In a recent decision in Inferno Restaurant & Pizzeria, Inc. v SW Michaels Pizzeria, Inc., 2019 NY Slip Op 50995(U) (June 13, 2019), the Supreme Court, Albany County, found that where a defendant knew of a plaintiff’s material breaches of a contract and failed to timely notify the plaintiff of these material breaches, the defendant, thereby, lost its right to terminate the contract based on the alleged breaches.

The plaintiff, Inferno Restaurant and Pizzeria, Inc. (“Inferno”), owns and operates several pizzerias in New York. In April 2018, Inferno sold one of its pizzeria businesses to defendant, SW Michaels Pizzeria, Inc. (“Michaels”). According to a promissory note, Michaels paid Inferno one-half of the purchase price at the closing and agreed to pay the balance of the purchase price in monthly installments continuing until April 2023, at which point the note would become payable in full. Inferno also took a security interest in the assets sold to Michaels. After only six months, Michaels stopped making its monthly payments to Inferno. Accordingly, Inferno moved for summary judgment in lieu of complaint, seeking immediate payment of the remaining balance and interest of the note, and Michaels opposed the motion.

Michaels did not deny defaulting on the payments to Inferno but did claim that Inferno materially breached the parties’ agreement by: 1) failing to properly train Michaels’ staff in the operation of the business; 2) failing to provide Michaels with all of the pizzeria’s recipes; and 3) making false assurances that there were no violations pending against the pizzeria. Michaels further claimed that Inferno’s material breaches of the contract caused Michaels to incur $75,000 in expenses and, ultimately, resulted in the pizzeria’s closure. Inferno responded to Michaels’ accusations by noting that Michaels never complained to Inferno about the training, missing recipes, or any health code issues and, thereby, waived its claim for breach of contract. In fact, Michaels did not notify Inferno of the alleged breaches until it filed the opposition papers.

A waiver is a voluntary and intentional abandonment of a known right (Nassau Trust Co. v Montrose Concrete Prods. Corp., 56 NY2d 175 [1982]). The doctrine of “election of remedies,” requires a non-breaching party in a contract dispute to “choose between two remedies: it can elect to terminate the contract or continue it. If it chooses the latter course, it loses its right to terminate the contract because of the default” (Awards.com v Kinko’s, Inc., 42 AD3d 178, 188 [1st Dept 2007], affd 14 NY3d 791 [2010], citing Bigda v Fischbach Corp., 898 FSupp 1004, 1011 [SDNY 1995], affd 101 F3d 108 [2d Cir 1996]).

“But New York law does not treat as inconsistent the right to continue to perform and to accept performance under a contract (on the one hand) and the right to sue for damages based on a breach (on the other)” (Luitpold Pharm., Inc. v Ed. Geistlich Söhne A.G. Für Chemische Industrie, 784 F3d 78, 934 [2d Cir 2015]). “‘A party to an agreement [that] believes [the agreement] has been breached may elect to continue to perform the agreement’ and later sue for the alleged breach, so long as that party does not waive its right to sue by, inter alia, failing timely to notify its counterparty of the breach” (id., quoting Capital Med. Sys. Inc. v Fuji Med. Sys., U.S.A. Inc., 239 AD2d 743, 746 [3d Dept 1997]).

Here, the Court found that Michaels lost its right to terminate the contract based on the alleged breaches when it elected to operate the pizzeria and continue to make monthly payments to Inferno rather than notify Inferno of the material breaches. Ultimately, Michaels could not rely on the breaches as a basis for affirmative relief or as a defense for nonperformance when it failed to timely notify Inferno of the alleged material breaches.

Takeaway: If you believe that an agreement (which you are a party to) has been breached, make sure to timely notify the breaching party of the material breach. Don’t risk waiving your right to sue or losing your right to terminate the contract based on the material breach.

 

We all know that understanding the law is a first step to good lawyering. But understanding what the particular judge assigned to your case likes and dislikes, and her pet peeves is just as important for your success as an advocate for your client.

On June 14, 2019, the New York State Bar Association’s Commercial and Federal Litigation Section held a Bench-and-Bar program at the Westchester County Courthouse. This program, which was co-moderated by our very own Matt Donovan, featured Westchester Commercial Division Justices – Hon. Linda Jamieson and Hon. Gretchen Walsh. The format of the program was an informal question – and – answer session, including questions from the audience. Below is a summary of some of the topics discussed:

Junior Associates and/or Underrepresented Attorneys: I previously discussed the recent trend of federal and Commercial Division judges allowing oral argument, when they otherwise would not have, if a junior or underrepresented attorney would argue the motion. Both Justice Jamieson and Justice Walsh stated that they like to see young attorneys (especially young women attorneys) argue in their courtroom. Justice Walsh stated that she is contemplating amending her rules to include language reflecting the recent trend in the Commercial Division to permit oral argument if counsel identifies a lawyer out of law school five years or less who will argue the motion. Justice Jamieson took a similar stance and stated that senior attorneys should give junior attorneys a chance to speak in court. The justices stated that if they allow oral argument on a motion, which they usually do not, the decision will not be based solely on oral argument, thus alleviating any concern senior attorneys would have in permitting younger attorneys to argue in court.

Rule 19-a– Statements of Material Facts for Summary Judgment Motions: The consensus between the justices was that they generally like Rule 19-a statements, which should contain only undisputed facts. Both Justice Walsh and Justice Jamieson stated that Rule 19-a statements are important because the parties reference (or at least should reference) the record in support of each statement. This opinion is contrary to what certain New York County Commercial Division justices stated on June 5, 2019 at a NYSBA panel, entitled Motion Practice Before the Commercial Division. Interestingly, at that panel, certain justices stated that they prefer parties to submit joint (as opposed to separate) 19-a statements, indicating that if the parties cannot agree on “undisputed facts,” the 19-a statements are not helpful. On the other hand, other judges stated that they prefer separate Rule 19-a statements from each party.

Rule 17 – Length of Papers: As of October 1, 2018, Commercial Division Rule 17 changed the length guidelines of briefs from 25 pages to 7,000 words and reply briefs from 15 pages to 4,200 words. The rule states that every brief must include a “certification by the counsel who has filed the document describing the number of words in the document.” If a document has standard margins and font, 7,000 pages is approximately 22-23 pages. However, it appears that many lawyers are not abiding by this rule. Why is that? One theory is that judges are not enforcing it. Although, both Justice Walsh and Justice Jamieson emphasized that lawyers need to keep their briefs short and concise, they indicated that they will not be sticklers when it comes to the 7,000 word limit. Although lawyers tend to always include a legal standard section in briefs, the justices stated that lawyers need not do so. So… use your words wisely.

Presumptive ADR: My colleague discussed Presumptive, Early Alternative Dispute Resolution (“Presumptive ADR”) in an earlier post, which is expected to begin in September 2019. Both Justice Jamieson and Justice Walsh are in favor of Presumptive ADR, which encourages settlement at the outset of the case.  Justice Walsh stated that the Advisory Committee on ADR is still figuring out which types of cases should go to Presumptive ADR, e.g. matrimonial cases versus business dissolution matters, noting that it may be better suited for certain types of cases. Justice Jamieson is a big proponent of ADR and wants attorneys to consider ADR and to meet and confer about whether or not the case is good for ADR prior to coming to court.

Pet Peeves: Both justices emphasized the importance of being courteous and professional. Justice Jamieson stated that her biggest pet peeve is when the attorneys before her begin to speak to each other instead of addressing the court. Justice Walsh stated that if the attorneys are not being courteous and cannot agree on adjournments, she will require that they come to court and go on the record. Justice Walsh also noted that the Chief Judge DiFiore is coming out with new rules regarding adjournments … so stay tuned.

This was a great program that provided Commercial Division litigators insight into what they should expect when entering the respective judges’ courtrooms. Litigators should make every effort to attend programs where judges provide valuable information concerning their individual preferences and style.

judge pardon

In law, as in life, mistakes happen. Some are irreparable: Statute of repose expired? Too much denim? In these circumstances, the law affords the court no discretion for mercy. Other errors, however, must be forgiven. In a recent decision, Commercial Division Justice Andrew Borrok held that plaintiff’s inadvertent failure to file proof of substitute service within twenty days was a mere “procedural irregularity” that could be corrected.

In Furuya v. Parry (Index No. 158800/2018), plaintiff served defendant with a summons and complaint seeking funds pursuant to a holdover agreement. Service was effected pursuant to CPLR 308 [4] by affixing a true copy of the papers to the door of defendant’s residence and mailing a copy to the same address. However, plaintiff did not file proof of service until 50 days later—30 days too late.

Defendant moved to dismiss the complaint for lack of personal jurisdiction based on plaintiff’s failure to timely file proof of service. The motion was denied.

The court explained that mere delay in filing proof of service pursuant to CPLR 308 was not a jurisdictional defect, but a procedural irregularity that may be corrected by the court nunc pro tunc. See Lancaster v Kindor, 98 AD2d 300, 306 [1st Dept 1984]. As the First Department explained, “the purpose of requiring filing of proof of service, along with the 10-day grace period, pertains solely to the time within which the defendant must answer, and does not relate to the jurisdiction acquired by service of the summons.” The law is the same in the Second Department. See Weininger v Sassower, 204 AD2d 715, 716 (1994).

Under CPLR §§ 2001 and 2004, the court found good cause and no prejudice to Defendant by accepting the untimely proof of service. The court’s analysis of good cause did not place much scrutiny on plaintiff’s culpability—plaintiff’s attorney submitted an affidavit stating he had intended to file the proof of service along with the amended complaint, but “cannot explain” why the documents were not filed, “except to surmise that I neglected to attach the document when e-filing.”

The court instead emphasized plaintiff’s prompt correction of the defect and the lack of prejudice to defendant: “If the filing of the proof of service is deemed timely, [defendant] will be in the same position as he would have been had the proof of service been filed within 20 days.” Notably, plaintiff’s claims were brought well within the statute of limitations, so dismissal would result in plaintiff filing a new action.

Please subscribe to New York Commercial Division Practice to receive email notifications of new posts.

You may have recently read on this blog that “vacating an arbitration award is an uphill battle.”  As my colleague Hamutal G. Lieberman discussed, there are only two instances when an arbitration award may be vacated: (1) instances involving fraud, corruption or misconduct of the arbitrators or (2) where an arbitration award exhibits “manifest disregard of the law”.  While Hamutal discussed the latter ground, a recent opinion by the Honorable Andrew Borrok, addressed the former. 

In Sorghum Inv. Holdings Ltd. v China Commercial Credit, Inc., despite the uphill battle, the Court granted a motion to vacate an arbitration award because it was procured by fraudulent and undue means.

A petitioner seeking to vacate an arbitration award on the basis that it was procured by fraud must plead that (1) respondent engaged in fraudulent activity; (2) even with the exercise of due diligence, petitioner could not have discovered the fraud prior to the award issuing; and (3) the fraud materially related to an issue in the arbitration.

Also, an arbitration award may be vacated if it was procured by undue means.  Undue means is where the award is “the result of immoral, if not necessarily illegal conduct, which is underhanded or conniving but falls short of corruption or fraud.”

As the petitioner only must demonstrate that there is a nexus between the alleged fraud and the decision of the arbitrator, the Court in Sorghum found the arbitration award was procured by fraud or undue means because the arbitrator explicitly relied on respondent’s attorney’s false declaration.  The Petitioner was able to show, through discovery obtained in a related action after the award, that the attorney’s false statement that he had “no record of any escrow deposit” was critical in the arbitrator’s decision.  Because the statement was clearly false and the arbitrator relied on it, the Court found the award was procured by fraud or undue means.

 

The takeaway here is that even though vacating an arbitration award is an uphill battle, the Court can still provide a safety net if the other side doesn’t play by the rules.

New York is continuously working to advance the delivery and quality of civil justice in this state. We recently discussed the technological developments in New York State Commercial Division courtrooms and a few months ago we discussed the increasingly-codified perspective of Commercial Division Justices to encourage junior attorneys to play a larger role in the courtroom. Now it seems that New York State civil courts are catching up to the Commercial Division.

Last week, Chief Judge Janet DiFiore and Chef Administrative Judge Lawrence K. Marks announced the implementation of a statewide “Presumptive, Early Alternative Dispute Resolution” program for all civil cases. The recent press release can be found here. The program is expected to begin in September 2019.

The program, nicknamed “Presumptive ADR”, targets a broad range of civil cases ranging from commercial disputes to matrimonial and personal-injury matters. The program is directed at cases in their inception to encourage upfront settlements or the significant narrowing of disputes leading to speedier resolutions in the future.

Any litigator that regularly practices in New York State Court will tell you that the adjudication of a civil matter from start to finish can take some time. However, Chief Judge Janet DiFiore and Chief Administrative Judge Lawrence K. Marks are expecting that this program will significantly reduce delays as well as decrease costs to the parties and the judiciary. “Making ADR services widely available in civil courts throughout the State—and facilitating the use of such services as early as possible in the case—are major steps toward a more efficient, affordable and meaningful civil justice process,” said Chief Judge DiFiore.

This is not the first time that the New York State Court System has tried to implement ADR into its case management system. Effective January 1, 2018, Chief Administrative Judge Lawrence Marks amended Rules 10 and 11 of Section 202.70(g), known as the “Rules of Practice for the Commercial Division,” to require each party to certify that it has discussed with counsel the availability of ADR mechanisms provided by the Commercial Division and/or private ADR providers, and whether the party is presently willing to pursue mediation at some point during the litigation. We discussed this amendment here.

The New York court system plans to issue uniform rules to authorize, endorse and provide a framework for courts throughout the state to introduce “presumptive ADR” via automatic presumptive referrals in identified types of civil disputes, subject to appropriate opt-out limitations. While court-sponsored mediation  already is integrated into the New York State civil court system, it remains underutilized relying on the parties to opt in or, in rare cases, an individual judge to refer the matter to mediation in specific cases.

The new program mirrors the mediation program currently in place in the United States District Court for the Southern District of New York.  In the Southern District, the assigned District Judge or Magistrate Judge may determine that a case is appropriate for mediation and may order that case to mediation–with or without the consent of the parties–before, at, or after the initial case-management conference.

New York State litigators should keep the statewide “Presumptive ADR” program in mind when retaining clients in the upcoming months. Some cases may be ripe for presumptive ADR at the outset leading to a speedy resolution and happy clients.

Want more tips on practice and procedure in the Commercial Division?  Subscribe to New York Commercial Division Practice and receive an email notification whenever a new post is published.

shutterstock_693898204

In a recent decision by the New York County Commercial Division (Borrok, J.), the Court held that New York law, not Swiss law, applies to a dispute involving the ownership of the storied Princie Diamond – an extremely rare and valuable 34.65 carat pink diamond quarried from the legendary Golconda mines of India.  In a wide-ranging, multi-part decision, Justice Borrok applied the “interest analysis” to determine that New York, not Switzerland, clearly has the greatest interest in the litigation.

The Plaintiffs in Angiolillo v Christie’s, Inc., et al.., 2019 NY Slip Op 29122 (Apr. 26, 2019) are the heirs of Renato Angiolillo (“Angiolillo”), an Italian Senator who purchased the Princie Diamond from Van Cleef & Arpels in 1960.  Under Italy’s inheritance laws, Angiolillo’s surviving spouse, Maria Girani Angiolillo (“Girani”) took custody, but not ownership, of the Princie Diamond when Angiolillo died in 1973.  After Girani’s death in 2009, Plaintiff Amedeo Angiolillo (Angiolillo’s eldest son) attempted to contact Girani’s son, Marco Bianchi Milella (“Milella”) for the return of the diamond.  But, Milella claimed he had never seen the Princie Diamond and had no knowledge of its whereabouts.  The Plaintiffs ultimately contacted the Italian authorities, and a criminal investigation of the missing Princie Diamond ensued.

Milella later admitted to taking the Princie Diamond, but maintained that he had lawfully inherited the diamond from his mother.  By this point, however, and unbeknownst to Plaintiffs, the diamond had already been transported from Italy to Switzerland on consignment, and then to New York, where it was consigned and transported to defendant Christie’s, Inc. (“Christie’s”).  Throughout August and September 2010, Christie’s attempted to privately sell the Princie Diamond to prospective buyers from around the world.

In October 2010, while Christie’s was still trying to privately sell the diamond, defendant Investel Finance, Ltd. (“Investel”) purchased the diamond from Milella by wiring $19.2 million into Milella’s Swiss bank account.  The Princie Diamond was located at the Geneva Freeport, a storage facility in Switzerland, at the time of its purchase. Investel then consigned the Princie Diamond to Christie’s for $40 million, and designated Christie’s as the exclusive seller of the diamond.  In 2013, after three years of unsuccessfully attempting to privately sell the Princie Diamond, Christie’s began negotiations to publicly auction the diamond in New York.

Christie’s apparently did not investigate the provenance of the Princie Diamond until March 2013, when it learned of the Italian news articles concerning the investigation of Milella.  In April 2013, Plaintiffs’ counsel contacted Christie’s advising that it was “a great likelihood, almost a certainty” that the diamond was stolen property, and requesting that Christie’s investigate and determine the proper title of the seller.  In response, Christie’s confirmed that the diamond was in fact the missing Princie Diamond, but advised that, under Swiss law, Investel had acquired full title and ownership of the Princie Diamond, including the right to consign the diamond to Christie’s for auction.  In 2013, Christie’s sold the Princie Diamond at an auction for nearly $40 million.  Plaintiffs thereafter sued Christie’s, Investel and others for, inter alia, conversion and replevin.

In August 2018, Plaintiffs moved for summary judgment on their claims.  Defendants cross-moved for summary judgment arguing, among other things, that they acquired good title to the gem as bona fide purchasers under Swiss law.  The issue before the Court was whether New York or Swiss law applied to the claims.

The Court’s Choice of Law Analysis 

Is There A Conflict Between the Two Laws? 

The Court first determined that there is a “well-recognized conflict” between New York and Swiss law with respect to issue of title.  Under New York law, “a thief cannot pass good title,” even if the chattel falls into the possession of a good-faith purchaser for value (Solomon R. Guggenheim Found. v Lubell, 77 NY2d 311, 317 [1991]).  Under Swiss law, however, a bona fide purchaser can become the owner even if the chattel was stolen or otherwise transferred without the authorization of its owner.

Given the Conflict, Which Law Applies? 

In determining which law applies, the Court conducted an “interest analysis,” which essentially asks: which jurisdiction has the greatest interest in the litigation?  Under this test, the Court determined that New York clearly has the greatest interest in the ligation because New York has an “overwhelming interest” in “preserving the integrity of transactions within its borders” and preventing the state from becoming “a marketplace for stolen goods” (Bakalar v Vavra, 619 F3d 136, 144 [2d Cir 2010]; Reif v Nagy, 61 Misc 3d 319, 323 (Sup Ct, NY County 2018]; Gowen v Helly Nahmad Gallery Inc., 60 Misc 3d 963 [Sup Ct, NY County 2018]).  This is particularly so given New York’s reputation as being a world-renowned center for art and culture.  As the Court explained:

“If the Plaintiffs’ claim to the Princie Diamond is credited, a stolen diamond was delivered in New York to a New York auction house, which for a number of years attempted to privately sell it to a buyer in New York and finally did sell it at a well-publicized and public New York auction.  In addition, the defendants availed themselves of New York law in their respective agreements (particularly, the Auction Agreement), brought the Princie Diamond to the Gemological Institute of America in New York for purposes of grading and elevation, and presented it to numerous private buyers in New York for over three years.”

The Court flatly rejected Defendants’ argument that Swiss law should apply since the Princie Diamond was located in Switzerland at the time it was purchased, noting that “New York courts do not concern themselves with the question of where the theft took place.”  In addition, the Court characterized as “inappropriate” what it considered to be Defendants’ “attempt to immunize an otherwise unlawful conversion by, essentially, passing the allegedly converted item through Switzerland.”  As the Court pointed out, “Christie’s was aware of the fact that [Milella] was being investigated in connection with the criminal conversion of the Princie Diamond and, in an attempt to avoid the issues of title and avoid litigation, Christie’s threatened litigation, including over $20 million in damages.  Now they try to claim the benefits of Swiss law under an essential restatement of the situs rule that New York courts have fully rejected.”

The Takeaway:  The traditional “situs” choice of law rule for torts, which applies the law of the jurisdiction where the tort was committed, has been repeatedly rejected by New York courts in favor of the more flexible “interest analysis.”  Under the interest analysis, the court must determine which jurisdiction has the greatest interest in the litigation.  In cases involving title to potentially stolen property, New York’s interest is “overwhelming”: To discourage the illicit trafficking of stolen goods and protect New York’s reputation as a preeminent cultural center.

Luddites beware!  If you’ve been reluctant to introduce technology into the way you practice law, the Commercial Division may soon leave you behind.

Here at New York Commercial Division Practice we regularly report on technological developments in the Commercial Division.  Earlier this year, for example, we reported on the technological proclivities of newly-appointed Manhattan Commercial Division Justice Andrew Borrok, whose individual Practices and Procedures emphasize (and even assume) lawyers’ use of technology when practicing in Part 53.

Last year, we twice reported on the implementation of the Integrated Courtroom Technology (or “ICT”) program in the Commercial Division, beginning with Westchester County (Courtroom 105, Walsh, J.) in January 2018, followed by New York County (Courtroom 208, Scarpulla, J.) in October 2018.  The Business & Commercial Law Committee of the Westchester County Bar Association, as well as NYSBA’s Commercial & Federal Litigation Section both presented CLE programs last year on the “21st Century Courtroom” in White Plains, showcasing many of its new hi-tech features and equipment.

Last week, members of ComFed’s Committee on the Commercial Division (including two of this blog’s authors), along with Administrative Judge Deborah A. Kaplan and Manhattan Commercial Division Justice Saliann Scarpulla, as well as sponsor A.C. Roman & Associates Inc., presented a similar program called “The Electronic Courtroom Comes to 60 Centre Street:  Using Integrated Courtroom Technology in the Commercial Division.”  The program, which took place in Justice Scarpulla’s Part 39, was standing-room only and, by all accounts, very well-received by the 75-plus lawyers, judges, and other court personnel in attendance.

Some of the hi-tech features and equipment showcased during last week’s program — all of which, by the way, are described in how-to detail in “Exhibit A” to Justice Scarpulla’s individual Practices and Procedures — included the following:

  • Interactive Smartboard.  Virtually every technological feature and device in Part 39 interacts with the 86-inch Smartboard, which is displayed prominently to the left of counsel table as one faces the bench.  The presenters showed how practitioners can use their laptops, tablets, and USB drives in conjunction with the Smartboard to display, highlight, and even annotate their motion papers and other documentary evidence during argument before judge and jury.
  • “ELMO” Document Camera.  The ELMO allows practitioners to project virtually any physical item in 3D onto the Smartboard for judge and jury to see.  It’s particularly useful for displaying unique documents or other pieces of evidence that are perhaps less conductive to being converted to electronic format.
  • Business Skype Capabilities.  The use of Skype in the courtroom is a considerable step up from teleconferencing (and even traditional videoconferencing), allowing parties and their counsel to remote into and even appear by video in court from an outside location via their desktop and laptop computers, tablets, and smartphones.  This feature is particularly relevant to practicing in the Commercial Division, which has become one of the premiere, go-to business courts across both nation and globe.

** Attention all Manhattan Commercial Division practitioners **  If you missed the program last week but would like to familiarize yourself with the ICT features in Part 39 beyond the information provided in Justice Scarpulla’s individual rules, fear not.  ComFed’s Committee on Continuing Legal Education was on hand to ensure that the presentation was video recorded, which recording will be spliced and packaged for distribution on the NYSBA’s “CLE Online and On-Demand” site later this year.

Want more tips on practice and procedure in the Commercial Division?  Subscribe to New York Commercial Division Practice and receive an email notification whenever a new post is published.

Dismissal of Malpractice CaseNeil Sedaka was right.   “Breaking up is hard to do.”   It’s no easier for law firms.  The saga over the departure of key partners from Quinn Emanuel continues, but this time in arbitration, not the courts.

Justice Saliann Scarpulla was faced with a motion by Quinn Emanuel Urquhart & Sullivan LLP to dismiss the Petition brought by the departing partners to stay arbitration in Selendy v. Quinn Emanuel Urquhart & Sullivan LLP.  The Petition squarely tees up the thorny and controversial issue of whether the partnership agreement’s post-withdrawal non-compete provision violates New York Rule of Professional Conduct 5.6.  The Partnership Agreement provides, in pertinent part, at section 5.1(a)(iii),

[i]f a partner voluntarily withdraws from [Quinn Emanuel], and if, at any time within eighteen (18) months after the effective date of such withdrawal, he, or any enterprise which he joins, performs any legal services in any case or other matter venued within 100 miles of any office of [Quinn Emanuel] for any client who was a client of [Quinn Emanuel] prior to the effective date of such withdrawal, and for which he or his new enterprise performed no legal services prior to the date of the withdrawing partner first became an employee or partner of [Quinn Emanuel], then the partner so withdrawing shall pay to [Quinn Emanuel], as a reasonable estimate of the harm caused to [Quinn Emanuel] and the other partners by his withdrawal as a result of the loss of fees which would otherwise have been received from [Quinn Emanuel’s] clients taken by him, a sum equal to 10% of the total fees billed by him and/or his new enterprise from that client for services rendered by them, or any of them, during the eighteen (18) month period following the effective date of his withdrawal from the partnership.

Rule 5.6(a) of New York’s Rules of Professional Conduct, adopted word for word from the Model Rules, provides,

A lawyer shall not participate in offering or making:

(a) a partnership, shareholder, operating, employment or other similar type of agreement that restricts the right of a lawyer to practice after termination of the relationship, except an agreement concerning benefits upon retirement.

Comment 1 to the Rule notes that the purpose is to avoid contractual limitations that might otherwise “limit[] the freedom of clients to choose their lawyer” and restricts a lawyer’s “professional autonomy.”

The courts in New York have consistently taken a dim view of non-compete clauses contained in law firm partnership agreements (see, e.g., Cohen v. Lord, Day & Lord and Denburg v. Parker, Chapin, Flattau & Klimpl, both of which refused to enforce such provisions), finding the clauses violative of public policy.  So does the court make a threshold decision on the issue, or is an arbitrator empowered to do so?

This is precisely what Justice Scarpulla was called upon to decide.  That is, not the ultimate issue of the validity of the clause, but rather whether an alleged violation of Rule 5.6 that implicates New York public policy should be decided initially by the court or instead in the arbitration proceeding.  Specifically, do the public policy concerns of a non-compete provision contained in a law firm partnership agreement preempt the mandatory arbitration provision in the Partnership Agreement?  Relying on the dyad of Hackett v Milbank Tweed cases (see Hackett I here and Hackett II here), Justice Scarpulla concluded that the public policy concerns raised, namely, whether the clause is “prohibitively anticompetitive,” simply do not override the broad arbitration clause and the state’s strong policy favoring arbitration.  Accordingly, the Court denied and dismissed the petition, directing judgement be entered accordingly.  The parties will now have to proceed to arbitration.

So . . . we’ll have to stay tuned for the motion to confirm or set aside the arbitration award sometime in the future to learn the outcome of the enforceability clause.

Reflecting on your first year of law school, you begrudgingly remember learning about personal jurisdiction and the long-arm statute. As a commercial litigator, one of your first questions in representing a defendant should be: Does this court have jurisdiction over my client? If the answer to that question is no, then of course, you next consider moving to dismiss.

In an interesting decision by Justice Saliann Scarpulla, the Court analyzed whether it had jurisdiction over defendant 400 5th Avenue, L.P (“Defendant”), the owner of the historic Kaufmann’s building in Pittsburg. In AM Pitt Hotel, LLC v 400 5th Ave., L.P., Plaintiff, AM Pitt Hotel, LLC (“Plaintiff” or “AM Pitt”) purchased part of the building from the Defendant to develop a hotel. The parties entered into a sale and development agreement (the “Sale Agreement”).

However, as the adage goes, “all good things must come to an end.” Plaintiff commenced this action against the Defendant, in the New York County Commercial Division for breach of contract and implied covenant of good faith and fair dealing arising from a construction dispute over the redevelopment of the historic building. The dispute pertained to Defendant’s delay in completing the construction of the hotel.

Not surprisingly, Defendant, a Pennsylvania limited partnership with a principle place of business in Pennsylvania moved to dismiss Plaintiff’s Complaint for lack of jurisdiction. In response, Plaintiff argued that the Court can exercise jurisdiction over the Defendant pursuant to the long arm statute (CPLR 302(a)(1)). Plaintiff’s main focus in opposition to Defendant’s motion to dismiss was based on that fact that Defendant’s construction manager, Core Realty Inc. met with Melohn Group, a 95% owner of Plaintiff and a New York real estate firm regarding investment in the building, once in New York.

Here, the Court stated, as did your 1L law school professor, that the main inquiry under CPLR 302(a)(1) is whether “defendant purposefully availed itself of the privilege of conducting activities in the state by transacting business in New York,’” The Court further opined that “purposeful availment occurs when the non-domiciliary seeks out and initiates contact with New York, solicits business in New York, and establishes a continuing relationship.”

Unfortunately for Plaintiff, the single meeting in New York between Core and Melohn hardly establishes that Defendant availed itself of the privilege of transacting business in New York. The Court evaluated the following factors:

  • The parties’ contractual relationship was centered in Pennsylvania;
  • Defendant did not return to New York to negotiate the Sale Agreement;
  • The Sale Agreement, which states that Pennsylvania law governs disputes, was executed in Pennsylvania; and
  • Plaintiff traveled to Pennsylvania to evaluate the progress of the construction project.

In other words, all roads lead to Pennsylvania. The Court similarly rejected Plaintiff’s argument that Defendant’s telephonic and electronic communication with Plaintiff relating to the performance and negotiation of the Sale Agreement, while Plaintiff was in New York, conferred jurisdiction over the Defendant. In that regard, the Court stated that Plaintiff’s own New York activities cannot be attributed to the Defendant (see Kennedy v Yousaf).

Takeaway: One meeting in New York is clearly not enough to create personal jurisdiction over a defendant. Remember, even if the defendant is in a nearby state, New York courts will not be able to assert jurisdiction over the defendant unless the plaintiff can establish that the defendant availed itself of the privilege of doing business in New York, thus invoking the benefits and protections of its laws.

The attorney-client privilege is intended to protect communications between an attorney and his/her client.  The Supreme Court stated that the privilege exists to “encourage full and frank communication between attorneys and their clients and thereby promote broader public interests in the observance of law and administration of justice.” See Upjohn Co. v. United States, 449 U.S. 383 (1981).  In Semsysco GMBH, et al. v. Global Foundries Inc. et al., the Honorable Marcy S. Freidman, showed us how that privilege can be easily lost.

So it is important to have an understanding of what constitutes a waiver of the attorney client privilege.  In the Semsyco it was the client, not the attorney who voluntarily disclosed privileged communications.  The court reiterated the “general rule,” which applies to both attorneys and clients:

“A disclosure of a privileged communication will operate as a waiver of the attorney-client privilege is subject to an exception where it is shown that the client intended to maintain the confidentiality of the document, that reasonable steps were taken to prevent disclosure, that the party asserting the privilege acted promptly after discovering the disclosure to remedy the situation, and that the parties who received the documents will not suffer undue prejudice if a protective order against use of the document is issued.”

Further, the Court reiterated that “the party who asserts the privilege has the burden of establishing that it has not waived the privilege.”

Here, the Court found that plaintiffs did not meet their burden in establishing that the privilege was not waived when the CEO forwarded an email chain containing attorney client privileged communications to the opposing side, pre-litigation, seeking a potential settlement.  Instead, the Court found that even by intentionally forwarding the “top email” of the email chain and “inadvertently” forwarding the privileged communications, the CEO waived the privilege.  The forwarding of the email chain was intentional, and the CEO did not state that he was unaware of the privileged communications below the top email.

The plaintiffs also failed to meet their burden of acting promptly to remedy the situation after discovering the disclosure.  Even though plaintiffs’ counsel requested that the email be returned within 48 hours after receipt of a letter from defendants’ counsel advising that they have waived their privilege, the plaintiffs did not make a showing that prior to receipt of the letter, the CEO was unaware  he had forwarded the email chain.  This means the burden to act promptly starts as soon as the party should have knowledge the communication was disclosed, not necessarily when the opposing side puts you on notice.  In this case, that occurred when the email was initially sent.

Takeaway: the lesson here is be careful what you forward.  Whether in litigation or not, attorneys and clients should make sure never to forward privileged communications to anyone outside the attorney-client relationship.  All emails to an outsider should be conveyed in a new email chain.  Nonetheless, mistakes do happen, but you must act promptly to rectify the mistake.  You should not wait until the mistake is pointed out, hoping nobody would notice.  If you don’t act promptly you will lose your privilege.