ADR LITIGATION Attorney Advertising April 2007 OPINION 43 TO - - PDF document

IN THIS ISSUE

Opinion 43 To Affect Out of State Attorneys Seeking to Appear in Alternative Dispute Proceedings (ADR) in New Jersey

David G. Tomeo, Esq.

The Road Not Taken: Avoiding Waiver of Arbitration Rights

Stefan B. Kalina, Esq.

Location Is Everything: Enforcing Forum Selection In Arbitration

Stefan B. Kalina, Esq. Questions on whether non-state licensed attorneys can appear in New Jersey Alternative Dispute Resolution (“ADR”) proceedings were answered in a recent ruling handed by the New Jersey Com- mittee on the Unauthorized Prac- tice of Law (“Committee”). In Opinion 43, the Committee ruled that out of state attorneys who seek to practice in ADR pro- ceedings — both arbitrations and mediations — in New Jersey must be in compliance with the New Jersey Rule of Professional Conduct (“RPC”) 5.5. The Com- mittee also “recommended” that ADR providers, such as the American Arbitration Association (“AAA”), “require” as part of their initial filing process, that

• ut of state attorneys submit

proof of their compliance with RPC 5.5 in connection with their

• representation. Out of state at-

torneys who act in accordance with these rules under RPC 5.5, may collect fees for participation in arbitrations and mediations in New Jersey.

Background

The question of whether out of state attorneys could participate in arbitra- tion and mediation proceedings in New Jersey was first addressed by the Committee in 1994. In Opinion 28, the Committee considered whether an

• ut of state attorney could appear be-

fore a panel of the AAA in New Jersey in the same capacity as any duly admit- ted New Jersey attorney to “present evidence and argue questions of sub- stantive law....” Based on its review of the AAA rules and other precedent, the Committee ruled that an out of state attorney could participate in an ADR matter in New Jersey. Ten years later — in 2004 — the RPC’s were amended to address the issue of multi-jurisdictional practice. Under RPC 5.5(b), a lawyer not admitted in New Jersey can practice law in this state only if the lawyer is admitted pro hac vice and is associated with local counsel, the lawyer is an in-house at-

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April 2007

Attorney Advertising

OPINION 43 TO AFFECT OUT OF STATE ATTORNEYS SEEKING TO APPEAR IN ALTERNATIVE DISPUTE PROCEEDINGS (ADR) IN NEW JERSEY

David G. Tomeo, Esq.

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torney in compliance with Court Rule 1:27-2, or the lawyer meets one of the following circumstances:

• the lawyer is involved in a transac-

tion which originates in, or is

• therwise related to, a jurisdiction in

which the lawyer is admitted;

• the lawyer engages in representa-

tion of a party in an ADR proceed- ing and the dispute originates in or is otherwise related to the jurisdic- tion in which the lawyer is admitted;

• the lawyer engages in discovery or

similar conduct in New Jersey in a proceeding in a jurisdiction in which the lawyer is admitted to practice; or

• the lawyer’s practice is on behalf of

an existing client of the jurisdiction in which the lawyer is admitted, provided that practice in New Jersey is occasional and is undertaken only when the prejudice to the client would be substantial if the lawyer is not involved in the case. Lawyers meeting any of these criteria then must satisfy RPC 5.5(c) which re- quires that the attorney be licensed and in good standing in all jurisdic- tions in which admitted, be subject to the RPC’s as well as the disciplinary authority of New Jersey Supreme Court, consent to the appointment of the Clerk of the Superior Court of New Jersey for service or process, not hold herself/himself out to be admit- ted in New Jersey, maintain a bona fide office in New Jersey, or use the

• ffice of local counsel as a bona fide
• ffice, and annually pay the required

fees and registration costs assessed to New Jersey attorneys. It was with this backdrop that the Committee decided to revisit Opinion 28.

Requirements for Practice

Opinion 43 begins its analysis by sum- marizing Opinion 28 and then review- ing the amendments to RPC 5.5. The Committee concluded that all the cri- teria in RPC 5.5 must be met by attor- neys seeking to practice in an ADR proceeding in New Jersey. The Com- mittee held that the most important

• f these requirements is that the Clerk
• f the Supreme Court be authorized

to accept service of process on the at- torney’s behalf and that the attorney comply with New Jersey’s rules regard- ing registration and fees. The Committee went on to consider two additional issues: whether a lawyer admitted in another state may participate in a mediation in New Jer- sey, and whether out of state attor- neys may be compensated for their services in an arbitration or mediation proceeding in New Jersey. Without any analysis or commentary whatso- ever, the Committee found that medi- ation “is akin to arbitration” and such required out of state attorneys partici- pating in mediation in New Jersey to likewise satisfy the requirements of RPC 5.5. The Committee answered the last question in the affirmative — allowing out of state attorneys in compliance with RPC 5.5 to be com- pensated for their services in connec- tion with arbitration and mediation

• matters. The Committee noted that,

in addition to the new requirements

• f Opinion 43, as well as those of

Opinion 28 and RPC 5.5, attorneys looking to be compensated must also follow any applicable New Jersey statutes and rules of court concerning the recovery of attorneys fees. At the end of its opinion, the Commit- tee indicated its belief that compliance with Opinion 43 would be difficult to

• monitor. Accordingly, the Committee

“recommended” that AAA and other arbitration and mediation providers “require, as part of [their] initial filing process,” the submission of proof of compliance with RPC 5.5, particularly the requirement of registration with the Clerk and the payment of the required fees.

Conclusions and Ramifications

Although Opinion 43 is short in overall length, the importance and the impact

• f this Opinion cannot be underesti-
• mated. Before Opinion 43 was prom-

ulgated, most attorneys gave little thought to whether they would be al- lowed to participate in an ADR pro- ceeding in another state — most 2

Opinion 43 not only imposes obligations on out

• f state lawyers, but also on New Jersey attorneys

serving as local counsel in arbitration or mediation matters.

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taking it for granted that they were permitted to do so without meeting any formal requirements. Obviously, Opinion 43 changes that way of think- ing with respect to New Jersey ADR

• proceedings. Opinion 43 not only im-

poses obligations on out of state lawyers, but also on New Jersey attor- neys serving as local counsel in arbitra- tion or mediation matters — local counsel now needs to make sure that their out of state colleagues have properly met all the requirements of RPC 5.5. The ramifications of Opinion 43 with respect to providers of ADR services is

• unclear. The first question is what if

any procedures providers must put in place to ensure compliance with RPC 5.5 given the Opinion’s use of the term “recommends”, rather than “re- quires.” To avoid the issue, ADR providers in New Jersey may want to put steps in place to ensure compli- ance, or at least make sure that they notify counsel of the Opinion 43 and the requirements of the RPC’s. Ques- tions also arise as to what a provider should do where an attorney has failed or refused to comply. These is- sues are of particular importance to ADR providers such as the CPR Inter- national Institute for Conflict Preven- tion and Resolution which provide minimal case administration. Finally, the Opinion places difficult burdens on neutrals themselves. Re- quiring or even suggesting compliance with Opinion 43 to an out of state counsel at the start of the proceedings seems to suggest a lack of neutrality, and hence may prevent the creation Recent disputes decided before the New Jersey Courts lend fur- ther insight to the future of arbi- tration proceedings. Specifically, in the case of Wein

• v. Morris, 388 N.J. Super 640

(App. Div. 2006), the Division held that parties who actively litigate for several years may waive their right to arbitration. Importantly, this ruling provides litigants with guidelines as to when, in the course of manag- ing a dispute, they may be ap- proaching the point of no return. To avoid this risk altogether, businesses should consider at the outset of any dispute whether they desire a race to the courthouse or arbitration. As the Wein case demonstrates, invoking arbitration early may avoid the risk of losing the op- tion of arbitrating before it is too late.

Background

The Wein case arises from a dispute

• ver unpaid commissions. The Plain-

tiffs, including Howard Wein (“Wein”), introduced potential ten- ants to the Defendants, including Jack Morris (“Morris”), to lease commercial

• space. The parties entered into “lease

commission agreements” which enti- tled Plaintiffs to fees if they success- fully produced a willing tenant to the

• Defendants. During negotiations over

two properties, the Defendants al- legedly bypassed the Plaintiffs and 3

• f trust crucial to the neutral’s role.

As with the providers, neutrals are faced with the question of how to im- plement such requirements and what to do in the face of a failure or refusal to comply. Finally, neutrals, who are themselves attorneys, may be con- cerned that working with an out of state attorney who is not in compli- ance may actually be assisting in the unauthorized practice of law, and hence face personal liability. These questions and others will likely be the subject of further opinions and possibly case law. Until further guid- ance is received, however, Opinion 43 must be carefully considered and ap- plied by all in the ADR community and by all litigators who regularly appear before ADR providers.

THE ROAD NOT TAKEN: AVOIDING WAIVER OF ARBITRATION RIGHTS

Stefan B. Kalina, Esq.

Importantly, this ruling provides liti- gants with guidelines as to when, in the course of managing a dispute, they may be approaching the point

• f no return.

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arranged leases directly with the po- tential tenants, and terminated the “lease commission agreements” with-

• ut paying Plaintiffs any fees. Plain-

tiffs sued alleging breach of contract and interference with Plaintiffs’ busi- ness relationships with those tenants. The “lease commission agreements” contained arbitration provisions. However, the parties proceeded to liti- gation, directly and willingly. Their lawsuit lasted almost five years. Fol- lowing the close of discovery, Morris sought to compel arbitration but with- drew his request. The case continued. Both parties filed summary judgment motions and the case was scheduled for trial. Surprisingly, on the eve of trial, the judge unilaterally decided the case was arbitrable. Both parties

• bjected. Nonetheless, the trial

judge disagreed, compelled the parties to arbitration, and ordered the lawsuit dismissed. Rather than appeal, the parties fol- lowed the order and arbitrated for

• ver two weeks. The arbitrator found

in favor of the Plaintiffs and awarded them unpaid commissions “in full set- tlement of all claims….” Wein, supra. In so doing, the arbitrator failed to ad- dress Plaintiffs’ claims for counsel fees and future commissions on potential lease renewals. Accordingly, the arbi- trator amended his award which was later confirmed by the trial court. Having lost, the Defendant appealed. The Wein court held the parties had waived their rights to arbitrate and should not have been compelled to do so in the first instance. It thus re- versed the trial court’s decision to send the case out for arbitration and rein- stated the lawsuit.

Application

• Establishing Waiver
• f Arbitration

The basic concept of waiver involves the “voluntary and intentional relin- quishment of a known and existing right,” Quigley v. KPMG Peat Mar- wick, LLP, 330 N.J. Super. 252 (App.

• Div. 2000) (internal citations omit-

ted). Under this standard, parties may waive their rights under valid arbitration agreements. Parties may indicate their intentions by word or

• deed. That is, parties may inform

courts that they wish to waive arbitration or they may demonstrate their desire not to arbi- trate by actively litigating their dispute. Either way, once arbitration has been waived, the matter must be litigated. Against this backdrop, New Jersey courts have analyzed if and when waivers occur in several fact pat-

• terns. At one end of the spectrum,

waiver does not occur simply by commencing suit. For example, in Hudik-Ross, Inc. v. 1530 Palisade

• Ave. Corp., 131 N.J. Super. 159

(App. Div. 1974), arbitration was raised immediately as a defense to the lawsuit, followed by a separate demand for arbitration four months into the case. The timely objection was made before any prejudice arose, thereby preventing a waiver from occuring. On the other end, courts have found a waiver when an

• bjection is not raised until the eve
• f trial. For example, in Farese v.

McGarry, 237 N.J. Super. 385 (App.

• Div. 1989), arbitration was not

raised as a defense to litigation until two weeks prior to trial. The failure to object over time led to prejudice and, therefore, a waiver. The Wein case falls outside the far end of the spectrum and thus serves as an example of when waiver surely occurs, Wein, supra. First, the parties chose to litigate for almost five years. In that time, they had several chances to fully assert their rights to arbitrate but failed to do

• so. The defendant waited to com-

pel arbitration for three and a half years while the lawsuit was pending and then withdrew his only attempt. Moreover, in response to the order to arbitrate, the parties mutually as- serted that their right “to compel ar- bitration had been waived.” Accordingly, “the parties waived their contractual right to arbitrate by actively litigating the matter in the trial court for a prolonged period of time….” Id. 4

Litigants must be mindful as they progress towards trial that, as either factor increases, so does the potential for prejudice to their adversary.

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While the Wein court opined that “it would be difficult to find a stronger case for waiver than the circumstances presented here,” it also provides guidance for those closer cases falling between the ex- tremes, Wein, supra. Following Wein, courts will look at factors in- cluding the “duration of discovery proceedings and the trial court’s ex- tensive involvement in managing suit….” Id. Litigants must be mind- ful as they progress towards trial that, as either factor increases, so does the potential for prejudice to their adversary. In deference to fairness, the greater chance of prejudice, the greater chance of waiver and, hence, a loss of arbitra- tion rights.

• The Effect of Waiver
• n Litigation

The Wein case also provides a clear example of how waiver directly im- pacts a court’s power to resolve

• cases. Courts are empowered to

compel parties to abide by their agreements to arbitrate. Impor- tantly, arbitration agreements do not strip courts of their jurisdiction to hear disputes. Rather, courts “will hold the parties to their under- taking…in recognition and enforce- ment of the agreement of the parties.” Wein, supra. For this rea- son, if parties consent to waive their arbitration rights, the court may exercise its jurisdiction and hear the case. Id. (“…to put it another way, such bar to the exercise of ju- risdiction as arises out of the agree- ment to arbitrate may be lifted by the consent or waiver of the parties.”) As Wein demonstrates, once waiver established, it will then “preclude enforcement of a contractual prom- ise to arbitrate.” Id. That is, a court may not relinquish its jurisdiction

• ver a matter once the parties waive

their right to resolve it through arbi-

• tration. Following this rule of tim-

ing, “having waived their contractual right to arbitrate by ac- tively litigating the matter in the trial court for a prolonged pe- riod…,” arbitration was no longer an option. Id. This timing element is especially im- portant in cases like Wein where waiver was established during the course of a prolonged lawsuit. Fu- ture litigants not willing to lose their arbitration rights should be aware that, at some point during active liti- gation, they may unwittingly waive

• them. To avoid this outcome, busi-

nesses should be guided by the fac- tors set forth in Wein and seek out arbitration before prejudice arises and the courts will be unable to

• blige their requests.

Conclusions and Ramifications

The Wein decision illustrates a clear case for waiver of arbitration rights through active litigation. Further- more, Wein provides guidance beyond the well-settled rule that parties may waive their rights by voluntarily choos- ing to litigate in lieu of arbitrating. It provides the key factors courts will consider when determining whether a party has waived its rights to arbitra-

• tion. Potential litigants should be

mindful of the tipping point created by prolonged litigation. Moreover, they should be guided by the Wein case as to when, in the course of liti- gation, they should act to preserve their rights to arbitrate the dispute at hand. 5

This timing element is especially important in cases like Wein where waiver was established during the course of prolonged litigation.

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In another recent decision - Allen v. World Inspection Net- work, Int’l, Inc., 389 N.J. Super 115 (App. Div. 2006) - the New Jersey Appellate Division held that parties must abide by the location they include in their ar- bitration agreements, a ruling that could pose direct impact on where businesses may be forced to arbitrate. The desig- nated locale is often known as the “forum selection” clause. By this decision, businesses may reasonably anticipate that New Jersey courts will enforce forum selection clauses over their later objections.

Background

The Allen Court was asked to consider a challenge to a forum selection clause directing New Jersey business- men to arbitrate in Washington State. Michael and James Allen (“Allen”), both of New Jersey, entered into a franchise agreement with World In- spection Network International (“WIN”), located in Washington, to

• pen and operate WIN franchises in

New Jersey. Both parties agreed that any disputes would “be resolved by arbitration conducted in Washington State.” Amidst a business dispute, Allen notified WIN they were terminat- ing the franchise agreement. In ac- cord with the forum selection clause, WIN filed a demand for arbitration in Washington State. Allen, in turn, filed suit in New Jersey and then sought to compel arbitration in New Jersey. While Allen secured an initial victory in trial court, WIN successfully appealed. The Appellate Division ruled that the arbitration must take place in Wash- ington State.

What It Means?

The ruling is significant for its rationale as much as its outcome. Allen raised a compelling objection that manda- tory arbitration agreements, including forum selection clauses, are prohibited under the New Jersey Franchise Prac- tices Act, N.J.S.A. 56:10-1 to 29 (“NJFPA”). The NJFPA directly applied to the parties’ contract and was en- acted to “shield [New Jersey] fran- chisees against abuses at the hands of franchisors with superior bargaining power….” Allen thus claimed that WIN’s insistence on arbitrating in their home state of Washington was an abuse that the NJFPA was designed to prevent.

Application

• The Federal Arbitration Act

However, the Allen court held that federal law trumped the objection raised under New Jersey law. That is, the Federal Arbitration Act, 9 U.S.C § 1, et seq. (“FAA”) “pre- empts” state laws, such as the NJFPA, regarding enforcement of ar- bitration agreements. Briefly, by way of backdrop, Congress is em- powered to regulate our national economy, known as interstate com-

• merce. At the same time, State leg-

islatures may pass laws affecting commerce inside their own borders, known as intrastate commerce. Generally, when both federal and state law conflict over a particular economic matter affecting both forms of commerce, federal law “preempts” state law under the Su- premacy Clause of the United States

• Constitution. Given the rise of arbi-

tration in interstate commercial transactions, Congress passed the FAA in 1947, thereby “preempting” any state law (e.g. the NJFPA) affect- ing arbitration. Since then, the 6

LOCATION IS EVERYTHING: ENFORCING FORUM SELECTION IN ARBITRATION

Stefan B. Kalina, Esq.

By this decision, businesses may reasonably an- ticipate that New Jersey courts will enforce forum selection clauses over their later objections.

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scope of arbitration and its proce- dures has been largely governed by federal law. The FAA imposes a strong federal policy of enforcing agreements to arbitrate disputes arising from inter- state commercial transactions. Southland Corp. v. Keating, 465 U.S. 1 (1984). It does so in two

• ways. First, it mandates that all arbi-

tration agreements be strictly en- forced according to their terms. According to the FAA, forum selec- tion is an “integral” term worthy of strict enforcement. Second, state courts must apply and enforce the FAA when reviewing arbitration

• agreements. Id. This requires state

courts to disregard any contrary state laws that would invalidate ar- bitration agreements that otherwise pass muster under the FAA. Id. The FAA does not contain any prohi- bition against mandatory arbitration

• r forum selection as found in the
• NJFPA. Accordingly, the Allen court

followed the FAA and upheld the parties’ franchise agreement that re- quired arbitration to take place in Washington State. Therefore, Allen instructs that New Jersey business may not avail themselves of conflict- ing, albeit favorable, New Jersey laws to raise after-the fact objec- tions to undesired, out of state arbitrations.

• Contractual Principles

Interestingly, there is an exception. The FAA only applies in this fashion provided the arbitration agreement itself is a valid contract. Interest- ingly, the trial court found the forum selection “unconscionable,” one of many bases to void contracts. This required “a finding of ‘such patent unfairness that no reasonable per- son not acting under compulsion or

• ut of necessity would accept its

terms.’ ” Allen, supra. (citing Howard v Dialosa, 241 N.J. Super. 222 (App. Div.), certif. denied, 122 N.J. 414 (1990)). Although the Ap- pellate Division rejected the trial court’s finding and reinstated the ar- bitration agreement due to lack of evidence, its reasons are instructive. The Allen court found no evidence regarding the negotiation of the agreement, whether the parties were represented by counsel, or the financial burdens imposed by the forum selection of Washington

• State. Indeed, the Allen court re-

marked that out of state forum se- lections are not per se improper because “reasonable persons seeking a lucrative franchise could conclude that the cost of arbitrating disputes in Washington would be

• utweighed by the economic advan-

tage of having the franchise.” Allen, supra. Ultimately, this case was sent back to the trial court so it may explore this issue. In so doing, the Allen de- cision teaches that while contractual defenses may exist to avoid the long arm of the FAA, they can prove diffi- cult to establish. New Jersey courts will consider the challenge as if it were any other contract dispute. Therefore, businesses must be pre- pared to explain why the arbitration terms to which they initially agreed are no longer binding on them.

Conclusions and Ramifications

The Allen decision reflects the caution- ary tale of how control may be lost if the parties agree to arbitrate in an in- convenient or distant location, even

• unwittingly. Under the FAA, state

courts must strictly enforce all integral terms of an arbitration clause, includ- ing forum selection. Accordingly, New Jersey courts, as in Allen, will likely force parties to arbitrate in their agreed-upon location over any later

• bjections. Therefore, businesses

should carefully consider where they wish to arbitrate before entering agreements to do so. 7

Allen raised a compelling objection that mandatory arbitration agree- ments, including forum selection clauses, are prohibited under the New Jersey Franchise Practices Act, N.J.S.A.

“ ”

ABOUT THE AUTHORS

David G. Tomeo is a Member of the Lowenstein Sandler Litigation Department and focuses on in- surance coverage disputes, telecommunications law, franchise practice matters and public con- tracting litigation. Mr. Tomeo is included on the roster of Superior Court of New Jersey approved mediators, and frequently appears before the AAA, and other ADR providers. Mr. Tomeo is a member of the Chartered Institute of Arbitrators, and is included on the Mediators’ Roster of the CPR International Institute for Conflict Prevention and Resolution. Additionally, Mr. Tomeo serves as the Lowenstein Sandler liaison to the CPR International Institute for Conflict Prevention and Resolution. Stefan B. Kalina is Counsel in the Lowenstein Sandler Litigation Department. He focuses his practice on insurance commercial law. Mr. Kalina is a member of the Roster of Neutrals for the Commercial Division of the Supreme Court of the State of New York for New York County, and is a certified arbitrator for the Council of Better Business Bureaus’ Autoline Program.

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