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

FACTS: The South Tahoe Utility District (South Tahoe) retained the law firm Sheppard, Mullin, Richter & Hampton, LLP (plaintiff) for occasional, as-needed labor and employment work beginning in 2002. In 2010, J-M Manufacturing Co. (defendant) retained the firm to represent it in a qui tam action. The firm ran a conflicts check, which revealed that South Tahoe had intervened as a real party in interest in the qui tam action, presenting a conflict of interest. The firm’s counsel analyzed the broad advance conflict waiver in South Tahoe’s engagement agreement, found that the firm had done no work for South Tahoe in the preceding five months, and did not disclose the conflict to either client. Instead, the firm entered an engagement agreement with J-M containing a similar conflict waiver purportedly allowing the firm to undertake representations of adverse current and future clients, provided the matters were not substantially related and the firm maintained confidentiality. The firm’s attorneys claimed they reviewed that waiver with a J-M representative, but the representative denied that, stating instead that the firm’s attorneys assured her it had no conflicts representing J-M. The firm represented J-M in the qui tam action for the next 16 months, billing nearly $3.8 million for some 10,000 hours. Meanwhile, the firm performed an additional 12 hours of labor and employment work for South Tahoe. The trial court found the waiver provision ineffective because J-M did not give fully informed consent to the conflict and disqualified the firm. The firm sued J-M for $1.3 million in outstanding fees. J-M countered demanding a refund of all fees already paid. The parties arbitrated the matter per the engagement agreement. The arbitration panel found that the firm violated the ethical rules by representing J-M without an effective conflict waiver but did so in good faith and not so egregiously as to require disgorgement of its fees. J-M appealed.