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  Los Angeles Lawyer
The Magazine of the Los Angeles County Bar Association

March 2010     Vol. 33, No. 1


MCLE Article: 2009 Ethics Roundup

Last year's economic turmoil brought legal ethics questions again to the fore

By John W. Amberg and Jon L. Rewinski

John W. Amberg is a partner in the Los Angeles office of Bryan Cave LLP, and Jon L. Rewinski is a partner in the Los Angeles office of Locke Lord Bissell & Liddell LLP. Both are former chairs and current members of the Los Angeles County Bar Association's Professional Responsibility and Ethics Committee. Amberg is also a former chair and Rewinski is a current member of the State Bar of California's Committee on Professional Responsibility and Conduct.

By reading this article and answering the accompanying test questions, you can earn one MCLE ethics credit. To apply for credit, please follow the instructions on the test.

Legal ethics faced considerable pressure in 2009 as the economy remained weak.1 Superior courts furloughed employees and closed their doors once a month,2 and law firm layoffs continued. U.S. District Judge Stephen G. Larson resigned his lifetime appointment, complaining his family could not live on his federal salary.3 Irked by leaks over his appointment to the California Court of Appeal of a political insider who had not practiced law in 21 years and a State Bar employee embezzlement scandal, Governor Arnold Schwarzenegger vetoed the State Bar dues bill (before eventually signing another version of it in January 2010).4

Reflecting the tidal wave of home foreclosures and related lawsuits, the State Bar's Committee on Professional Responsibility and Conduct (COPRAC) issued an Ethics Alert, warning California lawyers that ethics rules prohibit paying referral fees or splitting attorney's fees with foreclosure consultants and filing lawsuits simply to delay or impede foreclosure sales.5 By year-end, the State Bar's loan modification task force had obtained resignations from or placed on involuntary inactive status 14 lawyers, and state Attorney General Jerry Brown and the Justice Department were investigating and suing lawyers for loan modification scams.6

Major federal criminal cases collapsed due to prosecutorial misconduct. U.S. Attorney General Eric H. Holder Jr. agreed to set aside former Senator Ted Stevens's guilty verdict on corruption charges and dismissed the indictment due to the government's withholding of exculpatory evidence and misrepresentations to the court.7 In the case involving Broadcom Corporation and allegations of stock option backdating, Central District Judge Cormac J. Carney denounced the prosecutors' "shameful" intimidation of witnesses, which he said "distorted the truth-finding process and compromised the integrity of the trial." The judge dismissed charges against one of Broadcom's cofounders as well as a former chief financial officer, set aside another cofounder's felony guilty plea, and signaled his intention to dismiss the SEC's civil fraud complaint.8

Efforts to disbar or discipline former Bush Administration lawyers for excusing torture were met with skepticism. Ninth Circuit Judge Jay Bybee even set up a legal defense fund.9 Northern District Judge Jeffrey S. White, however, refused to dismiss a torture victim's lawsuit against John Yoo for crafting policy that allegedly deprived the plaintiff of his constitutional rights. "Like any other government official, government lawyers are responsible for the foreseeable consequences of their conduct," the court held.10

Last year the U.S. Supreme Court made its own foray into legal ethics issues. In Mohawk Industries, Inc. v. Carpenter,11 the Court held that discovery orders compelling the production of information claimed to be privileged do not qualify for immediate appeal under the collateral order doctrine.

Colleagues and friends mourned the death of lawyer Jeffrey A. Tidus, who was shot by an unknown assailant outside his Rolling Hills Estates home on December 7, 2009. A member of COPRAC and the Los Angeles County Bar Association's Professional Responsibility and Ethics Committee (PREC), Tidus left a wife and daughter and a legacy of selfless service to the bar and the integrity of the profession.

Attorney-Client Privilege

The attorney-client privilege was the subject of significant decisions in 2009. In Costco Wholesale Corporation v. Superior Court,12 the California Supreme Court granted review after the Los Angeles Superior Court ordered the production of portions of an opinion letter from the Sheppard Mullin law firm to its client Costco, and the Second District Court of Appeal denied a petition for a writ of mandate to block production. At issue was whether statements by employees interviewed by a Sheppard Mullin partner and reflected in her opinion letter were confidential and protected by the attorney-client privilege. The superior court ordered Costco to submit its lawyer's letter for in camera review by a discovery referee, who concluded the employee statements were not privileged because they were obtained by the lawyer "in her role as fact-finder rather than attorney, a role that could have been performed by a non-attorney."13 The court of appeal denied Costco's writ petition, ruling narrowly that it had not shown that production of the allegedly privileged letter would cause irreparable harm.14

The case settled, but the supreme court retained jurisdiction because the case raised issues of continuing public importance. It unanimously reversed the court of appeal, holding that the risk of the privilege possibly resulting in the suppression of relevant evidence was outweighed by the importance of preserving confidentiality in the attorney-client relationship.15 The court ruled that the privilege attached to the opinion letter in its entirety, "irrespective of whether it includes unprivileged material,"16 and that Evidence Code Section 915(a) bars in camera review of documents claimed to be privileged. Moreover, it held that a party seeking extraordinary relief from a discovery order that wrongfully invaded the attorney-client relationship need not establish harm from disclosure.17

Highlighting differences between California and federal law, the Ninth Circuit Court of Appeals decided an expedited interlocutory appeal by the government in United States v. Ruehle.18 During the prosecution of Broadcom's former chief financial officer, William J. Ruehle, for his role in backdating stock options that resulted in a $2.2 billion restatement of earnings, the government sought to use statements made by the defendant to attorneys at Irell & Manella. The Irell lawyers had shared those statements with outside auditors at Ernst & Young and the FBI. Ruehle objected that he had an attorney-client relationship with Irell, which represented Broadcom and its officers in various lawsuits, and therefore his statements were privileged.

Following a three-day hearing, the district court judge ruled that Ruehle had a reasonable belief that Irell represented him. According to the court, Ruehle had never given informed written consent to Irell's dual representation of him and Broadcom or the disclosure of privileged information to third parties, including the government. The court suppressed Ruehle's statements and referred Irell to the State Bar for possible discipline (though the State Bar only disciplines individual members of the bar, not law firms).19

The Ninth Circuit reversed, finding that the district court erred in applying California's liberal presumption that all communications during an attorney-client relationship are privileged. Instead, the district court should have followed the federal common law's strict view of the privilege, which obliges the party asserting the privilege to segregate privileged information from nonprivileged information.20 In contrast to the California Supreme Court in Costco, the Ninth Circuit stated that since the privilege is "an obstacle to the investigation of the truth,…it ought to be strictly construed within the narrowest possible limits consistent with the logic of its principle."21

With the burden on Ruehle, the Ninth Circuit held that he failed to prove his statements were made in confidence, given that Ruehle knew the fruits of Irell's inquiries would be disclosed to the company's outside auditors.22 Though the district court subsequently dismissed the criminal charges against Ruehle in December 2009, the case serves as a warning regarding the ethical pitfalls for lawyers who jointly represent a company and its officers and fail to obtain proper informed written consent or to advise the officers of their need for independent counsel.

Conflicts of Interest

Conflicts continue to hound and at times confound lawyers. Last year courts analyzed conflicts in a variety of situations. As these cases illustrate, lawyers who disregard conflicts risk disqualification, loss of fees, and malpractice liability.

In PrediWave Corporation v. Simpson Thacher & Bartlett LLP,23 the Sixth District Court of Appeal allowed PrediWave to proceed with a malpractice claim against its former counsel, Simpson Thacher. After representing PrediWave in transactional work, Simpson Thacher jointly represented the company and its CEO in heated litigation by a PrediWave shareholder alleging that the CEO was looting the company. Simpson Thacher also opposed efforts by directors aligned with the complaining shareholder to investigate the allegations. Over the next 13 months, Simpson Thacher collected about $10 million in legal fees. In the end, the complaining shareholder obtained a judgment against PrediWave and the CEO for $2.8 billion. The CEO fled the country, PrediWave filed for bankruptcy, and Simpson Thacher withdrew.

When the dust settled, those aligned with the complaining shareholder controlled PrediWave. Under new management, PrediWave sued Simpson Thacher for legal malpractice, breach of fiduciary duty, constructive fraud, and unfair business practices. PrediWave alleged that the firm breached its ethical duties by representing two clients--PrediWave and its CEO--that had conflicting interests and by taking steps in the litigation (such as obstructing the efforts of the new directors to investigate their concerns about looting) that were deleterious to PrediWave. Simpson Thacher moved to dismiss the complaint under the anti-SLAPP statute.24 The court of appeal concluded that the action should be permitted to move forward, reasoning that the anti-SLAPP statute cannot be used to prevent a client from suing a lawyer for acts ostensibly done in furtherance of the client's rights.25

Similarly, in United States Fire Insurance Company v. Sheppard, Mullin, Richter & Hampton,26 Sheppard Mullin attempted, without success, to use the anti-SLAPP statute to dismiss a lawsuit filed by a former client claiming that Sheppard Mullin accepted an engagement notwithstanding a conflict of interest. The former client, U.S. Fire, alleged that Sheppard Mullin had represented it on insurance coverage issues regarding claims asserted against an insured arising from asbestos-related bodily injury actions. In subsequent litigation, U.S. Fire filed a declaratory relief action against a different insured concerning the existence and scope of U.S. Fire's duty to defend it in other asbestos-related bodily injury actions. In this latter litigation, Sheppard Mullin represented an informal committee of asbestos creditors and two law firms providing legal services to creditors in their asbestos lawsuits against U.S. Fire's insured. U.S. Fire objected, contending that Sheppard Mullin had a disqualifying conflict because Sheppard Mullin's new clients were adverse to U.S. Fire and the two engagements were substantially related.

U.S. Fire sued to enjoin Sheppard Mullin from representing any party in the subsequent litigation. Invoking the anti-SLAPP statute, Sheppard Mullin moved to dismiss U.S. Fire's complaint, arguing that the firm's representation of parties in the subsequent litigation involved protected "petitioning activity," and U.S. Fire could not demonstrate a probability of prevailing on the merits of its claims.

The First District Court of Appeal held that U.S Fire could go forward with its action. The principal thrust of the alleged misconduct was the acceptance by Sheppard Mullin of the representation adverse to U.S. Fire, not protected petitioning activity that the firm undertook on behalf of its new clients.27 Thus, Sheppard Mullin could not invoke the protections of the anti-SLAPP statute. The court of appeal, however, did not decide the conflicts issue, which was left for the trial court.

A conflict between named plaintiffs and members of a class created problems for plaintiffs' counsel in Rodriguez v. West Publishing Corporation.28 Seven named plaintiffs filed a putative class action against the providers of bar review courses for violations of the antitrust laws. Five of the named plaintiffs had incentive agreements through which their lawyers agreed to pay them compensation tied to the dollar amount of any

settlement. Two of the plaintiffs, represented by separate counsel, did not. The district court certified a class with all seven as class representatives and appointed both sets of counsel as class counsel. Rather than disclosing the existence of the incentive agreements during the class certification process, class counsel instead did so for the first time during proceedings to approve a settlement. The district court approved the settlement but denied the plaintiffs' motion for compensation based on the incentive agreements.

The Ninth Circuit agreed that the incentive agreements "tied the promised request to the ultimate recovery and in so doing, put class counsel and the contracting class representatives into a conflict position from day one....They created an unacceptable disconnect between the interests of the contracting representatives and class counsel, on the one hand, and members of the class on the other. We expect those interests to be congruent."29 The court chastised plaintiffs' counsel for not disclosing the existence of the incentive agreements during the class certification process. Although affirming approval of the settlement (because two of the class representatives did not have conflicts created by the incentive agreements), the court reversed the award of attorney's fees to plaintiffs' counsel and remanded that issue to the district court.

May a law firm that drafted a will represent one beneficiary in probate proceedings adverse to other beneficiaries? The Fifth District Court of Appeal addressed this issue in Baker Manock & Jensen v. Superior Court.30 The Baker Manock firm drafted a will for an elderly woman who left a portion of her estate to her husband and the remainder to a trust for the benefit of two of her sons, who were also named coexecutors. The will and the trust omitted the mother's two other sons, but her husband had a will designating one of those sons as his executor. After the woman died, the two coexecutors of her will instituted probate proceedings with the Baker Manock firm representing one of them. While the mother's will was in probate, her husband died. As a result, one of the two sons omitted from the mother's will and trust, as the executor of the father's will, became a party to the probate proceedings over the mother's will.

The son serving as executor of the father's will moved to disqualify Baker Manock. Granting the motion, the trial court reasoned that it was inappropriate for Baker Manock to represent one beneficiary (the coexecutor) in proceedings against another beneficiary (the deceased husband) regarding the estate plan it drafted. According to the trial court, Baker Manock had an active and acute conflict of interest.

The Fifth District Court of Appeal reversed. It reasoned that even though Baker Manock, in drafting the will for its client (the mother), may have owed certain duties of care to its client's three named beneficiaries (the husband and two sons), Baker Manock did not represent these beneficiaries for purposes of a conflicts analysis:

[T]he potential for negligence liability--a contingency that may never arise in a particular case and certainly not yet implicated in the present case--in no way corresponds to or implicates the duties of confidentiality and loyalty that are present in any instance of an attorney-client relationship.…[I]t is incorrect to conclude that potential negligence liability somehow brings into the attorney-client relationship those who are merely third-party beneficiaries of the contract to draft a will.31

Baker Manock should not have been disqualified.


Generally, only a person who has or had an attorney-client relationship with a lawyer has standing, under appropriate circumstances, to move to disqualify the lawyer. In 2007, the supreme court created an exception to this rule in Rico v. Mitsubishi.32 If a lawyer improperly obtains and uses confidential information belonging to a nonclient, the nonclient has standing to disqualify the lawyer. In 2009, in Meza v. H. Muehlstein & Company,33 the Second District Court of Appeal applied this principle in a different context.

Plaintiff Meza sued several defendants for injuries sustained from exposure to toxic chemicals in her workplace. The trial court entered a case management order that, among other things, permitted defense counsel to share confidential information relating to their common interests without waiving attorney-client privilege and work product protections. After the trial court entered judgment for the defendants and the plaintiff's appeal was pending, the plaintiff's law firm hired a lawyer who had represented one of the defendants. The court of appeal reversed, remanding the matter to the trial court. The defendants then moved to disqualify the plaintiff's counsel.

In anticipation of the motion, the plaintiff's law firm had terminated the side-switching lawyer and dismissed the particular defendant he represented. The law firm also had erected an ethical screen precluding that lawyer from disclosing any confidential information shared among the defense group. In opposition to the motion, the plaintiff's law firm submitted a declaration by the lawyer verifying that he had not disclosed any confidential information to the plaintiff's law firm. Nevertheless, the trial court granted the disqualification motion.

Finding no abuse of discretion, the court of appeal affirmed. The court rejected the plaintiff's argument that members of the defense group lacked standing to file the motion because although the side-switching lawyer had never represented them, he was privy to their confidential information. In addition, the court rejected the plaintiff's contention that an effective ethical screen could prevent disqualification. Each member of the firm was presumed to have imputed knowledge of the defense group's confidential information. Finally, the court confirmed that the defendants had not waived the privilege by sharing confidential information because the disclosures related to their common interests, they had a reasonable expectation of confidentiality, and the disclosures were reasonably necessary for the accomplishment of their purpose.

In Cassel v. Superior Court,34 the Second District Court of Appeal analyzed the extent of protection afforded confidential communications made during mediation. Evidence Code Section 1119 provides that oral and written communications made "for the purpose of, in the course of, or pursuant to, a mediation" are inadmissible. The plaintiff, unhappy with a $1.25 million settlement reached as a result of a mediation, sued his former law firm for legal malpractice. The firm sought to exclude from evidence private communications that its lawyers had with the plaintiff on the eve of the mediation. The trial court granted the motion in limine, but the court of appeal issued a writ of mandate instructing the trial court to vacate its ruling. In a case of first impression, the majority concluded that the communications that the firm sought to exclude were not between disputants within the meaning of Evidence Code Section 1119, because the petitioner and his lawyers were the same party in the mediation.


Lawyers challenged the authority of tribunals to sanction them, with varying results. In Bak v. MCL Financial Group,35 a lawyer appearing before an arbitration panel of the Financial Industry Regulatory Authority (FINRA) argued that the panel exceeded its authority by sanctioning him. Attorney Theodore C. Peters represented defendant MCL Financial Group in a dispute by former employees over commissions. During prehearing document production, the plaintiffs inadvertently produced 112 pages of privileged documents to the defendants. After the plaintiffs demanded immediate return of the privileged documents, the defendants did so, but not before Peters had reviewed the documents, copied them, and sent copies to a FINRA staff attorney. The panel ordered Peters to pay $7,500 as sanctions for copying the privileged documents and included the sanctions in the award confirmed by the superior court.36

On appeal, Peters argued unsuccessfully that because he was not a party to the arbitration agreement, the arbitration panel lacked authority to sanction him. The Fourth District Court of Appeal held that by voluntarily appearing for the defendants in the proceedings, conducting discovery, and responding to the plaintiffs' privilege claims, he had subjected himself to the panel's authority.37 The court affirmed the sanctions, noting that under State Compensation Fund v. WPS, Inc.,38 Peters should have sought guidance from the arbitration panel rather than unilaterally copying the material and sending it to FINRA.39

In a case of first impression, In the Matter of Lehtinen,40 the Ninth Circuit held that a bankruptcy court has the inherent authority to sanction a lawyer by suspending him from practice in that court. The bankruptcy court sanctioned Jim Price, the lawyer for the chapter 13 debtor, after he failed to attend the meeting of creditors or the confirmation hearing and falsely informed his client that her case had been dismissed when the court had confirmed the plan. Price had multiple conflicts of interest: While serving as the debtor's lawyer, he also acted as a loan broker and conditioned her new loan on being hired as the real estate broker when she sold her house. The bankruptcy court ordered Price to disgorge his $1,500 fee and suspended him from practice in the bankruptcy court of the Northern District of California for three months. The Bankruptcy Appellate Panel upheld the bankruptcy court's authority to sanction Price, and the Ninth Circuit affirmed.

On appeal, Price challenged the bankruptcy court's authority and argued he was denied due process because the sanctions were punitive. The Ninth Circuit held a bankruptcy court has inherent power to sanction a broad range of conduct not limited to violations of court orders if the court makes an explicit finding of bad faith and willful misconduct. Although the bankruptcy court did not explicitly state that Price's conduct was in bad faith or willful, the Ninth Circuit concluded that it "impliedly did so" by stating that his conduct was "outrageously improper, unprofessional and unethical under any reading of California's ethical standards for attorneys."41 The court of appeals explained that a lawyer disciplinary proceeding is not a criminal proceeding, and suspension or disbarment is not ordered for the purpose of punishment but to maintain the integrity of the courts and the profession.42 The lawyer received notice of the alleged misconduct and the basis for the court's authority, and thus due process was satisfied.43

In Hernandez v. Vitamin Shoppe Industries, Inc.,44 class action lawyer Jeffrey Spencer was sanctioned after he wrote to class members he did not represent, urging them to opt out of a proposed class settlement and join his parallel class action. Spencer's actions were in violation of Rule 2-100 of the Rules of Professional Conduct, which prohibits contact with a represented party. Superior Court Judge John A. Sutro Jr. had enjoined Spencer from further communications with class members. When Judge Sutro was disqualified for the appearance of probable bias under Code of Civil Procedure Section 170.1(a)(6), based on remarks at the sanctions hearing, his replacement formalized the sanctions and Spencer appealed, arguing the sanctions were null and void. The First District Court of Appeal affirmed the injunctive relief.

The court of appeal held that the disqualified judge's orders were not null and void under Code of Civil Procedure Section 170.3(b)(4), which provides that if grounds for disqualification are first learned or arise after a judge makes his or her rulings, the rulings will not be set aside even if the judge is disqualified. Spencer pointed out that Judge Sutro's disqualification was based on comments he made before issuing his sanctions orders, but the appellate court swept aside the argument, explaining disingenuously that the finding of bias was prospective only.45 Further, the court held that Rule 2-100's "no contact" rule was triggered by the court's conditional certification of the class, and that absent class members are "parties" represented by class counsel. Thus the superior court had the authority to ensure the neutrality and objectivity of the notice to the class by sanctioning Spencer's "biased, inflammatory and misleading" letters to the class members.46

The Fourth District Court of Appeal reached a different result in Conservatorship of Becerra.47 The probate court appointed an attorney to represent the conservatee, the victim of an industrial accident. After the appointment, Linda Paquette, a lawyer for the original trustee, continued to contact the conservatee without his new attorney's permission, in violation of Rule 2-100 of the Rules of Professional Conduct. The court ordered Paquette to pay $1,000 in sanctions to the court and attorney's fees of $2,587 under Code of Civil Procedure Sections 177.5 and 575.2, which authorized sanctions for violation of a court order or local rule. The appellate court reversed, because no court order or local rule was violated.

The court of appeal explained that the Rules of Professional Conduct are not normally regarded as court orders or local rules for purposes of awarding monetary sanctions, since trial courts do not have responsibility for enforcing the rules and disciplinary authority is lodged in the state supreme court, which has delegated it to the State Bar Court.48 Although a court order appointed the attorney for the conservatee, and the appointed attorney could request that other lawyers in the case make contact only through her, violations of that request would violate Rule 2-100, not a court order. Even if the probate court concluded Paquette had violated Rule 2-100, this would not be tantamount to disobeying a court order under the cited statutes.49

Lawyers Behaving Badly

A lawyer who filed a false State Bar complaint against his cocounsel could not claim a constitutional right to petition or free speech because the complaint was an illegal attempt to extort attorney's fees from the other lawyer. This was the ruling in Cohen v. Brown,50 a dispute between two lawyers over the division of fees from a personal injury case. Michael Brown of the California Lawyers Group LLP induced Arlan A. Cohen to associate into the case as cocounsel for the plaintiff by lying about his trial experience, the state of preparation of the case, and the client's consent to a division of fees with Cohen. Cohen assumed the laboring oar, prepared the case for trial, and obtained a partial settlement at a mediation. When Cohen proposed a new fee-sharing arrangement in recompense for his extra work, Brown fired him. Cohen served an attorney's lien on Brown, defense counsel, and the defendant's insurer, but after the rest of the case settled for $2 million, Brown informed Cohen that he was not entitled to any portion of the $800,000 attorney's fees because the client had never signed a written agreement to the division of fees under Rule 2-200 of the Rules of Professional Conduct.51

Adding insult to injury, Brown threatened to file a complaint with the State Bar if Cohen did not sign off on the settlement check and allow all the fees to go to Brown.52 Cohen offered to sign the check so the client could be paid if the disputed fees were placed in an escrow account. Brown refused and filed a falsified State Bar complaint against Cohen in the name of the client. The State Bar initiated an inquiry of Cohen, the client sued Brown for breach of fiduciary duty and conversion, and Cohen sued Brown for fraud, breach of contract, extortion, and unjust enrichment.

In defense, Brown filed an anti-SLAPP motion under Code of Civil Procedure Section 425.16, claiming that Cohen's suit was an attempt to chill Brown's exercise of his constitutional right to petition and free speech. The trial court denied the motion, citing Flatley v. Mauro53 in holding that the State Bar complaint was an illegal act of extortion and not a protected activity. The Second District Court of Appeal affirmed, finding that Brown had unleashed the State Bar to make Cohen's life a living hell unless he signed the settlement check.54 The appellate court gave Cohen reason to hope that Brown would not receive a windfall and that Cohen could recover his quantum meruit recovery under Huskinson & Brown v. Wolf.55 Also, the court noted that it was still possible to fulfill the requirements of Rule 2-200 because the client (now solidly allied against Brown) could consent to the fee split anytime before the actual division of fees.56

In the Matter of Francis T. Fahy involved the disbarment of a lawyer after he found a convenient, but unethical, way to cut short his jury duty.57 The lawyer, Fahy, was serving as a juror in a medical malpractice case. After five days of deliberations, the jury was deadlocked, and the court ordered the jury to return the following week to resume its deliberations. Displaying a misguided dedication to his law practice, Fahy changed his vote to break the deadlock and reach a verdict for the defendant so he could return to his office. The foreperson reported her concern that jurors had changed their votes solely to end the deliberations, but when questioned by the judge, Fahy stated he had acted consistently with the court's instructions and the evidence. Six weeks later, the plaintiff moved for a new trial based on jury misconduct and, surprisingly, submitted a sworn declaration from Fahy in which he stated he had decided to vote for the defense solely to end deliberations and return to his practice.58 Confronted with his declaration in court, Fahy testified that he was tricked into signing it or that his signature was forged. A new trial was ordered, and the State Bar filed disciplinary charges against Fahy.

The State Bar Court found that Fahy breached his duty under Business and Professions Code Section 6068(a) to comply with the law by violating his duties as a civil trial juror, noting that his vote was decisive in breaking the jury's deadlock. His deceit during the judge's questioning was an act of moral turpitude and reprehensible conduct by an attorney under Business and Professions Code Section 6106.59 Concluding that "clients, courts, and the legal profession are at serious risk of future harm should he be allowed to continue to practice," the State Bar Court recommended Fahy's disbarment,60 and the supreme court obliged on July 22, 2009.61

Getting Paid

In another difficult economic year, courts, COPRAC, and PREC gave attorneys new issues to think about with respect to collecting and splitting fees.

COPRAC, in its Formal Opinion 2009-178, analyzed certain ethical duties that arise when an attorney attempts to settle a fee dispute with his or her client and wishes to include a Civil Code Section 1542 waiver to wipe out a potential malpractice claim. The committee noted that the existence of a fee dispute alone does not necessarily create a conflict requiring withdrawal. A decision to withdraw under Rule 3-700 of the Rules of Professional Conduct depends on several factors, including the level of antagonism, the nature of any other disputes concerning the attorney's services, and the degree to which withdrawal would prejudice the client.

The committee also concluded that it is ethically permissible to include a Section 1542 waiver in the settlement agreement, even if the attorney has not withdrawn from the engagement. However, if the attorney has not withdrawn, he or she must first 1) promptly disclose to the client the facts giving rise to any legal malpractice claim, 2) comply with Rule 3-400(B) of the Rules of Professional Conduct by advising the client of the right to seek independent counsel regarding the settlement, 3) give the client an opportunity to do so, 4) advise the client that the attorney is not representing the client in connection with the fee dispute, and 5) fully disclose to the client the terms of the settlement in writing, including the effect of the release and other provisions of the settlement.

The Mandatory Fee Arbitration Act62 permits clients to elect nonbinding arbitration before a local bar association for their fee disputes with their attorneys. If a client makes the election, his or her attorney must participate in an MFAA arbitration. Arbitration under the MFAA is intended to be quick and inexpensive so that the client need not hire a new lawyer in connection with the fee dispute. Clients waive their right to an MFAA arbitration by filing any pleading seeking affirmative relief or a setoff based on alleged malpractice or professional misconduct. MFAA arbitrations are strictly limited to fee disputes. The Second District Court of Appeal confirmed this principle last year in Fagelbaum & Heller, LLP v. Smylie.63

The MFAA permits either party to request a trial de novo within 30 days after the MFAA arbitration is completed.64 The supreme court in Aguilar v. Lerner,65 a 2004 decision, held that an agreement between a client and his attorney to submit all disputes between them to binding arbitration was enforceable, notwithstanding the MFAA, because the client had failed to elect MFAA arbitration. The majority opinion left undecided the issue of whether a client who elects MFAA arbitration may request a trial de novo after the MFAA arbitration has concluded when the client and attorney agreed in their engagement letter to resolve all disputes through binding arbitration. In 2009, the supreme court decided this issue in Schatz v. Allen Matkins Leck Gamble & Mallory LLP.66

The plaintiff, Schatz, retained Allen Matkins to represent him in a couple of matters. The original engagement memorialized an agreement to submit any disputes between them, including fee disputes, to binding arbitration before a retired judge or justice in San Diego. Schatz disputed a bill of about $170,000. The parties participated in an MFAA arbitration that concluded with an award in favor of Allen Matkins. Schatz timely requested a trial de novo. At that point, Allen Matkins petitioned to compel arbitration in accordance with the arbitration clause in the parties' engagement letter. Following Alternative Systems, Inc. v. Carey, a 1998 appellate decision,67 the trial court denied the petition to compel. The court of appeal affirmed, reasoning that the language in the MFAA permitting either party to a "trial after arbitration" means that the parties must thereafter adjudicate the fee dispute in court rather than through arbitration.

The supreme court, overruling Alternative Systems, reversed. The court reasoned that the phrase "trial after arbitration" should be harmonized with other language in the MFAA that recognizes that a client and lawyer may adjudicate disputes between them in court or in "other proceedings." Thus, the phrase "trial after arbitration" means a trial in accordance with applicable law: "The MFAA confers no immunity from valid defenses, such as the existence of a contractual obligation to arbitrate."68

While an attorney cannot force a client to forego his or her right to MFAA arbitration, once the MFAA arbitration is completed (or if the client fails to elect MFAA arbitration in the first place or waives his or her right to MFAA arbitration by seeking affirmative relief against the attorney), the attorney can enforce a predispute agreement with the client to submit all their disputes to binding arbitration. The MFAA "does not foreclose the possibility that, under a general agreement between the parties, the nonbinding MFAA process should be followed by binding arbitration, rather than by a lawsuit."69

The Third District Court of Appeal in Gilman v. Dalby,70 a case of first impression, concluded that as a matter of public policy, an attorney lien for fees and costs has priority over a medical provider's lien even if the medical provider's lien was first in time:

As a practical matter, medical liens have value only if the treated patient obtains a judgment from which the liens can be paid.…[U]nless the patient gets a monetary recovery in a lawsuit, the medical liens will usually remain unpaid, and the provider will never obtain payment for the services rendered.…An attorney lien that includes fees and the costs of suit is a necessary incentive for personal injury plaintiffs' lawyers to represent such clients.71

In general, a lawyer may not split legal fees with a nonlawyer.72 PREC concluded in its Opinion No. 523, issued in June 2009, that an attorney does not violate the fee-splitting rules by entering into an agreement with the client in a contingency fee case to include a statutory award of attorney's fees in the gross recovery for purposes of deciding the attorney's compensation. This is so even though the statutory award belongs to the attorney, not the client.

May lawyers who successfully represent themselves as a party in litigation recover fees based on their time working on the case if the prevailing party has a right to fees under Civil Code Section 1717? The Sixth District Court of Appeal concluded in Gorman v. Tassajara Development Corporation73 that the answer is no, even if the attorney has incorporated or is a member of a partnership. But the court permitted the attorney in Gorman to recover fees incurred by other lawyers and paralegals in his firm who worked on the matter.

In Formal Opinion No. 2009-176, COPRAC considered ethical obligations arising when defense counsel implements a policy of making settlement offers conditioned on the plaintiff's waiver of his or her statutory right to attorney's fees. The committee opined that a defense lawyer could ethically do so. Further, the plaintiff's lawyer has an ethical obligation to transmit the settlement proposal to the plaintiff and consummate the settlement if instructed to by the client even if the settlement, because of the fee waiver, would result in the lawyer receiving compensation considerably less than the reasonable value of the lawyer's services. A concern that this defense strategy could potentially drive a wedge between plaintiffs and their counsel must yield to the strong policy encouraging settlements.

The Second District Court of Appeal's decision in Karton v. Dougherty74 provides a cautionary tale to lawyers regarding aggressive efforts to pursue clients who have failed to pay. Karton, a lawyer, represented a client, Dougherty, in a marital dissolution action. The fee agreement gave Karton the right to collect 10 percent interest on fees and costs not paid within 30 days. The fee agreement also included an attorney's fees clause that was applicable in the event of litigation to collect unpaid fees and costs. At the end of the engagement, Dougherty owed Karton about $65,000. Karton filed an action in superior court to collect. When Dougherty failed to appear, Karton obtained a default judgment against Dougherty for about $87,000, which included interest and collection costs.

Dougherty filed several motions to set aside the default, all of which the superior court denied. He moved out of state. He filed a bankruptcy petition. He filed other litigation to set aside the default judgment. Although Karton in the interim collected about $56,000 on the $87,000 judgment, Karton continued to fight every step of the way. He ultimately asked the superior court to increase the amount of the default judgment from $87,000 to about $1.3 million to cover the additional fees and costs he incurred in his collection efforts. The superior court did so, and Dougherty filed a motion to set aside the default under Code of Civil Procedure Section 473.

The superior court denied the motion. Dougherty appealed. The Second District concluded that Karton's original application for a default judgment was defective and reversed the judgment.

Revision of the Rules of Professional Conduct

After nine years of labor by the Commission on the Revision of the Rules of Professional Conduct, the State Bar Board of Governors approved 35 revisions to the rules. State Bar President Howard Miller declared that the remaining revisions will be completed in 2010 so that the new rules can be submitted to the supreme court for adoption.75


1 A Dark Day as Law Firms Shed 800 Jobs, L.A. Daily J., Feb. 13, 2009.
2 Furloughs Begin in Los Angeles Courtrooms and Officials Brace for Confusion, L.A. Daily J., July 15, 2009.
3 Judge Resignations Highlight Stagnant Salaries, L.A. Daily J., Sept. 17, 2009.
4 Schwarzenegger Vetoes State Bar Dues Bill, Says Bar Must Abandon 'Business as Usual,' 25 Laws. Man. on Prof. Conduct 568 (ABA/BNA).
5 Ethics Alert: Legal Services to Distressed Homeowners and Foreclosure Consultants on Loan Modifications (Feb. 2, 2009), available at http://calbar.ca.gov /calbar/pdfs/ethics/Ethics-Alert-Foreclosure.pdf.
6 California State Bar J. (Oct., Nov. & Dec. 2009); Former Lawyer Is Accused of Defrauding Homeowners, L.A. Daily J., July 7, 2009.
7 Motion of the United States to Set Aside the Verdict and Dismiss the Indictment with Prejudice, United States v. Stevens, Case No. 08-231 (2009).
8 Broadcom Executives Walk Free after Judge Throws Out Charges, L.A. Daily J., Dec. 16, 2009; Reporter’s Transcript of Proceedings, United States v. Ruehle, No. 08-CR-00139 (CJC) (C.D. Cal. Dec. 15, 2009).
9 See http://www.bybeefund.org.
10 Ex Bush lawyer can be sued for justifying abuse, S.F. Chron., June 13, 2009.
11 Mohawk Indus., Inc. v. Carpenter, 130 S. Ct. 599 (2009).
12 Costco Wholesale Corp. v. Superior Court, 47 Cal. 4th 725 (2009).
13 Costco Wholesale Corp. v. Superior Court, 74 Cal. Rptr. 3d 345, 352 (2008), rev’d, 47 Cal. 4th 725 (2009).
14 Id. at 358-59.
15 Costco, 47 Cal. 4th at 741.
16 Id.
17 Id. at 746-47.
18 United States v. Ruehle, 583 F. 3d 600 (9th Cir. 2009).
19 Id. at 606.
20 Id. at 608-09.
21 Id. at 607 (quoting In re Horowitz, 482 F. 2d 72, 81 (2d Cir. 1973)).
22 Id. at 609.
23 PrediWave Corp. v. Simpson Thacher & Bartlett LLP, 179 Cal. App. 4th 1204, 102 Cal. Rptr. 3d 245 (2009).
24 Code Civ. Proc. §§425.16 et seq.
25 PrediWave Corp., 102 Cal. Rptr. 3d at 258, 263.
26 United States Fire Ins. Co. v. Sheppard, Mullin, Richter & Hampton, 171 Cal. App. 4th 1617 (2009).
27 Id. at 1628.
28 Rodriguez v. Schneider, 563 F. 3d 948 (9th Cir. 2009).
29 Id. at 959-60.
30 Baker Manock & Jensen v. Superior Court, 175 Cal. App. 4th 1414 (2009).
31 Id. at 1421.
32 Rico v. Mitsubishi Motors Corp., 42 Cal. 4th 807


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