"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." Cuker v. Berezofsky, 2019 WL 689592 (E.D.Pa. 2019) at 9.

Unfortunately, disputes among lawyers and their law firms are relatively common. Resulting claims sometimes lead to a civil action and some are subject to mediation and arbitration. Today, from our experience, most law firm agreements include alternate dispute resolution provisions which include some combination of mandatory mediation and/or arbitration. These provisions are set forth in the law firm's partnership agreement and control the scope and nature of the arbitration. Sometimes, there is a question concerning the scope of the arbitration provision and whether certain claims are arbitrable and others are not. Often these disagreements are complex and themselves, independent of the merits, can be difficult, time consuming, and expensive to resolve.

'Morelli v. Alters'

This spring, United States District Court Judge Gregory H. Woods issued two opinions in a dispute between two lawyers and a law firm which addressed the arbitrability of claims regarding a law firm and whether a stay of the ensuing lawsuit was merited. District Judge Woods, decided: Morelli 1 in March, Morelli v. Alters,  2020 WL 1285513 (S.D.N.Y. Mar. 18, 2020), and Morelli 2, in May, Morelli v. Alters, 2020 WL 2306445 (S.D.N.Y. May 8, 2020).

'Morelli 1′

Benedict Morelli and Jeremy Alters were two lawyers who were business partners. As succinctly described by Judge Woods, their relationship was as follows:

When plaintiff Benedict P. Morelli and defendant Jeremy Alters met, each believed the other to be an incredibly successful class action lawyer. Morelli agreed to loan Alters millions of dollars in exchange for tens of millions of dollars in fees that Alters allegedly represented to Morelli he was due because of his work on various class actions. And eventually, the pair agreed to become partners, with Alters receiving a multi-million dollar salary from Morelli, again backed by Alters' expected fees. The two executed three contracts that formalized this arrangement individually and on behalf of their respective law firms. But these agreements, and Morelli's and Alters' erstwhile friendship, were allegedly founded on lies. Plaintiffs allege that Alters had already promised the fees that he was due from the class action cases to other parties, so Morelli could never have collected what Alters promised to pay him. Thus, plaintiffs filed this action alleging that Alters defrauded them.

Morelli 1, 2020 WL 1285513, at *1.

On Jan. 7, 2020, Morelli filed a complaint against Alters alleging fraudulent inducement and misrepresentation. Morelli 2, 2020 WL 2306445, at *1. The suit concerns two agreements between the parties, a 2015 Agreement  and a 2018 Agreement. The 2015 Agreement contained a mediation and arbitration provision agreed to by Morelli and Alters. The Morelli Law Firm, PLLC, which is a plaintiff, was also a party to the 2015 Agreement, but did not agree to its arbitration clause.

Alters moved to dismiss the complaint for lack of subject matter jurisdiction and improper venue. Id. In Morelli 1, the court denied Alters' motion. As it relates to arbitrability, the court found that the simple arbitration clause in the 2015 Agreement "constituted a valid agreement to arbitrate." Morelli 2, at *1. The arbitration clause stated: "the parties to this agreement agree to mediate any disputes with a mutually agreed upon mediator. If mediation fails to resolve any dispute, the parties agree to arbitrate with a mutually agreed arbitrator or arbitrators." Id.

The court also held, in Morelli 1, that it would "likely" require Morelli to arbitrate his claims related to the 2015 Agreement, but because the Morelli Law Firm did not agree to the arbitration clause in the 2015 Agreement, the court held that the law firm could not be compelled to arbitrate its claims. Id. at *11-12. In addition, the court held that because the plaintiffs' fraudulent representation claims were "rooted in the 2018 Agreement," which did not contain an arbitration clause, it was not subject to arbitration. Morelli 2, at *1, citing Morelli 1, 2020 WL 1285513 at *12-14.

'Morelli 2′

Alters, thereafter, filed a petition to compel arbitration, which is the subject of Morelli 2. The district court began its analysis with Section 2 of the Federal Arbitration Act. As the court stated: "Under Section 2 of the FAA, as a general matter, arbitration agreements 'shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.' 9 U.S.C. § 2." Morelli 2, 2020 WL 2306445 at *2.

 The court then reiterated some basic tenets regarding arbitration (all citations omitted):

• "The FAA provides that the parties can petition the district court for an order compelling arbitration under 9 U.S.C. §4."

• "[A]rbitration is a matter of contract and that, therefore, a party cannot be compelled to arbitrate issues that a party has not agreed to arbitrate."

• "The 'question of arbitrability,' is an issue for judicial determination unless the parties clearly and unmistakably provide otherwise …."

• "[A]ny doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration …."

• "[T]he party resisting arbitration bears the burden of proving that the claims at issue are unsuitable for arbitration."

Judge Woods, in Morelli 2, concluded that Morelli's claims under the 2015 Agreement were subject to arbitration, but that the claims based upon the 2018 Agreement were not. The court held, in pertinent part:

Morelli's claims under the 2015 Agreement are subject to arbitration. In Morelli I, the Court held that "Section 7 [of the 2015 Agreement] is an unambiguous agreement to arbitrate. …

Because Morelli agreed to arbitrate his claims for fraudulent inducement and declaratory judgment arising under the 2015 Agreement, Alters' petition to compel arbitration is granted as to those claims. …

However, neither Morelli Law's nor Plaintiffs' claims under the 2018 Agreement are subject to arbitration. As discussed in Morelli I, the 2015 Agreement specifically exempts Morelli Law from the ambit of its arbitration provision. Moreover, the 2018 Agreement does not contain an arbitration provision. Therefore, those claims are not subject to arbitration.

Id. at *3 (citations omitted).

The district court then considered whether to stay the non-arbitrable claims. As the court stated: "The decision to stay the balance of the proceedings pending arbitration is a matter largely within the district court's discretion to control its docket." Id. (citations and quotations omitted).

The court reviewed the applicable factors when considering a stay application:

The Court must consider factors such as the desirability of avoiding piecemeal litigation and the degree to which the cases necessitate duplication of discovery or issue resolution. A discretionary stay is particularly appropriate where there is significant factual overlap between the remaining claims and the arbitrated claims. Similarly, "[b]road stay orders are particularly appropriate if the arbitrable claims predominate the lawsuit and the non-arbitrable claims are of questionable merit."

Id. at *4 (citations and quotations omitted).

The court should also consider whether the issues decided in the arbitration are "likely to have preclusive effect over some or all of the claims not subject to arbitration."

The court applied these criteria and concluded that: "Here, the Court declines to exercise its discretion to stay the remaining non-arbitrable claims." Id. Concerning the Morelli Law Firm claims, the court found:

Most importantly, the parties expressly declined to subject claims by Morelli Law  in the 2015 Agreement. It is axiomatic that "[a]rbitration is a matter of contract," that "as with any other contract, the parties' intentions control" the interpretation of an arbitration agreement, and that "[t]he best evidence of what parties to a written agreement intend is what they say in their writing." In the circumstances of this case, those three foundational principles counsel strongly against a discretionary stay of Morelli Law's claims under the 2015 Agreement. That agreement contains an arbitration provision, and the parties might easily have subjected claims by Morelli Law to arbitration if they had wanted to do so. That they chose not to do so is an unusually strong indication that the parties did not intend Morelli Law's claims to be subject arbitration.

Id. at *4 (citations omitted).

The court also declined to stay the fraudulent misrepresentation claim based upon the 2018 Agreement which did not include an arbitration clause. The court stated: "Because 'arbitration is a matter of contract[,] … a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit.' Therefore, Plaintiffs' claim arising out of the 2018 Agreement are not subject to arbitration."  Id. (citations omitted).

Finally, in Morelli 2 the court concluded:

Alters' petition to compel arbitration is GRANTED in part and DENIED in part. Morelli's fraudulent inducement and declaratory judgment claims arising out of the 2015 Agreement are subject to arbitration, so the Court compels arbitration of those claims. Alters' request for a stay of those claims is also GRANTED. However, Alters' petition to compel arbitration of Morelli Law's fraudulent inducement and declaratory judgment claims arising out of the 2015 Agreement and Plaintiffs' fraudulent misrepresentation claim arising out of the 2018 Agreement is DENIED. Alters' request for a stay of those claims is likewise DENIED.

Id. at *6.

Conclusion

Despite alternate dispute resolution clauses that are designed to save costs and enhance efficiency, such results, as exemplified by Morelli 1 and Morelli 2, are sometimes elusive.  Perhaps the lesson is, regardless of how law firm disputes are to be resolved, they are most often best avoided and resolved.

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 Ciampi LLC, assisted in the preparation of this article.