On certification to the Superior Court, Appellate Division.
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 filed a separate opinion Concurring in part and Dissenting in part.
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).
GARRETT M. HEHER v. SMITH, STRATTON, WISE, HEHER AND BRENNAN, ET AL. (A-10/11-95)
(NOTE: This is a companion case to Weiss v. Carpenter, Bennett & Morrissey also decided today.)
Argued September 27, 1995 -- Decided March 6, 1996
STEIN, J., writing for the Court.
The issue on appeal is whether an arbitration provision in a law firm agreement is enforceable if the dispute in question implicates the clear mandate of public policy underlying Rule of Professional Conduct (RPC) 5.6.
The Smith, Stratton, Wise, Heher and Brennan (SSWH&B) partnership agreement (Agreement) provided for arbitration of any dispute arising out of the Agreement or the partnership relationship. The Agreement also provided that arbitration was to be the only form of dispute resolution and that arbitration awards were binding and unappealable. In addition, the Agreement provided that partners who withdrew from the firm and thereafter competed with the firm in any manner forfeited certain benefits available to partners who withdrew from the firm but did not compete in any way (the forfeiture provision).
Robert A. White and Todd D. Johnston became partners at SSWH&B in 1978. They withdrew from the firm in July 1987, about one year after Garrett Heher, a former partner, had left the firm. White and Johnston joined another law firm and engaged in competition with SSWH&B. In November 1987, White and Johnston demanded arbitration of certain contested issues, including their entitlement to the stated benefit under the Agreement. White and Johnston specifically raised the issue of the enforceability of the forfeiture provision. On February 13, 1992, the arbitrator issued a lengthy decision rendering awards to White and Johnston on certain issues. The arbitrator, however, found the forfeiture provision valid and would not award White and Johnston their stated benefits. The arbitrator declined to defer decision on the enforceability of the forfeiture provision until this Court decided Jacob v. Norris McLaughlin & Marcus, which was then pending. White and Johnston accepted and negotiated all checks received from SSWH&B.
The Court issued its decision in Jacob on May 28, 1992, holding invalid under RPC 5.6 a provision of a law firm partnership agreement that required departing partners to forfeit termination-related compensation if they competed with the firm. In August 1992, Heher filed a complaint in Superior Court against SSWH&B and former and current members of the firm, including White and Johnston, alleging that the forfeiture provision of the Agreement was void as a matter of public policy and, therefore, he was entitled to the stated benefit provided for in the Agreement. Heher also argued that because the forfeiture provision was void as a matter of public policy, it was not arbitrable, but was subject to the jurisdiction of the courts. Among other things, Heher sought a permanent injunction preventing SSWH&B from arbitrating the issue of his entitlement to the stated benefit under the Agreement, and sought judgment in an amount equal to the stated benefit, together with prejudgment interest, attorneys' fees and costs.
SSWH&B moved to dismiss Heher's complaint or to stay the proceedings pending an arbitration to determine his entitlement to benefits under the Agreement. Heher cross-moved for summary judgment on the issue of arbitrability of the dispute and on his claim for the stated benefit plus prejudgment interest, fees and costs. Defendants White and Johnston moved to dismiss Heher's complaint as to them. The trial court denied SSWH&B's motion to dismiss the complaint, finding the forfeiture provision void and concluding that Heher's entitlement to compensation under the Agreement was not arbitrable. The court withheld decision on Heher's cross-motion for summary judgment. SSWH&B moved for reconsideration, alleging that Heher's departure from the firm with several of the firm's major clients decreased the firm's prospective earnings and diminished the value of its good will. Referring to another provision of the Agreement, SSWH&B argued that Heher's claim to benefits was affected by this diminished good will. The firm also contended that Heher was estopped from asserting the invalidity of the forfeiture provision because he had participated in drafting the Agreement.
White and Johnston filed an answer to Heher's complaint and a cross-claim against SSWH&B for stated -- benefits under the Agreement, seeking to void the February 1992 arbitration award and seeking indemnification from SSWH&B for any potential personal monetary liability to Heher. White and Johnston simultaneously filed a motion for summary judgment on their cross-claim for stated benefits. SSWH&B filed a cross-motion to dismiss White and Johnston's cross-claim.
As to SSWH&B's motion for reconsideration, the trial court confirmed its prior ruling that the forfeiture provision was void, but ordered arbitration on all other contested issues. On Heher's cross-motion, the court found the uncontested amount of the stated benefit due Heher under the Agreement was $143,355 and referred certain issues to arbitration. The court directed the arbitrator to make specific findings of fact and state specific reasons for the determinations of Heher's entitlement to prejudgment interest, the law firm's loss of good will, and the validity of the firm's estoppel argument.
Regarding White and Johnston, the court denied their summary judgment motion against SSWH&B and granted SSWH&B's cross-motion to dismiss their cross-claim for benefits, reasoning that the cross-claim was untimely. The trial court granted White's and Johnston's cross-motion to dismiss Heher's complaint as to them, reasoning that Heher's claim for benefits did not arise until after White and Johnston had left the firm.
On appeal, the Appellate Division concluded that the trial court should have stayed all proceedings arising from Heher's complaint, including Heher's challenge to the forfeiture provision, pending arbitration of all issues, noting that the arbitrator's decision would be subject to enhanced judicial review. The court reversed the denial of SSWH&B's motion to stay litigation and ordered the arbitration to proceed. The court also reversed the trial court's dismissal of Heher's claim against White and Johnston, noting that White and Johnston, as signatories to the Agreement, had agreed to arbitrate all disputes arising out of the Agreement or relationship. On White's and Johnston's cross-appeal, the Appellate Division affirmed the trial court's dismissal of their cross-claim for benefits under the Agreement, reasoning that the cross-claim was untimely because White and Johnston failed to bring suit to vacate the February 1992 arbitration award within three months of delivery of the award. The Appellate Division also held that their cause of action was one that arose out of the partnership relationship obligating them to submit the matter to arbitration.
The Supreme Court granted both the Heher's petition for certification and White's and Johnston's cross-petition.
HELD: An arbitration provision in a law firm agreement is enforceable if the dispute in question implicates the clear mandate of public policy underlying RPC 5.6 so long as the arbitrator's decision is subjected to an enhanced level of judicial review in order to afford appropriate relief from an arbitration award that obviously violate a clear mandate of public policy.
1. In order to assure that the parties honor their contractual commitment, Heher's claim for termination benefits must proceed to arbitration despite the public policy issues implicit in his challenge to the validity of the forfeiture provision. Arbitrators are capable of resolving such disputes in a manner consistent with the public policies underlying RPC 5.6. In addition, the arbitrator's Disposition would be subjected to an enhanced level of judicial review in order to afford appropriate relief from an arbitration award that obviously would thwart a clear mandate of public policy. (pp. 13-15)
2. In Weiss v. Carpenter, Bennett & Morrissey, the Court clarified its reference in Jacob to the possible application of estoppel principles to bar a partner from challenging an otherwise invalid forfeiture provision. Moreover, as found by the Appellate Division, Heher's claim against White and Johnston must be resolved in arbitration. Furthermore, although White and Johnston's potential liability are secondary to that of the partnership, their joinder as defendants in a proceeding that seeks ...