yes to solos and smalls who will appreciate your business enough to give you what biglaw can’t and what every client deserves: loyalty.

 

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