In Sheppard, Mullin, Richter & Hampton, LLP v. J-M Manufacturing Co., Inc., a somewhat divided Supreme Court today holds a client’s written waiver of its law firm’s current or future conflicts of interest doesn’t count if, when the client signs the waiver, there is an existing conflict which the firm does not disclose. The court’s opinion by Justice Leondra Kruger concludes the undisclosed conflict in this case negates the entire attorney-client agreement, including an arbitration clause, which requires the nullification of a seven-figure arbitration award to the firm for fees and the possible disgorgement of an even larger amount of fees the client had already paid. The court does, however, leave open the possibility that the firm could obtain compensation for its legal work on an equitable quantum meruit theory because “California law does not establish a bright-line rule barring all compensation for services performed subject to an improperly waived conflict of interest, no matter the circumstances surrounding the violation.”
Justice Ming Chin, joined by Chief Justice Tani Cantil-Sakauye, writes a long concurring and dissenting opinion. He would shut the door now on any possible fee recovery in the case, either under the contract or quantum meruit. Justice Chin says that when “full disclosure is not made and informed consent is not obtained, allowing quantum meruit recovery would be contrary to [the applicable professional conduct rule’s] prophylactic function, which is to prevent attorneys even ‘from putting [themselves] in a position’ . . . that may ‘tempt[]’ them to violate their ‘obligation of fidelity.’”
The court affirms in part and reverses in part the Second District, Division Four, Court of Appeal. The reversal is because the Court of Appeal ruled that the undisclosed conflict of interest completely barred the law firm’s ability to keep or recover any fees.