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

Sheppard, Mullin, Richter & Hampton, LLP (Sheppard) (plaintiff) simultaneously represented J-M Manufacturing Company (J-M) (defendant) and South Tahoe Utility District (South Tahoe). Sheppard represented J-M in a federal qui tam action brought by various public entities, including South Tahoe. Sheppard represented South Tahoe in several employment matters. Sheppard’s contracts with both parties included waivers of current and future conflicts of interests, but they did not specify conflicts. Sheppard did not inform either client of the representations. South Tahoe discovered the conflict of interest in violation of rule 3-310(C)(3) of the California Rules of Professional Conduct (rules) and successfully moved to disqualify Sheppard in the qui tam action. A dispute over J-M’s $3.8 million in outstanding bills from Sheppard was sent to arbitration. The arbitrators ruled for Sheppard, finding that Sheppard should have disclosed the conflicting interest and sought informed consent from J-M, but that the violation was not egregious enough to warrant the disgorgement of fees. The superior court affirmed the arbitrator’s award. The court of appeal reversed, finding that Sheppard’s undisclosed conflict of interest violated the rules, rendered the entire agreement unenforceable, and precluded the award of any fees. The California Supreme Court granted Sheppard’s petition for review.