SUPERIOR COURT OF CALIFORNIA
COUNTY OF SANTA CLARA

YI-CHING PAO, an individual,

Plaintiff,

vs.

NINA YUAN, an individual, RICHWAVE TECHNOLOGY, INC., a Taiwan corporation, and SHYH-CHYI WONG, an individual, and DOES 1 through 20, inclusive,

Defendants.
Case No. 2017-1-CV-311373

TENTATIVE RULING RE: MOTION TO DISQUALIFY

The above-entitled action comes on for hearing before the Honorable Thomas E. Kuhnle on October 12, 2018, at 9:00 a.m. in Department 5. The Court now issues its tentative ruling as follows:

I. BACKGROUND

This action arises from a dispute over the settlement of an earlier lawsuit. According to the allegations in the First Amended Complaint (“FAC”), plaintiff Yi-Ching Pao (“Pao”) founded and was a shareholder of three related companies: Epic Communications, Inc. (“Epic”), Epic’s wholly-owned subsidiary EpicCom, Inc. (“EpicCom”), and a “spinoff” entity with an ownership interest in Epic known as OEpic Semiconductors, Inc. (FAC, ¶ 5.)

In 2006, when Pao was the CEO of Epic, Epic commenced an action for misappropriation of trade secrets against Ali Corporation as well as two defendants in this action – Richwave Technology, Inc. (“Richwave”) and its CEO Shyh-Chyi Wong (“Wong”). James Li and his firm LiLaw, Inc. (together, “Li”) represented Epic. In 2009, Epic settled its claims against Ali Corporation. While the claims against Richwave and Wong were still pending, Epic commenced court-supervised liquidation proceedings in Taiwan. Defendant Nina Yuan (“Yuan”) was appointed to serve as the liquidator of Epic. Under Taiwanese law, Yuan was given the responsibility of winding up pending business, collecting debts, marshalling assets, and distribute corporate assets. In other words, Yuan was put in charge of Epic as it was liquidated. She worked under the supervision of the Taiwanese bankruptcy court.

In 2013, members of EpicCom’s board of directors, namely Yuan’s husband Ken Tai and her daughter Amy Tai, asked Pao to resign as CEO and General Manager of both Epic and EpicCom. In addition, Li was fired and Chris Kao (“Kao”) appeared on behalf of Epic and EpicCom. In a separate action, Epic and EpicCom “sued [Pao] personally on behalf of Epic.” (FAC, ¶ 10.) Pao settled that lawsuit in August 2016 while Epic’s lawsuit against Richwave and Wong was still pending.

After Pao’s settlement, Yuan asked him to assist with the trade secrets lawsuit against Richwave and Wong because he was a key witness. Pao agreed to assist upon satisfaction of conditions including: (1) execution of an irrevocable power of attorney granting him control over all aspects of the lawsuit; and (2) receipt of 20 percent of whatever Epic ultimately recovered. Yuan and her family agreed and executed a written power of attorney. The parties did not put their agreement about Pao’s 20 percent of the recovery into writing because they did not want the agreement to be used against them in the lawsuit against Richwave and Wong.

Pao then began managing Epic’s lawsuit against Richwave and Wong and questioned the propriety of attorney’s fees charged by Kao. Pao claims Kao thereafter secretly worked with Yuan and her family to negotiate a settlement of the claims against Richwave and Wong. Pao decided to fire Kao and rehire Li. Ultimately, the claims against Richwave and Wong were dismissed pursuant to a settlement agreement.

In this action Pao claims Yuan’s settlement of the lawsuit against Richwave and Wong violated the power of attorney because it was accomplished without his participation and over his objection. Pao asserts causes of action against Yuan, Richwave, Wong, and Doe defendants that “may include” Epic, EpicCom, and Kao for: (1) breach of contract (against Yuan); (2) breach of contract (against Yuan); (3) fraud (against all defendants); (4) unfair competition (against all defendants); and (5) declaratory relief (against all defendants).

Currently before the Court is Yuan’s motion to disqualify Li from representing Pao in this action. Additionally, there are two demurrers to the FAC before the Court, one filed by Yuan and one filed by Richwave and Wong.

II. DISCUSSION

Yuan moves to disqualify Li on the basis that representation of Pao in this action violates two distinct prohibitions set forth in Rule 3-310 of the California Rules of Professional Conduct (“Rule 3-310”). In particular, Yuan argues Pao may not employ Li as counsel in this matter because Li previously represented Epic and his representation of Pao violates his duties of loyalty and confidentiality as set forth in subdivisions (C) and (E) of Rule 3-310. In opposition, Pao argues Yuan lacks standing to move to disqualify his attorney because she is not a current or former client and that the representation does not violate Rule 3-310.

The Court, of course, has authority to adjudicate this motion. “A trial court’s authority to disqualify an attorney derives from the power inherent in every court ‘[t]o control in furtherance of justice, the conduct of its ministerial officers, and of all other persons in any manner connected with a judicial proceeding before it, in every matter pertaining thereto.’” (People ex rel. Dept. of Corp. v. SpeeDee Oil Change Systems, Inc. (“SpeeDee”) (1999) 20 Cal.4th 1135, 1145, quoting Code Civ. Proc., § 128, subd. (a)(5).) A motion to disqualify tests whether the opposing party’s right to counsel of his or her choice, which is an important right, “must yield to ethical considerations that affect the fundamental principles of our judicial process.” (SpeeDee, supra, 20 Cal.4th at pp. 1145-46.)

A. The California Rules of Professional Conduct at Issue

Subdivisions (C) and (E) of Rule 3-310 are at issue. Subdivision (C) states:

A member shall not, without the informed written consent of each client:

(1) Accept representation of more than one client in a matter in which the interests of the clients potentially conflict; or

(2) Accept or continue representation of more than one client in a matter in which the interests of the clients actually conflict; or

(3) Represent a client in a matter and at the same time in a separate matter accept as a client a person or entity whose interest in the first matter is adverse to the client in the first matter.
Subdivision (E) states: “A member shall not, without the informed written consent of the client or former client, accept employment adverse to the client or former client where, by reason of the representation of the client or former client, the member has obtained confidential information material to the employment.”

B. Yuan’s Standing

It is undisputed Yuan herself is not Li’s current or former client. Li previously represented Epic and EpicCom. (Yuan Decl., Ex. 2.) Yuan, however, was Epic’s court appointed liquidator who, much like a bankruptcy trustee, was responsible for managing the disposition of Epic’s assets, including the lawsuit against Richwave and Wong. (Yuan Decl., ¶¶ 9-11.) Because Yuan was not previously a direct client of Li, the parties dispute whether Yuan has standing to seek disqualification of Li. There is a split of authority on this issue. (Compare Kennedy v. Eldridge (2011) 210 Cal.App.4th 1197 (“Kennedy”) with In re Marriage of Murchison (2016) 245 Cal.App.4th 847 (“Murchison”).)

In Kennedy, the Third District upheld the disqualification of an attorney who represented the moving party’s father in a divorce proceeding and thereafter represented the father of the moving party’s child in a custody dispute. (Kennedy, supra, 201 Cal.App.4th at pp. 1201-02.) The court determined that although the moving party was not a former client of the attorney, she participated in the previous litigation and had a sufficiently close relationship with the former client such that there was a conflict warranting disqualification under Rule 3-310(E). (Id. at pp. 1205-08.) The court explained that “[i]t makes no sense for a court to stand idly by and permit conflicted counsel to participate in a case merely because neither a client nor former client has brought a motion.” (Id. at p. 1204.) The court held that when “an attorney’s continued representation threatens an opposing litigant with cognizable injury or would undermine the integrity of the judicial process, the trial court may grant a motion for disqualification, regardless of whether a motion is brought by a present or former client.” (Id. at p. 1205, italics added.)

In Murchison, the Second District reversed a disqualification order, in part because the moving party lacked standing. (See Murchison, supra, 245 Cal.App.4th at pp. 851-52.) In that case, a husband moved to disqualify the attorney retained by his wife to represent her in their divorce proceedings. (Id. at p. 849.) In those proceedings, the wife was awarded the family home on the condition she immediately list it for sale to extinguish her husband’s share of their community debt. (Id. at pp. 849-50.) When the wife sold the home to her divorce attorney, the husband moved to disqualify the attorney on the basis the sale violated Rule 3-300 of the California Rules of Professional Conduct prohibiting attorneys from entering into unfair business arrangements with their clients. (Id. at p. 850.) The court concluded the husband lacked standing to move to disqualify the attorney because he had no relationship with the attorney. (Id. at pp. 851-52.) Although not clearly articulated by the court, it effectively held only a client or former client has standing to move to disqualify an attorney. (Ibid.)

When “there is more than one appellate court decision, and such appellate decisions are in conflict[,]” “the court exercising inferior jurisdiction can and must make a choice between the conflicting decisions.” (Auto Equity Sales, Inc. v. Superior Ct. (1962) 52 Cal.2d 450, 455-56.) This Court chooses to follow Kennedy, and not Murchison, for several reasons.

First, the Second District stated in Murchison that it was addressing an issue of first impression. (Murchison, supra, 245 Cal.App.4th at p. 849.) But in light of Kennedy, the Second District’s statement does not appear to be accurate. In Murchison, the Second District did not cite Kennedy nor did it explain why it reached a contrary conclusion; there is no basis stated in Murchison for disregarding the Third District’s earlier decision in Kennedy.

Second, as the appellate courts acknowledged in both Kennedy and Murchison, there was no legal authority directly prohibiting a party other than a current or former client from moving to disqualify an attorney. (Kennedy, 210 Cal.App.4th at p. 1205; Murchison, supra, 245 Cal.App.4th at p. 849.) The Third District provided a more thorough and well-reasoned justification in Kennedy than the Second District provided in Murchison for why it adopted a particular rule given the absence of precedent. In Kennedy, the Third District discussed the purpose and function of the California Rules of Professional Conduct and explained why its holding was consistent therewith. (Kennedy, 210 Cal.App.4th at p. 1205.) In Murchison, the Second District did not provide a clear explanation for its holding. The Second District apparently concluded that, because clients typically move for disqualification, they should be the ones allowed to file such motions. (Murchison, supra, 245 Cal.App.4th at pp. 851-52.) This reasoning is not well supported, and may be unnecessary restrictive.

Third, the concerns that appear to have motivated and informed the Second District’s decision in Murchison are not present here. In that case, the Second District was concerned with the fact that the husband raised an ethical issue that had nothing to do with him or the fair resolution of the divorce proceedings and that did not trouble the client, his wife. (Id. at pp. 849, 851-52.) Murchison might be analogous if Yuan took issue with business dealings between Li and Pao. But Yuan is not raising such issues. Thus, Murchison is not analogous. Instead, this case more closely resembles Kennedy because the ethical issue Yuan raises pertains to a conflict of interest that permeates the fairness and integrity these proceedings.

For all of these reasons, the Court follows Kennedy, not Murchison. Accordingly, Yuan is not precluded from moving to disqualify Li based on a lack of standing simply because she was not his client.

C. Application of Rule 3.310(C)

Having resolved the issue of standing, the Court next considers whether Li’s successive representation of Pao violates Rule 3-310.

“Attorneys have a duty to maintain undivided loyalty to their clients to avoid undermining public confidence in the legal profession and the judicial process.” (SpeeDee, supra, 20 Cal.4th at p. 1146.) Rule 3-310(C) operates to preserve this trust by prohibiting an attorney, absent informed written consent of each client, from concurrently or simultaneously representing clients under circumstances that compromise the attorney’s ability to be loyal to each client. (Id. at pp. 1146-47; Sheppard, Mullin, Richter & Hampton, LLP v. J-M Manufacturing Co. (2018) 6 Cal.5th 59.) That particular subdivision limits an attorney’s ability to represent multiple clients in the same matter when there is a potential or an actual conflict. (Rules Prof. Conduct, rule 3-310(C)(1)-(2).) Additionally, it states an attorney shall not “[r]epresent a client in a matter and at the same time in a separate matter accept as a client a person or entity whose interest in the first matter is adverse to the client in the first matter.” (Rules Prof. Conduct, rule 3-310(C)(3).)

Rule 3-310(C) prohibits Li from concurrently representing both Pao and Epic in this lawsuit. (See SpeeDee, supra, 20 Cal.4th at p. 1147 [“The most egregious conflict of interest is representation of clients whose interests are directly adverse in the same litigation.”].) But neither party asserts and there is no evidence showing Epic is one of Li’s current clients. Thus, the Court is not presented with the issue of whether Li may concurrently represent multiple clients who are adverse parties or have potentially or actually conflicting interests. Accordingly, although not articulated by Pao in his opposition, Rule 3-310(C) is not implicated.

D. Application of Rule 3.310(E)

Yuan also identifies Rule 3-310(E) as a basis for disqualification. For context, “[p]rotecting the confidentiality of communications between attorney and client is fundamental to our legal system.” (SpeeDee, supra, 20 Cal.4th at p. 1146.) “[A] basic obligation of every attorney is ‘[t]o maintain inviolate the confidence, and at every peril to himself or herself to preserve the secrets, of his or her client.’” (Ibid., quoting Bus. & Prof. Code, § 6068, subd. (e).) “To protect the confidentiality of the attorney-client relationship, [Rule 3-310(E)] prohibits attorneys from accepting, without the client’s informed written consent, ‘employment adverse to the client or former client where, by reason of the representation of the client or former client, the [attorney] has obtained confidential information material to the employment.’” (SpeeDee, supra, 20 Cal.4th at p. 1146.) This particular prohibition is designed to prevent an attorney from using “against [a] former client knowledge or information acquired by virtue of the previous relationship.” (Costello v. Buckley (2016) 245 Cal.App.4th 748, 753.)

The first issue is whether Pao’s employment of Li is adverse to his former client. Pao’s discussion of the issue of adversity is conclusory and not supported by citation to or analysis of legal authority. Pao appears to believe Li’s representation of him in this matter is not adverse to Li’s former client, Epic, because his claims are asserted against Yuan individually. As a preliminary matter, this assertion is disingenuous because Pao also asserts claims against doe defendants that he specifically states “may include” Epic. (FAC, ¶ 4.) If Epic became an adverse party, there would indisputably be a conflict of interest. (See SpeeDee, supra, 20 Cal.4th at p. 1139.) But even if Epic is not expressly named a defendant, Pao has expressly taken a position adverse to Epic.
“An ‘adverse’ interest is one that is ‘hostile, opposed, antagonistic . . . detrimental, [or] unfavorable to another’s interest.’ [Citation.]” (Walker v. Apple, Inc. (2016) 4 Cal.App.5th 1098, 1110-11.) Here, although Epic has not yet been named as a defendant in this lawsuit, Pao’s interest is adverse to Epic. Pao’s central grievance in this lawsuit is that Epic settled its claims against Richwave and Wong instead of going to trial. Pao’s fifth cause of action is for a declaration that Epic’s settlement with Richwave and Wong is null and void. Accordingly, Pao’s interest in this lawsuit is adverse to Epic’s interest irrespective of the fact he has not yet named it as a defendant. In other words, although Pao and Epic are not yet adverse parties, Pao’s employment of Li in this matter is adverse to Li’s former client, Epic.

Additionally, an attorney may be disqualified when representing a party adverse to another who, although not a former client, has a close relationship with the former client. (Kennedy, supra, 201 Cal.App.4th at p. 1208.) Courts faced with similar scenarios have considered whether the relationship between the former client and the party moving for disqualification are sufficiently close such that the parties should be “treated as a single unity for purposes of determining whether an ethical conflict exists.” (Ibid.) For example, in Kennedy, the court upheld the disqualification of an attorney who subsequently represented a party adverse to the daughter of a former client. (Id. at pp. 1205-08.)

As another example, courts have held a parent company and its subsidiary have a sufficiently close relationship such that an attorney may be disqualified from successive representation of a party with an interest adverse to the subsidiary even though the attorney previously represented the parent company in particular. (Morrison Knudsen Corp. v. Hancock, Rother & Bunshoft (1999) 69 Cal.App.4th 223, 252-53.) The court explained that courts should focus on “the practical consequences of the attorney’s relationship with the corporate family.” (Id. at p. 253.) “If that relationship may give the attorney a significant practical advantage in a case against an affiliate, then the attorney can be disqualified from taking the case.” (Ibid.)

Although Yuan and Epic do not have a parent-child or parent-subsidiary relationship, the Court is persuaded that their relationship is sufficiently close such that they should be treated as one for the purpose of evaluating Li’s ethical obligations. Yuan has a sufficiently close relationship with Epic because, as liquidator, she had an obligation to manage its assets including the previous lawsuit with Richwave and Wong. Additionally, it is clear Pao has a significant practical advantage in this action to set aside Epic’s settlement agreement and recover damages from Yuan for her participation in the settlement process by virtue of employing the attorney that represented Epic both before and after the settlement was negotiated. Consequently, Li’s employment is effectively adverse to a former client because a close affiliate of Epic, namely Yuan, is named as a defendant here.

In summary, Pao’s employment of Li in this lawsuit is adverse to Epic and its liquidator Yuan. And so the Court next considers whether Li obtained confidential information as a result of his previous representation of Epic such that his successive representation of Pao violates Rule 3-310(E).

To make a determination on this issue, the Court must apply the substantial relationship test. (City Nat. Bank v. Adams (2002) 96 Cal.App.4th 315, 324-25.) “‘Where [a] substantial relationship between the subjects of the prior and the current representations can be demonstrated, access to confidential information by the attorney in the course of the first representation (relevant, by definition, to the second representation) is presumed and disqualification of the attorney’s representation of the second client is mandatory; indeed, the disqualification extends vicariously to the entire firm.’” (Id. at p. 327, quoting SpeeDee, supra, 20 Cal.4th at p. 1146.) In evaluating whether a substantial relationship exists, a court may consider circumstances such as the similarities between the factual scenarios and legal questions posed as well as the nature and extent of the attorney’s involvement in both matters. (Kennedy, supra, 201 Cal.App.4th at pp. 1206-07.)

Li first began representing Epic in 2006 and the scope of his representation included the trade secrets lawsuit against Ali Corporation, Richwave, and Wong. (Li Decl., ¶¶ 2-6.) Li continued representing Epic in the trade secrets lawsuit when he left a large law firm and opened his own practice in 2010. (Li Decl., ¶ 2; see also Yuan Decl., Ex. 3.) Although Li states he stopped representing Epic beginning in 2012 (Li Decl., ¶ 6), Pao inconsistently alleges Li represented Epic until 2013 (FAC, ¶ 18) and the evidence shows he resumed his representation of Epic in the trade secrets lawsuit as early as March 2017. (Li Decl., Exs. 7, 11, 12, 16).

Li’s previous representation of Epic in the trade secrets lawsuit is substantially related to his current representation of Pao. Pao’s central grievance is that the trade secrets lawsuit should have been tried and not settled. (See FAC, ¶¶ 8, 11-16.) Thus, Li’s previous representation of Epic, including his strategy for and approach to resolving the trade secrets lawsuit, is at the heart of the present dispute such that there is a substantial relationship between the two.

The fact that a different attorney, Kao, allegedly handled the disputed settlement does not support a contrary conclusion. Kao’s access to Epic’s confidential information does not erase Li’s presumptive knowledge or eliminate the risk that his knowledge will be misused in the present case in light of his representing a new client adverse to his former client and its liquidator.
In Pao’s opposition, he does not present any persuasive points on the substantial relationship test. Pao attempts to distinguish the two lawsuits by narrowly characterizing the present lawsuit as concerning Yuan and her conduct alone. His characterization is incomplete and inaccurate. Although Yuan’s conduct is at issue, that conduct relates to Epic’s liquidation and her participation in the settlement in light of her responsibilities as Epic’s liquidator. Additionally, Yuan’s conduct is not the sole issue in this lawsuit as Pao seeks to set aside Epic’s settlement agreement. Thus, Pao does not persuade the Court that the two lawsuits, and thus Li’s employment in connection therewith, are unrelated or only tenuously related.

For these reasons, the Court finds there is a substantial relationship between Li’s representation of Epic in the trade secrets lawsuit and his representation of Pao in the current lawsuit challenging the resolution of the trade secrets lawsuit. Because of this substantial relationship, it is presumed that Li possesses confidential information material to the current lawsuit. In light of the attendant risk that Epic’s confidential information will be misused for the benefit of Pao, whose interest is adverse, disqualification of Li is warranted under Rule 3-310(E). “When a conflict of interest requires an attorney’s disqualification from a matter, the disqualification normally extends vicariously to the attorney’s entire law firm.” (SpeeDee, supra, 20 Cal.4th at p. 1140) Accordingly, LiLaw, Inc. must be disqualified as well.

As a final matter, Pao argues the motion should, nevertheless, be denied because Yuan unjustifiably delayed in filing it. A motion for disqualification may only be denied on the basis of unjustifiable delay if there has been an extreme delay that results in extreme prejudice. (Western Continental Operating Co. v. Natural Gas Corp. of Cal. (1989) 212 Cal.App.3d 752, 763-64.) In evaluating whether there has been an unjustifiable delay, a court must focus on the stage of the case and not its age. (Ontiveros v. Constable (2016) 245 Cal.App.4th 686, 701-02.) When, as here, the case is not at issue, discovery has not concluded, and no trial date has been set, there has not been extreme delay sufficient to justify denying an otherwise meritorious motion. (See ibid.)

III. DISPOSITION

Li’s representation of Pao in this matter violates Rule 3-310(E). Yuan’s motion to disqualify Li and LiLaw, Inc. is therefore GRANTED. Li shall not use, reveal, or disclose any confidential information concerning Epic without obtaining Epic’s informed written consent. The hearing on the demurrers is continued to Friday, January 11, 2019 at 9:00 a.m. in Department 5.

The Court will prepare the final order if this tentative ruling is not contested.