Airis SFO, LLC v. City and County of San Francisco

Filed 10/17/06 Airis SFO, LLC v. City and County of San Francisco CA1/2

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

California Rules of Court, rule 977(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 977(b). This opinion has not been certified for publication or ordered published for purposes of rule 977.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

FIRST APPELLATE DISTRICT

DIVISION TWO

I. INTRODUCTION

The City and County of San Francisco (the City) appeals from an order denying its motion to disqualify the law firm of Duane Morris LLP (Duane Morris) from serving as counsel of record for the plaintiffs in this case. The trial court rejected the City’s argument that disqualification is mandatory, pursuant to rule 3-310 of the California State Bar Rules of Professional Conduct (rule 3-310), which precludes an attorney from representing a client in a matter adverse to another current client without the informed written consent of both clients. We affirm.

II. STATEMENT OF FACTS

A. The Underlying Action

On July 15, 2005, Duane Morris initiated the present action against the City on behalf of Airis SFO, LLC, Airis Holdings LLC (collectively Airis) and itself. According to the complaint allegations, Duane Morris was retained by Airis to assist it in

a City-sponsored competition for the exclusive right to design, develop, construct and operate a major cargo facility at the West Field Cargo Area of the San Francisco Airport. Airis won the competition, was awarded an “Exclusive Negotiations Agreement,” and ultimately entered into a series of negotiated agreements with the City which specified the terms for the redevelopment project. However, plaintiffs allege, the City breached its obligations to Airis by undermining the final approval process for the project, abandoning its agreements with Airis and adopting an Airport-led redevelopment plan.

The complaint alleges causes of action for breach of contract, express and implied, promissory estoppel, breach of the implied covenant of good faith and interference with contract. It further alleges that Airis’s damages include at least $6 million for expenses incurred on the project and more than $30 million in lost profits. The complaint states that Airis has assigned to Duane Morris pass through rights to part of Airis’s claims.

B. Background

1. Legal Services Duane Morris performed for the PUC

An attorney-client relationship between the City and Duane Morris was established in May 1997, when these parties executed an agreement pursuant to which Duane Morris agreed to serve as co-counsel for the San Francisco Public Utilities Commission (PUC) in proceedings relating to the restructuring of the electric service industry (the 1997 agreement). Initially, the 1997 agreement stated that Duane Morris would provide services to the City until June 30, 1998, but it was amended to extend the arrangement to June 30, 1999.

While the 1997 agreement was in effect, Thomas Berliner was the City’s “Utilities General Counsel.” Berliner left the City’s employment in September 1998 and joined Duane Morris the following month. According to a declaration Berliner filed in this action, after he left the City, the City Attorney asked him to “continue working on certain water and energy matters, all of which related to the PUC.”

In June 1999, the City and Duane Morris entered into a “Modified Agreement“ (the 1999 agreement) which Berliner signed on behalf of Duane Morris. Duane Morris agreed to provide legal services to the PUC relating to Electric Restructuring Proceedings, matters pertaining to the City’s water and power contracts, rates and other regulatory matters. The 1999 agreement expired on December 31, 1999.

On January 2, 2000, the City and Duane Morris entered into another agreement for the provision of legal services (the 2000 agreement). The term of the 2000 agreement was “from October 5, 1999 until the completion of the services specified in Appendix A” to the agreement. Appendix A states, in relevant part: “Contractor shall provide the following services, as assigned by the City Attorney’s Office: 1. Monitor proceedings at the Federal Energy Regulatory Commission; 2. Represent the City in proceedings and technical conferences at FERC and in other Federal forums as necessary; 3. Evaluate policies, procedures, and rules proposed at the Federal level for potential impacts on CCSF interests; 4. Recommend changes to Federal rules, policies, procedures to promote City interests; 5. Advise regarding protection of City water rights and City interests in water and power contracts, rates, and regulatory matters; 6. Other related matters.”

According to Berliner’s declaration, by January 2001 the City had changed its practice with respect to the assignment of PUC-related legal work to Duane Morris. By that time, legal work was assigned “on a task specific, or item by item, basis” and broad, open-ended assignments were not made. An assignment of a specific legal task was accompanied by an agreed upon budget and schedule and follow-up work was not guaranteed and was often assigned to other firms. According to Berliner, the City did not assure Duane Morris it would offer future work and, in at least one instance, adopted a competitive process for determining what law firm would be assigned PUC-related legal work. Berliner also stated that each time the City offered him a new assignment, he did not accept that work unless and until a successful conflict check had been completed.

On January 10, 2001, Berliner sent an “Engagement Letter” to City Attorney Louise Renne, the first paragraph of which stated: “The purpose of this letter is to confirm the engagement of Duane Morris & Heckscher LLP to represent the City and County of San Francisco on matters as assigned. This letter will by reference incorporate the terms and conditions of our existing contract with the City except as specified.” Berliner then identified two specific issues with respect to which the City sought Berliner’s opinion. According to Berliner’s letter, his work on these tasks would be preliminary in nature, limited to no more than 20 hours and would not be an exhaustive legal review. Berliner also stated that, ‘[i]f further work is requested, it will be under taken as assigned.” The letter contains information regarding billing rates for this work. This 2001 engagement letter was signed by the City Attorney on January 16, 2001.

According to City financial records, between May 1997 and December 2003, it paid Duane Morris a total of $2,311,295.92 for legal services, reimbursements and any other charges that Duane Morris submitted to the City during that period. The payments to Duane Morris exceeded $200,000 for each calendar year during this period except 2003 when Duane Morris was paid a total of $22,006.65. Duane Morris billed the City for only six hours of legal service during 2004, all of which were performed by Berliner prior to April 1, 2004.[1]

C. Prior Conflict Waivers by The City

In late 2002, an attorney named Oliver Holmes joined Duane Morris. At the time, Holmes had some existing clients he was representing in matters adverse to the City. An October 30, 2002, letter from Berliner to City Attorney Dennis Herrera confirmed that the City waived any existing conflicts with respect to these matters and that Duane Morris would create an ethical wall between Berliner and Holmes.

In a letter dated December 12, 2002, Berliner notified the City that Airis had requested that Duane Morris represent it in connection with a competition for a contract to operate a cargo facility at San Francisco Airport and requested that the City waive any potential conflict so Duane Morris could represent Airis. Berliner advised that there was no controversy at present but that “we are uncertain as to how the matter will play out” and that Airis had requested that Duane Morris represent it in all aspects of this work.

In a letter dated December 19, 2002, the City waived the potential conflict of interest and agreed that Duane Morris could represent Airis based on the understanding that the representation would not compromise Berliner’s ability to represent the City in other matters and that Berliner would ensure that no confidential City information that he obtained would be shared with attorneys at Duane Morris representing Airis. The City also expressly advised that “if a dispute or litigation arises between Airis and the City we reserve the right to raise any conflict of interest claim.”

Duane Morris partner Oliver Holmes submitted a declaration in this case regarding his representation of Airis. According to Holmes, Airis won the competition for the cargo facility contract at the airport on January 30, 2003, and “by June 2004, had been adverse to the City in numerous disputes for approximately 18 months. . . . During this 18 month period the City was informed in writing and on many occasions by Duane Morris about the parties’ disputes, and that Duane Morris was actively representing Airis in these disputes.”

D. The Offer of PUC Work in 2004

In January 2004, Berliner and two attorneys from two other law firms attended a meeting with City employees to discuss PUC water supply issues. More than 50 potential legal issues were identified during the meeting and were summarized in a City-prepared memorandum, a copy of which was forwarded to Berliner. Berliner was not asked to work on any of the issues identified in that memorandum or on any of the issues identified in subsequent drafts of issue lists generated by the City and circulated to him.

On April 12, 2004, Berliner received an e-mail from Deputy City Attorney Joshua Milstein which contained a revised draft list of legal issues relating to the PUC’s water supply.[2] The e-mail sought “comments before we assign these questions and work out a schedule of responses.” According to his declaration, Berliner did not undertake any work as a result of this e-mail and would not have worked on any issue identified therein without “reaching an agreement on cost and schedule with the City, because in each of [his] prior assignments from the City Attorney’s Office they always insisted on a specific budget for the work.”

On June 28, 2004, Berliner received a copy of an internal e-mail from Milstein to PUC staff members. Attached to the e-mail was an issues chart listing approximately 50 potential research issues. Berliner’s name was assigned to two issues although columns that were intended to reflect the cost and time frame for the assignment were left blank. Berliner stated in his declaration that he did not consider Milstein’s e-mail to be an authorization to undertake a legal assignment because the e-mail was not addressed to him, the attached chart was labeled as a “draft“ and the cost and scheduling for the work had not been discussed or agreed upon. Consequently, Berliner neither responded to Milstein’s June 28 e-mail nor commenced any work in connection with the issues discussed therein.

E. Assertion of the Conflict Regarding Airis

On June 25, 2004, Duane Morris filed an action on behalf of Airis against the City in federal district court. (Airis SFO LLC et al. v. City and County of San Francisco et al., (N.D. Cal. June 25, 2004, No. C 04-2568 JSW) (the federal action).) Airis sought injunctive and declaratory relief for the City’s alleged breach of the contract awarding Airis exclusive rights to develop the West Field Cargo Project at the San Francisco Airport.

On July 9, 2004, Owen Clements, the City’s Chief of Special Litigation, sent a letter to Oliver Holmes at Duane Morris regarding the federal action.

Clements requested that Duane Morris withdraw from the case taking the position that Duane Morris had an existing attorney-client relationship with the City and that Duane Morris had violated the Rules of Professional Conduct by filing the federal action against the City without obtaining the City’s informed written consent. Clements also made clear that the City did not consent to Duane Morris suing it over the West Field Cargo Project, and that it would not waive the “actual conflict of interest“ that Duane Morris had created.

Clements sent a copy of his July 9 letter to Berliner, who was surprised by the City’s assertion that it was an existing client of Duane Morris. After consulting with outside counsel, Berliner drafted a letter to the City dated July 14, 2004. In that letter, Berliner stated: “On June 28, Josh Milstein asked me to accept some new legal work for the PUC. Although I have not done any work for the PUC for some time and I would like to accept this new work, I regret that I will not be able to do so.” Berliner then explained that the City had taken the position that the PUC and the San Francisco Airport were part of the same client for conflict purposes. Although Berliner disagreed with this position, it meant that the City would have to waive the alleged conflict before he could accept new work for the PUC and the City had indicated it would not waive that conflict. Berliner stated that he had enjoyed his “previous work for the PUC,” expressed a desire to resume his past representation “if there is a way to do so,” and finally stated: “Of course, should the City Attorney and the Firm reach an agreement on the conflicts issue that the City has just raised, that, too, could re-open the door to our working together.”

In a July 16, 2004, order that was filed in the federal action, the district court denied Airis’s request for a temporary restraining order and set a schedule for the City’s anticipated motion to disqualify Duane Morris as plaintiffs’ counsel in that case. The City’s motion was to be filed no later than July 30, 2004. On July 29, 2004, Airis dismissed the federal action without prejudice.

C. The Present Motion to Disqualify

The City filed its motion to disqualify Duane Morris as plaintiffs’ counsel in this case on August 22, 2005. The sole basis for the City’s motion was that disqualification was mandatory because Duane Morris violated rule 3-310(C)(3).[3] After briefing and two hearings, the Honorable Beth L. Freeman denied the City’s motion in an order filed October 18, 2005 (October 18 order).

The October 18 order records several factual findings including that (1) Duane Morris and the City did not have an attorney-client relationship when Duane Morris filed the federal action; (2) the 2000 agreement, which was in place when the federal action was filed, was a contract qualifying Duane Morris to receive requests for legal services from the City; (3) Duane Morris did not provide any legal services to the City after March 2004; (4) on June 28, 2004, the City made a request for Duane Morris to perform legal services but Duane Morris did not accept that request. Based on these findings, the trial court concluded that “the per se disqualification rule regarding concurrent representation set forth in . . . Rule 3-310(C)(3) does not apply in this case.” [4]

III. DISCUSSION

A. Guiding Principles

“ ‘A trial court’s authority to disqualify an attorney derives from the power inherent in every court “[t]o control in furtherance of justice, the conduct of its ministerial officers, and of all other persons in any manner connected with the judicial proceeding before it, in every matter pertaining thereto.” (Code Civ. Proc., § 128, subd. (a)(5) . . . .)’ [Citation.] Motions to disqualify counsel are especially prone to tactical abuse because disqualification imposes heavy burdens on both the clients and courts: clients are deprived of their chosen counsel, litigation costs inevitably increase and delays inevitably occur. As a result, these motions must be examined ‘carefully to ensure that literalism does not deny the parties substantial justice.’ [Citation.] At the same time, we recognize that disqualification of counsel is necessary under certain circumstances, to protect the integrity of our judicial process by enforcing counsel’s duties of confidentiality and loyalty. [Citations.]” (City of Santa Barbara v. Superior Court (2004) 122 Cal.App.4th 17, 22-23, fn. omitted.)

“An attorney’s ethical duties to maintain undivided loyalty to his or her clients and to preserve the confidentiality of client communications require that the attorney refrain from simultaneous or successive representation of clients with adverse interests. [Citation.]” (City of Santa Barbara v. Superior Court, supra, 122 Cal.App.4th at pp. 22-23.) “A per se or automatic disqualification rule applies when counsel’s representation of one client is adverse to the interests of another current client.” (Responsible Citizens v. Superior Court (1993) 16 Cal.App.4th 1717, 1724 (Responsible Citizens).) “When the current representation is adverse to the interests of a former client, though, disqualification may be necessary only if the attorney, by reason of the former representation, obtained confidential information material to the current representation.” (Ibid.)

In the present case, the City does not contend that Duane Morris obtained confidential information material to its representation of Airis in this case. Rather, it relies solely on the per se rule of disqualification which is based on rule 3-310(C)(3) as interpreted and enforced by case law. (See Flatt v. Superior Court (1994) 9 Cal.4th 275, 282 (Flatt); Morrison Knudsen Corp. v. Hancock, Rothert & Bunshoft (1999) 69 Cal.App.4th 223, 230; Responsible Citizens, supra, 16 Cal.App.4th at p. 1724.) As noted above, the trial court found that Duane Morris was not automatically disqualified from representing Airis in this case.

“Generally, a trial court’s decision on a disqualification motion is reviewed for abuse of discretion. [Citations.] If the trial court resolved disputed factual issues, the reviewing court should not substitute its judgment for the trial court’s express or implied findings supported by substantial evidence. [Citations.] When substantial evidence supports the trial court’s factual findings, the appellate court reviews the conclusions based on those findings for abuse of discretion. [Citation.] However, the trial court’s discretion is limited by the applicable legal principles. [Citation.] Thus, where there are no material disputed factual issues, the appellate court reviews the trial court’s determination as a question of law. [Citation.] In any event, a disqualification motion involves concerns that justify careful review of the trial court’s exercise of discretion. [Citation.]” (People ex rel. Dept. of Corporations v. SpeeDee Oil Change Systems., Inc. (1999) 20 Cal.4th 1135, 1143-1144.)

B. The Relevant Date

As an initial matter, we must resolve the parties’ disagreement as to the relevant date for assessing whether the City was a current or former client of Duane Morris. The City uses the date the federal action was filed while respondents contend the relevant date for assessing whether the City was a current or former client was the date the complaint was filed in this state court action. The City is correct on this point.

There is no dispute that, when Duane Morris first undertook to represent Airis, the City expressly waived the potential conflict relating to Duane Morris’s concurrent representation of the City in PUC related matters.[5] However, the City also expressly reserved the right to assert the conflict of interest “if a dispute or litigation arises between Airis and the City.” Within a few days of the filing of the federal action, the City asserted the alleged conflict. Therefore, as a factual matter, the filing of the federal action signified the commencement of the adverse representation and is the pertinent date for assessing whether the City was a current or former client of Duane Morris.

The federal action was dismissed before the City could file a disqualification motion in that case. However, that occurrence does not shift our temporal focus to the filing of the complaint in the present action. To hold otherwise would violate the so-called “hot potato” rule which precludes a lawyer from circumventing the automatic disqualification rule by “unilaterally converting a present client into a former client prior to hearing on the motion for disqualification.” (Truck Ins. Exchange v. Fireman’s Fund Ins. Co (1992) 6 Cal.App.4th 1050, 1057 (Truck); see also American Airlines, Inc. v. Sheppard, Mullin, Richter & Hampton (2002) 96 Cal.App.4th 1017, 1037 [“a lawyer may not avoid breaching the duty of loyalty which the concurrent representation rule is designed to avoid by unilaterally converting a present client into a former client.”].) This rule has been approved by our Supreme Court who describe it as a “bar on curing dual representation conflicts by the expedient of severing the relationship with the preexisting client.” (Flatt, supra, 9 Cal.4th at p. 288.) In this context, the hot potato rule dictates that, if the City was a current client of Duane Morris when the federal action was filed, then Duane Morris and Airis cannot avoid the per se disqualification rule by dismissing the federal action and then waiting several months to pursue Airis’s claims against the City.

Respondents argue that the present case is substantively distinct from and unrelated to the federal action. However, they make no effort to actually distinguish the two complaints. Instead, respondents contend the trial court made an implied finding that the two cases are not the same. The court did no such thing. In fact, it expressly acknowledged, in its tentative ruling, that the two actions are “virtually identical.” Further, the record suggests that the most likely reason the October 18 order does not contain an express finding on this issue is that respondents objected that such a finding was unnecessary in light of the court’s conclusion that the City was already a former client when the federal action was filed.

In any event, the October 18 order reflects the trial court’s clear understanding that the crucial date for assessing whether a disqualifying conflict exists is the date the federal action was filed. All of the courts’ findings and its ultimate conclusion were made in reference to that date. Implicit in this order is the trial court’s recognition that the hot potato rule prevents Airis and Duane Morris from altering the fact that the conflict the City alleges arose when the federal action was filed and not when its disqualification motion could finally be heard.

Therefore, in assessing whether the trial court abused its discretion by denying the disqualification motion, we focus on the nature of the relationship between Duane Morris and the City on the date the federal action was filed.

C. The 2000 Agreement

The City contends the trial court committed legal error by mischaracterizing the 2000 Agreement as a contract qualifying Duane Morris to provide legal services and thereby failed to recognize that this “contract, on its face, establishes an on-going attorney-client relationship.” We disagree.

The City does not identify, nor do we find, any language in the 2000 agreement which extended the attorney-client relationship between these parties up to the time that the federal action was filed. Contrary to the City’s contention, language in the agreement stating that “[a]ll services performed under this contract are legal services” does not create an ongoing attorney-client relationship.

The stated term of the 2000 agreement is “until completion” of the services specified in Appendix A. However, as our factual summary reflects, the descriptions of those services are very general and are rendered even less precise by the statement that the Contractor shall provide services only as they are assigned by the City. Indeed, as the trial court observed at the disqualification hearing, the 2000 Agreement did not actually create an obligation on the part of the City either to give Duane Morris any legal work or to pay it any money. The lengthy document did, however, contain numerous generic terms pertaining to the rendering of services to a city which made no general or specific reference to either Duane Morris or to any legal matter. In light of the ambiguous nature of this agreement, the trial court reasonably construed it as a prequalification document which authorized Duane Morris to accept future legal work should the City elect to offer such to it.

The trial court’s interpretation of the 2000 Agreement was also supported by extrinsic evidence. That evidence showed that Duane Morris undertook to represent the City only when a specific matter was assigned to it, a budget was established and a time frame imposed. The January 10, 2001, engagement letter, which was signed by the City, is further evidence that, pursuant to the generic terms of the 2000 agreement, the City was an active or current client of Duane Morris, only when a specific assignment was made by the City and accepted by Duane Morris.

We find that the City has failed to show that the trial court committed legal error or otherwise abused its discretion by concluding that the 2000 Agreement did not establish that the City was a current client of Duane Morris when the federal action was filed.

D. The Totality of the Circumstances

The City contends the trial court abused its discretion by applying the wrong legal test to determine whether there was an attorney-client relationship between the City and Duane Morris when the federal action was filed. According to the City, the trial court erred by failing “to evaluate the totality of the circumstances based on the reasonable expectations of the client, as required by California law.”

There are several problems with the City’s argument. First, as the City’s own authority confirms, a totality of the circumstances test is used to determine whether an attorney-client relationship was created by an implied contract. (Responsible Citizens, supra, 16 Cal.App.4th at p. 1733.) Here, there is no dispute that an attorney-client relationship arose; the disputed issue is whether the City was a current or former client when the federal action was filed.

Second, even if the totality of the circumstances test applies in this context, the City mischaracterizes that test by focusing exclusively on its own perceptions of the relevant circumstances. Although the expectations of the client are certainly relevant, those expectations must be objectively reasonable. (Responsible Citizens, supra, 16 Cal.App.4th at p. 1733.) Furthermore, consistent with its own name, the totality of the circumstances test requires consideration of other circumstances in addition to the client’s expectations. Indeed, the case law is clear that an attorney-client relationship cannot be established unilaterally and cannot be created by the unilateral declaration of one party to the relationship. (Koo v. Rubio’s Restaurants, Inc. (2003) 109 Cal.App.4th 719, 729; Fox v. Pollack (1986) 181 Cal.App.3d 954, 959)

Finally, the City has not demonstrated that the trial court failed to consider the totality of the circumstances in this case. The matter was thoroughly briefed and the court held two lengthy hearings prior to rendering its decision. Nothing in the record before us indicates that the court ignored a relevant circumstance. In fact, it seems to us that the City’s real complaint is that the court simply did not draw the conclusion that the City hoped it would. Unfortunately for the City, the conclusion that the City was a former client of Duane Morris when the federal action was filed was a finding of fact and our standard of review regarding findings of fact is the substantial evidence test.

E. Substantial Evidence

Substantial evidence supports the trial court’s finding regarding the City’s status as a former client on the date the federal action was filed. There is evidence that Duane Morris’s attorney-client relationship with the City was always limited to PUC-related work. The 2000 agreement qualified Duane Morris to accept such work in the future but did not commit the City to assign any work to Duane Morris. Nor did the City retain Duane Morris to assure its availability to perform such work. By January 2001, the City did not assign on-going or open-ended matters to Duane Morris as it may once have done. The City used law firms other than Duane Morris to handle PUC legal matters and sometimes required firms to compete for such work. By 2004, the City was offering Duane Morris very little work and each new assignment was treated by Duane Morris as a new legal matter which it did not accept until a conflict check was complete. During the first three months of 2004, Duane Morris billed the City for a total of six hours of legal work. Further, as the City concedes for purposes of this appeal, Duane Morris did not perform any legal work for the City after March 2004. Nor did Duane Morris accept any new assignments after that date.

The City contends that evidence of a pattern of repeated legal assignments over a period of seven years establish an ongoing attorney-client relationship and that the three months lapse in legal work prior to the filing of the federal action “was simply not enough time as a matter of law to terminate the seven-year relationship.” To support this argument, the City refers us to non-binding cases from outside this jurisdiction which do not, in any event, advance its position. (See IBM v. Levin (1978) 579 F.2d 271 (IBM); Atromick International, Inc. v. Drustar, Inc. (S.D. Ohio 1991) 134 F.R.D. 226, Manior-Electroalloys Corp. v. Amalloy Corp. (D.N.J. 1989) 711 F.Supp.188 (Manior-Electroalloys); Shearing v. Allergan Inc. (D.Nev.1994) 1994 WL 382450 (Shearing).)

In IBM, a case applying federal law, the court affirmed an order disqualifying a law firm (CBM) from representing the plaintiffs in an antitrust case filed against IBM. In concluding the lower court did not abuse its discretion, the IBM court found, among other things, that the lower court’s ruling was supported by several factual findings including that “at all relevant times CBM had an on-going attorney-client relationship with both IBM and the plaintiffs.” (IBM, supra, 579 F.2d at p. 281.) Characterizing this finding as “entirely reasonable,” the court noted that “[a]lthough CBM had no specific assignment from IBM on hand on the day the antirust complaint was filed and even though CBM performed services for IBM on a fee for service basis rather than pursuant to a retainer arrangement, the pattern of repeated retainers, both before and after the filing of the complaint, supports the finding of a continuous relationship.” (Ibid.)

IBM is instructive because it affirms that, contrary to the City’s claim on appeal, the determination whether a person or entity is a current or former client is one of fact not law.[6] (IBM, supra, 579 F.2d at p. 281.) In this regard, IBM is factually distinguishable from the present case in that, among other things, CBM accepted work from IBM both before and after it filed the antitrust action against IBM. (Ibid.)

Another crucial distinction between our case and IBM is that here we review an order denying disqualification and apply a substantial evidence standard of review to a factual finding that the complaining party was not a current client when the adverse action was filed. This distinction applies equally to Manoir-Electroalloys, a district court decision granting a motion to disqualify based on the reasoning of IBM. (711 F.Supp. at pp. 194-196.) Despite this important distinction, we emphasize that our affirmance of the trial court in the present case is not inconsistent with the reasoning of IBM or Manoir-Electroalloys. Like the lower courts in those cases, the trial court here made a factual finding regarding the client status of the adverse party which was supported by substantial evidence.

Nor does the City’s non-binding case authority support its contention that a three-month period during which no legal work is performed is an insufficient lapse of time to terminate an attorney-client relationship, as a matter of law. The City’s primary authority for this proposition is Shearing, supra, 1994 WL 382450, an unpublished and extremely short opinion which contains little analysis but nevertheless acknowledges that “ ‘[e]ven without overt statements or acts by either party, the [attorney-client] relationship may lapse over time.’ “ Neither Shearing nor any other case cited by the City purports to establish the legal rule the City posits. Nor does the City cite a single case from in or outside California which treats this question as anything other than an issue of fact.

Further, the City mischaracterizes the trial court’s ruling by intimating that the court relied solely on the fact that Duane Morris had not performed any work for the City for three months prior to the filing of the federal action. Indeed, the significance of that time lapse is apparent only when viewed in the context of all the evidence presented to the trial court regarding the relationship between the City and Duane Morris. That evidence showed, among other things, that, at least by 2001, the relationship between these parties underwent a radical transformation. Berliner was no longer viewed or treated as the City’s legal advisor with respect to PUC work. Indeed, as time went on, Berliner was given less and less work by the City and was required to compete for work along with other outside firms. Further, each new assignment was treated by the parties as a new and distinct offer to perform legal services.

F. Berliner’s July 14, 2004, Letter

The City contends the trial court abused its discretion by permitting Duane Morris to circumvent the automatic disqualification rule by dumping the City as a client shortly after the federal action was filed. As noted earlier in our opinion, the hot potato rule prevents an attorney from unilaterally terminating his or her relationship with an existing client in order to represent another client who is adverse to the first. (See Flatt, supra, 9 Cal.4th at p. 288; Truck, supra, 6 Cal.App.4th at p. 1057.)

The City’s theory is that Duane Morris terminated it as a client on July 14, 2004, the date Berliner sent his letter to the City declining Josh Millstein’s offer of new legal work for the PUC. The City contends that, when read “in context,” this letter constitutes an admission that Duane Morris ended its attorney-client relationship with the City because of the conflict with Airis and with the specific intent to pursue litigation against the City on behalf of Airis.

Clearly, the trial court did not adopt the City’s interpretation of the July 14 letter or of the other evidence relating to the legal work that Millstein ultimately offered to Berliner in 2004. In this regard, the October 18 order states: “Duane Morris did not provide any legal services to [the City] between March 2004 and June 25, 2004. Although [the City] informed Duane Morris in January, February and April that it was considering hiring Duane Morris on June 28, 2004, Duane Morris did not accept that request.” Implicit in the court’s ruling was a determination that Berliner’s July 14 letter was a rejection of an offer of employment and not, as the City contends, a termination of an existing attorney-client relationship. In light of this conclusion, the trial court’s ruling did not offend the hot potato rule which comes into play only when a current client is terminated.

IV. DISPOSITION

The order denying the City’s motion to disqualify Duane Morris is affirmed.

_________________________

Haerle, Acting P.J.

We concur:

_________________________

Lambden, J.

_________________________

Richman, J.

Publication Courtesy of California attorney referral.

Analysis and review provided by Vista Property line attorney.

[1] The City’s records indicated that it paid Duane Morris $15,143.75 for work performed in 2004. However, most of that amount was paid to Berliner for serving as a witness in a case relating to events that occurred years earlier when Berliner was employed by the City.

[2] Milstein’s declaration pertaining to this project, along with some of the contemporary correspondence, was filed under seal in the superior court. Those sealed documents are not the source of any facts included in our factual summary.

[3] Rule 3-310(C)(3) provides that an attorney “shall not, without the informed written consent of each client: . . . (3) Represent a client in a matter 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] In the October 18 order, the trial court also expressly rejected the plaintiffs’ contention that the City was collaterally estopped from asserting a disqualifying conflict of interest in this case because the City already lost a motion to disqualify Duane Morris from another set of cases the parties refer to as the “SCADA cases.”

[5] Both the language of rule 3-310 and the case law recognize an exception to the per se rule against simultaneous representation of adverse interests when full disclosure has been made and both clients agree in writing to waive the conflict. (See e.g. Flatt, supra, 9 Cal.4th at p. 285, fn 4.)

[6] The issue whether an attorney-client relationship was ever formed has been characterized as a question of law. (Responsible Citizens, supra, 16 Cal.App.4th at p. 1733; Kraus v. Davis (1970) 6 Cal.App.3d 484, 491.) However, that issue is not disputed here.