California Supreme Court Holds that Public Entities May Retain Private Counsel on a Contingency Fee Basis to Prosecute Public Nuisance Actions in Certain Circumstances

COUNTY OF SANTA CLARA et al., Petitioners, v. THE SUPERIOR COURT OF SANTA CLARA COUNTY 2010 Cal. LEXIS 7241 (July 26, 2010)

The California Supreme Court has held that public entities may retain private counsel on a contingency fee basis to prosecute public nuisance actions in certain limited circumstances. Those limited circumstances exist when fundamental constitutional rights and the right to continue operation of an existing business are not implicated, and so long as the retention agreements allow the government attorneys to retain the power to control and supervise the litigation.

In County of Santa Clara, public entities, represented by both government attorneys and private law firms, brought a public nuisance abatement action against defendants, manufacturers of lead paint. The Superior Court, relying upon the California Supreme Court decision People ex rel. Clancy v. Superior Court, 39 Cal. 3d 740 (1985), barred the public entities from compensating privately retained counsel by means of contingent fees. The Superior Court concluded that Clancy precluded any arrangement in which private counsel has a financial stake in the outcome of a case brought on behalf of the public. The Court of Appeals reversed, holding that Clancy does not bar all contingent-fee agreements with private counsel in public-nuisance abatement actions, only those in which private attorneys appear in place of, rather than with and under the full control and supervision of, government attorneys. The Supreme Court, after re-examining the Clancy opinion, held that the Clancy decision “should be narrowed, in recognition of both (1) the wide array of public-nuisance actions (and the corresponding diversity in the types of interests implicated by various prosecutions), and (2) the different means by which prosecutorial duties may be delegated to private attorneys without compromising either the integrity of the prosecution or the public’s faith in the judicial process.”

The Supreme Court distinguished the public nuisance action in Clancy from the public nuisance action in County of Santa Clara. The public nuisance abatement claim in Clancy sought to shut down an adult book store which involved important constitutional concerns, threatened an ongoing business activity, and carried the threat of criminal liability. “In light of these interests, the case required the same ‘balancing of interests’ and ‘delicate weighing of values’ on the part of the government’s attorney prosecuting the case as would be required in a criminal prosecution.” Therefore, the disqualification of a private attorney with a pecuniary interest in the outcome of the case was mandated. In County of Santa Clara, the Supreme Court found that the public nuisance claim at issue involved a different set of interests that were not substantially similar to the fundamental rights at stake in a criminal prosecution, as they were in Clancy. The public nuisance claim in County of Santa Clara does not involve important constitutional concerns, threatened ongoing business activity or carry the threat of criminal liability (the statute of limitations on criminal liability had run). “Where neutrality is a critical concern in criminal prosecutions because of the important constitutional liberty interests at stake, in ordinary civil cases, the Court does not require neutrality when the government acts as an ordinary party to a controversy, simply enforcing its own contract and property rights against individuals and entities that allegedly have infringed upon those interests.” Clancy, supra, 39 Cal. 3d at 748. However, the Supreme Court also states that the public nuisance claim in County of Santa Clara was not an ordinary civil claim because the public entities’ attorneys are appearing as representatives of the public and not as counsel for the government acting as an ordinary party in a civil controversy.

Balancing these facts, the Supreme Court concludes that “because–in contrast to the situation in Clancy–neither a liberty interest nor the right of an existing business to continued operation is threatened by the present prosecution, this case is closer on the spectrum to an ordinary civil case than it is to a criminal prosecution. The role played in the current setting both by the government attorneys and by the private attorneys differs significantly from that played by the private attorney in Clancy. Accordingly, the absolute prohibition on contingent-fee arrangements imported in Clancy from the context of criminal proceedings is unwarranted in the circumstances of the present civil public-nuisance action.”

Based on this analysis, the Supreme Court held that because the public-nuisance abatement action in County of Santa Clarais being prosecuted on behalf of the public, the attorneys prosecuting the action are subject to a heightened standard of ethical conduct and neutrality applicable to public officials acting in the name of the public. “To ensure that the heightened standard of neutrality is maintained in the prosecution of a public-nuisance-abatement action, contingent-fee agreements between public entities and private counsel must contain specific provisions delineating the proper division of responsibility between the public and private attorneys. Specifically, those contractual provisions must provide explicitly that all critical discretionary decisions will be made by public attorneys–most notably, any decision regarding the ultimate disposition of the case.” The retention agreement must also specify that any defendant that is the subject of such litigation may contact the lead government attorneys directly, without having to confer with contingent-fee counsel. In summary, at a minimum, “contingent-fee agreements between public entities and private counsel must provide: (1) that the public-entity attorneys will retain complete control over the course and conduct of the case; (2) that government attorneys retain a veto power over any decisions made by outside counsel; and (3) that a government attorney with supervisory authority must be personally involved in overseeing the litigation.” The Supreme Court noted that these specific provisions are not exhaustive and that the unique circumstances of each prosecution may require a different set of guidelines for effective governmental supervision and control of the case.

Because the contingent-fee agreements in the County of Santa Clara case did not contain the provisions set forth above, the Supreme Court reversed the judgment rendered by the Court of Appeal and remanded the matter for further proceedings consistent with this opinion.