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Los Angeles Lawyer
The Magazine of the Los Angeles County Bar Association
April 2003
Vol. 26, No. 2

MCLE Article: 2002 Ethics Roundup

Issues of loyalty and confidentiality continue to dominate developments in legal ethics

By John W. Amberg and Jon L. Rewinski

John W. Amberg is a partner in the Santa Monica office of Bryan Cave LLP and Jon L. Rewinski is a shareholder in the Los Angeles office of Heller Ehrman White & McAuliffe LLP. Amberg is a member and former chair of the Association’s Professional Responsibility and Ethics Committee, and Rewinski is the current chair.

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

Last year, conflicting pressures from within California and outside the state buffeted the field of legal ethics for California lawyers. On the national stage, responding to the public outcry over corporate malfeasance, policymakers sought to enlist lawyers in the enforcement process by making them blow the whistle on their clients. Congress passed the Sarbanes-Oxley Act of 2002, which required the Securities and Exchange Commission to propose regulations imposing new duties on lawyers when they are faced with client wrongdoing. The American Bar Association proposed similar changes to the Model Rules of Professional Conduct. Lawyers and bar groups from throughout the country, including the Los Angeles County Bar Association, have warned that such regulations would alter the attorney-client relationship and threaten confidentiality and trust.

In California, the response by the state supreme court and the governor to recent scandals was to reaffirm the lawyer’s duty to counsel his or her client to avoid wrongdoing while still preserving the confidentiality that makes such advice possible. The supreme court rejected the State Bar’s proposed amendment to Rule 3-600 of the Rules of Professional Conduct that would have provided new protection to whistle-blowing attorneys. The court’s rationale was that the amendment was in conflict with Business and Professions Code Section 6068(e), which requires an attorney “[t]o maintain inviolate the confidence, and at every peril to himself or herself to preserve the secrets, of his or her client.” When the state Assembly tried to amend the law, Governor Gray Davis vetoed the legislation, saying that while it was well-intended, the proposed law would erode the relationship that is intended to foster candor between the attorney and client.

Cases decided by California courts last year also reflected this tension between a strict construction of an attorney’s ethical duties and a more pragmatic response to the modern realities of practice. A more long-range view will be provided by the State Bar’s Commission for the Revision of the Rules of Professional Conduct, which held public hearings around California as it proceeded with its multiyear task.

Duty of Loyalty
The two paramount duties owed by a lawyer to a client are the duty of loyalty and the duty of confidentiality. The duty of loyalty was given a ringing affirmation by the Second District Court of Appeal in American Airlines, Inc. v. Shepard, Mullin, Richter & Hampton.1 The background was a federal lawsuit by ADO Finance A.G. against McDonnell Douglas Corporation over the payload capacity and range of the MD-11 aircraft. Gregory A. Long, a partner in the Shepard, Mullin law firm, was retained by American Airlines to review confidential American-related documents to be produced by McDonnell Douglas in response to an ADO document request, and to oppose their production if necessary. The airline had an interest in protecting the reputation of the airplanes it was flying and its confidential information. After the document review, the airline also asked the partner to respond to a threatened subpoena of American by ADO. Simultaneously, ADO’s lawyers asked him to appear as a witness for ADO under Rule 30(b)(6) of the Federal Rules of Civil Procedure. ADO’s lawyers made this request of him because ADO had no employee who was as knowledgeable as Long. American objected, but after consulting his law firm’s ethics committee, the partner wrote his client that his work for the airline was completed, and he would accept the ADO assignment. During the deposition, the partner refused to answer questions relating to his work for American, and a special master later ruled he was not a proper Rule 30(b)(6) witness.

American Airlines successfully sued Long and Shepard, Mullin for breach of fiduciary duty, and the court of appeal affirmed. On appeal, the partner and the law firm argued that Rule 3-310(C) of the Rules of Professional Conduct, which governs conflicts of interest, did not apply because the partner was acting as a witness for ADO and not as its counsel. However, the court of appeal held that Rule 3-310(C) applied because as ADO’s designated agent, the partner owed a fiduciary duty to answer the deposition questions to the best of his ability, which conflicted with his fiduciary duty to preserve American’s confidences.2 Furthermore, under the “hot potato rule,” the lawyer could not avoid breaching his duty of loyalty by dropping his present client to accept the new assignment.3 The court of appeal held that the partner’s characterization of his relationship with American as over was disingenuous and in conscious disregard of the client’s rights.4

Long and Shepard, Mullin also argued that Rule 3-310(E) of the Rules of Professional Conduct, which prohibits the use of confidential information against a former client, did not apply because as a nonparty, American Airlines was not adverse to ADO. However, a former client need not be a party to the litigation for a conflict to arise, and the court of appeal noted that American had retained the partner to resist ADO’s discovery and avoid public disparagement of the aircraft.5 Finally, the lawyers argued that even if the partner possessed material confidential information from his representation of American, there was no danger of disclosure because ADO had agreed he would not be required to disclose confidential information obtained from American and he was in sole control of any disclosure. The court of appeal “categorically reject[ed]” this argument, which it said was “anathema to the Rules of Professional Conduct.”6 The court explained:
Long’s promise to maintain the confidences of American is entirely dependent on his self-assumed position as arbiter of his own fidelity and what is and is not a privileged communication. That is not a permissible avoidance of his fiduciary duty.…Clients always have to trust attorneys to maintain confidences imparted during the course of the attorney-client relationship, but they are not compelled to accept the attorney’s invitation to “trust me” when he undertakes to align himself with a new client whose interests pose a conflict of interest.7
Both the duty of loyalty and the duty of confidentiality were considered in City National Bank v. Adams.8 An attorney who prepared an opinion letter for City National Bank concerning the effect of a restrictive legend on stock pledged as collateral by a borrower was disqualified from representing the same borrower in a subsequent lawsuit by CNB against the borrower. The Second District Court of Appeal affirmed. Quoting a 1932 California Supreme Court case, Wutchumna Water Company v. Bailey,9 the appellate court noted:
[A]n attorney is forbidden to do either of two things after severing his relationship with a former client. He may not do anything that will injuriously affect his former client in any matter in which he formerly represented him nor may he at any time use against his former client knowledge or information acquired by virtue of the previous relationship.10

Therefore, a lawyer who accepts employment in violation of these rules is subject to disqualification.

The trial court found that the prior representation concerned the same matter as the subsequent representation, and the court of appeal agreed.11 Though the duty of loyalty furnished a sufficient basis for disqualification, the court of appeal also analyzed the lawyer’s duty of confidentiality under Rule 3-310(E). It held that when a substantial relationship exists between a former representation and a current representation, courts will “conclusively presume” that confidences material to the current dispute were exchanged between the lawyer and the former client. In the absence of informed written consent from the clients, the need to protect the first client’s confidential information required the lawyer to be disqualified.12 A pragmatic exception for those situations when a lawyer can show he or she had no opportunity to obtain confidential information13 was not available in this case because the lawyer’s clients were on opposite sides in the same matter, and the matter involved the lawyer’s work for the former client.14

Duty of Confidentiality
Last year courts of appeal reversed orders disqualifying lawyers in three published cases that considered the duty of confidentiality. In DCH Health Services Corporation v. Waite,15 two individual plaintiffs associated with plaintiff Downey Community Hospital Foundation moved to disqualify the defendant’s lawyer because he was married to Ana Luna, a former director of the foundation who also happened to be a Los Angeles Superior Court judge. Despite the lawyer’s denial that he had received confidential information from his wife, the trial court concluded that the “unique nature of the marital relationship” created an appearance of impropriety that only disqualification would cure. The Fourth District Court of Appeal reversed, holding that the individual plaintiffs lacked standing because they were never in a confidential relationship with the former director, and that neither the marital relationship nor the desire to avoid an “appearance of impropriety” was sufficient to disqualify the lawyer.16 The appellate court refused to decide the issue in a rote fashion based merely on the relationship between the lawyers. Indeed, the court offered an admonishment:
Rather, the court should start with the presumption that, unless proven otherwise, lawyers will behave in an ethical manner. Society has entrusted lawyers with confidences, and we should not assume that lawyers will violate these confidences when involved in particular relationships.17

The doctrine of imputed knowledge was the subject of another Fourth District Court of Appeal case, Frazier v. Superior Court,18 which involved Cumis counsel for an insured. An insurance company for the defendant retained counsel to represent its interests and also hired an independent lawyer to represent its insured as Cumis counsel.19 When the Cumis counsel was unavailable, the insurer’s lawyer covered some depositions in his place. Subsequently, the insurer’s law firm discovered it had a conflict of interest because the plaintiffs had contacted another lawyer in the firm about possible representation before filing suit, and it withdrew. The plaintiff moved to disqualify the Cumis counsel on the ground that there was a presumption that the insurer’s lawyers had divulged confidential information to the Cumis counsel. The trial court granted the motion, but the court of appeal vacated the disqualification.

The appellate court held that to affirm the lower court’s order, it would have to impute knowledge of the confidential information not only from one member of the insurer’s counsel’s firm to all the other lawyers in the firm but also from that firm to an entirely different firm, and there was no legal authority for such double imputation.20

Another attorney disqualification was reversed by the Third District Court of Appeal in McPhearson v. The Michaels Company,21 an employment discrimination case. The plaintiff’s lawyer had brought discrimination claims against the same employer in an earlier suit on behalf of another employee. When the first suit was settled, the settlement agreement contained a confidentiality clause stating that the plaintiff would keep the terms of the settlement agreement secret and would not disclose any information regarding the agreement to any past, present, or future employee. Later the lawyer sought to introduce the testimony of the first employee into the McPhearson case, and the employer moved to disqualify the lawyer on the ground that the settlement agreement created a conflict of interest. However, the McPhearson court noted that the confidentiality clause did not prevent the first client from testifying as a percipient witness, and that since both clients had executed informed waivers of the conflict, the only party seeking disqualification was a litigation adversary who was not personally interested in the alleged conflict.22 Expressing skepticism, the appellate court directed the trial court to vacate the order and reinstate the lawyer.

A lawyer is subject to automatic disqualification if his or her representation of a client conflicts with the duty to preserve the confidences of an adverse former client, if the information is material to the new representation and both clients do not consent.23 But what if the lawyer never represented the opposing party and is exposed to its confidential information? Mere possession of an adversary’s confidential information does not automatically disqualify the lawyer.

The issue was considered in Neal v. Health Net, Inc.,24 a suit for wrongful discharge based on alleged race and gender discrimination by Health Net’s former human resources manager. During the pendency of the suit, the plaintiff’s lawyer agreed to represent another former employee of the defendant, a legal secretary who had been fired after she reviewed the company’s litigation file on the plaintiff that contained privileged communications and reports from outside counsel. The secretary claimed she had looked in the file only to obtain the attorney’s number, but computer records showed that she had accessed the file for two and one-half hours. The lawyer denied receiving any confidential information from the secretary. The defendant had no way to dispute these denials, and there was no direct evidence that its confidential information was shared with the plaintiff’s lawyer, but the trial court concluded that there was a reasonable probability that the secretary had shared confidential information with the lawyer, and disqualified him.

The court of appeal reversed. It reasoned that even if a reasonable inference could be made that confidential information was disclosed, disqualification was inappropriate for mere exposure to such information, especially if the disclosure was in the course of a communication with a new client.25 Disqualification would not prevent the client from disclosing the information to a new attorney, and it would unfairly penalize the first client by depriving her of her chosen counsel.26

Are lawyers permitted, or even required, to be whistle-blowers regarding their clients? Not yet. But the legislative rumblings inside and outside of California during 2002 suggest that the day may soon be coming. For more than a century, the confidentiality of communications between attorney and client has been the bedrock upon which the relationship between the two has been built. Implicit is the belief that an attorney can best represent his or her client only if the client candidly and fully discloses all of the pertinent facts to the attorney. Recognizing the importance of this principle, every jurisdiction extends evidentiary protections to attorney-client communications and imposes ethical rules requiring attorneys to maintain client information in confidence.

Nowhere are the ethical restrictions more stringent than in California, as evidenced by Business and Professions Code Section 6068(e), which requires attorneys to maintain their clients’ confidences and secrets. Section 6068(e) has no exceptions. Thus, under California’s ethical requirements—as opposed to those in virtually every other state—if a client discloses in confidence to his attorney that he intends to kill his spouse, the attorney may not warn the spouse or law enforcement.27 Rather, in California, the attorney should advise the client against wrongful conduct and, if the client persists, withdraw from the engagement without disclosing confidential information.

In 2001, in the wake of the public allegations by Insurance Department attorney Cindy Ossias about the activities of former Insurance Commissioner Chuck Quackenbush, Assemblyman Darrell Steinberg introduced Assembly Bill 363, “The Public Agency Attorney Accountability Act.” As modified, AB 363 proposed enactment of a new section, Business and Professions Code Section 6068.1, which essentially would have permitted a government agency attorney to refer a concern over misconduct by the agency or its officials to a higher authority within the agency. If the attorney believed this was futile or was not satisfied with the response, the proposed section would have permitted the government agency attorney to disclose the matter to law enforcement. After further amendments, AB 363 was approved by the state Assembly in 2001 and the state Senate in 2002. Governor Davis vetoed AB 363 on September 30, 2002.
As AB 363 was making its way through the California Legislature, on January 26, 2002, the State Bar proposed to amend Rule 3-600 of the California Rules of Professional Conduct, which describes the duties of an attorney with an organization as a client. Rule 3-600 currently provides that if an attorney representing an organization knows that an agent of the organization is or may be committing a violation of law reasonably imputable to the organization, the attorney must comply with Business and Professions Code Section 6068(e). This means that the attorney may urge that the organization reconsider its action and/or refer the issue to the next higher authority in the organization but may not disclose confidential information to anyone outside of the organization, including law enforcement. The State Bar proposed amending the rule to permit disclosure outside of the organization under certain circumstances. The California Supreme Court rejected the proposed amendment on May 10, 2002, reasoning that “the proposed modifications conflict with [Business and Professions] Code section 6068(e).”28

Thus, attempts to create exceptions to Section 6068(e) were rejected twice in California during 2002. In the meantime, an ABA Task Force on Corporate Responsibility as well as the Securities and Exchange Commission were also looking into the whistle-blowing issue as a result of sensational revelations of alleged corporate wrongdoing at Enron, WorldCom, Adelphia Communications, and Tyco International, among others. As these scandals were unfolding, on July 16, 2002, the ABA Task Force on Corporate Responsibility issued a preliminary report that recommended modifications to the ABA’s Model Rules of Professional Conduct. Although the ABA Model Rules are not binding on members of the California Bar, they are quite influential, particularly in other states.

First, in a manner similar to the California State Bar’s ultimately futile attempts to amend Rule 3-600, the task force recommended that Model Rule 1.13—which, like Rule 3-600, generally defines the ethical duties of attorneys representing an organization, as opposed to an individual—be modified 1) to require an attorney to pursue remedial measures for misconduct by reporting it to higher levels of the corporation, and 2) to clarify that this “up the ladder” disclosure does not constitute a breach of the attorney’s duty not to reveal confidential information without client consent. The proposed modification to Model Rule 1.13 is not likely to face significant opposition in California, unless it is interpreted to require an attorney to make a “noisy withdrawal”—that is, to disclose the reasons for withdrawing from the representation. A noisy withdrawal is inconsistent with Rule 3-700 of the California Rules of Professional Conduct and Business and Professions Code Section 6068(e).

Second, the task force recommended that Model Rule 1.6, which generally delineates the duty of attorneys not to reveal confidential information without client consent, be modified 1) to permit disclosure when the attorney believes that client conduct has resulted in or is reasonably certain to result in substantial injury to the financial interests or property of another, and 2) to require disclosure to prevent felonies or other serious crimes, including violations of the federal securities laws, when such conduct is known to the attorney. The Los Angeles County Bar Association, among others, has opposed this proposed modification as weakening the attorney-client relationship, discouraging clients from candidly discussing the facts with counsel, and impeding an attorney’s ability to advise his or her clients to perform responsibly.29

Third, the task force recommended that Model Rule 1.2(d) (prohibiting an attorney from counseling a client to engage in, or assist a client, in conduct that the attorney knows is criminal or fraudulent), Model Rule 1.13 (defining and delineating the duties imposed on attorneys representing organizations, including duties arising when the attorney knows that an officer, director, employee or other corporate agent is engaged in wrongful conduct), and Model Rule 4.1 (prohibiting an attorney from knowingly making a false statement of fact or law or failing to disclose a material fact when necessary to avoid assisting the client in engaging in a criminal or fraudulent act) be modified to reach beyond actual knowledge to knowledge the attorney reasonably should have. The Association has opposed these changes as well because they would, in effect, turn the attorney into the client’s watchdog and adversary. The Association also fears that if an attorney is sued by a third party, the attorney may be required to disclose confidential information to defend against the allegation that he or she “should have known” of the client’s conduct.30

The task force is expected to finalize its recommendations on modifications to the Model Rules in early 2003.

In the meantime, on July 30, 2002, President George Bush signed the Sarbanes-Oxley Act of 2002,31 which imposed new ethical obligations on attorneys. Specifically, Section 307 required the SEC to prescribe minimum standards of professional conduct for attorneys appearing and practicing before the SEC for any reason regarding the representation of issuers. On November 21, 2002, the SEC issued its proposed new ethical rules.32 The SEC requested public comment on its proposed rules by December 18, 2002, and received a barrage of criticism from lawyers and bar groups, including the Association. Drawing the most fire from these critics were the rules requiring lawyers appearing before the SEC to make a noisy withdrawal under certain circumstances. On January 23, 2003, the SEC adopted its new rules, but in substantially modified form, and extended for another 60 days the comment period on the noisy withdrawal and related provisions.33

For an attorney who has credible evidence of a material violation of the Securities and Exchange Act of 1934, the SEC’s new rules give two options: 1) report the matter to the issuer’s chief legal counsel (or chief legal counsel and CEO), or 2) report the matter to the issuer’s “qualified legal compliance committee,” if the issuer has one.34 Doing nothing is not an option. Under the first option, the attorney is also required to report the matter up the corporate ladder if the issuer’s chief legal counsel (and/or CEO) fail to respond appropriately to the evidence.

The SEC’s new rules also allow an attorney for the issuer to reveal confidential information without the client’s consent to the extent the attorney reasonably believes necessary 1) to prevent the issuer from committing a material violation likely to cause substantial financial injury to the financial interests or property of the issuer or investors, 2) to prevent the issuer from committing an illegal act, or 3) to rectify the consequences of a material violation or illegal act in which the attorney’s services were used.35 Thus the new SEC rules are inconsistent with, and arguably will supersede, California Business and Professions Code Section 6068(e).

Although the new rules will impose additional obligations on attorneys practicing before the SEC, the SEC has made it clear that the new rules do not create a private cause of action.36 Rather, the SEC will have exclusive authority to enforce compliance with the new rules.37 The SEC’s new rules will become effective 180 days after publication in the Federal Register.

Ethics Standards for Arbitrators
New ethical standards for neutral arbitrators in California became effective on July 1, 2002. The standards, 15 in all, appear in the California Rules of Court.38
Among other things, the new regulations require an arbitrator to:
• Decline an appointment if he or she cannot be impartial (Standard 6).
• Disclose information possibly relating to potential biases or conflicts of interest, such as relationships with the parties or attorneys, previous service as an arbitrator for a party or attorney, financial relationships, knowledge of disputed evidentiary facts, and memberships in organizations practicing discrimination (Standard 7).
• Decline future employment from a party or attorney (Standard 10).
• Conduct hearings “fairly, promptly, and diligently and in accordance with the applicable law” (Standard 11).
• Avoid ex parte communications with a party or attorney (Standard 12).
• Refrain from using confidential information or informing a party of the award in advance (Standard 13).
• Disclose in writing to the parties the arbitrator’s compensation (Standard 14).
• Be truthful and accurate in marketing material and refrain from soliciting additional arbitration business during an arbitration (Standard 15).
The new ethics standards have been applauded by consumers and bar groups but criticized by arbitration services as adding costs to the process, creating roadblocks that will make arbitration impractical, exposing arbitration services to lawsuits, and improperly imposing new rules when current rules promulgated by the services adequately address the issue.39
Fee Splitting

The California Supreme Court spoke decisively on the subject of fee-splitting in Chambers v. Kay40 and resolved a conflict created when two courts of appeal issued contrary decisions in 2001.41 Attorneys Chambers and Kay were cocounsel for the plaintiff in a sexual harassment lawsuit brought by Rena Weeks against the law firm Baker & McKenzie. Kay orally promised to pay Chambers a percentage of the attorney’s fees, but after working together, they had a disagreement and Kay removed Chambers from the case. Kay nevertheless confirmed that Chambers would receive the promised percentage in a letter he copied to the client, but neither lawyer obtained the client’s written consent. Following the sizeable verdict, Kay abrogated the agreement, and Chambers sued.

The supreme court held that Chambers was prohibited from sharing in the fee received by Kay because the two attorneys did not comply with Rule 2-200(A)(1) of the Rules of Professional Conduct, which requires full written disclosure of a fee division to the client and the client’s consent in writing. The court disapproved a contrary decision in Sims v. Charness, which had limited Rule 2-200’s application to “pure referrals” in which a lawyer refers a matter to another lawyer but does no work. Looking strictly at the language of the rule, the court held that unless an attorney is a partner, associate, or shareholder with the other lawyer, he or she must comply with the rule.42 No exception is allowed for joint ventures among lawyers.43 Finally, the court affirmed that although Rule 2-200 precluded a claim based on the fee-sharing agreement, Chambers nevertheless could recover in quantum meruit for the reasonable value of his services—but that type of award could not be based on a division of the contingent fee.44

Regulating the Practice of Law
The somewhat musty concept of the unauthorized practice of law was given new life by the California Supreme Court’s 1998 holding in Birbrower, Montalbano, Condon & Frank, P.C. v. Superior Court.45 In Birbrower, a New York law firm could not recover fees for legal services that it performed in California in violation of Business and Professions Code Section 6125, which states that no one may practice law in California unless he or she is an active member of the State Bar. The effects of Birbrower are still being felt. On January 1, 2003, a new law doubled the penalty for the unauthorized practice of law: up to one year in county jail or a $1,000 fine, or both.46

In Gafcon, Inc. v. Ponsor & Associates,47 an insured sued its insurer, Travelers Property Casualty Corporation, and its in-house law firm, which is composed of lawyers who are all employees of Travelers. The insured alleged that the insurance company was engaged in the unauthorized practice of law. The superior court granted summary judgment for Travelers, and the court of appeal affirmed. The plaintiff argued that a corporation may not employ lawyers for customers, and that absent qualification of the company as a certified law corporation under the Business and Professions Code, such practice is barred by Section 6125. However, the appellate court rejected the argument that the insurance company’s employing lawyers to represent insureds constitutes the practice of law because, absent a conflict of interest, an attorney represents the insurer’s own rights and interests as well as those of the insured under the tripartite relationship among the insurer, insured, and insurance defense counsel in California.48 The prohibition against the practice of law by a corporation was intended to avoid interference with the lawyer’s independent judgment and duty of loyalty to the client,49 but this rule is subject to exceptions.50  The Gafcon court found the plaintiff had failed to rebut Travelers’ evidence that it did not control or interfere with its staff lawyer’s professional judgment or restrict the lawyer’s ability to represent the insured. Therefore, the insurer was not engaged in the unauthorized practice of law.51

In recent years, as law firms consolidated and the business of clients expanded across state lines, the legal profession has considered reforms to loosen the traditional limits on multijurisdictional and multidisciplinary practice. Notwithstanding Section 6125’s prohibition on practice by a nonmember of the State Bar, out-of-state attorneys and in-house counsel often perform legal services within California on a limited or temporary basis. In January 2002, the California Supreme Court Advisory Task Force on Multijurisdictional Practice recommended that out-of-state lawyers and in-house counsel be permitted to perform limited services without admission to the State Bar, in return for registration and compliance with certain regulations.52 In August 2002, the ABA House of Delegates adopted similar recommendations offered by the ABA Commission on Multijurisdictional Practice.53 The California Supreme Court appointed a Multijurisdictional Practice Implementation Committee composed of 16 lawyers, judges, and State Bar officials to draft new rules to implement the recommendations of the task force.

A separate report was issued last year by the State Bar Task Force on Multidisciplinary Practice.54 Multidisciplinary practice is a concept in which lawyers deliver legal services in combination with accountants, physicians, scientists, or other specialists, in a manner similar to the operations of the major accounting firms in recent years. Currently, Rule 1-310 of the Rules of Professional Conduct prohibits a lawyer from forming a partnership with a nonlawyer if the activity of the partnership includes the practice of law, and Rule 1-320 prohibits sharing legal fees with a nonlawyer. The multidisciplinary practice task force report acknowledged that permitting multidisciplinary practice would require modification of Rule 1-310 and Rule 1-320, and the subject is still undergoing study. In the wake of the corporate and accounting scandals, however, the public demand for independent auditors and securities analysts whose advice is not compromised by institutional conflicts of interest appears to have quelled the desire for allowing multidisciplinary practice, at least for now.
Attorney Indemnification

In two cases released on June 27, 2002, the California Supreme Court analyzed claims between cocounsel arising from their handling of a mutual client’s matter. In Beck v. Wecht,55 the supreme court imposed a bright-line rule that cocounsel cannot sue one another for breach of fiduciary duty. In Musser v. Provencher,56 the supreme court concluded that, depending on the circumstances of the case, cocounsel may sue one another for indemnification for legal malpractice damages. The attorney’s duty of undivided loyalty to the client and client confidentiality figured prominently in both cases.

In Beck, one attorney sued his cocounsel for breach of fiduciary duty because the cocounsel failed to accept a $6 million settlement offer made in the midst of a jury trial in spite of instructions from the client to do so. The jury returned a defense verdict. The attorney claimed that his cocounsel’s failure to follow the client’s instructions deprived him of a significant contingent fee. The issue before the supreme court was whether cocounsel owe each other a fiduciary duty. The courts of appeal were split on this issue.57

The supreme court concluded that it would be contrary to public policy to countenance actions based on the theory that cocounsel have a fiduciary duty to protect one another’s prospective interests in a contingency fee. Such a duty between cocounsel would increase the exposure of attorneys to liability and place them in an untenable position of divided loyalties to their clients and associated counsel.58 Litigation between attorneys could have an adverse impact on attorney-client relationships and “[p]ublic confidence in the legal system may be eroded by the spectacle of lawyers squabbling over the could-have-beens of a concluded lawsuit, even when the client had indicated no dissatisfaction with the outcome.”59 A client’s right of undivided loyalty from his or her attorney must be protected, even when the result of that right is the denial of an attorney’s cause of action against another attorney.60 The supreme court concluded that as a “bright-line rule,” there is no fiduciary duty between cocounsel.61

In Musser, an attorney represented a spouse in divorce proceedings. When the other spouse filed for bankruptcy, the attorney arranged for a bankruptcy specialist to obtain relief from the automatic stay so that the attorney could pursue a petition for spousal and child support. The bankruptcy specialist incorrectly advised the attorney that she could pursue the support petition without relief from the automatic stay. The attorney did so. The bankrupt spouse successfully reversed the support awards for violating the automatic stay. Thereafter, the attorney’s client settled for less than the original support award when faced with the possibility of punitive damages for violating the automatic stay.

The client sued the attorney for legal malpractice, and the client’s ex-spouse also sued the attorney for violating the bankruptcy stay. The attorney filed a cross-complaint against the bankruptcy specialist for indemnification. The trial court entered judgment for the bankruptcy specialist, but the court of appeal reversed, holding that the attorney was not barred from seeking indemnification from the bankruptcy specialist. The supreme court affirmed.

The supreme court noted that except for one much criticized exception, courts have uniformly barred indemnification claims between predecessor and successor counsel based primarily on two important policy considerations: avoiding conflicts of interest between attorneys and their clients and protecting client confidentiality.62 The Musser case, however, involved an indemnification claim between cocounsel, not between predecessor and successor counsel. The supreme court found this context different. As a result, the supreme court concluded that courts, using the same policy considerations that underlie indemnification between predecessor and successor counsel, must analyze on a case-by-case basis whether cocounsel can assert claims against each other for indemnification.63

This year, lawyers can expect to see further efforts by lawmakers and government agencies to modify the traditional role of lawyers in ways that may create conflicts with California’s ethics rules. Meanwhile, the California Supreme Court is certain to apply the Rules of Professional Conduct and Business and Professions Code Section 6068(e) strictly as cases come before it concerning such issues as conflicts of interest and quantum meruit recovery by lawyers who fail to get fee agreements in writing. The Commission for the Revision of the Rules of Professional Conduct will continue its work in 2003, and the California Supreme Court’s task force on multijurisdictional practice will unveil its proposals for public comment.

1 American Airlines, Inc. v. Shepard, Mullin, Richter & Hampton, 96 Cal. App. 4th 1017 (2002).
2 William H. Raley v. Superior Court, 149 Cal. App. 3d 1042 (1983).
3 Truck Ins. Exch. v. Fireman’s Fund Ins. Co., 6 Cal. App. 4th 1050 (1992).
4 American Airlines, 96 Cal. App. 4th at 1050.
5 Id. at 1040.
6 Id. at 1039.
7 Id. at 1040.
8 City Nat’l Bank v. Adams, 96 Cal. App. 4th 315 (2002).
9 Wutchumna Water Co. v. Bailey, 216 Cal. 564 (1932).
10 City Nat’l Bank, 96 Cal. App. 4th at 323-24 (quoting Wutchumna Water Co., 216 Cal. at 573-74).
11 Id. at 326-27.
12 Id. at 327 (citing People ex rel. Dep’t of Corps. v. SpeeDee Oil Change Sys., Inc., 20 Cal. 4th 1135, 1146 (1999)).
13 Adams v. Aerojet-General Corp., 86 Cal. App. 4th 1324 (2001).
14 City Nat’l Bank, 96 Cal. App. 4th at 328.
15 DCH Health Servs. Corp. v. Waite, 95 Cal. App. 4th 829 (2002).
16 Id. at 834.
17 Id.
18 Frazier v. Superior Court, 97 Cal. App. 4th 23 (2002).
19 San Diego Navy Fed. Credit Union v. Cumis Ins. Soc’y, Inc., 162 Cal. App. 3d 358 (1984); Civ. Code §2860.
20 Frazier, 97 Cal. App. 4th at 31.
21 McPhearson v. The Michaels Co., 96 Cal. App. 4th 843 (2002).
22 Id. at 851.
23 Cal. Rules of Prof’l Conduct R. 3-310(E).
24 Neal v. Health Net, Inc., 100 Cal. App. 4th 831 (2002).
25 Id. at 843.
26 Id. at 852.
27 The protections afforded client confidence (that is, the loyalty to the client) and client secrets through Business and Professions Code §6068(e) are broader than the evidentiary protections afforded attorney-client communications through Evidence Code §§954 and 955. The evidentiary protections are subject to various exceptions, such as the crime or fraud exception under Evidence Code §956. Because Business and Professions Code §6068(e) has no exceptions, if an attorney called to the stand to testify is asked questions about communications with a client, a judge may order the attorney to disclose the communications because of an evidentiary exception, such as the crime or fraud exception—but pursuant to §6068(e), the attorney is still not permitted to answer and, in fact, may be subjected to disciplinary proceedings if he or she does. See Mark L. Tuft, For Your Eyes Only, Los Angeles Lawyer, Dec. 2002, at 26.
28 See AB 363, Cal 2001-02 Reg. Sess., Res. 4-08-2002, at 1.
29 See Letter from Miriam Aroni Krinsky, President, Los Angeles County Bar Association, and Jon L. Rewinski, Chair, LACBA Professional Responsibility and Ethics Committee, to James H. Cheek, Chair, ABA Task Force on Corporate Responsibility (Oct. 30, 2002) (on file with author Rewinski).
30 Id.
31 15 U.S.C. §§7201 et seq.
32 Release Nos. 33-8150, 34-46868, and IC-25829.
33 17 C.F.R. ch. II, pt. 205 (2003). See SEC Press Release 2003-13 (Jan. 23, 2003).
34 SEC Press Release, supra note 33.
35 Id.
36 Id.
37 Id.
38 Cal. Rules of Ct., Appendix, Div. VI (effective July 1, 2002).
39 See, e.g., William Slate, The Justice-at-a-Price-Guys Take Aim at Arbitration, Los Angeles Times, at B13 (Aug. 13, 2002) (writer is the president of the American Arbitration Association); NASD Dispute Resolution, Inc. v. Judicial Council of Cal., 232 F. Supp. 2d 1055 (N.D. Cal. 2002) (the challenge to the new rules by the NASD and the NYSE); see also Letter from Donald L. Sullivan, President of the San Francisco Trial Lawyers Association, to William Slate, President of the American Arbitration Association, available at http://www.sftla.org/Justiceinmediation.htm (responding to the AAA’s criticism of the rules); SEC Notice to Members 02-68 (Oct. 2002) (requiring registered persons to waive the new rules for NASD and NYSE arbitrations if a customer claimant does so first).
40 Chambers v. Kay, 29 Cal. 4th 142 (2002).
41 Compare Chambers, id., with Sims v. Charness, 86 Cal. App. 4th 884 (2001). See Charlotte E. Costan, Fee-Splitting Headaches, Los Angeles Lawyer, Dec. 2001, at 26.
42 Chambers, 29 Cal. App. 4th at 147.
43 Id. at 151.
44 Id. at 162.
45 Birbrower, Montalbano, Condon & Frank, P.C. v. Superior Court, 17 Cal. 4th 119 (1998).
46 Bus. & Prof. Code §6126.
47 Gafcon, Inc. v. Ponsor & Assocs., 98 Cal. App. 4th 1388 (2002).
48 Id. at 1419-20 (citing State Farm Mut. Auto. Ins. Co. v. Federal Ins. Co., 72 Cal. App. 4th 1422 (1999)).
49 See People v. Merchants Protective Corp., 189 Cal. 531 (1922).
50 State Bar of California, Formal Op. No. 1987-91.
51 Gafcon, 98 Cal. App. 4th at 1415.
52 See California Supreme Court Advisory Task Force on Multijurisdictional Practice, Final Report and Recommendations (Jan. 7, 2002),  click here.
53 See ABA Center for Professional Responsibility, Final Report of the Commission on Multijurisdictional Practice, Client Representation in the 21st Century, click here .
54 See Report and Findings of the State Bar of California Task Force on Multidisciplinary Practice, available at http://www.calbar.org.
55 Beck v. Wecht, 28 Cal. 4th 289 (2002).
56 Musser v. Provencher, 28 Cal. 4th 274, 281 (2002).
57 Compare Pollack v. Lytle, 120 Cal. App. 3d 931 (1981) (holding that a fiduciary duty exists between cocounsel) with Joseph A. Saunders, P.C. v. Weissburg & Aronson, 74 Cal. App. 4th 869 (1999) (holding that a fiduciary duty does not exist between cocounsel).
58 Beck, 28 Cal. 4th at 294 (citing Pollack, 120 Cal. App. 3d at 949 (Johnson dissent)).
59 Id. at 295-96 (citing Mason v. Levy & Van Bourg, 77 Cal. App. 3d 60, 67 (1978)).
60 Id. at 294 (citing Pollack, 120 Cal. App. 3d at 945 (Johnson dissent)).
61 Id. at 298.
62 Musser v. Provencher, 28 Cal. 4th 274, 281 (2002); see also id. at n.3.
63 Id. at 284.

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