Arthur J. Ciampi

“There are two tragedies in life. One is to lose your heart's desire. The other is to gain it.” —George Bernard Shaw

Most law firm partnership agreements include arbitration as a means of alternate dispute resolution. While the resulting proceedings are (at least in theory) less expensive, more efficient and more confidential than a plenary proceeding, the arbitration of law firm disputes is not without risks, and including an arbitration provision in a law firm's agreement should be carefully considered (it being a given that most law firm partners have little say on whether their potential law firm disputes will be arbitrated or litigated).

Last month, the U.S. District Court for the Eastern District of Pennsylvania issued a decision concerning the break-up of an environmental and toxic tort class action law firm. Cuker v. Berezofsky, 2019 WL 689592 (E.D. Pa. 2019). Cuker reveals some of the plusses and minuses of arbitration of law firm disputes, and, without “spoiling” the Cuker court's conclusion (well, maybe a little), District Judge Mark Kearney warned:

Lawyers choosing final arbitration over a federal jury's decision because they assume it may be more efficient and less costly are often incorrect in their assumption….Id. at 9.

In this month's column we analyze Cuker and consider the benefits and detriments of arbitrating law firm disputes.

'Cuker v. Berezofsky'

In September 2017, the partners, Mark R. Cuker, Esther E. Berezofsky, and (non-party) Gerald J. Williams, agreed to dissolve their law firm, and, for this purpose, entered into an Agreement and Plan of Liquidation and Dissolution. This agreement provided, inter alia, that any dispute surrounding the dissolution be resolved through mediation or binding final arbitration, and that the parties, even after dissolution, would continue to work together on certain cases, specified in the agreement as “co-counsel cases.”

Despite the arbitration provision in the dissolution agreement, Cuker filed a case in state court alleging Berezofsky breached the dissolution agreement by refusing to pay monies due to him and Williams, failing to pay certain agreed-upon sums to the Partnership, taking more money for her new firm than was her due, and violating the co-counsel provision in the case In re Flint Water Cases, a class action by the residents of Flint, Mich. (the Flint litigation). Berezofsky moved to compel arbitration, and, with Cuker's consent, the motion was granted and a “three-member arbitration panel including two highly regarded former state court judges” was selected by the parties.

The Arbitration Proceeding

At a conference with the panel on Oct. 1, 2018, both Cuker and Berezofsky agreed that they could resolve the case in such a way as to “reduce or obviate discovery requirements.” As such, on Oct. 12, 2018, “both parties moved for summary disposition by letter brief.”

In his motion for summary disposition, Cuker claimed that Berezofsky's position as a member of the executive committee in the Flint litigation was not only in breach of the dissolution agreement, but also “a deliberate scheme to take those [corporate] opportunities from him.” Cuker made five legal arguments to support his claim that Berezofsky breached the dissolution agreement. He claimed Berezofsky: (1) did not notify clients about either the dissolution, or their right to choice of counsel; (2) excluded Cuker from the Flint litigation by secretly employing clients as class representatives; (3) had her firm, and not Cuker's, listed as class counsel in the Flint litigation; (4) forced over 3,000 “joint clients” to use her firm while becoming a leader on the Flint litigation executive committee, and excluding Cuker from any role in this case; and (5) committed tortious interference with Cuker's contractual relationship with parties in the Flint litigation for whom, Cuker alleged, he and Berezofsky were counsel. Moreover, at the oral argument, Cuker argued that, although he had agreed to summary disposition, it would be untimely for the panel to decide that he was not due a share of Berezofsky's fees as a leader in the Flint litigation, or to “dismiss any other aspect of [his] claims.”

Berezofsky rebutted that the dissolution agreement did not prescribe any fee sharing regarding her work on the Flint Executive Committee. The panel, after hearing oral arguments on Cuker and Berezofsky's cross-motions, unanimously found, in its Nov. 19, 2018 “Order and Opinion Re Flint Water Crisis Cases,” in favor of Berezofsky.

The panel's finding stated that the dissolution agreement did not mandate any fee sharing regarding Berezofsky's work on the Flint litigation Executive Committee and rejected Cuker's five arguments. The panel held that: (1) the division of clients occurred with client approval, and clients were properly notified of both the dissolution, and their right to choice of counsel; (2) Cuker was not prohibited by the dissolution agreement from either selecting clients to be class representatives, or “from securing common benefit work himself in the Flint litigation”; (3) either Berezofsky's or Cuker's firm could have requested to be listed as class counsel, and, regardless of who was selected, such position does not entitle one to “common benefit fees”; (4) the dissolution agreement did not proscribe either party from acquiring a leadership role in the Flint litigation; and (5) the Pennsylvania law Cuker relied on does not support his claim for tortious interference, nor is Berezofsky in any way required to aid Cuker in obtaining a leadership role.

Finally, the panel rejected Cuker's argument that the finding should be delayed, given that, he claimed, discovery was necessary for him to show how Berezofsky's alleged disparagement prevented his gaining a leadership position on the Flint litigation. “The panel rejected this argument because Mr. Cuker never applied for any leadership position or common benefit work in the Flint litigation and, after months of proceedings with 'hundreds of pages of pleadings and documents,' found the argument waived.”

Cuker made a motion to the panel for reconsideration and leave to amend his prayer for relief based on four errors he claimed the panel made in its Flint Order. Cuker argued that the panel: (1) encouraged Berezofsky to make a motion for summary disposition, and then granted the motion while not only staying discovery prematurely, but also mischaracterizing Cuker's claim; (2) waived his claim that, through her disparagement, Berezofsky violated the dissolution agreement; (3) “found the novation of the [dissolution] agreement by an 'unwritten agreement to divide servicing of clients in furtherance' of the 'Co-Counsel Matters' Section of the [dissolution] agreement”; and (4) found that the dissolution agreement imposed no affirmative obligations on the parties.

The panel found no reason to revise its ruling. Responding to Cuker's four arguments, the panel responded that: (1) as the “purpose of arbitration is to reach an expeditious result without subjecting the parties to huge sums of counsel fees for discovery and other pre-trial matters,” and, as both parties agreed to settle the dispute by summary disposition, in calling for such, the panel was not in error; (2) Cuker waived a disparagement claim; (3) as the parties consented to each represent half the clients, and all clients agreed to this, it was correct to find a novation of the dissolution agreement; and (4) the dissolution agreement did not impose “affirmative obligations.” The panel, on Jan. 29, 2019, issued its final arbitration award which, inter alia, held as final the Flint order and the order denying Cuker's motion for reconsideration and leave to amend his prayer for relief.

Motion to Vacate

Objecting to this finding, Cuker made a motion to vacate the final arbitration award in the District Court for the Eastern District of Pennsylvania. The court affirmed the panel's ruling, stating “we must confirm the award unless there are grounds for vacating the award under the narrow circumstances Congress defined in Section 10 of the Federal Arbitration Act.”

Section 10 makes provision for vacating and arbitration award only where:

(1) procured by corruption, fraud, or undue means; (2) the arbitrator demonstrated evident partiality or corruption; (3) the arbitrator was guilty of misconduct in refusing to postpone the hearing upon sufficient cause shown, in refusing to hear evidence pertinent and material to the controversy, or of any other misbehavior by which the rights of any party have been prejudiced; or (4) the arbitrator exceeded her powers or so imperfectly executed them that a final and definite award upon the subject matter submitted was not made.

According to Cuker's motion, the final award should be vacated under Section 10(a)(3), because, he claimed, the panel “committed misconduct” by “refusing to hear evidence pertinent and material to the controversy.” The court held that there was no “misconduct” in the panel's actions. Moreover, the court ruled, to vacate the panel's finding, the omission of evidence must have been so grievous as to have caused “procedural irregularities” which “deprived a party of a fair hearing.”

Cuker argued that arbitrators cannot grant a summary disposition “without hearing all material evidence,” and that the panel, in denying him discovery, not only refused to hear pertinent evidence, but also denied him a “fundamentally fair hearing.” The court rejected this argument, holding that, according to the Pennsylvania Court of Appeals, “fundamental fairness is not implicated by an arbitration panel's decision to forego an evidentiary hearing because of its conclusion that there were no genuine issues of material fact in dispute.”

Moreover, in her reply to Cuker's motion to vacate, Berezofsky argued that the dissolution agreement gave the panel the authority over discovery, that the arbitrators did, in fact, address discovery issues, and that Cuker agreed to this arrangement. “Mr. Cuker's motion to vacate the arbitration award,” Berezofsky stated, “seeks to enforce the [dissolution] agreement he characterizes as 'vigorously negotiated' through his counsel and cannot now ask the court to disregard the terms of the [dissolution] agreement regarding discovery.”

The court agreed, adding that the issue of discovery was thoroughly addressed by both parties during the binding arbitration, and both Berezofsky and Cuker consented to the panel's discovery terms.

The panel, the court ruled, in no way denied Cuker a “fundamentally fair hearing.” Indeed, the court drew attention to the panel's final arbitration award, which found in favor of Cuker in several instances. The court further found that the panel did not fail to consider Cuker's evidence. On the contrary, the arbitrators read the parties' briefs and heard their oral arguments. If Cuker believed there were additional open issues, the court held, he had every opportunity to raise them, but he failed to do so.

Cuker alleged that the panel acted in “manifest disregard of the law” by ignoring the dissolution agreement “in its entirety.” The court responded that “manifest disregard” is not a grounds for vacatur, and, further, that the standard for proving “manifest disregard” is so strict that it would require “more than legal error.” And while Cuker attempted to portray this dispute as a breach of contract case, and argued that the panel failed to see it as such, the court was unpersuaded, ruling not only that every issue Cuker raised pertaining to breach of agreement was satisfactorily addressed by the panel, but also that the arbitrators did not act in “manifest disregard of contract law.”

Conclusion

As the court aptly concluded in upholding the panel's award:

Lawyers choosing final arbitration over a federal jury's decision because they assume it may be more efficient and less costly are often incorrect in their assumption and, unlike appealing our decisions to the Court of Appeals, cannot then use this court as a court of arbitration appeals.

Alternate dispute resolution typically provides a viable alternative to litigation. The solution, however, is not without its drawbacks and limitations as evidenced by this recent decision.

Arthur J. Ciampi is the coauthor of the treatise 'Law Firm Partnership Agreements' and is the managing member of Ciampi LLC. Maria Ciampi, of counsel to the firm, assisted in the preparation of this article.