Filed 1/23/20
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FIFTH APPELLATE DISTRICT
JOHN HANCE et al.,
F075852
Plaintiffs,
(Super. Ct. No. 673904)
v.
SUPER STORE INDUSTRIES, OPINION
Defendant;
LAW OFFICES OF SCOTT A. MILLER,
Objector and Appellant;
LAW OFFICES OF STEVEN D. WAISBREN,
Claimant and Respondent.
APPEAL from an order of the Superior Court of Stanislaus County. John D.
Freeland, Judge.
Law Offices of Scott A. Miller, Scott A. Miller, Bonnie Fong; Esner, Chang &
Boyer, Stuart B. Esner and Joseph S. Persoff for Objector and Appellant.
Law Offices of Steven D. Waisbren and Steven D. Waisbren for Claimant and
Respondent.
Littler Mendelson, George J. Tichy II, Michelle R. Barrett and Lisa Lin Garcia for
Defendant Super Store Industries.
-ooOoo-
The attorneys who represented the plaintiff class in a class action moved the trial
court for approval of a settlement of the action; they also moved for an award of attorney
fees and a division of the award among cocounsel. The division of fees between two of
the attorneys was disputed, one seeking compensation in accordance with an alleged
written agreement for the division of the fees and the other contending the purported
agreement was unenforceable. The trial court made an award of attorney fees and
divided the fees in accordance with the alleged fee division agreement. Appellant
challenges the enforceability of that agreement and the division of the attorney fee award
between himself and respondent. We reverse and remand for a redetermination of the
division of the attorney fee award between appellant and respondent.
FACTUAL AND PROCEDURAL BACKGROUND
In January 2012, attorney William Margolin referred client John Hance to
Steven D. Waisbren, an experienced labor law attorney, to potentially represent Hance in
an action against his employer, defendant Super Store Industries, based on wage and hour
claims. Waisbren1 discussed the matter with Hance and concluded it had the potential to
become a class action. Waisbren had limited experience with class actions, so he brought
in attorneys Scott A. Miller and Bonnie Fong, because he believed Miller2 was qualified
to handle a class action. A second class representative, Joseph Ribeiro, was added.
Hance and Ribeiro signed representation agreements drafted by the three attorneys, in
which they retained the attorneys to represent them in a potential class action against
defendant. The representation agreements provided that attorney fees under the
agreements would be shared among the attorneys according to agreements among them.
Hance’s representation agreement additionally stated that Margolin would be paid a
1 “Waisbren” refers to both Steven D. Waisbren and Law Offices of Steven D. Waisbren.
2 “Miller” refers to both Scott A. Miller and Law Offices of Scott A. Miller.
2.
referral fee of 15 to 25 percent of the total attorney fees awarded; that provision was
omitted from Ribeiro’s agreement.
From January to September 2012, Waisbren performed work on the case, along
with Miller and Fong. On September 24, 2012, after negotiations among the attorneys,
Fong, with the approval of Miller, sent an email to Waisbren outlining three options for a
fee division agreement. On September 27, 2012, Miller and Waisbren met to discuss the
proposals; on the same date, Fong sent an email to Waisbren to “confirm our tentative
agreement.” Under its terms, Waisbren was to receive a 30 percent referral fee, Miller
was to pay Margolin’s 15 percent referral fee, and Miller was to handle the case and pay
the costs from that point forward. On October 1, 2012, Waisbren emailed back that the
September 27, 2012 proposal was “fine.” Miller, Fong, and Kelly Ann Buschman, an
additional attorney brought in by Miller, then performed the work on the case. Waisbren
remained as an attorney of record and monitored the progress of the case.
In 2014, Mike Helfgott was added as a third class representative. His
representation agreement did not mention Waisbren, Fong, or Margolin. Miller initially
failed to inform Helfgott that Waisbren was also an attorney of record on the case and
failed to inform Waisbren that Helfgott had been added as a class representative.
In 2016, the parties reached a settlement agreement in the class action. In March
2017, Miller and Fong, on behalf of the plaintiff class, moved for final approval of the
settlement. At the same time, they moved for an award of attorney fees, and a division of
those fees among the attorneys for the class.3
In 2015, a dispute had arisen between Miller and Waisbren regarding the share of
the attorney fee award to which Waisbren was entitled. Waisbren filed his own motion
for approval of division of the attorney fees. He contended the agreement reflected in the
3 Fong had her own law practice; she was not employed by Miller but had worked with
him as an independent contractor in the past. She agreed to participate in the representation of
the plaintiff class but did not make a separate claim for a share of the attorney fees.
3.
September 27 and October 1, 2012 emails constituted a binding agreement that Waisbren
was entitled to receive 30 percent of the award. In support, he presented copies of the
emails he contended reflected the agreement, and copies of three forms, signed by the
three class representatives, in which the class representatives consented to the attorneys’
fee division agreement.
Miller contended the purported fee division agreement with Waisbren was
unenforceable for a variety of reasons, including: (1) there was never a final agreement
to terms because Waisbren did not clearly accept all terms of the September 27, 2012
proposal; (2) any agreement for division of fees among the attorneys required the written
consent of all the clients (Rules Prof. Conduct, former rule 2-200)4 and, while Waisbren
initially obtained a written consent from each class representative, Helfgott subsequently
retracted his consent; and (3) if the fee division agreement was valid, it was rendered
invalid by Waisbren’s breach. Miller also contended the consents to the fee division
agreement, which Waisbren obtained from the clients, were invalid because Waisbren
failed to advise the clients that he lacked professional liability insurance, in violation of
former rule 3-410.5
On June 2, 2017, the trial court entered an order granting final approval of the
settlement of the class action. It awarded $4,300,000 as attorney fees to class counsel. In
a separate June 2, 2017 order determining the division of class counsel’s attorney fees,
the trial court ordered that 5 percent of the attorney fees ($215,000) be awarded to
Buschman, 15 percent ($645,000) be awarded to Margolin, 30 percent ($1,290,000) be
awarded to Waisbren, and the remaining 50 percent ($2,150,000) be awarded to Miller.
4 Former rule 2-200 was in effect at the time counsel allegedly entered into the fee division
agreement. Rule 1.5.1, with similar content, went into effect on November 1, 2018. Further
undesignated references to rules or former rules are to the State Bar Rules of Professional
Conduct.
5 Former rule 3-410 was in effect in early 2012, when Hance was referred to Waisbren and
retained him as counsel. Rule 1.4.2, with similar content, went into effect on November 1, 2018.
4.
The trial court was convinced by a preponderance of the evidence that Miller and
Waisbren agreed in October 2012 to allocate 30 percent of the awarded attorney fees to
Waisbren. Its order gave effect to that agreement. Miller appeals from the order dividing
the attorney fees among counsel.
DISCUSSION
I. Standard of Review
“An appellate court reviews an award of attorneys’ fees in the settlement of a class
action under an abuse of discretion standard.” (7-Eleven Owners for Fair Franchising v.
Southland Corp. (2000) 85 Cal.App.4th 1135, 1164.) Discretion must be exercised in
accordance with the applicable law; if the trial court’s decision falls outside the
permissible range of options set by the applicable legal criteria, it has abused its
discretion. (Cahill v. San Diego Gas & Electric Co. (2011) 194 Cal.App.4th 939, 957.)
“The abuse of discretion standard is not a unified standard; the deference it calls for
varies according to the aspect of a trial court’s ruling under review. The trial court’s
findings of fact are reviewed for substantial evidence, its conclusions of law are reviewed
de novo, and its application of the law to the facts is reversible only if arbitrary and
capricious.” (Hariguchi v. Superior Court (2008) 43 Cal.4th 706, 711–712, fn. omitted.)
When the facts are not in dispute, application of a statute or rule to those facts is reviewed
de novo. (Harustak v. Wilkins (2000) 84 Cal.App.4th 208, 212.)
II. Fee Division Agreement
In the trial court, as well as in this court, the attorneys argued at length regarding
whether there was a lack of compliance with former rule 2-200 that rendered the
attorneys’ fee division agreement unenforceable. Former rule 2-200 provided:
“(A) A member [of the California State Bar] shall not divide a fee for legal
services with a lawyer who is not a partner of, associate of, or shareholder
with the member unless:
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“(1) The client has consented in writing thereto after a full disclosure has
been made in writing that a division of fees will be made and the terms of
such division; and
“(2) The total fee charged by all lawyers is not increased solely by reason
of the provision for division of fees and is not unconscionable as that term
is defined in rule 4-200.”
The attorneys disputed whether a final fee division agreement had been reached,
whether Helfgott’s retraction of his consent invalidated compliance with former
rule 2-200, and whether Waisbren breached the agreement and thereby invalidated it. We
need not address these complex issues, however, because even if the fee division
agreement was not made unenforceable on any of these grounds, we conclude it was
unenforceable because of Waisbren’s failure to comply with former rule 3-410.
A. Violation of Rules of Professional Conduct
Former rule 3-410 provided, in pertinent part:
“(A) A member [of the California State Bar] who knows or should know
that he or she does not have professional liability insurance shall inform a
client in writing, at the time of the client’s engagement of the member, that
the member does not have professional liability insurance whenever it is
reasonably foreseeable that the total amount of the member’s legal
representation of the client in the matter will exceed four hours.
“(B) If a member does not provide the notice required under paragraph (A)
at the time of a client’s engagement of the member, and the member
subsequently knows or should know that he or she no longer has
professional liability insurance during the representation of the client, the
member shall inform the client in writing within thirty days of the date that
the member knows or should know that he or she no longer has
professional liability insurance.”
The apparent intent of the rule was to require the attorney to disclose the lack of
professional liability insurance to the client, at the time the client retained the attorney, so
the client could consider that information in making the decision to retain or not retain
the attorney. The disclosure would enable the client to make an informed decision
whether to engage an attorney who did not carry insurance that would protect the client in
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the event of the attorney’s negligent or other wrongful conduct that might have an
adverse effect on the client’s case.
The rule does not specify the consequences of noncompliance. We have found no
case addressing the consequences of a failure to comply with former rule 3-410. In cases
involving violations of other provisions of the Rules of Professional Conduct, however,
courts have determined a violation of the rules in the formation of a contract can render
the contract unenforceable.
In Kallen v. Delug (1984) 157 Cal.App.3d 940 (Kallen), the client sought to retain
the defendant as her attorney, to replace the plaintiff, in ongoing litigation. The plaintiff
refused to sign a substitution of attorney or transfer the client’s case files to the defendant
unless the defendant agreed to a specified fee division arrangement. (Id. at p. 945.)
Feeling he had no choice, the defendant signed the letter acknowledging the plaintiff’s
terms. (Id. at p. 946.) The client’s litigation was later settled, and the plaintiff demanded
his share of the attorney fees. The defendant contended the letter agreement was
unenforceable as contrary to public policy. The plaintiff sued to enforce the agreement.
(Id. at p. 947.)
The court reversed summary judgment in the plaintiff’s favor, concluding the fee
division agreement was illegal, contrary to public policy, and therefore unenforceable.
(Kallen, supra, 157 Cal.App.3d at p. 948.) Former rule 2-111(A)(2), which was then in
effect, provided that an attorney “shall not withdraw from employment until he has taken
reasonable steps to avoid foreseeable prejudice to the rights of his client, including …
delivering to the client all papers and property to which the client is entitled.” (Kallen, at
p. 950.) The rule applied equally when an attorney was discharged. (Ibid.)
Consequently, it was a breach of the plaintiff’s duties under former rule 2-111(A)(2) to
retain the client’s case file after discharge. (Kallen, at p. 950.) It was also a breach of his
duties under that rule for the plaintiff to use his refusal to execute a substitution of
attorney as a device to protect his fees. (Id. at pp. 950–951.) The court concluded: “It is
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clearly contrary to the public policy of this state to condone a violation of the ethical
duties which an attorney owes to his client. [Citation.] In recognition of this premise,
‘[contracts] which violate the canons of professional ethics of an attorney may for that
reason be void.’ ” (Id. at p. 951.)
In Scolinos v. Kolts (1995) 37 Cal.App.4th 635 (Scolinos), the plaintiff, an
attorney, referred a client to defendants, also attorneys, who orally agreed to pay the
plaintiff a referral fee of one-third of the attorney fees the defendants received in the
client’s case. The defendants settled the client’s action, and the plaintiff sued to recover
his referral fee. (Id at p. 637.) The trial court granted summary judgment in favor of the
defendants, finding the fee division agreement did not comply with former rule 2-108 (a
predecessor of former rule 2-200) because the alleged referral agreement was made
without disclosure to, or the written consent of, the client; therefore, it was void as
against public policy. (Scolinos, at pp. 638, 639.)
The court affirmed the judgment. It noted the purpose of the Rules of Professional
Conduct was “ ‘to protect the public and to promote respect and confidence in the legal
profession.’ ” (Scolinos, supra, 37 Cal.App.4th at p. 639.) It agreed with Kallen’s
rationale for invalidating an agreement that violated the Rules of Professional Conduct
and added: “It would be absurd if an attorney were allowed to enforce an unethical fee
agreement through court action, even though the attorney potentially is subject to
professional discipline for entering into the agreement.” (Scolinos, at pp. 639–640.)
In McIntosh v. Mills (2004) 121 Cal.App.4th 333 (McIntosh), the plaintiff, a
former bank employee, negotiated to assist the defendant, an attorney, in litigation
against the bank. (Id. at pp. 338–339.) Through his attorney, the plaintiff reached an
agreement with the defendant by which the plaintiff was to be paid 15 percent of any
attorney fees recovered in the cases against the bank in which he assisted. (Id. at
pp. 339–340, 343.) Two actions were settled, and the defendant received more than
$21 million in attorney fees. (Id. at p. 337.) The plaintiff sued the defendant for breach
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of the fee splitting agreement. (Ibid.) The trial court granted the defendant’s motion for
summary judgment on the ground the agreement was illegal and unenforceable, and the
plaintiff appealed. (Ibid.)
The appellate court affirmed the judgment. At the relevant time, former
rule 1-320(A) prohibited an attorney or law firm from directly or indirectly sharing legal
fees with a nonattorney. (McIntosh, supra, 121 Cal.App.4th at p. 344.) The reasoning
behind the rule was explained: “ ‘Prohibited fee-splitting between lawyer and layman
carries with it the danger of competitive solicitation [citation]; poses the possibility of
control by the lay person, interested in his own profit rather than the client’s fate
[citation]; facilitates the lay intermediary’s tendency to select the most generous, not the
most competent, attorney [citations]. [The rule’s] prohibition against lay intermediaries
seeks to bar both solicitation and the presence of a party demanding allegiance the lawyer
owes his client.’ ” (Id. at p. 345.) The court concluded: “In light of these public interest
concerns, and because there is no dispute here that the agreement at issue between
McIntosh and Mills clearly violates [former] rule 1-320(A), we conclude that the doctrine
of illegality applies facially to their fee-sharing agreement.” (Id. at p. 346.)
In Sheppard, Mullin, Richter & Hampton, LLP v. J-M Manufacturing Co., Inc.
(2018) 6 Cal.5th 59, 87 (Sheppard), a large law firm agreed to represent J-M
Manufacturing Company, Inc. (J-M) as defendant in certain litigation; at the same time,
different attorneys within the law firm were representing one of the plaintiffs in the J-M
litigation, South Tahoe Public Utility District (South Tahoe), in an unrelated matter. (Id.
at pp. 67–68, 69.) Both clients signed engagement agreements containing purported
general waivers of current and future conflicts of interest. (Id. at pp. 68, 69.) The law
firm did not disclose to either client that it also represented the other. (Id. at p. 70.) After
discovering the simultaneous representation, South Tahoe successfully moved to
disqualify the law firm from its representation of J-M in the litigation between J-M and
South Tahoe. The law firm then sued J-M for its unpaid fees. (Id. at pp. 70–71.)
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J-M contended the attorney engagement agreement was unenforceable because it
violated former rule 3-310(C)(3), which prohibited an attorney, without the informed
written consent of each client, from “ ‘[r]epresent[ing] a client in a matter and at the same
time in a separate matter accept[ing] as a client a person or entity whose interest in the
first matter is adverse to the client in the first matter.’ ” (Sheppard, supra, 6 Cal.5th at
p. 80.) The rule applied “even if ‘the simultaneous representations may have nothing in
common.’ ” (Ibid.) The court noted: “California courts have held that a contract or
transaction involving attorneys may be declared unenforceable for violation of the Rules
of Professional Conduct, the set of binding rules governing the ethical practice of law in
the State of California.” (Id. at p. 73.) It concluded the law firm’s concurrent
representation of the two clients violated former rule 3-310(C)(3) and rendered the
engagement agreement between the law firm and J-M unenforceable. (Sheppard, at
p. 80.) The law firm knew, when it agreed to represent J-M, that it already represented a
client with conflicting interests, but failed to inform J-M of that representation;
consequently, J-M’s purported waiver was not an informed consent as required by the
rule. (Ibid.) As a result, J-M’s engagement agreement was unenforceable. (Id. at p. 81.)
Former rule 3-410(A) required that the class representatives be informed in
writing, at the time of engaging Waisbren as their attorney, that he had no professional
liability insurance. It was undisputed that Waisbren failed to disclose to any of the class
representatives in writing that he lacked professional liability insurance. Neither the
representation agreements nor the attorney fee division consent forms, which the class
representatives signed, mentioned that Waisbren did not have professional liability
insurance. To allow Waisbren to recover his agreed upon percentage of the attorney fee
award, despite noncompliance with the requirements of the rule, would effectively
condone that violation, contrary to the purpose behind the rules—“to protect the public
and to promote respect and confidence in the legal profession.” (Former rule 1-100(A).)
It would bind the clients to an agreement they might not have entered into, or to a consent
10.
to fee division they might not have given, if the required disclosure had been made. It
would send an implicit message to attorneys that former rule 3-410 (and its successor,
rule 1.4.2), despite being phrased in mandatory language and being included in the Rules
of Professional Conduct that bind all members of the State Bar, lacks sufficient
importance for courts to enforce compliance. “It is clearly contrary to the public policy
of this state to condone a violation of the ethical duties which an attorney owes to his
client.” (Kallen, supra, 157 Cal.App.3d at p. 951.) Consequently, as in the cases
discussed above involving attorney violations of other rules, the fee division agreement
must be deemed unenforceable as in violation of public policy, to the extent it provides
for a percentage recovery by Waisbren.
We reject Waisbren’s argument that the attorney fee division agreement should be
enforced despite the violation of former rule 3-410, because Miller colluded with him in
failing to inform the class representatives of Waisbren’s lack of professional liability
insurance. He asserts that the omission from the retainer agreements of any disclosure of
his lack of professional liability insurance was inadvertent; further, he disclosed to Miller
shortly after the fee division agreement was reached that he did not carry such insurance.
According to Waisbren, in January 2015, Miller indicated to him, through Miller’s
counsel, that Miller would rather not advise the class representatives of Waisbren’s lack
of insurance for fear they would seek other counsel. Waisbren seems to assert it would
be inequitable to invalidate the contract on the ground of noncompliance with former
rule 3-410, when Miller was equally or more responsible for the failure to comply.
In McIntosh, the court recognized there are some exceptions to invalidating a
contract based on a violation of a rule of professional conduct. (McIntosh, supra,
121 Cal.App.4th at p. 347.) One such exception “is the in pari delicto exception. At its
most fundamental level, the exception allows an illegal contract to be enforced ‘so long
as the party seeking its enforcement is less morally blameworthy than the party against
whom the contract is being asserted, and there is no overriding public interest to be
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served by voiding the agreement.’ ” (Ibid.) Former rule 3-410 required an uninsured
attorney to disclose to the client at the time of engagement that the attorney lacks
professional liability insurance; the obligation is placed squarely on the shoulders of the
uninsured attorney. Thus, Waisbren was required to make that disclosure in writing at
the outset of his representation of the class representatives. He admittedly did not inform
the first two class representatives of that lack in their written retainer agreements. Miller
was apparently unaware of Waisbren’s lack of insurance at that time, since Waisbren
asserts he only told Miller months later, sometime after the fee division agreement was
reached. Consequently, Miller could not have made, or failed to make, the required
disclosure on behalf of Waisbren at the time Waisbren was engaged as counsel for Hance
and Ribeiro. The disclosure to the clients also was not made in the consent to division of
fees forms that Waisbren had each class representative sign. On these facts, we cannot
say Waisbren was “less morally blameworthy” for the failure to comply with former
rule 3-410 than Miller.
Further, there is an overriding public interest to be served by voiding the
agreement. The purpose of the Rules of Professional Conduct is “ ‘to protect the public
and to promote respect and confidence in the legal profession.’ ” (Scolinos, supra,
37 Cal.App.4th at p. 639.) Uninsured attorneys would have an incentive to fail to
disclose the lack of insurance to their clients, if they were permitted to benefit from an
uninformed consent to representation and fee division. Enforcing the agreement would
appear to elevate the interests of the attorney above the interests of the client. It would
also give the appearance of condoning a violation of the Rules of Professional Conduct,
which would adversely affect the public’s confidence in the commitment of the legal
profession to ethical conduct by its members. Thus, the circumstances of this case do not
warrant application of the in pari delicto exception.
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We conclude the trial court abused its discretion by enforcing the fee division
agreement, when the undisputed facts showed a clear violation of former rule 3-410,
which rendered the agreement unenforceable.
B. Quantum meruit
The cases that invalidate contracts because they violate Rules of Professional
Conduct do not mandate forfeiture of all compensation for the work the attorney
performed. In Sheppard, after concluding the law firm’s engagement agreement was
unenforceable because it was in violation of the Rules of Professional Conduct and
contrary to public policy, the court addressed its final question: whether the law firm
could receive any compensation for its services under the equitable doctrine of quantum
meruit. (Sheppard, supra, 6 Cal.5th at pp. 87, 88.) Under that doctrine, attorneys are
sometimes allowed “ ‘to recover the reasonable value of their legal services from their
clients when their fee agreements are found to be invalid or unenforceable.’ ” (Id. at
p. 88.) The court noted that “California law does not establish a bright-line rule barring
all compensation for services performed subject to an improperly waived conflict of
interest, no matter the circumstances surrounding the violation.” (Id. at p. 89.) The court
did not decide whether the law firm should recover in quantum meruit, because the trial
court had not yet addressed that issue. (Id. at pp. 88–89.)
The court quoted section 37 of the Restatement Third of Law Governing Lawyers:
“ ‘A lawyer engaging in clear and serious violation of duty to a client may be required to
forfeit some or all of the lawyer’s compensation for the matter.’ ” (Sheppard, supra,
6 Cal.5th at p. 89.) Although every violation of attorney conflict of interest rules is
serious to some degree, the Restatement did not impose a categorical rule of forfeiture in
every case; “the egregiousness of the attorney’s conduct, its potential and actual effect on
the client and the attorney-client relationship, and the existence of alternative remedies”
were identified as factors to be considered in determining whether and to what extent
forfeiture of compensation might be warranted. (Ibid.) These factors were relevant
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because forfeiture of compensation is an equitable remedy, which “derives primarily
from the general principle of equity that a fiduciary’s breach of trust undermines the
value of his or her services. [Citations.] ‘The remedy of fee forfeiture presupposes that a
lawyer’s clear and serious violation of a duty to a client destroys or severely impairs the
client-lawyer relationship and thereby the justification of the lawyer’s claim to
compensation.’ [Citation.] Forfeiture also serves as a deterrent to misconduct, and it
avoids putting clients to the task of proving the harm stemming from the lawyer’s conflict
of interest when the extent of the harm may be difficult to measure.” (Id. at pp. 89–90.)
“ ‘Considerations relevant to the question of forfeiture include the gravity and
timing of the violation, its willfulness, its effect on the value of the lawyer’s work for the
client, any other threatened or actual harm to the client, and the adequacy of other
remedies.’ ” (Sheppard, supra, 6 Cal.5th at p. 94.) The burden of proof of these factors
is on the attorney or law firm seeking quantum meruit compensation. (Ibid.) “And
before the trial court may award compensation, it must be satisfied that the award does
not undermine incentives for compliance with the Rules of Professional Conduct. For
this reason, at least absent exceptional circumstances, the contractual fee will not serve as
an appropriate measure of quantum meruit recovery. [Citations.] Although the law firm
may be entitled to some compensation for its work, its ethical breach will ordinarily
require it to relinquish some or all of the profits for which it negotiated.” (Id. at p. 95.)
A law firm or attorney seeking quantum meruit compensation after its fee
agreement is invalidated due to an ethical violation may be able to show its conduct was
not willful and the violation was not so severe or harmful as to reduce or eliminate the
value of its services. (Sheppard, supra, 6 Cal.5th at p. 90.) It may attempt to show the
remaining value of those services, and “the trial court must then exercise its discretion to
fashion a remedy that awards the attorney as much, or as little, as equity warrants, while
preserving incentives to scrupulously adhere to the Rules of Professional Conduct.”
(Ibid.)
14.
In Pringle v. La Chapelle (1999) 73 Cal.App.4th 1000, plaintiff, an attorney, was
retained by a corporation, its president, and its chief executive officer, La Chapelle; the
fee agreement was signed by each individual, and by La Chapelle on behalf of the
corporation. (Id. at pp. 1002–1003.) After the corporation filed for bankruptcy, the
plaintiff sued La Chapelle for her attorney fees; the jury found in her favor. (Id. at
p. 1003.) On appeal, La Chapelle contended the fee agreement was not enforceable,
because the plaintiff failed to comply with former rules 3-310 and 3-600; under those
rules, when an attorney simultaneously represented a corporation and its officers,
directors, or other constituents, and there was an actual or potential conflict of interest,
the attorney was required to obtain a written waiver of the conflict. Additionally, consent
to the dual representation on behalf of the corporation was required to be given by
someone other than an individual who was also being represented. (Pringle, at p. 1004.)
Because La Chapelle had signed the fee agreement on behalf of himself and the
corporation, he contended the plaintiff failed to comply with these rules. (Id. at
pp. 1004–1005.)
The court agreed with La Chapelle “that an attorney’s breach of a rule of
professional conduct may negate an attorney’s claim for fees,” but added that effect was
not automatic. (Pringle v. La Chapelle, supra, 73 Cal.App.4th at pp. 1005–1006.) Prior
case precedent suggested that, before an attorney who violated an ethical rule was
required to forfeit fees, there must be a serious violation of the attorney’s responsibilities,
such as fraud, unfairness, violation or excess of authority, or acts of impropriety
inconsistent with the character of the profession and the faithful discharge of duties. (Id.
at p. 1006.) The court noted it was La Chapelle who was seeking to avoid payment of
fees, not the corporation, although it was also La Chapelle who signed the fee agreement
on behalf of himself and the corporation. There was no precedent for denying fees on
that basis. (Ibid.) The court concluded the record was insufficient to determine whether
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the plaintiff’s violation of the ethical rules was sufficiently serious to deny her
compensation, and it affirmed the judgment. (Id. at pp. 1006–1007.)
In Mardirossian & Associates, Inc. v. Ersoff (2007) 153 Cal.App.4th 257, Ersoff
and Leonard retained the plaintiff, a law firm, to represent them in litigation. Ersoff
signed a retainer agreement that entitled the plaintiff to a contingency fee of 50 percent of
the recovery in the action. (Id. at p. 262.) It also provided that, if the clients discharged
the plaintiff, the plaintiff would be compensated according to an hourly fee schedule for
the hours worked. (Ibid.) Ersoff and Leonard also signed consents to the dual
representation. (Ibid.) Ersoff subsequently terminated the plaintiff’s representation and
replaced it with the law firm in which Ersoff’s wife was a partner. Nine days later,
Ersoff’s case settled for $3.7 million. The plaintiff sued Ersoff for quantum meruit. (Id.
at p. 263.)
On appeal, Ersoff argued the plaintiff simultaneously represented clients whose
interests were potentially or actually in conflict, and thereby violated former
rule 3-310(C) and forfeited its right to recover attorney fees. (Mardirossian &
Associates, Inc. v. Ersoff, supra, 153 Cal.App.4th at pp. 277–278.) The court stated: “In
certain circumstances, a violation of the Rules of Professional Conduct may result in a
forfeiture of an attorney’s right to fees. [Citations.] Although the breach of a rule of
professional conduct may warrant a forfeiture of fees, forfeiture is not automatic but
depends on the egregiousness of the violation.” (Id. at p. 278.) The trial court concluded
that, at most, there was only a potential conflict of interest between the two clients, and
the plaintiff had disclosed the potential conflict to Ersoff. Ersoff’s written consent,
including acknowledgment that he had been advised to consult other counsel on the issue,
sufficiently complied with the ethical rule. (Ibid.) The appellate court concluded that,
even if the disclosure was not sufficiently detailed, as Ersoff claimed, Ersoff had not
shown the violation was particularly egregious or he was prejudiced by it in any way.
(Id. at p. 279.) Consequently, the trial court did not abuse its discretion by concluding it
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would be inequitable to excuse Ersoff’s attorney fee obligation. (Ibid.) The court upheld
the judgment awarding the plaintiff $645,440 in attorney fees. (Id. at pp. 268, 280.)
When the rule violation that invalidates a fee agreement or a fee division
agreement is not sufficiently serious to warrant a complete forfeiture of attorney fees,
allowing recovery in quantum meruit would not discourage compliance with the
applicable ethical rules. (See Huskinson & Brown v. Wolf (2004) 32 Cal.4th 453, 460.)
Attorneys “understandably prefer to receive their negotiated fees rather than the typically
lesser amounts representing the reasonable value of the work performed.” (Ibid.)
Consequently, even if quantum meruit is available as a means of compensating an
attorney when a fee division agreement is invalidated due to violation of ethical rules, the
attorney still has ample incentive to comply with the Rules of Professional Conduct.
(Ibid.)
As stated in Sheppard, “whether principles of equity entitle the law firm to some
measure of compensation is a matter for the trial court to address in the first instance.”
(Sheppard, supra, 6 Cal.5th at p. 68.) Because the trial court found Waisbren was
entitled to be compensated pursuant to the terms of the fee division agreement, it did not
reach this issue. Accordingly, we must remand to allow the trial court to make that
determination in the first instance.
C. Measure of compensation
Miller contends that, in a class action, an award of attorney fees must be tied to the
attorney’s actual efforts to benefit the class, regardless of any fee division agreement. He
seems to conclude that, if a quantum meruit recovery is appropriate, Waisbren’s recovery
of fees must be limited to the hours reflected in his time records, multiplied by a
reasonable hourly rate. We do not believe the trial court is bound by such a strict rule.
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Rebney v. Wells Fargo Bank (1990) 220 Cal.App.3d 1117,6 addressed a written
fee division agreement among counsel in a class action, in which they agreed to divide
the attorney fee award on a percentage basis. (Id. at p. 1142.) Certain class members
objected that the percentage agreement was unlawful because it allocated fees without
regard to work performed, and thus gave individual attorneys an incentive not to litigate.
(Ibid.) The court stated: “The applicable substantive law is that an award of attorney
fees in class action litigation must be tied to counsel’s actual efforts to benefit the class.”
(Ibid.) The authority the Rebney court cited for that rule, however, was a federal case,
which relied on a provision of the American Bar Association Code of Professional
Responsibility that prohibited an attorney “from dividing a fee with an attorney who is
not a member of his firm, unless such division is made pursuant to client consent and is
based upon services performed and responsibility assumed.” (In re Agent Orange
Product Liability Litigation (2d Cir. 1987) 818 F.2d 216, 217.) California, however, only
had a similar rule, requiring that a fee division be based upon services performed and
responsibility assumed, between 1972 and 1979. (Chambers v. Kay (2002) 29 Cal.4th
142, 148–149; Moran v. Harris (1982) 131 Cal.App.3d 913, 916.) During that time
period, the effect of the provision was to prohibit referral fee agreements. (Chambers, at
pp. 148–149.) Since 1979, however, when that language was eliminated from former
rule 2-108, a predecessor of former rule 2-200, referral fees have been permitted.
(Chambers, at p. 149.) Thus, the “applicable substantive law” cited by the Rebney court
was a rule not in effect in California at that time or subsequently.
Even the Rebney court, however, recognized that quantum meruit recovery is not
measured strictly by hours times hourly rate. After stating that attorney fees “must be
tied to counsel’s actual efforts to benefit the class,” it went on: “This does not ‘mean that
class counsel need follow, line by line, the lodestar formula in arriving at an agreement as
6 Disapproved on another ground in Hernandez v. Restoration Hardware, Inc. (2018)
4 Cal.5th 260, 269, 274, fn. 4.
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to fee distribution. Obviously, the needs of large class litigation may at times require
class counsel, in assessing the relative value of an individual attorney’s contribution, to
turn to factors more subjective than a mere hourly fee analysis. It does mean that the
distribution of fees must bear some relationship to the services rendered.’ ” (Rebney v.
Wells Fargo Bank, supra, 220 Cal.App.3d at pp. 1142–1143; see also Mark v. Spencer
(2008) 166 Cal.App.4th 219, 229.)
To make this rule consistent with former rule 2-200, which permitted attorney fee
division agreements that included payment of a referral fee to an attorney, we must
construe the attorney’s “contribution” and “services rendered” to include the service of
referring the matter to an attorney experienced in the field relevant to the representation
or experienced as a class action attorney. (See Barnes, Crosby, Fitzgerald & Zeman, LLP
v. Ringler (2012) 212 Cal.App.4th 172, 186 [“Clients benefit from ‘referrals by “less
capable lawyers to … experienced specialists” ’ ”].) Under this construction, in assessing
the value of an attorney’s services to the client or the class for quantum meruit purposes,
the trial court may consider the reasonable value to the client or the class of the referral.
We note that, in the fee division agreement, all counsel agreed to a 15 percent
referral fee for Margolin, who referred Hance to Waisbren and did not claim to have
performed any other work on the case. Miller never disputed Margolin’s entitlement to
that amount, even though Margolin performed no work in the case. In his motion for
approval and division of an award of attorney fees to class counsel, Miller included a
request that Margolin be awarded 15 percent of the requested $4.3 million in fees, or
$645,000. The court awarded Margolin that amount. This indicates Miller and the other
class counsel assigned value to the referral of the case to an experienced labor law
attorney.
Miller’s September 27, 2012 proposed fee division agreement offered Waisbren
30 percent of the fees awarded for his referral of the case to Miller, an experienced class
action attorney, for the work Waisbren had already performed on the case, and for no
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further work. In this appeal, however, Miller contends Waisbren is entitled only to
quantum meruit recovery, measured by the hours included in his time record multiplied
by a reasonable hourly fee, or $110,295. Miller thus assigns absolutely no value to
Waisbren’s referral of the case to him. He advocates that Waisbren recover, for his
referral and his work, only about one-sixth of the amount Margolin recovered solely for
his referral. If the class benefited from Waisbren’s referral of the case to Miller, that
referral would appear to constitute part of Waisbren’s contribution to, or services
rendered in support of, the class action, the value of which should be considered in
determining the amount of attorney fees to award to Waisbren.
The trial court did not reach the issues of whether Waisbren should recover
compensation for his attorney services on a quantum meruit basis, despite invalidation of
the fee division agreement for violation of former rule 3-410 and, if so, how much he
should recover. We must remand the matter to the trial court to make those
determinations.
DISPOSITION
The June 2, 2017 order determining the division of class counsel’s attorney fees is
reversed, to the extent it determines the amounts Miller and Waisbren are awarded. The
matter is remanded to the trial court to redetermine the appropriate division between
Miller and Waisbren in accordance with the views expressed in this opinion.
The parties will bear their own costs on appeal.
_____________________
HILL, P.J.
WE CONCUR:
_____________________
LEVY, J.
_____________________
SMITH, J.
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