Sheppard, Mullin, Richter and Hampton, LLP v. J-M Manufacturing Company, Inc.

A large law firm agreed to represent a manufacturing company in a federal

qui tam action brought on behalf of a number of public entities. During the same

time period, the law firm represented one of these public entities in matters

unrelated to the qui tam suit. Both clients had executed engagement agreements

that purported to waive all such conflicts of interest, current or future, but the

agreements did not specifically refer to any conflict and the law firm did not tell

either client about its representation of the other. This arrangement fell apart when

the public entity discovered the conflict and successfully moved to have the firm

disqualified in the qui tam action. A fight over the manufacturer’s outstanding law

firm bills followed, and the dispute was sent to arbitration in accordance with an

arbitration clause in the parties’ engagement agreement.

The arbitrators ruled in the law firm’s favor and the superior court

confirmed the award, but the Court of Appeal reversed. That court concluded that

2

the matter should never have been arbitrated because, notwithstanding the broad

conflict waiver in the engagement agreement, the law firm’s undisclosed conflict

of interest violated rule 3-310(C)(3) of the Rules of Professional Conduct. This

ethical violation, the court ruled, rendered the parties’ agreement, including the

arbitration clause, unenforceable in its entirety. The Court of Appeal further held

that the conflict of interest disentitled the law firm from receiving any

compensation for the work it performed for the manufacturer while also

representing the utility district in other matters.

We agree with the Court of Appeal that, under the framework established in

Loving & Evans v. Blick (1949) 33 Cal.2d 603, the law firm’s conflict of interest

rendered the agreement with the manufacturer, including its arbitration clause,

unenforceable as against public policy. Although the manufacturer signed a

conflicts waiver, the waiver was not effective because the law firm failed to

disclose a known conflict with a current client. But we conclude, contrary to the

Court of Appeal, that the ethical violation does not categorically disentitle the law

firm from recovering the value of the services it rendered to the manufacturer;

whether principles of equity entitle the law firm to some measure of compensation

is a matter for the trial court to address in the first instance.

I.

In 2006, a qui tam action was filed against J-M Manufacturing Company,

Inc. (J-M), a pipe manufacturing company, in federal court in California. John

Hendrix, the relator in the action, alleged that J-M had misrepresented the strength

of polyvinyl chloride pipe it had sold to approximately 200 public entities around

the country for use in their water and sewer systems. In early 2010, the complaint

was unsealed, and many of these public entities intervened in the case.

As these events were unfolding, J-M began to consider replacing the law firm

that had been representing it in the action. In February 2010, shortly after the

3

complaint was unsealed, J-M’s general counsel, Camilla Eng, invited attorneys

from the law firm of Sheppard, Mullin, Richter & Hampton, LLP (Sheppard

Mullin), to discuss taking over the representation from the other law firm. The

attorneys, Bryan Daly and Charles Kreindler, ran a conflicts check to determine

whether Sheppard Mullin had represented any of the public entities identified as

the real parties in interest in the qui tam action. The conflicts check revealed that

another Sheppard Mullin attorney, Jeffrey Dinkin, had done employment-related

work for a public entity intervener, South Tahoe Public Utility District (South

Tahoe), on and off since at least 2002, and most recently in November 2009.

South Tahoe had, however, signed an advance waiver of conflicts in cases

unrelated to the employment matters on which Dinkin had provided assistance.

After internal consultation, Sheppard Mullin’s general counsel opined that because

of this advance conflict waiver, the firm could take on representation of J-M in the

qui tam action.

On March 4, 2010, Sheppard Mullin and J-M signed an engagement

agreement. Under the heading “Scope of Representation,” the agreement recited

that Sheppard Mullin was engaged to represent J-M in the qui tam action. The

agreement provided that the representation would terminate on completion of the

lawsuit and “any related claims and proceedings,” unless the law firm agreed

separately to provide J-M other legal services. The agreement recited the terms of

the representation, including payment of fees, and provided that these terms would

also apply to other engagements for J-M that Sheppard Mullin might undertake,

except as the parties otherwise agreed.

The engagement agreement also contained a conflict waiver much like the

one South Tahoe had signed. The waiver provision provided:

“Conflicts with Other Clients. Sheppard, Mullin, Richter & Hampton LLP

has many attorneys and multiple offices. We may currently or in the future

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represent one or more other clients (including current, former, and future clients)

in matters involving [J-M]. We undertake this engagement on the condition that

we may represent another client in a matter in which we do not represent [J-M],

even if the interests of the other client are adverse to [J-M] (including appearance

on behalf of another client adverse to [J-M] in litigation or arbitration) and can

also, if necessary, examine or cross-examine [J-M] personnel on behalf of that

other client in such proceedings or in other proceedings to which [J-M] is not a

party provided the other matter is not substantially related to our representation of

[J-M] and in the course of representing [J-M] we have not obtained confidential

information of [J-M] material to representation of the other client. By consenting

to this arrangement, [J-M] is waiving our obligation of loyalty to it so long as we

maintain confidentiality and adhere to the foregoing limitations. We seek this

consent to allow our Firm to meet the needs of existing and future clients, to

remain available to those other clients and to render legal services with vigor and

competence. Also, if an attorney does not continue an engagement or must

withdraw therefrom, the client may incur delay, prejudice or additional cost such

as acquainting new counsel with the matter.”

Although Eng revised certain portions of the engagement agreement before

signing, she made no changes to the conflict waiver provision. Sheppard Mullin

did not tell J-M about its representation of South Tahoe before or at the time the

engagement agreement was signed.

The engagement agreement also contained an arbitration clause, providing

that any dispute over fees or charges that was not resolved through voluntary

arbitration under the auspices of the California State Bar, and any other type of

dispute between the parties, would be settled by “mandatory binding arbitration”

conducted in accordance with the California Arbitration Act (CAA; Code Civ.

5

Proc., § 1282 et seq.). The arbitration clause also stated the agreement would be

governed by California law.

Dinkin, the Sheppard Mullin employment partner, again began actively

working for South Tahoe later in March 2010, a few weeks after Sheppard Mullin

began representing J-M. Over the course of the following year, Sheppard Mullin

billed South Tahoe for about 12 hours of work. During this period, South Tahoe’s

attorneys in the qui tam action became aware that Sheppard Mullin was now

representing J-M in that action. In March 2011, South Tahoe’s attorneys in the qui

tam action wrote to Sheppard Mullin asking for an explanation for the firm’s

failure to inform South Tahoe of the adverse representation. Sheppard Mullin

responded by reminding South Tahoe of its earlier conflicts waiver. Dissatisfied

with this response, South Tahoe filed a motion to disqualify Sheppard Mullin in

the qui tam proceeding.

In July 2011, the district court granted the disqualification motion, ruling that

Sheppard Mullin’s simultaneous representation of South Tahoe and J-M had been

undertaken without adequately informed waivers in violation of rule 3-310(C)(3)

of the Rules of Professional Conduct.

During its representation of J-M, Sheppard Mullin performed approximately

10,000 hours of work in the qui tam action and a related state court action.

According to Sheppard Mullin attorney Kreindler, the firm’s billings totaled more

than $3 million, of which more than $1 million remained unpaid.

Sheppard Mullin sued J-M for the unpaid fees. J-M cross-complained for

breach of contract, an accounting, breach of fiduciary duty, and fraudulent

inducement; it also sought disgorgement of fees previously paid to Sheppard

Mullin, as well as exemplary damages.

Sheppard Mullin petitioned for an order compelling arbitration under Code of

Civil Procedure section 1281.2. J-M opposed the order, asserting that Sheppard

6

Mullin’s conflict of interest had rendered the parties’ entire agreement illegal and

unenforceable. Overruling J-M, the superior court granted the petition to compel

arbitration.

1

The arbitrators ruled in Sheppard Mullin’s favor. They observed that “the

better practice” would have been for the firm to disclose its representation of

South Tahoe and seek J-M’s specific waiver of the conflict. But the arbitrators

concluded that, even assuming Sheppard Mullin’s failure to disclose the conflict

constituted an ethical violation, the violation was not sufficiently serious or

egregious to warrant forfeiture or disgorgement. The arbitrators observed that

Sheppard Mullin’s representation of South Tahoe involved matters unrelated to the

qui tam action and that the conflict of interest had not caused J-M damage,

prejudiced its defense of the qui tam action, resulted in communication of its

confidential information to South Tahoe, or rendered Sheppard Mullin’s

representation less effective or less valuable. The arbitrators awarded Sheppard

Mullin more than $1.3 million in fees and interest.

Sheppard Mullin petitioned the superior court to confirm the award, but J-M

petitioned to vacate it, renewing its contention that the parties’ engagement

agreement was illegal and unenforceable due to Sheppard Mullin’s simultaneous

representation of adverse interests in violation of rule 3-310(C)(3) of the Rules of

Professional Conduct. Again overruling J-M’s objection, the superior court

confirmed the award. Citing Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1

(Moncharsh), the court held that a violation of the Rules of Professional Conduct

does not render a retainer agreement unenforceable. The court concluded that the

arbitrators therefore did not exceed their powers in awarding the contractual fees.

(Code Civ. Proc., § 1286.2, subd. (a)(4).)



1 J-M petitioned the Court of Appeal for a writ of mandate, but the petition

was summarily denied.

7

The Court of Appeal reversed. The court explained that California law,

unlike federal law, treats a challenge to the legal enforceability of a contract as a

matter for the court to decide, regardless of whether the contract contains an

arbitration clause. The appellate court concluded that here, Sheppard Mullin’s

concurrent representation of J-M and South Tahoe violated rule 3-310(C)(3) of the

Rules of Professional Conduct, notwithstanding the scope of the conflict waivers

in the parties’ respective engagement agreements. This violation, the court

concluded, both rendered the engagement agreement with J-M unenforceable and

disentitled Sheppard Mullin from any fees for representing J-M while it was

simultaneously representing South Tahoe in other matters. For fee calculation

purposes, the court remanded to the superior court to determine when precisely

Sheppard Mullin’s representation of South Tahoe began.

We granted Sheppard Mullin’s petition for review. The petition presents

three questions: (1) whether a court may invalidate an arbitration award on the

ground that the agreement containing the arbitration agreement violates the public

policy of the state as expressed in the Rules of Professional Conduct, as opposed

to statutory law; (2) whether Sheppard Mullin violated the Rules of Professional

Conduct in view of the broad conflicts waiver signed by J-M; and (3) whether any

such violation automatically disentitles Sheppard Mullin from any compensation

for the work it performed on behalf of J-M. We consider each of these questions

in turn.

8

II.

The threshold question in the case concerns the proper scope of judicial

review of the arbitrators’ award under the CAA.

2 The CAA is “a comprehensive

statutory scheme regulating private arbitration in this state.” (Moncharsh, supra, 3

Cal.4th at p. 9.) “Through this detailed statutory scheme, the Legislature has

expressed a ‘strong public policy in favor of arbitration as a speedy and relatively

inexpensive means of dispute resolution.’ ” (Ibid.) To effectuate that policy, the

CAA provides that “[a] written agreement to submit to arbitration an existing

controversy or a controversy thereafter arising is valid, enforceable and

irrevocable, save upon such grounds as exist for the revocation of any contract.”

(Code Civ. Proc., § 1281.) Where, as here, an arbitrator has issued an award, the

decision is ordinarily final and thus “is not ordinarily reviewable for error by

either the trial or appellate courts.” (Moncharsh, at p. 13.) The exceptions to this

rule of finality are specified by statute. As relevant here, the CAA provides that a

court may vacate an arbitration award when “[t]he arbitrators exceeded their

powers and the award cannot be corrected without affecting the merits of the

decision upon the controversy submitted.” (Code Civ. Proc., § 1286.2, subd.

(a)(4) (section 1286.2(a)(4)).)

In Loving & Evans v. Blick, supra, 33 Cal.2d 603 (Loving & Evans), this

court held that the excess-of-authority exception applies, and an arbitral award

must be vacated, when a court determines that the arbitration has been undertaken

to enforce a contract that is “illegal and against the public policy of the state.”



2 As noted, the parties’ agreement calls for application of California law,

including the CAA, and both parties agree that the CAA governs. This case thus

presents no question concerning application of the Federal Arbitration Act, 9

United States Code section 1 et seq. (See Volt Info. Sciences v. Leland Stanford

Jr. U. (1989) 489 U.S. 468, 470; Cronus Investments, Inc. v. Concierge Services

(2005) 35 Cal.4th 376, 387.)

9

(Loving & Evans, at p. 610 (plur. opn. of Spence, J.); see id. at p. 615 (conc. opn.

of Edmonds, J.).) Sheppard Mullin does not ask us to revisit that holding. It does,

however, argue that the Loving & Evans illegality exception should apply only to

contracts that are found to violate public policy as it has been declared by the

Legislature. Because the Rules of Professional Conduct are not promulgated by

the Legislature, Sheppard Mullin argues, a violation of the rules can afford no

ground for vacating an arbitration award under section 1286.2(a)(4) of the CAA.

We reject the argument.

A.

Under general principles of California contract law, a contract is unlawful,

and therefore unenforceable, if it is “[c]ontrary to an express provision of law” or

“[c]ontrary to the policy of express law, though not expressly prohibited.” (Civ.

Code, § 1667.)

While this court has recognized that “questions of public policy are primarily

for the legislative department to determine,” we have also held that a contract or

transaction may be found contrary to public policy even if the Legislature has not

yet spoken to the issue. (Safeway Stores v. Retail Clerks etc. Assn. (1953) 41

Cal.2d 567, 574 [“In cases without number the state courts have declared

contracts, transactions and activities . . . to be contrary to public policy where their

legislative departments have not spoken on the subject.”]; Green v. Ralee

Engineering Co. (1998) 19 Cal.4th 66, 82 [administrative regulations promulgated

to effectuate statutory authority “may be manifestations of important public

policy”].)

As particularly relevant here, California courts have held that a contract or

transaction involving attorneys may be declared unenforceable for violation of the

Rules of Professional Conduct, the set of binding rules governing the ethical

practice of law in the State of California. In Chambers v. Kay (2002) 29 Cal.4th

10

142 (Chambers), this court refused enforcement of a fee division agreement

undertaken without written client consent, on the ground that the arrangement

violated the Rules of Professional Conduct. We noted that the California State Bar

is authorized by statute to formulate these rules, and they are adopted with the

approval of this court. (Chambers, at p. 156; see Bus. & Prof. Code, §§ 6076–

6077.) To enforce the fee division agreement, we observed, would be to

countenance “a violation of a rule we formally approved in order ‘to protect the

public and to promote respect and confidence in the legal profession.’ ”

(Chambers, at p. 158, quoting Rules Prof. Conduct, rule 1–100(A).) It would be

“absurd,” we concluded, for a court to aid an attorney in enforcing a transaction

prohibited by the rules. (Chambers, at p. 161.) Both before and after Chambers,

Courts of Appeal reached similar conclusions about similar fee splitting

arrangements in violation of the Rules of Professional Conduct. As the court

explained in Altschul v. Sayble (1978) 83 Cal.App.3d 153, the rules “are not only

ethical standards to guide the conduct of members of the bar; but they also serve

as an expression of public policy to protect the public.” (Id. at p. 163; see id. at

pp. 159–164; Kallen v. Delug (1984) 157 Cal.App.3d 940, 948–951; Scolinos v.

Kolts (1995) 37 Cal.App.4th 635, 639–640; Margolin v. Shemaria (2000) 85

Cal.App.4th 891, 901–903; McIntosh v. Mills (2004) 121 Cal.App.4th 333, 344–

346.) It follows that an attorney contract that has as its object conduct constituting

a violation of the Rules of Professional Conduct is contrary to the public policy of

this state and is therefore unenforceable.

11

B.

The question Sheppard Mullin raises here is whether a different, more

restrictive rule ought to apply when a court considers the lawfulness of a contract

on review of an arbitrator’s decision, applying the illegality exception recognized

in Loving & Evans.

The specific question in Loving & Evans concerned the validity of an

arbitration award granted to a group of unlicensed contractors feuding with a

property owner. (Loving & Evans, supra, 33 Cal.2d at pp. 604–605.) The

superior court had confirmed the award without establishing that the contractors

had at least substantially complied with the licensing statutes. We held this was

error because to enforce the agreement of an unlicensed contractor would violate

the public policy codified in statutes forbidding unlicensed persons from engaging

in the contracting business and from recovering compensation for such business.

(Id. at pp. 606–607, 613–614 (plur. opn. of Spence, J.); see id. at p. 615 (conc.

opn. of Edmonds, J.).)

We acknowledged that the merits of an arbitral award are not generally

subject to judicial review, but explained that “the rules which give finality to the

arbitrator’s determination of ordinary questions of fact or of law are inapplicable

where the issue of illegality of the entire transaction is raised in a proceeding for

the enforcement of the arbitrator’s award.” (Loving & Evans, supra, 33 Cal.2d at

p. 609.) Whether a contract is entirely illegal, and therefore unenforceable, is an

issue “for judicial determination upon the evidence presented to the trial court, and

any preliminary determination of legality by the arbitrator . . . should not be held

to be binding upon the trial court.” (Ibid.) This is because “[t]he question of the

validity of the basic contract [is] essentially a judicial question,” whether the

question is raised in opposition to a petition to compel arbitration or in a

postarbitration petition to vacate an arbitral award. (Id. at p. 610.) “If this were

12

not the rule,” we reasoned, “courts would be compelled to stultify themselves by

lending their aid to the enforcement of contracts which have been declared by

statute to be illegal and void. A party seeking confirmation cannot be permitted to

rely upon the arbitrator’s conclusion of legality for the reason that paramount

considerations of public policy require that this vital issue be committed to the

court’s determination whenever judicial aid is sought.” (Id. at p. 614.)

In the years since Loving & Evans was decided, this court has identified

limits to this exception to arbitral finality, but the court has not questioned the

continued validity of the exception itself.3 In Ericksen, Arbuthnot, McCarthy,



3 Since Loving & Evans, the Courts of Appeal in several cases have applied

the illegality exception in declining to confirm arbitration awards based on a

judicial determination that the parties’ contract violated public policy and was

therefore void and unenforceable in its entirety. (Lindenstadt v. Staff Builders,

Inc. (1997) 55 Cal.App.4th 882, 892–893 [whether unlicensed person acted as real

estate broker is for court to determine, not arbitrator]; All Points Traders, Inc. v.

Barrington Associates (1989) 211 Cal.App.3d 723, 737 [where arbitrator made

award to unlicensed person who allegedly acted as a real estate broker in violation

of statute, “the issue of illegality is one for judicial determination upon the

evidence presented to the trial court”]; Green v. Mt. Diablo Hospital Dist. (1989)

207 Cal.App.3d 63, 66, 71–73 [allegations that hospital district’s buy-out

agreement with executive constituted illegal gift of public funds, illegal payment

of extra compensation, etc., constituted claims of illegality voiding entire contract

and were subject to judicial determination; trial court properly denied petition to

compel arbitration]; Bianco v. Superior Court (1968) 265 Cal.App.2d 126, 129–

130 [applying rule to claim that oil drilling contract was unenforceable because the

parties failed to obtain the required drilling permits; petition to compel arbitration

should have been denied]; see also Epic Medical Management, LLC v. Paquette

(2015) 244 Cal.App.4th 504, 512 [stating rule that “[w]hen it is alleged that the

contract in its entirety is illegal, the issue is reviewable,” but finding rule

inapplicable because allegedly illegal transactions were only an incidental part of

parties’ contractual arrangement]; Ahdout v. Hekmatjah (2013) 213 Cal.App.4th

21, 36 [in case involving unlicensed person acting as contractor, distinguishing

Loving & Evans on ground that claim of illegality went to only one provision of

broad development agreement]; Cotchett, Pitre & McCarthy v. Universal Paragon

Corp. (2010) 187 Cal.App.4th 1405, 1417, fn. 1 [noting entire-illegality principle

but declining to address it in view of lack of illegality].)

13

Kearney & Walsh, Inc. v. 100 Oak Street (1983) 35 Cal.3d 312 (Ericksen), we

considered whether a party is entitled to avoid arbitration pursuant to a contractual

arbitration clause when the party alleges it was fraudulently induced to enter into

the contract. We answered the question in the negative, concluding that the

agreement to arbitrate was severable from the remainder of the contract, and the

question of whether the contract (as opposed to the agreement to arbitrate) had

been fraudulently induced was thus a matter for the arbitrator to consider in the

first instance. (Id. at pp. 317–320, citing, inter alia, Prima Paint v. Flood &

Conklin (1967) 388 U.S. 395 [reaching same conclusion in case of alleged

fraudulent inducement].) We also considered “the practical consequences of a rule

which would allow a party to avoid an arbitration commitment” merely by

pleading that the other party never intended to fulfill its contractual obligations.

(Ericksen, supra, at pp. 322–323.) In holding such a fraud claim did not preclude

arbitration, we distinguished Loving & Evans and other cases in which “the issue

of illegality of the contract has been raised.” (Ericksen, at p. 316, fn. 2.) We

explained that while “[q]uestions of public policy which are implicated by an

illegal agreement . . . might be ill-suited for arbitral determination,” the same is

not true of “garden-variety ‘fraud in the inducement’ ” claims “related to

performance failure.” (Id. at p. 317, fn. 2.) The latter sort of claims, we

explained, are, by contrast, “ideally suited for the arbitrator’s expert

determination.” (Ibid.)

Later, in Moncharsh, supra, 3 Cal.4th 1, we considered whether the claimed

illegality of a provision of a contract (as opposed to the entirety of the contract)

constitutes grounds for vacating an arbitral award. In that case, an attorney and

law firm executed an employment agreement that, among other things, provided

for the remittance of a substantial percentage of future fees to the law firm if the

attorney left and took clients with him. When the attorney did just that, the firm

14

demanded its contractual share, and the attorney refused. The parties submitted

the ensuing dispute to an arbitrator in accordance with the arbitration clause of the

employment agreement. (Id. at pp. 6–7.) In the arbitration proceedings, the

attorney argued that the fee sharing clause was unenforceable because it violated

the Rules of Professional Conduct and case law on entitlement to fees from a

former client, but the arbitrator rejected the argument. The attorney sought

judicial review of the merits of that ruling through a petition to vacate or modify

the award under Code of Civil Procedure section 1286.2, citing Loving & Evans in

support of his claim for judicial review. (Moncharsh, at pp. 7–8, 31.)

This court rejected the argument. Loving & Evans, we emphasized,

concerned a claim that the contract was illegal not just in part, but in whole.

(Moncharsh, supra, 3 Cal.4th at pp. 31–32.) The distinction mattered, we

explained, because the CAA calls for the enforcement of an arbitration agreement

unless there are grounds for revoking that agreement. (Moncharsh, at p. 29; see

Code Civ. Proc., § 1281.2.) “If a contract includes an arbitration agreement, and

grounds exist to revoke the entire contract, such grounds would also vitiate the

arbitration agreement. Thus, if an otherwise enforceable arbitration agreement is

contained in an illegal contract, a party may avoid arbitration altogether.”

(Moncharsh, at p. 29, italics added.)4 But when, as in Moncharsh itself, “the

alleged illegality goes to only a portion of the contract (that does not include the

arbitration agreement), the entire controversy, including the issue of illegality,

remains arbitrable.” (Id. at p. 30.) We accordingly rejected the suggestion that



4 Despite its broad phrasing, Moncharsh did not purport to overrule Ericksen,

supra, 35 Cal.3d at pages 316 to 317, footnote 2, 322 to 323, in which we had

taken the view that fraudulent inducement in the making of the contract, as

distinguished from illegality, is not a ground for vitiating an arbitration agreement

contained therein.

15

judicial review of an arbitrator’s decision is routinely available in such cases. (Id.

at p. 32, fn. 14.)

In the portion of Moncharsh on which Sheppard Mullin relies most heavily,

we went on to observe “that there may be some limited and exceptional

circumstances justifying judicial review of an arbitrator’s decision when a party

claims illegality affects only a portion of the underlying contract. Such cases

would include those in which granting finality to an arbitrator’s decision would be

inconsistent with the protection of a party’s statutory rights.” (Moncharsh, supra,

3 Cal.4th at p. 32, citing Shearson/American Express Inc. v. McMahon (1987) 482

U.S. 220, 225–227.) In light of the legislative policy in favor of arbitral finality,

however, we counseled that courts should be reluctant to invalidate an award on

such a ground “[w]ithout an explicit legislative expression of public policy.”

(Moncharsh, at p. 32, italics added.) “Absent a clear expression of illegality or

public policy undermining” the statutory presumption favoring private arbitration

and the finality of arbitral awards, “an arbitral award should ordinarily stand

immune from judicial scrutiny.” (Ibid.) The particular ethical rules the attorney

had cited were inadequate for this purpose, we held, as the rules said nothing to

suggest arbitration was inappropriate to resolve what was “essentially an ordinary

fee dispute.” (Id. at p. 33.)

Sheppard Mullin seizes on the reference to an “explicit legislative expression

of public policy” in this passage to argue that judicial review of the arbitral award

in this case should be limited to whether the parties’ agreement violates a statute

or comparable declaration of the Legislature. But the language on which

Sheppard Mullin relies is not fairly read as a general caution against reliance on

nonlegislative expressions of public policy in considering the enforceability of

contracts containing arbitration agreements. The passage was concerned with a

different subject: when, notwithstanding a valid and enforceable arbitration

16

agreement, an arbitrator’s resolution of a particular issue should be subject to

judicial review for legal error. The court noted that such review might be

warranted when “granting finality to an arbitrator’s decision would be inconsistent

with the protection of a party’s statutory rights,” but it advised courts to be wary

of such claims in the absence of a clear expression of statutory policy.

(Moncharsh, 3 Cal.4th at p. 32, italics added; see also id. at p. 33 [“[T]he normal

rule of limited judicial review may not be avoided by a claim that a provision of

the contract, construed or applied by the arbitrator, is ‘illegal,’ except in rare cases

when according finality to the arbitrator’s decision would be incompatible with the

protection of a statutory right.”].) Moncharsh did not suggest, much less hold, that

a court presented with a claim that an entire contract or transaction is void for

illegality is limited to considering only those expressions of public policy that are

contained in legislative enactments.

Sheppard Mullin argues that it makes no sense to distinguish for these

purposes between claims of partial contractual illegality and complete illegality; in

either case, it argues, the legislative policy favoring contractual arbitration should

yield only when the contract violates public policy as the Legislature has declared

it. But ever since Loving & Evans—whose continued validity Sheppard Mullin

has not questioned—California cases have made clear that the legislative policy

favoring contractual arbitration, and the finality of arbitral awards, applies only

when there is, in fact, a valid contract to arbitrate. (Loving & Evans, supra, 33

Cal.2d at p. 610.) And as we said in Moncharsh, while a claim that a single

provision of a contract is illegal ordinarily has no bearing on the validity of the

parties’ agreement to arbitrate, the same is not true of a claim that the entire

contract is void for illegality. In such cases, we have said, the agreement to

arbitrate cannot be severed from the remainder, and a court is not bound to

17

confirm the results of an arbitration conducted under such a contract. (Moncharsh,

supra, 3 Cal.4th at p. 29.)

Sheppard Mullin also makes much of the fact that Loving & Evans itself

concerned a claim of illegality premised on violation of statutory law, and

references to the nature of the claim are scattered throughout the opinion. (E.g.,

Loving & Evans, supra, 33 Cal.2d at p. 604 [the arbitration award could not “be

reconciled with the settled public policy of this state as expressed in our statutory

law”]; id. at p. 612 [confirming the arbitration award “would be tantamount to

giving judicial approval to acts which are declared unlawful by statute”].)

Subsequent cases applying the Loving & Evans illegality exception have involved

similar scenarios. (E.g., All Points Traders, Inc. v. Barrington Associates, supra,

211 Cal.App.3d at p. 737 [unlicensed person allegedly acted as a real estate broker

in violation of statute].)5 But the logic of these cases is not so limited. As we

have since explained, the basic premise of Loving & Evans is that an agreement to

arbitrate is invalid and unenforceable if it is made as part of a contract that is

invalid and unenforceable because it violates public policy. (Moncharsh, supra, 3

Cal.4th at p. 29; Loving & Evans, at p. 610; accord, Richey v. AutoNation, Inc.

(2015) 60 Cal.4th 909, 917 [notwithstanding general rules of arbitral finality,

“judicial review may be warranted when a party claims that an arbitrator has

enforced an entire contract or transaction that is illegal”].) And as noted,

California law holds that a contract may be held invalid and unenforceable on



5 Green v. Mt. Diablo Hospital Dist., supra, 207 Cal.App.3d at pages 71 to

73, applied the rule to an agreement made in violation of both statutory and

constitutional limits on public agencies. The court in Bianco v. Superior Court,

supra, 265 Cal.App.2d at pages 129 to 130, did not specify the source of the law

requiring the parties to acquire drilling permits; whether it was a statute or a

regulation is thus unclear.

18

public policy grounds even though the public policy is not enshrined in a

legislative enactment.

C.

Sheppard Mullin warns that failure to adopt a legislative policy limitation

will invite a flood of litigation by parties disappointed by arbitration results.

Courts will be mired in difficult line-drawing exercises to determine what sort of

contracts violate public policy and which do not. The problem will be particularly

acute in the context of attorney-service contracts, Sheppard Mullin says, because

the Rules of Professional Conduct govern so many aspects of the attorney-client

relationship. And to resolve these claims, courts will be regularly called on to

resolve highly factual disputes, thereby eliminating the advantages of arbitration.

But by declining to adopt Sheppard Mullin’s legislative policy limitation on

the illegality exception, we are hardly breaking new ground. We merely affirm

that, under Loving & Evans, the legality of a contract that contains an arbitration

agreement is to be judged by the same standards as a contract without such an

agreement. And we repeat that those standards do not encompass claims of mere

partial illegality; the case law does not establish, nor do we today hold, that an

attorney-services contract may be declared illegal in its entirety simply because it

contains a provision that conflicts with an attorney’s obligations under the Rules

of Professional Conduct. As Moncharsh illustrates, the violation of an ethical rule

in one portion of a contract (there a fee-splitting provision) does not necessarily

preclude enforcement of the contract as a whole. (Moncharsh, supra, 3 Cal.4th at

p. 30; see also Civ. Code, § 1599 [contract with “several distinct objects” may be

void as to an unlawful one and valid as to a lawful one]; Birbrower, Montalbano,

Condon & Frank v. Superior Court (1998) 17 Cal.4th 119, 137–139 [when

attorney-service contract was valid as to services performed in New York and

invalid as to those performed in California, the valid part would be severed from

19

the remainder, allowing law firm to seek contractual fees for New York work];

Calvert v. Stoner (1948) 33 Cal.2d 97, 103–105 [invalid provision in fee

agreement prevented client from settling without lawyer’s consent; it was held

severable from the lawful compensation provisions, which remained enforceable].)

It is only when “the illegality taints the entire contract” that courts may declare

“the entire transaction is illegal and unenforceable.” (Keene v. Harling (1964) 61

Cal.2d 318, 321.)

With this background in mind, we turn to the question whether the claimed

violation in this case constitutes grounds for revocation of the entire contract.

III.

J-M argues, and the Court of Appeal agreed, that the engagement agreement

at issue is unenforceable because it violated rule 3-310(C)(3) of the Rules of

Professional Conduct (rule 3-310(C)(3)). That rule provides that an attorney

“shall not, without the informed written consent of each client . . . [¶] . . . [¶] . . .

[r]epresent a client in a matter and at the same time in a separate matter accept as a

client a person or entity whose interest in the first matter is adverse to the client in

the first matter.” (Ibid.) “Simply put,” without informed written consent, “an

attorney (and his or her firm) cannot simultaneously represent a client in one

matter while representing another party suing that same client in another matter.”

(Certain Underwriters at Lloyd’s London v. Argonaut Ins. Co. (N.D.Cal. 2003)

264 F.Supp.2d 914, 919.) This general prohibition applies even if “the

simultaneous representations may have nothing in common.” (Flatt v. Superior

Court (1994) 9 Cal.4th 275, 284 (Flatt).) “ ‘Informed written consent’ ” is defined

to mean “written agreement to the representation following written disclosure,”

and “[d]isclosure” is defined as “informing the client . . . of the relevant

circumstances and of the actual and reasonably foreseeable adverse consequences

to the client . . . .” (Rules Prof. Conduct, rule 3-310(A)(2), (1).)

20

Sheppard Mullin does not dispute that its concurrent representation of J-M

and South Tahoe came within the scope of rule 3-310(C)(3), but maintains that it

obtained J-M’s informed consent to that representation by means of the conflict

waiver provision of the parties’ engagement agreement. We conclude that

Sheppard Mullin’s concurrent representation of J-M and South Tahoe violated rule

3-310(C)(3) and rendered the engagement agreement between Sheppard Mullin

and J-M unenforceable. Our conclusion rests on three subsidiary points: First, at

the time Sheppard Mullin agreed to represent J-M in the qui tam action, the law

firm also represented a client with conflicting interests, South Tahoe; second,

because Sheppard Mullin knew of that conflicting interest and failed to inform

J-M of it, J-M’s consent was not “informed” within the meaning of the Rules of

Professional Conduct; and third, Sheppard Mullin’s unconsented-to conflict of

interest affected the whole of its engagement agreement with J-M, rendering it

unenforceable in its entirety.

A.

In their engagement agreement, Sheppard Mullin asked J-M to agree to the

law firm’s representation of any other client, “currently or in the future,” in

matters not substantially related to its representation of J-M, “even if the interests

of the other client are adverse” to J-M’s. The conflict waiver clause alerted J-M

that Sheppard Mullin is a large firm with many offices and attorneys and may

represent clients whose interests conflict with J-M’s, but it did not disclose any

particular conflict, or even any area of potential conflict, and did not mention

Sheppard Mullin’s concurrent representation of South Tahoe.

The parties and amici curiae debate at length whether a general advisement of

this type is adequate to obtain a client’s informed consent to the possibility of

future conflicts with a law firm’s future clients. But J-M argues that this debate is

beside the point, because when it hired Sheppard Mullin to represent it in the qui

21

tam action, the firm’s representation of South Tahoe was not merely a future

possibility; it was a present reality. Sheppard Mullin disputes the premise,

asserting that when the firm took on J-M’s representation on March 4, 2010, South

Tahoe was a former client (or, to borrow a term used at oral argument, a

“dormant” client) and did not become a current client again until March 29, when

Dinkin began new employment work for the agency. But based on the terms of

Sheppard Mullin’s engagement agreement with South Tahoe, as well as the

undisputed facts concerning their course of dealing, we agree with J-M: Sheppard

Mullin and South Tahoe had an attorney-client relationship at the time Sheppard

Mullin took on J-M, South Tahoe’s adversary, as a client.

South Tahoe’s operative engagement agreement, executed in 2006, provided

that Sheppard Mullin would represent the utility district “in connection with

general employment matters (the ‘Matter’).” The agreement further provided that

South Tahoe could terminate the representation at any time, as could Sheppard

Mullin (subject to its ethical obligations), but that otherwise the representation

would terminate “upon completion of the Matter” unless the firm agreed to render

other legal services to the agency. The parties’ agreement thus established an

attorney-client relationship that, absent earlier termination by one of the parties,

would endure so long as Sheppard Mullin continued to work on “the Matter,”

which was defined in the agreement as “general employment matters.”

Dinkin had performed employment work for South Tahoe in November 2009

and did so again beginning on March 29, 2010. Overall, Dinkin had provided

South Tahoe legal services as a Sheppard Mullin partner since 2002, and the firm

billed the utility district for 119 hours of work in the five years before May 2011.

As of March 4, 2010, then, Sheppard Mullin’s work on “general employment

matters” was ongoing. There is no evidence either party terminated the

engagement until South Tahoe did so in 2011, after it discovered the firm’s

22

conflict of interest. It follows that Sheppard Mullin was still South Tahoe’s

attorney in March 2010, when it also began representing J-M.

This conclusion finds support in a substantial body of case law from both

within and without California. Under comparable circumstances, where a law

firm and client have had a long-term course of business calling for occasional

work on discrete assignments, courts have generally held the fact that the firm is

not performing any assignment on a particular date and may not have done so for

some months—or even years—does not necessarily mean the attorney-client

relationship has been terminated. In International Business Machines Corp. v.

Levin (3d Cir. 1978) 579 F.2d 271, 281, for example, the court found a continuous

attorney-client relationship existing at the time a law firm took on adverse

representation even though the law firm “had no specific assignment from IBM on

hand on the day the antitrust complaint was filed and even though [the law firm]

performed services for IBM on a fee for service basis rather than pursuant to a

retainer arrangement.” As the court explained, “the pattern of repeated retainers,

both before and after the filing of the complaint, supports the finding of a

continuous relationship.” (Ibid.; see also, e.g., M’Guinness v. Johnson (2015) 243

Cal.App.4th 602, 616–617 [several-month gap following completion of last

assignment did not terminate attorney-client relationship]; Kabi Pharmacia AB v.

Alcon Surgical, Inc. (D.Del. 1992) 803 F.Supp. 957, 962 [allegedly “ ‘sporadic’ ”

nature of firm’s work, and “lull” in such work at time of adverse representation,

does not support finding there was no ongoing attorney-client relationship]; SWS

Financial Fund A v. Salomon Bros. Inc. (N.D.Ill. 1992) 790 F.Supp. 1392, 1395,

1399 [continuing relationship found where firm had billed client for 214 hours

over a 13-month period on a number of discrete projects, the last ending two

months before firm began adverse representation]; Manoir–Electroalloys Corp. v.

Amalloy Corp. (D.N.J. 1989) 711 F.Supp. 188, 193–195 [individual was law

23

firm’s current client in 1988, even though firm had last performed work for

individual in 1983 to 1984, where the two had a long-standing arrangement

involving legal work on a number of matters].) The central question is whether

the client would reasonably understand that the representation has terminated (see

Rest.3d Law Governing Lawyers, § 31, com. h, p. 223; id., § 18), and courts are

properly reluctant to impose on a client the burden of discerning that a law firm

that has done periodic work for it has ceased to be the client’s attorney, simply by

lapse of time.

Sheppard Mullin contends its agreement with South Tahoe was a

“framework” agreement under which the relationship would be renewed, on the

same terms, each time the client had a new assignment for the firm—and,

critically, one that would end when the assignment was completed. (See Banning

Ranch Conservancy v. Superior Court (2011) 193 Cal.App.4th 903, 913 (Banning

Ranch) [framework agreement between law firm and client created “a structure for

establishing future attorney-client relationships on an ‘as-requested’ basis by the

[client], and subject to confirmation by the . . . firm,” but “ ‘did not create an

attorney-client relationship absent an actual request, and acceptance, for

representation on a particular matter’ ”].) The terms of the agreement do not,

however, bear out the characterization. The agreement provided that Sheppard

Mullin’s representation of South Tahoe would continue for the length of “the

Matter,” which the agreement defined as general employment matters, in the

plural. The definition belies the suggestion that the parties intended to terminate

the attorney-client relationship after each individual general employment matter

was completed. And unlike the framework agreement at issue in Banning Ranch,

the agreement contained no language reserving to the law firm the right to decline

work requested by the client. Nor did the agreement include any other explicit

statement that Sheppard Mullin and South Tahoe would maintain an attorney-

24

client relationship only during times when the law firm was actually performing

work for the utility district.

While the South Tahoe engagement agreement was not what the Banning

Ranch court called a “[c]lassic retainer agreement[]” (Banning Ranch, supra, 193

Cal.App.4th at p. 917)—there was no retainer fee involved—it was not a simple

framework agreement, either. It was, rather, an agreement governing a continuing

engagement involving occasional work on employment matters as needed. And

under that agreement, over the course of a decade Sheppard Mullin regularly

advised and assisted South Tahoe with employment matters. (Cf. Banning Ranch,

at p. 915 [law firm performed minimal work for client under agreement].) Absent

any express agreement severing the relationship during periods of inactivity, South

Tahoe could reasonably have believed that it continued to enjoy an attorney-client

relationship with its longtime law firm even when no project was ongoing. (See

Manoir–Electroalloys Corp. v. Amalloy Corp., supra, 711 F.Supp. at p. 194 [client

could reasonably “construe [attorney’s] actions as the actions of attorneys vis-à-vis

their present client”].)

B.

As noted, J-M consented to waive current conflicts, as well as future ones.

The waiver thus, by its terms, covers the conflict with South Tahoe. We must

therefore consider whether the waiver constituted effective consent to Sheppard

Mullin’s concurrent representation of adverse interests.

The limitations in rule 3-310(C)(3) serve to enforce “the attorney’s duty—

and the client’s legitimate expectation—of loyalty, rather than confidentiality.”

(Flatt, supra, 9 Cal.4th at p. 284.) It is for this reason that the rules encompass

simultaneous representation even in unrelated matters where there is no risk that

confidential information will be transmitted. (Ibid.) The purpose of these rules,

we have explained, “is evident, even (or perhaps especially) to the nonattorney. A

25

client who learns that his or her lawyer is also representing a litigation adversary,

even with respect to a matter wholly unrelated to the one for which counsel was

retained, cannot long be expected to sustain the level of confidence and trust in

counsel that is one of the foundations of the professional relationship.” (Id. at

p. 285; accord, People ex rel. Dept. of Corporations v. SpeeDee Oil Change

Systems, Inc. (1999) 20 Cal.4th 1135, 1147; Jeffry v. Pounds (1977) 67

Cal.App.3d 6, 10–11 (Jeffry).)

Because rule 3-310(C)(3) embodies a core aspect of the duty of loyalty, the

disclosure required for informed consent to dual representation must also be

measured by a standard of loyalty. To be informed, the client’s consent to dual

representation must be based on disclosure of all material facts the attorney knows

and can reveal. (See, e.g., Image Technical Services, Inc. v. Eastman Kodak Co.

(N.D.Cal. 1993) 820 F.Supp. 1212, 1214–1215, 1217 [law firm failed to obtain

informed consent to a conflict of interest because it did not disclose known

material details of the conflict].) An attorney or law firm that knowingly

withholds material information about a conflict has not earned the confidence and

trust the rule is designed to protect.

Assessed by this standard, the conflicts waiver here was inadequate. By

asking J-M to waive current conflicts as well as future ones, Sheppard Mullin did

put J-M on notice that a current conflict might exist. But by failing to disclose to

J-M the fact that a current conflict actually existed, the law firm failed to disclose

to its client all the “relevant circumstances” within its knowledge relating to its

representation of J-M. (Rules Prof. Conduct, rule 3-310(A)(1).)

Sheppard Mullin contends the blanket disclosure and waiver was sufficient in

light of J-M’s size and sophistication and the participation of J-M’s own general

counsel in the engagement negotiations. It cites a federal disqualification case

from Texas, Galderma Laboratories v. Actavis Mid Atlantic LLC (N.D.Tex. 2013)

26

927 F.Supp.2d 390 (Galderma), for support. In that case, Galderma, a large

corporation with global operations, engaged a law firm to help it with employee

benefits matters, signing (by its general counsel) a blanket waiver of conflicts for

the law firm. (Id. at p. 393.) One of the firm’s other clients, Actavis, was later

named a defendant in an intellectual property suit brought by Galderma, and the

firm represented Actavis in that litigation. When Galderma learned of the law

firm’s adverse concurrent representation, it sought to disqualify the firm in the

intellectual property action. (Id. at p. 394.)

The district court denied disqualification. The court applied the American

Bar Association Model Rules of Professional Conduct (hereinafter the Model

Rules), which require informed consent to concurrent representation of adverse

interests (a more lenient Texas rule did not). (Galderma, supra, 927 F.Supp.2d at

pp. 395–396.) Relying on a comment to rule 1.7 of the Model Rules to the effect

that a general waiver may be effective where the client is an experienced user of

legal services represented by independent counsel, the district court found the law

firm’s blanket waiver form effective to obtain informed consent from Galderma, a

large corporation represented by its own general counsel. (Id. at pp. 396–397,

399–406.)6

Galderma is inapposite. As an initial matter, whether or not the district court

in that case correctly interpreted and applied the Model Rules, California has not



6 Rule 1.7(b)(4) of the Model Rules permits concurrent representation of

adverse parties with each client’s informed consent, confirmed in writing.

Comment 22 to the rule, addressing consent to a future conflict, notes that a

“general and open-ended” consent will ordinarily be ineffective but may suffice

“if the client is an experienced user of the legal services involved,” particularly if

the client is independently represented when giving consent.

27

adopted those rules or, more importantly, the comments to them.

7 But even more

to the point, Sheppard Mullin’s blanket waiver would not be effective in this case

even under Galderma’s approach, because here the law firm failed to disclose a

known, existing conflict before soliciting J-M’s consent. On this point, the

Galderma court was clear: “If a conflict of interest is known to an attorney at the

time he seeks a waiver, the attorney is not allowed to hide that conflict, regardless

of whether the client is sophisticated or not.” (Galderma, supra, 927 F.Supp.2d at

pp. 402–403.) We agree. Whether the client is an individual or a multinational

corporation with a large law department, the duty of loyalty demands an attorney

or law firm provide the client all material information in the attorney or firm’s

possession. No matter how large and sophisticated, a prospective client does not

have access to a law firm’s list of other clients, and cannot check for itself whether

the firm represents adverse parties. Nor can it evaluate for itself the risk that it

may be deprived, via motion for disqualification, of its counsel of choice, as

happened here. In any event, clients should not have to investigate their attorneys.



7 On May 10, 2018, this court approved comprehensive amendments to the

Rules of Professional Conduct, to take effect November 1, 2018. As part of this

revision, current rule 3-310 will be replaced by a new provision governing

conflicts of interest involving current clients, rule 1.7, which does take some of its

language from rule 1.7 of the Model Rules. Like the current rule 3-310, new rule

1.7 will require informed written consent for concurrent representation of adverse

interests. But in approving this rule, we did not adopt the comment to rule 1.7(a)

of the Model Rules upon which the Galderma court relied. We instead noted that

the client’s experience and sophistication and the presence of independent

representation in connection with the consent are “relevant” to the effectiveness of

that consent, and that the new rule “does not preclude an informed written

consent[] to a future conflict in compliance with applicable case law.” (Rules

Prof. Conduct, rule 1.7, com. 9, eff. Nov. 1, 2018 [as of

Aug. 30, 2018]. All Internet citations in this opinion are archived by year, docket

number, and case name at .)

28

Simply put, withholding available information about a known, existing conflict is

not consistent with informed consent.8

Because this case concerns the failure to disclose a current conflict, we have

no occasion here to decide whether, or under what circumstances, a blanket

advance waiver like the one at issue in Galderma would be permissible.9 We

conclude, rather, that without full disclosure of existing conflicts known to the

attorney, the client’s consent is not informed for purposes of our ethics rules.

Sheppard Mullin failed to make such full disclosure here.

C.

Sheppard Mullin argues that even if it failed to secure adequate consent to the

dual representation of J-M in the qui tam action, the ethical violation does not

invalidate the entire engagement agreement because the agreement encompassed

other matters as well. But as noted, the object of the agreement was representation

in the qui tam action. The agreement states that Sheppard Mullin is engaged to

represent J-M “in connection with the lawsuit filed by Qui Tam plaintiff John



8 We recognize that client confidentiality may, in some cases, limit what a

law firm may tell one client about its representation of another. As noted in a

comment to rule 1.7 of the Model Rules, if one client “refuses to consent to the

disclosure necessary to permit the other client to make an informed decision, the

lawyer cannot properly ask the latter to consent.” (Model Rules, rule 1.7, com. 19;

see also Rules Prof. Conduct, rule 1.7, com. 7, eff. Nov. 1, 2018



[as of Aug. 30, 2018].)

9 Several federal courts applying California law have declined to enforce

blanket advance waivers on grounds they insufficiently disclosed the conflicts of

interest. (Lennar Mare Island, LLC v. Steadfast Ins. Co. (E.D.Cal. 2015) 105

F.Supp.3d 1100, 1115, 1118; Western Sugar Coop. v. Archer-Daniels-Midland

Co. (C.D.Cal. 2015) 98 F.Supp.3d 1074, 1083–1084; Concat LP v. Unilever, PLC

(N.D.Cal. 2004) 350 F.Supp.2d 796, 801, 819–821.) Because we deal here with

disclosure and waiver of a known existing conflict, we do not decide whether these

decisions are correct.

29

Hendrix.” The agreement further states that the representation will terminate upon

completion of that action and any related proceedings. The only reference to work

outside that scope is a general statement that, except as the parties otherwise agree,

the agreement’s terms will also apply to “other engagements for [J-M] that

[Sheppard Mullin] may undertake.” (Italics added.) And while the agreement

states that certain provisions on responding to possible third party document

requests survive termination of the representation, those provisions were not

independent of the qui tam representation but dependent on it. They do not

change the fact that the agreement was one for representation in the qui tam

action, a representation that violated rule 3-310(C)(3).10

As explained in part II, ante, violation of a Rule of Professional Conduct in

the formation of a contract can render the contract unenforceable as against public

policy. That is what happened here when Sheppard Mullin agreed to represent

J-M in the qui tam action, while also representing South Tahoe on other matters,

without obtaining J-M’s informed consent. It is true that Sheppard Mullin

rendered J-M substantial legal services pursuant to the agreement, and J-M has not

endeavored to show that it suffered damages as a result of the law firm’s conflict

of interest. But the fact remains that the agreement itself is contrary to the public

policy of the state. The transaction was entered under terms that undermined an

ethical rule designed for the protection of the client as well as for the preservation

of public confidence in the legal profession. The contract is for that reason



10 At oral argument, counsel for Sheppard Mullin offered a different argument

for treating the conflict as relating only to a portion of the parties’ agreement: The

agreement encompassed not only representation in the qui tam action, but also

representation in a state court action to which South Tahoe was not a party. The

engagement agreement itself, however, makes clear that its object was

representation in the qui tam action. In any event, Sheppard Mullin did not

include this argument or supporting reasoning in its briefs, and we decline to

address an argument cursorily raised for the first time at oral argument.

30

unenforceable. (See Chambers, supra, 29 Cal.4th at p. 159 [refusing to enforce

fee-sharing agreement reached without client’s written consent, even though client

was informed of agreement and referring attorney performed substantial legal

services]; Altschul v. Sayble, supra, 83 Cal.App.3d at p. 164 [fee-sharing

agreement reached without client’s written consent would be void as contrary to

public policy even if referring attorney performed some legal services].)

IV.

Because Sheppard Mullin’s ethical breach renders the engagement agreement

unenforceable in its entirety, the rule of Loving & Evans means that Sheppard

Mullin is not entitled to the benefit of the arbitrators’ decision awarding it unpaid

contractual fees. The final question before us is whether Sheppard Mullin may

receive any compensation for its services at all.

As an alternative to contractual recovery, Sheppard Mullin has sought

recovery under the equitable doctrine of quantum meruit—a doctrine that has

sometimes been applied to allow attorneys “to recover the reasonable value of

their legal services from their clients when their fee agreements are found to be

invalid or unenforceable.” (Huskinson & Brown v. Wolf (2004) 32 Cal.4th 453,

462 (Huskinson), citing cases; see Rest.3d Law Governing Lawyers, supra,

§ 39.)

11 The Court of Appeal, however, held that Sheppard Mullin’s conflict of

interest disentitles it from either receiving or retaining any compensation for the

approximately 10,000 hours it worked on the qui tam matter, even on a theory of

quantum meruit. Relying on a series of California cases in which courts denied



11 “Quantum meruit refers to the well-established principle that ‘the law

implies a promise to pay for services performed under circumstances disclosing

that they were not gratuitously rendered.’ [Citation.] To recover in quantum

meruit, a party need not prove the existence of a contract [citations], but it must

show the circumstances were such that ‘the services were rendered under some

understanding or expectation of both parties that compensation therefor was to be

made.’ ” (Huskinson, supra, 32 Cal.4th at p. 458.)

31

compensation in the face of serious ethical breaches, the Court of Appeal held that

an attorney may never recover compensation for services rendered while it labored

under an improperly waived conflict of interest. (See Fair v. Bakhtiari (2011) 195

Cal.App.4th 1135; Jeffry, supra, 67 Cal.App.3d 6; Goldstein v. Lees (1975) 46

Cal.App.3d 614 (Goldstein).)

Sheppard Mullin contends that not every attorney conflict of interest

precludes quantum meruit recovery of unpaid fees, much less requires

disgorgement of fees already paid. And here, it argues, the circumstances do not

warrant the denial of fees. The firm asserts that, as the arbitrators found, its

attorneys acted in good faith reliance on the blanket conflict waivers both clients

signed. There is no claim that Sheppard Mullin ever worked against J-M’s interest

in any matter, and no evidence suggests a breach of confidentiality. And finally,

Sheppard Mullin emphasizes that J-M stipulated in the arbitration proceedings that

it was not challenging the “value or [] quality” of Sheppard Mullin’s work on the

qui tam action or seeking “transition costs” incurred in replacing the disqualified

firm.

12 Under the circumstances, Sheppard Mullin argues, denying all

compensation for the extensive legal services the firm rendered in the qui tam

action would impose a greatly disproportionate penalty and give J-M a massive

windfall.

The ultimate question whether Sheppard Mullin is entitled to any

compensation at all is not ripe for our resolution. Because the superior court

ordered the matter to arbitration before determining whether the parties had an

enforceable contract and refused to review the merits of the arbitral award after it



12 In the stipulation, however, J-M reserved the right to present evidence of

the ethical violation and to argue that because of it Sheppard Mullin was not

entitled to any fees.

32

was made, it has yet to consider any of the noncontract issues framed by the

parties’ pleadings.

13 Our holding today will reposition the parties where they

were before the case took its unwarranted detour to arbitration, giving them an

opportunity to litigate their noncontract claims. In order to clarify the scope of

issues remaining for resolution, however, we address the portion of the Court of

Appeal’s decision categorically barring recovery. We conclude, contrary to the

Court of Appeal, that California law does not establish a bright-line rule barring all

compensation for services performed subject to an improperly waived conflict of

interest, no matter the circumstances surrounding the violation.

Like the Court of Appeal, we begin by considering the rule described in

section 37 of the Restatement Third of Law Governing Lawyers: “A lawyer

engaging in clear and serious violation of duty to a client may be required to

forfeit some or all of the lawyer’s compensation for the matter.” (See also id.,

§ 39, com. e, p. 288 [where fee contract is unenforceable, attorney may recover in

quantum meruit “unless the lawyer’s conduct warrants fee forfeiture under § 37”].)

An actual conflict of interest, the Court of Appeal reasoned, is always a serious

violation, and so always bars any compensation. But while every violation of

attorney conflict of interest rules is indeed serious to some degree, the rule

described in the Restatement—which in turn derives from general principles of

agency law—is not so categorical. The Restatement instructs, and we agree, that

the egregiousness of the attorney’s conduct, its potential and actual effect on the

client and the attorney-client relationship, and the existence of alternative



13 In its complaint, Sheppard Mullin pleaded a cause of action for quantum

meruit; J-M cross-complained for breach of fiduciary duty and fraudulent

inducement and prayed for exemplary damages as well as disgorgement of the fees

already paid. These claims have not been tried, nor have they been tested by

means of a motion for summary judgment.

33

remedies are all also relevant to whether and to what extent forfeiture of

compensation is warranted. (See id., § 37.)

The law takes these case-specific factors into account because forfeiture of

compensation is, in the end, an equitable remedy. As California courts have often

noted, the rule governing attorney forfeiture derives primarily from the general

principle of equity that a fiduciary’s breach of trust undermines the value of his or

her services. (Cal Pak Delivery, Inc. v. United Parcel Service, Inc. (1997) 52

Cal.App.4th 1, 14, fn. 2 (Cal Pak); Schaefer v. Berinstein (1960) 180 Cal.App.2d

107, 135, disapproved on other grounds in Jefferson v. J.E. French Co. (1960) 54

Cal.2d 717, 719; accord, Kidney Association of Oregon v. Ferguson (1992) 315

Or. 135, 144 [843 P.2d 442] [“When a court reduces or denies attorney fees as a

consequence of a lawyer’s breach of fiduciary duty, it is a reflection of the limited

value that a client receives from the services of an unfaithful lawyer.”].) “The

remedy of fee forfeiture presupposes that a lawyer’s clear and serious violation of

a duty to a client destroys or severely impairs the client-lawyer relationship and

thereby the justification of the lawyer’s claim to compensation.” (Rest.3d Law

Governing Lawyers, supra, § 37, com. b, p. 272.) Forfeiture also serves as a

deterrent to misconduct, and it avoids putting clients to the task of proving the

harm stemming from the lawyer’s conflict of interest when the extent of the harm

may be difficult to measure. (Ibid.)

The degree to which forfeiture is warranted as an equitable remedy will

necessarily vary with the equities of the case. The commentary to the Restatement

thus recognizes that while an attorney’s “flagrant” breach of his or her duty to a

client may justify a complete forfeiture even without proof of harm to the client

(Rest.3d Law Governing Lawyers, supra, § 37, com. d, p. 273), in other, less

egregious cases complete forfeiture “would sometimes be an excessive sanction,

giving a windfall to a client” (id., com. b, p. 272). As our sister court has

34

explained, a rule of automatic and complete forfeiture “for every breach of

fiduciary duty, or even every serious breach, would deprive the remedy of its

equitable nature and would disserve its purpose of protecting relationships of

trust.” (Burrow v. Arce (Tex. 1999) 997 S.W.2d 229, 241; see also id. at p. 242,

fn. 45 [collecting state cases taking similarly flexible approach].)

When a law firm seeks compensation in quantum meruit for legal services

performed under the cloud of an unwaived (or improperly waived) conflict, the

firm may, in some circumstances, be able to show that the conduct was not willful,

and its departure from ethical rules was not so severe or harmful as to render its

legal services of little or no value to the client. Where some value remains, the

attorney or law firm may attempt to show what that value is in light of the harm

done to the client and to the relationship of trust between attorney and client.

Apprised of these facts, the trial court must then exercise its discretion to fashion a

remedy that awards the attorney as much, or as little, as equity warrants, while

preserving incentives to scrupulously adhere to the Rules of Professional Conduct.

The Court of Appeal decisions on which J-M relies do not persuade us to

adopt a more categorical rule. In Jeffry, supra, 67 Cal.App.3d at pages 8 to 9, a

law firm represented a client in a personal injury matter while, through a different

attorney, also representing the client’s wife against the client in their marital

dissolution case, without the client’s knowledge or consent. After an unconflicted

attorney substituted into the personal injury matter and obtained a recovery for the

client, the firm sought and was awarded the reasonable value of its services.

(Ibid.) On appeal, the client argued that “an attorney should be barred from

recovering a fee when the client has discharged him for accepting employment

hostile to the client’s interests” (id. at p. 9) and the appellate court agreed,

criticizing the law firm’s “uninhibited acceptance of a lawsuit against a current

client” (id. at p. 11) and denying the firm any compensation for services rendered

35

after its ethical breach (id. at p. 12). The court’s holding was not surprising, given

the facts: the law firm had decided to represent the client’s wife in a lawsuit

against him, without making any effort to obtain his consent. But the court did not

purport to craft a rule to govern all other breaches, nor did it offer any reasoning to

support such a categorical rule.

The same is true of Cal Pak, supra, 52 Cal.App.4th 1, in which the trial court

disqualified an attorney and disallowed compensation after he proposed to drop

his clients’ claims in exchange for several million dollars, to be paid directly to the

attorney. (Id. at pp. 6–8.) The Court of Appeal ruled that the trial court “clearly

did not abuse its discretion,” at least insofar as it denied compensation for work

performed after this “colossal misdeed.” (Id. at pp. 16, 13; see also id. at p. 13

[“here the trial court faced a direct, acknowledged, undisputed and indefensible

betrayal by counsel of the interests of his client and the putative class”].) In so

ruling, the court did recite a “general rule in conflict of interest cases that where an

attorney violates his or her ethical duties to the client, the attorney is not entitled to

a fee for his or her services” (id. at p. 14), but it also observed that the same cases

point to the possibility of some fees being recoverable in certain circumstances (id.

at p. 16). The court ultimately upheld the trial court’s ruling in pertinent part

without relying on any absolute rule denying all compensation for attorneys who

act under a conflict of interest, no matter the nature and consequences of the

breach.

14



14 Day v. Rosenthal (1985) 170 Cal.App.3d 1125 involved a similarly

egregious breach of duty. The attorney there had cheated Doris Day and her

husband out of millions of dollars, while ostensibly representing them as attorney

and business manager. (Id. at pp. 1133–1134.) The case, as the trial court

described it, “ ‘ooze[d] with attorney-client conflicts’ ” and “ ‘reek[ed]’ ” of

violations of the Rules of Professional Conduct. (Id. at pp. 1134, 1135.) After

reviewing the misconduct in detail, the appellate court rejected the attorney’s

36

J-M also relies on Goldstein, supra, 46 Cal.App.3d 614, in which an attorney

had served first as a corporation’s general counsel, then as counsel for a corporate

director waging a proxy battle for control of the company. The Court of Appeal

held the latter representation was subject to a conflict of interest, rendering the

contract for that representation unenforceable. (Id. at pp. 617, 623–624.) The

court went on to conclude, without any supportive reasoning, that the attorney’s

firm was barred from any noncontractual recovery for his services: “Technically,

of course, this action is not brought upon the contract, but is brought for services

rendered pursuant to the contract. Needless to say, this distinction does not call

for a different result.” (Id. at p. 624, fn. 11.) Goldstein’s unexamined

conclusion—needless to say—holds little persuasive value. (Compare Rest.3d

Law Governing Lawyers, § 37, supra, com. a, p. 271 [noting that even when an

attorney’s contract is rendered unenforceable by misconduct, the lawyer may in

some cases recover the fair value of services rendered].)15



complaint that the trial court failed to determine the value of his services,

explaining that the trial court in fact “found that the reasonable value of all his

services was zero” (id. at p. 1163) and, in any event, “[h]is conflicts of interest

rendered his services valueless and required no finding on the[ir] reasonable

value” (id. at p. 1162).

15 The concurring and dissenting opinion (post, at p. 11) notes that Goldstein

and Jeffry cited this court’s decision in Clark v. Millsap (1926) 197 Cal. 765, 785,

in which we upheld a trial court’s award of only a partial fee “upon a

consideration of conflicting evidence which involves the unraveling of

transactions intermingled with fictitious and fraudulent acts.” We explained that

“a court may refuse to allow an attorney any sum as an attorney’s fee if his

relations with his client are tainted with fraud” or other improper acts

“ ‘inconsistent with the character of the profession.’ ” (Ibid.) Here, the trial court

has not yet determined whether Sheppard Mullin’s violation of the Rules of

Professional Conduct constituted fraud or whether it was in other respects so

inconsistent with the character of the legal profession as to justify complete

forfeiture of compensation.

37

Finally, J-M relies on Fair v. Bakhtiari, supra, 195 Cal.App.4th 1135 (Fair),

but Fair is not reasonably read to establish a categorical rule barring all recovery

in cases of conflict of interest. In Fair, the trial court denied quantum meruit

recovery to an attorney who had entered into extensive real estate investments

with a client without giving the client advisements required by the Rules of

Professional Conduct. (Id. at pp. 1142–1144, 1146.) On appeal, the court

observed that services burdened by a conflict of interest between attorney and

client have often been held to be without value. But it explained that “ ‘[w]here

the entire contract is prohibited by statute or public policy, recovery in quantum

meruit based on the reasonable value of services performed may or may not be

allowed.’ ” (Id. at p. 1150.) The Court of Appeal concluded that the trial court

had not abused its discretion in disallowing quantum meruit recovery under the

circumstances of the case because the court “could well determine” that the

attorney’s conduct was “fundamentally at war” with both ethical rules and

statutory law and that it “infected the entire relationship” between the attorney and

his clients. (Id. at p. 1169.)

As Fair itself acknowledged, other California cases have explained that

quantum meruit recovery may indeed be available in cases of conflict of interest,

depending on the circumstances. (Fair, supra, 195 Cal.App.4th, at p. 1161.)

Pringle v. La Chapelle (1999) 73 Cal.App.4th 1000, involved a claim that an

attorney who represented both a corporation and individuals with interests adverse

to the corporation failed to obtain valid waivers of the conflict and was therefore

entitled to no fees for her services to one of the individual clients. (Id. at p. 1005.)

The appellate court agreed with the individual client that “an attorney’s breach of

a rule of professional conduct may negate an attorney’s claim for fees,” but noted

the absence of any cited case holding that it “automatically” does so. (Id. at

pp. 1005, 1006, italics added.) On the minimal record the client had provided, the

38

Court of Appeal could not “ascertain if the purported violation of the rules was

serious, if any act was inconsistent with the character of the profession, or if there

was an irreconcilable conflict” (id. at p. 1006), and therefore affirmed the

judgment awarding the attorney her fees. (Id. at p. 1007; see also Mardirossian &

Associates, Inc. v. Ersoff (2007) 153 Cal.App.4th 257, 279 [affirming trial court’s

award of compensation in quantum meruit on assumption that attorney violated

rule 3-310 of the Rules of Professional Conduct, where asserted ethical violation

was not “particularly egregious” and where complaining client had not shown

prejudice]; Sullivan v. Dorsa (2005) 128 Cal.App.4th 947, 965–966 [whether

violation of rules on representation of adverse interests was serious enough to

compel forfeiture of fees is a question primarily for the trial court’s factfinding

and discretionary judgment].)

The Court of Appeal also looked for support to this court’s decision in

Huskinson, supra, 32 Cal.4th 453, but Huskinson does not mandate application of

a categorical bar on compensation in all cases involving the ethical conflicts rules.

In Huskinson, two law firms violated the Rules of Professional Conduct by

agreeing between them to divide the prospective fee in a contingency case without

obtaining the client’s informed written consent; one firm later sued the other for its

agreed share of the fee. (Id. at pp. 456–457.) We held that while the plaintiff firm

could not recover on the contract, which was unenforceable, it could recover the

reasonable value of its services under a claim for quantum meruit. We reasoned

that the ethical rule requiring disclosure to the client did not bar either the

representation or the receipt of compensation. We further reasoned that allowing a

quantum meruit recovery, which would be smaller than the agreed fee division,

would not undermine the ethical rule’s policy because attorneys would still have a

strong incentive to comply in order to receive their full fee. (Id. at pp. 459–460,

463.)

39

In the portion of Huskinson on which the Court of Appeal relied, we

distinguished two cases in which courts had disallowed quantum meruit recovery

to attorneys who committed ethical violations, Jeffry, supra, 67 Cal.App.3d 6, and

Goldstein, supra, 46 Cal.App.3d 614, explaining that those cases “involved

violations of a rule that proscribed the very conduct for which compensation was

sought, i.e., the rule prohibiting attorneys from engaging in conflicting

representation or accepting professional employment adverse to the interests of a

client or former client without the written consent of both parties.” (Huskinson,

supra, 32 Cal.4th at p. 463.) But we had no occasion in Huskinson to consider

whether an unwaived conflict of interest, standing alone, always requires the

denial of compensation. The issue was not presented there and so we did not

decide it.

16



16 The concurring and dissenting opinion (post, at pp. 23–24) also invokes

Thomson v. Call (1985) 38 Cal.3d 633 (Thomson), in which a city council

member’s sale of real estate to the city was found to have violated Government

Code section 1090’s ban on self-dealing by public employees. We upheld a

judgment requiring the defendant to return the entire purchase price, even though

the city was permitted to retain the property. (Thomson, at pp. 646–652.)

Thomson is distinguishable both procedurally and substantively. Whereas

the superior court there had held a trial and tailored a remedy appropriate to the

facts and equities (Thomson, supra, 38 Cal.3d at pp. 643–644), here there has been

no trial and no such opportunity for the superior court to consider the most

appropriate remedy. And while we noted the trial court’s remedy in that case was

“consistent with a long, clearly established line of cases” denying all recovery for

transactions made in violation of Government Code section 1090 (Thomson, at

p. 647), precedent in the area of attorney rule violations points to a more

fact-dependent inquiry into the egregiousness of the attorney’s ethical violation, its

effect on the value of the work to the client, and other possible injuries to the

client. (See, e.g., Cal Pak, supra, 52 Cal.App.4th at pp. 15–16; Rest.3d Law

Governing Lawyers, supra, § 37.) The difference between these approaches

reflects a difference in the nature of the conflicts at issue—a Government Code

section 1090 violation inheres in the very fact of the official’s interest in the

transaction, and cannot be avoided by full disclosure (Thomson, at pp. 649–650)—

40

The Court of Appeal cases demonstrate that forfeiture of compensation is

often an appropriate response to conflicted representation. But they do not stand

for the proposition that quantum meruit recovery for legal services performed

while the attorney suffers from an unwaived conflict of interest is categorically

barred, and we do not so hold. We instead hold that the issue is generally one for

the discretion of the trial court, to be exercised in light of all the circumstances that

gave rise to the conflict. Once again, the Restatement provides useful guidance:

“Considerations relevant to the question of forfeiture include the gravity and

timing of the violation, its willfulness, its effect on the value of the lawyer’s work

for the client, any other threatened or actual harm to the client, and the adequacy

of other remedies.” (Rest.3d Law Governing Lawyers, supra, § 37; see also

Kidney Association of Oregon v. Ferguson, supra, 843 P.2d at p. 477 [factors to be

considered include the value of services to the client and “ “whether the breach

was intentional, negligent or without fault’ ”].)

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



as well as a different judgment about the range of remedies that will effectively

avoid undermining incentives to comply with the relevant rules (see id. at p. 651).

Under these circumstances, we conclude consideration of aggravating and

mitigating circumstances, such as whether the law firm knowingly violated rule

3-310(C)(3) and whether the conflict affected the value of its legal work, is more

appropriate than the “undeniably harsh” categorical rule applied in Thomson.

(Thomson, at p. 650.)

41

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. (Huskinson, supra, 32 Cal.4th

at p. 458, fn. 2, citing Chambers, supra, 29 Cal.4th at p. 162.) 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.

On remand, Sheppard Mullin may be unable to meet its burden and the trial

court may find its misconduct so egregious or so potentially harmful to J-M as to

preclude any award. But without a more robust factual record or any trial court

findings we are unable to say it would be an abuse of discretion to order Sheppard

Mullin compensated in some degree for the many thousands of hours of legal

work it performed on J-M’s behalf before South Tahoe successfully moved to

have Sheppard Mullin disqualified. Sheppard Mullin’s concurrent representation

of J-M and South Tahoe in separate matters involved a conflict of interest

affecting the representation itself, not merely the attorney’s compensation as in

Huskinson, supra, 32 Cal.4th at page 463. But the firm did seek and obtain J-M’s

written consent to the conflict, albeit through a blanket waiver clause we hold here

to be ineffective under the circumstances, and it could properly have represented

both clients had the consent been properly informed. (Rule 3-310(C)(3).) The law

firm may have been legitimately confused about whether South Tahoe was J-M’s

current client when it took on J-M’s defense, or it may in good faith have believed

the engagement agreement’s blanket waiver provided J-M with sufficient

information about potential conflicts of interest, there being at the time no explicit

rule or binding precedent regarding the scope of required disclosure. The conflict

was, moreover, not one in which Sheppard Mullin represented another client

against J-M (compare Jeffry, supra, 67 Cal.App.3d at p. 11). And although J-M is

under no obligation to present evidence that it was injured—the harm resulting

42

from a violation of the duty of loyalty often being intangible and difficult to

quantify—at this point, questions as to whether Sheppard Mullin’s conflict may

have affected the value of its work or led to a loss or default in the qui tam

litigation have not yet been litigated.

On the other hand, considering Sheppard Mullin’s actions and reasoning in

light of the rule set forth in rule 3-310(C)(3), the trial court may conclude that the

firm has not shown it was legitimately confused or that it acted in good faith. The

law firm may also be unable to show its conduct caused or threatened no harm or

only minimal harm to its client. Considering these and other factors, the trial court

may determine that the policy of rule 3-310(C)(3) is best vindicated by a complete

forfeiture of compensation. On the limited factual record before us, however, we

cannot conclude that the existence of an improperly waived conflict of interest, by

itself, presents an absolute bar to the award of reasonable compensation for

services rendered.

By leaving open the possibility of quantum meruit compensation for the

10,000 hours that Sheppard Mullin worked on J-M’s behalf, we in no way

condone the practice of failing to inform a client of a known, existing conflict of

interest before asking the client to sign a blanket conflicts waiver. Trust and

confidence are central to the attorney-client relationship, and maintaining them

requires an ethical attorney to display all possible candor in his or her disclosure of

circumstances that may affect the client’s interests. Sheppard Mullin’s failure to

exhibit the necessary candor in this case has rendered its contract with J-M

unenforceable and has thus disentitled it to the benefit of the unpaid contract fees

awarded by the arbitrators in this case. Whether Sheppard Mullin is nevertheless

entitled to a measure of compensation for its work is, along with the other

unresolved noncontract issues raised by the pleadings, a matter for the trial court

to consider in the first instance.

We affirm the judgment of the Court of Appeal insofar as it reversed the

superior court’s judgment entered on the arbitration award. We reverse the

judgment of the Court of Appeal insofar as it ordered disgorgement of all fees

collected, and remand for further proceedings consistent with our opinion.