On certification to the Superior Court, Appellate Division, whose opinion is reported at
The opinion of the Court was delivered by Stein, J. Chief Justice Wilentz and Justices Handler, Pollock, Garibaldi and Coleman join in Justice Stein's opinion. Justice O'hern did not participate.
The opinion of the court was delivered by: Stein
(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the interests of brevity, portions of any opinion may not have been summarized).
STANLEY WEISS, ET AL. v. CARPENTER, BENNETT & MORRISSEY CARPENTER, BENNETT & MORRISSEY, ET AL. v. STANLEY WEISS, ET AL. (A-9-95)
(NOTE: This is a companion case to Heher v. Smith, Stratton, Wise, Heher and Brennan also decided today.)
Argued September 27, 1995 -- Decided March 6, 1996
STEIN, J., writing for a unanimous Court.
In this appeal, the Court determines the enforceability of provisions in a law firm's partnership agreement that withhold the right to receive distribution of a partner's capital account only from partners who withdraw from the firm for any reason other than death, permanent disability, attainment of age sixty-five, or appointment to the Judiciary (the forfeiture provisions).
Stanley Weiss (Weiss), Jerome E. Sharfman (Sharfman), and Thomas J. Lennon (Lennon) sued their former law firm, Carpenter, Bennett & Morrissey (CB&M), as a result of disagreements concerning the amounts to which they were entitled as withdrawing partners of the firm. Weiss, Sharfman and Lennon sought to recover their claimed shares of the firm's capital account and earnings, and to recover damages for alleged breaches of fiduciary duties and other tortious conduct. On CB&M's motion, all claims, except for a defamation claim asserted by Weiss, were referred to arbitration.
The arbitrator issued a comprehensive opinion holding unenforceable under Rule of Professional Conduct (RPC) 5.6 the forfeiture provisions of the CB&M partnership agreement, relying on Jacob v. Norris, McLaughlin & Marcus, wherein this Court held that a law firm's "Service Termination Agreement" that withheld termination compensation only from those firm members who within one year of termination represented clients of the firm or solicited employees of the firm to engage in law practice violated RPC 5.6. The arbitrator determined that Sharfman and Lennon should receive their equity interests in the firm, that Weiss was equitably estopped from contesting the forfeiture provisions, and that each of the withdrawing partners should receive his share of CB&M's 1991 net income, but not the additional share of net income to which they would have been entitled on withdrawal at age sixty-five, or for death, disability or judicial appointment. Concerning the estoppel issue, the arbitrator noted Weiss's participation as a member of the Executive Committee that framed and modified agreements over the years, and Weiss's acquiescence in the firm's enforcement of those provisions against partners who had previously withdrawn from the firm. The arbitrator also relied on Weiss's participation on behalf of CB&M in litigation involving a partner's divorce proceeding as demonstrating Weiss's understanding and endorsement of the forfeiture provisions of the partnership agreement.
On CB&M's motion, the trial court confirmed the award in all respects. Only Weiss appealed, contending in part that if issues concerning the interpretation of the RPC 's are to be arbitrable, courts must provide an enhanced review of the arbitrator's determination. Weiss also claimed that the arbitrator's determination in respect of the issue of equitable estoppel was inconsistent with Jacob.
The Appellate Division concluded that the issues concerning the interpretation and enforceability of the partnership agreement were properly referred to arbitration. Because the issues of whether the forfeiture provisions were enforceable and whether Weiss was equitably estopped from challenging the provisions involved significant public-policy issues, the Appellate Division applied an enhanced level of judicial review. The court found, pursuant to Jacob, that the forfeiture provisions of the CB&M partnership agreement violate RPC 5.6. Invoking a public policy-exception to the general rule of non-interference with arbitration awards, the Appellate Division determined that, based on this Court's reference to estoppel principles in Jacob, the evidence adduced did not justify the arbitrator's Conclusion that Weiss should be equitably estopped from challenging the forfeiture provisions.
This Court granted CB&M's petition for certification.
HELD: Provisions in a law firm's partnership agreement that withhold the right to receive distribution of a partner's capital account only from a partner who withdrew from the firm for any reason other than death, permanent disability, attainment of the age of sixty-five, or appointment to the Judiciary violates RPC 5.6 and, therefore, is unenforceable.
1. Although heightened judicial scrutiny may be required for certain arbitration awards that sufficiently implicate public policy concerns, the circumstances that require more than customarily deferential review of arbitration awards remain largely undefined. This Court's prior decisions regarding agreements to arbitrate child-support payment obligations or public-sector collective bargaining arbitration agreements are not sufficiently analogous to suggest precisely the extent to which public policy concerns necessitate enhanced review. (pp. 11-16)
2. Federal cases that have addressed the circumstances under which federal courts are authorized to set aside collective-bargaining agreement arbitration awards that are inconsistent with a clear mandate of public policy are instructive. The U.S. Supreme Court has held that a court's refusal to enforce an arbitrator's interpretation of collective bargaining contracts is limited to situations where the contract as interpreted would violate some explicit public policy that is well-defined, dominant, and is to be ascertained by reference to laws and legal precedent and not from general considerations of supposed public interests. Federal courts and commentators are divided over the scope of that public-policy exception. (pp. 16-27)
3. That a dispute may require an arbitrator to address and resolve issues that affect public policy does not imply that the parties cannot avail themselves of the arbitration process. Rather, parties must proceed to arbitration and the arbitrator must consider and resolve the public-policy aspects of the dispute in a manner that vindicates the interests and goals advanced by the underlying public policy, subject to the appropriate standard of judicial review. The Court must determine the circumstances under which an arbitration award that implicates a clear mandate of public policy should be subjected to judicial intervention in order to protect the public interest. The RPC's express a clear mandate of public policy. (pp. 26-30)
4. The Court strongly prefers judicial confirmation of arbitration awards untainted by fraud, corruption or similar wrongdoing. Therefore, if the correctness of the arbitration award, including the arbitrator's resolution of the public-policy question, is reasonably debatable, judicial intervention is unwarranted. The duty of the judiciary's enhanced level of review of such awards is discharged by a careful scrutiny of the award, in the context of the underlying public policy, to assure that the interests and objectives to be served by the public policy are not frustrated by the arbitral award. If the arbitrator's resolution of the public-policy question is not reasonably debatable and plainly would violate a clear mandate of public policy, a court must intervene to prevent enforcement of the award. (pp. 31-33)
5. In this case, the arbitrator's decision incorporated his legal Conclusion that the forfeiture provisions of CB&M partnership agreement discourages a partner from leaving and becoming competitive with the firm and, therefore, is violative of RPC 5.6. That determination accurately reflects the clear mandate of public policy. Moreover, on this record, the Court is satisfied that retroactive application of the Court's decision in Jacob will not result in extreme unfairness to CB&M. (pp. 33-35)
6. The Court's observation in Jacob about equitable estoppel should be understood to refer to a unique and extraordinary exercise of control by a dominant partner in a law firm, one who initiated and demanded the inclusion of the forfeiture provision in the firm's agreement, and subsequently exerted a dominating influence in insisting that the forfeiture provision be enforced against withdrawing partners. The estoppel doctrine should not apply to the ordinary senior partner who merely participated in the partnership's decisions to adopt and enforce the provisions. In applying that standard, Weiss cannot be estopped from challenging the forfeiture provisions of the CB&M Agreement. Although be served on the firm's Executive Committee, there is no evidence demonstrating that be played a unique role in enforcing the forfeiture provisions. (pp. 35-38)
Judgment of the Appellate Division is AFFIRMED.
CHIEF JUSTICE WILENTZ and JUSTICES HANDLER, POLLOCK, GARIBALDI and COLEMAN join in JUSTICE STEIN's opinion. JUSTICE O'HERN did not participate.
The opinion of the Court was delivered by STEIN, J.
In Jacob v. Norris, McLaughlin & Marcus, 128 N.J. 10, 607 A.2d 142 (1992), we held that a law firm's "Service Termination Agreement" that withheld termination compensation only from those firm members who within one year of termination represented clients of the firm or solicited employees of the firm to engage in law practice violated Rule 5.6 of the Rules of Professional Conduct (RPC). Id. at 22. At issue in this appeal is the enforceability of a provision in a law firm's partnership agreement that withholds the right to receive distribution of a partner's capital account only from partners who withdraw from the firm for any reason other than death, permanent disability, attainment of age sixty-five, or appointment to the judiciary. Pursuant to the partnership agreement, the claims of three withdrawing partners that the agreement's effect contravened our holding in Jacob, supra, were referred to an arbitrator selected by the parties, who determined that the challenged provisions violated RPC 5.6. Relying on Jacob, 128 N.J. at 36, the arbitrator further determined that one of the withdrawing partners was equitably estopped from challenging the enforceability of the invalid provisions because of his influential role as a member of the firm's Executive Committee and his acquiescence in the firm's enforcement of those provisions against partners who previously had withdrawn from the firm.
In a reported opinion, the Appellate Division affirmed the arbitrator's decision to the extent that it held invalid under Jacob the provisions restricting capital-account distributions to certain withdrawing partners. Weiss v. Carpenter, Bennett & Morrissey, 275 N.J. Super. 393, 404, 646 A.2d 473 (1994). Invoking a public-policy exception to the general rule of noninterference with arbitration awards, see Tretina Printing, Inc. v. Fitzpatrick & Assocs., Inc., 135 N.J. 349, 358, 640 A.2d 788 (1994), the Appellate Division concluded that the arbitrator's application of estoppel principles to the claim of one of the withdrawing partners would violate RPC 5.6, and therefore vacated the judgment of the Chancery Division confirming the award. Weiss, supra, 275 N.J. Super. at 408-09. We granted the law firm's petition for certification, 142 N.J. 446 (1995). Accordingly, we must address the extent to which arbitration awards implicating the validity under RPC 5.6 of law firm agreement termination provisions are subject to enhanced judicial scrutiny because of their public-policy implications.
We base our summary of the material facts primarily on the arbitrator's factual determinations, supplemented as required by other portions of the record.
Procedurally, this appeal is the outgrowth of consolidated civil actions. Stanley Weiss (Weiss), Jerome E. Sharfman (Sharfman), and Thomas J. Lennon (Lennon), former partners of the New Jersey law firm of Carpenter, Bennett & Morrissey (CB&M), instituted the first action as a result of disagreements concerning the amounts to which they were entitled as withdrawing partners of the firm. They sued CB&M to recover their claimed shares of the firm's capital and earnings, and to recover damages for alleged breaches of fiduciary duties and other tortious conduct. On CB&M's motion, all claims, except for a defamation claim asserted by Weiss, were referred to arbitration. The parties designated the Honorable Sidney Schreiber, a former Associate Justice of this Court, to serve as arbitrator. Following hearings on the liability issues, the arbitrator issued a comprehensive opinion holding unenforceable under RPC 5.6 the provision of the CB&M partnership agreement that required Weiss, Sharfman, and Lennon to forfeit their equity interests in the firm because they had withdrawn as partners prior to age sixty-five for reasons other than death, disability, or judicial appointment. The arbitrator determined that Sharfman and Lennon should receive their equity interests in the firm, that Weiss was equitably estopped from contesting the forfeiture provision, and that each of the withdrawing partners should receive his share of CB&M's 1991 net income, but not the additional share of net income to which they would have been entitled on withdrawal at age sixty-five or for death, disability, or judicial appointment. The arbitrator issued his award after the parties stipulated the amounts to which the withdrawing partners were entitled.
CB&M then instituted a summary proceeding to confirm the award, and the withdrawing partners counterclaimed to vacate portions of the award and confirm the balance. The trial court confirmed the award in all respects, consolidating for purposes of appeal the initial action that had been stayed with the summary proceeding instituted to confirm the award.
The disagreement between CB&M and its withdrawing partners concerned provisions of the partnership agreement specifying the payments to which partners leaving the firm would be entitled. CB&M, a well-established, Newark law firm, had adopted the practice of revising its partnership agreement every three years since 1970, and upon execution, the revised agreement would take effect retroactively on the date following the termination of the prior agreement. Weiss, Sharfman, and Lennon, as well as the other partners, had signed the partnership agreement in question, which took effect January 1, 1988, and by its terms contemplated that the partnership would enter into a successor agreement during 1991. The 1988 agreement provided that the percentage interests allocated to the partners would continue in effect until December 31, 1990, and between that date and the execution of the successor agreement the compensation of all partners would be determined by a majority vote of the senior partners.
Weiss, a senior partner and a member of CB&M's Executive Committee, had joined the firm in 1959, and became a junior partner in 1963. Weiss headed one of CB&M's nine working groups; Sharfman and Lennon were junior partners and members of the working group headed by Weiss.
Weiss's withdrawal from the firm was triggered by the negotiations leading to the adoption of a partnership agreement that would replace the 1988 agreement. Weiss submitted a proposed outline of an agreement that apparently contemplated increased compensation and voting rights for Weiss and two other Executive Committee members, which the Executive Committee approved by a divided vote. The senior partners, however, rejected Weiss's proposal and adopted an alternative proposal that was substantially consistent with the 1988 agreement. Primarily because of the partners' vote on the terms of the successor agreement, Weiss decided in May 1991 to leave ...