McGrath: Potential conflicts can void engagement agreements

In Sheppard, Mullin, Richter & Hampton, LLP v. J-M Manufacturing Co., Inc. (2018) 6 Cal.5th 59 ("Sheppard"), the California Supreme Court held that a law firm's failure to disclose an actual conflict of interest rendered its engagement agreement--including the arbitration clause--unenforceable as against public policy. That decision left open a question: does the same rule apply when the undisclosed conflict is merely potential? In Doe 1 v. McGrath Kavinoky LLP (June 29, 2026, Case No. B343201) __ Cal.App.5th __ ("McGrath"), the California Court of Appeal answered "yes." 

The takeaway is significant: a law firm that fails to obtain the client's informed written consent about a potential conflict of interest under Rule of Professional Conduct 1.7(b) at the outset of the engagement risks rendering the engagement agreement unenforceable. McGrath demands immediate attention to intake procedures and engagement letter disclosures when lawyers represent multiple clients in a single action.

To understand the rationale of McGrath, start with Sheppard. In that case, a law firm agreed to represent a manufacturing company in a qui tam action while simultaneously representing one of the public entities suing the manufacturing company in unrelated matters. The firm failed to disclose the dual representation. After the conflict surfaced and the firm was disqualified, the firm sued the manufacturing company client for outstanding fees and successfully moved to compel arbitration. The California Court of Appeal reversed, concluding that the firm's undisclosed conflict constituted an ethical breach that rendered the engagement agreement unenforceable in its entirety. The Supreme Court affirmed, holding that because the California Rules of Professional Conduct are "an expression of public policy to protect the public," an "attorney contract that has as its object conduct constituting a violation of the Rules of Professional Conduct is contrary to the public policy of this state and is therefore unenforceable." (Sheppard, supra, 6 Cal.5th at p. 74 (quotations omitted).) Because the ethical breach went to the entire object of the engagement, the arbitration clause fell with the rest of the agreement.

The facts in Sheppard involved an actual conflict of interest: simultaneous representation of adverse parties. The opinion did not address whether a violation of Rule 1.7(b)--governing potential conflicts--would produce the same result.

Enter McGrath. At issue was a law firm that represented victims of sexual abuse by a gynecologist at UCLA. The firm ultimately represented 312 clients in separate cases, but the cases were litigated in the aggregate before the same judge, and the parties reached a global $374.4 million settlement in January 2022. From that settlement fund, two of the firm's clients--Jane Does 1 and 2 (collectively, "Does")--received $1.4 million and $1.7 million, respectively.

After the settlement, Does sued the firm, alleging they had been promised individualized representation and high-value recoveries but were "bullied" into accepting shares of the global settlement that undervalued their cases. The firm subsequently moved to compel binding arbitration pursuant to its engagement agreements with Does. The trial court denied the motion, finding that "at the time Plaintiffs entered into their respective retainer agreements, the likelihood of a conflict of interest arising was high" with every plaintiff "in competition with each other plaintiff as to their allotted settlement amount." (McGrath, supra, __ Cal.App.5th __.) Because the firm failed to disclose this potential conflict and obtain informed written consent from the clients, the trial court held the firm's engagement agreements with Does, including the arbitration provisions therein, were unenforceable.

The Court of Appeal affirmed. In a unanimous decision, the appellate court held that Sheppard's rationale--that a violation of the Rules of Professional Conduct renders an engagement agreement unenforceable--"applies equally to violations of rules 1.7(a) and 1.7(b)." (McGrath, supra, __ Cal.App.5th __.) The appellate court rejected the firm's attempt to distinguish Sheppard on the ground it involved an actual conflict, observing that the firm "does not explain why a violation of rule 1.7(a) renders an engagement agreement unenforceable, but a violation of rule 1.7(b) does not." (Id.)

The appellate court rejected the firm's reliance on Brawerman v. Loeb & Loeb LLP (2022) 81 Cal.App.5th 1106. That case distinguished Sheppard by holding that an engagement agreement was not void where "the illegality lay not in the entry into the agreement but in its performance." (Brawerman, supra, 81 Cal.App.5th at 1124.)  The appellate court noted that the firm's potential conflict with Does existed when the parties executed their engagement agreement. Without obtaining informed written consent from Does when the parties signed the engagement agreement, the firm's breach of Rule 1.7(b) was baked into the formation of the contract itself. (McGrath, supra, __ Cal.App.5th __.)

The upshot from McGrath is clear--firms must obtain informed written consent from clients where there is a significant risk of a materially limiting conflict at the outset of any engagement. Where the potential conflict exists at the inception of the representation, lawyers must obtain informed written consent at the outset of the engagement--not when the conflict materializes. The relevant question is whether, when an engagement agreement is signed, there is a significant risk of a material limitation. Waiting until a potential conflict materializes is too late. And failing to obtain such informed written consent risks severe repercussions.

For firms that represent multiple clients in mass torts, coordinated proceedings or any multi-party litigation posture, McGrath stands as a cautionary tale. "Unless the plaintiffs' interests are perfectly aligned, which is rare," McGrath warns that "a lawyer representing multiple plaintiffs with related claims inevitably faces decisions about whose interests to advance." (McGrath, supra, __ Cal.App.5th __ (quotation omitted).) There is no reason to conclude that the holding would be different if a law firm represented more than one defendant without informed written consent. The message is clear: when a law firm represents more than one client, there is a risk that failure to obtain informed written consent can result in the court concluding the engagement agreement is void. That holding can result in State Bar discipline, elimination of a binding arbitration provision, a malpractice claim, and/or a claim for disgorgement of fees or reduction of same. So disclose conflicts and obtain informed written consent before the representation begins.