SHEPPARD, MULLIN, RICHTER & HAMPTON v. J-M MANUFACTURING

Amicus Curiae Brief of The Association of Discipline Defense Counsel

Cal.December 14, 2016

SIJPREVE COURT COPY,enecour Supreme Court Number S232 FIL ED DEC 14 2016 IN THE SUPREME COURTOF THE STATE OF CALIFORNIA Jorge Navarrete Clerk SECOND APPELLATEDISTRICT, DIVISION FOUR" Deputy SHEPPARD, MULLIN, RICHTER & HAMPTONLLP, Plaintiffand Respondent, VS. J-M MANUFACTURINGCO.INC., Defendant and Appellant. Review of the Opinion of the Court ofAppeal of the State of California, | (No. B256314) Los Angeles County Superior Court, Case No. YC067332 APPLICATION OF THE ASSOCIATIONOF DISCIPLINE DEFENSE COUNSEL FOR LEAVETO FILE AN AMICUS CURIAE BRIEF; PROPOSED AMICUSCURIAE BRIEF Samuel Bellicini Jerome Fishkin Merri A. Baldwin (SBN 152191) (SBN 47798) (SBN 141957) President, Association of Fishkin & Slatter LLP Rogers Joseph O’Donnell Disciplinary Defense Counsel 1575 Treat Blvd., Ste 215 311 California St., 10th FI. Samuel C. Bellicini, Lawyer Walnut Creek, CA 94598 San Francisco, CA 94104 1005 Northgate Dr., # 240 (925) 944-5600 (415) 956-2828 San Rafael, CA 94903 Fax: (925) 944-5432 Fax: (415) 956-6457 (415) 298-7284 Fax: (628) 888-0704 Attorneys for THE ASSOCIATION OF DISCIPLINE DEFENSE COUNSEL Amicus Curiae on Behalf of Plaintiff and Respondent, SHEPPARD, MULLIN, RICHTER & HAMPTON LLP. 380783.9 Supreme Court Number 8232946 IN THE SUPREME COURT OF THE STATE OF CALIFORNIA SECOND APPELLATE DISTRICT, DIVISION FOUR SHEPPARD, MULLIN, RICHTER & HAMPTONLLP, ~— Plaintiffand Respondent, VS. J-M MANUFACTURINGCO.INC., Defendant and Appellant. Review of the Opinion of the Court of Appeal of the State of California, (No. B256314) Los Angeles County Superior Court, Case No. YC067332 APPLICATION OF THE ASSOCIATIONOFDISCIPLINE DEFENSE COUNSEL FOR LEAVETO FILE AN AMICUS CURIAE BRIEF; PROPOSED AMICUSCURIAE BRIEF Samuel Bellicini Jerome Fishkin Merri A. Baldwin (SBN 152191) (SBN 47798) (SBN 141957) President, Association of Fishkin & Slatter LLP Rogers Joseph O’Donnell Disciplinary Defense Counsel 1575 Treat Blvd., Ste: 215 311 California St., 10th FI. Samuel C. Bellicini, Lawyer Walnut Creek, CA 94598 San Francisco, CA 94104 1005 Northgate Dr., #240 (925) 944-5600 (415) 956-2828 San Rafael, CA 94903 Fax: (925) 944-5432 Fax: (415) 956-6457 (415) 298-7284 Fax: (628) 888-0704 Attorneys for THE ASSOCIATION OF DISCIPLINE DEFENSE COUNSEL Amicus Curiae on Behalf of Plaintiff and Respondent, SHEPPARD, MULLIN, RICHTER & HAMPTONLLP. 380783.9 TABLE OF CONTENTS Page(s) APPLICATION FOR LEAVE TO FILE AMICUS CURIAE BRIEF oo. ecssesescssssssesessessssesseeeseessnerscseesseaeceseaseneseeeaeeaessessssesesatens 1 DISCLOSURE OF AUTHORSHIP OR MONETARY CONTRIBUTION... .ccscessesecscenecseseeeceeceeseeaeceetseeeeessesesseessessesaes 2 AMICUS CURIAEBRIEF......ceeeeceeeesereeeeeeees seesssteseeseeecseouseeseneeseseesaeers 3 INTRODUCTIONWu.eesessssetseeeeseeeeceeseesceeeaeeeeeesseseessesesssseseesasseeavecseeses 3 I, I. IIL. A SOPHISTICATED CONSUMER OF LEGAL SERVICES, REPRESENTED BY COUNSEL, CAN GIVE ITS INFORMED CONSENT TO AN ADVANCE WAIVER OF CONFLICTS OF INTEREST WHERE SUCH A CLIENT IS INA SUFFICIENTLY EQUAL BARGAINING POSITION WITH THE ATTORNEY TO CONCLUDE THAT THE CLIENT FAIRLY CONSENTED TO THE WAIVER,oo. ceeeccesessseseeseersseeesaeseceneesseeesesseseceesaeesseseesaeeseesesseseseesesees 4 A. California Courts Have Considered and Relied Upon the Sophistication of Clients in Enforcing Fee Agreements Between Lawyers andClients.............cccccceeees 5 B. A Client’s Sophistication is One Factor That Should Weighin Favor of Enforcing an Advance Waiver..........0.0.... 9 A CONFLICT OF INTEREST THAT UNDISPUTEDLY CAUSED NO DAMAGETO THE CLIENT AND DID NOT AFFECT THE VALUE OR QUALITY OF AN ATTORNEY'S WORK SHOULD NOT AUTOMATICALLY(I) REQUIRE THE ATTORNEY TO DISGORGE ALL PREVIOUSLY PAID FEES, AND(II) PRECLUDE THE ATTORNEY FROM RECOVERING THE REASONABLE VALUE OF THE UNPAID WORK oeecessseececceseaee 15 A. California Cases Ordering Disgorgement of Attorney Fees as a Remedy Do So On a Case by Case Basis.............. 16 B. Quantum Meruit Cases Involving Alleged Effective _ Breaches: Courts Analyze Specific Facts ...........:cccessseeees 21 AUTOMATIC FORFEITURE OF FEES FOR A 380783.9 TABLE OF CONTENTS (Continued) Page(s) BREACH OF A PROFESSIONAL RULE TRANSFORMSA DISCIPLINARY RULE INTO A MEANS TO IMPOSE PUNITIVE DAMAGES WITHOUT THE PROCEDURAL SAFEGUARDS AVAILABLEIN THE DISCIPLINARYSYSTEM .essosssssenete 28 CONCLUSION cevcesececsscsscsssssessesesesssssstssesesssssssssusiusitusisiiettesesssssseessemeeeee 32 CERTIFICATE OF WORD COUNTceceeccccsssssssusseststeseserssessesseeseeeeeeeneeee 34 ii 380783.9 TABLE OF AUTHORITIES Page(s) Federal Cases Blecher & Collins, P.C. v. Northwest Airlines©D. Cal. 1994) B58 F. Supp. 1442iccscscsseccsecessssessesseesseccsseesessteeseresseesssesuses 17, 22 BMWofNorth America v. Gore (1996) 517 US 559leecceesessceseeescecseeesnseeeessessesseseecseeesesesseceesscssesseseesereeenns 31 Galderma Laboratories, L.P. vy. Actavis Mid-Atlantic LLC (2013) 927 F.Supp. 2d 390... ..ccscssccsssssscessesscceseesessscascssecssesesssscsessenees 10, 11, 14 Rodriguez v. Disner (2012) 688 F.3d 645 oocclecceeteseteeeeeesVe cseeessesacevseeesaeesaceceeseeceesssssessateeseaeess 22 California Cases A.I. Credit Corp., Inc. v. Aguilar & Sebastinelli (2003) 113 Cal. App. 4th 1072.0... cee cesccssssseessessessesseesssssssessssessssssscsecresessavens 27 Anderson v. Eaton (1930) 211 Cal. 113ceeeeccseseeeteeseeeeesceceveneeseeseeseesaseseessaeeseeeessaseresseeae 21, 24 Asbestos Claims Facility v. Berry & Berry (1990) 219 Cal. App. 3d 9. ciceccsscsssssesssessescessesssecsscsscsscssecsseesaessecsassacssenecnes 22 Ball v. Posey (1986) 176 Cal. App. 3d 1209... cccssscsssssessseseeesscssessessecsseceesescsstasssesaeenaes 18 Cal Pak Delivery, Inc. v. United Parcel Service, Inc. (1997) S2 Cal. App. 4th Looecccccsessesesseessseesesssessessesessessecssesescesssnessaceres 26, 27 Calvert v. Stoner (1948) 33 Cal. 20 97ie iiceccccssesssscsesssessessesecesseceseeecessessessssensssesaee 17, 19, 20, 22 Conservatorship ofChilton (1970) | 8 Cal. App. 3d 34... ececceseeeeeeestes eeseseneeseeseeeesseseneceeeeeeseenesnesesnsey 23, 25 Clark v. Millsap (1926) 197 Cal. 765 ...ececccssscsssssesssscsesenscesceseccssecsesecsncssssssensesscesesons 16, 17, 20, 24 -iii- 380783.9 TABLE OF AUTHORITIES (Continued) Page(s) Cotchett, Pitre & McCarthy v. Universal Paragon Corp. (2010) 187 Cal. App. 4th 1405...seceeveneecenstaeesseesneeesseeceaseetsasenaeses 6, 7,8 Dawson v. Toledano (2003) 109 Cal. App. 4th 387... ececcsseecescsssssseseesssssssessscssscsssssscsssasensesenes 27 Day v. Rosenthal (1985) 170 Cal. App. 3d 1125 oo ieeccccsssesssesssesssssesessessecsscssscsssessssssssesensvesses 25 Desert Outdoor Advertising v. Superior Court (2011) 196 Cal. App. 4th 866.00... cccccscccessesssssesesscssccscessecssscsessssssesssseeaeeaeens 8 Ferguson v. Yaspan (2014) 233 Cal. App. 4th 676.00... cceesccssecsscssssesssssesessesceseesesstsssessvssesseceees 8,9 In Re Fountain (1977) 74 Cal. App. 3d 715 oeccececscesssccssescssessssssccsesesscesseceessusscsscasonss 17, 18 Frye v. Tenderloin Housing Clinic, Ine. (2006) 38 Cal. 4th 23 oooesecsceensceseesseessessesesssecsessesseeesteseesssessursveessesseeas 19 Goldstein v.. Lees (1975) 46 Cal. App. 3d OLA ee ecsssesessesesteseereneeseeesnnersseanentenssnsntenessaessneseeseesnes 22 Goldstein v. Lees (1975) 46 Cal. App. 3d 618woeseneeecesevsesseeeseeesaeeecessseceseesneeaeeses passim Huskinson & Brown, LLP v. Wolf(2004) 32 Cal. 4th 453 oooecsecsssseessseesssseeesesseseessssesesseeeess seceeaeenees 17, 21, 22 Jeffry v. Pounds (1975) | 67 Cal. App. 3d 6... cesscccssseesesseserecessessseesessessensasssssaneees 16, 21, 22, 24 Klemm vy. Superior Court (1977) 75 Cal. App. 3d 893 oo. scsessccsessessssessecssscsessssessesssessssssssssacscsersesseaters 29 Lofton v. Wells Fargo Home Mortgage (2014) 230 Cal. App. 4th 1050... ecsccssceseesesessseessecscsscsssssssccsvsvsnsveesaeeaeaes 20 Loube v. Loube (1998) 64 Cal. App. 4th 421occccecsesceseceersennes beseesseeecesaeesesaeesecsteeeseecnens 27 -]V- 380783.1 TABLE OF AUTHORITIES (Continued) Page(s) M’Guinness v. Johnson (2015) 243 Cal. App. 4th 602.0... cccesccssesscesecssseseseesecsesssessscssssscssssssscseversesenss 14 Mardirossian & Assoc., Inc. v. Ersoff(2007) 153 Cal. App. 4th 257... ccccecscsssecssscsssscsscsssssssscessseessessaecatesserssseqerss 20 Mirabito v. Liccardo (1992) 4 Cal. App. 4th 41...eeeeeeeNenteeceesesessanecesuseceeeaeeeesssestesseesesaeeeas 29 Most v. State Bar (1967) 67 Cal. 2d 589oeeessccseeceseesseeseseccesscsesesseesssceseseseeeeesaeeseesescsseserssasens 28 Nickerson v. Stonebridge Life Ins. Co. (2016) 63 Cal. 4th 363...eececeesescesssessseececsneessseseseeeseseesssaneeeesseesssssssensees 30, 32 Olson v. Cohen (2003) 106 Cal. App. 4th 1209.0...cc eccccsccsseesssessessssssecesseeessstesessessaseees 19, 20 Pringle v. La Chappelle (1999) 73 Cal. App. 4th 1000... ceccesccsssccsssesssseseecsscsesesssscsseessscsssessevaes 19, 26 Ramirez v. Sturdevant (1994) | 21 Cal. App. 4th 904,eeceeeceecseeeesenesecsecsesseseressesesseeessssesscneeseeeess 25 Rosenberg v. Lawrence (1938) 10 Cal. 2d 590oeceeccseceessseseeessessecsessssssecsseeseeesesensececsucaussevsnesuaces 22 Sloan v. Stearns (1955) 137 Cal. App. 2d 289oocesceeseceseesctensseneeesessessecssessessesssetsesesssedeess 23 Slovensky v. Friedman (2006) 142 Cal. App. 4th 1518.0...ceseusaesseseecsesecatenseecsesassessssessasaess 20, 28 Sullivan v. Dorsa (2005) 128 Cal. App. 4th 947occecccccsscsssecssscesssessessecesscesatecssssesscssessassses 27, 28 Wiley v. Silsbee (1934) 1 Cal. App. 2d 520...eee ceccesseesecsseteseseesseesscssessessascssessessesesensasens 22 Younan v. Caruso (1996) 51 Cal. App. 4th 401.eeeeeeeeeesSesessssesaeecesseeesssceseseaeseseeensesseteneees 27 380783.1 TABLE OF AUTHORITIES (Continued) Page(s) California Statutes Cal. Civil Code § 3294(a) ose eeeecescsenessseseeetsetseeesersessnecsesseesssseseessessesessecsscessesseseesensessess 32 Cal. Bus. & Prof. Code § 17200........ccccssceccssscessssscssessssccsssecsssssseseveasensenes 19 Cal. Bus. &Prof Code§§ 6200, et Sq. .....ccsccsssecsscsscessccsecssesssscssesesessseseees 7 Other Authorities California State Bar Formal Ethics Opinion 1989-115...ce cesescsssceseees 11 Restatement (Third) ofLaw Governing Lawyers (2000) § 37 wu... 30 Restatement (Third) ofLaw Governing Lawyers, §122, | comment c(i) (2000) ssovternnecenesaetanesunesniiessaseesiesiiessnssesetssiesareeceses 14 Rule of Professional Conduct Rule 1-100....cccccceessessessecesesessesvsssecsseas 28 Rule of Professional Conduct Rule 2-200....csssssssssecssssessssessssssssessessssessesn 22 Rule of Professional Conduct Rule 3-300...cccleceeecessesseccesesseceeeeees 8, 23 Rule of Professional Conduct Rule 3-310....c.csscsssssssecesecesssesesesseeees passim Rule of Professional Conduct Rule 3-600 sssessssssatusssstannanenae 19 Rule of Professional Conduct Rule 4-200....c.ccccccsccsssssscesessessessscsescscecceees 5,6 40 St. Mary’s Law Journal 967 (2009)....cccccscsscccssccssssssccsccsscssvescsereesscens 31 -Vi- 380783.1 APPLICATION FOR LEAYXKre FILE AMICUS CURIAE The Association of Discipline Defense Counsel (ADDC) requests leave to file an amicus curiae brief in this matter in accord with Rule 8.520(f) of the California Rules of Court. This amicus brief supports the outcome soughtby petitioner Sheppard Mullin, though not for the same reasons. ADDCis an unincorporated association of attorneys who specialize in representing other attorneys in State Bar disciplinary and admissions matters. Most of our membersalso represent and advise clients about professional responsibility matters, from conflicts of interest to trust accounts to attorney client fee agreements. Most of our members represent clients in attorney client fee disputes, legal malpractice cases, and matters concerning the admission of law students to practice law. Many of our membersare also experienced expert witnesses in matters involving attorney professional responsibility. ADDC has previously appeared as amicus beforethis court in the guantum meruit case ofHuskinson & Brown LLP v. Wolf (2004) 32 Cal. 4th 453. In that case, ADDC argued the quantum meruit position. | ADDC members havespecial expertise in the issues before this court. Our membersare attorneys who regularly advise attorneys and law firms aboutconflicts of interest, conflict consents and waivers, and attorney fees. Our members regularly draft those conflict consents for themselvesand for their clients. Our members also frequently advise attorneys aboutthe issues of disgorgement, entitlement to fees and the determination of reasonable fees or quantum meruit. 380783.9 Webelieve that there are relevant cases and other authorities relevant to the issues in this matter that have not been cited by either of the parties. We cite and discuss them in our proposed brief. We also proposeto this Court standards that we requestthis Court set forth to determine whether and in what circumstances disgorgementand fee forfeiture may be appropriate, and when attorneys are otherwise entitled to fees, whether contractual fees or reasonable fees as determined by a court. | DISCLOSURE OFAUTHORSHIP OR MONETARY CONTRIBUTION No party or counsel for any party authored any portion of this brief. No party or counsel for any party made a monetary contribution intended to fund the preparation or submission ofthis brief. No personor entity other than the amicus curiae made a monetary contribution intended to fund the preparation or submission of this brief. Dated: December 1, 2016 Respectfully submitted, ROGERSJOSEPH O’DO PC By: MERRIA.BALDWIN ” Samuel C. Bellicini SAMUEL C. BELLICINI, LAWYER Jerome Fishkin FISHKIN & SLATTER LLP Attorneys for The Association of Discipline Defense Counsel 380783.9 AMICUS CURIAE BRIEF INTRODUCTION The Association of Disciplinary Defense Counsel (“ADDC”). submit this amicusbrief on two ofthe three issues identified in the Court’s briefing order of March 9, 2016: whether a sophisticated consumerof legal services can give its informed consent to an advance waiverof conflicts; and whether a conflict of interest that causes no damageto the client and did not affect the value or quality of the attorney’s work nonetheless automatically requires the attorney to disgorgeall legal fees and preclude the attorney from receiving the reasonable value ofthe unpaid work. Based on its members’ experience advising and defending attorneysin civil as well as disciplinary matters, the ADDC requests this Court to set forth a standard concerningthe enforceability of advance waivers that includes consideration of the relative sophistication of the client who agreed to the waiver, including whetherit had the advice of independent counsel, as part of the determination of informed consent. Such a standard would be consistent with California law concerning the enforceability of attorney-client fee agreements, and would allow clients greater choice and flexibility in choosing counsel, in part because by giving lawyers a greater certainty that client waivers will likely be enforced, the universe of attorneys available to clients will expand. . Onthe issue of the disgorgementof fees, the ADDC requests this Court decline to adopt a rule of automatic disgorgement of fees in all situations involving an attorney’s conflict of interest, but instead adopt a standard for determining reasonable attorney’s fees 3. 380783.9 that includes consideration ofthe value ofthe services provided because a rule of automatic disgorgementis contrary to established California law andrisks creating a disincentive for lawyers to represent multiple parties, as well as increasing the risk of fee disputes among lawyersandclients. I. A SOPHISTICATED CONSUMER OF LEGAL SERVICES, REPRESENTED BY COUNSEL, CAN GIVE ITS INFORMED CONSENT TO ANADVANCE WAIVER OF CONFLICTS OF INTEREST WHERE SUCH A CLIENT IS IN A SUFFICIENTLY EQUAL BARGAINING POSITION WITH THE ATTORNEY TO CONCLUDE THATTHE CLIENT FAIRLY CONSENTED TO THE ~ While this Court has not yet had the opportunity to determine whethera sophisticated client who is represented by counsel can give informed consent to an advance waiver of a conflict of interest, California law has enforced attorney fee agreements against sophisticated clients who were represented by counselin negotiating those agreements. These cases, while applying a differentrule of professional conductthan isat issue here, are instructive because they recognizethe principle that certain clients are likely to be in a position of equal bargaining powerwith the law firms that represent them, and thus the agreements those clients make with their chosen counsel should be enforced. The sophistication of a client is but one factor that merits consideration by a court when determining the enforceability of a consent and waiverof conflicts, just as it is when a court determines the enforceability of an attorney-client fee agreement. Enforcing such agreements allows both attorneys and clients greater certainty in entering into attorney-client representation -4. 380783.9 agreements, whichin turn gives clients greater flexibility and choice of counsel. A. California Courts Have Considered and Relied Upon the Sophistication of Clients in Enforcing Fee Agreements Between Lawyers and Clients. A client’s level of sophistication is a familiar consideration courts weigh when determining the enforceability of attorney-client fee agreements under the unconscionability rule of Rule of Professional Conduct 4-200. “Unconscionability” for purposesofRule of Professional Conduct 4-200(b), and general _ contract law, depends onfactors similar to those raised in briefing of this case: equal bargaining powerin the form ofclient sophistication and representation by counsel (procedural unconscionability) versus the harshness or one-sidedness of the agreement(substantive unconscionability). [A] contractis largely an allocation ofrisks between theparties, and therefore [ ] a contractual term is substantively suspectif it reallocates the risks of the bargain in an objectively unreasonable or unexpected manner. [Citations.] But notall unreasonablerisk allocations are unconscionable; rather enforceability of the clauseis tied to the procedural aspects of unconscionability . . . such that the greater _ the unfair surprise or inequality of bargaining power, the less unreasonable the risk allocation which will be tolerated. 380783.9 Cotchett, Pitre & McCarthy v. Universal Paragon Corp. (2010) 187 Cal. App. 4th 1405, 1419-20 [internal citations omitted]. ~ On facts that raise certain issues similar to those raised in this case, the Court of Appeal in Cotchett refused to permit a client, Universal Paragon Corp. (UPC), to avoid its fee agreement with the Cotchett law firm, in large part because it found that UPC was a sophisticated client who was represented by counselat the time the fee agreement was executed. Cotchett was decided under Rule of Professional Conduct 4-200(b), which provides, among other enumerated factors for determining the conscionability of a fee, the “relative sophistication of the memberandtheclient.” Rule 4- 200(b)(2).. In Cotchett, the client, UPC, was a property developer who wanted to sue Ingersoll-Randin orderto take control over contaminated property owned by Ingersoll-Rand, whichabutted UPC’s property. UPC wanted to control the environmental clean-up of the polluted Ingersoll-Rand property, and then develop both properties for a new project. 187 Cal. App. 4th at 1409. UPC hired separate outside counselto negotiate a fee agreement with the Cotchett firm. The final fee agreement provided for a hybrid contingency/hourly fee agreement whereby Cotchett would be entitled to a contingency fee that was to be based on the total monetary recovery and competing valuations of any real property UPC might be awarded, which would operate as a partial credit against Cotchett’s hourly fee. /d. at 1410-12. ~ Cotchett successfully settled the UPC/Ingersoll-Rand case, and almost immediately, UPC balked at payingthe firm the -6- 380783.9 agreed-upon fee. The parties attended non-bindingfee arbitration under the Mandatory Fee Arbitration Act (Bus. & Prof Code sections 6200, et seq.), and then attended private JAMSarbitration. UPC then contended that the Cotchett fee agreement was unconscionable. Jd. at 1414. ~ As notedin the Court of Appeal opinion, the JAMS arbitrator specifically rejected UPC's argumentthat the contingency fee agreement was unconscionable. She noted that there had been no disparity in _ bargaining power between UPC and CP & M;that UPC wasa very sophisticated client represented by independent counselin the negotiation of the fee arrangement; that UPC andits attorney had the opportunity to review the retainer agreementbefore it was signed; and that CP & M had done an excellent job for UPC, reaching what Hanson had characterized as a “stupendous” result. Contingency fees, in Judge Westerfeld's experience, typically range from 33 percent to 40 percent of a settlement amount, and a contingency of50 percentis not unconscionable. 187 Cal. App. 4th at 1415. The Court of Appeal agreed, and held that UPC negotiated the Cotchett fee agreementon level bargainingfield, again emphasizing that UPC’s level of sophistication and representation by counsel were determinative ofthis issue. Onthe issue of procedural . unconscionability, UPC is a sophisticated corporateclient that initiated the Ingersoll— -7- 380783.9 Randlitigation to acquire real property it intended to developaspart of a larger project. It employed outside counsel to negotiate the fee agreement with CP &M,» _ and wielded equal bargaining powerduring those negotiations. The fee agreement was not a contract of adhesion; if UPC had not been satisfied with its terms, it could have employed any of a numberoflaw firms in lieu of CP & M. This was a private business transaction between equally matched parties, pure and simple. (Ramirez v. Sturdevant (1994) 21 Cal. App. 4th 904, 913, 26 Cal.Rptr.2d 554 [negotiation of fee agreementis, in general, an arm's length transaction].) Cotchett, 187 Cal. App. 4th at 1420-21. Similarly, in Desert Outdoor Advertising v. Superior Court (2011) 196 Cal. App. 4th 866, the Court of Appeal enforced an arbitration clause in an attorney-client fee agreement againstclients who“werethe president of a corporation well-knownforits prominencein the billboard industry, as well as another businessman.” Jd. at 874. The Desert Outdoor Courtcorrectly recited that, “{t]he scope of a fiduciary’s obligations dependsonthespecific facts ofthe case. Such factors may include, for example,the relative sophistication and experience of the vulnerable party.” Jd. at 873 (citations and internal notations omitted). In Ferguson v. Yaspan (2014) 233 Cal. App. 4th 676, the attorney Yaspanentered into a business agreementwith his client Ferguson, to purchasefifty percent of a trust Ferguson owned. Yaspandid not comply with the written consent requirement of Rule _8- : 380783.9 of Professional Conduct 3-300. Nevertheless, in a lawsuit brought by Ferguson’s heir to avoid the agreement, the Court ofAppeal enforced the agreement in part because Ferguson had hired independent counsel to review the draft agreement with Yaspan. 233 Cal. App. 4th at 687-89. . In all of these cases, the Court found that the sophistication of the client, and particularly the involvement of outside independent counsel in the negotiation of the agreementat issue, to be determinative in establishing the fairness and validity of the fee agreement. The courts expressly recognizedthat client sophistication materially affected the relative position ofthe client versus the lawyerin the negotiation process ofthe parties’ | representation agreement. With the involvementof outside independent counsel on behalf of the client in the negotiation process, any perceived advantage or superiorposition the contracting lawyer might otherwise have had was substantially mitigated,resulting in both parties having equal bargaining power. B. —_A Client’s Sophistication is One Factor That Should Weigh in Favor of Enforcing an Advance Waiver _ Forsimilar reasons as those that underlie preceding - courts’ determinations ofthe enforceability of fee agreements, courts should weigh a client’s sophistication when considering the enforceability of advance waivers, particularly the participation of separate counsel. Where clients are experienced and sophisticated legal consumers, represented by separate counsel, and thoseclients understand the meaning of a conflict waiver, those factors should -9. 380783.9 weigh in favor of finding the waiver valid and enforceable. Moreover, important policy reasonsexist to support the enforcement of advance waivers circumstancessuchasthis, including fostering the goal of promotinggreater certainty andreliability of such waivers and allowing larger law firmsto take on the representation of a greater range of clients, thereby fostering an expanded choice of counsel for sophisticated clients who often demand a wide range of counsel to assist on a wide range different matters. Therefore, courts should weighthe relative sophistication of clients when determining whether a particular client’s consent was informed under Rule 3-310. A client’s informed consentis required in order for an attorney to undertake any representation that may potentially or actually conflict with the interests of other clients of that attorney. Rule 3-310(C). Accordingly, without informed consent, a law firm may not accept clients whoseinterests might conflict with other clients, even if on unrelated matters. For large law firms, with a diverse and extensive book of clients involved in different industries and sectors, such potential and actual conflicts would effectively limit the diversity of clients they represent unless each ofthoseclients consents to the conflicts that exist and may exist. In turn, certain large corporate clients who need or require employmentof a number of law firms recognize that they need to agree to advance waivers in order to retain certain of the law firms they want to represent them, and, as wasthe case here, routinely provide such consents. See, e.g., Galderma Laboratories, L.P. v. Actavis Mid-Atlantic LLC (2013) 927 F.Supp. 2d 390, 406. -10- 380783.9 e e ae Rule 3-310 states that “informed written consent” means “the client’s or formerclient’s written agreementto the representation following written disclosure.” Rule 3-310(A)(2). “Disclosure” means “informing the client or formerclient of the relevant circumstances and of the actual or reasonably foreseeable adverse consequences to the client or former client.” Rule 3-310(A)(1). The purpose ofthe rule, then, is to ensure that a client’s consent is informed by the client’s awareness of whattheclientis actually agreeing to by providing such consent. In this context, there is no sound reason not to consider a client’s level of sophistication among the factors to be considered when weighingthe validity and enforceability of the consent, and in particular whether it was represented by independent counsel in connection with the waiver. A corporate client, represented by counsel, experiencedin litigation and familiar with conflict waivers and the rules governing conflicts, should be held to a higher level of understanding of the contents of such agreements than other clients should be. “When a client has their own lawyer who reviews the wavier, the client does not need the same type of explanation from the lawyer seeking a waiver becausethe client’s own lawyer can review whatthe language of the waiver plainly says and advise the client accordingly.” Galderma Laboratories L.P., 927 F. Supp. 2d at 405. The California State Bar recognized this in its Formal Ethics Opinion 1989-115, when it stated that “it is possible in appropriate circumstances and with knowledgeable and sophisticated clients to clarify obligations and responsibilities by agreements of [advance waivers].” Cal. Formal Opin. 1989-115. -lI- . 380783.9 Lawyers must necessarily rely upon the validity and enforceability of waivers in taking on clients whose interests may conflict with other clients of the lawyer or law firm. Clients, too, have an interest in seeing these agreements enforced, since that predictability ensures the availability of the largest number of potential lawyers and law firmsavailable for representation in a given matter. When facts demonstrate that a sophisticated client knowingly | entered into a conflict waiver, freely provided consent, and understoodthe terms and meaning ofthat consent, there are significant reasons to find such a consentvalid and enforceable, and thatdetermination is entirely consistent with Rule 3-310. In the present case, the Court of Appeal did not consider the relative sophistication of the client, J-M Manufacturing Co. (“J- M”), in finding that the conflict waiver was unenforceable. Rather, the court’s analysis focused almostentirely on the fact that Sheppard Mullin had notspecifically disclosed the “potential or actual conflict” with South Lake Tahoe, and did not obtain J-M’s informed written consent to continued representation once the law firm began advising South Lake Tahoeafter the J-M representation began. 244 Cal. App. 4th at 613. However, by omitting consideration oftherelative sophistication ofthe client, and the fact of involvementoftheclient’s in-house counsel, the Court of Appeal’s analysis elevates one factor — the specific identification of South Lake Tahoe asa client or former client of the firm’s with interests that conflict with J-M’s interests — overall other factors that are undeniably relevant to a determination of whether the client’s consent was informed. This approach thus -12- 380783.9 imposes on Rule 3-310 a bright-line test that is not present in therule itself. The terms of the waiver that J-M signed specifically provided, in part, that “We maycurrently or in the future represent one or more other clients (including current, former and future clients) in matters involving [J-M].” 244 Cal. App. 4th at 599. (Emphasis omitted.) The waiver goes on to specify that, pursuant to this waiver, the law firm: _,.. may representanotherclient in a matter in which we do not represent [J-M], even if the interests of the other client are adverse to [J-M] (including appearance on behalf of anotherclient adverse to [J-M]in litigation or arbitration) and canalso, if necessary, cross-examine[J- M] personnel on behalf of the other client in such proceedings. . . provided the other matter is not substantially related to our representation of [J-M] and in the course of representing [J-M] we have not obtained confidential information of [J-M] material to representation ofthe otherclient. 244 Cal. App. 4th at 599. (Emphasis omitted.) _ Thus, the plain language of the waiver that J-M negotiated through its separate counsel and signed,specifically included an express agreementby the client that Sheppard Mullin could not only represent other clients whoseinterests are adverse to J-M’sin the qui tam matter, butalso clients in a farmore directly adverse circumstance: representing clients in litigation against J-M. In consentingto that potential conflict, arguably a far more significant and directly adverse conflict than was present here, J-M was represented by experienced in-house counsel; had the opportunity to and did negotiate the agreement with the law firm (although apparently raised no questions concerning the waiver) and agreed to -13- 380783.9 the terms ofthis waiver.' In that context, it is hard to understand why Sheppard Mullin’s failure to specifically disclose its South Lake Tahoerepresentation created grounds upon whichto void the waiver. The Court of Appeal did not explain whythe failure to disclose the prior representation of South Lake Tahoeeitherat the time the representation began or later was such a material fact that it rendered J-M’s consent invalid. When J-M’sexperience, sophistication and representation by independent counselis considered, the fact that the law firm failed to specifically disclose that South Lake Tahoe had been or wasa client for purposes of an unrelated employment advice matter does not, by itself, provide an obvious basis upon which to conclude that J-M did not understand what it was waiving whenit provided the consentat issue. California law recognizes the general principle that a representation agreement between a lawyeranda client is a contract that must be enforced by its terms, in accordance with the plain meaning of those terms. M’Guinness v. Johnson (2015) 243 Cal. App. 4th 602, 617. By failing to considerthe sophistication of the client and particularly the participation of independent counsel in connection with a conflict consent and waiver, the Court ofAppeal improperly tilted the balance between client and lawyer, and created a situation in which the only relevant factor is whether or not specific ' The Court in Galderma Laboratories L.P. noted that in-house counsel, while employed by the company,“isstill [a] lawyer independent from[the law firm], advising Galderma on whetheror not Galderma should giveits consent.” 927 F. Supp. 2d at 403. See-also Restatement (Third) of Law Governing Lawyers, §122, commentc(i) (2000). -14. | 380783.9 conflicts were disclosed. In light of the specific terms of the waiverJ- M knowingly agreedto, applying that bright-line test unfairly penalizes the law firm, particularly where a sophisticatedclient acceptedthe specific risks plainly set forth in that waiver. II. ACONFLICT OF INTEREST THAT UNDISPUTEDLY CAUSED NO DAMAGETO THE CLIENT AND DID NOT AFFECT THE VALUE OR QUALITY OF AN ATTORNEY'S WORK SHOULD NOT AUTOMATICALLY()REQUIRE THE ATTORNEY TO DISGORGEALL P IOUSLY PAID FEES,AND wa PRECLUDE THE ATTORNEY FROM RECOVERI THE REASONABLE VALUE OF THE UNPAID WORK Underpresent law established by this Court, the existence of a conflict of interest or any other attorneybreach of duty does not provide grounds for automatic disgorgement of previously paid fees. Rather, each case is considered separately, on its facts. There is no policy reason to changethatprinciple. The body of case law that concerns the determination of attorney fees by analyzing the reasonable value of that work, the quantum meruittest, includes standardsthat allow a court to evaluate and possibly decrease fees as a result of an attorney’s conflict of interest or breach of any other attorney duty. Rather than establish a rule that would create a risk of inconsistent (and unfair) application through an automatic | disgorgementstandard, this Court should instead establish standards for disgorgementthat are similar to the standards used in determining reasonablevalue offees. _ The standardsthat are most consistent with current case law and principle of fairness would be (1) each case has to be -15- 380783.9 determined on its own facts; (2) any penalty must be proportional to the harm caused; and (3) all other relevant facts be taken into consideration,as in all other cases in equity and as in guantum meruit cases. A. California Cases Ordering DisgorgementofAttorney Fees as a Remedy Do So Ona Case by CaseBasis, Thefirst California Supreme Court case to consider disgorgementof attorney fees was Clark v. Millsap (1926) 197 Cal. 765. Attorney Millsap defraudedthe client Clark, who demanded damagesfor the value ofproperty taken by Millsap. The client had paid $7500 in fees and denied that she owed any moreto theattorney. The attorney claimed $20,000 in fees based on a promissory note he had prepared, andthe client had signed, andthus allegedit as a setoff. Held, due to fraud by the attorney, the promissory note was unenforceable. As recognized in Respondent’s opening brief herein at page 45, the Clark opinionstated that a court “may” refuse to allow attorney fees if the relationship with the client is tainted by fraud. In many reported opinions, the holding in Clark is erroneously reported as mandatory. | The Clark opinion cited 6 Corpus Juris 722, 723, which states that fraud or unfairness “will prevent” fees. Some Court of Appeal cases cite the Corpus Juris statementas the holding in Clark, construe it as mandatory, and automatically deny fees in conflict cases.” However,this is an incorrect application ofthatliability: * Goldstein v. Lees (1975) 46 Cal. App. 3d 618, discussed below. The Court of Appealin this case cited Goldstein as setting forth a mandatory standard based on Clark. 244 Cal. App. 4th at 617. See also Jeffry v. -16- 380783.9 Clark says only that fraud by an attorney “may” support a disgorgementof fees: “It is to be observed in this connectionthat a court may refuse to allow an attorney any sum as an attorney’s fee if his relations with the client are tainted with fraud.” 197 Cal. at 786. This Court has not departed from that holding in any case since then. The next disgorgementcase in this court was Calvertv. Stoner (1948) 33 Cal. 2d 97. Calvertis not cited in either party’s briefs, nor cited in the papers seeking or opposing review.’ This court held in Calvert that “recoupment” may beordered if there is “fraud” or “bad faith” by the attorney. Jd. at 105. The client Calvert had soughtto recover previously paid attorney fees. She argued that because the attorneyclient fee agreementhad a clausethat prohibited settlement without attorney approval, it was anillegal contract and should not be enforced. This court pointed out that the clause had never been invoked,so even if it was an illegal clause, no recoupment wasindicated. Thefirst reported case that actually ordered disgorgement wasalso notcited in thepetition or responsive papers: Jn Re Fountain (1977) 74 Cal. App. 3d 715. The Court ordered disgorgement of attorney fees without any discussionofthe criteria the Court applied to reach that determination. The attorney had accepted $500 down Pounds (1975) 67 Cal. App. 3d 6 ,9, which extended Goldstein to apply to reasonable value cases. Accord, Blecher & Collins, P.C. v. Northwest Airlines (C.D. Cal. 1994) 858 F. Supp..1442, 1457. > Calvert wascited by this Court in Huskinson & Brown, LLP v. Wolf (2004) 32 Cal. 4th 453, a reasonable value case. -17- 380783.9 paymenton fee to file a habeas corpus action. He did notfile a protective petition, so the time for filing expired. The attorney then filed a late petition. The Attorney General arguedthat the acts of the attorney should be attributed to the client and the filing dismissed. The attorney arguedthat he had no dutyto file the original petition because his whole fee had not been paid. The Court permitted the filing ofthe late habeas petition and ordered disgorgementofthe fees. Therationale is not stated but can be inferred. The attorney took a position in the litigation directly adverse to his client’s interest while purporting to excuse the attorney’s own misconduct, with the result that the client suffered damages; the court labeled the behavioras a “conflict of interest.” Jd. at 719. In Ball v. Posey (1986)176 Cal. App. 3d 1209, 1212, attorney Posey was found to have wrongfully converted nearly $40,000 ofclient property. He was permitted to retain $1,135 as reasonable fees for work done. The Court ordered the remainder of the fees he had been paid disgorged based on his charging an excessive fee. The disgorgement was notfor the full amount paid, but for the excessive portion. The jury also awarded the client punitive damagesas a result of the attorney’s use of undue influence on an elderly, ill widow.’ * Ball points out an issue not discussed in any of the cases — disgorgement is a remedy that is sometimes ordered by courts as a refund offees to a client, and other times ordered for punitive purposes. Theimplication of the stated issue in this case is that this Court is looking at punitive disgorgement. In the opinion below,the Court ofAppeal notesthat disgorgementis sometimes sought as a tort remedy, which “may” require proof of damages, andat other times for serious ethical breaches, whichit -18- 380783.9 The next reported disgorgement case was Pringle v. La Chappelle (1999) 73 Cal. App. 4th 1000, in which the Court upheld a trial court judgmentthat there were properly waived conflicts of interest, and therefore declined to order disgorgement. It went on to recite that there is no basis for disgorgementunlessthere is . 999*“[f]raud,’” “unfairness,” (cf. Calvert supra) or “acts in violation or excess of authority.” Jd. at 1006. It also recited that there was no automatic forfeiture offees for a violation ofa rule ofprofessional conduct, even Rule 3-310 or Rule 3-600. Jd. In Olson v. Cohen (2003) 106 Cal. App. 4th 1209, Attorney Cohen did notregister his professional corporation with the State Bar. His formerclient Olson filed an unfair competition case under Bus..& Prof. Code section 17200 and sought disgorgement of all fees paid byall clients over the previous four years. The court held that unfair competition is an equitable cause of action, and that disgorgement of fees would be improper because it would be disproportionate to the wrongdoing. There was no evidence of any client damage, no evidence ofunfair competition, and no evidence that any client actually employed Cohen due to his company’s | corporate status. The principle of Olson was followed by this Court in Frye v. Tenderloin Housing Clinic, Inc. (2006) 38 Cal. 4th 23. Tenderloin Housing Clinic was a nonprofit agency that represented tenants but did not register as a professional corporation. This Court says does not. 244 Cal. App. 4th at 620, fn. 10. As discussed below, proof of damages should be a factor to considerin all cases. -19- 380783.9 refused to order disgorgementof fees because, as in Olson, such would be disproportionate to the wrong where there was no damageto the client, and no evidence of concealmentnor misrepresentation: Thus, the court refused to apply an automatic disgorgement remedy, consistent with this Court’s ruling in Clark and Calvert. In Slovensky v. Friedman (2006) 142 Cal. App. 4th 1518, 1522, the client was denied disgorgementdue to lack of damages. There, the attorney obtained a monetary settlementin a case that was barred by the statute of limitations. ‘The Court lookedatall the facts and determinedthat an alleged violation of a Rule of Professional Conduct should automatically result in disgorgement. In that case, breach of fiduciary duties was assumed. In discussing disgorgement, Lofton v. Wells Fargo Home Mortgage (2014) 230 Cal. App. 4th 1050, 1064-65, indicated that disgorgement was a discretionary remedy, even in a conflict of interest setting. The Court held that there had to be evidence of wrongdoing that affects the value of attorney services before a Court could order disgorgement of fees. The Court went on to say that the attorney’s breach had to be egregious. The unifying theme in the foregoing casesis that disgorgement of fees is not an automatic remedy but may be ordered only after the Court makes a careful assessmentof the equities involved. Violation of a rule, duty or statute by itself will not ordinarily support disgorgement. The Court should also consider whether the client suffered damage, and the seriousness of the attorney’s misconduct. -20- 380783.9 B. Quantum Meruit Cases Involving Alleged Effective Breaches: Courts Analyze Specific Facts Thereis a considerable body of case law involving quantum meruit claims in matters where the attorney had allegedly breached duty to the client. Perhaps the most oft-cited conflict of interest case is this court’s opinion in Anderson v. Eaton, (1930) 211 Cal. 113. Attorney Anderson represented Mrs. Eaton on a one-third contingency fee contract against Benson Lumber,arising out ofthe death of her husband. He also represented the husband’s employer against Mrs. Eaton in the workers compensation case. She fired him and settled her claim against Benson in pro per. The lawyer then sued for his contractual one-third fee. The Court ruled the contract was void and denied him recovery. The Court specifically noted that Andersonoffered no evidence to support his quantum meruit claim and therefore the quantum meruit count was dismissed for lack of evidence. 21 Cal. at 114. Anderson,like this case, involved simultaneous representation of conflicting interests. It has been cited as authority for denial of quantum meruit due to the conflict of interest without recognition that quantum meruit was notat issue before the Court or addressedin the opinion.” In Huskinson & Brown v. Wolf(2004) 32 Cal. 4th 453, this Court denied enforcement of a fee sharing contract between two attorneys who had notobtained written client consent. The defendant attorney had the money and arguedthatthe plaintiff attorney should ° See, e.g., Goldstein and Jeffry, supra. -2]- 380783.9 not get any. This Court approved an award ofguantum meruit. In its discussion, this Court evaluated several criteria to determine when quantum meruit would be permitted in the face of a violation of a rule of professional conduct. First, it looked to the purpose ofthe rule, in that case Rule 2-200, to determine whether allowing a quantum meruit fee recovery would be consistent with that purpose.. Jd. at 458-59. If so, the Court examined whether allowing quantum meruit compensation would undermine compliance with the rule. Jd. at 459. Huskinsonrecites several earlier cases in which quantum meruit was permitted when attorney client fee agreements were otherwise unenforceable or invalid. Id. at 461.° The only two cases Huskinson cited for disallowance of quantum meruit were two cases involving violations ofthe predecessor to Rule 3-310, addressing conflicts of interest. Jeffry, (1977) 67 Cal. App. 3d 6; and Goldstein v. Lees (1975) 46 Cal. App. 3d 614. This Court in Huskinson did not make such disallowance mandatory. However, some subsequentcaseshaveincorrectly continuedto cite Jeffry and Goldstein as setting forth a mandatory rule of disgorgement when conflicts of interest are present, as was done in the within case by thetrial court and Court of Appeal.’ ° Calvert (attorney reserved right to veto settlement); Rosenberg v. __ Lawrence (1938) 10 Cal. 2d 590 (attorneys agreed to kick back a portion of fees to client; Wiley v. Silsbee (1934) 1 Cal. App. 2d 520 (attorney represented divorce client on a contingentfee). ” See, e.g., Asbestos Claims Facility v. Berry & Berry (1990) 219 Cal. App. 3d 9, 26-27; Rodriguez v. Disner (2012) 688 F. 3d 645, 654 (discussing California law); Blecher, 858 F. Supp. at 1457. -22- 380783.9 In fact, the case law in the Courts of Appeal is mixed on the issue of whether an attorney’s conflict of interest should result in automatic denial ofthe reasonable value of attorney fees, or whether the client should obtain relief only if there are damages. In Sloan v. Stearns (1955) 137 Cal. App. 2d 289, Stearns hired attorney Light to obtain financing for a commercial building project. Lightwas secretly one ofthe lenders. Thus, he had an adverserelationshipto his client, a clear violation of former Rule 4, predecessor to current Rule 3-300. Oneissue before the Court was whetherthis adverse relationship should result in a fee forfeiture.. The minority wanted the rule enforced in the formof a fee denial in the civil case. 137 Cal. App. 2d at 304-305. The majority refused, pointing outthat in the civil case, the attorney could defend by showing client consent and an absence of damage. Thus, there was no automatic denial of reasonable value fees. | Conservatorship ofChilton (1970) 8 Cal. App. 3d 34 was a case where Mrs. Chilton was under a conservatorship. One Stevens, using undue influence, obtainedhersignature on a contract to employ attorney Arditto. Arditto sought attorney fees for services rendered to Mrs. Chilton. The Court held that Arditto had actually served Stevens and not Mrs. Chilton, and wasacting pursuantto a conflict ofinterest. The Court denied him fees dueto the conflict of interest. Chilton determined that the client received no benefit; therefore the reasonable value of the services rendered was zero. That determination was made onthe facts, and wasnotthe result of an automatic rule of fee forfeiture. -23- 380783.9 In Goldstein, counsel represented dissident shareholders in a proxy battle. The Court denied the attorney fees because of the conflict of interest between the attorney’s currentclients, the shareholders, and the corporation, his former client, whose confidential information the attorney possessed. Goldstein held that the conflict present there required denial of fees, and that the Court could raisethe issue itself. The holding in Goldstein begins with a misreading of Clark v. Millsap, by citing the Corpus Juris quote . prohibiting recovery instead of the Court’s statement recognizing that a court may allow no fees. 46 Cal. App. 3d at 618. Similarly, at the same page, Goldstein also cites Anderson v. Eaton, but did not note that Anderson did not make a reasonable value determination. Jd. Goldstein acknowledgesthat there was no evidencethat the attorney’s representation was adverse to the company. Jd. at 619, n. 3. Goldstein fails to recognize the distinction between fees on the contract and fees calculated on the basis of guantum meruit or reasonable value. Overall, then, Goldsteinis based on several flaws, but it becomesthe basic cited case for automatic forfeiture. In Jeffry, the law firm was allowed a partial share of Mr. Pounds' personalinjury recovery. It was denied any share of the fees that accrued after an actual conflict arise, when the firm began representing Mrs. Poundsin her divorce against Mr. Pounds. Jeffry cites Goldsdtein, Clark v. Millsap and Anderson v. Eaton, making the sameerror that was made in Goldstein. Jeffry’s sort of facts may very well lead a court to deny attorney fees after a conflict arises. Afterall, the clients were lay persons, the conflict was clear, and there was no evidence of an attempt to seek a waiver. We do not argue that there -24- 380783.9 should never be a disgorgementor a denial offees. We argue that each case should be decided onitsfacts. Day v. Rosenthal (1985) 170 Cal. App. 3d 1125 was a long case, analyzing decades of work by attorney Rosenthal for actress Doris Day. One portion of the appeal concernedthe allegation that there had been no finding in the proceedings below asto the reasonable value of the attorney’s bond transaction services. The Court of Appeal responded, “First, the trial court did make an express finding that none of Rosenthal's services had any value (Finding No. 12).” 170 Cal. App. 3d at 1162. However, the Day Court continued in dicta, “Second, no finding was necessary. His conflicts of interest rendered his services valueless and required no finding on the reasonable value ofhis fees.” 170 Cal. App. 3d at 1162, citing Conservatorship ofChilton, 8 Cal. App. 3d at 43. This dicta in Day misinterpreted Chilton. In reality, the trial court in Chilton made a finding of fact, not a finding of law. In Ramirez v. Sturdevant (1994) 21 Cal. App. 4th 904, the attorney negotiated a settlement of both the gross client recovery and the attorney fees as separate amounts, with $150,000 inuring to the client and $215,000 in attorney fees inuring to the attorney. The Court noted that a contract which permits the attorney to negotiate a lump sum settlementor bifurcate it constitutes a potential conflict of interest. Id. at916. Whenthe attorney is negotiating a bifurcated settlement, there is an actual conflict of interest inherent in the situation. Jd. at 922. However, in determining entitlement to fees, the Court held that the trial court should consider whetherthe ultimate result properly balanced the rights of client and attorney. Jd. at 925. -25- 380783.9 Asrelevant here, the Court did not hold that there should be an automatic denial of contract fees or reasonable fees to the attorney because ofan actual conflict of interest. Rather, the case was remandedto the trial court to determineifthe conflict ofinterest' actually resulted in client damage. _ In Cal Pak Delivery, Inc. v. United Parcel Service, Inc. - (1997) 52 Cal. App. 4th 1, the attorney offered to sell out his class client for a multi-million dollar payment from the opposingside; the class would receive nothing. Thetrial court eventually disqualified that lawyer, and prohibited him “from receiving any fees (directly or indirectly) in connection with his representation in this case.’” Jd. at 8. On appeal, the court reversed as premature the part of the order precluding the attorney from recovering attorney’s fees for services rendered before the breach occurred. /d. at 17. In Pringle v. La Chappelle (1999) 73 Cal. App. 4th 1000, the attorney represented both the companyandits chief executive officer (“CEO”). Becausethe clients had an actual conflict of interest, the attorney provided a conflict waiver. However, the CEO signed the conflict waiver for both parties, rendering it ineffective. Nevertheless, the Court of Appeal upheldthetrial court’s award of reasonable value fees to the attorney. The Court held that fee forfeiture is not automatic. | The court stated that the test is whether the violation was serious, if the attorney acted inconsistently with the character ofthe profession, or if there was an irreconcilable conflict. Jd. at 1006-07. Pringle acknowledged that the lack of a valid conflict waiver was a factor to consider, not a requirement of automatic disgorgement. -26- 380783.9 _ AL. Credit Corp, Inc. v. Aguilar & Sebastinelli (2003) 113 Cal. App. 4th 1072, is heavily relied upon by J-M in this case, but A.l. Credit is similarly flawed. First, it relies on Goldstein, then it misconstrues Cal Pak as supportingautomatic forfeiture. Id. at 1076. Second,it holds that a ruling of conflict in the client matteris collateral estoppel against the attorney in a fee dispute, without acknowledging long standing authority to the contrary. See Younanv. Caruso (1996) 51 Cal. App. 4th 401, 409; Loube v. Loube (1998) 64 Cal. App. 4th 421; Dawson v. Toledano (2003) 109 Cal. App. 4th 387. _ A. I. Credit elevates mandatory conclusive presumptions from substantial relationship cases into mandatory conclusive presumptions for a fee dispute. See 113 Cal. App. 4th at 1078 and n.4. Lastly, in Sullivan v. Dorsa (2005) 128 Cal. App. 4th 947, multiple owners of real estate agreed to partition, and they nominateda partition referee to handle the sale. Thesale fell through. Thereferee then sought attorney fees for his first lawyers, Silicon Valley Law Group (“SVLG”). The ownersalleged that the law firm had a conflict of interest, due to a concurrent relationship with the prospective buyer, and thus asked the court to deny attorney fees. After pointing out the possible lack of standing, the Court wenton to state that fee forfeiture is not automatic. Rather, “the owners make no attempt to establish that SVLG’salleged misconduct was so incompatible with the faithful performanceofits duties as to require disallowanceof fees.” Jd. at 965 (citing Pringle and Clark). Thus, this Court has never held that disgorgementor denial of fees was automatic. Nor has this Court actually upheld a disgorgementof attorney fees. The Courts ofAppeal have sometimes -27- | 380783.9 upheldreasonable valueof fees andsometimes denied reasonable value in cases involving alleged breaches by attorneys. In that latter situation, two cases have decreed the denial of reasonable value as automatic; others have analyzed the specific facts of the case to determine the reasonablevalue of the attorney services.® I. AUTOMATIC FORFEITURE OF FEES FOR A BREACH OFA PROFESSIONAL RULE TRANSFORMS A DISCIPLINARY RULE INTO A MEANS TO IMPOSE PUNITIVE DAMAGES WITHOUT THE PROCEDURAL SAFEGUARDS AVAILABLE IN THE DISCIPLINARY Automatic forfeiture of fees based upon an attorney’s violation of a disciplinary rule improperly renders that disciplinary rule into the basis for determining civil damages without the procedural safeguardsthat exist in the disciplinary system, wherethe standard of proof requiredto find a violation is higher, and mitigating circumstances are considered. Allowing automatic disgorgement would therefore contradicts the principles that the disciplinary rules are not intendedto serveasthe basis ofcivil claims against attorneys, and that attorney discipline andcivil litigation have different purposes. Most v. State Bar (1967) 67 Cal. 2d 589, n.5. Rule of Professional Conduct 1-100 itself states that the Rules are not intendedto create a civil cause of action: As stated in ® The Court of Appeal in this case cites Dorsa, Slovensky, and Mardirossian & Assoc., Inc. v. Ersoff(2007) 153 Cal. App. 4th 257, in support of its conclusion,stating that none of them involved actual conflict of interest. 244 Cal. App. 4th 590, n.9. The Court below did not discuss those casesthat did involve actual conflicts. -28- 380783.9 Klemm y. Superior Court (1977) 75 Cal. App. 3d 893, 901, the attorney's civil liability is to the client “who suffers loss,” not the client who can show a breach with no damage. In civil cases, the rules of professional conduct may be used as one part ofthe test of a duty to the client, but may not serve as the basis ofliability. Mirabito y. Liccardo (1992) 4 Cal. App. 4th 41, 45. But if an automatic disgorgementrule were applied, the sole test would be whetherthere has beena violation of a rule of professional conduct, with no analysis of the relative equities, extenuating circumstances, intent, or any other ameliorating circumstance. _ The risk of an automatic disgorgementruleis that every alleged breach of a professional rule will become groundsfor a client to seek disgorgementor fee forfeiture, even in cases where there has been no material breach, and no damagetotheclient.” A further risk of an automatic disgorgementrule could be a decrease in the numberofattorneys willing to accept the representation of multiple clients in a single matter, due to the possibility that the clients’ waiver may be found defective, particularly where there is no opportunity for attorneys to demonstrate extenuating circumstances. ” Our members have seen anincrease in cases in whichthe client alleges a breach of the rules and claims therefore that no fees are owed. In Arbitration Advisory 2012-03, “Handling Legal Malpractice Claims and ethical issues during Arbitration,” §C, page 4, the State Bar Committee on Mandatory Fee Arbitration has notified clients that it can reduce claimed fees for ethical breaches by the attorney. Our membersare seeing this issue moreoften, thus effectively turning fee arbitrations into a form ofdiscipline cases, without procedural safeguards. -29- 380783.9 The best way to maintain a clear distinction betweencivil litigation damages and punitive sanctionsor discipline is to eliminate the principle that a breach of the rules of professional conduct should ever result in an automatic disgorgement of fees. The-principle should be that the client may beentitled to relief from the attorney’s fee claim based onall of the circumstances, including whether the client has suffered damages. If the attorney’s conductis egregious enough for punishment, that punishment should be in a punitive damage cause of action (or through the discipline system). Asthis court stated in the recent case ofNickerson v. Stonebridge Life Ins. Co. (2016) 63 Cal. Ath 363, 371: In our judicial system,“[a]lthough compensatory damagesand punitive ' damagesare typically awarded at the same time by the same decision maker, they serve distinct purposes. The formerare intended to redress the concrete loss that the plaintiff has suffered by reason of the defendant's wrongful conduct. [Citations.] The latter... operate as ‘private fines' intended to punish _ the defendant and to deter future wrongdoing.” (Cooper Industries, Inc. v. Leatherman Tool Group, Inc. (2001) 532 U.S. 424, 432, 121 S.Ct. 1678, 149 L.Ed.2d 674 (Cooper Industries ).) _ In the Restatement (Third) ofLaw Governing Lawyers (2000) §37 the principle is stated thus: A lawyer engaging in clear and serious violation of duty to a client may be required to forfeit someorall of the lawyer's -30- 380783.9 compensation for the matter. Considerations relevant to the question of forfeiture include _ the gravity and timingofthe violation, its willfulness, its effect on the value of the lawyer's workfor the client, any other threatened or actual harm to the client, and the adequacy of other remedies. Commentc to that section shows that somestates view a conflict of interest as groundsfor a total forfeiture while others do not. Thosethat do are oriented towards punishmentofthe attorney, | somethingbestleft to the disciplinary process. Two Texas writers comparedtheir state’s principles to those across the country. J. Webb & B. Stribling, “Ten Years After Burrow v. Arce; the Current State of Attorney Fee Forfeiture,” 40 St, Mary's Law Journal 967 (2009).. The writers note that a minority ofjurisdictions use disgorgementfor punitive purposes, while a majority analyze various factorsto determineifthe breach wassufficiently serious to warrant disgorgement. Jd. at pg. 1023. Proportionality is a constitutional requirement for punitive damages; BMWofNorth America v. Gore (1996) 517 US 559, 576. Similarly,. proportionality should be a requirement for disgorgementor any forfeiture offees. This Court should not approvea rule of automatic disgorgement or forfeiture of fees for a breach of a rule of professional conduct by an attorney. Instead, consistent with the case law determining quantum meruit fee recovery, this Court should create standards to guidethetrial courts in determining appropriate fees in such circumstances. Further, consistent with principles of -31- 380783.9 fairness, these standards should seek proportionality betweenclient harm and the amount of disgorgementor reduction in the reasonable value offees. CONCLUSION _ Asstated in Nickerson, “To determine whetherajury’s awardofpunitive damagesis grossly excessive, reviewing courts must consider, among other factors,whether the ‘measure of punishmentis both reasonable and proportionate to the amountof harm tothe plaintiff by comparing the amountof compensatory damages to the amount of punitive damages.” 63 Cal. 4th at 367. Furthermore, under Cal. Civil Code §3294(a), punitive damages can be awarded only whenthere is “oppression, fraud, or malice” proven by clear and convincing evidence. - The determination of an attorney’s entitlement to fees in a situation where there has existed an alleged conflict of interest (or other ethical breach) should be consistent with existing law as well as principles of fairness. The current case law does not provide clear standards for courts to determine whether disgorgement is appropriate. | A rule of automatic disgorgement would operate as a rule of punishment, whichrisks unfairness and inconsistency. Werequest that this court expressly reject an automatic punishment, andset forth standards to determineentitlement to attorney fees where an alleged conflict has occurred that recognizes: (1) each case should be determined on its own facts; (2) any penalty imposed on the lawyer -32- 380783.9 mustbe proportional to the harm caused; and (3) all other relevant facts must be taken into consideration as in all other cases in equity. Dated: December 1, 2016 Respectfully submitted, ROGERS JOSEPH O’DONNELL PC MERRI A. BALDWIN Samuel C. Bellicini SAMUEL C. BELLICINI, LAWYER Jerome Fishkin FISHKIN & SLATTER LLP Attorneys for The Association of Discipline Defense Counsel -33- 380783.9 CERTIFICATE OF WORD COUNT Cal. Rules of Court, rule 8.204(c)(1).) Pursuant to California Rules of Court, rule 8.204(c)(1), I certify that the total word count ofthe AmicusBrief, excluding covers, table of contents, table of authorities, and certificate of compliance is 7,951. In makingthis certification, I have relied on the computer program, Microsoft Word, for this word count. Dated: December 1, 2016 . yO MERRI A. BALDWIN -34- 380783.9 CERTIFICATEOF SERVICE STATE OF CALIFORNIA, COUNTY OF SAN FRANCISCO I, the undersigned, declare as follows: At the time of service, I was over 18 years of age and not a party to this action. I am employed in the County of San Francisco, State of California. My business address is 311 California Street, San Francisco, CA 94104. On December2, 2016, I served the following document described as APPLICATION OF THE ASSOCIATIONOF DISCIPLINE DEFENSE COUNSELFOR LEAVETO FILE AMICI CURIAE > BRIEF; PROPOSEDBRIEFonthe interested parties in this action as follows: SEE ATTACHED SERVICE LIST IX BY U.S. MAIL: Byplacing a true and correct copy thereof enclosed in a sealed envelope addressed as above or onthe attached service list, with postage thereon fully prepaid, in the U.S. Mail at San Francisco, California. I am readily familiar with my employer’s practice of collection and processing correspondence for mailing. Under that practice it would be deposited with U.S. Postal Service on the same day with postage thereon fully prepaid at San Francisco, California, in the ordinary course of business. I am aware that on motion of the party served, service is presumedinvalid if postal cancellation date or postage meter date is more than one dayafter date of deposit for mailing as stated in the affidavit. BY FEDERAL EXPRESS: I am readily familiar with my employer’s practice of the collection and processing of FedEx packages. Underthat practice, packages should be deposited with FedEx that same day,with overnight (next business day) delivery charges thereon fully prepaid, in the ordinary course of business. I caused such envelope(s) to be delivered by overnight mail to the addressees listed on the attached servicelist. Ix I declare under penalty of perjury under the laws of the State of California that the foregoing is true and corréct. Executed on December 2, 2016, at San Francisco, California. typo,Jon (PorHoren -35- 380783.9 SERVICE LIST SHEPPARD MULLINRICHTER & HAMPTONLLPy. J-M MANUFACTURINGCO,,. INC. Case No. 8232946 Kent L. Richland Jeffrey E. Raskin Greines, Martin, Stein & Richland LLP 5900 Wilshire Blvd.,: 12th Floor Los Angeles, CA 90036-3697 Attorneys for Defendant and Appellant J-M MANUFACTURINGCO.INC. dba J-M EAGLE Kinh-Luan Tran Lee Tran & Liang APLC 601 S. Figueroa Street Suite 3900 Los Angeles, CA 90017 Attomeys for Defendant and Appellant J-M MANUFACTURING CO.INC. Dba J-M EAGLE Kevin S. Rosen Gibson, Dunn & Crutcher 333 South Grand Avenue,Ste. 4700 Los Angeles, CA 90071-3197 Attorneys for Plaintiff and Respondent SHEPPARD MULLIN RICHTER & HAMPTON James Francis McShane Shepard Mullin Richter & Hampton, LLP 333 S HopeStreet, 48th Floor Los Angeles, CA 90017-1448 Attorneys for Plaintiff and Respondent SHEPPARD MULLIN RICHTER & HAMPTON Michael K. Collins Hill, Farrer & Burrill LLP One California Plaza 300 South Grand Ave., 37th FI. Los Angeles, CA 90071 Attorneys for Pub/Depublication Requestor INSURANCE MUTUALRISK RETENTION GROUP,INC. Mark E. Haddad Sidley & Austin LLP 555 West Fifth Street Los Angeles, CA 90013 Attorneys for Pub/Depublication Requestors AF BEAZLEY SYNDICATE AT LLOYDS; CNA FINANCIAL CORP., ENDURANCE SPECIALTY HOLDINGSLTD., W.R. BERKELEY, ARNOLD & PORTER LLP Sean SelegueArnold & Porter LLPThree Embarcadero Center, 10th FI.San Francisco, CA 94111Attorneys for Pub/Depublication RequestorsARNOLD & PORTER LLP; FINNEGAN,HENDERSON,et al. LLP -36- 380783.9 Peter R. Jarvis Holland & Knight 50 California St., Ste. 2800 San Francisco, CA 94111 Attorneys for Pub/Depublication Requestors ALSTON & BIRD LLP; BRYAN CAVE LLP; CARLSMITH BALL LLP; DAVIS WRIGHT TREMAINE LLP; DLA PIPER LLP (US); DKEMA GOSSETT PLLC; FAEGRE BAKER DANIELSLLP; FISH & RICHARDSONP.C.; GOODWIN PROCTER LLP; GRENBERG TRAURIG LLP; HOLLAND & KNIGHTLLP; HUGHES HUBBARD & REED LLP; IRELL & MANELLA LLP; KIRKLAND ELLIS LLP; KNOBBE MARTENS OLSON & BEAR LLP;LATHAM & WATKINS; LOWENSTEIN SANDLER LLP; MANATT PHELLPS & PHILLIPS LLP; MORGAN, LEWIS & BOCKIUS LLP; MUNGER, TOLLES & OLSON LLPL O’MELVENY& MEYERS LLP; PERKINS COIE LLP; | PROSKAUVER ROSE LLP; REED SMITH LLP; SEYFARTH SHAW LLP; SIDLEY AUSTIN LLP; UMBERGSIPSER LLP; WOMBLE CARLYLE SANDRIDGE & RICE LLP and VENABLE LLP California Court of Appeal Second District, Division Four Ronald Reagan State Building 300 S. Spring Street 2nd Floor, North Tower Los Angeles, CA 90013 Mail Only Honorable Stuart M. Rice Los Angeles Superior Court Torrance Courthouse 825 Maple Ave. Torrance, CA 90503 Mail Only -37- 380783.9