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Archive for the ‘California LPL’ Category

Is “But-For” Causation In California Legal Malpractice Cases In Jeopardy?

Posted on: September 18th, 2018

By: Gretchen Carner & Brett Safford

California attorneys sued for fraud and intentional torts, as opposed to negligent legal malpractice, may be subjected to a different causation standard after the California Court of Appeal’s recent opinion in Knutson v. Foster (2018) 25 Cal.App.5th 1075.  The opinion has caused somewhat of a stir.  “But-for” causation and the “case-within-the-case” analysis are concepts used in virtually every lawsuit by a former client against his or her attorney.  It is axiomatic that a plaintiff, to establish a claim against his or her former attorney, must show that but for the conduct of the attorney, plaintiff would have achieved a better result.

Knutson modifies the causation analysis for certain claims against attorneys. Knutson held that the “but-for” standard should not be used when an attorney is sued by his or her former client for fraud and/or intentional breach of fiduciary duty. The Knutson court premised its reversal of the trial court on a supposed distinction between the “but-for” and substantial factor causation tests. In addition, the Knutson court appears to have abandoned the well-established “case-within-the-case analysis.”

In Knutson, Plaintiff Dagny Knutson filed a lawsuit against her former attorney Richard Foster for fraudulent concealment and intentional breach of fiduciary duty.  Knutson’s claims against Foster arose from his handling of her claim for breach of oral contract against USA Swimming.

Knutson, an internationally ranked swimmer in high school, committed to Auburn University on a full athletic scholarship.  She selected Auburn because Paul Yetter, one of its swimming coaches, was considered an expert in the individual medley, Knutson’s specialty event.  However, in March 2010, the head coach of USA Swimming Mark Schubert told Knutson that Yetter was leaving Auburn and advised her to swim professionally instead of attending Auburn or another university.  Schubert then orally promised her that she would receive training at USA Swimming’s “Center for Excellence” in Fullerton, California as well as room, board, tuition, and a stipend.  The agreement was to last through 2016—after the Summer Olympics in Rio de Janeiro.  Notably, the oral agreement did not include “performance markers,” which Knutson would have to meet to retain her benefits.  Knutson accepted the offer and hired a sports agent.  However, only a few months after moving to Fullerton, USA Swimming terminated Schubert’s employment.

At the suggestion of her agent, Knutson hired attorney Foster after she stopped receiving money from USA Swimming.  Yet, Foster did not disclose to Knutson his close personal ties with high-level persons in the aquatics industry or that he had well-established relationships USA Swimming and other swimming organizations.  Foster also did not disclose that he represented Schubert in 2006, or that following Schubert’s termination from USA Swimming in 2010, he refused to represent Schubert in a wrongful termination action because “he did not want to have a negative relationship with USA Swimming in the future.”

Foster, on behalf of his client, Knutson, ultimately reached a settlement with USA Swimming.  The settlement agreement provided tuition from January to December 2012, but between 2013 and 2016, all payments were contingent upon “perform markers,” i.e., Knutson maintaining a top 25 ranking in the world or a top three ranking in the United States.

After learning of Foster’s conflicts of interest, Knutson sued Foster for fraudulent concealment and intentional breach of fiduciary duty.  The jury found in favor of Knutson on both causes of action, but the trial court granted Foster’s motion for new trial on the grounds that Knudson “failed to adduce evidence of causation and that the jury’s award of damages was excessive.” The trial court also denied Foster’s motion on two other grounds.  Both Knutson and Foster filed notices of appeal.

The Court of Appeal reversed, holding that the trial court erroneously applied the “but-for” test for causation instead of the “substantial factor” test.  The Court explained, “Here, the trial court recognized the different standards of causation between legal malpractice claims and fraud claims, but nevertheless erroneously applied the malpractice standard of causation to the fraudulent concealment claim.  Although the court referred to the substantial factor for causation, it used and applied the but for test.”  After identifying Foster’s alleged concealments and breaches of loyalty, the court then concluded that “[a] substantial factor in Knutson’s decision to enter into the settlement agreement was Foster’s fraudulent concealment of the foregoing facts” and breaches of his fiduciary “caused Knutson harm initially by failing to provide her with all the information needed to make an informed decision about entering into the settlement agreement with USA Swimming and failing to ensure that Knutson’s best interests were being protected by Foster during the negotiations.”

The Court’s analysis in Knutson is problematic because it blurs the relationship between the “but-for” test of causation applied in legal malpractice claims and the “substantial factor” test of causation applied in intentional tort claims.  The “but-for” test has long been the appropriate causation standard for legal malpractice claims.  As explained by the California Supreme Court in Viner v. Sweet (2003) 30 Cal.4th 1232, “In a litigation malpractice action, the plaintiff must establish that but for the alleged negligence of the defendant attorney, the plaintiff would have obtained a more favorable judgment or settlement in the action in which the malpractice allegedly occurred. The purpose of this requirement, which has been in use for more than 120 years, is to safeguard against speculative and conjectural claims.”  (Id. at p. 1241, emphasis added.)  “This method of presenting a legal malpractice lawsuit is commonly called a trial within a trial.” (Blanks v. Seyfarth Shaw LLP (2009) 171 Cal.App.4th 336, 357.)  The “substantial factor” test requires that the “the plaintiff to establish ‘a reasonable basis for the conclusion that it was more likely than not that the conduct of the defendant was a substantial factor in the result.’ ” (Lysick v. Walcom (1968) 258 Cal.App.2d 136, 153, emphasis added.)

Knutson is a significant case because it not only contains a confusing analysis of the distinction between “but-for” causation and “substantial factor” causation, but it could also be read to dispose of the “case-within-the-case” analysis for claims against an attorney for fraud and/or intentional breach of fiduciary duty.  Review by the California Supreme Court is warranted to address the confusion Knutson creates.  Until then, it should be argued that Knutson is an outlier case which can be distinguished on its specific facts.  We will be keeping a close eye on this one.

If you have any questions or would like more information, please contact Gretchen Carner at [email protected] or Brett Safford at [email protected].

Cal. Supreme Court Says Attorneys May Not Get Paid If They Have A Flawed “Blanket” Conflict of Interest Waiver

Posted on: September 13th, 2018

By: Greg Fayard

The California Supreme Court has weighed in on the vital importance of conflict of interest waivers. A flawed one could deprive attorneys of their fees.

On August 30, 2018, the Supreme Court analyzed the validity of a conflict of interest waiver in a law firm’s retainer agreement for a high stakes case.  In Sheppard, Mullin, Richter & Hampton, LLP v. J-M Manufacturing Co., Inc. (2018) 2018 Cal. LEXIS 6399, J-M Manufacturing Company, Inc. (J-M) retained California law firm Sheppard Mullin to represent it in a large federal lawsuit where J-M was sued for over $1 billion in damages. Sheppard Mullin’s agreement had a general conflict waiver, where J-M waived any and all conflicts of interest. It turns out, however, that Sheppard Mullin had, and was, representing one of J-M’s adversaries in the federal case—specifically the South Lake Tahoe Public Utility District (South Tahoe), but in unrelated employment matters. That prior and concurrent representation was not specified in the conflict waiver that J-M agreed to.

South Tahoe learned of the conflict, and successfully moved to disqualify Sheppard Mullin. Unfortunately, Sheppard Mullin had already billed 10,000 hours in the huge federal action, to the tune of some $3 million in fees, with over $1 million unpaid by J-M. Sheppard Mullin then sued J-M for its unpaid fees. J-M cross-complained, seeking to disgorge its fees it paid to Sheppard Mullin and to not have to pay the additional fees owed. The law firm’s retainer agreement had an arbitration clause, which Sheppard Mullin successfully invoked. The arbitrators ruled in favor of Sheppard Mullin, allowing the law firm to keep its earned fees, but also requiring J-M to pay Sheppard Mullin the over $1 million it still owed. The arbitrators described Sheppard Mullin’s flawed conflict waiver as a minor and it did not warrant disgorgement of all the fees J-M had paid. J-M claimed the flawed conflict waiver was an ethical breach by Sheppard Mullin that rendered the whole contract illegal and unenforceable, in violation of public policy (to protect the public from unethical attorney conduct). The trial court disagreed and affirmed the arbitrators’ ruling. J-M appealed. The Court of Appeal reversed, holding the entire agreement was illegal, and Sheppard Mullin was not entitled to any of its $3 million in fees, including the millions J-M already paid the firm. Sheppard Mullin petitioned the Supreme Court, which granted review and issued a 41-page opinion and dissent.

The Supreme Court held that the whole Sheppard Mullin-J-M contract was unenforceable because the flawed conflict waiver violated public policy. The Supreme Court held that at the time it represented J-M, Sheppard Mullin represented an adverse party in that case, which the firm knew about but did not tell J-M. Hence, the general conflict waiver J-M agreed to was not “informed.” Sheppard Mullin’s representation of J-M’s adversary (South Tahoe), was a “present reality” and not a “future possibility” and should have been specifically disclosed. Hence, the Supreme Court vacated Sheppard Mullin’s attorneys’ fee award. Sheppard Mullin was therefore not entitled to the over $1 million in unpaid fees.

But what about the millions of dollars J-M already paid Sheppard Mullin? Should those fees be disgorged? Could Sheppard Mullin keep those fees based on a quantum meruit theory? The Supreme Court held that quantum meruit was not before the court, as it did not have a robust-enough factual record on the fees J-M already paid, and remanded to the trial court. The Supreme Court provided guidance to the trial court on the quantum meruit analysis. Attorneys may be entitled to quantum meruit fees even under the cloud of an unwaived or improperly waived conflict of interest, which is a case-specific inquiry that focuses on whether the flawed conflict waiver was willful, whether any value had been provided to the client, and the amount of harm to the client. The Court held that there is no categorical rule barring quantum meruit fees when an unwaived or improperly waived conflict of interest exists. It depends on the circumstances.

Specifically: “When a law firm seeks fees in quantum meruit that it is unable to recover under the contract because it has breached an ethical duty to its client, the burden of proof on these or other factors lies with the firm. To be entitled to a measure of recovery, the firm must show that the violation was neither willful nor egregious, and it must show that its conduct was not so potentially damaging to the client as to warrant a complete denial of compensation. And before the trial court may award compensation, it must be satisfied that the award does not undermine incentives for compliance with the Rules of Professional Conduct. For this reason, at least absent exceptional circumstances, the contractual fee will not serve as an appropriate measure of quantum meruit recovery. . .  Although the law firm may be entitled to some compensation for its work, its ethical breach will ordinarily require it to relinquish some or all of the profits for which it negotiated.” (Sheppard, Mullin, Richter & Hampton, LLP v. J-M Manufacturing Co., Inc., 2018 Cal. LEXIS 6399, *56.)

The trial court, therefore, should decide if such legal fees should be completely or partially forfeited.

The lesson here is straightforward and applies to all jurisdictions, not just California: conflict of interest waivers are very important. They should be as clear and specific as possible so that the client knows exactly what it is waiving. Blanket, general, waivers can be insufficient, creating the risk of attorneys losing millions of dollars in legal fees.

If you have any questions or would like more information, please contact Greg Fayard at [email protected].

The California State Bar’s New Rule Follows a National Trend of Disciplining Attorneys for Discrimination

Posted on: August 24th, 2018

By: Paige Pembrook

The newly revised California Rules of Professional Conduct for attorneys, set to take effect November 1, 2018, include a tougher approach to discrimination, harassment, and retaliation in legal practice that exposes attorneys to State Bar discipline even where there has been no prior court determination of any wrongful conduct. The new rule is part of a national trend prohibiting discrimination as attorney misconduct.

Current Rule 2-400 that applies through October 2018 prohibits discrimination and harassment in connection with the management or operation of a law practice. Once a court determines that an attorney has committed unlawful discrimination and/or harassment, the State Bar can investigate and impose discipline. Given that no discipline appears to have been imposed under the current rule in the thirty years since its enactment in 1989, the new rule has teeth to allow for greater enforcement.

New Rule 8.4.1 replaces and fundamentally changes the current rule to expand attorneys’ exposure to State Bar discipline for discriminatory conduct. First, Rule 8.4.1 expands the scope of wrongful conduct to explicitly prohibit retaliation as well as discrimination and harassment. Second, Rule 8.4.1 prohibits all such conduct in connection with the representation of a client, the termination or refusal to accept the representation of any client, and law firm operations, whereas the current rule only prohibits conduct in connection with the management or operation of a law practice. Finally, Rule 8.4.1 eliminates the current requirement that there be a prior adjudication by a court that unlawful discrimination occurred before the State Bar can commence an investigation or impose discipline on an attorney for such discrimination.

The elimination of the requirement of a court adjudication of wrongdoing prior to State Bar investigation and discipline is the most drastic and contested change in the rule. Essentially, the State Bar Court becomes a forum of first resort for alleged victims of discriminatory, harassing, or retaliatory conduct by attorneys, despite the State Bar Court having limited resources and due process protections. Concern over the elimination of the prior adjudication requirement led to a new self-reporting requirement for attorneys who receive notice of disciplinary charges for violating Rule 8.4.1. It requires such attorneys to provide the disciplinary charges to the California Department of Fair Employment and Housing, the U.S. Department of Justice, or the U.S. Equal Employment Opportunity Commission, allowing the agencies to become involved and institute parallel administrative or judicial proceedings stemming from the same conduct. Attorneys must also report such parallel proceedings to the State Bar, allowing it to step aside so that the appropriate court or agency can adjudicate the matter.

In sum, the new rule is harsh. The comments to the new rule make clear that it permits the imposition of discipline for conduct that would not necessarily result in an award or remedy in a civil proceeding. Any person (including but not limited to prospective, former, and current employees, clients, and opposing counsel) can file complaints alleging discrimination with the State Bar that trigger investigations and discipline up to and including disbarment. Disciplinary charges may also trigger reporting requirements to government agencies that may lead to further investigations and proceedings.  Discipline for misconduct can also serve as evidence in a legal malpractice claim, demonstrating that an attorney fell below the standard of care. For example, if an attorney’s harassment of a firm employee resulted in that employee missing critical deadlines that impacted the outcome of a client’s matter, State Bar discipline based on that harassment may be evidence in a malpractice action against the attorney.

Although California has had a rule prohibiting discrimination since 1989, the reinforced new Rule 8.4.1 is part of a national trend prohibiting discrimination in the practice of law. In 2016, the ABA approved Model Rule 8.4(g) that makes it professional misconduct to engage in conduct that the lawyer knows or reasonably should know is harassment or discrimination. Twenty states already have provisions in their attorney conduct rules addressing the subject of Model Rule 8.4 in some manner or adopting a version of Model Rule 8.4, including Colorado, Florida, Indiana, Ohio, New Jersey, New York, Michigan, Minnesota, Vermont, and the District of Columbia, to name a few.

California’s new Rule 8.4.1 is one of the strongest prohibitions and goes far beyond the ABA’s Model Rule 8.4 in policing discriminatory misconduct by attorneys. However, other states are likely to follow the ABA and California’s lead in increasing the State Bar’s powers to discipline attorneys for discrimination, retaliation, and harassment. Accordingly, all attorneys should be wary that conduct that was previously considered a professional discourtesy may be actionable misconduct that will lead to discipline, and any resulting discipline may provide evidence of attorney malpractice.

If you have any questions or would like more information, please contact Paige Pembrook at [email protected].

In California Lawyer-Client Sex Will Soon Be A No-No

Posted on: May 14th, 2018

By: Greg Fayard

In California, lawyers can have consensual sex with their clients as long as it is not based on coercion or in exchange for legal services. That will change this Fall.  On May 10, 2018, the California Supreme Court approved comprehensive changes to the lawyer Rules of Professional Conduct—the first major change in 29 years.  Under the new rules, California lawyers cannot have consensual sex with their clients—except in one of two situations: 1) the client is the lawyer’s spouse or domestic partner; or 2) a sexual relationship existed prior to the lawyer-client relationship.  This means California lawyers can be disciplined by the State Bar for having consensual sex with clients.

The sex ban has been divisive even though at least 17 other states have adopted a similar ban. Supporters of the lawyer-client sex ban argue the relationship between a lawyer and client is inherently unequal, so any sexual relationship is potentially coercive. Others claim the blanket ban is an unjustified invasion of privacy.

The new Rule is 1.8.10 and goes into effect November 1, 2018.

If you have any questions or would like more information, please contact Greg Fayard at [email protected].