JM Eagle says ruling upholding the ethical rules was most important in multi-million-dollar legal fee dispute before California's High Court

LOS ANGELES, Sept. 6, 2018 /PRNewswire/ -- The California Supreme Court has ruled that an attorney-client contract between JM Eagle, the world's largest maker of plastic pipe, and international law firm Sheppard, Mullin, Richter & Hampton, is "unenforceable in its entirety" because it violated the state's Rules of Professional Conduct.

When Sheppard Mullin's Los Angeles office was retained by JM in 2010 to defend the manufacturer in a lawsuit filed by multiple plaintiffs, including South Tahoe Public Utility District, it failed to disclose that South Tahoe was already one of its clients in another matter. 

"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," stated the August 31 ruling, which is available here: http://www.courts.ca.gov/opinions/documents/S232946.PDF

"Whether the client is an individual or a multinational corporation with a large law department," the Court ruled, "the duty of loyalty demands an attorney or law firm provide the client all material information in the attorney or firm's possession."

The Court rejected Sheppard Mullin's argument that a blanket conflict waiver in the engagement contract was sufficient to comply with ethical standards required by the Rules of Professional Conduct for attorneys.

"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," the Court said.

JM Eagle hailed the ruling as validation of its decision to pursue the case as far as possible on ethical principles, regardless of the outcome and the expense. The company said the decision was a victory for everyone who needs to seek legal representation as well as a victory for the ethical practice of law in California.

"Most companies in corporate America seldom take a case like this through the review process," said JM's General Counsel Camilla Eng.  "It is a rare instance for a large company to pursue a law firm as it is tremendously challenging and risky; especially when resources can be devoted to more productive pursuits for the business.  But JM Eagle felt strongly that it must pursue the case as far as possible on ethical principles, regardless of the outcome."

The case will have far-reaching impacts. A California Supreme Court opinion not only affects the outcome of a case, it explains the law on the issues that the case addresses, which governs all other California Courts going forward.

"The Court's written opinion not only validated JM's decision to stand up for what is right, it further established guidelines that law firms must follow when being hired by clients and requires law firms to tell clients not just when they have a conflict of interest due to representing a different client, but all relevant information that the law firm possesses about the conflict," said Eng.

Because the contract with Sheppard Mullin was invalidated due to its failure to disclose a material fact, JM Eagle is entitled to seek disgorgement of fees which are potentially, at this point in time, $5.7 million with interest, Eng said.

"The concept of disgorgement is very concerning to law firms, which is why so many law firms signed onto Sheppard Mullin's position," said Eng. "This was a David and Goliath situation."

Sheppard Mullin had more than 30 law firms and several insurance companies sign onto a brief in support of their case, as well as separate supporting briefs from the Association of Defense Counsel and legal scholars.

"On our side, we had primarily non-profits, the Association of Corporate Counsel (ACC), the Beverly Hills Bar Association, one lawyer, one legal scholar and a private group of General Counsels of California corporations who once they heard of our case, coordinated and paid for an amicus brief out of their own pockets," said Eng. "In the wise words of Winston Churchill, 'success is not final, failure is not fatal: it is the courage to continue that counts.'" 

JM incurred the costs not only of litigating the fee dispute but also the cost to hire a new law firm to defend it and get that firm up to speed in the underlying case.

The decision that the engagement agreement is unenforceable means that Sheppard Mullin is not entitled, under that contract, to the $1.3 million in unpaid fees and interest awarded to the law firm by arbitrators.  In addition, it is not entitled, under the contract, to the $2.7 million in fees it has already been paid by JM Eagle.  Instead, in order to be entitled to any fees at all, Sheppard Mullin will have to demonstrate (among other things) that any award of fees will not be an incentive for it or other law firms to engage in the ethical breaches it committed in this case.

The Court majority also ruled that Sheppard Mullin could ask the trial court to approve some compensation of reasonable value for the 10,000 hours it had worked for JM.

Although the Court was unanimous in deciding that the engagement contract was unenforceable, Justice Ming W. Chin dissented in part, arguing that recovery of any compensation should be unavailable to Sheppard Mullin under the circumstances of this case. Chief Justice Tani G. Cantil-Sakauye concurred with the dissenting opinion.

With 23 manufacturing plants throughout North America, JM Eagle manufactures the widest array of high-grade, high-performance polyvinyl chloride and high-density polyethylene pipe across a variety of industries and applications including utility, solvent weld, electrical conduit, natural gas, irrigation and water/sewage.  More information can be found at www.jmeagle.com

SOURCE JM Eagle