July 8 — A law firm had a disqualifying conflict of interest in representing both the plaintiff in civil racketeering litigation and a criminal defendant who pleaded guilty in the scheme, the U.S. District Court for the Central District of California said June 24 ( State Comp. Ins. Fund v. Drobot, 2016 BL 205454, C.D. Cal., No. SACV 13-0956 AG (JCGx), 6/24/16 ).
Judge Andrew J. Guilford stuck by his decision earlier this year to disqualify Hueston Hennigan LLP as counsel for State Compensation Insurance Fund (SCIF) in the sprawling civil litigation. The civil and criminal cases are one and the same for conflicts purposes, and the clients' dueling interests would mangle the firm's loyalties too severely for informed consent to fix the conflict, Guilford found.
The firm obtained a total of seven waivers from SCIF and its criminal defense client, but the waivers “just didn't cut it,” Guilford said.
The decision casts doubt on whether lawyers can rely on waivers to legitimize concurrent representation of clients with adverse interests in overlapping criminal and civil proceedings. The court's restrictive stance on the question of waivability will be especially alarming to large firms that see conflict waivers as a key risk management tool.
Hueston Hennigan lawyers represented SCIF in a civil racketeering suit against Michael Drobot Sr. and other defendants who allegedly mounted a long-running scheme involving kickbacks and fraudulent billing for spinal surgeries at a now-defunct hospital in Southern California.
During the same time frame another lawyer in the firm, Brian Henningan, was representing Paul Randall, a health care marketer, in a criminal probe that grew out of the scheme. Randall pleaded guilty and he's now left with uncertainty about his legal representation while awaiting a “life-altering sentencing hearing,” Guilford said.
One of the defendants in SCIF's civil suit filed a motion to disqualify Hueston Hennigan as its counsel. Some other defendants joined in the motion, although many defendants represented by large firms didn't, Guilford said.
Guilford ejected Hueston Hennigan in March and produced this opinion to explain why he found disqualification necessary and why he wouldn't reconsider his decision.
On a threshold issue Guilford held that the defendants seeking Hueston Hennigan's disqualification had standing to raise the firm's conflict of interest even though they weren't its current or former clients.
Guilford relied on Colyer v. Smith, 50 F. Supp. 2d 966 , 15 Law. Man. Prof. Conduct 275 (C.D. Cal. 1999), which said that nonclients have standing when a lawyer's ethical breach “infects the litigation” so severely that it may obstruct justice for the nonclient.
Hueston Hennigan's conflict of interest had already affected the defendants' discovery on Randall's connection to the kickback scheme, and the firm's divided loyalties might even furnish grounds for overturning the eventual result of the litigation if it remained as counsel for both SCIF and Randall, Guilford said.
Guilford found that Hueston Hennigan's concurrent representation of SCIF and Randall posed an actual, adverse conflict of interest.
The clients' divergent interests presented a crisis of loyalty for the firm, Guilford said. He rejected the idea that their interests were aligned because Randall's plea agreement required cooperation.
Hueston Hennigan was involved in a “zero sum game” in which its attorneys had knowledge that could help one client at the expense of the other, Guilford said. He described several ways in which the conflict could—and in several instances did—lead Hueston Hennigan to pull punches in representing SCIF or Randall.
For example, he pointed out that SCIF didn't name Randall as a defendant in its case, and it didn't add him as a defendant later on when it expanded its complaint and filed an additional suit. Drobot brought in many additional parties as third-party defendants, and SCIF sued nearly all of them except Randall, Guilford said.
He also noted that Randall's criminal defense counsel didn't come to his deposition in the civil case, where a Hueston Hennigan attorney asked Randall about his connection to the kickback scheme, leading Randall to “inconsistently invoke his Fifth Amendment privilege.”
In addition, Guilford said the conflicting interests could limit the firm's advocacy for Randall in his criminal case at sentencing with regard to the extent of his cooperation and the amount of any fine and restitution.
“Trying to represent a criminal defendant while representing his victim seems to present obstacles so obvious and numerous as to defy complete delineation,” Guilford said.Filings
SCIF's supplemental response
Motion for reconsideration of disqualification order
Guilford decided that an informed conflict waiver wasn't possible in the uniquely complex situation presented here.
“[T]he duty of loyalty is improperly and impermissibly compromised when one law firm represents—at the same time, in the same litigation, in the same courthouse—a criminal and his victim,” he said.
SCIF argued that concurrent conflicts are unwaivable only in situations where a lawyer represents adversaries at a contested trial or hearing. It grounded this argument on language in Klemm v. Superior Court, 142 Cal. Rptr. 509 (Cal. Ct. App. 1977), which said concurrent representation of clients with adverse interests at “a trial or hearing” is barred even with a conflict waiver.
Guilford didn't agree that unwaivability is confined to that context. Klemm didn't say that contested trials or hearings are the only settings in which concurrent conflicts bar representation despite a waiver, and Klemm didn't address concurrent conflicts in complex, multidefendant litigation, he said.
Guilford found it unnecessary to decide here whether a firm's representation of adversaries must be in the same “lawsuit,” the same “litigation” or the same “matter” in order for the conflict to be deemed unwaivable.
SCIF's civil actions and the criminal case involving Randall are effectively the same for conflicts purposes, Guilford said.
Treating the civil and criminal cases as distinct would elevate form over substance and would invite lawyers to dodge conflicts by finagling joinder rules or committing other shenanigans, he said.
Moreover, Guilford said that SCIF's broad reading of Klemm didn't comport with Flatt v. Superior Court, 36 Cal. Rptr. 2d 537 (Cal. 1994). Flatt emphasized the difficulties of concurrent adverse representation and indicated that waiver was acceptable only in rare circumstances, he said.
Guilford also grounded his holding of unwaivability on the court's inherent authority to manage lawyer conduct in cases before it. Hueston Hennigan's concurrent representation of SCIF and Randall threatened the interests of the court, the parties and the public in ways that even informed written consent couldn't fix, he said.
Hueston Hennigan invoked the consent exception in California Rule of Professional Conduct 3-310(C), which prohibits adverse representation in certain circumstances “without the informed written consent of each client.”
The firm pointed out that SCIF had executed four separate conflict waivers specific to the firm's concurrent representation of Randall in the criminal matter. SCIF provided informed written consent each time there was a change in Randall’s actual or anticipated role in the proceeding, the firm said.
Guilford acknowledged that Rule 3-310(C) allows concurrent representation of clients with adverse interests in limited situations if both clients provided informed written consent. However, the comment to that rule recognizes that written consent may not suffice for some conflicts, he pointed out.
Moreover, Guilford found that even if the consent exception in the rule were broad enough to apply here, Hueston Hennigan didn't actually secure informed consent from SCIF and Randall.
He combed through Randall's three waivers and SCIF's four waivers, and found them ineffective.
The waivers at times incorrectly described the criminal and civil proceedings as “unrelated,” and large portions of the waivers amounted to boilerplate without much substantive meat, Guilford said. The waivers also contradicted one another and contained questionable terms, he said.
Guilford contrasted these waivers with a conflict waiver that he found sufficient in another case. See United States v. DeCinces, No. SACR 12-0269-AB, Dkt. 441 (C.D. Cal. July 21, 2015). That waiver was the “gold standard” for effective informed consent, he said.
Guilford also found that the timing of the waivers impaired their efficacy. Getting new waivers late in the game can mean that a client consents just to avoid the difficulty and expense of switching attorneys, he said.
Hueston Hennigan provided opinions from several experts who said disqualification wasn't appropriate, but Guilford gave short shrift to the experts' views. Their declarations ignored important questions about the law and how it applies to these particular facts, he said.
Guilford also said Hueston Hennigan couldn't have fixed the situation by simply dropping either SCIF or Randall as a client. The “hot potato” rule prevents lawyers who knowingly undertake adverse concurrent representation from dropping the less favored client like a “hot potato” when a conflict appears, Guilford said.
Moreover, Guilford didn't like SCIF's idea of remaining as counsel but using “conflict counsel” to provide independent representation on particular points. That approach presented many practical problems that would further complicate an already complicated case, he said.
Jason A. Armstrong, Bozeman, Mont., and M. Cris Armenta, Manhattan Beach, Cal., represented Lokesh S. Tantuwaya, who filed the motion to disqualify. Joseph T. McNally and Scott D. Tenley, Office of the U.S. Attorney, Santa Ana., Cal., represented the United States, which joined in the motion.
Hueston Hennigan represented SCIF regarding the motion for disqualification, Munger Tolles & Olson LLP represented SCIF in seeking reconsideration. SCIF was also represented by in-house lawyers.
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