California Supreme Court Will Review Arbitration, Advance Conflict Waivers, and Disgorgement of Fees

The California Supreme Court has granted review in Sheppard, Mullin, Richter & Hampton, LLP v J-M Manufacturing Co., Inc. to address several legal ethics issues of critical importance to California law firms.  The Court of Appeal in the case below held that the question of whether the firm’s arbitration provision was enforceable was for the court, not the arbitrators, to decide; that the firm’s simultaneous representation of J-M and another client violated California Rules of Professional Conduct 3-310(C)(3); and that the firm’s violation of Rule 3-310(C) made the entire fee agreement unenforceable, meaning the firm was not entitled to any fees related to the matter from the date of the conflict forward.

The Supreme Court’s review will consider the following: “(1) May a court rely on non-legislative expressions of public policy to overturn an arbitration award on illegality grounds? (2) Can a sophisticated consumer of legal services, represented by counsel, give its informed consent to an advance waiver of conflicts of interest? (3) Does a conflict of interest that undisputedly caused no damage to the client and did not affect the value or quality of an attorney’s work 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?”

Each of these issues has potentially far-reaching implications for California law firms.  The arbitration question may determine the validity and effectiveness of law firm fee agreement arbitration clauses.  The advance conflict waiver question may resolve, potentially for the first time in a definitive way, the question of whether and to what extent a client can waive conflicts in advance.  And the fee disgorgement question may resolve whether a law firm that is held to have a conflict forfeits its fees from the conflict date forward.

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