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California Supreme Court: Advance Conflict Waivers Have Limits

The recent decision at the California Supreme Court in Sheppard, Mullin, Richter and Hampton LLP v. J-M Manufacturing, is likely to change the way business is done at large law firms.

The big issue that might be making some BigLaw partners nervous involves general advanced conflict waivers in client agreements being used to invalidate those client agreements when conflicts exist. In short, the Court held that if there is an actual conflict at the time of retention, unless that conflict is specifically disclosed, a general advanced conflict waiver is not valid.

Details of the Case and Appeals

Sheppard, Mullin, Richter and Hampton LLP was retained by J-M Manufacturing to defend a qui tam action. Unfortunately, one of the plaintiffs in that action was also a client of SMRH in an unrelated matter. And while both J-M and the conflict-causing plaintiff both had signed advance conflict waivers in retainers with SMRH, in the qui tam action, the firm was disqualified due to the conflict.

After the disqualification, J-M sought to invalidate the contract and get paid the nearly $2 million in fees paid in a subsequent action. After the contractually required arbitration and the superior court decision confirming the arbitrator's ruling in favor of the law firm, the court of appeals reversed both, explaining that the contract was void in its entirety, and therefore unenforceable. The court of appeals also ruled that the firm was not entitled to the fees it earned under the contract.

Fortunately for the firm, there's a silver lining. Although the California Supreme Court did not reverse the holding that the contract was void and unenforceable, it did hold that the firm may be entitled to recover fees in quantum meruit and returned the case to the trial court to decide that issue and set the amount of earned fees.

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