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

Sheppard, Mullin, Richter & Hampton, LLP (Sheppard) (plaintiff) had an opportunity to represent J-M Manufacturing Company (J-M) (defendant) in a large lawsuit about J-M’s pipe quality. One of the many parties suing J-M was South Tahoe Utility District (South Tahoe). Sheppard had represented South Tahoe in small, unrelated employment matters for nine years but was not actively representing South Tahoe at that time. Sheppard’s agreement with South Tahoe contained a general conflict waiver of all current and future conflicts. J-M signed a similar general blanket waiver. Sheppard did not specifically disclose its representation of either party to the other one. Later, Sheppard performed a few hours of unrelated employment work for South Tahoe. A year into the pipe lawsuit, South Tahoe discovered the conflicting representation. Sheppard was disqualified from continuing to represent J-M. At that point, Sheppard had worked over 10,000 hours for J-M. Sheppard sued J-M for $1.3 million in unpaid fees. J-M counterclaimed, requesting that Sheppard return the $2.5 million in fees J-M had already paid. An arbitrator found that (1) Sheppard’s failure to specifically disclose the conflicting representations may have violated the professional rules, (2) Sheppard had thought it was following the rules, and (3) the conflict had not actually damaged J-M. The arbitrator ordered J-M to pay Sheppard the remaining $1.3 million of fees. The superior court affirmed the award. The appellate court reversed, ruling that an ethical-rule violation automatically prevented an attorney from recovering any fees. The California Supreme Court agreed to review the matter.