CABLE OAKLAND v. WILSON

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Court of Appeal, First District, Division 2, California.

CABLE OAKLAND, Plaintiff and Respondent, v. Clarence WILSON, Defendant and Appellant.

No. A037626.*

Decided: May 20, 1988

Robert M. Bramson, Farrow, Schildhause & Wilson, Oakland, for defendant and appellant. Gregory E. Hodge, The Culver Law Firm, Inc. Oakland, for plaintiff and respondent.

Defendant and appellant Clarence Wilson appeals from an order disqualifying the law firm of Farrow, Schildhause and Wilson (Farrow firm) from representing him in action for fraud, negligence and breach of contract brought by plaintiff and respondent Cable Oakland.   The issue here is whether the trial court abused its discretion in ordering disqualification on the basis that the Farrow firm's representation of appellant against Cable Oakland without the latter's consent constituted a conflict of interest under California Rules of Professional Conduct, rule 5–102(B).

BACKGROUND

According to its complaint, Cable Oakland, a partnership, was awarded a 15–year franchise by the City of Oakland in 1983 to install and operate a citywide cable television system.   Pursuant to that agreement, Cable Oakland hired Sharp/Ebony Underground Construction (Sharp/Ebony) to install and rebuild a cable equipment television system.   Appellant is a former employee of Cable Oakland who, at the time, was responsible for monitoring and coordinating Sharp/Ebony's activities.

In July 1986 Cable Oakland filed this action for fraud, deceit, negligence and breach of contract against Sharp/Ebony, appellant and others.   The complaint claims that defendants either intentionally or negligently induced Cable Oakland to pay Sharp/Ebony for work never performed, materials never used, and work and materials that were either unnecessary or billed at a rate higher than permitted by the contract.   In addition to general damages, Cable Oakland seeks at least $907,385 in special damages, and $1 million in punitive damages.

Appellant, represented by the Farrow firm, filed a general denial.   Soon afterward, the Farrow firm noticed the depositions of two current employees of Cable Oakland.   By letter dated September 24, 1986, Cable Oakland's attorney, Taylor Culver, informed the Farrow firm of his belief that the firm's representation of appellant against Cable Oakland was ethically inappropriate for reasons that were best not spelled out in a letter and that his client would not respond to discovery until new counsel were substituted.   Harold Farrow, chief partner in the firm, replied by letter in which he denied that he or his firm had any conflict of interest and threatened to ask the court for sanctions in the event that Cable Oakland's employees did not appear for deposition.

When Culver refused to alter his position, the Farrow firm, on behalf of appellant, brought a motion to compel the appearance of Cable Oakland's employees at deposition and for imposition of sanctions for willful failure to appear.   Cable Oakland responded with a cross-motion to disqualify the Farrow firm from participating in the litigation on the following grounds:  (1) the firm's past and continuing representation of Telecommunications Inc. of Denver, Colorado (TCI), an entity which, through other enterprises, owns a partnership interest in Cable Oakland;  (2) attorney Farrow's partial ownership interest in Focus Cable, the predecessor in interest to Cable Oakland;  (3) the fact that one of Farrow's partners is Lionel Wilson (no relation to appellant Wilson), Mayor of the City of Oakland which has a contractual franchise agreement with Cable Oakland;  and (4) attorney Farrow's ownership of Pan Pacific & Low Ball Cable Television of Emeryville (Emeryville Cable) which purchases its satellite signals from Cable Oakland.

The motions were heard jointly.   At the hearing, appellant's counsel represented to the court that he was prepared to file a declaration by TCI's general counsel and officer waiving any conflict caused by Farrow's representation of appellant in the case.   The court replied that unless Cable Oakland was prepared to signed such a waiver, the proferred declaration was not relevant.   Since Cable Oakland was unwilling to waive the conflict, the court denied the motion to compel and granted the motion to disqualify the Farrow firm under the Rules of Professional Conduct of the State Bar of California, rule 5–102(B).1  Appellant filed a notice of appeal from the order removing the Farrow firm;  such an order is appealable.  (Kraus v. Davis (1970) 6 Cal.App.3d 484, 487, 85 Cal.Rptr. 846.)

APPEAL

 Every trial court has the inherent and statutory power to control its officers in proceedings before it and to disqualify an attorney where necessary to avoid impropriety.  (Code Civ.Proc., § 128;  Klemm v. Superior Court (1977) 75 Cal.App.3d 893, 901, fn. 4, 142 Cal.Rptr. 509.)   On appeal the decision of the trial court on whether to disqualify an attorney will not be disturbed unless an abuse of discretion has been shown.   (Elliott v. McFarland Unified School Dist. (1985) 165 Cal.App.3d 562, 567, 211 Cal.Rptr. 802;  William H. Raley Co. v. Superior Court (1983) 149 Cal.App.3d 1042, 1047, 197 Cal.Rptr. 232;  Chambers v. Superior Court (1981) 121 Cal.App.3d 893, 903, fn. 7, 175 Cal.Rptr. 575.)   Where there is a conflict in the affidavits, the resolution of the trial court is binding on the appellate court.  (Chadwick v. Superior Court (1980) 106 Cal.App.3d 108, 115, 164 Cal.Rptr. 864.)

 Rule 5–102(B) states:  “A member of the State Bar shall not represent conflicting interests, except with the written consent of all parties concerned.”   It is not disputed that the Farrow firm has acted and continues to act as counsel for TCI, which appellant describes as “the nation's largest cable television company, whose interests permeate the industry.”   One of those interests is in Cable Oakland, appellant's adversary in this action.   Prior to attorney Culver's letter of September 24, 1986 questioning the ethical propriety of the Farrow firm's representation of appellant, TCI, through its wholly-owned subsidiary TCI Development Corporation, was one of four general partners in Cable Oakland.   Five days after the letter was received TCI sold its share of Cable Oakland to one of the other partners, LCI West, a subsidiary of Lenfest Communications.   However, this transaction did not completely extricate TCI from Cable Oakland because TCI (1) still owns a 20 percent interest in Lenfest Communications, and (2) a TCI vice president continues to sit on Cable Oakland's management committee.   By simultaneously representing TCI, which has a significant interest in Cable Oakland, and defending appellant against charges of fraud and other misconduct in a suit by Cable Oakland, the Farrow firm finds itself on both sides of the lawsuit and exposed to a conflict of interest.

In William H. Raley Co. v. Superior Court, supra, 149 Cal.App.3d 1042, 197 Cal.Rptr. 232 (Raley ), the Court of Appeal ruled that the trial court abused its discretion in not ordering disqualification of a law firm representing a plaintiff suing Raley corporation, which was managed by a bank trustee, where one of the firm's principals, ZoBell, sat on the board of directors of the bank.   Although ZoBell was not the attorney in charge of handling the suit and took steps to isolate himself from it, the court saw a clear conflict where Zobell had access to confidential information about Raley through the bank, and his “duties on behalf of the Bank will require him to focus on the weaknesses of [plaintiff's] lawsuit while, at the same time Zobell's law firm advocates the merits of [plaintiff's] action.”  (Id., at p. 1047, 197 Cal.Rptr. 232.)

As counsel for TCI, Farrow has, or may during the course of this suit, come in contact with confidential information about Cable Oakland which may be useful in representing appellant.   At the same time, as counsel for appellant, Farrow will probably be tempted, if not duty-bound, to use all information at his disposal to further appellant's cause.   In other words, Farrow's “ongoing dual status creates a risk of misappropriation of confidential information” about Cable Oakland which may be pertinent to appellant's defense.  (Raley, supra, at p. 1049, 197 Cal.Rptr. 232.)   As Raley suggests, continual monitoring of the lawsuit to ensure that such misappropriation does not take place would present the trial court with a virtually impossible task.  (Id., at pp. 1049–1050, 197 Cal.Rptr. 232.)

Appellant, through the Farrow firm, contends that Cable Oakland is in no position to complain of misuse of confidential information because it is not or has never been a client of Farrow's.   The only one who has standing to complain, appellant argues, is TCI, which was willing to waive any conflict.   In fact appellant goes so far as to maintain that, absent an objection from TCI, the Farrow firm may use every means available including confidential information gained about Cable Oakland from TCI to further appellant's cause.   According to appellant, if the Farrow firm exploits trade secrets gained through TCI in order to defeat Cable Oakland in this action, Cable Oakland's sole remedy is to sue TCI, not to seek disqualification of the firm.

 We believe appellant takes a far too narrow view of the mandate of rule 5–102(B).   A lawyer need not be attorney of record on both sides of a lawsuit in order to represent conflicting interests.   There are situations which give rise to a fiduciary duty or implied professional relation, even where there is no express attorney-client relationship.  (Westinghouse Elec. Corp. v. Kerr–McGee Corp. (7th Cir.1978) 580 F.2d 1311, 1319.)   Thus, “[f]iduciary obligations and professional responsibilities may warrant disqualification of counsel in appropriate cases even in the absence of a strict contractual attorney-client relationship.”  (Trone v. Smith (9th Cir.1980) 621 F.2d 994, 1002.)   The State Bar of California has recognized that a conflict of interest may arise under rule 5–102(B) where an attorney's relationship with a nonclient “creates an expectation that the attorney owes [the nonclient] a duty of fidelity,” or where the attorney has acquired confidential information in the course of such a relationship “which will be, or may appear to be ․ useful” in litigation on behalf of the client.  (Cal.Compendium on Prof. Responsibility, State Bar Formal Opn. No. 1981–63 (State Bar Opn.), p. 3.)   Thus, in Raley, although ZoBell did not have an attorney-client relationship with the bank, he did have ongoing access to confidential information about the plaintiff through his relationship with the bank, as well as duties to the bank which conflicted with his firm's duty to the plaintiff.

In this case, although the Farrow firm did not represent Cable Oakland, its attorneys had a direct channel to confidential information about Cable Oakland through its representation of TCI.   TCI has both an ownership interest and a management voice in Cable Oakland.   Cable Oakland is particularly compromised by the Farrow firm's access to the TCI vice president serving on Cable Oakland's management team.   While this relationship may not rise to the dignity of attorney and client, the Farrow firm's access to the inner workings of Cable Oakland through its representation of one of Cable Oakland's principal owners commands a professional duty not to disclose such secrets without Cable Oakland's consent.2  This duty, along with the duty not to harm the financial interests of its client TCI, is at odds with the Farrow firm's concurrent and competing duty to aid appellant in defeating Cable Oakland's million-dollar-plus lawsuit.   Under the foregoing principles, the firm's position constituted a conflict of interest under rule 5–102(B).  “[T]he purpose of the rules against representing conflicting interests is not only to prevent dishonest conduct, but also to avoid placing the honest practitioner in a position where he may be required to choose between conflicting duties or attempt to reconcile conflicting interests.”  (Woods v. Superior Court (1983) 149 Cal.App.3d 931, 936, 197 Cal.Rptr. 185;  Vivitar Corp. v. Broidy (1983) 143 Cal.App.3d 878, 882, 192 Cal.Rptr. 281.)  “Loyalty to a client is also impaired when a lawyer cannot consider, recommend or carry out an appropriate course of action for the client because of the lawyer's other responsibilities or interests.   The conflict in effect forecloses alternatives that would otherwise be available to the client.”  (ABA Model Rules Prof. Conduct, rule 1.7, com.)

It follows that the consent of TCI was not sufficient to remove the cloud of impropriety under rule 5–102(B).   The rule requires the written consent of “all parties concerned.”  (Emphasis added.)   Cable Oakland clearly qualified as a concerned party and its refusal to waive the conflict justified the trial court's decision.

 We also believe that the trial court could properly consider disqualification appropriate because of the appearance of impropriety.   While concern for appearances has mainly surfaced in criminal cases in this state (e.g., Comden v. Superior Court (1978) 20 Cal.3d 906, 915, 145 Cal.Rptr. 9, 576 P.2d 971;  People v. Lopez (1984) 155 Cal.App.3d 813, 823, 202 Cal.Rptr. 333 and cases cited), the principle is set forth in canon 9 of the American Bar Association's Model Code of Professional Responsibility, and federal courts have long recognized that attorney disqualification may be appropriate where there exists an appearance of conflict, even in civil cases.  (W.L. Gore & Assoc. v. Intern. Medical Prosthetics (Fed.Cir.1984) 745 F.2d 1463, 1467;  Trone v. Smith, supra, 621 F.2d 994, 1001;  Schloetter v. Railoc of Indiana, Inc. (7th Cir.1976) 546 F.2d 706, 709.)   Moreover, at least one civil case in California has expressly upheld disqualification on the basis of the appearance of impropriety.  (Woods v. Superior Court, supra, 149 Cal.App.3d at p. 936, 197 Cal.Rptr. 185;  see also State Bar Opn., op.cit. supra, pp. 4–7 and San Diego Co. Bar Assn., Ethics Opinion 1970–2, Informal Opn. No. 12, pp. 1–2.)

In this case, attorney Farrow not only represents a company which holds a financial interest in Cable Oakland, but himself has personal financial interests intertwined with Cable Oakland.3  Furthermore, another principal in Farrow's firm, Mayor Wilson, is chief elective officer of the city and a voting member of the Oakland City Council (Oakland City Charter, §§ 200, 219), a body which negotiated a long term franchise contract with Cable Oakland.   These relationships give rise to speculation that the Farrow firm has or will come in contact with privileged information belonging to Cable Oakland and thereby gain an unfair advantage in litigation against it.  (See Chambers v. Superior Court supra, 121 Cal.App.3d 893, 901, 175 Cal.Rptr. 575 citing Armstrong v. McAlpin (2nd Cir.1980) 625 F.2d 433, 444–445.) 4  Even though there was no showing of actual misappropriation, the spectre of potential abuse of trust and confidences remains.   These concerns are exacerbated by the fact that attorney Farrow has made no attempt to screen himself off from involvement with the case.  (Compare Chambers v. Superior Court, supra, 121 Cal.App.3d 893, 903, 175 Cal.Rptr. 575 and Raley, supra, 149 Cal.App.3d 1042, 1049, 197 Cal.Rptr. 232.)   Instead of taking protective measures to guard against misuse of inside information about Cable Oakland in this litigation, the Farrow firm claims the right to do so as long as the transmitting party does not object.   The unseemly nature of this situation is apparent.

We conclude that, in light of the conflict under rule 5–102(B), as well as the appearance of impropriety stemming from attorney Farrow's potential access to privileged information about his adversary, the trial court acted within its discretion in ordering the Farrow firm disqualified.  (Raley, supra, 149 Cal.App.3d at p. 1050, 197 Cal.Rptr. 232.)

Concedely, disqualification orders sometimes have harsh consequences and disqualification motions are sometimes interposed for tactical reasons.  (See Chambers v. Superior Court, supra, 121 Cal.App.3d at p. 902, 175 Cal.Rptr. 575.)   Nevertheless, appellant's right to choice of counsel must be balanced against the need to maintain high standards of ethical responsibility.   (Dill v. Superior Court (1984) 158 Cal.App.3d 301, 306, 205 Cal.Rptr. 671.)   We are satisfied that, in this instance, the motion arose from a legitimate concern on the part of Cable Oakland and was not brought simply to harass or gain tactical advantage.  (W.L. Gore & Assoc. v. Intern. Medical Prosthetics, supra, 745 F.2d 1463, 1468.)

Finally, it does not appear that disqualification resulted in any serious hardship on appellant.  (W.L. Gore & Assoc. v. Intern. Medical Prosthetics, supra, 745 F.2d at p. 1467.)   The motion was heard early in the litigation and new counsel substituted for appellant shortly after the court's ruling.   Moreover, the controversy centers around the performance of a construction contract—not the type of subject matter which would call for particular sophistication in cable television law.

DISPOSITION

The order is affirmed.

FOOTNOTES

1.   All “rule” citations are to the California Rules of Professional Conduct, unless otherwise noted.

2.   Because there is no past or present attorney-client relationship between Cable Oakland and Farrow's firm, this is not a case of successive or simultaneous representation.  (Rule 4–101;  Chambers v. Superior Court, supra, 121 Cal.App.3d 893, 897, 175 Cal.Rptr. 575.)   Like Raley, this is a square peg of a case which does not fit into the round holes of commonly applied rules concerning disqualification.  (Raley, supra, 149 Cal.App.3d at pp. 1049–1050, fn. 3, 197 Cal.Rptr. 232.)   Nevertheless, we believe the ethical imperative embodied in rule 5–102 demands recognition of the fact that a lawyer who counsels and represents Company A, which holds a significant share of and has management participation in Company B, owes a duty not to put himself in position where he can exploit the secrets he learns about Company B as a sword in ongoing litigation against it.  (Cf. Goldstein v. Lees (1975) 46 Cal.App.3d 614, 120 Cal.Rptr. 253, [former counsel to a corporation prohibited from subsequently representing shareholder in proxy fight].)

3.   Rule 5–101(A) provides that “[e]xcept with the consent of his client after full disclosure, a lawyer shall not accept employment if the exercise of his professional judgment on behalf of the client will be or reasonably may be affected by his own financial, business, property, or personal interests.”   Moreover, rule 5–102 requires an attorney to obtain the informed written consent of his client before undertaking any representation which involves even a potential conflict of interest.   (Civil Service Com. v. Superior Court (1984) 163 Cal.App.3d 70, 82, 209 Cal.Rptr. 159;  Klemm v. Superior Court, supra, 75 Cal.App.3d 893, 898, 142 Cal.Rptr. 509.)   There is nothing in the record showing that Farrow disclosed, let alone obtained, a waiver from appellant regarding Farrow's ongoing representation of TCI, his present ownership of Emeryville Cable (which depends upon Cable Oakland for its satellite signals), or his former ownership interest in Cable Oakland's predecessor.

4.   According to the declaration of Cable Oakland's partner and general manager J. Patrick O'Connor, after the commencement of this suit, attorney Farrow attempted to directly contact both O'Connor and Gerry Lenfest of Lenfest Communications (another partner in Cable Oakland).   If these attempts had been successful and the parties had discussed matters relating to the suit, Farrow's conduct would have violated rule 7–103.   (See Chronometrics, Inc. v. Sysgen, Inc., (1980) 110 Cal.App.3d 597, 603, 168 Cal.Rptr. 196.)   The trial court could reasonably conclude that this sort of behavior was another indicator of the Farrow firm's readiness to use its unique position vis-a-vis TCI to gain leverage against Cable Oakland, leverage not available to other law firms.

SMITH, Associate Justice.

ROUSE, Acting P.J., and BENSON, J., concur.