HEHER v. SMITH, STRATTON, WISE, HEHER AND BRENNAN
Case Date: 03/06/1996
Docket No: SYLLABUS
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(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.
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 to establish the partnership's liability is both appropriate and consistent with the entire-controversy doctrine.
(pp. 15-16)
3. The trial court properly dismissed White's and Johnston's cross-claim to vacate the February 1992 arbitration award
because they failed to comply with the statutory requirement that parties seeking to vacate an arbitration award must do so
within three months of the date of the award was rendered. (p.16)
Judgment of the Appellate Division is AFFIRMED.
O'HERN, J., concurring in part and dissenting in part, concurs in the opinion and judgment of the Court insofar
as it orders arbitration of the contractual dispute subject to the standard of review set forth in the Court's opinion. Justice
O'Hern disagrees with that part of the opinion that subjects Johnston and White to the jurisdiction of the arbitrators for
imposition of liability under the Agreement without permitting the arbitrators to consider either the entitlement of
Johnston and White to benefits under the Agreement or the inequity of holding them liable for benefits to others without
any credit for benefits to which they are equally entitled.
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.
GARRETT M. HEHER,
Plaintiff-Appellant
v.
SMITH, STRATTON, WISE, HEHER
Defendants-Respondents
and
TODD D. JOHNSTON and ROBERT A.
Defendants-Respondents
and
EDWARD J. GEOGHEGAN and JOHN DOE
Defendants.
Argued September 27, 1995 -- Decided March 6, 1996
On certification to the Superior Court,
Appellate Division.
Richard M. Altman argued the cause for
appellant and cross-respondent (Pellettieri,
Rabstein and Altman, attorneys).
Bruce W. Clark argued the cause for
respondents and cross-appellants (Dechert,
Price & Rhoads, attorneys; Mr. Clark, Todd D.
Johnston, and Robert A. White, pro se, on the
briefs).
William B. McGuire argued the cause for
respondents and cross-respondents (Tompkins,
McGuire & Wachenfeld, attorneys; Marianne M.
DeMarco, on the briefs).
The opinion of the Court was delivered by
"the sole forum for the resolution" of such disputes. The
arbitrators' award was to be "final" and not appealable "to any
court." The Agreement also provided that partners who withdrew
from the firm and "thereafter compete[d] with the firm in any
way" forfeited certain benefits available to partners who
withdrew from the firm but did not compete (the "forfeiture
provision").
entire dispute between Heher and SSWH&B was subject to
arbitration pursuant to the terms of the partnership agreement.
Heher was a partner in the law firm of SSWH&B from 1966 to
August 4, 1986, when he voluntarily withdrew from the firm.
Heher continued to engage in the private practice of law in New
Jersey and a number of Heher's former clients continued to retain
him following his withdrawal. The partnership agreement at issue
was in effect from June 1, 1983, through at least August 1987.
Article IV(4) of the Agreement provided:
The "stated benefit" was defined as "an amount equal to the average of the partner's annual compensation from the firm . . . for the five (5) consecutive years next before the firm year in which his interest in the firm was terminated." The Agreement further provided that SSWH&B's obligation to pay stated benefits in any given year would be limited to a certain percentage of the
firm's gross receipts for the prior year. The Agreement provided
that the stated benefit would be paid in eight equal quarterly
installments commencing in the first quarter following the
partner's termination.
5.2 Arbitration shall be the sole forum for the
resolution of disputes arising out of this agreement or
the partnership relationship. The arbitrators' award
resolving any such dispute shall be final and shall not
be appealed to any court.
After withdrawing from the firm, Heher informed SSWH&B of his intention to arbitrate certain disputes arising on his withdrawal. The parties never commenced arbitration proceedings,
however, either because Heher did not pursue arbitration or
because the two arbitrators named by the parties never met to
choose a third arbitrator as provided for by the Agreement.
1992, SSWH&B issued checks to White and Johnston for the balance
due under the modified award. White and Johnston also accepted
and negotiated those checks.
Heher's entitlement to benefits under the Agreement. Heher filed
a cross-motion for summary judgment on the issue of the
arbitrability of the dispute and also 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.
was affected by the alleged loss in firm goodwill. Article
IV(8), which apparently relates only to the tax treatment of
benefits received under the Agreement, provided in relevant part:
The firm also contended that Heher was estopped from asserting
the invalidity of the forfeiture provision because, as a senior
partner and a member of the firm's Finance Committee, he had
participated in drafting the Agreement.
The court found that the uncontested amount of the stated benefit
due Heher under the Agreement was $143,355, and referred to
arbitration the following issues: (1) whether Heher was entitled
to prejudgment interest, and if so, from what date, and in what
amount; (2) whether Heher's stated benefit of $143,355 should be
adjusted to account for loss of goodwill, as alleged by SSWH&B;
and (3) whether there was any validity to SSWH&B's allegation
that Heher was estopped from asserting the invalidity of the
forfeiture provision because of his participation in drafting the
Agreement. The court directed the arbitrators to make specific
findings of fact and to state specific reasons for their
determinations on all issues.
Heher appealed and moved to stay arbitration pending appeal.
SSWH&B cross-appealed, as did White and Johnston. The trial
court stayed arbitration pending appeal, and ordered that count
three of Heher's complaint, seeking supplemental benefits under
the Agreement, be subject to arbitration.
with SSWH&B was "precisely the type of issue" the parties had
agreed to arbitrate.
benefit of $143,355, because "there is nothing left to
arbitrate."
Regrettably, our disposition of this appeal prolongs the delay in resolving Heher's claim for compensation from SSWH&B emanating from his withdrawal from the firm in 1986. Nevertheless, concerning the primary issue before us--whether the arbitration provision of SSWH&B's partnership agreement is enforceable if the pending dispute implicates the clear mandate of public policy underlying RPC 5.6--we are firmly convinced that 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. That conclusion is fortified by our confidence in arbitration and in the ability of arbitrators to resolve such disputes in a manner
consistent with the public policies underlying RPC 5.6. As we
observed in Weiss, supra:
[___ N.J. at ___-___ (slip op. at 27-8).] See also Hackett v. Milbank, Tweed, Hadley & McCloy, 80 N.Y.2d 870, 871-72, 587 N.Y.S.2d 598, 599, 600 N.E.2d 229, 230 (1992) (holding that dispute over withholding of law partner's right to receive termination benefits from firm should proceed to arbitration despite contention that denial of benefits would violate public policy); Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 27-28, 111 S. Ct. 1647, 1653, 114 L. Ed.2d 26, 38 (1991) (holding that important public policies underlying Age Discrimination in Employment Act do not preclude compulsory arbitration of claim asserting violation of Act). Moreover, the arbitrator's disposition will be subjected to an enhanced level of judicial review in order to afford appropriate relief from an arbitration award that obviously would frustrate a clear mandate
of public policy. Weiss, supra, ___ N.J. at ___ (slip op. at
31). Thus, in requiring that the dispute proceed first to
arbitration, we assure that the parties honor their contractual
commitment to arbitrate, presuming that the arbitrator's award
will vindicate the public policy interests at stake in a manner
consistent with our holdings in Jacob and Weiss, but reserving
the power of judicial review to override awards that violate a
clear mandate of public policy. Ibid.
White and Johnston left the firm. Moreover, although White and
Johnston's potential liability to Heher is secondary to that of
the partnership, their joinder as defendants in the proceeding
that seeks to establish the partnership's liability is both
appropriate and consistent with the entire controversy doctrine.
See Seventy-Three Land, Inc. v. Maxlar Partners,
270 N.J. Super. 332, 335-38 (App. Div. 1994); La Mar-Gate, Inc. v. Spitz,
252 N.J. Super. 303, 309-10 (App. Div. 1991).
We affirm the judgment of the Appellate Division.
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.
SUPREME COURT OF NEW JERSEY
GARRETT M. HEHER,
Plaintiff-Appellant
v.
SMITH, STRATTON, WISE, HEHER
Defendants-Respondents
and
TODD D. JOHNSTON and ROBERT A.
Defendants-Respondents
and
EDWARD J. GEOGHEGAN and JOHN DOE
Defendants.
O'HERN, J., concurring in part and dissenting in part.
standard of review set forth in the opinion of the Court. I do
not agree, however, that defendants Johnston and White should at
once be subject to the jurisdiction of the arbitrators for
imposition of liability under the law firm's termination
agreement without permitting the arbitrators to consider either
the entitlement of Johnston and White to benefits under the
agreement or the inequity of holding them liable for benefits to
others without any credit for benefits to which they were equally
entitled.
NO. A-10/11 SEPTEMBER TERM 1995
GARRETT M. HEHER,
DECIDED March 6, 1996
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