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March 12, 2009

U.S. Fire Ins. Co. v. Sheppard, Mullin, Richter & Hampton (2009) 171 Cal.App.4th 675

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The First District holds that a law firm sued for representing successive clients with conflicting interests in a substantially related matter cannot use the anti-SLAPP statute to strike the complaint as the gravamen of the complaint does not involve protected activity.

 U.S. Fire is an insurance company sued in the “Kelly-Moore” litigation for a duty to defend an insured against asbestos-related bodily injury actions.  Sheppard Mullin represented U.S. Fire in the Kelly-Moore litigation during which time confidential information was shared including litigation strategies, policies and positions concerning insurance contract interpretation, settlement negotiation policies and strategies, and the identity of key decision makers.  U.S. Fire was sued as a defendant in the “Plant Litigation” for matters similar to the “Kelly-Moore” litigation.  In the “Plant Litigation” Sheppard Mullin represented creditors in their asbestos lawsuits against Plant.

U. S. Fire filed suit against Sheppard Mullin for conflicts of interest, alleging that the creditors had a common interest with Plant to obtain the maximum amount of insurance coverage.  U.S.  Fire alleged that the policies and legal arguments in both the Kelly-Moore litigation and the Plant litigation were similar.  Thus, Sheppard Mullin possessed confidential information by light of its representation of U.S.  Fire in the Kelly-Moore litigation.  U.S. Fire sought a preliminary and permanent injunction against Sheppard Mullin’s representation of the creditors, as well as damages.

Sheppard Mullin filed a special motion to strike under California’s anti-Strategic Lawsuit Against Public Participation (anti-SLAPP) statute premised on its right of petition and free speech.  Sheppard Mullin admitted that it had been retained in the Kelly-Moore litigation and by creditors in the Plant litigation.  The Sheppard Mullin attorneys denied that a conflict of interest existed.  It stated that an ethical wall had been erected isolating the team in the Plant Litigation from contact with the files and those who worked on the Kelly-Moore Litigation.  U.S. Fire countered that Sheppard Mullin had not obtained a conflict of interest waiver when it undertook its representation of the Plant creditors committee and enumerated the types of legal services provided in the Kelly-Moore litigation.  U.S. Fire described the voluminous documentation involved in the Kelly-Moore litigation including documentation of litigation strategies, settlement strategies, liability analysis, discovery and dispositive motions filed and opposed by Sheppard Mullin.

The Court of Appeal held that Sheppard Mullin was not entitled to the protection of the anti-SLAPP statute.  In analyzing the anti-SLAPP statute, the court engages in a two-step process.  First, the court decides whether the defendant has made a threshold showing that the challenged cause of action is one arising from protected activity.  The defendant must demonstrate that the acts were taken in furtherance of the right of petition or free speech in connection with a public issue.  If this burden is met the court determines whether the plaintiff has demonstrated a probability of prevailing on the claim.

The principal thrust or gravamen of a cause of action determines whether the anti-SLAPP statute applies.  The focus is not the form of the plaintiff’s cause of action but, rather, whether the defendant’s activity constitutes protected speech or petitioning.  The anti-SLAPP statute does not apply where protected activity is only collateral or incidental to the purpose of the transaction or occurrence underlying the complaint.

Not all attorney conduct in connection with litigation, or in the course of representing clients, is protected.  For example, representation of parties with adverse interests in violation of the duty of loyalty is not protected activity.  The conduct is not what occurs in the court room, but the very acceptance of an adverse engagement.  The applicable ethical rule itself supports this conclusion.  Rule 3-310(E) recognizes that the disqualifying event in a successive conflict of interest scenario is the acceptance of the adverse relationship substantially related to the former representation.

U.S.  Fire’s complaint against Sheppard Mullin focused on the attorney-client relationship between them, and sought relief based on a claim of successive representation conflict of interest in violation of rule 3-310(E).  The complaint did not allege that there was actual disclosure of U.S.  Fire’s confidences; the principle thrust was the acceptance by Sheppard Mullin of representation adverse to U.S.  Fire.  Details of the Plant litigation in the complaint were to support the allegation that the two matters were substantially related and were only incidental to the principal thrust of the complaint.  Evidence that confidential information was actually used against the former client in litigation would help support damages, but was not the basis for the claim.

Comment: Courts have been reluctant to allow attorneys to use the anti-SLAPP statute to strike complaints from their own clients.


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