California Landmark Cases on Lawyer's Duty of Loyalty

In 1994, the Supreme Court addressed a problem relating to the duty of attorney loyalty. (Flatt v. Superior Court (1994) 9 Cal.4th 275.) In the course of its discussion, the Supreme Court distinguished the duty of loyalty, which was at issue in that case, from the duty of client confidentiality, which is at issue in cases of vicarious disqualification. To properly understand Flatt in context, however, it is necessary to briefly discuss the "substantial relationship" test. In Flatt, supra, 9 Cal.4th at pages 278-279, an attorney interviewed a prospective client regarding a suit the prospective client wanted to bring. The attorney then realized that the target of the action was another client. The attorney declined the new representation, without advising the prospective client regarding the statute of limitations or that new counsel should be sought. The issue before the Supreme Court was whether the duty of client loyalty had prohibited the attorney from giving such advice to the prospective client, which would have harmed the existing client. When it is alleged by a former client that its former attorney possesses material confidential information and is therefore disqualified from representing an adversary in another case, it is difficult for the former client to establish, as a factual matter, "what is in the mind of the attorney." (Western Continental Operating Co. v. Natural Gas Corp. (1989) 212 Cal.App.3d 752, 759-760.) The courts have therefore established a test, under which, if the former client can demonstrate a substantial relationship between the subjects of the former and the current representations, it is presumed that the attorney had access to confidential information in the first representation which is relevant to the second representation. (Flatt, supra, 9 Cal.4th at p. 283.) In discussing the substantial relationship test in Flatt, the Supreme Court stated that once the test is met, "disqualification of the attorney's representation of the second client is mandatory; indeed, the disqualification extends vicariously to the entire firm." (Flatt, supra, 9 Cal.4th at p. 283.) The Supreme Court cited Henriksen v. Great American Savings & Loan (1992) 11 Cal.App.4th 109 for the proposition that vicarious disqualification is compelled as a matter of law. (Ibid.) The Flatt case, however, was not concerned with whether a tainted attorney's law firm was subject to vicarious disqualification. "Our Supreme Court's decisions bind us, and its dicta command our serious respect. However, 'language contained in a judicial opinion is " 'to be understood in the light of the facts and issue then before the court, and an opinion is not authority for a proposition not therein considered. ' " ' When questions about an opinion's import arise, the opinion 'should receive a reasonable interpretation and an interpretation which reflects the circumstances under which it was rendered ' , and its statements should be considered in context ." (Dyer v. Superior Court (1997) 56 Cal.App.4th 61, 66 65 Cal.Rptr.2d 85.) In the context of Flatt, the Supreme Court's citation of Henriksen v. Great American Savings & Loan (1992) with approval and statement of a rule of automatic vicarious disqualification should not be read as a binding adoption of a rule of automatic vicarious disqualification in all circumstances, as the issue was not then before the Supreme Court. Indeed, the Supreme Court itself has subsequently indicated that the question of whether vicarious disqualification can be overcome by the creation of an ethical wall is still an open one. Prior to that indication, however, appellate courts rejected attempts to avoid vicarious disqualification with the creation of ethical screening walls simply by quoting the language of Flatt. (See, e.g., Morrison Knudsen Corp. v. Hancock, Rothert & Bunshoft (1999) 69 Cal.App.4th 223, 238.)