IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE LAWRENCE COHEN and JAY ROSENBAUM,

Plaintiffs,

v. WALTER G.D. REED and EDWARDS WILDMAN PALMER LLP, a Delaware limited liability partnership,

Defendants.

C.A. No. 7172-VCL

PLAINTIFFS’ ANSWERING BRIEF IN OPPOSITION TO DEFENDANTS’ MOTION TO DISMISS AND COMPEL ARBITRATION

OF COUNSEL: John L. Talvacchia Charlotte L. Bednar ECKERT SEAMANS CHERIN & MELLOTT, LLC Two International Place, 16th Floor Boston, MA 02110 (617) 342-6800

Francis G.X. Pileggi (Bar No. 2624) Jill Agro (Bar No. 4629) ECKERT SEAMANS CHERIN & MELLOTT, LLC 300 Delaware Avenue, Suite 1210 Wilmington, DE 19801 (302) 655-3667 Attorneys for Plaintiffs Lawrence Cohen and Jay Rosenbaum

Dated: February 15, 2012

EFiled: Feb 15 2012 4:51PM EST Transaction ID 42530672 Case No. 7172-VCL

     

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Table of Contents INTRODUCTION ................................................................................................................................ 1

NATURE AND STAGE OF PROCEEDINGS ............................................................................................ 5

STATEMENT OF RELEVANT FACTS ................................................................................................... 6

STATEMENT OF ISSUES INVOLVED ................................................................................................. 11

ARGUMENT .................................................................................................................................... 12

I. This Court Must Determine the Substantive Arbitrability of Plaintiffs’ Claims.......................................................................................................... 12 II. Plaintiffs’ Claims Do Not Fall within the Narrow Confines of the Arbitration Provision in the EWP Partnership Agreement. .............................................. 14

A. The Arbitration Clause in the Partnership Agreement is Very Narrow................ 15 B. A Master Can Determine the Appropriate Equitable Relief................................. 21

III. The Court May Resolve any Non-Arbitrable Claims without Staying these Proceedings. .................................................................................. 22

CONCLUSION.................................................................................................................................. 25

     

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Table of Authorities

Cases

Actrade Fin. Techs. v. Aharoni, 2003 Del. Ch. LEXIS 114 (Del. Ch. Oct. 17, 2003) ................. 19 ASDC Holdings, LLC v. Richard J. Malouf 2008 All Smiles Grantor Retained Annuity

Trust, 2011 Del. Ch. LEXIS 129 (Del. Ch. Sept. 14, 2011) ............................................. 15 Auriga Cap. Corp. v. Gatz Props. LLC, 2012 Del. Ch. LEXIS 19 (Del. Ch. Jan. 27, 2012) ....................................................... 2, 20 Berl Co. v. White, 1997 Del. Ch. LEXIS 167 (Del. Ch. Nov. 18, 1997) ...................................... 23 Cantor Fitzgerald, L.P. v. Cantor, 2001 Del. Ch. LEXIS 70 (Del. Ch. May 11, 2001) ........ 19, 20 DiGiacobbe v. Sestak, 743 A.2d 180 (Del. 1999)......................................................................... 22 Dweck v. Nasser, 2012 Del. Ch. LEXIS 7 (Del. Ch. Jan. 18, 2012)............................................... 1 E.I. DuPont de Nemours & Co. v. Pressman, 679 A.2d 436 (Del. 1996) .................................... 18 Estate of Eller v. Bartron, 31 A.3d 895 (Del. 2011)....................................................................... 2 GTSI Corp. v. Eyak Tech., LLC, 10 A.3d 1116 (Del. Ch. 2010) ............................................. 13-14 Havens v. Attar, 1997 Del. Ch. LEXIS 12 (Del. Ch. Jan. 20, 1997) ............................................ 12 HDS Inv. Holding, Inc. v. Home Depot, Inc., 2008 Del. Ch. LEXIS 154 (Del. Ch. Oct. 17, 2008)................................................... 15, 22 Homestore, Inc. v. Tafeen, 888 A.2d 204 (Del. 2005).................................................................. 22 James & Jackson, LLC v. Willie Gary, LLC, 906 A.2d 76 (Del. 2006) ................................. 12, 13 Julian v. Julian, 2009 Del. Ch. LEXIS 164 (Del. Ch. Sept. 9, 2009)........................................... 23 Kahn v. Kolberg Kravis Roberts & Co., L.P., 23 A.3d 831 (Del. 2011) ...................................... 20 Kaplan v. First Options, 19 F.3d 1503 (3d Cir. 1994).................................................................. 18 McLaughlin v. McCann, 942 A.2d 616 (Del. Ch. 2008) .............................................................. 13 Meinhard v. Salmon, 164 N.E. 545 (N.Y. 1928) ............................................................................ 2

     

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Messina v. Lowe’s Home Ctrs., Inc., 2007 U.S. Dist. LEXIS 47006 (E.D. La. June 26, 2007).................................................. 18 Meso Scale Diagnostics, LLC v. Roche Diagnostics GmbH, 2011 Del. Ch. LEXIS 61 (Del. Ch. Apr. 8, 2011) ....................................................... 12-13 Milton Invs., LLC v. Lockwood Bros., II, LLC, 2010 Del. Ch. LEXIS 149 (Del. Ch. July 20, 2010) ......................................................... 16 Modern Dust Bag Co., Inc. v. Commercial Trust Co., 91 A.2d 469 (Del. Ch. 1952)............................................................................................. 20 NAMA Holdings, LLC v. Related World Mkt. Ctr., LLC, 922 A.2d 417 (Del. Ch. 2007)................................................................................ 12, 14-15 One Virginia Avenue Condo. Ass’n of Owners v. Reed, 2005 Del. Ch. LEXIS 115 (Del. Ch. Aug. 8, 2005).......................................................... 22 Paige Capital Mgmt., LLC v. Lerner Master Fund, LLC, 2011 Del. Ch. LEXIS 116 (Del. Ch. Aug. 8, 2011).......................................................... 21 Parfi Holding AB v. Mirror Image Internet, Inc., 817 A.2d 149 (Del. 2002) ........................ 15, 16 Pritzker v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 7 F.3d 1110 (3d Cir. 1993).......................................................................................... 17, 18 SBC Interactive, Inc. v. Corporate Media Partners, 714 A.2d 758 (Del. 1998) .......................... 12 Schnell v. Chris-Craft Industries, Inc., 285 A.2d 437, 439 (Del. 1971)......................................... 3 Steiner v. Meyerson, 1995 Del. Ch. LEXIS 95 (Del. Ch. July 19, 1995) ....................................... 9 Tague v. Hurd, 2005 U.S. Dist. LEXIS 13099 (E.D. Pa. June 30, 2005)..................................... 18 Toyo de Baja California, Inc. v. Toyo Tire & Rubber Co., 2005 Cal. App. Unpub. LEXIS 6118 (Cal. App. 4th Dist. July 15, 2005) .................. 13-14 Trippe Mfg. Co. v. Niles Audio Corp., 401 F.3d 529 (3d Cir. 2005) ............................................ 12

     

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Statutes and Court Rules

Court of Chancery Rule 12(b)(1)...................................................................................................12

Court of Chancery Rule 135 ..........................................................................................................21

Court of Chancery Rule 143 ..........................................................................................................21

California Rule of Court 977(a).....................................................................................................14

10 DEL. C. § 372 (2011).................................................................................................................21

Secondary Sources

Susan Atherton, et al., FIDUCIARY PRINCIPLES: CORPORATE RESPONSIBILITIES TO STAKEHOLDERS, 2 Journal of Religion and Business Ethics (2011)...........................................2

Geoffrey Hazard, Jr. and W. William Hodes, 1 THE LAW OF LAWYERING (3d ed.).....................................2

Donald J. Wolfe, Jr. & Michael A. Pittenger, CORPORATE AND COMMERCIAL PRACTICE IN THE DELAWARE COURT OF CHANCERY (2011).............................................................. 20, 21-22 RESTATEMENT OF THE LAW GOVERNING LAWYERS ....................................................................................2

     

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INTRODUCTION

Defendants do not deny their breach of fiduciary duties in their motion to compel

arbitration. Nor do they allege that the Plaintiffs fail to state a claim upon which relief

can be granted. Rather, their motion is a thinly-veiled effort to avoid the equitable

remedies that should flow from their faithless conduct.

The Defendants’ strategy to evade the equitable grasp of this forum cannot be

justified by a narrowly-written arbitration clause that plainly does not require all disputes

related to the parties’ agreement to be arbitrated. Rather, the applicable arbitration

provision merely covers disputes “ . . . concerning the amount to be paid to such [former]

Partner.” Defendants’ Opening Memorandum of Law (“DOML”) at 4 (citing §16.2 of the

Edwards Wildman Amended and Restated Partnership Agreement (“Partnership

Agreement”)). By comparison, the capacious range of equitable remedies that the Court

of Chancery has the authority to grant for the breach of fiduciary duty in this case, far

exceeds the myopic scope of the tightly circumscribed arbitration provision involved in

this case.

The fundamental nature of a fiduciary’s duty of loyalty was recently explained by

Your Honor in Dweck v. Nasser,1 and this Court has frequently employed careful scrutiny

to claims involving breaches of the duty of loyalty. This Court also recently emphasized

the far-ranging scope of remedial measures available to a court of equity to redress

breaches of fiduciary duties, unconstrained by the more precise calculations that might be

appropriate for the computation of damages in a conventional breach of contract claim, in

                                                        1 2012 Del. Ch. LEXIS 7, at * 34 (Del. Ch. Jan. 18, 2012). 

     

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the Auriga Capital case.2 This Court’s expansive authority to customize a remedy for

breach of the duty of loyalty is especially applicable to this case, to support the reasoning

that militates against confining the remedies available for the claims of Cohen and

Rosenbaum to the mere “amounts owed” pursuant to the terms of the parties’ agreement.

Not only did Defendant Reed, the managing partner of Plaintiff Cohen’s former

law firm, have an affair with Cohen’s wife, but Reed also abused his power as a fiduciary

in a controlling position, to advance his personal romantic interests, instead of advancing

the interests of the firm, and by treating Cohen unfairly, in terms of Cohen’s role in the

law firm.3

                                                        2 Auriga Cap. Corp. v. Gatz Props., 2012 Del. Ch. LEXIS 19, at * 112–13 (Del. Ch. Jan. 27, 2012).  3 Reed’s actions disturb the foundation of the duty of loyalty, which is embodied in the classic prose of Judge Cardozo in Meinhard v. Salmon:

[C]opartners, owe to one another, while the enterprise continues, the duty of the finest loyalty. Many forms of conduct permissible in a workaday world for those acting at arm’s length, are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior.

164 N.E. 545, 546 (N.Y. 1928) (cited approvingly by the Delaware Supreme Court in Estate of Eller v. Bartron, 31 A.3d 895, 898 (Del. 2011)). See generally Geoffrey Hazard, Jr. and W. William Hodes, 1 THE LAW OF LAWYERING, § 4.12 (3d ed.) (citing RESTATEMENT OF THE LAW GOVERNING LAWYERS, § 56, Comment b) (stating that it is axiomatic that lawyers are subject to exacting duties of a fiduciary nature); RESTATEMENT OF THE LAW GOVERNING LAWYERS, §2, Comment d (referring to requirement of good moral character for admission to bar in most states); Susan Atherton, et al., FIDUCIARY PRINCIPLES: CORPORATE RESPONSIBILITIES TO STAKEHOLDERS, 2 Journal of Religion and Business Ethics, 8, 10 (2011) (Fiduciary law, which has a religious origin that can be traced to both the Old and New Testaments, is traceable to developments in ancient Roman law and early English law which defined fiduciary relationships as both moral and legal relationships of trust.). 

     

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To their credit, Defendants do not attempt to justify their contemptible violations

of their fiduciary duty and common decency. Rather, they attempt to deflect attention

from the scandalous facts and unwinnable merits of the case by engaging in a procedural

turf war designed to limit the remedies available for their wrongdoing to the narrow

damages provided by the narrow scope of a narrow arbitration clause that was not written

to cover all disputes—and certainly not intended to cover the broad forms of relief

available in a court of equity for the egregious breaches of fiduciary duty that are

uncontested in this case.

Plaintiffs properly asserted their claims for breach of fiduciary duty and

constructive termination against Defendants Walter G.D. Reed and Edwards Wildman

Palmer LLP (“EWP”) in this Court. Defendants’ exegesis of the Federal Arbitration Act

is not necessary, and does not shed light on the applicability of the narrow arbitration

provision in EWP’s Partnership Agreement, which applies only to disputes between the

firm and a former partner “concerning the amount to be paid to such Partner . . . as

provided in [the Partnership Agreement] . . . .”

Plaintiffs have not asserted claims for breach of contract, and they are not seeking

relief that is only available to them pursuant to a strict reading of the terms of the

Partnership Agreement.4 Rather, Plaintiffs have invoked the equitable powers of this

Court to find that Defendants are liable for their extraordinary breaches of fiduciary duty;

                                                        4 Defendants will argue that they have strictly complied with the terms of the Partnership Agreement. However, “[t]he answer to that contention, of course, is that inequitable action does not become permissible simply because it is legally possible.” Schnell v. Chris-Craft Industries, Inc., 285 A.2d 437, 439 (Del. 1971) (admonishing directors who tried to changed the date of an annual shareholder meeting to perpetuate their time in office, even though the statute may have allowed it). 

     

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and therefore, Plaintiffs seek equitable relief—not based on any contractual entitlement—

but based on an equitable analysis of Plaintiffs’ losses caused by Defendants’ breaches.

The Partnership Agreement does not make any provision for EWP to share its

profits with “withdrawn” or “terminated” partners. Plaintiffs do not claim contractual

entitlement to a share of those profits. Rather, Cohen and Rosenbaum seek equitable

relief to obtain the money they would be entitled to if Reed and EWP acted in accordance

with their fiduciary duties and did not force them out before they were entitled to a share

of the profits. That is, Cohen and Rosenbaum seek the equitable relief of a share of

profits that Plaintiffs would have received but for a breach of fiduciary duty.

     

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NATURE AND STAGE OF PROCEEDINGS

On January 13, 2012, Plaintiffs Lawrence Cohen and Jay Rosenbaum filed their

Complaint against Defendants Walter G.D. Reed and Edwards Wildman Palmer LLP

(“EWP,” and collectively with Reed, “Defendants”), alleging three causes of action as

follows:

• Count I: Breach of fiduciary duty against Reed;

• Count II: Breach of fiduciary duty against EWP; and

• Count III: Constructive discharge against EWP.

Plaintiffs are seeking: (i) an equitable determination of the monies they would

have received if they had not been constructively discharged from EWP; (ii) acceleration

of the reimbursement of their capital balances; and, alternatively, the appointment of a

Special Master to determine the monetary relief due to Plaintiffs.

Defendants filed a Motion to Dismiss and Compel Arbitration on January 26,

2012, arguing that Plaintiffs’ claims should be dismissed for lack of subject matter

jurisdiction based upon the arbitration provision contained in Section 16.2 of the EWP

Partnership Agreement.

On February 2, 2012, the parties stipulated to and the Court entered (i) an Order

governing the preservation of electronically stored information; (ii) an Order governing

the briefing schedule for Defendants’ Motion to Dismiss and Compel Arbitration; and

(iii) an Order staying discovery pending the outcome of Defendants’ Motion to Dismiss

and Compel Arbitration.

This is Plaintiffs’ Answering Brief in Opposition to Defendants’ Motion to

Dismiss and Compel Arbitration.

     

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STATEMENT OF RELEVANT FACTS

Lawrence Cohen and Jay Rosenbaum are successful lawyers who have a track

record of collaborating on their substantial practices. (Compl. ¶ 7–10, 13.) Cohen and

Rosenbaum provide legal services to their clients in the areas of trust management, estate

planning, and estate administration. (Id. at ¶¶ 9–10.) Cohen and Rosenbaum have worked

together with many of the same clients since approximately 1996, and their practice and

client bases are inextricably related. (Id. at ¶ 13.) Through a series of law firm mergers,

the law firm at which Cohen and Rosenbaum had been practicing became known as

Edwards Wildman Palmer LLP (“EWP”) beginning on October 1, 2011. (Id. at ¶¶ 7–10.)

Cohen’s wife, Laurie Hall, is also a partner at EWP, also practicing in the area of

trust management, estate planning, and estate administration. (Id. at ¶ 14.) Beginning in

2009, Defendant Reed, the then-managing partner of EWP, began an adulterous affair

with Laurie Hall. (Id. at ¶ 17.) From that point, Reed intentionally excluded Cohen from

important firm functions including partner retreats, committee membership, and

appointment to leadership posts in the firm’s departments and practice groups. (Id. at ¶

16.) At the same time, Reed used his authority to advance the career of his paramour—

Cohen’s wife—through the ranks at EWP. (Id. at ¶ 18.)

For instance, Reed appointed Laurie Hall to the firm’s executive Operating

Committee; invited her to important firm functions; and increased her compensation by

an amount inconsistent with her billings and client originations. (Id. at ¶¶ 19–21, 36.)

Reed acted to advance his personal, romantic relationship with Laurie Hall without any

     

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concern about fulfilling his fiduciary obligations of loyalty and care to his other partners

or EWP. (Id. at 36.)

Then, in October 2011, EWP—through the firm’s in-house counsel—instructed

Cohen to divide arbitrarily a significant portion of the origination credit for his clients

with his soon-to-be-ex-wife. (Id. at ¶ 40.) This would divest Cohen of a substantial part

of his compensation derived from originating those clients. (Id. at ¶ 47.) The instruction

to transfer origination to his wife came from Jeffery Swope, EWP’s in-house general

counsel. (Id. at ¶ 39.) While Swope did not explicitly state “split your clients or we’ll

split them for you,” that was the bottom-line of the message he delivered. (Id. at ¶ 42.) If

Cohen had capitulated and split his client origination with Laurie Hall, Cohen’s billings

from his clients would have decreased, Laurie Hall’s billings would have increased, and

their compensation would have changed commensurately for the 2011 billing year. (Id.)

While this split would have benefitted Laurie Hall, it would not have benefitted EWP in

any way.

Threatened with the ultimatum to either (i) accept reduced compensation

arbitrarily imposed and endure continued humiliation, or (ii) leave EWP and retain the

clientele he had worked years to acquire, Cohen chose the only viable alternative—he

found a new job. (Id. at ¶¶ 43, 49.) Cohen and Rosenbaum resigned from EWP on or

about November 7, 2011. (Id. at ¶ 56.) If Cohen had not left EWP in November, EWP

would have forced Cohen arbitrarily to give Laurie Hall origination credit for a

substantial portion of his clientele, which would have arbitrarily reduced Cohen’s client

billings and commensurate income for 2011. (Id. at ¶ 42.) No matter which choice Cohen

     

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made—either taking an arbitrary, major hit to his compensation, or leaving EWP before

annual distributable net profits were calculated and distributed—Cohen would not get his

appropriate and customary share of the firm’s distributable profits for 2011, because

“withdrawn” partners are not entitled to any profits. (See Partnership Agreement, § 14.1.)

Due to the consequences of being compelled to resign from EWP before the

calculation and distribution of profits to the partners for 2011, Cohen and Rosenbaum

requested that EWP (i) include Cohen and Rosenbaum in EWP’s 2011 distribution of net

profits through October 2011, and (ii) accelerate the payment of their capital account

balances. (Id. at 60.) EWP refused. (Id.) It was not enough that Reed took Cohen’s wife

and any opportunity Cohen had for fair compensation and growth at EWP; Reed also

wanted Cohen’s profits – so he took them too. EWP was complicit in Reed’s actions. Not

surprisingly, this suit followed.

Defendants responded by filing a Motion to Dismiss and Compel Arbitration

based on the arbitration provision contained in Section 16.2 of EWP’s Partnership

Agreement, which states:

In the event that any dispute shall arise between the Firm and any Partner whose membership in the Firm shall have been terminated, or between the Firm and any Beneficiary or the estate of a deceased Partner, concerning the amount to be paid to such Partner, Beneficiary, or estate as provided in this Agreement, the Managing Partner and such Partner, Beneficiary or estate shall join in the selection of one arbitrator to whom the matter in dispute shall be referred, to be heard in Boston, Massachusetts, in accordance with the Commercial Arbitration Rules of the American Arbitration Association. The award of such arbitrator shall be final and conclusive, and judgment may be entered thereon in any court of competent jurisdiction. To the extent the dispute involves legal issues, the then

     

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existing law of the State of Delaware without regard to conflict of law provisions shall control in the arbitration.

(Partnership Agreement § 16.2) (emphasis added).

The arbitration provision, however, does not apply to the relief sought in the

Complaint. Plaintiffs, as “withdrawn partners,” as that term is defined in Section 14.1 of

the Partnership Agreement, are entitled to keep the draw received through the date of

withdrawal, but there is no entitlement to a share of the profits. Further, withdrawn

partners are entitled to receive their respective “Contributed Capital,” “which shall be

paid in three equal annual installments beginning on the first anniversary of the date of

such withdrawal . . . .” (Partnership Agreement, §§ 14.1, 14.2.)

The “amount to be paid” to Cohen and Rosenbaum for their Contributed Capital,

according to the terms of the Partnership Agreement, is not in dispute. Whether Reed

breached his fiduciary duty to Cohen and Rosenbaum in denying acceleration of those

payments, is an issue that exceeds the scope of the arbitration provision in the Partnership

Agreement because Cohen and Rosenbaum are not entitled to that relief: “as provided in

[the] Agreement.” The Partnership Agreement gives the managing partner and the

operating committee the sole discretion “to accelerate such payments.” (Partnership

Agreement, § 14.2.) Cohen and Rosenbaum seek amounts that are not provided for in the

Partnership Agreement, but that they would have received as a share of profits if Reed

and EWP had not breached their fiduciary duties. This is the very essence of a claim in

equity—the assertion that a corporate officer “has misused power over corporate property

or processes in order to benefit himself rather than advance corporate purposes.” Steiner

v. Meyerson, 1995 Del. Ch. LEXIS 95, at * 2 (Del. Ch. July 19, 1995) (Allen, C.). The

     

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essence of this case is not a breach of contract claim that the parties agreed to have

determined by an arbitrator whose only responsibility is crunching numbers.

     

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STATEMENT OF ISSUES INVOLVED

I. Whether the Court may determine the substantive arbitrability of

Plaintiffs’ claims.

II. Whether Plaintiffs’ equitable claims are outside of the scope of the narrow

arbitration provision of the Partnership Agreement.

III. Whether the Court may determine Plaintiffs’ non-arbitrable claims prior to

referring any potential arbitrable claims to arbitration.

     

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ARGUMENT

A motion to dismiss based on an arbitration clause is properly reviewed under

Court of Chancery Rule 12(b)(1). NAMA Holdings, LLC v. Related World Mkt. Ctr., LLC,

922 A.2d 417, 429 n.15 (Del. Ch. 2007). A dispute is not arbitrable if, on its face, it falls

outside of the specific confines of the arbitration clause. Id. at 429 (citing SBC

Interactive, Inc. v. Corporate Media Partners, 714 A.2d 758, 761 (Del. 1998)).

The Court must analyze each individual claim, rather than the Complaint as a

whole, to determine whether each claim is arbitrable under the relevant arbitration

clause.5 See generally Havens v. Attar, 1997 Del. Ch. LEXIS 12 (Del. Ch. Jan. 20, 1997)

(analyzing each of nine claims individually to determine arbitrability); Trippe Mfg. Co. v.

Niles Audio Corp., 401 F.3d 529, 532 (3d Cir. 2005) (same).

I. This Court Must Determine the Substantive Arbitrability of Plaintiffs’ Claims.

Delaware courts are charged with deciding questions of substantive arbitrability

except “when there is ‘clear and unmistakable evidence’ that the parties intended

otherwise.” Willie Gary, 906 A.2d at 78 (exception “applies in those cases where the

arbitration clause generally provides for arbitration of all disputes and also incorporates a

set of arbitration rules that empower arbitrators to decide arbitrability”) (emphasis

                                                        5 The Partnership Agreement does not specifically reference the Delaware Uniform Arbitration Act, and Plaintiffs do not dispute the application of the Federal Arbitration Act. See 10 DEL. C. § 5702(c). However, “Delaware arbitration law mirrors federal law.” James & Jackson, LLC v. Willie Gary, LLC, 906 A.2d 76, 79 (Del. 2006).  

     

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added).6 “This evidentiary standard is satisfied if an arbitration clause (1) generally refers

all disputes to arbitration and (2) references a set of arbitral rules, such as the American

Arbitration Association (“AAA”) rules that empowers arbitrators to decide arbitrability.”

Meso Scale Diagnostics, 2011 Del. Ch. LEXIS 61, at * 68–69 (emphasis added). Where

the arbitration clause at issue “does not generally refer all controversies to arbitration . . .

something other than the incorporation of the AAA rules would be needed to establish

that the parties intended to submit arbitrability questions to an arbitrator.” Willie Gary,

LLC, 906 A.2d at 81 (emphasis added).

Delaware courts will also determine substantive arbitrability—for reasons of

efficiency—“if the assertion that the underlying dispute would be arbitrable is ‘wholly

groundless.’” GTSI Corp. v. Eyak Tech., LLC, 10 A.3d 1116, 1120–21 (Del. Ch. 2010)

(citing McLaughlin v. McCann, 942 A.2d 616, 626 (Del. Ch. 2008)). “Satisfying this

narrow exception requires ‘a clear showing that the party desiring arbitration has

essentially no non-frivolous argument about substantive arbitrability to make before the

arbitrator.’” Id. Where an arbitration clause on its face “clearly does not require

arbitration of Plaintiff’s causes of action, Defendant’s claim that the arbitrability of those

causes of action under the [] Agreement’s arbitration clause must be decided by an

arbitrator, and not the court, is wholly groundless.” Toyo de Baja California, Inc. v. Toyo

                                                        6 Issues of substantive arbitrability concern the applicability of an arbitration provision to a given dispute, and require the Court to analyze the validity and scope of the particular arbitration clause. Meso Scale Diagnostics, LLC v. Roche Diagnostics GmbH, 2011 Del. Ch. LEXIS 61, at * 62–63 (Del. Ch. Apr. 8, 2011). Issues of procedural arbitrability, by comparison, concern whether the parties to an agreement containing an arbitration provision have complied with the procedural prerequisites of that provision, such as time limits, notice requirements, and other conditions. Id. 

     

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Tire & Rubber Co., 2005 Cal. App. Unpub. LEXIS 6118, at * 24–25 (Cal. App. 4th Dist.

July 15, 2005) (holding court had the authority to determine the issue of substantive

arbitrability) (California Rule of Court 977(a) prohibits parties from citing or relying on

opinions not certified for publication).

The arbitration clause in the EWP Partnership Agreement does not “generally

refer all controversies to arbitration.” Rather, the clause is only applicable to claims

concerning the amount to be paid to former partners as provided in the Partnership

Agreement. The clause does not contain any broad language that would indicate the

parties’ intent to submit any claim that touches upon the Partnership Agreement to

arbitration, nor does it unequivocally establish that the parties intended to submit the

issue of substantive arbitrability to arbitration.

Further, using this Court’s phrase in GTSI Corp., Defendants have “not made any

non-frivolous argument”7 that the claims asserted in the Complaint are arbitrable, and this

Court need not sit idly by and defer to an arbitrator if the claims are not covered by the

arbitration clause. In sum, there is no sound reading of the arbitration provision in the

EWP Partnership Agreement that would require the parties to submit Plaintiffs’ request

for equitable relief for breach of fiduciary duty claims to arbitration.

II. Plaintiffs’ Claims Do Not Fall within the Narrow Confines of the Arbitration Provision in the EWP Partnership Agreement.

Delaware courts engage in a two-pronged analysis to determine if a particular

claim is subject to arbitration:

                                                        7 For the sake of clarity, we wish to emphasize that throughout this brief we are tracking the “double negative” language in the cited cases and in no way intend to implicate Rule 11 or similar rules that this language may imply. 

     

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First, the court must determine whether the arbitration clause is broad or narrow in scope. Second, the court must apply the relevant scope of the provision to the asserted legal claim to determine whether the claim falls within the scope of the contractual provisions that require arbitration. If the court is evaluating a narrow arbitration clause, it will ask if the cause of action pursued in court directly relates to the right in the contract. If the arbitration clause is broad in scope, the court will defer to arbitration on any issues that touch on contract rights or contract performance.

NAMA Holdings, 922 A.2d at 430 (emphasis added) (quoting Parfi Holding AB v. Mirror

Image Internet, Inc., 817 A.2d 149, 155 (Del. 2002)). While arbitration clauses are

generally interpreted broadly, a presumption in favor of arbitration “will not trump basic

principles of contract interpretation.” Id.

A. The Arbitration Clause in the Partnership Agreement is Very Narrow.

Delaware courts have stated that arbitration provisions containing expansive

phases such as “involving or relating to” or “arising out of” an agreement, are broad and

may require issues not expressly identified in an arbitration clause to be arbitrated. See

ASDC Holdings, LLC v. Richard J. Malouf 2008 All Smiles Grantor Retained Annuity

Trust, 2011 Del. Ch. LEXIS 129, at * 17 (Del. Ch. Sept. 14, 2011) (describing broad

arbitration provisions). Broad arbitration clauses require the parties to arbitrate any issue

that touches on contractually delineated rights or contractual performance. Id.

In contrast, narrow arbitration clauses limit arbitrable issues to those specifically

included in the arbitration clause, and only require the parties to arbitrate disputes that the

parties specifically intended to be decided by arbitration. HDS Inv. Holding, Inc. v. Home

Depot, Inc., 2008 Del. Ch. LEXIS 154, at * 17 (Del. Ch. Oct. 17, 2008). Narrow

     

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arbitration provisions cannot be construed to require a party to arbitrate an issue it did not

agree to arbitrate. Id.

Even broad language, however, does not render an arbitration clause all-inclusive.

Parfi, 817 A.2d at 156. In Parfi, the Delaware Supreme Court held that an arbitration

clause requiring the parties to submit to arbitration “any dispute, controversy, or claim

arising out of or in connection with th[e] Agreement, or the breach, termination, or

invalidity thereof,” did not require the parties to arbitrate “every possible breach of duty

that could occur between the parties.” Id. (holding that the parties were not required to

arbitrate breach of fiduciary duty claims).

In Parfi, the parties were not required to arbitrate breach of fiduciary claims that

were “independently and separately assertable” and, thus, would not arise “‘in connection

with’ the Agreement.” Id. at 157; see also Milton Invs., LLC v. Lockwood Bros., II, LLC,

2010 Del. Ch. LEXIS 149, at * 34 n.69 (Del. Ch. July 20, 2010) (defining as “narrow” an

arbitration clause referring to arbitration “[a]ll disputes among or between the Members

involving or relating to [four categories]”).

The arbitration clause in the EWP Partnership Agreement is restricted merely to

claims: (i) between the Firm and a withdrawn partner (ii) concerning the amount to be

paid to such partner “as provided in this Agreement.” This clause is far less broad than

the clause in Parfi that was held to exclude claims for breach of fiduciary duty.

Accordingly, based upon an obvious application of Parfi, Plaintiffs’ claims are properly

within the subject matter jurisdiction of this Court, and need not be submitted to

arbitration.

     

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Defendants argue that Reed was “acting in his capacity as Managing Partner”

with respect to the allegations in the Complaint, and, therefore, may invoke the

arbitration clause as an agent of EWP even though the restricted scope of the arbitration

clause does not apply to claims involving an existing partner. Defendants’ argument that

an agent of EWP is covered even though not so stated in the arbitration clause is

inapplicable.8 There are three reasons that Reed’s actions should be separately viewed

from those of EWP for purposes of the scope of arbitration clause analysis.

First, Reed was not acting as an agent of EWP when he engaged in a salacious

affair with Cohen’s wife. The firm was not acting to advance a personal romantic

relationship with Cohen’s wife, and EWP did not have a reason to request that Cohen

split his clients with Laurie Hall. Reed’s actions were solely for his own personal benefit,

and EWP was complicit in Reed’s scheme. EWP cannot drag Reed and Plaintiffs into

arbitration where the firm was merely a vehicle for Reed to victimize Plaintiffs.

Second, the breach of fiduciary duty claim asserted against Reed individually

does not implicate “the amount to be paid to [Cohen and Rosenbaum] as provided in this

Agreement,” and is therefore not subject to arbitration under the arbitration clause of the

Partnership Agreement. Had Plaintiffs remained at EWP through the date when 2011

profits were determined and distributed, and if Reed, through Swope, did not try to take

away, arbitrarily, Cohen’s client origination credits, presumably EWP would have fairly

                                                        8 See DOML at 15 n.3 (citing Pritzker v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 7 F.3d 1110, 1121 (3d Cir. 1993)). The “status” of Defendants’ “agency” argument is evidenced by its relegation in Defendants’ memorandum to a footnote only, and the absence of any supporting Delaware case law.  

     

18

compensated Cohen and Rosenbaum for the approximately $5 million of business they

brought to the firm in 2011.9 (Compl. ¶ 45.) Reed’s attempted arbitrary division of

Cohen’s clients with Laurie Hall, via its general counsel, Swope, would have inequitably

skewed the calculation of Cohen’s share of profits.

Lastly, in Pritzker, the federal case that Reed and EWP cite in a footnote, the

plaintiffs in that case (non-signatories to an agreement) were seeking to compel the

defendants (agents of the signatories) to arbitrate. See Tague v. Hurd, 2005 U.S. Dist.

LEXIS 13099, at * 6–7 (E.D. Pa. June 30, 2005) (distinguishing situations in which

Pritzker is applicable). By contrast, in our case the opposite is true: Defendants are trying

to compel Plaintiffs to arbitrate. Apart from the agency issue, there is no argument that

Reed, as an existing partner, is covered by the arbitration clause. Accordingly, Kaplan v.

First Options, is more on point. 19 F.3d 1503, 1518 (3d Cir. 1994).

In Kaplan, the court held that:

Where, as here, the arbitration involves an obligation the officer has undertaken separately and independently of his acts as an agent of the member that employs him, we believe some evidence of an associated person’s consent to arbitrate beyond his or her employment as an agent or executive of a member must appear.

Id.                                                         9 Plaintiffs further believe that Reed forced Cohen and Rosenbaum to resign prior to the end of the fiscal year so that EWP would not have to pay Cohen and Rosenbaum their share of the firm’s profits. Termination for the purpose of denying an employee his benefits before those benefits vest is a violation of public policy and a breach of the employer’s duty of good faith and fair dealing. See generally E.I. DuPont de Nemours & Co. v. Pressman, 679 A.2d 436, 441 (Del. 1996) (identifying public policy exceptions to the at-will employment doctrine); Messina v. Lowe’s Home Ctrs., Inc., 2007 U.S. Dist. LEXIS 47006 (E.D. La. June 26, 2007) (holding that it is against public policy “to impose a requirement of continued employment through the bonus period without a remedy for termination that is not based on employee misconduct”).  

     

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Plaintiffs have not claimed that they are entitled to their share of profits “as

provided by [the] Agreement.” As “withdrawn partners,” they are only entitled to the

draw received through the date of withdrawal, and are not contractually entitled to a share

of profits “as provided by [the] Agreement.” In their Complaint, they acknowledged that

the Partnership Agreement does not entitle them to a share of EWP’s 2011 profits.

(Compl. ¶ 44.) Rather, Plaintiffs request relief commensurate with the amounts they

would have received if they had not been constructively discharged from EWP, and other

equitable relief for the damages caused by Reed’s breach of fiduciary duty.10 (Id. at 18,

¶ A.)

The “profits” portion of Plaintiffs’ requested relief by no means fully quantifies

the harm caused by Defendants, which is why Plaintiffs further requested that the Court

exercise its broad discretion to tailor an equitable remedy “to suit the situation as it

exists.” Cantor Fitzgerald, L.P. v. Cantor, 2001 Del. Ch. LEXIS 70, at * 9 (Del. Ch. May

11, 2001) (holding “where there has been a breach of the duty of loyalty, as here,

‘potentially harsher rules come into play’ and ‘the scope of recovery for a breach of the

duty of loyalty is not to be determined narrowly . . . . The strict imposition of penalties

under Delaware law are designed to discourage disloyalty.’”).

                                                        10 “This court has subject matter jurisdiction over claims that are equitable in nature even if monetary damages are sought in relief,” and breach of fiduciary duty claims are well-established equitable claims within the express jurisdiction of this Court. Actrade Fin. Techs. v. Aharoni, 2003 Del. Ch. LEXIS 114, at * 18 (Del. Ch. Oct. 17, 2003).  

     

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Last month, this Court reiterated that it liberally calculates damages resulting

from a breach of the fiduciary duty of loyalty. Auriga Cap. Corp. v. Gatz Props., 2012

Del. Ch. LEXIS 19, at * 118 n.167 (Del. Ch. Jan. 27, 2012).11

The situation presented in the Complaint is not ordinary, and there is no case law

or precise formula on which to base a calculation of damages. “[W]here the

circumstances of a case are such as to require the application of equitable principles, the

fact that no precedent can be found in which relief may be granted under a similar state of

facts is no reason for refusing relief.” Modern Dust Bag Co., Inc. v. Commercial Trust

Co., 91 A.2d 469, 469 (Del. Ch. 1952). Indeed, “[e]xtraordinary facts will sometimes call

for extraordinary remedies.” Cantor Fitzgerald, 2001 Del. Ch. LEXIS 70, at * 13 n.18.

Plaintiffs seek equitable relief—not contractual damages—in their Complaint.

Because the arbitration provision of the Partnership Agreement does not extend beyond a

measure of money due under the Partnership Agreement, an arbitrator would not have the

subject matter jurisdiction to resolve Plaintiffs’ claims.12 Further, Reed’s discretionary

decision not to accelerate the payment of Cohen’s and Rosenbaum’s capital accounts is

also a fiduciary breach that would fall outside of an arbitrator’s jurisdiction. The

Partnership Agreement states: “The Managing Partner and the Operating Committee shall

be authorized to accelerate such [Contributed Capital] payments in their sole discretion.”

                                                        11 In order to compensate for the “common law’s inability to provide full, fair, and just relief in all instances,” equity has evolved to “employ judicial principles and tools creatively so as to effect justice in any given circumstance. See Donald J. Wolfe, Jr. & Michael A. Pittenger, CORPORATE AND COMMERCIAL PRACTICE IN THE DELAWARE COURT OF CHANCERY, § 12.01[a], at 12-2 (2011).  12 See Kahn v. Kolberg Kravis Roberts & Co., L.P., 23 A.3d 831, 840 (Del. 2011) (holding that actual harm is not necessary to establish a breach of fiduciary duty claim). 

     

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(Partnership Agreement, § 14.2.) Even though the Partnership Agreement provides Reed

with the authority to accelerate the payment of capital balances, Reed was still required to

abide by his duty of loyalty and exercise good faith in exercising his discretion. See Paige

Capital Mgmt., LLC v. Lerner Master Fund, LLC, 2011 Del. Ch. LEXIS 116, at * 114

(Del. Ch. Aug. 8, 2011) (involving a breach of fiduciary duty in the exercise of a

contractual provision allowing discretion).

Accordingly, the Court should not view Plaintiffs’ prayers for relief as requesting

merely contractual damages. Nor should the Court forego the exercise of its discretion to

broadly craft remedies for breaches of fiduciary duties.

B. A Master Can Determine the Appropriate Equitable Relief.

Plaintiffs’ Complaint seeks an alternative remedy that includes the appointment of

a Master to determine the relief due to Plaintiffs as a result of Reed’s breaches of the duty

of loyalty. Just weeks after Plaintiffs filed their Complaint, EWP replaced Reed as a

managing partner. However, EWP, and its new managing triumvirate,13 continue to ratify

Reed’s breaches—specifically by failing to repudiate Reed’s actions in EWP’s response

to the Complaint (which EWP filed jointly with Reed).

The Court can appoint a Special Master to handle any matter pending before the

Court of Chancery, unless specifically prohibited by a rule or statute. See Ct. Ch. R. 135,

143; 10 DEL. C. § 372 (2011). See also Donald J. Wolfe, Jr. & Michael A. Pittenger,

                                                        13 EWP has employed a new leadership team, as of February 2, 2012, including: Robert Shuftan, EWP’s new managing partner; Laurence Harris, the deputy managing partner; and Alan Levin, the managing chairman. See Press Release, Edwards Wildman Palmer LLP, Edwards Wildman Announces New Firm Leadership (Jan. 31, 2012) (available at http://www.edwardswildman.com/newsstand/detail.aspx?news=2762) (last visited Feb. 15, 2012).  

     

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CORPORATE AND COMMERCIAL PRACTICE IN THE DELAWARE COURT OF CHANCERY, § 12.06[c],

at 12-86 (appointing Master to conduct accounting); § 1.07, at 1–19 (describing Court’s power to

appoint a Special Master). Upon the Court’s appointment, a Master can appropriately

determine the appropriate amount of fees, expenses, and damages to be awarded. See

DiGiacobbe v. Sestak, 743 A.2d 180, 182 (Del. 1999) (holding that a Special Master can

hear and evaluate all claims in a case unless otherwise prohibited by rule or statute). See

also Homestore, Inc. v. Tafeen, 888 A.2d 204, 209 (Del. 2005) (appointing Special

Master to determine fees and expenses to be awarded); One Virginia Avenue Condo.

Ass’n of Owners v. Reed, 2005 Del. Ch. LEXIS 115, at * 48 (Del. Ch. Aug. 8, 2005)

(stating that the Court of Chancery, or the Court of Chancery Master, or a private special

master agreed to by the parties may conduct an accounting).

The Court may properly appoint a Master to determine the remedies available to

Plaintiffs, and given EWP’s continued ratification of Reed’s breaches of fiduciary duties,

the appointment of a Master is appropriate to objectively assess the amounts to which

Cohen and Rosenbaum would have received from EWP but for the breaches of fiduciary

duty.

III. The Court May Resolve any Non-Arbitrable Claims without Staying these Proceedings.

If the Court determines that any of Plaintiffs’ claims are subject to arbitration, the

Court may still, in its discretion, hear and determine the non-arbitrable claims before

submitting the remaining issues to arbitration. Home Depot, 2008 Del. Ch. LEXIS 154, at

     

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* 18 (holding that the Court has the power to hear the non-arbitrable claims before

submitting the remaining claims to arbitration).14

Further, in certain circumstances where the Court has jurisdiction over the

equitable claims asserted in the case, and a separate arbitration proceeding for an

arbitrable claim would frustrate the intended purposes of arbitration (i.e., expediency and

efficiency), the Court may resolve the arbitrable claim. See Berl Co. v. White, 1997 Del.

Ch. LEXIS 167, at * 6 (Del. Ch. Nov. 18, 1997) (“Ordinarily, the benefit of arbitration

clauses lies in the economy and efficiency of speedier resolution of disputes. Ironically,

compelling arbitration here would frustrate a process that is well under way and capable

of providing the parties full and complete relief.”).

The Court will only stay claims pending the resolution of arbitration where the

defendants have shown good cause as to why the claims should be stayed. Julian v.

Julian, 2009 Del. Ch. LEXIS 164, at * 30–31 (Del. Ch. Sept. 9, 2009). In making that

determination, the Court will consider the preclusive effects of a separate arbitration of

the issues before the Court and vice versa, as well as the potential burden imposed by

litigating actions in different fora. Id. In addition, the Court should consider whether an

arbitrator’s decision on the amounts due to Plaintiffs might preclude Plaintiffs from

subsequently asserting claims for breaches of fiduciary duty against the Defendants in

this Court—which may be challenged under the doctrines of res judicata and collateral

estoppel. Indeed, the Partnership Agreement states that the arbitrator’s award “shall be

                                                        14 Should the Court determine that the parties are required to arbitrate any of Plaintiffs’ claims, Plaintiffs reserve the opportunity to submit a more complete response to any future motion to stay these proceedings pending arbitration. No motion to stay is pending. 

     

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final and conclusive, and judgment may be entered thereon in any court of competent

jurisdiction.” (Partnership Agreement, § 16.2.)

Defendants have not requested that the Court stay any non-arbitrable claims if the

Court finds that only some of Plaintiffs’ claims are arbitrable. Their wholesale grouping

of Plaintiffs’ claims and failure to evaluate each claim individually does not support a

decision to stay.

If the Court finds some claims to be arbitrable, Plaintiffs request that the Court

decide the non-arbitrable claims without staying these proceedings.15

                                                        15 Defendants have not initiated any arbitration proceedings related to Plaintiffs’ claims in this case. 

     

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CONCLUSION

For the foregoing reasons, Plaintiffs respectfully request that the Court deny

Defendants’ Motion to Dismiss and Compel Arbitration, and proceed to adjudicate the

claims asserted in Plaintiffs’ Complaint.

By: OF COUNSEL: John L. Talvacchia Charlotte L. Bednar ECKERT SEAMANS CHERIN & MELLOTT, LLC Two International Place, 16th Floor Boston, MA 02110 (617) 342-6800

ECKERT SEAMANS CHERIN & MELLOTT, LLC /s/ Francis G.X. Pileggi Francis G.X. Pileggi (Bar No. 2624) Jill Agro (Bar No. 4629) 300 Delaware Avenue, Suite 1210 Wilmington, DE 19801 (302) 425-0430 Attorneys for Plaintiffs Lawrence Cohen and Jay Rosenbaum

Dated: February 15, 2012