The California Supreme Court has ruled that the law firm originally hired to represent Los Angeles-based JM Eagle in a federal case is not entitled to $1.3 million in unpaid legal fees nor the $2.7 million it already collected from the world's largest plastic pipe producer.
The court voided an attorney-client contract the manufacturer had with Sheppard, Mullin, Richter & Hampton for violating the state's rules of professional agreement.
JM Eagle had retained the firm in 2010 to defend it in a lawsuit alleging violations of the False Claims Act by dozens of plaintiffs, including the South Tahoe Public Utility District. The law firm failed to disclose that the utility was its client 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," according to the 76-page ruling, which was issued Aug. 31.
Because the contract with the law firm 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, according to JM's lawyer Camilla Eng.
She expects the case to have far-reaching effects with the California Supreme Court opinion governing 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," Eng said in the release.
The state's Supreme Court majority ruled Sheppard Mullen could ask the trial court to approve some compensation for about 10,000 hours of legal work it did for JM. However, to be entitled to any compensation, the law firm will have to demonstrate, among other things, that an award of fees would not be an incentive for other law firms to engage in ethical breaches, according to a news release from JM Eagle.
The manufacturer ended up hiring the Los Angeles law firm Bird, Marella, Boxer, Wolpert, Nessim, Drooks & Lincenberg, P.C. to represent it in the federal case filed by a fired product assurance engineer who became a whistleblower in 2006. Three states and 40-plus cities and water districts joined the lawsuit accusing JM of violating the False Claims Act by falsely representing that its pipe products met industry standards in order to receive government payments from 1996 to 2006.
The case went to trial in September 2013 and after seven weeks of testimony related to five exemplar plaintiffs, a jury found that JM falsely represented uniform compliance with pipe standards set by the American Water Works Association and Underwriters Laboratories.
The plaintiffs had argued that without uniform compliance of quality standards, they got "the luck of the draw" with an estimated $2.2 billion of JM pipes they purchased and installed under streets across the U.S., including California, Nevada and Virginia. The case is ongoing.