Los Angeles Lawyer March 2012

March 2012 /$4

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Visit us online at www.lacba.org

Corporations inCONFLICT

Los Angeles lawyerSa’id Vakili describes the conflicts inherent inshareholder derivative lawsuits page 20

2011 EthicsRounduppage 26

PatentReform Act

page 34

ReaffirmationAgreementspage 12

Medicare Set-AsideTrustspage 15

March2012_ Master.qxp 2/13/12 1:53 PM Page c1

One University Drive, Orange, CA 92866714-628-2500 ■ www.chapman.edu/law

SPECIAL GUEST OF HONOR AND AWARD RECIPIENT:

Richard D. Fybel, Associate Justice, 4th District Court of AppealChair of the California Supreme Court's Advisory Committee

on the Code of Judicial EthicsRecipient of 2012 PILF Award for Commitment in Public Service

KEYNOTE SPEAKER:

Todd Spitzer, Victims' Rights Attorney and Legal Affairs Director, Marsy's Law for All, former California State Assemblyman, County Supervisor, and Assistant District Attorney Topic: "Marsy's Law and the Continuing Fight to Advance Victims' Rights"

C H A P M A N U N I V E R S I T Y S C H O O L O F L AW ’S

PUBLIC INTEREST LAW FOUNDATIONANNUAL AWARDS DINNER

Tuesday, March 20, 2012 ■ 6 to 9 P.M. ■ DoubleTree by Hilton, 100 The City Drive, Orange, CA

Please attend the PILF awards dinner celebrating and supporting the work of the Public Interest Law Foundation. Tickets are $50 each, with discounts for Chapman alumni, students, faculty, staff and public interest lawyers. Reserve dinner tickets at www.chapman.edu/law/rsvp.

Guests are invited to participate in a silent auction with bid items that will include access for two at a private party in the Gold Suite at an Angels game hosted by the Traut Law Firm; Newport Harbor boat cruise for eight; tickets to attend the Kids’ Choice Awards (hosted by Will Smith); 10th row field seats at the Angels v. Oakland game;

Newport Harbor kayaking adventure package; signed books; fine wine and artwork; dining gift cards; gift baskets; and more.

Please consider donating a silent auction item or a direct gift to PILF. Table sponsorships are available. For details, contact Chapman Law Communications Director, David Finley at 714-628-2565 or [email protected].

One University Drive, Orange, CA 92866714-628-2500 ■ www.chapman.edu/law

CHAPMAN UNIVERSITY SCHOOL OF LAW AND THE SOCIETY OF AMERICAN LAW TEACHERSare pleased to present:

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You’ll learn: ■ How to break into law teaching or administration ■ The different roles and responsibilities of administrators and teachers■ The perspectives of law school deans and hiring chairs■ About law review publication strategies and the interview process■ How to create supportive networks to navigate these paths

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Register at www.saltlaw.org/conferences/view/42 or contact Professor Ernesto Hernandez at [email protected] for more information. For a full schedule of panels and presenters, see www.chapman.edu/law/breaking-in. The event includes breakfast and a light lunch. Advanced registration is required. Check-in begins at 9:30 a.m.

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20 Corporations in ConflictBY SA’ID VAKILI

While shareholder derivative lawsuits name the corporation as a defendant,courts have recognized that its interests are aligned with those of the plaintiffs

26 2011 Ethics RoundupBY JOHN W. AMBERG AND JON L. REWINSKI

Disqualification motions as a weapon in litigation and the limits of an attorney’sduty to a client featured prominently among the legal ethics issues of 2011

Plus: Earn MCLE legal ethics credit. MCLE Test No. 212 appears on page 29.

34 Something New under the SunBY ROD S. BERMAN

The Patent Reform Act introduces many critical reforms including adoption of thefirst-to-file system and substantially revised procedures for challenging a patent

F EATU RE S

Los Angeles Lawyer

the magazine of

the Los Angeles County

Bar Association

March 2012

Volume 35, No. 1

COVER PHOTO: TOM KELLER

03.12

10 Barristers Tips

How to get along with opposing counselin litigationBY CHRISTIANE A. ROUSSELL

12 Practice Tips

Reaffirmation agreements in Chapter 7bankruptcy proceedingsBY MAGDALENA REYES BORDEAUX

15 Practice Tips

How to create and maintain a Medicareset-aside trustBY SEAN M. NOVAK

44 Closing Argument

To Kill a Mockingbird: when lawyers were heroesBY JEFFREY A. SHANE

41 Classifieds

43 CLE Preview

DE PARTM E NTS

LOS ANGELES LAWYER (ISSN 0162-2900) is published monthly,except for a combined issue in July/August, by the Los AngelesCounty Bar Association, 1055 West 7th Street, Suite 2700,Los Angeles, CA 90017 (213) 896-6503. Periodicals postage paidat Los Angeles, CA and additional mailing offices. Annual sub-scription price of $14 included in the Association membershipdues. Nonmember subscriptions: $28 annually; single copyprice: $4 plus handling. Address changes must be submittedsix weeks in advance of next issue date. POSTMASTER: AddressService Requested. Send address changes to Los AngelesLawyer, P. O. Box 55020, Los Angeles CA 90055.


4 Los Angeles Lawyer March 2012

VISIT US ON THE INTERNET AT www.lacba.org/lalawyer

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EDITORIAL BOARD

ChairKENNETH W. SWENSON

Articles CoordinatorDENNIS PEREZ

JERROLD ABELES (PAST CHAIR)ETHEL W. BENNETTERIC BROWNCAROLINE BUSSINPATRICIA H. COMBSCHAD C. COOMBS (PAST CHAIR)MICHELLE WILLIAMS COURTELIZABETH L. CROOKEBEN M. DAVIDSONANGELA J. DAVIS (PAST CHAIR)GORDON ENGDONNA FORDSTUART R. FRAENKELMICHAEL A. GEIBELSON (PAST CHAIR)GABRIEL G. GREENSHARON GLANCZTED HANDELJEFFREY A. HARTWICKSTEVEN HECHT (PAST CHAIR)JOSHUA S. HODASLAURENCE L. HUMMERAMY K. JENSENGREGORY JONESMARY E. KELLYKENNETH K. LEEKATHERINE KINSEYKAREN LUONGPAUL MARKSAMY MESSIGIANMICHELLE MICHAELSCOMM. ELIZABETH MUNISOGLURICHARD H. NAKAMURA JR. (PAST CHAIR)CARMELA PAGAYADAM J. POSTGARY RASKIN (PAST CHAIR)JACQUELINE M. REAL-SALAS (PAST CHAIR)DAVID A. SCHNIDER (PAST CHAIR)STEVEN SCHWARTZLOUIS SHAPIROMAYA SHULMANHEATHER STERNDAMON THAYERTHOMAS H. VIDAL

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Copyright © 2012 by the Los Angeles County Bar Association. All rightsreserved. Reproduction in whole or in part without permission is pro-hibited. Printed by R. R. Donnelley, Liberty, MO. Member BusinessPublications Audit of Circulation (BPA).

The opinions and positions stated in signed material are thoseof the authors and not by the fact of publication necessarily those ofthe Association or its members. All manuscripts are carefully consideredby the Editorial Board. Letters to the editor are subject to editing.

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LOS ANGELES LAWYER IS THE OFFICIAL PUBLICATION OF THE LOS ANGELES COUNTY BAR ASSOCIATION1055 West 7th Street, Suite 2700, Los Angeles CA 90017-2548Telephone 213.627.2727 / www.lacba.org

ASSOCIATION OFFICERSPresidentERIC A. WEBBERPresident-ElectRICHARD J. BURDGE JR.Senior Vice PresidentPATRICIA EGAN DAEHNKEVice PresidentLINDA L. CURTISTreasurerMARGARET P. STEVENSAssistant Vice PresidentPAUL R. KIESELAssistant Vice PresidentHELEN B. KIMAssistant Vice PresidentELLEN A. PANSKYImmediate Past PresidentALAN K. STEINBRECHERExecutive DirectorSALLY SUCHILAssociate Executive Director/Chief Financial OfficerBRUCE BERRAAssociate Executive Director/General CounselW. CLARK BROWN

BOARD OF TRUSTEESSEYMOUR I. AMSTERP. PATRICK ASHOURIROBERTA B. BENNETTORI S. BLUMENFELDMARRIAN S. CHANGKENNETH CHIUBRIAN K. CONDONDUNCAN W. CRABTREE-IRELANDBRIAN S. CURREYJEFFERY J. DAARANDREW S. DHADWALANTHONY PAUL DIAZLOUIS R. DIENESDAVID C. EISMANCHRISTINE C. GOODMANJACQUELINE J. HARDINGANGELA S. HASKINSHARUMI HATALAWRENCE C. HINKLE IIBRIAN D. HUBENLILLIAN VEGA JACOBSEVAN A. JENNESSRUTH D. KAHNSAJAN KASHYAPMICHAEL K. LINDSEYSARAH E. LUPPENHON. RICHARD C. NEAL (RET.)ANNALUISA PADILLADEBORAH C. SAXE LINDA E. SPIEGELBRUCE IRA SULTAN

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In my first column in the July/August 2011 issue of LosAngeles Lawyer, I drolly suggested that if you wanted toread wonderfully written and thoughtful columns from

the Editorial Board chair…you should check out previousyears’ issues on the LACBA Web site. That was supposed to

Ken Swenson is in-house counsel for Bank of America in Los Angeles. He is the 2011-12 chairof the Los Angeles Lawyer Editorial Board. He can be reached at [email protected].

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be funny, but since some of my so-called friends have thanked me for the tip andapparently avoided my columns like the plague (now really, how often do find your-self avoiding the plague?), I followed my own advice.

I started at the beginning. Well, not a James Michener beginning—like when thesupercontinent Pangaea first begins continental drift, and, a few million years later,the Los Angeles County Bar starts publishing a magazine. More like the beginningin March 1978, when the first issue hit the mailboxes.

In its early days, the magazine had a much different look and editorial feel. Forone thing, it included classified ads, some of which were better reading than the actualarticles. From one: “3 Academy Award Winners need financing for a motion pic-ture.” Really? This was the best they could do? It was either that or ask doctors,which takes all the sport out of it, because doctors will invest in anything.

Another classified advertised karate instruction, perhaps appealing to those whoneeded a way to manage disgruntled clients. Someone recently offered me karatelessons, but they were advertised as Christian karate, so I passed. Nothing againstreligion; I just didn’t see how getting a black belt in turning the other cheek was goingto help me defend myself.

Editorial Board chair columns did not actually start until 1989. Before that timethe space was taken up by letters to the editor. Oh, sure, you would probably likethat, seeing this space filled with your mindless drivel instead of my own. Wait….I’mnot sure that came out right.

The magazine also gave a column to the Los Angeles County Bar president. So,for a while, we had the President’s Page and From the Chair. Sadly for you, the columnswritten by a president are gone, and all you get is one written by a piece of furni-ture. I would like to be called the president of the Editorial Board—a nice way todress up an office that otherwise carries little prestige and no power. Plus, it soundsbetter than being a chair.

Actually, I’m thinking of renaming the column Keeping the Seat Warm, since thechair is only seated for a year. (Yes, I intended that pun. You can send your com-plaints to management via the e-mail address below. That’s my e-mail address, soyou can be confident your missives will be ignored.)

Ted Gerdes was the first Editorial Board chair to regularly write the column. Ihave read some of Ted’s work, and it exemplifies what I was referring to when I sug-gested you read prior From the Chair columns. In one, Ted pointed out that goodwriting takes several rewrites. It takes me several rewrites to finish one of thesecolumns, so you can imagine how hard it must be to produce good writing. Ted wenton to decry legalese in legal writing and favored simplification for clarity. I agree,and have removed all legalese from this column. In fact, I have removed all refer-ence to the law entirely. Suddenly it all becomes much clearer—perhaps pointlessfor a legal publication, but at least the pointlessness is clearer.

I have to say that comparing those early issues to today’s highly stylized and hipglossy publication makes me proud to be associated with the magazine. Now if onlyI could do something about all that legalese in the middle. ■


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MANY OF US GREW UP WATCHING reruns of Perry Mason and ThePractice in which the protagonist attorneys use a take-no-prisonersapproach with their opponents and wrap up a case in 60 minutes,including the commercials. However, as young lawyers, we quicklyrealize that day-to-day litigating is not so sensational. The reality isthat most cases last months, sometimes years, and throughout thattime, attorneys must work with opposing counsel to accomplish thenecessary steps of a case. Litigating a case as a war may ultimatelycause opposing counsel to back down but also may backfire, and itwill almost certainly cause stress and chaos. It behooves opposing attor-neys to work cooperatively from the outset.Opposing counsel are not the enemy. Learningearly in practice that it is acceptable to com-promise and that being reasonable is not theequivalent to losing will benefit your bloodpressure and your clients.

One way to start dealings with opposingcounsel is to call to introduce yourself person-ally. An early initial conversation provides anopportunity to set the tone of the case and dis-cuss preliminary matters. For example, oppos-ing counsel may agree to voluntarily dismiss aparticular defendant rather than oblige you to file an expensive demur-rer. Discussion, rather than motion, saves significant time and money.Sometimes opposing counsel may agree to your request in exchangefor something that benefits his or her client but has little or no impacton yours, resulting in a win-win situation. For example, opposing coun-sel may agree to dismiss your client’s parent company, which is not aproper defendant, in exchange for your acceptance of service onbehalf of your client. You save the opposing party money by accept-ing service, and your client is relieved of the expense of moving to dis-miss the parent company or defending it at trial. The initial conver-sation is also an opportunity to sense how opposing counsel evaluatesthe case and may even result in an early settlement.

Similarly, once the judge schedules the case management confer-ence, initiate scheduling the meet-and-confer discussion. Consider send-ing an e-mail message or making a call to mention a checklist of top-ics that the local rules or judge’s order require you to cover. Opposingcounsel will often appreciate that you have cut down on the think-ing that he or she must do, and it will help you to better understandwhat to expect in the case regarding future discovery and motions.A confirming letter after the conversation, including a request thatopposing counsel reply immediately with any disagreement, is animportant record to keep opposing counsel accountable for com-mitments he or she made. Taking this initiative will also encourageyou to be better prepared in planning your case.

Planning is particularly crucial at the discovery stage. Screamingmatches and childish name-calling at depositions and nasty letters makefor entertaining stories but waste client resources. Attorneys commonly,but often unnecessarily, battle about the timing and scope of discovery.

Although getting what you want is an ego boost, it is important toconsider the big picture.

In a deposition, it is typically not worth arguing about an objec-tion. If you are taking the deposition, allow opposing counsel to inter-ject the objection and, unless he or she is instructing the witness notto answer or is improperly coaching the witness, move on to the nextquestion. If opposing counsel is instructing the witness not to answer,confirm with the witness that he or she is following counsel’s instruc-tion, ask the court reporter to mark the question, and move on. It maywork to ask the question a different way or to return to it near the

end of the deposition to test if the attorney will maintain the instruc-tion. Losing your temper makes it less likely that you will rationallythink around the obstacle. Remember that it is your deposition, andit is in your client’s best interest to maintain control and get the besttestimony. Typically, a court will recognize only egregious behaviorby opposing counsel as warranting suspension of a deposition. Thus,if you react too aggressively, you may lose your opportunity todepose that witness.

With written discovery, it is often beneficial to grant opposing coun-sel’s request for an extension. Consider that you may later need anextension on your client’s responses or another compromise. Once youreceive the opposing party’s responses, draft a respectful, concise let-ter addressing any deficiencies in the responses, considering it may laterbe used as an exhibit to a motion, and offer to schedule a call to dis-cuss. Often a thorough meet-and-confer discussion aids in efficientresolution of discovery issues. Letter wars take more time and expenseand are not nearly as productive. Many courts require a discussionbefore a discovery motion is filed. Thus, it is makes sense to initiateit at the outset in the event a motion is necessary.

When planning a mediation, consider using a mediator proposedby opposing counsel. Opposing counsel will be more likely to trusta mediator with whom he or she is familiar, potentially leading to afavorable resolution for your client. Being reasonable early in a casemay allow you to gain opposing counsel’s trust and ultimately get whatyou want. ■

barristers tips BY CHRISTIANE A. ROUSSELL

How to Get Along with Opposing Counsel in Litigation

Learning early in practice that it is acceptable to compromise and

that being reasonable is not the equivalent of losing will benefit

your blood pressure and your clients.

Christiane A. Roussell, a member of the Barristers Executive Committee, isa labor and employment attorney at Hunton & Williams LLP in Los Angeles.



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RICH

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EW

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A DEBTOR WHO FILES FOR CHAPTER 7 bankruptcy relief must statean intention to retain or surrender personal property—usually a car.After the passage of the Bankruptcy Abuse Prevention ConsumerProtection Act (BAPCPA) in 2005, the options available to the debtorwanting to keep a car were greatly restricted.1

Prior to the passage of BAPCPA, five circuits—including theNinth—allowed debtors who wanted to keep their cars to carry outthis intention by selecting from three options:2

1) A redemption agreement, which allowed the debtor to pay the cred-itor the present value of the vehicle soon after filing bankruptcy.3

2) A reaffirmation agreement, which imposed personal liability on thedebtor if the debtor later defaulted on the car loan.4

3) The “ride-through” option,5 which allowed a debtor to continuemaking payments on the vehicle without requiring a reaffirmationagreement to be filed with the bankruptcy court.6

The other circuits rejected the ride-through option and only rec-ognized a debtor’s right to indicate an intention to redeem or reaf-firm.7

In the five circuits that permitted it, the ride-through option wasextremely popular, because debtors could retain their vehicles with-out having to assume personal liability for the car loans.8 The ride-through option also prevented creditors from impinging on a debtor’sright to a fresh start because it did not impose personal liability onthe debtor for the car loan. When a debtor selected the ride-throughoption a creditor still retained the right to repossess the vehicle if thedebtor later defaulted on the loan.9

After BAPCPA, key provisions in Bankruptcy Code Sections 362and 521 restricted a debtor’s ability to state a ride-through intentionwhen filing for Chapter 7 bankruptcy relief.10 A debtor who seeks toretain a vehicle after filing for Chapter 7 relief is now required to statea permissible intention—which after BAPCPA is either an intentionto reaffirm or redeem.11

Failure of a debtor to indicate a permissible intention may allowa creditor to exercise nonbankruptcy options, such as to invoke anipso facto clause,12 a contract provision that permits a creditor todeclare the contract in default by virtue of the other party’s insolvencyor bankruptcy.13 However, courts have held that a creditor is not per-mitted to exercise an ipso facto clause when a debtor complies withthe newly adopted BAPCPA provisions under Sections 362 and 521in the reaffirmation agreement process.14 As such, even if a bankruptcyjudge denies a reaffirmation agreement, a creditor is not permittedto exercise an ipso facto clause unless the creditor demonstrates thatthe debtor failed to comply with Sections 362 and 521.

Debtor Compliance

When a debtor files for bankruptcy, the automatic stay is triggeredand prevents a creditor from repossessing a vehicle without permis-sion from the court.15 Generally, ipso facto clauses in installment con-tracts are unenforceable as a matter of law.16 The bankruptcy codehas afforded the debtor protections upon filing for bankruptcy pur-

suant to Bankruptcy Code Sections 365(e)(1)(B)17 and 541(c)(1)(B),18

which generally restrict or render unenforceable ipso facto clauses.However, under a new BAPCPA provision, Bankruptcy Code

Section 362(h)(1)(A), the automatic stay can now be terminated ina Chapter 7 bankruptcy case when a debtor fails to timely file a state-ment of intention pursuant to Section 521(a)(2)(A), which requiresa debtor retaining a vehicle with a secured loan to indicate either anintention to redeem or reaffirm. If a debtor fails to state an intentionto redeem or reaffirm, the secured creditor has the right to takewhatever action is permissible under nonbankruptcy law pursuant toSection 521(a)(6).19 Accordingly, when a secured creditor has a per-missible ipso facto clause in the loan agreement, a debtor’s failure tocomply with Sections 362 and 521 can trigger the ipso facto clause

practice tips BY MAGDALENA REYES BORDEAUX

Reaffirmation Agreements in Chapter 7 Bankruptcy Proceedings

Magdalena Reyes Bordeaux is a senior staff attorney with Public Counsel andspecializes in consumer bankruptcy litigation.


and leave the debtor vulnerable to reposses-sion of his or her vehicle.

However, debtor compliance with newlyadopted Sections 362 and 521 does notrequire the debtor to ensure the agreement isapproved by the court. Courts have consis-tently held that compliance under Sections362 and 521 only requires a debtor seekingto reaffirm a car loan to: 1) file a statementof intention indicating an intent to reaffirm,2) cooperate with the creditor in filing a reaf-firmation agreement with the bankruptcycourt, and 3) act upon the intention to reaf-firm by attending the reaffirmation hearing setby the bankruptcy court.20

Some courts have allowed a debtor tocure the failure to indicate an intention to reaf-firm when a debtor timely executes a reaf-firmation agreement.21 Nevertheless, adebtor’s failure to comply with Sections 521and 362 is risky and could leave the debtorvulnerable to repossession of his or her vehi-cle by the secured creditor.22 After a debtorhas complied with Sections 521 and 362, thefinal determination of whether the reaffir-mation agreement is legally enforceable isgoverned by Bankruptcy Code Section 524(c).

Approval of Reaffirmation Agreement

Pursuant to Section 524(c), a reaffirmationagreement is unenforceable unless the agree-ment is approved by the bankruptcy court.Provisions under Section 524(c) grew out ofconcerns about the long history of coerciveand deceptive actions by creditors to securereaffirmation agreements of discharged debt.23

Section 524(c) provides two ways that adebtor can request approval of a reaffirma-tion agreement by the bankruptcy court.

First, an attorney can certify the agreementdoes not pose an undue hardship on thedebtor or a dependent of the debtor and thathe or she provided the debtor with disclosuresregarding the reaffirmation agreement, includ-ing that the agreement is voluntary.24 Alter-natively, a bankruptcy judge can determinethat the reaffirmation agreement does notpose an undue hardship on the debtor or adependent of the debtor and that the agree-ment is in the best interest of the debtor.25

After debtors have complied with Sections362 and 521, they can first attempt to havea reaffirmation agreement approved by thebankruptcy court by asking their attorneys tosign a declaration along with the reaffirma-tion agreement.26 The attorney declarationmust state that the attorney: 1) informed thedebtor that the agreement is voluntary, 2)informed the debtor about the consequencesof reaffirming a discharged debt, and 3) deter-mined the agreement does not pose unduehardship on the debtor or a dependent ofthe debtor.27 If a debtor’s attorney certifica-tion is not filed with the court or one is not

filed because the debtor is unrepresented, thedebtor must seek approval of a reaffirmationagreement from the bankruptcy court.

When a debtor requests that a bankruptcyjudge approve a reaffirmation agreement,the request is made directly at a reaffirmationhearing.28 At a reaffirmation hearing, a bank-ruptcy judge has the duty to carefully exam-ine the debtor’s financial circumstances andensure that the reaffirmation agreement: 1)does not pose an undue hardship on thedebtor or a dependent of the debtor, and 2)is in the best interest of the debtor.29 More-over, a presumption of undue hardship ariseswhen the debtor’s monthly income less thedebtor’s monthly expenses as shown on thedebtor’s completed and signed statement insupport of the agreement is less than thescheduled payments on the reaffirmed debts.30

When Congress passed BAPCPA, newBankruptcy Code Section 524(k) expandedconsumer debtor protections in the reaffir-mation agreement process by requiring cred-itors to provide additional disclosures to thedebtor in a timely manner so as to ensure thedebtor is fully aware of the consequences ofentering into a contract imposing personal lia-bility of a discharged debt.31 Congress, how-ever, did not seek to eliminate or restrict sub-sequent review and approval by a bankruptcyjudge of a reaffirmation agreement.32 Moreimportantly, Congress did not include any lan-guage when it passed BAPCPA and amendedSection 524 that an ipso facto clause wouldbe triggered if a bankruptcy court denied areaffirmation agreement. If Congress hadwanted to give a secured creditor the right toexercise an ipso facto clause upon denial ofa reaffirmation agreement, it could have doneso by inserting such language in Section 524,since Congress had already amended thatsection when it passed BAPCPA.

During the reaffirmation agreement hear-ing, a debtor is unable to compel a judgepresiding over the reaffirmation hearing toapprove a reaffirmation agreement.33 In fact,the bankruptcy court has held that a debtor’sconcern over a creditor-relief provision, suchas an ipso facto clause, if the court disap-proves the reaffirmation agreement is notwarranted, and is not sufficient to overcomea presumption of undue hardship.34 Thus, adebtor can comply with Sections 362 and521 and still not have an enforceable reaf-firmation agreement because the bankruptcyjudge has ruled, pursuant to Section 524,that the agreement poses either an unduehardship and/or is not in the best interest ofthe debtor. However, some creditors havetried to impose an additional obligation ondebtors by advising them that if they areunable to get a reaffirmation agreementapproved by the bankruptcy judge, an ipsofacto clause in the contract will be triggered

and leave them vulnerable to repossessionof their cars.35

Ipso Facto Clauses

The bankruptcy code explicitly restricts theenforceability of ipso facto agreements pur-suant to Bankruptcy Code Sections 362,541(c)(1)(B), and 365(e)(B). Since the over-riding purpose of a Chapter 7 bankruptcyrelief is to provide the honest but unfortunatedebtor with a fresh start, courts view ipsofacto clauses as unenforceable as a matter oflaw.36

After BAPCPA, Congress created a carve-out for secured creditors to exercise an ipsofacto clause. However, the ability of a cred-itor to exercise the clause can only be triggeredunder very limited circumstances. The securedcreditor’s right to exercise an ipso facto clausecan be further limited if a creditor refuses toprovide a debtor with a reaffirmation agree-ment or file such an agreement with the bank-ruptcy court.37 Thus, a secured creditor canlose the ability to exercise an ipso facto clauseif the secured creditor thwarts a debtor’s abil-ity to carry out a debtor’s intention to reaf-firm pursuant to Bankruptcy Code Section362(h)(1)(B).38

Bankruptcy courts have held that a cred-itor does not have the right to exercise an ipsofacto clause when a debtor complies withSections 362 and 521, but the bankruptcyjudge denies the agreement at a reaffirmationhearing.39 More importantly, courts haverecognized that the provisions under Section521(d), which can trigger an ipso facto clause,when working in concert with other sectionsof the code, can only be invoked by a debtor’sfailure to comply with Sections 362 and521.40 The bankruptcy courts have rejectedthe position argued by creditors that the lan-guage of Section 521(d) allows a securedcreditor to exercise an ipso facto clause whena debtor has complied with Sections 362 and521.41

Courts have further held that when adebtor complies with Sections 362 and 521,the debtor may retain possession of the col-lateral after the entry of discharge and the clo-sure of the case without fear that the securedcreditor will exercise an ipso facto provisionand repossess the collateral, so long as thedebtor remains current.42 Since a securedcreditor is not entitled to exercise an ipsofacto clause after the bankruptcy court hasdenied a reaffirmation agreement, a creditorcannot thereafter repossess the vehicle with-out violating the automatic stay or dischargeinjunction when there is no payment or insur-ance default.43 In fact, the bankruptcy courthas found a secured creditor in violation ofthe discharge injunction and awarded com-pensatory damages along with return of thevehicle pursuant to Bankruptcy Code Section

Los Angeles Lawyer March 2012 13


105 after the creditor repossessed a vehiclewhen a debtor complied with Sections 362and 521 and the bankruptcy judge denied thereaffirmation agreement at a reaffirmationhearing.44

The passage of BAPCPA brought manysweeping changes to the bankruptcy code,especially as they relate to consumer debtorsfiling for Chapter 7 bankruptcy. One keychange was elimination of a debtor’s abilityto retain personal property securing a debt,such as a vehicle, without stating a permissibleintention to either retain or redeem as requiredby Bankruptcy Code Sections 362 and 521.BAPCPA also created a limited carve-out forcreditors to exercise an ipso facto clauseunder Bankruptcy Code Section 521 when thedebtor failed to comply with Sections 362 and521—provided the clause is permissible underapplicable nonbankruptcy law.45 Debtor com-pliance with Sections 362 and 521 does notrequire a debtor to get approval of the reaf-firmation agreement. Sections 362 and 521only require the debtor to enter the reaffir-mation agreement.

When a bankruptcy court denies a reaf-firmation agreement under Section 524(c)and the debtor has complied with Sections362 and 521, bankruptcy courts have con-sistently held that a creditor cannot exercisean ipso facto clause. Since the approval of areaffirmation agreement is out of the controlof the debtor, courts have held that Section521(d), which allows creditors to exercise apermissible ipso facto clause, is not triggered.

If a creditor exercises an ipso facto clauseafter the debtor has complied with Sections362 and 521 in entering into a reaffirmationagreement that is denied by the judge, thecreditor may be in violation of the automaticstay or discharge injunction. In such cases, thecourt may award compensatory and punitivedamages against the secured creditor. ■

1 Bankruptcy Abuse Prevention Consumer ProtectionAct, Pub. L. No. 109-8, 119 Stat. 23 (2005).2 In re Dumont, 581 F. 3d 1104, 1109 (9th Cir. 2009).3 11 U.S.C. §722. Since many debtors are unable to paya vehicle’s present value even if it is less than the out-standing loan, this option is often economically infea-sible.4 11 U.S.C. §524(c).5 In re Dumont, 581 F. 3d at 1108 n.3 (“Ride-throughwas not limited to automobile loans. However, as thename implies, ride-through was used most frequentlyto allow debtors to hold on to an automobile.”).6 Id. at 1109.7 Id.8 Id. at 1108.9 Id.10 11 U.S.C. §§362(h)(1)(a), 521(a)(2)(A), 521(a)(2)(B),521(a)(6)(B), and 521(d). In re Perez, 2010 Bankr.LEXIS 2229, at *23 n.14 (Bankr. D. N.M. July 12,2010).11 In re Dumont, 581 F. 3d at 1117.12 Id. at 1114.13 In re Perez, 2010 Bankr. LEXIS 2229, at 37 n.26.14 In re Dumont, 581 3d at 1118-19 (The court held

that courts have allowed the ride-through after BAPCPAwhen there has been substantial compliance with §§362and 521 by the debtor.).15 11 U.S.C. §362(a)(2) provides “a petition filed…operates as a stay, applicable to all entities of theenforcement, against the debtor or against property ofthe estate.”16 In re Jones, 591 F. 3d 308, 312 (4th Cir. W. Va.2010) (citing Riggs Nat. Bank of Washington, D.C. v.Perry, 729 F. 2d 982, 984-85 (4th Cir. 1984) (explain-ing that [ipso facto] clauses deprive debtors of theadvantages of bankruptcy proceedings by causing themto default immediately upon filing a bankruptcy peti-tion)). 11 U.S.C. §365(e)(1)(B) generally renders unen-forceable any contractual terms that purport to createa default solely based on the commencement of abankruptcy case. In re Dumont, 581 F. 3d at 1115.17 In re Dumont, 581 F. 3d at 1115.18 Id. at n.18.19 11 U.S.C. §521(a)(2)(6) provides:

[I]f the debtor fails to so act within the 45-dayperiod referred to in paragraph (6), the stayunder Section 362(a) is terminated with respectto the personal property of the estate or of thedebtor which is affected, such property shall nolonger be property of the estate, and the cred-itor may take whatever action as to such prop-erty as is permitted by applicable non-bank-ruptcy law.

20 11 U.S.C. §§362(h)(1)(a), 521(a)(2)(A), 521(a)(2)(B),521(a)(6)(B), 521(d). In re Perez, 2010 Bankr. LEXIS2229, at *29 (Bankr. D. N.M. July 12, 2010) (The courtheld that §521(a)(2)(B) does not require the debtor toconsummate an enforceable reaffirmation agreement,since whether the agreement is enforceable depends onfactors outside the debtor’s power or control, but onlyto do all that is within the power and control of thedebtor.). See also In re Moustafi, 371 B.R. 434, 438(Bankr. D. Ariz. 2007); In re Husain, 364 B.R. 211, 219(Bankr. E.D. Va. 2007); In re Barron, 441 B.R. 131,137 (Bankr. D. Ariz. 2010); In re Chim, 381 B.R. 191,198 (Bankr. D. Md. 2008).21 In re Bower, 2007 Bankr. LEXIS 2580, at 2586(Bankr. D. Or. July 26, 2007).22 In re Miller, 443 B.R. 54, 59 (Bankr. D. Del. 2011).23 In re Grisham, 436 B.R. 896, 900 (Bankr. N.D.Tex. 2010).24 11 U.S.C. §524(c)(3).25 11 U.S.C. §§524(c)(3), 524(c)(6)(A)(i), and524(c)(6)(A)(ii).26 11 U.S.C. §524 (c)(3).27 11 U.S.C. §524 (c)(3). When an attorney files an affi-davit with the agreement, the reaffirmation agreementis typically approved without further scrutiny fromthe court. Many attorneys are uncomfortable certify-ing that the reaffirmation agreement will not pose anundue hardship because a debtor’s financial circum-stances could change in an instant. A debtor who hadevery intention of paying a car loan when an attorneycertified the agreement and later unexpectedly loses ajob will not only have his or her car repossessed but willalso have a creditor chasing after the debtor for anypotential deficiency judgment.28 11 U.S.C. §524(d).29 11 U.S.C. §524(6)(A).30 “The presumption [of undue hardship] may berebutted in writing by the debtor if the statementincludes an explanation that identifies additional sourcesof funds to make the payments as agreed upon underthe terms of such agreement. If the presumption is notrebutted to the satisfaction of the court, the court maydisapprove such agreement. No agreement shall bedisapproved without notice and a hearing to the debtorand creditor.” 11 U.S.C. §524(m)(1).31 “[A]n agreement between a holder of a claim and thedebtor, the consideration for which, in whole or in part,

is based on a debt that is dischargeable in a case underthis title is enforceable only to the extent enforceableunder applicable non-bankruptcy law…[and] only if thedebtor received the disclosure described in subsection(k) at or before the time at which the debtor signed theagreement.” 11 U.S.C. §524(c)(2).32 In re Quintero, 2006 Bankr. LEXIS 906, at 908(Bankr. N.D. Cal. May 5, 2006) (The court statedthat BAPCPA includes in its title the phrase “con-sumer protection” and that BAPCPA’s addition of 11U.S.C. §524(k), which mandates greater disclosuresabout the terms of the reaffirmation agreement, is oneof the primary consumer protections Congress affordedto Chapter 7 debtors that recognized a debtor’s con-tinuing need for protection from coercive and decep-tive creditor actions.).33 In re Perez, 2010 Bankr. LEXIS 2229, at *28-29(Bankr. D. N.M. July 12, 2010).34 In re Chim, 381 B.R. 191, 199 (Bankr. D. Md. 2008).35 At monthly reaffirmation hearings in the Los Angelesand San Fernando Valley divisions of the CentralDistrict of California, Public Counsel and pro bonoattorneys counsel hundreds of pro se debtors eachmonth before scheduled reaffirmation hearings. Everymonth, the most common question asked by pro sedebtors is, can they repossess my car if the judgedenies the agreement? Some pro se debtors reportthat creditors have warned them that failure to get areaffirmation approved will result in automatic repos-session of their vehicle despite their compliance withBAPCPA.36 In re Jones, 591 F. 3d 308, 309-10 (4th Cir. W. Va.2010) (citing Riggs Nat. Bank of Washington, D.C. v.Perry, 729 F. 2d 982, 984-85 (4th Cir. 1984)); In reDumont, 581 F. 3d 1104, 1108 (9th Cir. 2009).37 11 U.S.C. §362(h)(1)(B) provides:

[U]nless such statement [of intention] specifiesthe debtor’s intention to reaffirm such debt onthe original contract terms and the creditorrefuses to agree to the reaffirmation on suchterms.

38 In re Quintero, 2006 Bankr. LEXIS 906, at 909-10.The court reasoned that Congress could not haveintended to leave it within a secured creditor’s powerto thwart a Chapter 7 debtor’s attempt to retain his orher car and reaffirm the debt by failing to complywith the requirement that the creditor supply thedebtor with the expanded disclosure at the appropri-ate time and that by failing to comply with §524(k) thecreditor had in effect refused to enter into an enforce-able reaffirmation agreement with the debtor and wasprohibited from repossessing the car.39 See supra note 20.40 In re Dumont, 581 F. 3d at 1117; In re Chim, 381B.R. at 197.41 In re Hardiman, 398 B.R. 161, 187 (E.D. N.C.2008) (The court held that since the debtor had alreadycomplied with §§362 and 521, the remaining lan-guage stating, “[n]othing in this title shall prevent orlimit the operation of an [an ipso facto clause]” doesnot apply.); In re Perez, 2010 Bankr. LEXIS 2229, at40. The same analysis should be applied when readingthe language used later in §521(d).42 Id. at 44. In re Bower, 2007 Bankr. LEXIS 2580,2588 (Bankr. D. Or. July 26, 2007) (Because the debtorcomplied with §521(a)(6), the debtor could retain thevehicle after disapproval of a reaffirmation agreementso long as the debtor stayed current on payments andinsurance.). See also In re Quintero, 2006 Bankr.LEXIS 906 at 909; In re Moustafi, 371 B.R. 434, 440(Bankr. D. Ariz. 2007).43 In re Barron, 441 B.R. 131, 137 (Bankr. D. Ariz.2010).44 In re Baker, 390 B.R. 524, 531-32 (Bankr. D. Ariz.2008).45 In re Dumont F. 3d 1104 at 1115.




THE CENTERS FOR MEDICARE & MEDICAID SERVICES (CMS) possessesan absolute right to reimbursement for any medical treatment thata personal injury plaintiff receives that is due to the alleged negligenceof a third party. Severe penalties await attorneys and parties who donot protect Medicare’s reimbursement interests. Unfortunately, attor-neys need extreme patience and perseverance to properly follow thecomplex, evolving rules governing Medicare reimbursement througha set-aside trust account created to hold settlement proceeds forfuture medical expenses.

Until recently, CMS had no formal position regarding reim-bursement for future medical expenses that it may be required to pro-vide to Medicare recipients who sustain injuries as a result of the neg-ligence of a third party. The general consensus was that attorneysrepresenting these recipients did not have to make provisions for futuretreatment and care covered by Medicare when negotiating a settle-ment of a claim against a third party. However, CMS recently issueda formal position paper making it clear that this practice can no longercontinue. Out of economic necessity, CMS has become more expan-sive and aggressive in enforcing its right to reimbursement for med-ical care for an injured plaintiff. This new approach was previouslyconfined to the workers’ compensation arena, but now CMS hasexpanded the obligation to create a Medicare set-aside.

Medicare was created when the Social Security Act of 1965 wassigned into law by President Lyndon B. Johnson as amendments toexisting Social Security legislation.1 At the bill signing ceremony,President Johnson enrolled former President Harry S. Truman asthe first Medicare beneficiary and presented him with the firstMedicare card. According to the Federal Medicare Trustees annualreport, there are currently over 47.5 million Americans covered byMedicare, of whom 39.6 million are aged 65 and older, and 7.9 mil-lion are disabled.2 Total benefits paid in 2010 were $516 billion.3

Income was $486 billion, and expenditures were $523 billion.4

As it exists today, Medicare provides health insurance for 1) peo-ple 65 or older, 2) people of any age with End-Stage Renal Disease(ESRD) (permanent kidney failure requiring dialysis or a kidneytransplant), and 3) people under 65 with certain disabilities.5 Inorder to qualify for coverage under the third category, known as Class3, an individual must submit an application showing that he or sheis 18 years old or older, has worked in jobs covered by Social Security,and has a medical condition that has prevented the applicant fromworking (or is expected to prevent the applicant from working) forat least 12 months or end in death.6 Applications for Medicare aresubmitted to the Department of Social Security.7 Once coverage isapproved for Medicare benefits, the administration is turned over toCMS,8 which is a branch of the U.S. Department of Health andHuman Services. This federal agency administers Medicare, Medicaid,and the Children’s Health Insurance Program, and it enforces Medicarereimbursement regulations.

At inception, Medicare was defined as the primary payer for ser-vices except those covered by workers’ compensation.9 In 1980,

Congress expanded the definition of “primary payers,” establishingthat Medicare would be the secondary payer in circumstances in whichthere was a potentially responsible third party.10 The purpose ofenacting this change in Medicare was to shift costs from the Medicareprogram to private sources of payment.11 The Medicare set-aside trusthas evolved out of these changes. (Although called trusts, Medicareset-aside trusts are not related to other common estate planninginstruments. In establishment and administration, they more closelyresemble a blocked minor’s account.)

The law prohibits Medicare from making payment if payment hasbeen made or can reasonably be expected to be made by a third party,including “workers’ compensation insurance, any liability or no-fault insurance, or an employer group health plan.”12 The Medicarerules further state that if payment has not been made, or cannot beexpected to be made promptly by a third-party payer, then Medicaremay make a conditional payment. However, it further requires reim-bursement to CMS for any payments made on behalf of an injuredperson.13

CMS has the option to initiate recovery on its own from any iden-tifiable third-party payer. The Code of Federal Regulations expresslystates that CMS “may initiate recovery as soon as it learns that pay-ment has been made or could be made under workers’ compensation,any liability or no-fault insurance, or an employer group healthplan.”14 This is created as a direct right of action by CMS to recoverfrom any primary payer.15 However, a direct right of action also wascreated for recovery from parties that receive primary payments.16

Under Section 411.24(g), CMS has a right of action to recover its pay-ments from any entity, including a beneficiary, provider, supplier, physi-cian, attorney, state agency, or private insurer that has received a pri-mary payment.17 The penalties for attorneys and parties who do notprotect Medicare’s interests when settling a case are severe.18 Penaltiesinclude double damages and interest on all amounts owed.19

Cox v. Shalala

In Cox v. Shalala,20 the court considered an appeal by the heirs of awrongful death victim. The heirs opposed Medicare’s efforts torecover a conditional payment for medical treatment on the decedent’sbehalf. The matter had informally resolved for $800,000.21 Medicarehad conditionally paid the amount of $181,187.75 in medicalexpenses prior to the decedent’s death.22 As discussed by the court,when the government has information that medical care is neededbecause of an injury or illness that was caused by another party, a con-ditional payment can be made.23 When a conditional payment is madefor medical care, the government has a direct right of recovery for theentire amount conditionally paid from any entity responsible formaking primary payment.24 The court ordered the heirs to repay the

practice tips BY SEAN M. NOVAK

How to Create and Maintain a Medicare Set-Aside Trust

Sean M. Novak is senior partner of The Novak Law Firm, P.C., in Beverly Hillswho specializes in catastrophic personal injury litigation, employment dis-crimination, and civil litigation.


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entire amount, which was deemed owed toMedicare with interest from the date onwhich notice of the debt was mailed.25

The duty to protect the interests of CMSdoes not fall just on plaintiffs. On July 1,2009, the Medicare, Medicaid and SCHIPExtension Act (MMSEA) went into effect.26

The act created affirmative obligations onthe part of a defendant to determine whethera plaintiff has received Medicare benefits andto notify CMS of its right to possible recov-ery from the plaintiff.27 The punishment fora defendant who fails to comply with theseobligations can include a penalty of $1,000per day.28 Double damages and interest canalso be recovered against the defendant.29

As a result, there is strong incentive on bothsides of a matter to ensure that the govern-ment’s rights have been protected.

Medicare is always the secondary payer toworkers’ compensation and other insurancesuch as no-fault and liability insurance.Accordingly, CMS has long maintained thatall beneficiaries and claimants must considerand protect its interest when settling anyworkers’ compensation case.30 This is deemedto include past and future interests. The resulthas been the necessity to create workers’compensation Medicare set-aside trusts.

Set-aside trusts must be used in the work-ers’ compensation arena, and CMS is aggres-sive in its enforcement of this requirement. Asa result, attorneys practicing in the workers’compensation field have long been exposed tothe frustrations surrounding the creation ofthese trusts. Fortunately, significant lessonscan be learned from their experiences. Thefirst of these is that CMS ultimately deter-mines how much must be placed into a set-aside trust against a future claim. There areno appeal rights to a CMS determination ofthe appropriate amount of a set-aside trust.

In seeking to balance the interests of clientsagainst their Medicare reimbursement oblig-ations, attorneys have tried to argue that thefollowing passage in the Code of FederalRegulations justifies reduction in the amountneeded to be placed in the set-aside trust:

If it is not necessary for CMS to takelegal action to recover, CMS recoversthe lesser of the following:(i) The amount of the Medicare pri-mary payment.(ii) The full primary payment amountthat the primary payer is obligated topay under this part without regard toany payment, other than a full pri-mary payment that the primary payerhas paid or will make, or, in the caseof a primary payment recipient, theamount of the primary payment.31

Attorneys have argued that Section411.47c requires CMS to negotiate to acceptless than the actual payments made by

Medicare for medical treatment if CMS is notforced to take legal action by the client toestablish the set-aside. CMS, however, issuedan opinion on September 29, 2011, that thecompromise language in Section 411.47conly addresses conditional past Medicarepayments. However, the right of CMS todetermine the amount of the set-aside trustdoes not mean that the attorney and client arepowerless. If it is believed that a CMS deter-mination contains obvious mistakes or a fail-ure to discount for procedures or treatments,a petition to CMS can be made for a deter-mination for a correction of the errors.32 If anattorney believes that CMS has misinter-preted the evidence or disagrees with theCMS determination for some other reason,the attorney can submit a revised applicationfor reevaluation. Additional evidence anddocuments may be included.

Furthermore, a petition can be made afterthe set-aside trust is established if the treat-ing physician concludes that the client’s med-ical condition has substantially improved.33

The client or client’s representative may sub-mit a new proposal covering future expectedmedical expenses. However, these proposalsmust justify at least a 25 percent reduction inthe outstanding funds in the set-aside trust.34

In addition, the proposal may not be sub-mitted until at least five years after a previ-ous CMS approval letter for the set-asidetrust.35

Liability Medicare Set-Aside Trusts

Until recently, CMS issued statements indi-cating that it did not consider establishment ofa liability Medicare set-aside trust to be nec-essary in most instances. Specifically, state-ments from CMS and other federal entitiesmake clear that CMS did not require set-asidesfor liability claims, such as those arising frominjuries from an automobile accident. However,this position appears to have changed. OnSeptember 29, 2011, CMS published a liabil-ity Medicare set-aside memorandum statingthat liability Medicare set asides (LMSAs) area definite component of CMS’s Medicare set-aside process and equation:

Where the beneficiary’s treating physi-cian certifies in writing that treatmentfor the alleged injury related to theliability insurance (including self-insur-ance) “settlement” has been completedas of the date of the “settlement,” andthat future medical items and/or ser-vices for that injury will not berequired, Medicare considers its inter-est, with respect to future medicals forthat particular “settlement,” satisfied.If the beneficiary receives additional“settlements” related to the underlyinginjury or illness, he/she must obtain aseparate physician certification for

those additional “settlements.”CMS’s position makes it clear that, when

a treating physician certifies in writing thatnecessary treatment for a Medicare recipientinjured by a third party has been completedand/or services are not required, no LMSA isnecessary. However, CMS indicates that itwould consider a LMSA necessary ininstances in which the treating physician cer-tifies ongoing treatment is necessary and/orfuture services will be required. CMS hasimplied that a set-aside trust is the appropriatemeans of ensuring that Medicare’s interestshave been considered.

Unfortunately, the memo from CMSadvises all settling parties that, in situationsin which treatment has been completed or ser-vices are not required, CMS will not pro-vide confirmation that CMS’s interest withrespect to future medical bills for that settle-ment has been satisfied. As a result, the ben-eficiary and his or her attorney are encouragedto save the physician’s certification as proofif CMS seeks reimbursement later.

If a set-aside trust is required, Medicarewill look to the client’s primary treating physi-cian (PTP) for assessment of future medicalneeds. This requires that the primary treatingphysician list all anticipated future servicesand treatment related to the injuries the clientsuffered as a result of a third party’s mis-conduct. CMS will then set the requiredamount for the set-aside trust based uponthe outline from the PTP. There is no appealright for the determination by CMS of theamount of the set-aside trust. Considerablework is involved in administrating a Medicareset-aside account. This includes the neces-sity for an annual auditing to see that any pay-ment from the set-aside trust was madeaccording to Medicare fee schedules or the set-tlement fee schedule.

Trust Administration

The set-aside trust is not the same as aninstrument used for estate planning or assetmanagement. A Medicare set-aside arrange-ment can be established, however, to makepayments on a defined schedule to coverexpenses projected for future years.36 In astructured Medicare set-aside arrangement,monies are apportioned over fixed or definiteperiods of time.37 The seed money for theMedicare set-aside arrangement must includean amount equal to the amount calculated tocover the first surgery procedure and twoyears of treatment.38 In a structured Medicareset-aside arrangement, if funds are notexhausted during a given period, the excessfunds must be carried forward to the next.39

If a client dies before the funds in the set-aside trust are exhausted, the remainder passesto the client’s heirs pursuant to state law.40

However, CMS and the contractor responsi-



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ble for monitoring the client’s case must firstverify that all claims have been paid.41 Thismay involve holding the set-aside trust openfor some period after the date of death, asproviders, physicians, and other suppliers arepermitted to submit their initial bill toMedicare for a period ranging from 15 to 27months after the date of service.42

Additionally, the beneficiary of the trustcan only use money in the trust for treat-ment that is in the future medical award.This requires a CMS determination regardingwhether a treatment is medically necessary tocure or relieve the effects of injuries caused bythe third party. Furthermore, Medicare willnot make any payment until the trust account,including interest, is fully exhausted.

These administrative burdens can be dealtwith effectively by retaining an expert instructured settlements at the time the client’scase is being resolved. Experts in structuredsettlements are more acquainted with theprocess than the other experts whom attor-neys for plaintiffs typically employ. Structuredsettlement experts can handle establishmentand administration of the Medicare set-asidetrust and potentially free the attorneys andclients from the burden.

It should be noted that CMS has made itclear that administrative fees and expenses foradministration of the set-aside trusts andattorney costs specifically associated withestablishing the trusts cannot be charged tothe set-aside arrangement.43 The CMS will nolonger be evaluating the reasonableness ofthese costs. The payment of these costs mustcome from some other payment source thatis completely separate from the set-asidetrust.44 In light of the complexities involvedin establishing and administering a set-asidetrust, the benefits of working with experiencedexperts are significant.

Economic pressure is forcing the govern-ment to seek new sources of revenue on adaily basis. Compounding this problem isthe political pressure being placed on theMedicare system. As a result, it is not sur-prising to see Medicare expanding its scopeof requirements for future set-aside trusts toinclude third-party liability matters. Beingprepared in advance for the potential need forcreation of set-aside trusts is the best way forattorneys to protect clients and themselvesfrom liability. ■

1 See Social Security Amendments of 1965, Pub. L. 89-97, 79 Stat. 286 (1965).2 See 2011 ANNUAL REPORT OF THE BOARDS OF TRUSTEES

OF THE FEDERAL HOSPITAL INSURANCE AND FEDERAL

SUPPLEMENTARY MEDICAL INSURANCE TRUST FUNDS 4,available at https://www.cms.gov/ReportsTrustFunds/downloads/tr2011.pdf.3 Id.4 Id.5 See Medicare Eligibility Guidelines, SSA Pub. No. 05-

1004 (June 2011), available at http://www.ssa.gov/pubs/10043.html.6 Id.7 Id.8 Id.9 See Background and Overview, General Provisions,in MEDICARE SECONDARY PAYER (MSP) MANUAL (Mar.20 2009), available at https://www.cms.gov/manuals/downloads/msp105c01.pdf [hereinafter MSP MANUAL];See also 42 U.S.C. 1395y; 42 C.F.R. 411.24(h), (i).10 MSP MANUAL, supra note 9.11 Id.12 See 42 C.F.R. 411.24(b).13 See id.14 See 42 C.F.R. 411.24(b).15 See 42 C.F.R. 411.24(e).16 See 42 C.F.R. 411.24(g).17 Id.18 See 42 U.S.C. §1395y; see also United States v.Harris, 2009 U.S. Dist. Lexis 23956 (N.D. W. Va.Mar. 26, 2009); Cox v. Shalala, 112 F. 3d 151, 154 (4thCir. 1997).19 See 42 U.S.C. §1395y. 20 Cox, 112 F. 3d 151.21 See id.22 See id. (citing 42 U.S.C. §1395(b)(2)(B)(i); 42 C.F.R.§411.52 (1993)).23 Id. (citing 42 U.S.C. §1395y(b)(2)(B)(ii); 42 C.F.R.§411.24(e)).24 Id. at 155-56 (citing 42 U.S.C. §1395y(b)(2)(B)(ii);42 C.F.R. §411.24(e)).25 Id. at 155-56.26 See Medicare, Medicaid, and SCHIP Extension Actof 2007, Pub. L. No. 110-173 (2007).27 Id.28 Id.; see also 42 U.S.C. §1395y.29 See 42 U.S.C. §1395y(b)(2)(B)(ii).30 See Medicare Secondary Payer (MSP)—Workers’

Compensation (WC) Additional Frequently AskedQuestions (July 11, 2005), available at https://www.cms.gov/WorkersCompAgencyServices/Downloads/71105Memo.pdf.31 42 C.F.R. §411.24c(1).32 Id. See also, e.g., Jason Lazarus, The New Frontierof Liability Medicare Set Asides: Part 3, available athttp://voices.injuryboard.com/miscellaneous/the-new-frontier-of-liability-medicare-set-asides-part-3.aspx.33 Id.34 Id.35 Id.36 See Medicare Secondary Payer (MSP) Frequently AskedQuestions (Apr. 21, 2003) and Medicare Secondary Payer(MSP)—Workers’ Compensation (WC) AdditionalFrequently Asked Questions: 1) Use of WC Fee Schedulevs. Full Actual Charges for WC Medicare Set-asideArrangement (WCMSA); 2) Self-administration of aWCMSA; 3) Up-front Settlement of Future Medicals vs.WCMSA; 4) Inflation Adjustment/Discount to PresentValue; 5) Structured WCMSAs; 6) WC Claim ResolutionWhere Medicals Remain Open (Oct. 15, 2004), avail-able at https://www.cms.gov/WorkersCompAgencyServices/Downloads/101504Memo.pdf.37 Id.38 Id.39 Id.40 See Medicare Secondary Payer (MSP) Frequently Ask-ed Questions (Apr. 21 2003), available at https://www.cms.gov/WorkersCompAgencyServices/Downloads/42103Memo.pdf.41 Id.42 Id.43 See Medicare Secondary Payer (MSP) FrequentlyAsked Questions (May 7, 2004), available at https://www.cms.gov/WorkersCompAgencyServices/Downloads/50704Meo.pdf.44 Id.


A. J. HazarabedianArtin N. Shaverdian

Glenn L. Block


http://gerberco.com

http://www.caledlaw.com


MIC

HA

EL C

ALL

OW

AY

CONFLICTCORPORATIONS

SHAREHOLDER DERIVATIVE LAWSUITS

have not diminished. Indeed, in industriessuch as finance and technology, the numberof these lawsuits is growing.1 A shareholderderivative suit is typically an action by one ormore shareholders against some or all of theofficers or directors of a corporation to redresscorporate mismanagement. While the cor-poration itself is usually named as a defen-dant, its status as defendant is nominal. Inpractice, the interests of the shareholder andthe corporation are considered aligned, andthe plaintiff benefits only as a shareholder.Even through the shareholder may be theplaintiff named in the lawsuit, any recoverygoes to the corporation rather than to theplaintiff-shareholder.2 These dynamics giverise to significant conflicts of interest. Among

the most important are the potential con-flicts between the shareholder and the cor-poration, between the plaintiff shareholderand other shareholders, and between the cor-poration and its counsel. Some of these poten-tial conflicts may also pose ethical challengesto the attorneys involved.

Although myriad acts can underlie a claim,shareholder derivative actions usually emergeas a result of breaches of fiduciary duties byofficers or directors. These duties, long rec-ognized at common law, have been codifiedin Corporations Code Section 309.3 Pursuantto these authorities, each director owes afiduciary duty of care to the corporation andits shareholders, and he or she must serve “ingood faith in a manner such director believesto be in the best interest of the corporation

and its shareholders and with such care,including reasonable inquiry, as an ordinar-ily prudent person in a like position would useunder similar circumstances.”4 In addition tothe duty of care, directors also owe a fiduciaryduty of loyalty to the corporation they serve.“Loyalty” means placing corporate and share-holder interests ahead of any other businessor personal interests.5

Discharging these obligations requires theexercise of sound business judgment. Courts

Sa’id Vakili is a partner with the Los Angeles firmof Vakili & Leus, LLP. His practice emphasizes busi-ness and employment litigation. He wrote thisarticle in collaboration with Peter Zablotsky,Professor of Law at Touro College Jacob D. FuchsbergLaw Center in New York.

IN

The potential for conflicts of interest inshareholder derivative lawsuits is high, leading tocomplex issue for courts and attorneys to resolve

by SA’ID VAKILI




have ruled that this obligation includes man-aging proactively: “A director cannot close hiseyes to what is going on about him in the con-duct of the business of the corporation andhave it said that he is exercising businessjudgment.”6 Similarly, “the [business judg-ment] rule does not immunize a director fromliability in the case of his or her abdication ofcorporate responsibilities.”7

Officers also have fiduciary duties to thecorporation. These duties include a “duty, not only affirmatively to protect the interestof the corporation committed to his charge,but also to refrain from doing anything thatwould work injury to the corporation.”8

Here, the courts can impose a higher standardof care on an officer, as compared to a direc-tor, because officers are often more closelyinvolved in running the corporation and havemore direct responsibility for the prepara-tion of “information, reports, or statementson corporate affairs.”9 Finally, an officerwho participates in corporate managementand who exercises some discretionary author-ity owes a fiduciary duty of loyalty to the corporation, even if the officer’s authorityfalls short of having control over the corpo-ration.10

In establishing what the appropriate exer-cise of these duties entails, courts have held,for example, that unreasonable salaries orother compensation paid to managementmay be challenged as a waste of corporateassets, and that, even when approved by a“disinterested” board, “unreasonably” largepayments to officers and directors may con-stitute a “waste” of corporate assets and thusviolate a director’s fiduciary duties to thecorporation.11 It has also been held that direc-tors or officers may not seize a corporateopportunity for themselves without first offer-ing it to the corporation.12 For example, afiduciary may not acquire property in whichthe corporation has an interest or tangibleexpectancy when a proposed activity is rea-sonably incident to the corporation’s presentor prospective business and is one in whichthe corporation has the capacity to engage.Or, the purchase of corporate stock by one ofits directors could be an appropriation of acorporate opportunity.13 Pointedly, at leastone court has held that a corporation’s finan-cial inability to take advantage of the oppor-tunity is irrelevant if a shareholder-directordiverted and concealed the opportunity with-out giving the corporation a chance at it.14

Conflicts between Plaintiff andCorporation

A derivative action commenced by a plaintiffshareholder against the officers and direc-tors of the corporation does not give rise toa conflict between that plaintiff shareholderand the corporation. Viewed from another

angle, the interests of the plaintiff share-holder and the corporation are consideredaligned, and the shareholder only benefitsthrough the corporation. As such, the primarymechanism for eliminating a conflict betweenthe plaintiff and the corporation, despite thefact that the officers and directors of the cor-poration are being sued, is the straightforwardrequirement that the plaintiff be a share-holder.

Corporations Code Section 800(b)(1) setsthe prerequisites for bringing a shareholderderivative action under California law.15 Aderivative plaintiff will qualify to initiate anaction on a corporation’s behalf if 1) theplaintiff is a shareholder of record, holder ofa beneficial interest, or holder of a votingtrust certificate, 2) the plaintiff was a share-holder when the wrong to the corporationthat gave rise to the action took place (thecontemporaneous-ownership rule), and 3)the plaintiff made a reasonable effort toinform the corporate directors about theaction and induce them to commence suitagainst the responsible parties, unless suchefforts would have been “useless” or “futile.”Section 800(b)(1) also provides that the courthas discretion to waive the contemporaneousownership requirement if it finds that there isno one else to enforce the claim on the cor-poration’s behalf and that defendants wouldotherwise retain the benefits derived fromtheir willful breach of fiduciary duty unless theaction is permitted to proceed.16

One federal court has permitted share-holders to act as plaintiffs in a derivativeaction despite positions adverse to the defen-dant directors in an earlier relationship. InTyco Laboratories, Inc. v. Kimball,17 theplaintiffs who brought the derivative actionowned a substantial interest in the corpora-tion and may previously have been in a posi-tion adversarial to the defendant directorsregarding control of the corporation. But thecourt found that this did not disqualify theplaintiffs from representing the corporation’sshareholders in a derivative action, becausethe plaintiffs were pursing common interestwith the corporation by seeking redress foralleged breaches of fiduciary duties and otherviolations of state and federal laws on the cor-poration’s behalf, and because any recoverywould inure to the corporation’s benefit andnot to the plaintiffs in their individual capac-ities.18

Indeed, the conflict between the plaintiffshareholder and those charged with corporategovernance generally emerges on a morepractical level—over the scope and logisticsof shareholder inspection rights. Perhaps thegreatest need of the shareholder bringing thederivative suit is to inspect corporate records.Naturally, defendant officers and directorswould prefer to minimize plaintiff share-

holder access to information. This conflictappears to be resolved firmly in favor of theplaintiff shareholder.

Specifically, California law grants the rightof inspection to shareholders unconditionally.The critical components of the right are statu-tory and are codified in Corporations CodeSection 1601.19 Subsection (a) provides, “Theaccounting books and records and minutes ofproceedings of the shareholders and the boardand committees of the board of any domes-tic corporation, and of any foreign corpora-tion keeping any such records in this state orhaving its principal executive office is thisstate, shall be open to inspection upon thewritten demand of the corporation of anyshareholder.”20 The statute goes on to grantthe right of inspection “for a purpose rea-sonably related to such holder’s interest as ashareholder.”21 Section 1601(b) provides thatan attorney for the shareholder may be pre-sent during the inspection, and that “theright of inspection includes the right to copyand make extracts.”22

Court interpretations of this section haveaffirmed the rights of shareholder inspec-tion. Regarding the quality of the recordsmade available for inspection, Section 1601generally guarantees that the records pro-vided be adequate and correct.23 At least onecourt has held that an inspector’s inability tomake sense of the ledgers or financial state-ments due to the lack of any specifics in infor-mation was a failure to provide any mean-ingful inspection under Section 1602.24

Courts have also held that a “reasonable”purpose for an examination includes inves-tigating the disparity in value between thepublished report and market value of out-standing shares,25 determining if the out-standing shares are held by an oligopoly of ashareholders who dictate the accounting poli-cies,26 and examining corporate assets todetermine if they have been used in self-deal-ing.27 Based upon these holdings, other rea-sonable interests would appear to includeprosecuting a shareholder derivative com-plaint for the benefit of a nominal defendantcorporation and its shareholders in order torecover monies converted by officers or direc-tors, ascertaining whether assets are grosslyundervalued, ascertaining whether transac-tions are tainted by director conflicts of inter-est, determining the fair value of the assetswhen interested directors fail to obtain a fair-ness opinion in violation of CorporationsCode Section 1203(a), and remedying otherbreaches of fiduciary duties by officers ordirectors.28

Courts have also held that shareholderinspection of foreign corporations is gov-erned under California law regardless ofwhere the company is incorporated. In Valtzv. Penta Investment Corporation,29 a 5 per-



cent shareholder in a Delaware corporationinvoked his absolute right to inspect underCalifornia law. The corporation argued thatbecause of its place of incorporation, themore limited Delaware law, which allowsinspection only for a proper, investment-related purpose, should be applied. The courtfound, however, that by locating a principalexecutive office in California and keeping itsbooks and records here, a corporation bringsdisputes regarding inspection of the recordsinto California courts and renders Californiapublic policy applicable. The court reasonedthat full faith and credit need not be givenunder the laws of another state when doingso would violate California public policy.Moreover, the court in Valtz held that Cali-fornia places no proper-purpose restriction ona shareholder’s right of inspection, and thatthe California courts must enforce that pol-icy despite the fact that the corporation wasincorporated in Delaware.30

These rules also apply to a “nominally for-eign corporation.” Pursuant to the Corpora-tions Code, a “nominally foreign corpora-tion” is any foreign corporation doingintrastate business in California if, duringthe previous year, 1) the average of what istermed the “property factor,” the “payroll fac-tor,” and the “sales factor” within Californiais more than 50 percent, and 2) more thanhalf of its voting securities are held by personswith California addresses as shown by the cor-poration’s books.31 In short, California lawapplies if the corporation conducts more than50 percent of its business in California, andif California residents own most of the stock.At least one California court has relied uponthe U.S. Supreme Court to interpret this stat-ute. In Wilson v. Louisiana-Pacific Resour-ces,32 the Third Appellate Department wrote,“Every state is entitled to enforce in its owncourt its own statutes, lawfully enacted. Onewho challenges that right, because of theforce given to a conflicting statute of anotherstate by the full faith and credit clause,assumes the burden of showing, upon somerational basis, that of the conflicting interestsinvolved those of the foreign state are supe-rior to those of the forum.”33

The Corporations Code does not specifythe number of past years for which recordsmust be made available.34 However, Section17058 requires limited liability companies(LLCs) to maintain all tax returns and finan-cial statements of the past six years, andbooks and records related to internal affairsof the LLC for at least the past four years.35

Finally, if a corporation refuses to honorthe lawful demand of a shareholder to inspectthe records, and if good cause can be shown,Section 1603 vests courts with the authorityto appoint an independent inspector oraccountant “to audit the books and records

kept in this state and investigate the property,funds and affairs of any domestic corporationor any foreign corporation keeping records inthis state.”36 When appointed, inspectorshave much broader rights than sharehold-ers, as they are able to inspect all books andrecords of a company, without limitation to

the time and types of records. While theshareholder typically pays the costs of thecourt-ordered inspection, courts do addi-tionally have the power to appoint costs of theaudit against the corporation by writ of exe-cution.37

Conflicts between the Plaintiff andRemaining Shareholders

In order to avoid conflicts between the plain-tiff shareholder and other shareholders, thefederal counterpart to Corporations CodeSection 800 provides an additional require-ment—that a “derivative action may not bemaintained if it appears that the plaintiffdoes not fairly and adequately represent theinterests of shareholders or members whoare similarly situated in enforcing the right ofthe corporation or association.”38 This sug-gests that there can be disqualifying conflictsbetween a plaintiff shareholder and othershareholders. While California’s Section800(b)39 contains no such requirement, giventhe nature of a shareholder derivative suit, aconflict arguably arises between a plaintiffshareholder in a derivative action and the

other shareholders when the plaintiff share-holder simultaneously brings a direct claimagainst a corporation.

Even in this context, however, Californiacourts have held that a shareholder maymaintain separate direct and derivative actionsand that nothing in California state law pro-

hibits a shareholder from initiating a deriv-ative lawsuit if he or she also happens to bewronged in an individual capacity.40

Moreover, in the case of closely held corpo-rations with a small number of shareholders,the distinction between direct and derivativeactions may blur if the acts of one or a fewofficer/shareholders directly affects both thecorporation and the other shareholders. Thefact that shareholders may also have otherindividual claims does not preclude themfrom bringing a derivative action.41

By contrast, at least under federal law,cases of clear conflict between a direct and aderivative action brought by the same share-holder can be problematic. For example, inZarowitz v. Bank America Corporation,42

the plaintiff, a former bank employee, wasfired after the bank attributed substantialinvestment losses to decisions made by theplaintiff and other employees. Two sets of lit-igation ensued: The bank sought damagesagainst the plaintiff and other former employ-ees for its losses, and the plaintiff sued indi-vidually for wrongful termination anddefamation. Meanwhile, a series of four class



actions and a dozen derivative actions werefiled against the bank’s officers and direc-tors. With the single exception of this plain-tiff, all the other plaintiffs reached a com-prehensive settlement agreement with thebank’s insurers. The plaintiff attempted toblock two of the settlements, however,because he thought they would have anadverse effect on his damage action forwrongful termination. Under these facts, thecourt agreed that the plaintiff had a conflictof interest with the other shareholders andthus had no standing to object to the settle-ment of the derivative action.43

Conflicts in Legal Representation

While the typical shareholder derivative actionis brought against the officers and directorsof a corporation, it also names the corpora-tion as a defendant. As such, the questionarises as to whether an attorney can simul-taneously represent the officers and direc-tors on one hand and the corporation on theother. If the case involves allegations ofwrongdoing against the officers or directors,the answer is an emphatic no. Indeed, bothgeneral principles of legal ethics and estab-lished California precedent appear to requireper se disqualification if a lawyer attempts torepresent both the company and its individ-ual officers and directors in a derivativeaction.

Every relevant codification of rules oflegal ethics—the Model Rules of ProfessionalResponsibility, the Model Code ofProfessional Responsibility, and the CaliforniaRules of Professional Conduct—prohibit thesimultaneous representation of conflictinginterests or concurrent adverse representa-tion.44 In applying this prohibition to share-holder derivative actions alleging miscon-duct by corporate officers or directors, aleading treatise on corporations states, “Dualrepresentation of the corporation and indi-vidual defendants in a derivative proceedingwhich asserts a claim of serious wrongdoingby those in control of the corporation is con-sidered improper because a potential con-flict of interest exists between counsel’s dutyto the corporate entity and counsel’s rela-tionship with the individual defendants.”45

The treatise advises that the corporationretain independent counsel whenever the cor-poration decides to take an active role in thelitigation. He concludes that, except inpatently frivolous cases, allegations of fraud,intentional misconduct, or self-dealing byofficers or directors require separate counsel.46

Other commentators have been arriving atsimilar conclusions for decades, with onestating that the possibility for conflicts ofinterest in shareholder derivative actions is“universally recognized.”47

In California, Rule 3-310 of the Rules of

Professional Conduct expressly prohibits con-flicts of interest.48 Section 3-310(C) providesthat a lawyer shall not, without the informedwritten consent of each client, “[a]ccept rep-resentation of more than one client in a mat-ter in which the interests of the clients poten-tially conflict, or “[a]ccept or continuerepresentation of more than one client in amatter in which the interest of the clientsactually conflict.”49

The seminal California case addressingRule 3-310(C) in a shareholder derivativeaction is Forrest v. Baeza.50 In Forrest, alawyer was simultaneously representing bothseveral corporations and their corporate direc-tors who were accused of embezzling from,and subjecting the corporations to, penaltiesfor tax fraud. The court reasoned that, insuch suits, the corporation, while nominallya defendant, is actually a plaintiff; if the alle-gations are proved, the corporation stands tobenefit from recovery for the wrongful actionsof the directors.

The court then reviewed California prece-dent and held, “Current case law clearly for-bids dual representation of a corporationand directors in a shareholder derivative suit,at least where the directors are alleged tohave committed fraud.”51 The Forrest courtconcluded, “In all but a few instances, the ruleof disqualification in simultaneous represen-tation cases is a per se or ‘automatic’ one.”52

Many subsequent cases have cited Forrest. Forexample, in La Jolla Cove Motel and HotelApartments, Inc. v. Superior Court, the courtwrote that “where a shareholder has filed anaction questioning its management or theactions of individual officers or directors,such as in a shareholder derivative action, cor-porate counsel cannot represent both the cor-poration and the officers, directors or share-holders with which the corporation has aconflict of interest.”53

Moreover, the conflict of interest cannot becovered by the traditional means of writtenconsent or partial withdrawal, because theexception cannot be applied when there isno disinterested party that can provide the con-sent. That is precisely the situation in mostshareholder derivative actions, because, typ-ically, all the directors and officers of the cor-poration are named as individual defendants.

Indeed, Rule 3-600(E) specifically recog-nizes this eventuality.54 It allows a lawyer torepresent a company and its officers anddirectors subject to the requirement ofinformed, written consent found in Rule 3-310(C) but goes on to state unequivocally, “Ifthe organization’s consent to the dual repre-sentation is required by rule 3-310, the con-sent shall be given by an appropriate con-stituent of the organization other than theindividual or constituent who is to be repre-sented, or by the shareholder(s) or organiza-

tion members.”55 In other words, the officersand directors named as individual defendantscannot give valid consent on behalf of the cor-poration for their own lawyer to represent thecorporation.56

The court of appeal in Forrest alsoaddressed this issue and held that the officersand directors could not give valid consent tohave counsel represent both them and thecompany in a derivative action. The courtdescribed reliance on consent as “ill founded”in the context of derivative litigation. Thecourt reasoned, “This consent rationale seemspeculiarly inapplicable in a derivative suit,because the corporation must consent throughits directors, who are the individual defen-dants.”57 The court concluded that “it wouldbe meaningless in derivative litigation toallow the consent of the parties defendant toexculpate the practice of dual representa-tion, for most often it would be the defendantdirectors and officers who would force thecorporation’s consent.”58

Nor does partial withdrawal seem to bea viable strategy. It is well established that alaw firm may not play “hot potato” with itsclients to avoid disqualification for concurrentadverse representation. In Truck InsuranceExchange v. Fireman’s Fund Insurance Com-pany,59 a law firm was counsel of record forthe plaintiff, Truck Insurance Exchange, whileat the same time representing the defendant,Fireman’s Fund Insurance Company, inanother, unrelated action. The law firm soughtto avoid disqualification in the case involvingTruck Insurance by withdrawing as counselin the unrelated case involving the defen-dant. The court held that a law firm could notavoid disqualification by withdrawing fromthe representation of the less favored clientbefore a hearing on a motion for disqualifi-cation.

In reaching this decision, the court citeda series of cases for the proposition that anattorney who is simultaneously representingone client against the interest of anotherclient should not be able to avoid the rule ofper se disqualification by simply droppingone of the clients when a disqualificationmotion is filed. The court stated that it sawno reason to depart from the “well-estab-lished principle requiring automatic disqual-ification” when a law firm seeks to avoiddisqualification simply by dropping one clientlike a hot potato. If this were not the case, thecourt noted, a law firm could always converta present client into a former client whenfaced with disqualification.60 The same poli-cies and rationale would appear applicable inshareholder derivative cases and operate toprevent a lawyer from curing this conflict bysimply withdrawing as counsel for the cor-poration.

The very nature of the shareholder deriv-



ative action engenders conflict between theshareholders and the corporation, amongshareholders, and for the attorneys involved.Some of these conflicts are proving intractable.Future courts will likely be called upon in thecontinuing effort to reach ultimate resolu-tions. ■

1 ZURICH AMERICAN INSURANCE COMPANY, RECENT

DEVELOPMENTS IN SHAREHOLDER DERIVATIVE SUITS 2(Advisen MSC Ad., 2009).2 COUNSELING CALIFORNIA CORPORATIONS §3A.17, at474.18 (CEB 3d ed. 2011).3 CORP. CODE §309.4 CORP. CODE §309(a); Lebman v. Superior Court,145 Cal. App. 4th 109, 121 (2006).5 1 CAL. PRACTICE GUIDE: CORPORATIONS 91 6:252(Rutter 2010).6 Burt v. Irving Co., 237 Cal. App. 2d 828, 853 (1965).7 Gaillard v. Natomas Co., 208 Cal. App. 3d 1250,1263 (1989).8 Bancroft-Whitney Co. v. Glen, 64 Cal. 2d 327, 345(1966).9 1 BALLENTINE & STERLING, CALIFORNIA CORPORATION

LAW §102.02 (4th ed. 2010).10 GAB Business Servs., Inc. v. Lindsey & NewsomClaim Servs., Inc., 83 Cal. App. 4th 409, 420-21(2000), disapproved on other grounds, Reeves v.Honlon, 33 Cal. 4th 1140, 1154 (2004).11 1 CAL. PRACTICE GUIDE: CORPORATIONS, supra note5, ¶6:421.12 Industrial Indem. Co. v. Golden State Co., 117 Cal.App. 2d 519, 533 (1953).13 Kelegion v. Mgrdichian, 33 Cal. App. 4th 982, 988(1955).14 Klinicki v. Lundgren, 695 P. 2d 906, 920 (Or. 1985).

15 CORP. CODE §800(b)(1).16 Id.17 Tyco Labs., Inc. v. Kimball, 444 F. Supp. 292 (E.D.Pa. 1977).18 Id. at 299.19 CORP. CODE §1601.20 CORP. CODE §1601(a).21 Id.22 CORP. CODE §1601(b).23 CORP. CODE §1601.24 Schnabel v. Superior Court, 5 Cal. 4th 704 (1993).25 Homestake Mining Co. v. Superior Court, 11 Cal.App. 2d 488 (1936).26 Id.27 Capron v. Pacific Sw. Discount Corp., 6 Cal. App.2d 436 (1935).28 Id.; Homestake Mining Co., 11 Cal. App. 2d 488;CORP. CODE §§1600 et seq.29 Valtz v. Penta Inv. Corp., 139 Cal. App. 3d 803(1983).30 Id. at 808.31 CORP. CODE §2115.32 Wilson v. Louisiana-Pacific Res., 138 Cal. App. 3d216 (1982).33 Id. at 222 (quoting Alaska Packers Assoc. v. IndustrialAccident Comm’n, 294 U.S. 532 (1935) (holding thatCalifornia laws that mandate cumulative voting are notpreempted by Utah laws that only provide for straightvoting unless otherwise stated)).34 CORP. CODE §§1500 et seq.; CORP. CODE §§1600 etseq.35 CORP. CODE §17058.36 CORP. CODE §1603.37 Koshaba v. Koshaba, 56 Cal. App. 2d 302 (1942).38 FED. R. CIV. P. 23.1.39 CORP. CODE §800(b).40 Denevi v. LGCC, 121 Cal. App. 4th 1211, 1221-22

(2004).41 Jara v. Suprema Meats, Inc., 121 Cal. App. 4th1238, 1253-60 (2004). 42 Zarowitz v. BankAmerica Corp., 866 F. 2d 1164 (9thCir. 1989).43 Id. at 1166.44 MODEL RULES OF PROF’L CONDUCT R. 1.7; MODEL

CODE OF PROF’L RESPONSIBILITY DR 5-105.45 13 FLETCHER, CYCOPEDIA OF CORPORATIONS §6025.46 Id.47 See Developments in the Law–Conflicts of Interestin the Legal Profession, 94 HARV. L. REV. 1244, 1339-40 (1981). See also 1 WITKIN, CAL. PROC. 4TH,Attorneys, §13, at 182 (1997) (noting that “the latercases tend to bar dual representation in all derivativeactions”).48 CAL. RULES OF PROF’L CONDUCT R. 3-310.49 CAL. RULES OF PROF’L CONDUCT R. 3-310(C).50 Forrest v. Baeza, 58 Cal. App. 4th 65 (1997).51 Id. at 74.52 Id.53 See, e.g., La Jolla Cove Motel and Hotel Apartments,Inc. v. Superior Court, 121 Cal. App. 4th 773, 785-86(2004) (citing FRIEDMAN, CAL. PRACTICE GUIDE:CORPORATIONS ¶6:612).54 CAL. RULES OF PROF’L CONDUCT R. 3-600(E).55 Id.56 See, e.g., Pringle v. La Chapelle, 73 Cal. App. 4th1000, 1006 (1999).57 Forrest v. Baeza, 58 Cal. App. 4th 65, 76 (1997).58 Id. (quoting Comment, Independent Representationfor Corporate Defendants in Derivative Suits, 74 YALE

L.J. 524, 528 (1965)). See also Developments in theLaw, supra note 47, at 1341.59 Truck Ins. Exch. v. Fireman’s Fund Ins. Co., 6 Cal.App. 4th 1050 (1992).60 Id. at 1054-58.



http://www.jamsadr.com


2011

Justice was delayed for many in 2011.California’s budget woes continued to taketheir toll as the state’s trial courts saw theirbudgets reduced last year by $350 million,leading to layoffs and dark courtrooms andresurrecting memories of the era when caseswere dismissed if not brought to trial withinfive years.1 The reductions were described byGovernor Jerry Brown as “debilitating.”2

More cuts are expected in 2012 as the LosAngeles courts face a $161 million budgetgap.3 These severe cuts, however, did noth-ing to reduce the number of developments inlegal ethics in 2011.

Budget problems also did not prevent thestate from acting decisively to shut downlawyers preying on desperate homeownershurt by predatory lending and the collapse ofthe real estate market. Attorney GeneralKamala Harris and the State Bar chargedPhilip Kramer, Mitchell J. Stein, and their law

firms and associates with fraudulently induc-ing borrowers to join lawsuits that had nochance of success. The lawyers’ practiceswere placed in receivership and their assetsfrozen.4 Meanwhile, the State Bar’s backlogof disciplinary cases, which stood at morethan 1,500 in July, was substantially reducedby year end, due to additional staffing and awillingness to settle cases on more lenientterms, according to defense attorneys.5 JayneKim took over as chief trial counsel after

John W. Amberg is a partner in the Los Angelesoffice of Bryan Cave LLP, and Jon L. Rewinski is apartner in the Los Angeles office of Locke Lord LLP.Both are former chairs and current members ofthe Los Angeles County Bar Association’s Profe-ssional Responsibility and Ethics Committee.Amberg is also a former chair and Rewinski is a for-mer member of the California State Bar’s Com-mittee on Professional Responsibility and Conduct.

Amid dark courtroomsand continuing budgetcuts, legal ethics issuescontinue to arise

MCLE ARTICLE AND SELF-ASSESSMENT TEST

By reading this article and answering the accompanying test questions, you can earn one MCLE legal ethics credit.

To apply for credit, please follow the instructions on the test answer sheet on page 29.

ETHICSROUNDUP

by JOHN W. AMBERGand JON L. REWINSKI



the unexpected resignation of James E.Towery and the firing of four senior man-agers.6

While the State Bar treated lawyers withsome leniency, a private company sought asignificant punitive award from an attorney.After a former Toyota lawyer provided thou-sands of company documents to the plaintiffsin rollover suits, contending that the docu-ments showed the auto manufacturer hadconspired to destroy evidence, Toyota broughtan arbitration claim against the lawyer forbreach of his confidentiality agreement.Without ruling on the underlying contentions,the arbitrator awarded Toyota $2.6 million,including punitive damages.7 A formerMorrison & Foerster attorney was sentencedto jail for a scheme to bilk the San FranciscoUnified School District and the law firm’sinsurer by billing for phony services for hisautistic son.8 Central District Judge JamesOtero, reflecting concern over the severityof the punishment in comparison to the crime,rejected a plea deal that would have sent LosAngeles attorney Pierce O’Donnell to jail forsix months for violating campaign financelaws again, and the government responded byinsisting on taking the case to trial, puttingO’Donnell’s law license in jeopardy.9

The Atlanta law firm King & Spaldingdrew national attention when, after criticismby corporate clients and employees, it backedout of its engagement by the U.S. House ofRepresentatives to defend the constitutionalityof the Defense of Marriage Act (DOMA),which denies federal benefits to same-sexcouples. The firm denied it had abandoned aclient and blamed partner Paul Clement, a for-mer U.S. Solicitor General, for signing theretainer agreement without managementapproval, prompting Clement to bolt thefirm.10 The contract with the RepublicanHouse would have prohibited all the lawyersand employees of the law firm, not just thoseworking on the case, from advocating againstDOMA, in violation of the law of severalstates, including California, that prohibitemployers from regulating their employees’political activities.11

Conflict of Interest and Disqualification

Rule of Professional Conduct 3-310(C) ordi-narily prohibits a lawyer from representingclients with conflicting interests unless bothclients provide informed written consent, butthe conflict may be waivable, and what lookslike a conflict may be no conflict at all. In con-solidated class actions, Kullar v. Foot LockerRetail, Inc., lawyers for parties objecting tothe proposed class action settlement in thatcase also represented the plaintiffs in twooverlapping putative class actions who soughtto participate in the settlement.12 Foot Lockermoved to disqualify the plaintiffs’ lawyers

based on a conflict of interest, but the FirstDistrict declined to do so. It noted that sinceno class had been certified yet, an attorney-client relationship did not exist between thelawyers and members of the putative class.Also, it held that there was no conflict becausepreventing the settlement might be in thebest interests of class members who would belikely to obtain a better recovery by pursuingthe litigation. Though the putative class mem-bers favoring the settlement were adverse tothe objectors, their common interest in theoutcome of the litigation was unaffected bythat disagreement.13

Appellate courts issued writs of mandateto reverse orders disqualifying counsel in twocases. In Banning Ranch Conservancy v.Superior Court,14 the Fourth District heldthat an open-ended retainer agreement did notcreate a current attorney-client relationship.Banning Ranch Conservancy sued the City ofNewport Beach, challenging the city’s plan tobuild a four-lane highway through its coastalproperty. The city moved to disqualify theplaintiff’s lawyers, arguing it was a currentclient of the firm based on a 2005 retaineragreement under which the lawyers hadagreed to provide legal services “as requested”by the city. The firm had performed 1.2 hoursof work and sent its final invoice five yearsbefore. Since then, the city had hired 10 dif-ferent law firms. The appellate court heldthat the retainer agreement called for repre-sentation on a matter-by-matter basis anddid not mean the firm currently representedthe city. There was no need to terminate theagreement because it was not “self-effectu-ating,” and was distinguishable from a “clas-sic retainer agreement” in which clients paya fee and the lawyers commit themselves tofuture legal representation.15

In In Re Shared Memory Graphics,LLC,16 the Federal Circuit Court of Appealsvacated Northern District Judge Maxine M.Chesney’s order granting Nintendo Companyof America’s motion to disqualify the lawfirm representing Shared Memory Graphicsin its patent infringement suit againstNintendo. Nintendo contended that one ofthe opposing firm’s partners, a former in-house lawyer for Applied Micro Devices, hadreceived confidential information in a priorsuit pursuant to a joint defense agreement.The Federal Circuit rejected the argumentsince the joint defense agreement expresslyrecited that “nothing in this Agreement…shallbe used to disqualify the respective counsel ofsuch party in any future litigation,” which itconstrued as an enforceable advance waiverof conflicts.17

Usually, only clients have standing to dis-qualify counsel based on a conflict of inter-est, but there are some exceptions. In a cus-tody dispute over an infant, the mother

obtained an order disqualifying the paternalgrandfather from representing his son, thefather of the child, though she was never thelawyer’s client. In Kennedy v. Eldridge,18 theThird District held that a nonclient has stand-ing to disqualify if continued representationthreatens cognizable injury or would under-mine the integrity of the judicial process.19 Ina loosely reasoned opinion, the appellatecourt found that a substantial relationshipexisted between the current custody disputeand an earlier custody fight involving themother as a young girl, in which the firmhad represented the mother’s father. It heldthat the father and daughter should be treatedas “a single entity for purposes of determin-ing whether an ethical conflict exists” andupheld disqualification, based on a pre-sumption that the firm had obtained confi-dential information in the prior representationthat could be used to gain an unfair advan-tage over the mother in the current dispute.20

Additionally, the court applied ABA ModelRule of Professional Conduct 3.7, which pro-hibits advocates from also being witnesses,though the ABA Model Rules do not applyin California and this state’s counterpart,Rule of Professional Conduct 5-210, appliesonly to jury trials. Finally, it justified theresult based on the “appearance of impro-priety,” although this standard has neverbeen adopted in California.21

Central District Judge Josephine StatonTucker disqualified attorney Mark Holmesafter he sued his own clients in O.A. VenturesLLC v. Stoffal.22 Represented by attorneyHolmes, plaintiff O. A. Ventures (OVAL),the owner of a motorboat, sued the defen-dants for engine damage. When one of thedefendants cross-claimed against OVAL’smanager Marciniak, Holmes answered thecross-complaint for Marciniak and filed cross-claims by Marciniak against OVAL and byOVAL against Marciniak for “intentionalacts, gross negligence, recklessness and neg-ligence.” Holmes then announced a settlementof the cross-action between his two clients andmoved to dismiss the defendant’s cross-com-plaint. He argued that any conflict of inter-est had been resolved by his clients’ settlement.Holding that the defendant had standing todisqualify because Holmes’s ethical breachwas designed to obstruct his claim, and thatthe court had inherent authority to orderdisqualification given Holmes’s “manifestand glaring” ethical breach, Judge Tuckerruled that the conflict was so patentlyimproper that it could not be waived by theclients or permitted by the court.23

Duty to a Former Client

In Oasis West Realty LLC v. Goldman,24

the California Supreme Court addressed theduty that a lawyer owes to a former client.


Nearly 80 years ago, the court held in Watch-umna Water Company v. Bailey that a lawyerowes a former client a continuing duty ofconfidentiality and a more limited duty of loy-alty. An attorney may not do anything thatwill injure the former client “in any matter inwhich he formerly represented” the client.25

However, the limits of the duty of loyaltywhen the lawyer is acting on his or her ownbehalf remained undefined.

Kenneth Goldman and his law firm ReedSmith were retained by developer Oasis WestRealty to help obtain approval for a hotel andcondominium project in Beverly Hills. Aftertwo years, Goldman and the firm resigned theengagement. Two years later, Goldman pub-licly supported a public referendum to over-turn the city council’s approval of the project,and the developer sued its former lawyer forbreach of fiduciary duty, professional negli-gence, and breach of contract. Goldman fileda motion to strike under the anti-SLAPPstatute, Code of Civil Procedure Section425.16, on the ground that his activities werein furtherance of his constitutional rights ofpetition and free speech. The court of appealfound Goldman had not disclosed any of hisformer client’s confidential information andwas acting as an individual citizen, not as alawyer for a new client with a conflictinginterest. The court concluded that the plain-tiff failed to demonstrate a probability ofprevailing on its claims.26

The supreme court reversed, evidentlyoffended by the specter of a lawyer fouling hisnest. It ruled that Oasis had presented aprima facie case that Goldman used confi-dential client information when he opposedthe project he had previously supported.Though there was no direct evidence thatGoldman had relied on confidential infor-mation, the court held it was reasonable toinfer he did so.27 It noted that a lawyer’sduty not to misuse a former client’s confi-dential information does not depend onwhether the lawyer is serving a new client orhis own interests, though in this case theinterests were not mercenary.28 The lawyer’sfreedom of expression is limited by his dutynot to misuse confidential information, andsince the court concluded that a prima faciecase existed that Goldman did use confiden-tial information to the detriment of his for-mer client, the First Amendment would notprotect “such duplicity.”29 The court’s rea-soning is troubling because it suggests thatalmost any position taken contrary to a for-mer client may be presumed to be animproper use of confidential information,undermining the purpose of the anti-SLAPPstatute, though the court disclaimed anyintent to announce “a broad categorical bar”on attorney free speech.30 The opinion is alsodisappointing because by conveniently focus-

ing on the lawyer’s presumed breach of theduty of confidentiality, it missed an oppor-tunity to define the duty of loyalty to a for-mer client in the novel circumstance in whichthere is no new client.

Finally, the court stated that it could beinferred that Goldman’s opposition to theproject had developed during the represen-tation. It explained that Goldman was oblig-ated by Rule 3-310(B) to disclose to Oasis anypersonal interest that could substantiallyaffect his professional judgment “but neverdid so.”31 However, though Rule 3-310(B)(4)requires disclosure of a lawyer’s legal, busi-ness, financial, or professional interests, itdoes not mention “personal interest,” and asprofessionals, lawyers have never been obligedto share the personal views of their clients.Professor James Fischer of Southwestern LawSchool blogged: “[T]he implications of theSupreme Court’s disclosure holding are poten-tially staggering. Does Rule 3-310(B) nowrequire a lawyer to disclose that the lawyerdoes not share the client’s objectives of therepresentation?”32

Confidentiality

It is an ethics violation for a lawyer to usewithout permission another person’s confi-dential information or to disclose a formerclient’s secrets, as a couple of 2011 appellatecases illustrate.

In 2007, in Rico v. Mitsubishi MotorsCorporation,33 the supreme court explainedthe ethical duty that a lawyer owes when thelawyer comes into possession of apparentlyprivileged materials belonging to opposingcounsel. Adopting a standard first articulat-ed in State Compensation Insurance Fund v. WPS, Inc.,34 the court stated: “When alawyer who receives materials that obvi-ously appear to be subject to an attorney-client privilege or otherwise clearly appearto be confidential and privileged and whereit is reasonably apparent that the materialswere provided or made available throughinadvertence, the lawyer receiving such mate-rials should refrain from examining thematerials any more than is essential to ascer-tain if the materials are privileged, and shallimmediately notify the sender that he or shepossesses material that appears to be privi-leged.”35 The penalty for violating this eth-ical rule may be disqualification. But Ricoleft some practical questions unanswered,including how much a lawyer could orshould read “to ascertain if the materials areprivileged.”

In 2011, the Fourth District looked atthis issue in Clark v. Superior Court.36 Itsanalysis essentially suggests that once a lawyersees the label “Attorney-Client Privileged,”“Prepared at Request of Counsel,” or “HighlyConfidential” on a document belonging to an

opponent, the lawyer should stop reading, putthe document aside, and call opposing coun-sel. By reading and using the document’s con-tent, the lawyer risks disqualification.

Prior to his termination, the plaintiff inClark had been the chief administrative offi-cer of defendant VeriSign, Inc., a provider ofInternet infrastructure services, and had signeda nondisclosure agreement prohibiting himfrom removing or using VeriSign’s confiden-tial and privileged information following thetermination of his employment. Shortly afterhis termination, Clark sued for wrongful ter-mination, breach of contract, and securitiesfraud. During pretrial skirmishing, defensecounsel suspected that Clark’s lawyer pos-sessed confidential VeriSign materials, includ-ing an e-mail message that a VeriSign seniorvice president had transmitted to VeriSign’sgeneral counsel. (This message was calledthe “Bond memo.”) Defense counsel’s suspi-cions were confirmed when the plaintiff’slawyer produced during discovery copies ofseveral VeriSign documents marked “Attor-ney-Client Privileged,” “Prepared at Requestof Counsel,” and “Highly Confidential.”Claiming that many of the disputed docu-ments were not privileged, the plaintiff’slawyer nevertheless sequestered them andmet and conferred with defense counsel, buthe disregarded the defense counsel’s demandthat the disputed documents be returned.

After the plaintiff conceded in his depo-sition that he used the Bond memo as the basisfor his securities fraud claim, defense coun-sel moved to disqualify the plaintiff’s lawyer.The trial court granted the motion. TheFourth District affirmed, rejecting the plain-tiff’s argument that the trial court erred in dis-qualifying the plaintiff’s lawyer without con-ducting an in camera review of the disputeddocuments to determine whether they were infact privileged. Pursuant to Evidence CodeSection 915 and Costco Wholesale Corpor-ation v. Superior Court,37 a court cannotorder an in camera inspection of documentsclaimed to be privileged. The court mustascertain the “dominant purpose of the rela-tionship” between the communicators. If thedominant purpose is an attorney-client rela-tionship, the court said, the communicationis protected by the privilege. The court crit-icized Clark’s lawyer for reviewing the con-tent of the disputed documents and for usingthe Bond memo to craft the securities fraudclaim. No doubt, the criticism was appro-priate. One wonders, however, whether thecourt’s approach would adequately address asituation in which a lawyer claims a com-munication is not privileged because of thecrime-fraud exception.

In Fremont Reorganizing Corporation v.Faigin,38 the Second District criticized alawyer for improperly disclosing his former




MCLE Test No. 212The Los Angeles County Bar Association certifies that this activity has been approved for MinimumContinuing Legal Education legal ethics credit by the State Bar of California in the amount of 1 hour.

MCLE Answer Sheet #2122011 ETHICS ROUNDUP

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INSTRUCTIONS FOR OBTAINING MCLE CREDITS

1. Study the MCLE article in this issue.

2. Answer the test questions opposite by markingthe appropriate boxes below. Each questionhas only one answer. Photocopies of thisanswer sheet may be submitted; however, thisform should not be enlarged or reduced.

3. Mail the answer sheet and the $20 testing fee($25 for non-LACBA members) to:

Los Angeles LawyerMCLE TestP.O. Box 55020Los Angeles, CA 90055

Make checks payable to Los Angeles Lawyer.

4. Within six weeks, Los Angeles Lawyer willreturn your test with the correct answers, arationale for the correct answers, and acertificate verifying the MCLE credit you earnedthrough this self-assessment activity.

5. For future reference, please retain the MCLEtest materials returned to you.

ANSWERS

Mark your answers to the test by checking theappropriate boxes below. Each question has onlyone answer.

1. ■■ True ■■ False




















1. A member of the California bar cannot representclients with conflicting interests unless both clientsprovide informed written consent.

True.False.

2. A lawyer may represent potential class action plain-tiffs who favor and who oppose a proposed settlementwithout violating the rule against representing partieswith conflicting interests if the class has not been cer-tified yet.

True.False.

3. A retainer agreement under which a lawyer agreesto provide legal services as requested by the clientcreates a continuing attorney-client relationship.

True.False.

4. Ordinarily, only clients have standing to disqualifya lawyer based on a conflict of interest.

True.False.

5. A court has inherent authority to disregard a cli-ent’s choice of counsel and to disqualify an attorney forethical breaches.

True.False.

6. Lawyers do not breach their duty to a former clientwhen exercising their right of free speech as a privatecitizen and their motives are not mercenary.

True.False.

7. A lawyer’s duty of zealous advocacy for a clientobligates him or her to read and use documents, evenif they contain confidential information from the oppos-ing party.

True.False.

8. A lawyer may read and use confidential documentsfrom the opposing party unless they come into his orher possession by accident.

True.False.

9. When it is disputed whether documents are pro-tected by the attorney-client privilege, a court mustconduct an in camera inspection of the documentsbefore ruling.

True.False.

10. If the “dominant purpose” of the relationshipbetween the communicators is an attorney-client rela-tionship, their written communications are privileged.

True.False.

11. An in-house lawyer can be sued for breach of fidu-ciary duty to a client after blowing the whistle on thepotentially illegal actions of the lawyer’s employer.

True.False.

12. A client’s e-mail communications with his or herlawyer using the client’s employer’s computer are priv-ileged if the client uses a private password.

True.False.

13. Communications among lawyers in a law firm maybe privileged although the client is not a party to thecommunications.

True.False.

14. Work product, whether written or not, that consistsof an attorney’s mental impressions, conclusions,opinions, and legal theories is entitled to absoluteprotection.

True.False.

15. A retainer agreement cannot require the lawyer’sconsent before the client settles a lawsuit.

True.False.

16. In a legal malpractice suit arising out of a media-tion, the mediation privilege excludes any evidenceof communications between the lawyer and clientrelated to the mediation.

True.False.

17. A client suffers actual injury to start the running ofthe statute of limitations for legal malpractice when pay-ing the lawyer’s bill.

True.False.

18. Rule of Professional Conduct 2-100 prohibitingcontact with a represented party does not create astatutory or constitutional right not to be contactedby opposing counsel.

True.False.

19. A lawyer’s consent to an opposing lawyer’s contactwith his or her client can be an implied one.

True.False.

20. Failure to comply with Rule of Professional Conduct3-300 will bar a lawyer’s enforcement of a contractwith his client and quantum meruit recovery.

True.False.


client’s confidential information. For manyyears, Alan I. Faigin served as an in-housecounsel, and for a time as the general coun-sel, of Fremont General Corporation. In thiscapacity, he also provided legal services to sev-eral of Fremont’s subsidiaries, includingFremont Reorganizing Corporation andanother subsidiary that became insolvent.The relationship between Faigin and hisemployer soured, and Fremont ultimatelyfired him. The very next day, Faigin informedthe insurance commissioner, the liquidator ofthe insolvent subsidiary, that two Fremontentities were planning to auction certain art-work belonging to the subsidiary in liquida-tion, a disclosure that resulted in litigation bythe insurance commissioner against thoseFremont entities. The Fremont entities ulti-mately resolved the insurance commissioner’slitigation by handing over the proceeds of theart auction plus $5 million. In the meantime,Faigin sued Fremont for wrongful termina-tion. Fremont cross-claimed, claiming thatFaigin’s disclosure to the insurance commis-sioner constituted a breach of his legal, eth-ical, and fiduciary duties.

Faigin moved to strike the cross-com-plaint pursuant to the anti-SLAPP statute,Code of Civil Procedure Section 425.16.Although the trial court granted the motion,the Second District reversed. It concludedthat Fremont demonstrated a reasonableprobability of prevailing on its claims againstFaigin for breaching his legal, ethical, andfiduciary duties. In response to Fremont’sclaims, Faigin could not rely on the litigationprivilege. “[T]o allow litigation attorneys tobreach their professional duties owed to theirown clients with impunity from civil liabilitywould undermine the attorney-client rela-tionship and would not further the policies ofaffording free access to the courts and encour-aging open channels of communication andzealous advocacy.”39

Attorney-Client Privilege

E-mail messages exchanged between a plain-tiff and her attorney on her employer’s com-puter were not privileged communications, theThird District held in Holmes v. PetrovichDevelopment Company LLC,40 a sexualharassment and wrongful termination case.Attorney-client privileged communicationsare defined by Evidence Code Section 952 ascommunications made in confidence.41 Theplaintiff sent the messages to her lawyer dis-cussing her potential claims against the com-pany via her employer’s computer, despitehaving been warned that the computer wasfor company business only, that the com-pany would monitor and inspect messages,and that employees had no right of privacyin their messages. Consequently, the courtheld, the e-mail messages were akin to con-

sulting her lawyer in her employer’s confer-ence room, in a loud voice, with the dooropen. The court rejected the plaintiff’s argu-ment that she believed her e-mail would beprivate because she utilized a private passwordto use the company computer and deleted themessages after they were sent, finding that herbelief was unreasonable. The fact that thecompany did not enforce its computer mon-itoring policy was akin to the unreasonablebelief that she could exceed the posted speedlimit on a lonely public roadway simplybecause it is rarely patrolled.42

In Fireman’s Fund Insurance Companyv. Superior Court (Front Gate Plaza LLC),43

the Second District held that communica-tions among the lawyers in a law firm may beprotected as privileged communications eventhough the client is not a party to the con-versation, and that an attorney’s mentalimpressions, conclusions, opinions, and legaltheories are entitled to absolute work prod-uct protection, whether or not they arereduced to written form. After Front GatePlaza sued Fireman’s Fund for bad faith inhandling a claim, a whistle-blower providedaccounting records from Front Gate to theinsurer’s lawyers that allegedly showed theinsured had submitted fraudulent claims. Thesuperior court adopted the discovery referee’srecommendation that the Fireman’s Fundlawyers be ordered to answer depositionquestions regarding their handling of thewhistle-blower’s information, and they peti-tioned the court of appeal for a writ of man-date on the grounds that such informationwas privileged and work product. The appel-late court granted the writ, holding that theattorney-client privilege is not limited to com-munications directly between the client andthe lawyer because Evidence Code Section952 contemplates disclosure to those “rea-sonably necessary for the transmission of theinformation or the accomplishment of thepurpose for which the lawyer is consulted.”The court said this surely included otherlawyers in the law firm representing theclient.44 The opinion also considered the his-tory and meaning of Code of Civil ProcedureSection 2018.030, which codifies the workproduct doctrine in California. Noting adichotomy between the absolute privilegegranted to writings that reflect an attorney’sopinion work product in subdivision (a), andthe qualified privileged for all other workproduct in subdivision (b), Justice Croskeyconcluded that the statute was intended toprovide absolute protection to written opin-ion work product and qualified protection towritten nonopinion work product, “with theimplicit understanding that unwritten opin-ion work product is already entitled toabsolute protection.”45 He wrote: “Is itpatently absurd to provide a greater protec-

tion for written opinion work product thanunwritten opinion work product? In ourview, the answer to that question is yes.”46

Engagement Letters

Can a lawyer enforce a client’s promise toprosecute a claim to trial or settlement aspart of an agreement to switch from an hourlyfee to a contingent fee? No, according to theSecond District’s decision in Lemmer v.Charney.47 A clause in a retainer agreementprohibiting a client from settling a lawsuitwithout the lawyer’s consent is void as againstpublic policy. “[T]he law does not recognizea tort cause of action for damages for theclient’s decision to abandon [a claim], becausethat would equally constrain defendant tokeep his lawsuit alive just for his attorney’sprofit, despite his own fears and desire toabandon the case.”48

Once a lawyer and client form a rela-tionship, the lawyer owes the client variousfiduciary duties. When a lawyer leaves one lawfirm to join another, does the lawyer have afiduciary duty to explain the differencesbetween the new firm’s and the old firm’sengagement letters? No, at least if the clientis a sophisticated businessperson, accordingto the First District’s decision in Desert Out-door Advertising v. Superior Court.49 After alawyer switched law firms, his clients, a cor-poration and one of its employees, signed anengagement letter with the new firm so thelawyer could continue to handle pending lit-igation. Unlike the engagement letter withthe lawyer’s first firm, the new engagement let-ter included a mandatory arbitration clausefor any future disputes. The president of thecorporate client signed the new engagementletter without reading it and then balked atthe new firm’s attempt to send the clients’ mal-practice claim into arbitration. The presi-dent offered numerous excuses for not read-ing the engagement letter, including a lawyer’sfiduciary duty to disclose significant devel-opments. The courts disagreed. “A cardinalrule of contract law is that a party’s failure toread a contract, or to carefully read a contract,before signing it is no defense to the con-tract’s enforcement.”50 Under the circum-stances, where sophisticated clients were sentthe new fee agreement, urged to read it,encouraged to seek the advice of their owncounsel before executing it, and offered theopportunity to retain other counsel if theywere dissatisfied with the terms, the lawyer didnot have a fiduciary duty to explain the arbi-tration clause that was clearly set forth in thenew engagement letter.

Malpractice

As in prior years, 2011 saw its share of pub-lished opinions in legal malpractice actions.In one of those cases, Cassel v. Superior



Court,51 the law firm successfully invokedan evidentiary privilege in response to its for-mer client’s malpractice claims. In two othercases, Callahan v. Gibson, Dunn & CrutcherLLP52 and Smith v. Cimmet,53 the defendantlawyers had less success derailing malpracticeclaims asserted against them.

In Cassel v. Superior Court, a formerclient alleged that his lawyers at WassermanComden pressured him into settling a disputeduring mediation on unfavorable termsbecause, according to the former client, thefirm had an undisclosed conflict of interest.Based on the mediation privilege codified inEvidence Code Section 1119, the trial court

granted Wasserman Comden’s motion in lim-ine to exclude any evidence concerning com-munications related to the mediation, includ-ing private discussions between WassermanComden and its former client. On a writ,the court of appeals reversed. The supremecourt reversed. The court’s opinion, writtenby Justice Marvin R. Baxter, relied on a lit-eral reading of the statute. Section 1119 pro-vides that, absent certain statutory excep-tions, things said or written “for the purposeof” and “pursuant to” a mediation are inad-missible in “any civil action” unless the con-fidentiality of the particular communicationis expressly waived by all mediation “par-ticipants.” The statute does not exclude pri-vate communications between a lawyer andhis or her client for purposes of a later mal-practice action. As Justice Baxter noted, it isnot the court’s “responsibility or ourprovince” to express a view about whether thestatutory language, thus applied, ideally bal-ances the competing concerns or representsthe soundest public policy.54 In his concurringopinion, Justice Ming W. Chin expressedconcern about the breadth of the court’s hold-ing: “This holding will effectively shield anattorney’s actions during mediation, includ-ing advising the client, from a malpracticeaction even if those actions are incompetentor even deceptive. Attorneys participating inmediation will not be held accountable for any

incompetent or fraudulent actions duringthat mediation unless the actions are soextreme as to engender a criminal prosecutionagainst the attorney.”55 His point is welltaken. Unless the legislature revises the statute,it is difficult to imagine how a client couldassert a malpractice claim against a lawyerbased on misconduct at a mediation.

Because Code of Civil Procedure Section340.6(a) tolls a legal malpractice claim untilthe client sustains “actual injury,” a mal-practice claim can lie dormant for manyyears, as illustrated by the Second DistrictCourt of Appeal’s 2011 opinion in Callahanv. Gibson, Dunn & Crutcher LLP.56 Two

brothers retained Gibson Dunn in 1988 toadvise them on restructuring their real estatetrust and succession planning. Gibson Dunnrecommended that the business be convertedinto a limited partnership and drafted thepartnership agreement. Once the agreementwas signed, the engagement ended. About15 years later, one brother died and the otherbecame incapacitated. This confluence ofevents exposed a drafting problem in thepartnership agreement’s succession and ter-mination provisions, which led to litigationto dissolve the partnership. When did theclients suffer actual injury? Not when GibsonDunn drafted the partnership agreement in1988. At that point, there was only a poten-tial for harm. Not when the clients paid thefees for Gibson Dunn’s services, also in 1988,even though, arguably, the fees exceeded thevalue of the services because of the draftingerror. The clients, and their successors, suf-fered actual injury when the surviving brotherbecame incapacitated, thereby triggering thedissolution provision of the partnership, orwhen the clients incurred legal fees in the lit-igation to dissolve the partnership.

Another 2011 appellate decision, Smith v.Cimmet,57 illustrates how a client’s changingbackstory can complicate life for lawyers.The backstory in Smith involved a wealthyindividual who died at age 91. He was sur-vived by his wife and two children from an

earlier marriage. A prior will provided gen-erously for the wife and made the two chil-dren the residual beneficiaries. A later will leftdecedent’s entire estate to his wife. At thetime of the decedent’s death, two lawyers(Jerry Cimmet and Matthew Pavone) wereprosecuting civil claims against the businesspartner of the decedent for mismanaginginvestments. After the decedent’s death, thelawyers took their instructions from the wife,who was the designated personal represen-tative of the decedent’s estate. Unfortunately,the lawyers’ claim against the decedent’s busi-ness partner was unsuccessful.

Matters became more complicated for the

lawyers when the decedent’s children pre-vailed in separate probate litigation in Oregonagainst the wife, invalidated the second will,and made one of the children the estate’snew personal representative. No doubt, giventhe acrimony between the children and thewife, the new representative was not favor-ably inclined toward the legal services that thelawyers had provided to the estate. In fact, hesued the lawyers for malpractice, claiming thatthey dissipated estate assets by inappropriatelypursuing litigation against the decedent’sbusiness partner. The lawyers tried to defeatthe claims by arguing that they never had anattorney-client relationship with the succes-sor representative. Although the trial courtaccepted that argument, the First Districtdisagreed and reversed judgment for thelawyers, who had an attorney-client rela-tionship with the estate. The new personalrepresentative inherited the powers concern-ing the estate from the prior personal repre-sentative. Those powers included standingto pursue a malpractice action against theestate’s lawyers.

Contact with a Represented Party

The Ninth Circuit affirmed the convictionof former Orange County Sheriff MichaelCarona for witness tampering, rejecting hisappeal based on the ground that prosecu-tors had violated Rule of Professional


The Ninth Circuit affi rmed the conviction of formerOrange County Sheriff Michael Carona for witnesstampering, rejecting his appeal based on the groundthat prosecutors had violated Rule of ProfessionalConduct 2-100, which prohibits a lawyer from director indirect communication with a represented party.


Conduct 2-100, which prohibits a lawyerfrom direct or indirect communication witha represented party. Though prosecutorsknew Carona was represented by counsel,they arranged for a cooperating witness toshow the defendant fake grand jury subpoe-nas and to secretly record their conversa-tion, during which Carona coached the wit-ness to lie. The district court ruled the meetingviolated Rule 2-100 but allowed the incrim-inating tape to be played to the jury. Onappeal, Carona argued the tape should havebeen suppressed and the lead prosecutor dis-qualified. The Ninth Circuit held there was noviolation of Rule 2-100 because the witnesswas not the alter ego of the prosecutor, and themeeting did not resemble an interrogation,though these are not the standards for an eth-ical violation. Stating that deception and trick-ery are acceptable government tactics, theappeals court held it would be antithetical tothe administration of justice and a perver-sion of the rule against ex parte contacts topermit Carona to immunize himself “simplyby letting it be known he has retained coun-sel.”58 While Rule 2-100 governs attorneyconduct, the disciplinary rule does not createa statutory or constitutional right not to becontacted by opposing counsel, and the courtheld that discipline could adequately deterfuture violations, though the State Bar took noaction against the prosecutors in this case.59

Two ethics opinions showed similar flex-ibility in applying the “no contact” rule. InFormal Opinion No. 2011-181, the StateBar’s Committee on Professional Respon-sibility and Conduct (COPRAC) advised thatalthough the consent of the other lawyer isrequired under Rule 2-100, such consent canbe implied. The lawyer’s implied consent canbe inferred from the circumstances, includingwhether the other attorney is present duringthe communication, the lawyer facilitatedthe communication, the relationship is trans-actional or adversarial, or the parties have acommon interest. Consent to contact with arepresented party should not be inferred if thecommunication would interfere with theattorney-client relationship or if the lawyerexpressly withholds consent or instructs theother lawyer not to communicate with hisclient.60 In Formal Opinion 11-461, the ABAStanding Committee on Ethics andProfessional Responsibility construed the“no-contact” rule under ABA Model Rule4.2, the counterpart to Rule 2-100, and con-cluded that although a lawyer may not use anintermediary to communicate with a repre-sented person, he may take the initiative bysuggesting that his client communicate directlywith the other party, and may even assist hisclient regarding the substance of the com-munication. However, the lawyer cannotoverreach by helping the client obtain confi-

dential information, admissions against inter-est, or an enforceable obligation from therepresented party.61

Getting Paid

As in years past, 2011 provided several impor-tant lessons to lawyers interested in gettingpaid.

First, a failure to comply with ethics rulesthat go to the heart of a lawyer’s fiduciaryduty may preclude a lawyer from collectinga fee. Thus, in Fair v. Bakhtiari,62 a lawyerand his existing client formed three highly suc-cessful real estate investment businesses. Thelawyer neglected to obtain the client’s writ-ten consent and to advise the client in writ-ing of his right to seek the advice of an inde-pendent lawyer, as required by Rule 3-300.Although the businesses thrived, the rela-tionship soured, and the parties fell into lit-igation. Because he had failed to comply withRule 3-300, the lawyer was unable to enforceagreements concerning profit distributions. Hewas also unable to pursue a quantum meruitclaim to recover the fair value of his legal ser-vices. “[V]iolation of a rule that constitutesa serious breach of fiduciary duty, such as aconflict of interest that goes to the heart of theattorney-client relationship, warrants denialof quantum meruit recovery.”63

Second, when a lawyer’s lien for fees is atissue, the lawyer is an indispensable party.Thus, a court may not dispose of the attor-ney lien without giving the attorney an oppor-tunity to be heard.64

Third, greed may be bad for business. InIn re Bluetooth Headset Product LiabilityLitigation, the Ninth Circuit reversed anorder by the district court awarding classcounsel $800,000 in legal fees when the set-tlement fund for the class was only$100,000.65 “[T]he disparity between thevalue of the class recovery and class counsel’scompensation raises at least an inference ofunfairness, and…the current record d[id] notadequately dispel the possibility that classcounsel bargained away a benefit to the classin exchange for their own interests.”66

Fourth, generally law firm and attorney lit-igants who represent themselves in litigationcannot recover fees for their own legal ser-vices.67 As the U.S. Supreme Court has noted,“The adage that ‘a lawyer who representshimself has a fool for a client’ is the productof years of experience by seasoned litiga-tors.”68 Lawyer-litigants, however, are enti-tled to compensation for other lawyers theyretain to represent them in the litigation.Hence, the Second District’s 2011 decision inCarpenter & Zukerman v. Cohen69 holdsthat the trial court properly struck a cost billthat included attorneys’ fees for an associateof the prevailing law firm-litigant. On theother hand, the Fourth District’s 2011 deci-

sion in Dzwonkowski v. Spinella70 held thatthe trial court properly granted a sole prac-titioner’s (Dzwonkowski’s) motion for attor-ney’s fees as the prevailing party in a fee dis-pute with a former client (Spinella) overservices provided in a probate matter becausethe fees were incurred by another sole prac-titioner retained by Dzwonkowski. The factthat the second sole practitioner was also ofcounsel to Dzwonkowski, and from time totime provided legal services on a contractbasis to Dzwonkowski’s clients, includingSpinella in the underlying probate matter,did not preclude the fee award.

Rules Revision

In October 2011, the California SupremeCourt issued an order, requested by the StateBar, withdrawing the previous submission ofproposed Rules of Professional Conduct, sothat the State Bar could submit all 67 of theproposed new rules in a single comprehen-sive petition.71 The resubmission of the pro-posed Rules is expected during the first sixmonths of 2012. ■

1 Trial courts anticipate tougher times in 2012, L.A.DAILY J., Dec. 27, 2011 [hereinafter Trial courts antic-ipate tougher times].2 Governor Edmund G. Brown Jr., An Open Letter tothe People of California (Dec. 5, 2011).3 Trial courts anticipate tougher times, supra note 1.4 People v. The Law Offices of Kramer and Kaslow, LosAngeles Sup. Ct., LC 094571; Prosecutors sue firmsover bank lawsuits, L.A. DAILY J., Aug. 19, 2011.5 Defense attorneys say clients benefitted from bar’sefforts to reduce backlog, L.A. DAILY J., Jan. 6, 2012.6 Chief Trial Counsel James Towery resigns, CAL. BAR

J., July 2011; State Bar’s Dunn Fires Four Managersin Discipline Unit, THE RECORDER, July 6, 2011; StateBar near zero on discipline backlog, L.A. DAILY J.,Dec. 27, 2011.7 Toyota Wins Case Arguing Ex-Employee BrokePledge, NEW YORK TIMES, Jan. 6, 2011.8 Former MoFo attorney sentenced in fake billingscheme, L.A. DAILY J., Nov. 16, 2011.9 Fighting to keep his law license, NAT’L L. J., Nov. 29,2011.10 At Unease, ABA J., July 2011.11 See Chris Geidner, The DOMA Gag Rule? Contractwith King & Spalding bars all employees of the inter-national law firm from advocating for repeal of DOMA,METRO WEEKLY, Apr. 20, 2011; LAB. CODE §1101. 12 Kullar v. Foot Locker Retail, Inc., 191 Cal. App. 4th1201 (2011).13 Id. at 1205-07.14 Banning Ranch Conservancy v. Superior Court, 193Cal. App. 4th 903 (2011).15 Id. at 916-17.16 In re Shared Memory Graphics, 659 F. 3d 1336(Fed. Cir. 2011).17 Id. at 1341.18 Kennedy v. Eldridge, 201 Cal. App. 4th 1197 (2011).19 Id. at 1205.20 Id. at 1207-08.21 Id. at 1210.22 O.A. Ventures LLC v. Stoffal, U.S. Dist. Ct., No.10cv01624 (C.D. Cal. Oct. 20, 2011); Judge disqual-ifies attorney for conflict, L.A. DAILY J., Oct. 27, 2011.23 O.A. Ventures, No. 10cv01624 at 9.24 Oasis West Realty LLC v. Goldman, 51 Cal. 4th 811



(2011).25 Watchumna Water Co. v. Bailey, 216 Cal. 564,573-74 (1932).26 Oasis West Realty LLC, 182 Cal. App. 4th 688(2010), opinion depublished and review granted, 110Cal. Rptr. 3d 612 (2010).27 Oasis West, 51 Cal. 4th at 822.28 Id. at 822-23.29 Id. at 824-25.30 Id. at 825.31 Id. at 822.32 James Fischer on Oasis West Realty, “May a lawyerpublicly oppose a former client’s project?” LEGAL

ETHICS FORUM, June 13, 2011.33 Rico v. Mitsubishi Motors Corp., 42 Cal. 4th 807(2007).34 State Comp. Ins. Fund v. WPS, Inc., 70 Cal. App. 4th644 (1999).35 Rico, 42 Cal. 4th at 817 (quoting State Comp. Ins.Fund, 70 Cal. App. 4th at 656-57).36 Clark v. Superior Court, 196 Cal. App. 4th 37(2011).37 Costco Wholesale Corp. v. Superior Court, 47 Cal.4th 725, 731-32 (2009).38 Fremont Reorganizing Corp. v. Faigin, 198 Cal.App. 4th 1153 (2011).39 Id. at 1173-74.40 Holmes v. Petrovich Dev. Co. LLC, 191 Cal. App.4th 1047 (2011).41 EVID. CODE §952 states, in pertinent part: “‘[C]onfi-dential communication between lawyer and client’means information transmitted between a client and hisor her lawyer in the course of that relationship and inconfidence by a means which, so far as the client isaware, discloses the information to no third persons.”42 Holmes, 191 Cal. App. 4th at 1069-71.43 Fireman’s Fund Ins. Co. v. Superior Court (FrontGate Plaza LLC), 196 Cal. App. 4th 1263 (2011).44 Id. at 1274.45 Id. at 1278.46 Id. at 1281.47 Lemmer v. Charney, 195 Cal. App. 4th 99 (2011).48 Id. at 105.49 Desert Outdoor Adver. v. Superior Court, 196 Cal.App. 4th 866 (2011).50 Id. at 872.51 Cassel v. Superior Court, 51 Cal. 4th 113 (2011).52 Callahan v. Gibson, Dunn & Crutcher LLP, 194 Cal.App. 4th 557 (2011).53 Smith v. Cimmet, 199 Cal. App. 4th 1381 (2011).54 Cassel, 51 Cal. 4th at 136.55 Id. at 138.56 Callahan, 194 Cal. App. 4th 557.57 Smith, 199 Cal. App. 4th 1381.58 U.S. v. Carona, 630 F. 3d 917 (9th Cir. 2011).59 Id. at 923.60 State Bar of California Standing Committee onProfessional Responsibility and Conduct, Formal Op.No. 2011-181.61 ABA’s Standing Committee on Ethics & ProfessionalResponsibility, ABA Formal Op. No. 11-461.62 Fair v. Bakhtiari, 195 Cal. App. 4th 1135 (2011).63 Id. at 1161 (internal citations omitted).64 In re Ramirez, 198 Cal. App. 4th 336 (2011).65 In re Bluetooth Headset Prod. Liab. Litig., 654 F. 3d935 (2011).66 Id.67 See Trope v. Katz, 11 Cal. 4th 274 (1995).68 Kay v. Ehrler, 499 U.S. 432, 438 (1991).69 Carpenter & Zukerman v. Cohen, 195 Cal. App. 4th373 (2011).70 Dzwonkowski v. Spinella, 200 Cal. App. 4th 930(2011).71 See http://ethics.calbar.ca.gov/Committees/RulesCommission/ProposedRulesofProfessionalConduct.aspx.


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AFTER PASSING CONGRESS with bipartisan support, the Leahy-Smith America Invents Act, also known asthe Patent Reform Act,1 was signed by President Barack Obama on September 16, 2011. The new law signifi-cantly reforms the way inventors protect their inventions and advances the harmonization of global patent laws,but until many details of implementation are settled, the costs of patent litigation may not decrease.

The U.S. Patent Office was founded in 1790, and few significant revisions to patent law have been made since.The last major reform occurred in 1952, with the enactment of the patent laws encompassing Title 35 of the UnitedStates Code.2 The first steps toward modernizing U.S. patent laws were taken in 2004, when academics beganto push for reform, which moved slowly until debate began on the House floor last June.

The Patent Reform Act contains many important changes, including:

• Giving the patent right to the first person to file a patent application rather than the first to invent.

• Eliminating the esoteric interference practice in which owners of applications for the same invention litigatedwho was the first to conceive of the invention and reduce it to practice.

• Expanding defenses to patent infringement claims to include the defense of prior commercial use of thepatented invention.

• Increasing the means for challenging patents, including making it easier for competitors to submit invalidat-ing prior art to the Patent Office and providing for new ways to challenge patents after they issue.

• Providing a method by which patent owners can cure potentially invalidating mistakes made by the applicantduring the processing of a patent application.

• Eliminating lawsuits targeting companies for mistakenly marking products with the wrong patent number and

Rod S. Berman practices intellectual property law with Jeffer, Mangels, Butler & Mitchell LLP in Los Angeles.

Something NEWunder the SunThe Patent Reform Act of 2011 represents thefirst major overhaul of patent law since 1952

by Rod S.Berman

AN

AM

E KA

NEK

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making it more difficult to file multidefendantlawsuits.

• Eliminating patents on tax strategies.

• Providing a new method for expeditingthe issuance of patents.

The most significant change in the PatentReform Act is the conversion from a “first toinvent” system to a “first to file” system,thereby conforming the U.S. patent laws to thelaws of most industrialized countries.3 Thischange becomes effective on March 16, 2013.Presently, even if an applicant is the first to filea patent application in the United States, a sec-ond applicant to file could own the rights tothe invention if the second applicant was thefirst to conceive and reduce the invention topractice. This provides a disincentive to filepatent applications, since the first to inventgenerally trumps the first to file. Most of theworld acts differently—the first to file trumpsthe first to invent. Now, under the PatentReform Act, on or after March 16, 2013, ingeneral the one who is first to file a patentapplication will own the patent rights.

Inventors need to rethink their strategy forfiling patent applications. No longer will theybe able to wait to develop their inventions andcreate a workable mode of making and usingthem. There will now be a rush to file apatent application before a competitor does.The filing of less-than-perfect patent appli-cations and more provisional patent appli-cations will likely increase. Inventors will bepressed to gather data quickly and file a sep-arate patent application at each stage of prod-uct development. The first-to-file rule willlikely favor large companies that have theresources to quickly prepare and file patentapplications. Most of the world has alreadyaccepted this fact. The United States is justcatching up.

The first-to-file reform also will eventuallyeliminate the esoteric “interference” prac-tice. In interference proceedings, companieswage an expensive war over who was thefirst to invent the subject matter of compet-ing patent applications. Specially trainedattorneys have typically handled these pro-ceedings, frequently delaying the effective-ness of a patent for many years. During theseproceedings, doubt about who owns thepatent rights significantly affects investorinterest.

Although reform has eliminated interfer-ence practice, it will be replaced with deriva-tion practice.4 In a derivation proceeding, apetitioner asks the new Patent Trial andAppeal Board to invalidate a patent if it wasbased upon or derived from another inventor’spatent or patent application.5 However, thisproceeding must be requested within a yearof the date of publication of the first filer’spatent application and must be supportedby substantial evidence.6 Entities should there-

fore monitor their competitors’ applicationsfor derivation issues. Even derived inven-tions, however, typically include novel fea-tures. Moreover, inventors who derive theirinventions from others may be more likely tokeep their inventions secret, thereby frus-trating the fundamental constitutional pur-pose of the Patent Act—full disclosure of aninvention to the public in return for a limitedperiod of market exclusivity.

Reexaminations

The Patent Reform Act also makes majorchanges in the manner in which third parties

can challenge patents outside of court pro-ceedings.7 Previously, aside from litigatingthe validity of a patent, the only ways tochallenge the validity of an issued patentwere to seek ex parte or inter partes reex-amination before the Patent Office. This pro-cedure required the requester (the patentowner or the challenger of the patent) to askthe Patent Office to declare that prior artsubmitted in the form of patents or printedpublications created a substantial new ques-tion about the patentability of the claims ofthe patent.

Effective September 16, 2012, a new pro-cedure called Post Grant Review will affectapplications filed on or after March 16,2013.8 PGR will allow a third party, typicallya competitor, to convince the Patent Office’sPatent Trial and Appeal Board that the patentshould not have been granted due to prior artthat the Patent Office was either not awareof or did not properly consider when theapplication was initially examined. The stan-

dard for the Patent Office to grant a PGR peti-tion is whether the information presented inthe petition “if not rebutted…would demon-strate to the Patent Office Examiner that it ismore likely than not that at least one of theclaims challenged is unpatentable” or that thepetition “raises a novel or unsettled legalquestion that is important to other patents orpatent applications.”9 PGR has been availablefor many years in a number of foreign juris-dictions, but to U.S. applicants, it presents asignificant reform.

To some, PGR provides a competitorwith the chance to delay the effectiveness of

a patent, since the patent cannot be enforcedwhile it is under review. Those opposed tothis provision of the Patent Reform Act alsoasserted that only large entities with financialresources will be able to afford the pro-ceedings, and that the proceedings wouldunduly burden the Patent Office. To others,PGR provides an opportunity for the PatentOffice to vet patents under the scrutiny ofthose whom the patent would be enforcedagainst and presumably to increase the qual-ity of the patents. A likely result is narrowerpatents, particularly in technical fields withsignificant patent prior art, as the applicantwill initially want to seek patent protectionfor claims that can readily be distinguishedfrom the prior art. PGR can be based uponany legal challenge to the patent but canonly be filed within nine months after thegrant of the patent or broadening reissue.10

One significant limitation to PGR is that thepetitioner is estopped from asserting thesame grounds that it asserted in its PGR





petition in any subsequent federal courtaction challenging the patent.11 Moreover,PGR cannot be instituted if the petitioner hasalready filed a civil action for patent inva-lidity.12 Any civil action for patent invalid-ity is automatically stayed in favor of a PGRfiling until the patentee successfully lifts thestay, the patent owner files a civil action orcounterclaim for infringement, or the peti-tioner moves the court to dismiss the civilaction.13 Companies will need their patentcounsel to monitor competitors’ patent fil-ings. Any person or entity seeking to avoidPGR should file a patent application beforeMarch 16, 2013.

The Patent Reform Act also establishes asupplemental examination system for patentowners that allows inequitable conduct tobe cured prior to patent infringement liti-gation. Prior to the Patent Reform Act, theFederal Circuit referred to claims of inequit-able conduct as being a plague upon patentlitigation because they were so often assert-ed—at great cost to defendants—but madefew patents unenforceable. These claims alsopoisoned patent transactions by reducing thevalue of patent assets. This problem resultedwhen the validity or enforceability of a patentinvolved in a transaction was called intoquestion by the buyer due to mistakes madeby the patent applicant or newly discoveredevidence related to the patent.

The new supplemental examination pro-cedure, like the former ex parte reexamina-tion, can result in inequitable conduct beingpurged and unenforceability and invaliditychallenges to patents avoided—or at leastthe risk of a finding of invalidity or unen-forceability reduced.14 The supplementalexamination procedure becomes effective onSeptember 16, 2012, for patents issued on orafter that date. While advantageous to thosewho wish to assert patent validity, the pro-cedure is limited to issues of validity or unen-forceability related to patents and printedpublications raising a substantial questionof patentability, and the procedure may onlybe initiated by the patent owner.

This procedure should give patent ownersan opportunity to cure obvious prosecutionproblems that could result in a claim ofinequitable conduct being asserted againstthe plaintiff patent owner in patent infringe-ment litigation. On the other hand, thoseopposed to this reform believe it will encour-age patent applicants from disclosing keyprior art to the Patent Office, with the hopethat the lack of disclosure will result in theissuance of the patent, with the only riskbeing the possibility of having to file a requestfor supplemental examination.

For plaintiffs, supplemental examinationmay result in some added expense and delaybut also may provide security. This procedure

may be helpful in patent purchase transactionsin which a buyer questions a key valuablepatent as being potentially unenforceable andtherefore of little value.

Another way reformers believe the qual-ity of patents will improve is that on or afterSeptember 16, 2012, third parties can submitto the examiner handling a patent applicationprior art in the form of patents and printedpublications or statements of the patent ownermade in federal court or before the PatentOffice that reflects the owner’s position on thescope of any claim that the third party believesimpacts the patentability of the invention.15

Tax Patents

There is even reform of interest to taxpayers,entrepreneurial accountants, and tax lawyers.The media has reported a plethora of objec-tions to providing a patent “monopoly” formethods for complying with tax codes. Nomore patents will issue on tax strategies forreducing, avoiding, or deferring tax liabilityin any federal, state, local, or foreign juris-diction when the patents could subject tax-payers to royalty fees for using the patentedstrategy when filing tax returns. Significantly,this tax patent ban applies to patent appli-cations pending as of September 23, 2011, orthose patents issued on or after this date.16 Butthe reforms only go so far—patents relatedsolely to financial services management soft-ware or tax return preparation and filingsoftware are not affected.17 Notably, in addi-tion to certain tax patents, patent claimsdirected to or encompassing a “human organ-ism” are banned for applications filed on orafter September 23, 2011.

Prioritized application processing isanother feature of the Patent Reform Act.Since September 26, 2011, the Patent Officehas allowed applicants to pay $4,800 to havetheir application prioritized, provided theapplication contains no more than four inde-pendent claims and no more than 30 totalclaims, which is achievable for most inventorswith clever patent attorneys.18 In other words,entities that can afford paying an extra $4,800will speed up the processing of their patentapplications without having to conduct apreexamination search. This is a welcomepatent reform for those who can afford itand whose inventions are in the telecommu-nications, biotechnology, computer software,and electronics arts, in which the averagependency of a patent application is three tofour years. With prioritized examination, thePatent Office is required to provide the patentapplicant with a final disposition from thePatent Office within a year of the grant of pri-oritized status. For inventions that have ashort market life, or for those who want apatent to issue as soon as possible for eitherenforcement or sale, this reform should be of

great benefit, since patent rights only ariseupon the issuance of a patent and end 20years after the effective filing date. There arefew downsides to prioritized examination.Probably the most significant one is that thePatent Office is limiting prioritized applica-tions to 10,000 annually.

The Patent Reform Act has also expandedthe prior commercial user defense to patentinfringement so that it is no longer limited topatents directed to methods of doing busi-ness.19 The expansion of this defense is a sig-nificant patent reform and can be used withrespect to patents issued on or after September16, 2011. To prove this defense, the defendantmust demonstrate by clear and convincing evi-dence that it commercially used the patentedtechnology in the United States more than ayear before either the effective filing date ofthe asserted patent or a public disclosure bythe inventor of the invention.20 Notably, thedefense may only be asserted by the com-mercial user. If the defense is unreasonablyasserted, the patent-owner plaintiff mayhave a solid basis to seek an award of itsattorney’s fees. In addition, the defense canonly be assigned as part of the sale or trans-fer of the entire business of the patent chal-lenger.21 This reform, unfortunately, mayencourage entities to keep innovations secret,contrary to the constitutional purpose ofthe Patent Act.

Patent Marking

Pesky qui tam false marking lawsuits havealso been virtually eliminated under thePatent Reform Act. In these suits, plaintiffsand even law firms allege that the defendantentity intentionally sold products markedwith expired patent numbers or unrelatedpatent numbers in an attempt to reduce com-petition and deceive the public. Now theseclaims will be limited to lawsuits filed bythe U.S. government or those filed by com-petitors who can show competitive injury,and they may seek only compensatory dam-ages.22 This is great news to businesses andbad news to those who have scoured retailstores to find products with incorrect or out-of-date patent notices. While considered astatutory patent law reform, this is really areform of a decision by the Federal Circuit,23

which ruled that the $500 false markingpenalty applied to each falsely marked item,not just each patent. So, if, for example, acompany mistakenly left an expired patentnumber on billions of once-patented drink-ing cups, the litigant could seek billions ofdollars of damages. For manufacturers, oneof the benefits of this legislative reform is toremove from actionable conduct the mark-ing of a product with an expired patent num-ber, provided the patent at one time didcover the product marked.24 Manufacturers


Jack Trimarco & Associates

Polygraph/Investigations, Inc.

9454 Wilshire Blvd., 6th Floor

Beverly Hills, CA 90212

Dear Jack:

As you know, Bryan Stow, a San Francisco Giants fan, was brutally attacked by two men in the

Dodger Stadium parking lot on opening day, March 31, 2011.

On May 22, 2011, Los Angeles Police Department (LAPD) SWAT officers arrested my client,

Giovanni Ramirez at an East Hollywood apartment complex. LAPD Chief Charlie Beck said at a

news conference that day, “I believe we have the right guy. I wouldn’t be standing here in front

of you. I certainly wouldn’t be booking him later on tonight. You know this is a case that needs

much more work, but we have some significant, significant pieces to it that leads me to believe

that we do indeed have the right individual”.

Mr. Ramirez agreed to take a LAPD polygraph examination, to be conducted on June 1, 2011.

I retained your services as a nationally known and respected polygraph examiner. You agreed

to polygraph my client at Los Angeles County Men’s Central Jail, on that day prior to the LAPD

examination. Further, you agreed to monitor the LAPD polygraph examination in an observation

room within Parker Center (LAPD Headquarters).

After you polygraphed Giovanni Ramirez, as you departed the jail, you telephoned me. You

said, “LAPD arrested the wrong guy, Giovanni Ramirez was not on Dodger stadium property on

March 31, 2011”.

On June 1, 2011, you accompanied me to Parker Center to monitor the LAPD polygraph

examination. The respect shown to you by the LAPD polygraph personnel comforted me. You

advised them that Mr. Ramirez passed your exam as you handed them your report.

Although this case had many interesting facets, central to Giovanni Ramirez being eliminated as

a suspect, were your “non deceptive” polygraph results.

It is a tribute to your reputation that polygraph testing conducted by you is so well received and

respected by the prosecution, as well as the defense. You saved my client’s life…thank you.

Very truly yours,

August 4, 2011DONALD B. MARKS

ANTHONY P. BROOKLIER

TELEPHONE

(310) 273-7166

(310) 772-2287

FAX (310) 772-2286

JACK TRIMARCO & ASSOCIATESwww.jacktrimarco.com

A proud member of the Los Angeles County Bar Association


http://www.jacktrimarco.com

will not need to spend the resources to elim-inate patent numbers in costly molds once thepatent has expired. Not surprisingly, thoseopposed to this reform believe it will encour-age companies to retain patent markings onproducts in order to deceive competitorsinto believing the product is still covered bythe patent.

Other litigation reforms include limita-tions on so-called nonpracticing entity patentplaintiffs—those who buy patents for theonly purpose of seeking royalties. In thepast, patent plaintiffs could add numerousdefendants to the same complaint, providedall the defendants were alleged to infringe thesame patent. Often, 20 or more party defen-

dants would be pleaded in order to realizeeconomies of scale by suing multiple defen-dants with the time and expense of filing asingle action, including reduced attorneyand expert fees. This created significant prob-lems for defendants because while the cost ofsuing multiple defendants was only margin-ally more than suing a single defendant,defendants often had to bear significant costs,particularly in discovery, that usually dwarfeda plaintiff’s proposed settlement. It alsoallowed plaintiffs to sue defendants in plain-tiff-friendly venues, such as the remote East-ern District of Texas. In addition to the costof defending claims, defendants often facedthe prospect of discovery of their highly con-

fidential business information in the samecase that also may involve a direct competi-tor. As a result, this type of litigation oftenmade defendants willing to pay to settle theclaims for an amount that was less than thecost of a defense budget.

Now, for all lawsuits filed on or afterSeptember 16, 2011, multiple defendants mayonly be included in the same complaint if allthe defendants participated in the same allegedact of infringement and there are commonquestions of fact—generally meaning they allsold the same product.25 This should be ofgreat benefit to those have been sued, since itreduces the patent plaintiff’s economy of scalein litigating these cases. The question remains,however, whether a court confronted with aplethora of patent claims involving differentalleged infringing products and different defen-dants will consolidate them, even if only forpretrial proceedings, thus reducing the hoped-for cost benefits.

Despite its mechanisms to conform theU.S. patent process with that of other indus-trialized nations, the Patent Reform Act’s un-certainties will likely cause patent litigation tobecome even more expensive, at least at theoutset. For example, the Patent Trial and Ap-peal Board will need rules to handle discovery.Time will tell how much the Patent ReformAct actually saves businesses money. ■

1 Leahy-Smith America Invents Act, Pub. L. No. 112-29, 125 Stat. 284 (2011), available at http://www.gpo.gov/fdsys/pkg/BILLS-112hr1249enr/pdf/BILLS-112hr1249enr.pdf.2 35 U.S.C. §§101 et seq.3 35 U.S.C. §102.4 35 U.S.C. §135(a).5 35 U.S.C. §135(b).6 35 U.S.C. §135(a).7 For more information, see Ben M. Davidson,Reexamining Reexaminations, LOS ANGELES LAWYER,Dec. 2011, at 26.8 35 U.S.C. §321(a), (b).9 35 U.S.C. §324(a), (b).10 Another procedure for challenging issued patents,inter partes review, effective September 16, 2012,allows a petitioner to challenge a patent nine monthsafter the patent issues based upon limited prior art. 35U.S.C. §§311(b), 314(a).11 35 U.S.C. §325(e)(1).12 35 U.S.C. §325(a)(1).13 35 U.S.C. §325(a)(2).14 35 U.S.C. §257(c)(1).15 35 U.S.C. §122(e).16 H.R. 1249 §14(a).17 H.R. 1249 §14(c).18 35 U.S.C. §2(b)(2)(G).19 35 U.S.C. §273(a).20 35 U.S.C. §273(a)(2).21 35 U.S.C. §273(e)(1).22 35 U.S.C. §292(a), (b). For more information onpatent marking reform, see Thomas J. Daly & DanielR. Kimbell, Bad Marks, LOS ANGELES LAWYER,July/Aug. 2011, at 30.23 Forest Group Inc. v. Bon Tool Co., 590 F. 3d 1295(Fed. Cir. 2009).24 35 U.S.C. §292(c).25 35 U.S.C. §299(a).


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�You are invited...NEW MEMBER/NEW ADMITTEEORIENTATION RECEPTION

MARCH 22, 2012

The Los Angeles County Bar Association cordially invites all newLACBA members and all attorneys newly admitted to the State Barof California to join us for a grand night of fabulous food, greatdrinks, and networking with the most well-known and influentialmembers of the Los Angeles legal profession.

Mingle with prominent attorney members from all practice areas,meet LACBA's leadership team, build your contacts in the legalcommunity, and check out the many benefits of membership in thelargest metropolitan voluntary bar association in the nation!

MILLENNIUM BILTMORE HOTEL506 South Grand Avenue, Los Angeles

information & networking reception6:00PM - 8:00PM

after-partyHosted by LACBA Barristers8:00PM - 10:00PM

free! Attendance is complimentary for new members. Limited host bar.

Please R.S.V.P. by calling 213.896.6560 or by visiting www.lacba.org/reception



On two Saturdays—March 17 and April 14—Trial Advocacy and the Litigation Section will

host a course covering an innovative and practical seven-step method for analyzing the

admissibility of potential evidence. Participants receive a written summary of key rules

of evidence, including key definitions and evidentiary presumptions, hearsay objections,

and the rules regarding the admissibility of character evidence and 1101(b) evidence of

specific instances of conduct. Written course materials will be distributed via e-mail

prior to the first class, making a correct e-mail address necessary at the time of

registration. The program will take place at the Los Angeles County Bar Association, 1055

West 7th Street, 27th floor, Downtown. Parking is available at 1055 West 7th and nearby

parking lots. On-site registration will be available at 8:00 A.M., with the program

continuing from 8:30 A.M. to 12:30 P.M. The registration code number is 011597.

$125—CLE+ member

$250—LACBA member

$350—all others

7.5 CLE hours

California Rules of Evidence: TAP Seminar Series

The Los Angeles County Bar Association is a State Bar of California MCLE approved provider. To register for the programs listed on this page, please call the Member Service Department at (213) 896-6560 or visit the Association Web site at http://calendar.lacba.org, where you will find a full listing of this month’s Association programs.

Beginning on Tuesday, March 13, Trial Advocacy and the Litigation Section will host a six-

evening course providing introductory trial advocacy instruction, emphasizing participant mock

trial performance and constructive feedback. Those who attend will receive instruction on basic

trial skills and perform a jury trial. They will also learn to mark exhibits, lay evidentiary

foundation, deliver opening statements, conduct witness direct and cross exam, and deliver

closing arguments.

The course will take place on Tuesday and Thursday nights from 5:30 to 8:30 P.M. at the

LACBA/Executive Presentations Mock Courtroom. Course instructors are seasoned prosecutors

with local prosecutorial agencies. There are no prerequisites or interviews for course

admission. Successful completion of this course meets the prerequisites for admission to the

five-week Traditional TAP course taught annually in the fall. Completion and certification from

Traditional TAP qualifies attorneys for a pro bono practicum with a local prosecutorial agency

trying criminal cases.

Course materials will be distributed via e-mail prior to the first class, requiring a correct e-

mail address at the time of registration. Enrollment is limited to 14 people per class. The

program will take place at the Los Angeles County Bar Association, 1055 West 7th Street, 27th

floor, Downtown. Parking is available at 1055 West 7th and nearby parking lots. The

registration code number is 011530.

$995—LACBA member

$1,195—all others

16.5 CLE hours, including 1 hour of legal ethics

Fourth Annual

Symposium on

Family-Based

Immigration

On Saturday, March 3, the

Immigration Law Section will host a

full-day examination of complex

issues in family-based immigration

law by leading national authorities.

Gail Pendleton, Charles Wheeler,

Tifany Markee, Louisa Lau, and Mary

Mucha will discuss U visas and the

Violence Against Women Act,

derivation of citizenship, retention of

priority dates, adoptions, ethical

issues in dual representation of

spouses, and current procedures at

the LAFO. The program will take place

at the Los Angeles County Bar

Association, 1055 West 7th Street,

27th floor, Downtown. Parking is

available at 1055 West 7th and nearby

parking lots. On-site registration will

begin at 8 A.M., with the program

starting at 9 A.M. and continuing to

4:30 P.M. The registration code

number is 011574.

$90—CLE+ member

$115—Immigration Law Section

member

$145—LACBA member

$165—all others

6.25 CLE hours, including 1 hour of

legal ethics

Introductory TAP (i-TAP)



THIS YEAR MARKS THE 50TH ANNIVERSARY of the release of the clas-sic movie To Kill a Mockingbird, considered by many critics to be thegreatest movie ever made about a trial lawyer. The character ofAtticus Finch not only won Gregory Peck an Academy Award for BestActor but was also named by the American Film Institute as the top-ranking hero in 100 years of film history.

The occasion of the movie’s silver anniversary demands that wereflect on the status of our profession over these five decades. In the1960s the legal profession was not only respected but widely viewedas a noble calling. Lawyers fought for grand causes and were seen assolid contributors to society’s progress: Theywere at the forefront of the Civil Rights move-ment, assisted the underprivileged classes, andfought on behalf of the unfairly discriminatedagainst.

Atticus, the incisive country lawyer, pow-erfully and courageously fights for justice bydefending a black man wrongly accused ofraping a white woman. He is a man of moral-ity and compassion who nurtures his children with love and teacheslife lessons to help them cope with the stresses of their young lives,even as they learn the harsh reality of racial hatred. His brilliance inthe courtroom is admired today, even though the members of the all-white male jury cannot overcome their innate prejudice and ultimatelyconvict an innocent man.

As with many other trends in modern American society, theWatergate scandal of the 1970s can be viewed as a decisive turningpoint. Lawyers, including the attorney general of the United States,were convicted and thrown in jail for perjury, fraud, and obstructionof justice. In the ensuing 40 years, we have seen lawyers lying, con-spiring with, and defending corrupt financial institutions as theyswindled their shareholders and the American public. We have expe-rienced the recent spectacles of lawyers operating in the shadows intacit approval behind the scandals of Keating, Enron, Countrywide,Madoff, and Big Tobacco. In government we see lawyers and judges,not the people, deciding who will be our president and executivebranch lawyers approving torture.

Our image as lawyers has suffered in recent years as sharks andshysters are charged with overbilling of clients, creating unduedelays in discovery and litigation, and refusing to create expedientsolutions to client matters for the sake of the attorneys’ own finan-cial gain and law firm interests. One concerned individual complainedto me recently of her family lawyer billing her a substantial sum forthe bare act of giving her the name of another attorney for a personalinjury case. Even after acknowledging that these are tough times formany lawyers to make a living, what has become of the legal pro-fession’s tradition of pro bono, of law firms providing help to thoseclients in need of lawyers but who cannot afford one? Such work isin our rules, our customs, and traditions. Altruism is, 50 years afterTo Kill a Mockingbird, still heroic, and there is a place for it in our

practice of law.Certainly there are lawyers who still take public service seriously,

but increasingly they are not the models who are driving our pro-fession’s culture. Today, attorneys brag about themselves as “thetrial firm of the century” or advertise the enormous size of their juryverdicts. Do we judge ourselves by the size of our wallets or by thecharacter of our practices?

Of course there are conscientious lawyers who handle businesscases for the disadvantaged, the bankrupt, the tenant, the consumer,the personal-injury victim, and the shareholders in our recent economic

downturn. Some clients can only get justice because a lawyer will takea case on contingency fee. These lawyers go unheralded but shouldbe our example.

We need to recapture our professional character as heroic actorsfighting for justice for the common men and women of our times. Wefew, we precious few, we band of brothers and sisters in the law, bydoing the great deeds of our heritage, can rehabilitate our image withthe public and to continue once again to make the commonwealth amore just and better place to live. Our integrity as lawyers is a moralimperative.

We are today, 50 years later, still inspired by the message ofAtticus Finch’s closing argument: “Now gentleman, in this countryour courts are the great levelers. In our courts, all men are createdequal. I’m no idealist to believe firmly in the integrity of our courtsand of our jury system. That’s no ideal to me. That is a living, work-ing reality!”

Atticus’s message, one he skillfully instills in his children, is thenecessity in a civilized society of the values of tolerance and fairness,of respect and dignity for others, no matter what a person’s color. Ashe teaches them, “You never really understand a person until you con-sider things from their point of view…until you climb into his skinand walk around in it.”

This is a film that should be seen by parents with their children,as it ennobles and inspires us to be better people. But underlying thenarrative is the story of America itself: learning to overcome our his-tory of prejudice and racism and harkening back to the country’s idealsof equal justice under the law. This is the unfinished business of oursociety, and the film still motivates us to continue that work. ■

closing argument BY: JEFFREY A. SHANE

To Kill a Mockingbird: When Lawyers Were Heroes

Today, attorneys brag about themselves as the “trial firm of the

century” or advertise the enormous size of their jury verdicts.

Jeffrey A. Shane is a Los Angeles lawyer who practices in the areas of personalinjury, accidents, and business law.


C O N T I N U I N G E D U C AT I O N O F T H E B A R � C A L I F O R N I A U N I V E R S I T Y O F C A L I F O R N I A M S TAT E B A R O F C A L I F O R N I A

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Los Angeles Lawyer March 2012