SHEPPARD, MULLIN, RICHTER & HAMPTON v. J-M MANUFACTURINGAmicus Curiae Brief of Exponential Interactive, Inc.; Halston Operating Company, LLC; Herbalife International of America, Inc.; JDI Display America, Inc.; Kimberly-Clark Corporation; Leaf Group Ltd.; NETGEAR, Inc.; Newegg Inc.; Turo Inc.; Varian Medical Systems, Inc.; and VidAngel, Inc.Cal.December 13, 2016Supreme Court Case No. 8232946 SUPREME COU RT COPY (Court of Appeal, Second District, Division Four, Case No. B256314) (Los Angeles County Sup. Court, Hon. Stuart Rice, Case No. YC067332) IN THE SUPREME COURT OF THE STATE OF CALIFORNIA SHEPPARD, MULLIN, RICHTER & HAMPTON, LLP Plaintiffand Respondent, SUPREME COURT FILED DEC 18 2016 Jorge Navarrete Clerk VS. J-M MANUFACTURINGCO., INC., Defendant and Appellant. Deputy APPLICATION FOR LEAVE TO FILE AMICI CURIAE BRIEF, AND AMICI CURIAE BRIEF OF EXPONENTIAL INTERACTIVE, INC., HALSTON OPERATING COMPANY, LLC, HERBALIFE INTERNATIONAL OF AMERICA,INC., JDI DISPLAY AMERICA, INC., KIMBERLY-CLARK CORPORATION, LEAF GROUP LTD., NETGEAR,INC., NEWEGGINC., TURO INC., VARIAN MEDICAL SYSTEMS, INC. AND VIDANGEL, INC. INSUPPORT OF DEFENDANT AND APPELLANT *Gordon M.Fauth, Jr. (Cal. Bar No. 190280) Rosanne L. Mah (Cal. Bar No. 242628) LITIGATION LAW GROUP 1801 Clement Avenue, Suite 101 Alameda, California 94501 Telephone (510) 238-9610 Facsimile (510) 473-0603 gmf@classlitigation.com Counselfor Amici Curiae Supreme Court Case No. 8232946 (Court of Appeal, Second District, Division Four, Case No. B256314) _ (Los Angeles County Sup. Court, Hon. Stuart Rice, Case No. YC067332) IN THE SUPREME COURT OF THE STATE OF CALIFORNIA SHEPPARD, MULLIN, RICHTER & HAMPTON,LLP Plaintiffand Respondent, VS. J-M MANUFACTURINGCO., INC., Defendant and Appellant. APPLICATION FOR LEAVETO FILE AMICI CURIAE BRIEF, AND AMICI CURIAE BRIEF OF EXPONENTIAL INTERACTIVE, INC., HALSTON OPERATING COMPANY, LLC, HERBALIFE INTERNATIONAL OF AMERICA,INC., JDI DISPLAY AMERICA, INC., KIMBERLY-CLARK CORPORATION, LEAFGROUP LTD., NETGEAR, INC., NEWEGGINC., TURO INC., VARIAN MEDICAL SYSTEMS, INC. AND VIDANGEL, INC. IN SUPPORT OF DEFENDANT AND APPELLANT *Gordon M.Fauth,Jr. (Cal. Bar No. 190280) Rosanne L. Mah (Cal. Bar No. 242628) LITIGATION LAW GROUP 1801 Clement Avenue, Suite 101 Alameda, California 94501 Telephone (510) 238-9610 Facsimile (510) 473-0603 emf@classlitigation.com Counselfor Amici Curiae TABLE OF CONTENTS Page APPLICATION FOR LEAVETO FILE AMICI CURIAEBRIEP......... I THE INTEREST OF AMICI CURIAE......cccccccccsscsscssessecsevssesessstecserees 1 AMICI CURIAE BRIEF ....ccccccsssessesssscssveesssvsvscvscssesecssssscssssessssaessceesnes 10 INTRODUCTIONuccccccceesscsscssereesssesssscssessessersssesssssesssessesedaeseevasseees 10 ARGUMENT.occcccccccccsessssesstecsecsessscesesesseneeessssesssssesusersssssevssssssassvsvnaaes 12 I. IfThis Court Allows Boilerplate Advance Conflict Waivers II. I. IV. VI. VII. To Substitute For Informed Consent Under Rule 3-310, The Ability OfAmici To Utilize Outside Legal Counsel Effectively Will Suffer, Harming Their Businesses............... 12 Amici And Other Similar Corporations Would Need To Know The Nature And Specifics Of The Conflict Before They Could Provide The Informed Consent Required By Rule 3-310... ecescsstesseseccsecssssersecseceessscsessesesesessesssesensenteneees 13 No Matter How Sophisticated, The Client Would Always Lack The Information Controlled By The Law Firm Necessary To Identify And Evaluate Conflicts. ....ccceeeee 14 Because Most Clients Would Lack Sufficient Bargaining Power To Reject A Broad Advance Waiver, Such A Provision Is Unconscionable ........ccccscccsssssccccseseccccssssessseesees 15 The Court Should Reject This Cynical Attempt To Destroy A Fundamental Pillar Of The Attorney-Client Relationship, One That Has Helped Make California The Innovation Capital Of The World oo. ccccccseccecsseetscreserecrsccssecsersnessesens 17 The Rule Proposed By Sheppard Would Promote Law Firm Profit But Would Irreparably Damage Public Trust In The Integrity Of The Legal Profession ........ccccccsesessssscesesesseessees 17 This Court Should Deny Sheppard Its Fees, And Should Set A Bright Line Rule Which Leaves No Doubt As To A Law Firm’s Duty OfUndivided Loyalty And The Consequences Of Concealing Known Conflicts From A Client ..........00 18 CONCLUSION uv ccccccscseseestereseceeesserseseeesssesensenseecsessesenessentees 19 CERTIFICATE OF COMPLIANCE......ccccstsssstsnesetessesesssescseseessnenees 20 ii TABLE OF AUTHORITIES Cases Flatt v. Superior Court (1994) 9 Cal.4th 275, 36 Cal.Rptr.2d 537 iccciscsessseeseeterseseneseeerees 13, 14 Little v. Auto Stiegler, Inc. (2003) 29 Cal.4th 1064, 130 Cal.Rptr.2d 892... ccseeesessseeesesseeens 16 People v. SpeeDee Oil Change Systems, Inc (1999) 20 Cal.4th 1135, 86 Cal.Rptr.2d 816 occecseseeteeeeetsens 17-18 Rules California Rules of Professional Conduct, Rule 3-310 vcceccccsscesessctsesessssvdecsesssestecsssetersssseceserseeseeseserserseees passim Other http://www.sheppardmullin.com/about-factsHtml... ccsseeseeeseeeeeeeeeees 14 ili APPLICATION FOR LEAVETO FILE AMICI CURIAE BRIEF TO THE HONORABLETANI GORRE CANTIL-SAKAUYE, CHIEF JUSTICE OF THE CALIFORNIA SUPREME COURT: Pursuant to California Rule of Court 8.520(f), the undersigned, Exponential Interactive, Inc., Halston Operating Company, LLC, Herbalife International of America, Inc., JDI Display America, Inc., Kimberly-Clark Corporation, Leaf Group Ltd., NETGEAR,Inc., Newegg Inc., Turo Inc., Varian Medical Systems, Inc. and VidAngel, Inc., request leave to file the attached brief as Amici Curiae in support of Defendant and Appellant J-M Manufacturing Co., Inc. As explained below,applicants believe that their brief will aid this Court in reaching a decision in the present matter. As also set forth below, applicants believe that they will be adversely affected if this Court does not render a decision upholding the Court of Appeal ruling in this matter. This application is timely made. THE INTEREST OF AMICI CURIAE Amici Curiae are gravely concerned about the outcomeofthe case before the Court. Amici are all business entities with inside counselthat utilize outside counselat firms such as Sheppard, Mullin, Richter & Hampton, LLP, the Respondentin this case, on which they rely to represent them with undivided loyalty in many confidential and sensitive matters. Amici consider it of the utmost importance that any law firm they hire disclose any conflict of interest. A ruling in this case that allows a law firm to conceal knownconflicts because of a broad advance waiverof conflicts that has becomestandard in many law firm engagementletters would deprive Amiciofthe undividedloyalty of their attorneys and place them at the mercyofprofit-focused law firms and unscrupulous outside counsel. Amici would no longer be able to repose trust in the integrity of the attorney-client relationship and their ability to utilize outside counsel would be fundamentally compromised. Instead, Amici would be left with mistrust and nagging suspicionsthat their law firms might be knowingly or unknowingly acting against their best interests. Exponential Interactive, Inc. (“Exponential”), a Delaware corporation with its principal place of business in Emeryville, California,is a provider of digital media and advertising solutions to brands such as AT&T, Disney, HP, Lexus, Mastercard, Sony, and Verizon. Exponential delivers innovative advertising experiences that transform the way brands interact with audiences across desktop, in-stream, and mobile devices globally. Exponential was founded in 2001 and haslocations in 21 countries worldwide, including a second California office in El Segundo. As a medium-sized company with a small in-house legal team, Exponential relies heavily on law firms for expertise globally in areas such as civil litigation, employment/HR matters, and corporate governance. The companyhasa particular interest in the matter at hand because it cannot thoroughly review an outside law firm’s existing client base and lacks the bargaining power to impose outside counsel retainer guidelines on all ofits law firms. As a result of this imbalance, Exponential has been forced to sign someretainer agreements in the past that contained advance conflict waivers. Exponential is very concerned about any ruling in this case that would allow law firmsto use such waiversas justification to conceal known conflicts, particularly as the digital advertising space is both crowded and extremely competitive. Halston Operating Company, LLC (“Halston”) is headquartered in Los Angeles, California. Founded in the 1960s, Halston today continues to evolve the Halston legacy through the Halston Heritage collection. The Company designs, manufactures, andretails apparel in California and throughout the United States, based on the strong codes developed by its founder Roy Halston Frowick, the creator of luxury American Fashion. Halston Heritage is an approachable luxury lifestyle brand — mixing legacy codes with a modern edgeto create an effortless women’s collection of ready-to-wear, dresses, handbags, footwear and small leather goods. The Halston Heritage brand is marketed through some of the world’s most formidable retailers including Neiman Marcus, Bergdorf Goodman, Saks Fifth Avenue, Net-A-Porter and Harvey Nichols, as well as Halston Heritage stores. Halston has presently observed small- and medium-size law firms in California adopting broad advance conflict waivers substantially similar to the waiver at issue in the case, and thus is deeply concerned for the integrity of the attorney-client relationship and the entire legal profession, if concealment of a known,existing conflict of interest is permitted. Herbalife International of America, Inc. (“Herbalife”) is headquartered in Los Angeles, California. For more than 36 years, the mission at Herbalife has been to change people’s lives by providing the best nutrition and weight-management products in the world and the best business opportunity for extra income. Herbalife products are available exclusively to and through dedicated Herbalife Independent Distributors. Herbalife is committed to fighting the worldwide problems ofpoor nutrition and obesity by offering high-quality products, one-on-one coaching with an Herbalife distributor and a community that inspires customers to live a healthy, activelife. Herbalife supports the Herbalife Family Foundation and its Casa Herbalife programsto help bring good nutrition to children in need. Herbalife also sponsors more than 200 world-class athletes, teams and events around the globe, including Cristiano Ronaldo, the LA Galaxy and champions in manyother sports. The company has more than 8,000 employees worldwide, and its shares are traded on the New York Stock Exchange (NYSE: HLF) with net sales of $4.5 billion in 2015. Herbalife is represented by law firms in a variety of matters and depends ontheir undivided loyalty. It would expect outside counsel to notify it of any conflicts, and is deeply concerned about the outcomeofthis case. JDI Display America, Inc. (“JDIDA”) is a display supplier to the mobile, automotive, medical, and other industries. JDIDA has in-house counsel, but from time to time, JDIDA engages outside counsel, including both large and small law firms. Being a smaller company, JDIDA often has little choice but to accept the broad advance conflict waivers ofthe type at issue here just to get legal representation, despite deep concerns aboutthe potential for divided loyalties. In particular, JDIDA has many customers and indemnity obligations and dependsonits outside counselto be ethical and to fully inform it of actual and potential conflicts ofinterest. Kimberly-Clark Corporation (“Kimberly-Clark”) (NYSE: KMB)is based in Irving, Texas. With a 144-year history of innovation, Kimberly- Clark has revenues of over $20 billion, and employs approximately 43,000 persons. Kimberly-Clark and its well-known global brands are an indispensablepart oflife for people in more than 175 countries. Every day, nearly a quarter of the world's population trust Kimberly-Clark's brands and the solutions they provide to enhance their health, hygiene and well-being. Kimberly-Clark believes that a lawyer’s duty of loyalty should require disclosure of a known conflict, and is concerned about the outcome of this case. In Kimberly-Clark’s experience, while large corporations such as Kimberly-Clark might be able to achieve removal of advance waiver provisions from agreements with the law firms used regularly andforlarger matters, they cannot always negotiate the waivers out for less frequent and more specialized representations. No company should ever be denied the opportunity to give informed consent. Leaf Group Ltd. (formerly Demand Media,Inc.) (“Leaf”) is a diversified Internet company headquartered in Santa Monica, California, that builds platforms across its media and marketplace properties to enable communities of creators to reach passionate audiences in large and growing lifestyle categories. Leaf's content studio and diverse advertising offerings also help brands and publishers find innovative ways to engage with their customers. Leaf has, on numerous occasions, declined to retain certain law firms due to actual and potential conflicts that were disclosed during the conflicts check process. Without such disclosure and a frank discussion with the disclosing law firms, Leaf might have unwittingly engaged counsel whoseinterests were not entirely aligned with Leaf’s and also caused rifts in certain significant professional relationships. Leaf believes that conflicts of interest among current and/orpast clients, including the potential for a conflict of interest, can undermine firm's ability to properly represent a client's interest in an ethical and prudent manner. NETGEAR,Inc., with headquarters in San Jose, California,is a global networking companythat delivers innovative products to consumers, businesses and service providers. The Company's products are built on a variety of proven technologies such as wireless (WiFi and LTE), Ethernet and powerline, with a focus on reliability and ease-of-use. The product line consists of wired and wireless devices that enable networking, broadband access and network connectivity. These products are available in multiple configurations to address the needs of the end-users in each geographic region in which the Company's products are sold. NETGEARproducts are sold in approximately 28,000 retail locations around the globe, and through approximately 31,000 value-addedresellers, as well as multiple major cable, mobile and wireline service providers around the world. Newegg Inc. (“Newegg”), a Delaware corporation with headquarters at City of Industry, California, is one of the largest online retailers of electronic and technology products in the United States. Although it has its ownlegal department, it utilizes outside law firms for a wide variety of matters, including business disputes and patentlitigation. Newegg operates in a highly-competitive field. The matters in whichit is represented by outside counsel are confidential and sensitive. Newegg expects undivided loyalty from its outside counsel, and it views with alarm the possibility that, using broad, advance waivers ofthe kind at issue here, a law firm might conceal from it a known conflict of interest. Even with over $2 billion in annual revenue, Newegg does not have the volumein purchasing legal services that would allow it to retain law firms for certain critical transactions andlitigation matters without agreeing to the broad advance waivers being demanded nowby mostlarge law firms. Turo Inc. (“Turo”’), a Delaware corporation headquartered in San Francisco, California, is a peer to peer car sharing marketplace where travelers can rent any car they want, wherever they want it, from a vibrant R S U N G A R a gr t o Y Se e community of local car owners. Travelers choose from totally unique selection of nearby cars, while car owners earn extra money and help fuel their adventures. A pioneer ofthe sharing economyandtravelindustry, Turo operates in over 2,500 cities in North America, providing a safe, supportive community where the car the consumerrentsis part of a story, not a fleet. Turo utilizes the services of outside counsel for various matters, and is deeply concerned abouta decision in this case that might allow a law firm to conceal knownconflicts. As a start-up with a small legal budget and only one in-house attorney, Turo has been forced against its owninterest and better judgment to sign advance conflict waivers in orderto retain legal services from prestigiousfirst tier law firms. Varian Medical Systems, Inc. (“Varian”), of Palo Alto, California, is the world's leading manufacturer of medical devices and software for treating cancer and other medical conditions with radiation. The company provides comprehensive solutions for radiotherapy, radiosurgery, proton therapy and brachytherapy. The companysupplies informatics software for managing comprehensive cancerclinics, radiotherapy centers and medical oncology practices. Varian is also a premier supplier of X-ray imaging components, including tubes, digital detectors, cables and connectors as well as image processing software and workstations for use in medical and industrial settings, as well as for security and non-destructivetesting. Varian employs approximately 7,700 people whoare located at manufacturing sites in North America, Europe, and China and has sales and support offices around the world. Varian retains outside counsel from large law firms to representit globally in civil litigation, patent litigation, acquisitions, transactional and regulatory matters. Varian appreciates that its outside counsel have, from time to time, disclosed potential conflicts ofinterests, so that Varian can make an informed decision on whether to engage or continue the representation. Varian is very concerned about any ruling in this case that would allow law firms to use advance waiversas justification to conceal knownconflicts ofinterests. VidAngel, Inc. (““VidAngel”) is a Utah start-up company formed in 2013 that began to conduct business in 2014. It has had in-house counsel for less than four monthsandis defending twosignificant litigations with older and much larger companies seeking to suppress its disruptive technology that allows customers to purchase movies on line and have those movies filtered to remove any content they find objectionable and streamed to them to watch on a variety of devices, It is concerned that owingto its small size and recent market entry a firm might nottreatits interests with paramount importance andcare if that firm has business needs in conflict with those of VidAngel. VidAngel discovered an undisclosed business interest conflict of a firm it was planningto retain only when it conducted a UCC-1 search and discovered that the firm had an economicinterest in its adversary. VidAngel strongly believes law firms should disclose knownconflicts. Amici’s brief will aid the Court in assessing the importanceto the business community of enforcing the duty of lawyers to disclose conflicts. Amici’s experience as business entities with inside counsel which employ outside counsel is typical of many other companies engaged in commerce that would share Amici’s alarm and outrage at the prospect of a law firm using a boilerplate advance waiverto justify concealing a known, existing conflict. Amici Curiae respectfully ask the Court to grant their application and accept their attached brief for filing, and to consider their arguments in favor of Defendant and Appellant.’ Respectfully submitted, LITIGAT, eLAW GROUP Date: December2, 2016 "7 AEFauth,Jr. Counsel for Amici Curiae Exponential Interactive, Inc., Halston Operating Company, LLC, Herbalife International of America, Inc., JDI Display America, Inc., Kimberly-Clark Corporation, Leaf Group Ltd., NETGEAR,Inc., Newegg Inc., Turo Inc., Varian Medical Systems, Inc. and VidAngel, Inc. ' Noperson or party or counsel for any party, other than Amici and counsel for Amici, have authored the proposed brief in whole or in part or funded the preparation ofthe brief. AMICI CURIAE BRIEF INTRODUCTION Amici Curiae, as businesses engaged in commercein California that utilize law firms such as Sheppard, Mullin, Richter & Hampton, LLP (“Sheppard”), the Plaintiff and Respondent in this case, know from their ownsituations and experiencesthat a ruling allowing law firms to use a boilerplate advance waiverof conflicts as justification not to disclose known conflicts would causeserious erosion of the attorney-client relationship and compromisetheir ability to utilize outside counsel | effectively. Clients should not have to be on constant guard againstnot only their counterparties but against their own legal advocatesas well. Amici would not have expected Sheppard to use the broad advance waiver at issue here asjustification to conceal a known andexisting conflict. That is an extreme position completely at odds with widely accepted and long-standing canonsof legal ethics. Because Sheppard failed to reveal the known South Tahoe Public Utilities District (“South Tahoe”) conflict to J-M Manufacturing Co., Inc. (“J-M”), there was simply no disclosure made that would have allowed Amici or any other responsible business entity to provide the informed consent required by Rule 3-310 of the California Rules of Professional Conduct (“Rule 3-310”). Amiciall considerit of the utmost importance that any law firm they hire disclose any conflict of interest. A ruling in this case that allowed a law firm to conceal a knownconflict because of a boilerplate advance waiverin the retainer agreement would cause Amicito be uncertain as to the undivided loyalty of their attorneys and unable to depend on theintegrity of the attorney-client relationship. Since they would never possessfull 10 information regarding the law firm’s other cases and clients, Amici could never themselves knowofall potential conflicts of interest that might exist. Therefore, Amici would be forced into a position of doubt and mistrust vis- a-vis their own attorneys, and Amici’s ability to depend on outside counsel as an extension of in-house legal resources would be greatly compromised. The theoretical power ofa client to reject a blanket advance waiver provision in the law firm’s retainer agreement is a chimera. In Amici’s experience, only the largest of business entities, such as Walmart, Google and Apple, are able to dictate such an exclusion to any law firm that wants their business. The vast majority of corporations do not possess that kind of bargaining power. As mentioned previously, even Newegg withits substantial annual revenues cannotas a practical matter negotiate out broad advance waiver language, because the numberof law firms that provide certain types of high level legal representation (many ofwhom are advocating as amici in favor of Sheppard’s position) is limited. If they needed the law firm’s expertise or brand, Amici and most other business entities would be forced to accept the waiver provision. For these and other reasonsset forth herein, Amici respectfully urge this Court to find in favor of Appellant and to prevent further erosion of legal ethics rules in favor of the convenience andprofitability of large law firms, 11 ARGUMENT I. If This Court Allows Boilerplate Advance Conflict Waivers To Substitute For Informed Consent Under Rule 3-310, The Ability Of Amici To Utilize Outside Legal Counsel Effectively Will Suffer, Harming Their Businesses. Amicifind intolerable and indefensible the regime urged by Sheppard, which would fundamentally erode client rights and impair a corporation’s ability to trust outside counsel. If law firms are allowed to use broad advance waivers to avoid their duty to disclose known andexisting conflicts to clients, the ability of Amicito utilize outside counsel effectively will suffer, to the detriment of their businesses. Amici and many other companies depend on outside law firms to provide counsel as needed for litigation and other needs beyondthe staffing capability and expertise of their own legal departments. They are able to do this seamlessly because of the assurance provided by the duty of loyalty, as exemplified by Rule 3- 310, which requires law firms to inform the client of any knownconflicts. If that assurance is withdrawn, Amici’s ability to leverage their in-house counsel with trusted outside counsel will be greatly diminished, and significant efficiencies will be lost. “The effective functioningofthe fiduciary relationship between attorney and client dependsonthe client’s trust and confidence in counsel.” Flatt v. Superior Court (1994) 9 Cal.4th 275, 282, 285, 36 Cal.Rptr.2d 537. Amici and other similar business entities cannot repose trust and confidence in attorneys unless assured oftheir undivided loyalty. Amici respectfully urge this Court to preserve the integrity of the attorney-client relationship by finding that advance conflict waivers cannot substitute for informed 12 written consent under Rule 3-310, and that law firms maynotrely on such boilerplate waivers to conceal knownconflicts from their clients. II. Amici And Other Similar Corporations Would Need To Know The Nature And Specifics Of The Conflict Before They Could Provide The Informed Consent Required By Rule 3-310. If in the place of J-M, Amici would not have interpreted the broad advance waiverat issue here to mean that Sheppard would conceal known conflicts. Because Sheppard failed to disclose its current, existing conflict to either J-M or South Tahoe, there was simply no disclosure upon which Amici or any responsible business entity could possibly provide the informed written consent contemplated by Rule 3-310. Amici struggle to understand how clients could possibly be well served if they have to constantly wonder whether their own outside counsel is loyal to them or instead is loyal to an undisclosed third party that may have directly adverse interests. “A client who learns that his or her lawyeris also representing a litigation adversary, even with respect to a matter wholly unrelated to the one for which counsel wasretained, cannot long be expected to sustain the level of confidence andtrust in counsel.... [Flew if any clients would be willing to suffer the prospect of their attorney continuing to represent them under such circumstances.” Flatt at 285. In proper circumstances, Amici might consider waiving a conflict. However, at a minimum, Amici would need to know theidentity of the party whoserepresentation created the conflict, the nature of all matters for which representation was provided, and the duration ofthe relationship between the law firm and the other party. Without these specifics, Amici’s 13 officers and in-house counsel would lack the information required to make an informed decision on whether to waive the conflict. In terms of safeguarding Amici’s corporate interests, it would not have mattered to Amici whether or not Sheppard wasactively representing South Tahoe at the moment. Amici would need to know of any such recutring client presenting a conflict with which the firm had a continuing relationship, even if there was no active representation going on atthe time, in order to assess the danger and make an informeddecision. Ill. No Matter How Sophisticated, The Client Would Always Lack The Information Controlled By The Law Firm Necessary To Identify And Evaluate Conflicts. There is no merit to Sheppard’s suggestion that “sophisticated” corporations with in-house legal staff are somehow able by themselvesto investigate and evaluate a law firm’s potential conflicts. Even if that were possible, such a regime would place clients and attorneys into combative postures, allowing lawyers to conceal known conflicts while requiring clients always to mistrust their lawyers, seriously weakening the attorney- client relationship. However, a conflicts check by a corporate client is simply notpractical. It is the law firm alone that possesses and controls the information regarding its many cases andclients needed to determine whether a conflict exists. Sheppard itself provides a goodillustration. According to Sheppard’s website, it has 15 offices spread across North America, Europe and Asia, with some 750 lawyers. See ShepardMullin (as of Nov. 28, 2016). It would be impossible for a corporate client to obtain the information from Sheppard’s files needed to do a competent conflicts check. Few corporate 14 entities in the world have legal operations teams with sufficient capacity to search even the publicly available records to determine a law firm’s relationships—let aloneall of the confidential, non-public clients that a law firm may have. Conversely,it is relatively easy for the law firm to perform the conflicts check, using available software to scan its database ofclients and casesto identify potential conflicts. Based upon their experience having retained large law firms, Amici recognize that Sheppard’s argumentthat corporate clients are “sophisticated” is a red herring serving to obfuscate the imbalance of information that law firms have over clients with respect to whoelse they represent and how. No matter how “sophisticated”it is, at best a corporate legal department might be able to determine someofthe law firm’spublic clients, but it would never be able to determine the law firm’s confidential clients and matters unless the firm disclosed them. Accordingly, law firms such as Sheppard should not be allowed to evadetheir ethical duty to disclose conflicts and obtain informed written consent by pleading that a client is “sophisticated.” IV. Because Most Clients Would Lack Sufficient Bargaining Power To Reject A Broad Advance Waiver, Such A Provision Is Unconscionable. Contrary to Sheppard’s depiction, Amici and most other corporations would be unable to reject a presented boilerplate waiver of conflicts provision. Amici know this from their own experience, where they have sometimeshad to accept boilerplate waiver clauses in order to obtain needed representation despite attemptsto strike or modify such provisions. Sheppard’s claim that the changing legal market means corporateclients now have symmetric bargaining poweris at best misleading and at worst 15 offensive to Amici. This is not reality for most companies that retain law firms. In fact, for that reason, such a provision should be found to be not only a violation of California’s professionalethics rules but also unconscionable under California law. The broad advance waiver is procedurally unconscionable because, contrary to Sheppard’s position,it is a “take it or leaveit” proposition for most corporate clients. See Little v. Auto Stiegler, Inc. (2003) 29 Cal.4th 1064, 130 Cal.Rptr.2d 892, 897-898. As Amici know from their own experiences, the reality of the legal marketplace is that only the largest of companies, like Walmart, Google and Apple, possess sufficient bargaining powerand legal spend to negotiate advance waivers outofthe retainer agreementfor their regular “go-to” firms, and even they cannot always negotiate the waivers out for “one-off” or more specialized representations. The vast majority of companies simply lack that kind of clout. If this Court allows broad advance waiversto insulate law firms from liability for concealing known conflicts, corporate law firms will all impose non- negotiable boilerplate advance waiver clauses through their retainer agreements. Businesses such as Amici that need the services of a law firm becauseof its expertise or connections will either have to accept the waiver provision, or, forgo the legal representation that the business needs. The broad advance waiveris substantively unconscionable because the result is both one-sided and harsh. See id. Although the law firm is a fiduciary of the client, the provision would allow the law firm,for its own benefit, to conceal a known,existing conflict from the client. Not knowing of the conflict, a client such as any of the Amici would be forced to subject itself to a potentially-dangerous conflict with possibly disastrousresults. 16 V. The Court Should Reject This Cynical Attempt To Destroy A FundamentalPillar Of The Attorney-Client Relationship, One That Has Helped Make California The Innovation Capital Of The World. California is home to thousandsof highly innovative and successful companies that have shaped the technological revolution. Oneof the things that has made California successful in attracting and nurturing innovationis the legal structure it offers new businesses, which provides them with the legal services and assurances they need that makeit possible for them to grow and prosper. Keyto the ability of Amici and other businesses to use law firms in leveraging their growth has beentheir ability to trust those law firms to represent them loyally and without undisclosed conflicts. Amici believe that advance waiver of conflicts provisions are unconscionable and violate public policy in California, as well the basic tenets of the duty of loyalty and the attorney-client relationship, as reflected in Rule 3-310 and proposed Rule 1-7. The Court should hold that all such advance waiver of conflicts provisions are unenforceable in California. VI. The Rule Proposed By Sheppard Would Promote Law Firm Profits But Would Irreparably Damage Public Trust In The Integrity Of The Legal Profession. Sheppard’s arguments are, to put it bluntly, fee-driven. The interpretation of Rule 3-310 urged by Sheppard would undeniably promote law firm profits, allowing law firms to maximize revenues by takingin all clients without regard for conflicts, but it would irreparably damage public trust in the integrity of the legal profession. “The paramount concern must be to preserve public trust in the... integrity of the bar.” Peoplev. SpeeDee Oil Change Systems, Inc. (1999) 20 Cal.4th 1135, 1146, 86 17 Cal.Rptr.2d 816, 824. Amici have no issue with and strongly support capitalism. But Amici believe that strong public interest dictates that a profession that claims the right and privilege to govern itself, and whose members write and make most of the laws and regulations governing our society, should be required to meet higher standards of ethical and professional behavior. Certainly, higher than that demonstrated by the Sheppard firm in this matter. Sheppard would have this Court believe the exigencies of the modern age somehowrequire the lawyer’s traditional duty of loyalty to be discarded. As law firms grow insize, there is undoubtedly pressure on their partners to bring in ever more clients and business. This provides incentive for the law firm to ignore conflicts. However, for Amici and other corporations, the ethical requirements of a legal representative have not changedat all. The duty of loyalty remainsvital to the ability of Amici to trust and effectively utilize outside counsel. Removing the requirementthat lawyers inform clients of conflicts and obtain their informed consent would strike at the heart of the fiduciary relationship that exists between a lawyer and client, and create a slippery slope down which law firms wouldslide. Relaxation of the duty of loyalty would allow law firms to maximize profits by increasing their revenue streams, but it would be at the expense ofthe public’s trust in the integrity of the profession. VII. This Court Should Deny Sheppard Its Fees, And Should Set A Bright Line Rule Which Leaves No Doubt As To A Law Firm’s Duty Of Undivided Loyalty And The Consequences Of Concealing Known Conflicts From A Client. This Court should deny Sheppard fees for its malfeasance, and should set a brightline rule that leaves no doubt as to a law firm’s duty of 18 undivided loyalty and the consequencesofignoring that duty. There should not be incentive for a law firm to push the ethics envelope at the expense of the duty of loyalty. Lawyers should not be encouraged to constantly think, “I wantto try to get away with a little bit more,” with respect to ethics and their own clients. Accordingly, this Court should not allow Sheppard to retain or recover fees for representation that it undertook knowingthat there was an undisclosed conflict. This Court should send a message reminding law firms like Sheppard of what the duty of loyalty means. CONCLUSION To preserve the integrity of the legal profession in California, and the ability of corporate clients to trust in and depend on outside counsel, the Court should upholdstrictly the informed written consent requirement of Rule 3-310 (and proposed Rule 1.7) and should find that law firms must always disclose knownconflicts to their clients. The Court should also find Sheppard’s attempt to use a boilerplate advance waiver provision to conceal a known,existing conflict to be unconscionable. Respectfully submitted, LITIGATFON L GROUP Date: December2, 2016 By: ”Gordon M. Fauth, Jr. Counsel for Amici Curiae Exponential Interactive, Inc., Halston Operating Company, LLC, Herbalife International of America, Inc., JDI Display America, Inc., Kimberly-Clark Corporation, Leaf Group Ltd., NETGEAR,Inc., Newegg Inc., Turo Inc., Varian Medical Systems, Inc. and VidAngel,Inc. 19 CERTIFICATE OF COMPLIANCE I certify that this brief has been prepared using proportionately- spaced Times New Romantypeface of 13 points or greater. Exclusive of the exempted portions in California Rule of Court 8.520 (c), the brief contains 2,666 words, as counted by Microsoft Word. I declare under penalty of perjury that this Certificate of Compliance is true and correct and that this declaration was executed on the date below. } Date: December2, 2016 By: , | NM Gotden M.auth, Jr. : 20 PROOF OF SERVICE I, Gordon M.Fauth, Jr., hereby declare as follows: Iam employed at 1801 Clement Avenue, Suite 101, Alameda, California 94501. I am over the age of eighteen years and am not a party to this action. On December2, 2016, I served the within document(s): APPLICATION FOR LEAVETO FILE AMICI CURIAEBRIEF, AND AMICI CURIAE BRIEF OF EXPONENTIAL INTERACTIVE, INC., HALSTON OPERATING COMPANY, LLC, HERBALIFE INTERNATIONAL OF AMERICA,INC., JDI DISPLAY AMERICA, INC., KIMBERLY CLARK CORPORATION, LEAF GROUP LTD., NETGEAR, INC., NEWEGGINC., TURO INC., VARIAN MEDICAL SYSTEMS, INC. AND VIDANGEL, INC. IN SUPPORT OF DEFENDANT AND APPELLANT XX_ by depositing the document(s) listed above in the United States mail at Alameda, California in a sealed envelope with first-class postage thereon fully prepaid, addressed to the person(s)/parties as set forth below: SEE ATTACHED SERVICELIST I am aware that on motion ofparty served, service is presumed invalid if postal cancellation date or postage meter date is more than 1 day after date of deposit for mailing in affidavit. I declare under penalty of perjury under the laws of the State of California that the aboveis true and correct. Executed December2, 2016, at Alameda, California. Gordon M. Fauth, Jr. “ R E N E E e t a Pla te abe 21 SERVICE LIST Office of the Clerk of Court Court of Appeal Second Appellate District, Division Four 300 South Spring Street Los Angeles, CA 90013 Office of the Clerk of Court Los Angeles Superior Court 111 North Hill Street Los Angeles, CA 90012 Kent L. Richland Barbara W.Ravitz Jeffrey E. Raskin Greines, Martin, Stein & Richland LLP 5900 Wilshire Boulevard, 12th Floor Los Angeles, California 90036 Attorneysfor Defendant and Appellant J- M Manufacturing Co., Inc. Kevin S. Rosen Theane Evangelis Bradley J. Hamburger Andrew G. Pappas Gibson, Dunn & Crutcher 333 South Grand Avenue, Suite 4700 Los Angeles, California 90071 Attorneysfor Plaintiffand Respondent Sheppard, Mullin, Richter & Hampton LLP 22
