Uncertainty permeates a high-profile $160 million racketeering case after Hueston Hennigan, a prominent downtown L.A. law firm at the center of the dispute, was disqualified by a federal judge last week for representing both the plaintiff and another adverse party.

U.S. District Court Judge Andrew Guilford said in his preliminary written ruling that Hueston’s involvement represented a conflict “so egregious that it is unwaivable,” adding, “The ripple of effects of the ethical breach are perhaps too numerous to identify.”

Now Hueston Hennigan could be forced to repay millions of dollars in attorneys’ fees collected during the nearly two-year litigation, according to legal experts.

The firm’s disqualification marks a stunning turn of events in a civil case that was filed in June 2013 by John Hueston on behalf of the State Compensation Insurance Fund. At the time, Hueston was a partner at Century City’s Irell & Manella. He and Brian Hennigan co-founded Hueston Hennigan in January of last year, and he brought the case with him.

“Millions of dollars have been spent on the legal work and depending on how much of that work is usable, (the insurance fund) could make a colorable argument that they’re entitled to at least some of that money back,” said Randall Miller of downtown’s Miller Law Associates, who represents attorneys and judges in ethics disputes and legal malpractice cases.

The Racketeer Influenced and Corrupt Organizations Act suit at the center of the controversy alleges illegal kickbacks were given to doctors to refer patients to a group of health care providers run by Michael Drobot. Drobot, who pleaded guilty to federal fraud charges in 2014, allegedly paid doctors $10,000 to $15,000 to refer patients to Pacific Hospital for spinal surgeries. Those activities led to as much as $580 million in fraudulent claims paid out by the state insurance fund and other insurers, according to the U.S. Attorney’s Office in Los Angeles.

The payments initially came to light in early 2013 when the FBI raided the Long Beach offices of Pacific Hospital, and SCIF retained Hueston shortly after to represent them in the civil suit. Two years before Hueston took on the insurance fund as a client, Hennigan, who was also at Irell at the time, had already begun his representation of health care marketer Paul Randall in the criminal proceedings related to the $580 million medical fraud scheme.

When SCIF came to Hueston asking for representation in 2013, his firm was aware of the possible conflict involving Randall, who pleaded guilty in April 2012 to helping Drobot pull of the scheme. But Hueston agreed to represent SCIF anyway. The firm said it believed a written waiver signed by Randall informing him of the potential conflict issues cleared them of any ethics violations.

This conflict waiver was followed by several others signed in the following months by both Randall and representatives of the insurance fund that informed them of the conflict issues. In its filings with the court, the firm claimed both parties were aware of the concurrent representation and chose to continue with the firm as counsel. Hennigan said the firm was also told by third-party counsel that it was in the clear ethically to represent both parties.

“We obtained outside counsel’s advice and they said we were OK with written waivers in place,” Hennigan said.

But the court pointed out that in its own waivers Hueston Hennigan acknowledged it was representing clients directly adverse to each other, something the judge said is expressly barred in the adversarial legal system.

“Of course, in light of State Fund’s potential claims against Randall and Randall’s alleged role as a co-conspirator in the Pacific Hospital scheme at issue in the Actions, State Fund and Randall may have, and likely do have, directly adverse interests,” one of the conflict waivers reads.

Cris Armenta, a Santa Monica defense attorney who filed the disqualification motion on behalf of her client, Dr. Lokesh Tantuwaya, said there are serious questions about the impact of Hueston Hennigan’s conduct on the larger case.

“We have questions about how this ethical breach has infected the entirety of the case and if the case should go forward as currently constructed,” Armenta said. “How deep do these infections run? We’re researching whether it’s something that has further impact on the litigation.”

Paying up?

It’s unclear whether the disqualification could force Hueston Hennigan to return attorneys’ fees paid it by the state fund or whether the firm would have grounds to appeal Guilford’s decision.

When the fund was asked about its plans moving forward and whether it would attempt to recoup money from the firm, a spokeswoman revealed little.

“We are reviewing the decision and will be weighing our options.” said SCIF’s Jennifer Vargen in an email.

When asked about the possibility of returning money and how much the firm has collected so far in fees, Hennigan said the firm could not disclose financial information and did not want to speculate about what could happen until Guilford submits a final written order on the disqualification.

“It would be inappropriate to talk about the financial arrangement we have with SCIF,” he said. “We also don’t know what the court’s final order will say and we’ll need to study that order when it comes out in order to make a decision on how to move forward.

But not everyone agrees that Hueston Hennigan did anything wrong.

Erwin Chemerinsky, dean of the UC Irvine School of Law and an expert on constitutional law, said he was asked to review the disqualification forms by Hueston Hennigan after Guilford’s ruling last week. He said the firm would have a case if it appealed the disqualification order and that its liability on the fee disgorgement was, at this juncture, negligible.

“I think they have strong grounds for an appeal,” Chemerinsky said. “From my perspective, they did not do anything wrong. If they did nothing wrong, they don’t have any liability.”

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