In recent times, by far the most popular of all of the available species of legal malpractice claims has been and will most likely continue to be malpractice based upon a perceived conflict of interest. Particularly in the entertainment industry, such claims often arise from underlying transactional matters either because the attomey has entered into a business transaction with his or her client or because the attorney has represented two or more clients in the same transaction with competing interests.
Certainly, one could argue that there is nothing inherently unethical with “doing business with” one’s own client. After all, many lawyers have clients that are quite educated and extremely sophisticated. In fact, some clients are often far more savvy than their attorneys, particularly in the entertainment and real estate fields, where the vast majority of these cases arise. This author has argued that it is not necessarily inherently unethical for an attorney to represent two or more clients in the same deal, when that “deal” is of a transactional nature and when the relationships that cause the “conflicts” actually enhance the deal.1
II. RULES OF PROFESSIONAL CONDUCT
Notwithstanding the relative sophistication of some entertainment clients, there are rules that protect all clients from the appearance of gross impropriety that most commentators agree naturally accompanies such business relationships. Those guidelines appear in the California Rules of Professional Conduct, specifically Rules 3-300 and 3-310. The Rules provide standards by which all attorneys who are licensed in Califomia must govern their conduct. Compliance with the Rules allows attorneys both to continue the privilege of practicing law in California and to avoid liability in a legal malpractice suit.
Of course, some experts maintain that the Rules set forth only a minimum standard. Strict compliance with the Rules will absolve attorneys of liability with the State Bar, but will not necessarily insulate them from legal malpractice liability.2 In any event, one thing is clear: non-compliance with the express terms of the Rules will expose an attorney both to disciplinary action by the State Bar and to malpractice liability.
The first Golden Rule and the best advice in any situation potentially involving Rule 3-300 is “DO NOT ENGAGE IN BUSINESS ACTIVITIES WITH YOUR CLIENTS.” The second Golden Rule in dealing with 3-300 is “DO NOT ENGAGE IN BUSINESS ACTIVITIES WITH YOUR CLIENTS.” There is a concomitant Golden Rule with respect to Rule 3-310. If one insists on violating the Golden Rule (which is designed only to reduce the likelihood of a malpractice claim, not to eliminate the possibility completely, which perhaps nobody can do with any degree of certainty), there are certain things that must be done before entering into the business relationship with your client.
Rule 3-300, which deals with attorneys entering into business transactions with their clients, provides as follows:
An attorney shall not enter into a business transaction with a client; or knowingly acquire an ownership, possessory, security, or other pecuniary interest adverse to a client, unless each of the following requirements has been satisfied: (1) The transaction or acquisition and its tenns are fair and reasonable to the client and are fully disclosed and transmitted in writing to the client in a manner which should reasonably have been understood by the client; and (2) The client is advised in writing that the client may seek the advice of an independent lawyer of the client’s choice and is given a reasonable opportunity to seek that advice; and (3) The client thereafter consents in writing to the terms of the transaction or the terms of the acquisition.3
Rule 3-310, which deals with the representation of two or more clients with competing, potentially adverse interests, provides as follows:
A member shall not, without the informed written consent of each client:
(I) Accept representation of more than one client in a matter in which the interests of the clients potentially conflict; or
(2) Accept or continue representation of more than one client in a matter in which the interests of the clients actually conflict; or (3) Represent a client in a manner and at
the same time in a separate matter accept as a client a person or entity whose interest in the first matter is adverse to the client in the first matter.4
Make no mistake about it, an attomey who does not do these things will get sued! There are many lawyers and clients in the entertainment industry who are conversant in the Rules. The instant that something goes wrong with a deal, they are quick to use the Rules to their advantage and to find a scapegoat for whatever went wrong. After all, who ever heard of a conflict/malpractice case arising out of a hugely successful motion picture or record that is destined to earn massive profits for years to come?
However, even the Golden Rules and pristine compliance with the Rules of Professional Conduct may not be enough to prevent malpractice suits in the first place, let alone insulate you from liability. But not to worry, there is still some semblance of hope, and that hope lies within the definition of malpractice itself.
The elements of a cause of action in tort for professional negligence are “(l) the duty of the professional to use such skill, prudence and diligence as other members of his profession commonly possess and exercise; (2) a breach of that duty; (3) a proximate causal connection between the negligent conduct and the resulting injury; and (4) actual loss or damage resulting from the professional’s negligence.”5 In a legal malpractice action, as in most negligence cases, the Lawyer’s liability is limited to “all damages directly and proximately caused by his negligence.“6
In a simple case of legal malpractice (if there is such a thing), causation is not hotly disputed. For example, in a case in which an attomey allows a statute of limitations to run on his or her client’s claim, it is fairly easy to detennine who caused the client’s damages when a judge grants summary judgment and dismisses the client’s underlying claim (assuming that the client had a good case in the first place-which he must also prove).
A conflict/malpractice case, however, is more complicated, by definition. First, it can be extremely difficult to ascertain particular facts which are normally very easy to discover. For example, it is a formidable task to find information suggesting when the malpractice was or should have been discovered and when the actual damage occurred, both for statute of limitations purposes.
In a conflict/malpractice case, as opposed to a standard malpractice case, causation is equally difficult to ascertain and equally important. Nevertheless, this overlooked element must be proven, whether the claim is pled in terms of negligence, breach of contract, or breach of fiduciary duty; and it must be proved by a preponderance of the evidence.7 Even a fraud based malpractice claim is not actionable without proximately-caused damage.8
When a claim for legal malpractice has been made, the operative question is: “What would have happened had the lawyer acted otherwise?”9 The parties are compelled to conduct a trial within the trial, in order to establish that the defendant’s conduct was a “substantial factor” in causing the plaintiff’s damages,10 and that “but for” the Lawyer’s professional negligence, the client would have prevailed in the underlying action.11 This test of causation is something more than a “50-50 possibility or a mere chance,”12 and must rise to the level of a reasonable probability.13
Where reasonable minds cannot differ regarding the causation issue, the question may be considered as a matter of law.14 A motion for nonsuit may therefore lie when, despite the presentation of ample evidence of negligence, the plaintiff cannot prove that the malpractice caused the damages now sought. In that case, it may be possible to exclude certain evidence of negligence by a motion in limine.
In a conflict/malpractice case involving an underlying entertainment transaction, it is not easy to prove that the plaintiff would not have lost all his money in the deal “but for” the conflict of interest and the failure to disclose adequately that conflict. This is not like proving an underlying personal injury claim after the defendant lawyer let the statute of limitations run.
As stated by the California Supreme Court in Budd v. Nixen15
If the allegedly negligent conduct does not cause damage, it generates no cause of action in tort. [Citation] The mere breach of a professional duty, causing only nominal damages, speculative hann, or the threat of future harm-not yet realized-does not suffice to create a cause of action for negli- gence. [Citations] Hence, until the client suffers appreciable hann as a consequence of his attorney’s negligence, the client cannot establish a cause of action for malpractice.16
In another case, Sprigg v. Garcin,17 the court held that even if negligence is conclusively proved by the former client, that negligence must be shown to have proximately caused the precise damages of which the plaintiff complains, or the action will fail as a matter of law. The Court of Appeal concluded that the trial court erred in denying the defendant lawyers’ motion for judgment notwithstanding the verdict. The court ruled that there was no evidence whatsoever from which a jury could detennine that the defendants’ activities, albeit negligent, legally caused the injuries for which the plaintiff sought redress.18
After determining that the defendants’ negligence could be inferred from the facts of the case, the Sprigg court noted: But the record simply is devoid of any evidence fiom which it can be inferred that the defendants‘ negligent acts caused any injury to plaintiff. No statute of limitations ran or affirmative defense assertable by [the adverse party in the underlying action] was raised by reasons of defendants’ activities . . . . [The attorney] testified that the amended complaint which he filed included allegations sufficient for the plaintiffs’ recovery of all damages suffered by them, including damages for loss of use during the restoration period, and there was no evidence that the settlement which [the attorney] eventually negotiated with [the other
* Partner of the entertainment and litigation firm of McPherson Kalmansohn, Century City, California.
1. Edwin F. McPherson, Conflicts in the Entertainment Industry. . .Not!, THE ENTERTAINMENT AND SPORTS LAWYER, Vol. Io, Number 4, Winter I993; cf J. Anderson and D. Miller, Professional Responsibility lol – A Response to “Conflicts in the Entertainment Industry . . . Natl,” THE ENTERTAINMENT AND SPORTS LAWYER, Vol. ll, Number 2, Summer I993.
2. For instance, some expert witnesses maintain that, notwithstanding the general consensus that a requirement of a written disclosure has always been considered the better and more onerous means by which to ensure that a client knows and understands the nature of the conflict, a separate oral explanation of the nature of the conflict should also be required. However, there is no suppon for this proposition in the Rules of Professional Conduct and little, if any, support in the causes.
3. CAL. RULES OF PROFESSIONAL CONDUCT Rule 3-300 (I994).
4. ***Missing footnote
5. Williams v. Wraxall, 39 Cal. Rptr. 2d 658. 663 (Ct. App. I995) (citing Jackson v. Johnson, 7 Cal. Rptr. 2d 482, 484-85 (Ct. App. 1992)); see also Budd v. Nixen, 491 P.2d 433, 436 (Cal. I971); Purdy v. Pacific Auto. Ins. Co., 203 Cal. Rptr. 524, 533 (Cr. App. I984).
6. Smith v. Lewis, 530 P.2d 589, 597 (Cal. I975) (citing Pete v. Henderson, 269 P.2d 78, 79 (cal. Ct. App. 1954)); DiPaIma v. setdman, 33 cal. Rptr. 2d 219 (Cr. App. I994).
7 Skopp v. Weaver, 546 P.2d 307, 3 Io (Cal. I976); United Community Church v. Garcin, 282 Cal. Rptr. 368, 373 (Ct. App. 1991): McDonald v. John P. Scripps Newspaper, 257 Cal. Rptr. 473, 475 (Ct. App. I989).
8. Agnew v. Parks, 343 P.2d ll8 (Cal. Ct. App. I959); see also Garcia v. Superior Coun, 50 Cal. 3d 728, 737, 789 P.2d 960 (Cal. I990); Committee on Children’s Television, Inc. v. General Foods Corp., 673 P.2d 660, 674 (Cal. I983); Williams, 39 Cal. Rptr. 2d al 664 (“A ‘complete causal relationship‘ between the fraud or deceit and the plaintiffs damages is required”); Wallis v. Farmers Group. lnc., 269 Cal. Rptr. 299, 308 (Ct. App. I990); Nagy v. Nagy, 258 Cal. Rptr. 787, 790 (Ct. App. I989) (“Fraudulent representations which work no damage cannot give risc to an action at law.”).
9. United Community Church, 282 Cal Rptr. at 373. Mitchell v. Gonzales, 819 P.2d 872, 878-79 (Cal. l99l); Osborn v. Irwin Memorial Blood Bank, 7 Cal. Rptr. 2d lol, Io7-08 (Cl. App. I992). ld.; see also Williams, 39 Cal. Rptr. 2d at 658; Sukoff v. Lemkin, 249 Cal. Rptr. 42, 44 (Cr. App. I988).
10 Duane v. Zachariah, 28 Cal. Rptr. 2d 88, 9l (Ct. App. I994); see also Bromme v. Pavitt, 7 Cal. Rptr. 2d 608, 6l4 (Ct. App. I992): Dumas v. Cooney, l cal. Rptr. 2d 534, 589 (Cr. App. 1991).
13. Budd v. Nixen, 491 P.2d 433, 436 (cal. 1971); Bromine v. Pavin, 7 cal. Rptr. 2d at 6l4; Cottle v. Superior Court, 5 Cal. Rptr. 2d 882, 897 (Ct. App. I992); Dumas v. Cooney, l Cal. Rptr. 2d at 589.
14. Budd, 491 P.2d at 436.
15. Id. at 433.
16. ***Missing footnote