The number of reported cases in 2010 involving legal ethics and professional responsibility showed an increase from previous years. The U.S. Supreme Court took up 16 cases dealing with how lawyers do their jobs--nearly 20 percent of its decision docket.1
The Court granted certiorari to consider former Attorney General John D. Ashcroft's claimed immunity for allegedly abusing the material witness statute to detain and label--but never charge--a Muslim convert as a terrorism suspect. George W. Bush appointee Judge Milan D. Smith Jr. of the Ninth Circuit described these actions as "chilling...and a cautionary tale to law-abiding citizens...."2 After Fox News reported that seven Justice Department lawyers previously represented Guantanamo Bay detainees, American Bar Association President Carolyn Lamm asserted a lawyer's ethical obligation to represent people "who otherwise would stand alone against the power and resources of the government." Most of the lawyers were former Supreme Court clerks, and several had been hired by the Bush administration.3
Judges were not spared from the harsh spotlight on ethical misconduct. The Senate convicted U.S. District Judge G. Thomas Porteous of Louisiana for corruption and perjury, making him only the eighth federal judge in history to be removed.4 U.S. Senior District Judge Jack Camp of the Northern District of Georgia pleaded guilty to charges that he bought drugs for a stripper who was secretly cooperating with the FBI.5 Five members of the Michigan Supreme Court censured former Chief Justice Elizabeth Weaver after she publicly released a secret tape recording of the court's deliberations.6 U.S. District Judge Manuel L. Real was scolded for failing to explain his rulings and "act[ing] obdurately regarding appellate directives" by the U.S. Judicial Council's conduct and disability committee.7 Moreover, he was removed from a patent case by the U.S. Circuit Court of Appeals for the Federal Circuit--the 12th time he had been removed from a case by an appellate panel.8
In California, the Santa Clara University School of Law presented James E. Towery, the State Bar of California's new chief trial counsel, with a study reporting that prosecutors are rarely punished for professional misconduct.9 The study identified 707 cases from 1997 to 2009 in which appellate courts had found prosecutorial misconduct but the State Bar disciplined only six deputy district attorneys.10 Meanwhile, a State Bar task force investigating complaints against lawyers accused of home loan modification fraud continued to obtain suspensions, resignations, and disbarments, though more than 1,800 investigations remained open based on 4,000 complaints.11
A U.S. magistrate judge lifted her 2008 discovery sanctions against six California attorneys who had represented Qualcomm, Inc., concluding that Qualcomm had misled the lawyers when it withheld documents.12 The Ninth Circuit suspended Walter J. Lack and Paul A. Traina for six months and formally reprimanded Thomas V. Girardi for filing an appellate brief containing false statements and offering evidence they knew was spurious.13 When the State Bar declined to prosecute, finding the lawyers did not intend to deceive, Girardi claimed total vindication.14
Conflicts of Interest
Not unlike prior years, 2010 provided examples illustrating that law firms accepting engagements for clients with conflicts risk disqualification15 and client lawsuits.16 But 2010 is particularly noteworthy because in Kirk v. First American Title Insurance Company,17 a California appellate court concluded for the first time that a private law firm may use an ethical screen to rebut a presumption that knowledge about a closed matter obtained by a lawyer when he or she worked at a prior law firm must be imputed to all lawyers in the new firm.
Kirk was one of four related lawsuits commencing in February 2005 against First American Title Insurance Company alleging improper business practices. A team of lawyers at Bryan Cave represented First American. In October 2007, the plaintiffs' lawyers asked Gary Cohen, formerly the general counsel of the California Department of Insurance, to consult with them. The plaintiffs' lawyers spoke with Cohen for 17 minutes. Shortly thereafter, Cohen declined the engagement. Fourteen months later, Sonnenschein, Nath & Rosenthal hired Cohen to join its insurance practice. A few months after that, in 2009, Sonnenschein hired lawyers from the Bryan Cave team defending First American.
Wishing to preserve its multiyear investment in the team, First American signed substitutions of attorney transferring the defense to Sonnenschein. After receiving the substitutions, plaintiffs' counsel objected, citing their prior confidential communication with Cohen. Sonnenschein immediately erected an ethical screen around Cohen. Notwithstanding the screen, the plaintiffs moved to disqualify Sonnenschein for violating Rule 3-310(E) of the Rules of Professional Conduct by failing to obtain written consent from the plaintiffs before agreeing to represent First American.
The trial court granted the motion, reasoning that Cohen received confidential information about the actions during his 17-minute conversation with the plaintiffs' lawyers in October 2007. The trial court imputed Cohen's knowledge to his Sonnenschein colleagues and ruled that Sonnenschein's disqualification was mandatory. According to the court, even if screening were permitted under California law, Sonnenschein's screen was not effective enough, as evidenced by the fact that while the screen was in place, Cohen assisted First American on an unrelated matter. First American and Sonnenschein appealed. Due to the significance of the issues, the Second District Court of Appeal set briefing and argument on an expedited basis. Twenty-five law firms filed amicus briefs in support of Sonnenschein.
In an opinion by Justice Walter Croskey, the Second District reversed, noting that the paradigm with which courts have historically justified vicarious disqualification--"the everyday reality that attorneys, working together and practicing law in a professional association, share each other's, and their clients', confidential information"18--represents an outdated view of the practice of law. According to the court:
We do not doubt that vicarious disqualification is the general rule, and that we should presume knowledge is imputed to all members of a tainted attorney's law firm. However, we conclude that, in the proper circumstances, the presumption is a rebuttable one, which can be refuted by evidence that ethical screening will effectively prevent the sharing of confidences in a particular case.19
While the specific elements of an effective screen will vary from case to case, two are necessary. First, the screen must be timely imposed. Second, an effective screen must involve preventive measures to guarantee that information will not be conveyed.20 Depending on the circumstances, an effective ethical wall may require:
- Physical, geographical, and departmental separation of attorneys.
- Prohibitions against and sanctions for discussing confidential matters.
- Established rules and procedures preventing access to confidential information and files.
- Procedures preventing a disqualified attorney from sharing in the profits from the representation.
- Continuing education in professional responsibility.
- Notice to the former client.21
The court reversed the disqualification order and remanded the case to the trial court to determine the effectiveness of Sonnenschein's screen.
Kirk only addresses a law firm's ability to rebut a presumption of imputation when a tainted lawyer has gained confidential information from a substantially related prior matter, albeit one that did not result in a formal engagement in the case at issue. The ruling in Kirk does not change existing law that the presumption is irrebuttable when a lawyer switches sides during an ongoing engagement.
Duty of Loyalty
In a closely watched case that has been accepted for review by the California Supreme Court, a lawyer's duty of loyalty to a former client was pitted against his First Amendment right to speak out on matters of public interest. The case, Oasis West Realty, LLC v. Goldman,22 involved Kenneth A. Goldman, a Reed Smith LLP partner and Beverly Hills resident, who was retained by Oasis West Realty in 2004 to help secure approval from the Beverly Hills City Council for construction of a new hotel and condominiums at the intersection of Wilshire and Santa Monica Boulevards. Goldman resigned in 2006, after he had been paid $60,000 for representing Oasis in meetings with city officials, the city council, and homeowners associations. In 2008, the city council approved the Oasis development, and Beverly Hills residents opposed to the project formed a political action committee to force a public referendum.
Goldman supported the referendum by appearing before the city council to oppose a rule requiring individuals seeking signatures on the referendum petition to carry the complete environmental impact statement on the project. Goldman also went door to door with his wife to solicit signatures on the petition. Feeling betrayed, Oasis immediately wrote to Goldman and Reed Smith, demanding that they withdraw from all activities adverse to the project and that Goldman and his wife "remain silent" on the issue. Goldman agreed to take no further steps in opposition to the project.
After the development was narrowly approved by the voters, Oasis sued Goldman and Reed Smith for breach of the fiduciary duties of loyalty and confidentiality and sought $4 million for the cost of fighting the referendum and winning approval of the ballot measure. The defendants moved to strike the complaint under the anti-SLAPP statute, Code of Civil Procedure Section 425.16, on the ground that Goldman's activities were in furtherance of his constitutional rights of petition and free speech.
The superior court denied the motion, but the Second District Court of Appeal reversed. It found no evidence that Goldman had revealed any confidential information or encouraged others to think that he was basing his opposition on that type of information. Moreover, the court noted that Rule 3-310(E) of the Rules of Professional Conduct, which limits successive representations, applies when the lawyer has accepted a second client with conflicting interests--but in this case there was no second client.
The appellate court distinguished the California Supreme Court's sweeping 1932 dictum in Wutchumna Water Company v. Bailey23 that an attorney "may not do anything which will injuriously affect his former client in any matter in which he formerly represented him." It did so on the ground that if read literally, the Wutchumna dictum would bar Goldman not only from circulating the petition but also from signing it or voting against the ballot measure. The court concluded, "We cannot find that by representing a client, a lawyer forever forfeits the constitutional right to speak on matters of public interest." The state supreme court has granted review in Oasis and depublished the opinion.24
Duty of Confidentiality
In Formal Opinion 2010-179, the State Bar's Standing Committee on Professional Responsibility and Conduct (COPRAC) tackled the duties of confidentiality and competence in the context of an attorney's use of technology to transmit or store confidential client information. COPRAC concluded that an attorney risks violating duties of confidentiality and competence by using a laptop in a coffee shop through a public wireless connection unless the attorney takes appropriate precautions, such as using a combination of file encryption, encryption of wireless transmissions, and a personal firewall--particularly when dealing with sensitive client information. COPRAC also concluded that an attorney likely does not violate ethical duties by using a laptop at home provided his or her personal wireless system has been configured with appropriate security features.
In United States v. Graf,25 the Ninth Circuit Court of Appeals applied two new standards to the attorney-client privilege. Defendant Graf was convicted of selling fraudulent health insurance plans and ordered to pay $20 million in restitution after the court-appointed fiduciary waived the attorney-client privilege of the company with which Graf was associated, and its lawyers testified against him. On appeal, Graf argued that he was an outside consultant to the corporation, not an officer, director, or employee, so he had his own personal privilege that the company could not waive.
Noting that he was not an officer or director because he had been previously banned from the insurance industry, the Ninth Circuit held that Graf was a "functional employee," and the waiver applied.26 Addressing the issue of whether a corporate employee may hold a joint privilege for communications with corporate counsel, the Ninth Circuit adopted the Third Circuit's five-factor test from In re Bevill, Bresler & Shulman Asset Management Corporation27 and held that Graf failed to establish he had a personal attorney-client privilege.28
A client sacrificed her attorney-client privilege to the culture of narcissism in Lenz v. Universal Music Corporation.29 A 29-second video on the Internet of the plaintiff's toddler dancing to the Prince song "Let's Go Crazy" led to a takedown notice from Universal to YouTube.com. After YouTube complied, the plaintiff contacted the Electronic Frontier Foundation and, with its support, sued Universal under the Digital Millennium Copyright Act for allegedly misrepresenting that her video infringed its copyright. Prior to and during the litigation, Lenz generated a constant stream of e-mails, electronic "chats," and postings to her blog in which she blithely disclosed her conversations with her attorneys, her motives for bringing the suit, her strategy, her lack of injury, and the legal issues she was pursuing or abandoning. While the e-mails containing what should have been confidential details were sent to her mother and friends, she also spewed forth to strangers not only on her blog but also to a reporter at Zerogossip.com. Universal moved to compel discovery of her conversations with her lawyers on the ground that Lenz had repeatedly waived the attorney-client privilege.
The magistrate judge granted the motion, and the district court overruled her objections. At her deposition, Lenz tried to retract her blog admission that hers "was not a 'fair use' case at all" by testifying, "It may have been I was misunderstanding what I'd been told by counsel." The court summed up the cost of her foolish lack of discretion: "A party may not attempt to explain an apparent admission as a misinterpretation of a conversation with counsel, and then deny the opposing party on the basis of privilege access to the very conversation at issue."30
Business with a Client
Rule 3-300 of the Rules of Professional Conduct prohibits a member from entering into a business transaction with a client unless the transaction is "fair and reasonable," the terms are fully and comprehensibly disclosed in writing to the client, the client is advised in writing that he or she may seek independent counsel, the client has an opportunity to do so, and the client provides his or her written consent. The existence of an attorney-client relationship at the time of the transaction is generally an essential element of a Rule 3-300 violation, as illustrated by In the Matter of Marie Darlene Allen.31
Allen, a lawyer, agreed to purchase a duplex from her close friend and sometime client for $700,000. Because of delays in closing escrow, Allen and the friend entered into an interim occupancy agreement, pursuant to which Allen made extensive renovations to the duplex. Having difficulty with financing, Allen placed the refurbished duplex on the market without telling her friend and accepted an offer to buy it for $895,000, subject to closing the still pending escrow. When the friend refused to close escrow on the sale to Allen, Allen sued her for breach of contract. The friend filed a cross-complaint against Allen for breach of fiduciary duty and fraud. Although Allen prevailed in this civil case, the State Bar filed a notice of disciplinary charge against her for violating Rule 3-300.
The charge was dismissed by both the hearing judge and the State Bar Court's Review Department. Rule 3-300 does not apply to transactions between a lawyer and a former client unless the transaction is related to the former representation and as a result, the former client has placed continuing trust in his or her former lawyer. The Review Department rejected the State Bar's contention that the parties' former professional relationship and ongoing and long-term personal friendship created an "ongoing aura of inherent influence" by Allen. It also concluded that the State Bar failed to prove that the attorney-client relationship was resurrected while escrow was pending.
Malpractice Claims and Defenses
Legal malpractice claims are subject to a one-year statute of limitations.32 In 2010, appellate courts analyzed theories for tolling this statute in a trio of published opinions.
In Lockton v. O'Rourke,33 the plaintiff filed a legal malpractice claim against the Quinn Emanuel firm 13 months after the plaintiff lost a claim that Quinn Emanuel allegedly failed to take appropriate steps to preserve. In Laclette v. Galindo,34 a real estate agent sued her lawyer two years after she entered into a settlement agreement negotiated by her lawyer who, she alleged, had a conflict. In Jocer Enterprises, Inc. v. Price,35 the plaintiffs replaced their lawyer (Price) with new counsel on July 3, 2006. On July 9, 2007, the plaintiffs filed a legal malpractice action against Price and Price's law firm. In all three cases, the malpractice claims were facially time-barred. In Lockton and Jocer Enterprises, appellate courts affirmed dismissal of the claims (although not because of the statute in Jocer Enterprises). In Laclette, the appellate court reversed a dismissal of the claim.
The different results demonstrate the importance of client engagement and disengagement letters. In Lockton, the plaintiff argued that the statute of limitations against Quinn Emanuel should have been tolled under Code of Civil Procedure Section 340.6(a)(2) because Quinn Emanuel continued to represent the plaintiff during the 13-month period between the loss of his claim and the commencement of his malpractice claim. The court disagreed because Quinn Emanuel expressly provided in its engagement letter that its representation excluded providing services to the client concerning the client's other claim--a purported malpractice claim against another major law firm. Lockton illustrates that a carefully crafted engagement letter can limit a lawyer's malpractice exposure.
In Laclette,36 the lawyer argued that his representation ended on January 25, 2005, when he finalized a settlement on behalf of his two clients--a real estate agent and her employer. He did not speak with the agent for two years thereafter. The lawyer neglected, however, to send a disengagement letter. The settlement required the agent to pay $175,000 in monthly installments of $3,750 to a disgruntled home purchaser. After two years of making payments, the agent sued her lawyer, claiming that he improperly undertook to represent her and her employer notwithstanding a conflict of interest between them. The Second District Court of Appeal reversed summary judgment for the lawyer:
[W]e cannot say as a matter of law that [the agent] could not reasonably expect [her lawyer] to represent her in the event of issues arising concerning the performance of the settlement. We reject [the lawyer's] theory that the two-year hiatus, when no legal services were required of [the lawyer] with respect to the settlement agreement, had the effect of implicitly terminating [the lawyer's] representation of [the agent].37
A representation ends when the client actually has or reasonably should have no expectation that the attorney will provide further legal services.38 A disengagement letter or notice of withdrawal would have made a difference.
In Jocer Enterprises,39 the Second District Court of Appeal concluded that the plaintiff's legal malpractice claim against attorney Price--filed a year and six days after Price was replaced--was tolled by Code of Civil Procedure Section 340.6(a)(4) and therefore was not time-barred. Section 340.6(a)(4) tolls a malpractice claim while "[t]he plaintiff is under a legal or physical disability which restricts the plaintiff's ability to commence legal action." The plaintiff had no legal or physical disability. Nevertheless, the court reasoned that the legislature intended Section 340.6(a)(4) to encompass the general tolling provisions codified in Chapter 4, Title 2, Part 2 of the Code of Civil Procedure40--including tolling when a defendant is absent from the state.41 Price was outside California during the year preceding the filing of the claim. Therefore, the claim was tolled. The court remanded the case with instructions to allow the plaintiff an opportunity to amend its malpractice claim against Price.
Conspiring with a Client
In Favila v. Katten Muchin Rosenman LLP,42 the Second District Court of Appeal construed Code of Civil Procedure Section 1714.10, which requires a showing by the plaintiff and the court's permission before a lawyer can be sued for conspiring with his client. Although the estate of the founder of Motion Graphix, a photographic and imaging technology company, was the majority shareholder after his death, the minority owner, Raleigh Souther, sold Motion Graphix's assets for $5,000 to a new corporation of which he was the sole shareholder, officer, and director. He did so by misrepresenting that a majority of the shareholders had voted to sell and also dissolving the old company. Motion Graphix was represented in the sale and dissolution by its corporate counsel, Katten Muchin, which also formed Souther's new company.
In a smoking gun e-mail to a Katten Muchin lawyer, Souther predicted he would be sued but urged the firm to complete the shady transaction quickly. Asserting the true value of the intellectual property transferred to the new company was $8 to $12 million, the founder's estate sued Souther and the new company for conversion, breach of fiduciary duty, and fraud and petitioned for leave to sue two Katten Muchin lawyers and their law firm for conspiracy under Section 1714.10.
The superior court denied the petition, ruling the estate had not met its burden under Section 1714.10(a) to establish a reasonable probability that it would prevail against the lawyers since "[p]eople cc lawyers with emails all the time." It also held the estate had not pleaded either of the two exceptions to the statute under Section 1714.10(c): 1) the attorneys had an independent legal duty to the plaintiff, or 2) the acts of the attorneys went beyond the performance of a professional duty to their client and involved a conspiracy to violate a legal duty in furtherance of the attorneys' financial gain. Separately, the superior court dismissed a derivative malpractice action against the lawyers brought on behalf of Motion Graphix by the estate, reasoning the estate lacked standing because Motion Graphix was dissolved. Even if the estate had standing, the suit was improper because outside counsel could not defend themselves unless the holder of the attorney-client privilege agreed to waive it, citing McDermott, Will & Emery v. Superior Court.43 According to the court, Souther's new company held the privilege, having acquired it along with the other Motion Graphix assets.
The Second District Court of Appeal reversed, noting that developments in the law regarding Section 1714.10 had rendered its gatekeeping function "practically meaningless."44 Since an attorney has an independent duty not to defraud individuals engaged in transactions with the attorney's client, the plaintiff need not demonstrate a probability of prevailing on the merits under Section 1714.10(a). The amended complaint was "minimally adequate" to plead conspiracy to commit fraud because it alleged that the lawyers knew the estate was still the majority owner of Motion Graphix and that Souther's misrepresentations were made to induce the estate not to block the sale.45 The court discounted the fact that one lawyer had left Katten before express misrepresentations were made and the other Katten lawyer was not involved at the outset of the alleged fraudulent scheme, because everyone who enters into a common design is deemed a party to every act previously or subsequently done by the others.46
Acknowledging it was a case of first impression, the court of appeal also held that the estate had standing to maintain a derivative action for Motion Graphix because a dissolved corporation can prosecute actions while winding up its affairs, and a shareholder's interest does not abruptly end upon dissolution.47 It disagreed that the new corporation had acquired Motion Graphix's attorney-client privilege because a sale of the corporation's assets generally does not transfer the privilege.48 Because California law does not permit judicially created exceptions to the attorney-client privilege, the court remanded the case for a determination whether the privilege had been waived or if the crime-fraud exception applied.49
Approved as to Form and Substance
As a matter of first impression, the Second District Court of Appeal concluded in Freedman v. Brutzkus50 that an attorney's signature approving a contract "as to form and content" does not constitute an actionable representation to an opposing party's attorney. Attorneys Freedman and Brutzkus represented opposing parties in negotiations over a license agreement. Both attorneys signed the final license agreement under the recital "Approved as to form and content."
After many subsequent unhappy events, Freedman sued Brutzkus, claiming that Brutzkus's representation that he "approved" the license agreement "as to form and content" was a lie. The superior court sustained Brutzkus's demurrer to Freedman's complaint. The Second District Court of Appeal affirmed:
We conclude that the only reasonable meaning to be given to a recital that counsel approves the agreement as to form and content, is that the attorney, in so stating, asserts that he or she is the attorney for his or her particular party, and that the document is in the proper form and embodies the deal that was made between the parties.51
Brutzkus, therefore, made no misrepresentation to support the fraud claims.
Code of Civil Procedure Section 425.16, the anti-SLAPP statute, provides lawyers and law firms with a powerful shield against claims of wrongdoing by persons other than former clients.52 If a defendant establishes that a claim is based on protected "petitioning activity," which includes written and oral statements made in connection with judicial proceedings, Section 425.16 requires the court to strike the claim unless the plaintiff can establish a likelihood of success on the merits by a reasonable probability. A plaintiff often cannot do this because of the litigation privilege.53 With certain exceptions, the prevailing defendant is entitled to recover attorney's fees and costs.
In two cases last year--Seltzer v. Barnes54 and Coulter v. Murrell55--courts ordered the dismissal of claims alleging that lawyers made false statements during settlement negotiations in prior litigation. In Seltzer, the plaintiff alleged that her attorney colluded with her insurance carrier during settlement negotiations in a prior case. The First District Court of Appeal reversed an order denying the defendant attorney's special motion to strike the plaintiff's claims alleging fraud and intentional infliction of emotional distress. Case law has established that negotiations to settle pending litigation qualify as protected petitioning activity.56 Moreover, the plaintiff could not establish by a reasonable probability that she would succeed on the merits because the litigation privilege protects any "publication or broadcast" made in a judicial proceeding. Thus, the plaintiff's claims should have been dismissed.
Similarly, in Coulter, the U.S. District Court for the Southern District of California, invoking the anti-SLAPP statute, dismissed fraud and conspiracy claims against a lawyer who allegedly lied about facts to an opposing party to induce him to settle a trust dispute on terms that he subsequently regretted.
The anti-SLAPP statute has an exemption for commercial speech57 that the California Supreme Court analyzed in Simpson Strong-Tie Company, Inc. v. Gore.58 Attorney Gore ran a newspaper advertisement inviting wood deck owners whose decks were built with certain fasteners and connectors manufactured by Simpson Strong-Tie to "call if you would like an attorney to investigate whether you have a potential claim" because "you may have certain legal rights and be entitled to monetary compensation...." After Gore refused a demand to pull the advertisement, Simpson Strong-Tie sued him for defamation, trade libel, false advertising, and unfair business practices. Gore filed a special anti-SLAPP motion to dismiss, which the superior court granted and the court of appeal affirmed. The supreme court granted review to resolve a split among the courts of appeal over which party bears the burden of proving or disproving the commercial speech exemption and to decide the applicability of the exemption to Gore's advertisement.
The supreme court concluded that a plaintiff seeking to rely on the commercial speech exemption bears the burden of proving it. Affirming the order granting Gore's special motion to dismiss, the court held that the commercial speech exemption applies to statements about "a business competitor's business operations, goods or services...."59 Gore's advertisement did not qualify as commercial speech because Gore and Simpson Strong-Tie are not competitors.
In Franklin Mint Company v. Manatt, Phelps & Phillips LLP,60 a malicious prosecution lawsuit, the Second District Court of Appeal reversed judgment in favor of the Manatt law firm and attorney Mark S. Lee, and the supreme court declined review, permitting the suit to proceed. The case arose out of a federal lawsuit for trademark infringement and related claims filed in 1998 by Manatt on behalf of the estate of Diana, Princess of Wales, and her Memorial Fund against Franklin Mint and its principals, Stewart and Lynda Resnick, relating to Franklin Mint's use of Diana's name and image in the sale of commemorative plates and dolls. The complaint accused Franklin Mint of falsely advertising that proceeds would be donated to charity and characterized the defendants as "vultures feeding on the dead." After one federal judge denied a motion to dismiss claims for false advertising and trademark dilution, a second judge granted Franklin Mint's summary judgment motion and awarded attorney's fees under the Lanham Act, finding the estate's claims "groundless and unreasonable."61
In 2002, Franklin Mint sued Manatt and Lee in state court for malicious prosecution. The court denied Manatt's summary judgment motion, and the case was tried before a different superior court judge who directed a verdict for the lawyers. According to the judge, "[I]t is overwhelmingly clear that Mr. Lee had probable cause to bring his action and...had he failed to file a cause of action, one would have had a serious question of whether or not he committed malpractice."62
In a 2-1 decision, the Second District Court of Appeal reversed, holding that "no reasonable attorney" could find tenable the claims for false advertising or trademark dilution.63 This was surprising, since a federal judge had denied Franklin Mint's motion to dismiss on the ground the underlying complaint failed to state a claim and a superior court judge had directed the verdict from which Franklin Mint appealed.
laintiff must prove the underlying action was terminated in its favor, prosecuted without probable cause, and initiated with malice.64 As the supreme court held in the seminal case Sheldon Appel Company v. Albert & Oliker, a claim lacks probable cause "only if 'any reasonable attorney would agree that the [claim] is totally and completely without merit.'"65 A claim need not be meritorious to be legally tenable.66 In reversing the judgment, the majority's opinion put the burden on Manatt to prove its claims, weighed the conflicting evidence, and disputed the lawyers' efforts to extend the law, though it acknowledged there was no previous case like the underlying case.
In dissent, Justice Richard M. Mosk rejected Franklin Mint's attempt to shift the burden of proof to Manatt and concluded that the malicious prosecution plaintiff had failed to carry its burden of proving that Manatt's claims were legally or factually untenable. First, the federal court's denial of the Franklin Mint's motion to dismiss established the legal tenability of the claims under Swat-Fame, Inc. v. Goldstein.67 Second, Franklin Mint failed to prove the claims were factually untenable because it did not introduce into evidence the record from the underlying case.68
Justice Mosk traced the history of malicious prosecution as a disfavored tort since it deters citizens from resorting to the courts to protect their rights and chills the zeal and creativity of lawyers.69 Lamenting the "diminishing appreciation by the judiciary for the increasing hazards and pitfalls faced by those in private legal practice," he expressed sympathy for any party that is sued and prevails--even as he noted that Franklin Mint had already recovered its attorney's fees. Nevertheless, Justice Mosk added, "That does not mean the lawyers who represented the losing party should be fair game."70
Vindication of Substantial Injustice
Usually the foolish, dishonest, and venal are the ones who provide ethics lessons by their negative example, but a case in which a lawyer persisted, against obstruction and indifference, in a nine-year quest to clear her name after being held in contempt is also instructive. In 2001, a court granted the defendant's motion to strike the complaint in Moore v. Kaufman71 under the anti-SLAPP statute. The defendant's motion asked for attorney's fees as sanctions against both the plaintiff and her attorney, Frances Diaz, though Code of Civil Procedure Section 425.16 does not authorize an award of attorney's fees against a party's attorney, and the defendant offered no authority to support the award. In September 2001, the court signed a judgment prepared by the defendant that awarded fees and costs against both the plaintiff and Diaz, leaving the amounts blank. The plaintiff appealed, but Diaz did not.
The defendant filed a motion for attorney's fees and costs of $41,000 against the plaintiff alone. In a January 2002 minute order, the court granted the motion without specifying that the award was only against the plaintiff and directed the defendant to prepare a formal order. However, the defendant's lawyer never complied and refused Diaz's requests for a formal order or for a stipulation to correct the judgment so it would state the attorney's fees award was against the plaintiff only.72 In June 2002, the court denied Diaz's ex parte application to correct the judgment nunc pro tunc, admitting it "did not have a whole lot of recollection" about the matter. Diaz filed a noticed motion to correct the judgment, but this, too, was denied in January 2003 on the ground that no error was committed in the underlying matter. This conclusion was based on an incomplete exhibit from the defendant, who falsely implied that the court had been presented with authority to support the award of fees against the lawyer. In April 2004, the defendant filed a new motion for attorney's fees incurred to enforce the judgment as well as accrued interest. The court ordered Diaz to pay $131,635--more than three times the original award.73
In September 2005, Diaz appeared for a judgment debtor exam and refused to answer questions on the ground the September 2001 judgment was "void." In February 2006, the court ordered Diaz to show cause why she should not be judged in contempt. The court held a contempt trial in May 2006 and warned it would impose criminal sanctions unless Diaz agreed to submit to questioning. Diaz refused and was found in contempt and sentenced to jail until she agreed to answer questions. The court of appeal granted an emergency stay, and after several more years of briefing, Diaz was permitted to file a writ petition collaterally attacking the September 2001 judgment as a defense to the order of contempt.74
Because the anti-SLAPP statute does not authorize attorney's fees against a party's lawyer, the court of appeal at long last held that the September 2001 judgment as well as the resulting order requiring Diaz to answer questions at her debtor exam were void. The court refused to adhere to an earlier ruling that Diaz had waived her attack on the judgment, explaining that were it to do so, "we would be deliberately shutting our eyes to a manifest misapplication of existing principles that results in substantial injustice."75
Business and Professions Code Section 6147 requires contingent fee agreements (except for those in medical malpractice actions) to be in writing, signed by both attorney and client. Also, the agreements must contain various specified elements, including a statement that "the fee is not set by law but is negotiable between attorney and client."76 An agreement that fails to comply with all of the statutory requirements is void. Although contingent fee agreements are generally assumed to more likely arise in litigation, certain transactional matters may also involve contingent fee agreements subject to Section 6147,77 as demonstrated by the Second District Court of Appeal in Arnall v. Superior Court.78
In Arnall, a tax attorney entered into two service agreements to provide tax advice to clients for a fixed monthly stipend plus a success fee of 2 percent of specified reductions in "adverse economic impact" and other "economic savings." The agreements did not contain a statement that "the fee is not set by law but is negotiable between attorney and client," as set forth in Section 6147(a)(4). The tax lawyer sued the clients for compensation under the service agreements. The court of appeal, issuing a writ of mandate ordering the trial court to reverse its order denying the clients' summary adjudication motion, concluded that the agreements were void for failure to comply with Section 6147(a)(4).
In Cotchett, Pitre & McCarthy v. Universal Paragon Corporation,79 the First District Court of Appeal had occasion to analyze Rule 4-200(A) of the Rules of Professional Conduct, which makes it an ethical violation for a member to charge an unconscionable fee. The court affirmed an order confirming a contingent fee award by a JAMS arbitrator to the Cotchett firm. The case involved a client of the Cotchett firm, UPC, which owned a parcel of land earmarked for development. UPC retained the Cotchett firm to represent it in negotiations and litigation designed to persuade the owner of an adjacent parcel to compensate UPC for damages resulting from environmental problems and to sell its parcel to UPC. Represented by separate counsel, UPC and the Cotchett firm entered into a carefully negotiated written retainer agreement providing that if settlement involved UPC's purchase of the adjacent parcel, the Cotchett firm would be paid, among other things, 16 percent of the greater of the fair market value of the property or the total damages as contained in UPC's most recent damages assessment made for settlement purposes.80 UPC acquired the land in settlement, as well as a $6 million payment. UPC argued that the property, which needed extensive remediation, was worth only $1.8 million. It also argued that the Cotchett firm's fees, based on hourly rates or a quantum meruit theory, would have been between $1.081 and $2.162 million.
Despite UPC's arguments, the arbitrator awarded the Cotchett firm $7.554 million in fees. In doing so, she relied on an internal UPC communication claiming the property had a fair market value of $18.45 million and valuing its damage claim at $50 million. The trial court confirmed the arbitration award, and the court of appeal affirmed.
The appellate court concluded that UPC failed to demonstrate that the fee was unconscionable: "This was a private business transaction between equally matched parties, pure and simple." Moreover, according to the court, "That the fee was based on UPC's estimate of the actual damages rather than the fair market value of the property does not render the fee unconscionable when it was within UPC's power to control the estimate." The fee was 30 percent of $24.45 million--the value of UPC's settlement, according to the arbitrator's finding--which is "well within the range of reasonable contingency fees."81
In two appellate opinions--Plummer v. Day Eisenberg, LLP82 and Olsen v. Harbison83--lawyers who were forced out of cases prior to settlement fought over the division of contingent fees they had negotiated. In both cases, the clients consented to agreements by their lawyers to split their contingent fee, as required by Rule 2-200 of the Rules of Professional Conduct. In Plummer, the Fourth District Court of Appeal concluded that the plaintiff-attorney's claims should have survived the defendant-attorneys' summary judgment motion. In Olsen, the Third District Court of Appeal concluded that the plaintiff-attorney's claims were properly dismissed on the defendant-attorney's demurrer and subsequent motions. What was the reason for the different results?
In Plummer, the client also gave attorney Plummer a lien against any settlement proceeds to secure the payment of his fee. After about a year, cocounsel allegedly squeezed Plummer out of the case. Cocounsel then associated in new counsel, the Day Eisenberg firm. Ultimately, the underlying case settled for $1 million. The settlement check included attorney Plummer as a payee, but the bank negotiated the check without his signature. Having received none of his fee, Plummer sued, among others, Day Eisenberg for conversion and interference. The trial court granted summary judgment for Day Eisenberg, but the Fourth District reversed. The court rejected Day Eisenberg's argument that Plummer's lien was invalid pursuant to Rule 3-300 of the Rules of Professional Conduct. A charging lien created in a contingency fee agreement does not create an adverse interest within the meaning of Rule 3-300.84
In Olsen, attorney Olsen associated attorney Harbison into a contingent fee case on behalf of a client injured on a golf course. The client then fired Olsen but continued to engage Harbison, who ultimately settled the client's case for $775,000. Olsen received none of the fee. The Third District affirmed judgment for Harbison. While Olsen might have a quantum meruit claim against the client, he had no such claim against Harbison because Olsen performed services for the client, not for Harbison. The litigation privilege precluded Olsen's claims for fraud and interference based on allegedly disparaging statements that Harbison made to the client about Olsen. In the end, Olsen's breach of contract claim lacked merit:
[O]nce [the client] fired [Olsen] as her attorney, the contract between them ceased to exist. When the [client-Olsen] contract ceased to exist, the fee-sharing agreement between [Olsen] and [Harbison], premised on that agreement, also ceased to exist. There was no viable contract on which to base a breach of contract claim....85
Revision of the Rules of Professional Conduct
The State Bar's Board of Governors approved 67 new rules of professional conduct after a nine-year effort by the Commission for the Revision of the Rules of Professional Conduct. The rules will go into effect after they are approved by the California Supreme Court.86