California Supreme Court affirms decision to deny law firm's arbitration award

By Gabriel Neves | Sep 9, 2018

SAN FRANCISCO – The California Supreme Court has affirmed a lower court's decision to deny an arbitration award to a law firm that was in a dispute with a pipe maker.

California Justice Leondra Kruger, in the panel of the California Supreme Court, issued a 76-page ruling on Aug.30, affirming a decision by the California Second District Court of Appeal.

The ruling involved a lawsuit filed by the law firm Sheppard, Mullin, Richter & Hampton against J-M Manufacturing Co., which makes PVC pipes.

According to court documents, the law firm represented J-M in a federal qui tam action brought on behalf of a number of public entities without disclosing that  it "represented one of these public entities in matters unrelated to the qui tam suit."

As stated in the ruling, "both clients had executed engagement agreements that purported to waive all such conflicts of interest, current or future, but the agreements did not specifically refer to any conflict and the law firm did not tell either client about its representation of the other," and "this arrangement fell apart when the public entity discovered the conflict and successfully moved to have the firm disqualified in the qui tam action."

The decision mentioned that, "in 2006, a qui tam action was filed against J-M Manufacturing Company, Inc., a pipe manufacturing company, in federal court in California. John Hendrix, the relator in the action, alleged that J-M had misrepresented the strength of polyvinyl chloride pipe it had sold to approximately 200 public entities around the country for use in their water and sewer systems."

About four years later, in 2010, the complaint was "unsealed," with some of the entities intervening in the case.

J-M, in the meantime, was considering "replacing the law firm that had been representing it in the action," and it invited Sheppard Mullin's attorneys to discuss taking over the legal representation, for which the firm accepted on Mar. 4, 2010.

The agreement, per the ruling, "recited the terms of the representation, including payment of fees, and provided that these terms would also apply to other engagements for J-M that Sheppard Mullin might undertake, except as the parties otherwise agreed." It also contained an "arbitration clause," that provided that "any dispute over fees or charges that was not resolved through voluntary arbitration under the auspices of the California State Bar, and any other type of dispute between the parties, would be settled by “mandatory binding arbitration” conducted in accordance with the California Arbitration Act."

One of the firm's attorneys, Jeffrey Dinkin, was working for South Tahoe Public Utility District, another entity in the lawsuit, at the same time the agreement was signed.

The same ruling stated that in July 2011, South Tahoe was granted a motion to disqualify the law firm, stating that "Sheppard Mullin’s simultaneous representation of South Tahoe and J-M had been undertaken without adequately informed waivers in violation of rule 3-310(C)(3) of the Rules of Professional Conduct."

After being disqualified, Sheppard Mullin "sued J-M for the unpaid fees," and J-M filed a cross-complaint "for breach of contract, an accounting, breach of fiduciary duty, and fraudulent inducement; it also sought disgorgement of fees previously paid to Sheppard Mullin, as well as exemplary damages," the document said.

Kruger's ruling showed that Sheppard Mullin "performed approximately 10,000 hours of work in the qui tam action and a related state court action," with amounts totaling "more than $3 million, of which more than $1 million remained unpaid."

The firm, as shown in the ruling, "petitioned for an order compelling arbitration," which was decided in its favor.

After being confirmed by the superior court, the court of appeals vacated the award, stating that "California law, unlike federal law, treats a challenge to the legal enforceability of a contract as a matter for the court to decide, regardless of whether the contract contains an arbitration clause."

In her opinion in the ruling, Kruger pointed out the trust issues that Sheppard Mullin displayed in the dispute with J-M.

"Trust and confidence are central to the attorney-client relationship, and maintaining them requires an ethical attorney to display all possible candor in his or her disclosure of circumstances that may affect the client’s interests," Kruger said, adding that the firm's "failure to exhibit the necessary candor in this case has rendered its contract with J-M unenforceable and has thus disentitled it to the benefit of the unpaid contract fees awarded by the arbitrators in this case."

Justice Ming Chin issued a dissenting opinion on the case, who disagreed on the need of a trial court establishing "good faith" of the law firm in the case.

"Procedurally, it requires no factual development or credibility determination to decide whether the mere absence of such legal authority establishes good faith, so we are in as good a position as the trial court to decide that issue and need not commit this determination to the trial court’s discretion," Chin said.

California Supreme Court Case number S232946


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