Under California Law, Where Party Challenges An Entire Contract As Illegal Or In Violation Of Public Policy, The Question Of Enforceability Is For The Court To Decide.
A substantial fee dispute between Sheppard, Mullin, Richter & Hampton, LLP and its client J-M Manufacturing Co., Inc., resulted in an arbitrator’s award to Sheppard, Mullin that the trial court confirmed, that the client appealed, and that the Court of Appeal has now reversed in a published opinion. Sheppard, Mullin, Richter & Hampton, LLP v. J-M Manufacturing Co., Inc., No. B256314 (2/4 Jan. 29, 2016).
The problem with the arbitrator’s award in favor of Sheppard, Mullin was that Sheppard, Mullin simultaneously represented adverse parties, albeit in unrelated matters. This nevertheless violated Cal. Rules of Prof. Conduct, Rule 3-310, requiring that attorneys avoid the simultaneous representation of adverse interests.
The rule that an arbitrator’s mistakes of law and fact does not provide a basis for refusing to confirm an award is not ironclad, because under California law, the court gets to decide the enforceability of a contract where a party challenges an entire contract as illegal or in violation of public policy. Here, the Court of Appeal readily found a violation of Rule 3-310 to be a violation of an expression of public policy:
“As discussed in Flatt, SpeeDee Oil, American Airlines v. Sheppard Mullin, and Fiduciary Trust, the attorney’s duty of undivided loyalty that forms the basis of Rule 3- 310 constitutes the very foundation of an attorney-client relationship. The Agreement, which violated Rule 3-310(C), therefore violated an expression of public policy. The trial court erred in holding that the Agreement was valid and enforceable.” (slip op., p. 26).
Agreeing with cases holding that “[t]here is no requirement that a contract violate an express mandate of a statute before it may be declared void as contrary to public policy,” the Court of Appeal rejected Sheppard, Mullins’ argument that courts may consider only public policy as expressly declared by the Legislature.
A January 30, 2016 post in Mike Hensley’s and my blog, “California Attorney’s Fees,” describes the end result here as a “brutal reversal”, because “the reviewing court found that S, M was not entitled to fees during the conflict as a matter of law under Rule 3-310, but remanded for a determination of when the actual conflict arose.” So a fee award of $1.3M got reversed.
NOTE: This is the third published California opinion in recent months that addresses the “public policy” exception to the general rule that arbitration awards can’t be reviewed for a mistake of law or fact, the other two being SingerLewak v. Gantman, 241 Cal.App.4th 610 (2015) (See Oct. 22, 2015 post) and Epic Medical Management v. Paquette, B261541 (2/8 filed Dec. 29, 2015, ord pub. Jan. 28, 2015).