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October 15, 2003

Pour Le Bebe, Inc. v. Guess? Inc. (2003) 112 Cal.App.4th 810 (rev. den. 01/14/04)

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The Second District decides that the trial court lacks jurisdiction to set aside an arbitration award based on an attorney’s ethical violation where there is no clear and convincing evidence that the violation affected the award.

Pour Le Bebe, Inc.  (PLB) and Guess? Inc.  (Guess) pursued claims against each other based on a series of licensing agreements subject to arbitration provisions.  PLB sought to disqualify Guess’ counsel Daniel Petrocelli and the law firm of Mitchell, Silberberg & Knupp (MSK) on the basis of concurrent and prior representation where confidential information substantially related to the current dispute was exchanged.

PLB claimed that prior matters that substantially related to the dispute included a sexual harassment claim and joint defense of Guess and PLB in arbitration.  PLB asserted that MSK had already asked questions based on confidential information acquired during the prior representation.  MSK characterized the representation in the sexual harassment matter as brief and insubstantial.  The joint defense took place in 1994 and involved the sale of a corporate jet.

MSK claimed that questions did not come from the receipt of confidential information, but from public knowledge about the habits of PLB officers.

PLB contended that MSK currently represented key PLB employees in immigration matters.  MSK countered that it no longer represented those employees, even if formal withdrawal papers had not been filed, and that it had not received any confidential information pertinent to the dispute.

PLB asserted that in May 1997 MSK asked PLB to agree to a conflict waiver acknowledging that Guess was the primary client and agreeing that MSK could represent Guess in disputes with PLB.  MSK countered that PLB refused to agree to this waiver and as a result MSK terminated its representation of PLB in mid-1998.  MSK claimed that the dispute between Guess and PLB materialized in May 1999.

After the arbitration panel denied PLB’s disqualification motion on insufficient evidence, PLB sought a temporary restraining order supported by a declaration of an immigration attorney opining that MSK still represented PLB employees in immigration matters.  The trial court denied the motion, agreeing with Guess that it lacked jurisdiction to decide the matter.  PLB made a motion to the arbitrators to reconsider the ruling based on new evidence that showed Guess consulted MSK about the dispute during the period MSK represented PLB.  The arbitration panel again found insufficient evidence to support the motion.  Subsequently the arbitration panel rendered an award in favor of Guess.

On appeal PLB argued that MSK violated Rule of Professional Conduct Rule 3-310(C) that precludes concurrent representation of clients who are adverse to each other and Rule 3-310(E) that precludes representation adverse to a former client where there is a “substantial relationship” between the former and current matters.

Rule 3-310(C) enforces the attorney’s duty of loyalty.  Thus, simultaneous representation of adverse interests is precluded even if the matters have nothing in common and no confidential information is exchanged.  An attorney may not terminate representation of one client to avoid this bar.

Rule 3-310(E) protects client confidentialityWhere a former client seeks to disqualify prior counsel, the client must demonstrate a substantial relationship between the two matters.  If there is a substantial relationship access to confidential information is presumed.  There is a substantial relationship when it appears confidential information material to the current dispute would normally have been imparted to the attorney.  The client need not show information directly relevant to the current dispute was acquired in the prior litigation, but that information material to the evaluation, prosecution, settlement or accomplishment of the litigation or transaction given its specific legal and factual issues was exchanged that could have some bearing on the current dispute.  There are situations where confidential information obtained through the representation of a third party could lead to attorney disqualification, such as representation of individuals in immigration matters.  The Court concluded that PLB had a colorable claim that MSK violated its ethical duties in representing Guess against PLB.

However, the Court refused to set aside the arbitration award in Guess’ favor on jurisdictional grounds.  The Court refused to invoke jurisdiction under C.C.P.  § 1286.2 that permits an arbitration award to be set aside if it was procured by corruption, fraud or other undue means.

The Court held that the term “undue means” should not be broadly interpreted, but refers matters similar to fraud or corruption.  Proof of fraud necessary to set aside an arbitration award does not require the stringent showing of extrinsic fraud necessary to set aside a judgment in contested litigation.  The showing of fraud to set aside an arbitration award is governed by a three part test: the fraud must be proven by clear and convincing evidence; the fraud must not have been discoverable upon the exercise of due diligence prior to or during the arbitration; and the party seeking to vacate the award must demonstrate that the fraud materially related to an issue in the arbitration.

Guess argued that the “undue means” raised by PLB had not only been discovered in the arbitration, but had been brought to the attention of the arbitration panel through the disqualification motions.  The Court disagreed that PLB had a full hearing on its conflict issue.  Nonetheless, the Court held that MSK’s breach of its professional obligations was not sufficient to set aside the award.

The Court examined cases where allegations of fraud or undue means lacked a connection to the arbitration award.  For example, in a case where one party had threatened the opposing party’s expert, there was no connection to the award because the threatened expert ultimately testified in the arbitration.  In another case where one party allegedly engaged in discovery abuse the Court concluded that the arbitrators had factored the discovery abuse into the award, considered it peripheral to the issues at stake, and therefore found insufficient reason to set aside the award.  Because PLB could not point to any aspect of the award that may have been tainted by MSK’s use of confidential information, there was no indication that the conflict affected the award.

The Court disagreed with PLB that MSK’s conflict was so egregious as to render the proceedings fundamentally unfair.  PLB’s examples of cases where an attorney’s ethical violation rendered the proceeding fundamentally unfair were inapposite.  In one case an attorney failed to assert defenses that would have benefited one of his joint clients.  In that case the attorney failed to disclose the pendency of ongoing proceedings to one of the clients.  In another an attorney attacked the opposing party’s expert witness, who was a client of her firm, on cross-examination.  In that case the attorney used information in the cross-examination she learned by representing the expert.  By contrast, its own counsel competently represented PLB.

The Court concluded that statutory limited review of arbitration awards mandated that PLB show by clear and convincing evidence that a conflict existed and that it had a substantial impact on the panel’s decision, rather than the less stringent showing, that applies in other contexts, that a conflict of interest has the potential to adversely affect a party.  Thus the Court did not disturb the award even though it believed that the conflict of interest allegations against MSK had merit.

Comment: Given the limited review of arbitration proceedings, failure to convince an arbitration panel of an ethical breach will likely result in an inability to disqualify counsel.  To set aside an arbitration award due to an attorney’s ethical breach requires clear and convincing proof that the ethical violation had an actual effect on the proceedings.

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