Nixon Peabody Clawback Fight Shows Lateral Move Pitfalls

By Anna Sanders
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Law360 (October 13, 2020, 6:18 PM EDT) -- A New York court's ruling this month that former Nixon Peabody LLP attorneys must arbitrate claims that they were punished for leaving the firm underscores the pitfalls of lateral moves and not closely reviewing partnership agreements, just as the coronavirus pandemic makes departures more appealing, experts say.

"I think we're going to see more lateral movement in the days to come," said Chris Batz, owner of legal recruiting firm The Lion Group LLC. "The pandemic has exposed good and bad leadership, or weak leadership. It's revealed deficiencies in law firm culture and structure, and I think partners are going to gravitate to strong business models, strong culture, strong leadership, and they should."

But the Nixon Peabody case shows what can go wrong when attorneys switch firms. After Thomas Gaynor, Abigail T. Reardon, Jinjian Huang, Stephen Reil and Maria S. Swiatek left Nixon Peabody for DLA Piper in July 2019, the firm tried to claw back hundreds of thousands of dollars in earned bonuses, the attorneys said in a September petition in New York state court.

The attorneys wanted to force their former firm to mediate instead of arbitrate the dispute, arguing in the petition that Nixon Peabody wanted to "bully" them into "costly arbitrations all over the country." Experts said law firms locked in disagreements with former clients or employees typically want to go into arbitration because it's confidential and tends to be quicker. 

The former Nixon Peabody attorneys said the firm didn't abide by the dispute resolution procedure in its partnership agreement requiring "parties to first negotiate in good faith, then mediate, and finally, as a last resort, arbitrate."

But New York Supreme Court Justice Jennifer G. Schecter agreed with Nixon Peabody's position that the partnership agreement mandated that any disputes with the former attorneys were for an arbitrator to decide — no matter if the Federal Arbitration Act or New York law applied.

Batz said the case reinforces the need for partners to get counsel before they make a move, as opposed to after igniting a dispute.

"They also need to be aware of the risks," Batz said. "No one is safe, necessarily, from the potential pitfalls of this happening, which is why it creates a chilling effect."

Other experts said that even if the case doesn't end up "chilling" other attorney departures, the judge's decision in the Nixon Peabody case demonstrates the difficulties of making a lateral move within the confines of a partnership agreement.

If partnership agreements mandate arbitration like Nixon Peabody's did, that clause will be enforced by the court to resolve disputes, said Geri S. Krauss, founding partner of Krauss PLLC and author of "Partner Departures and Lateral Moves: A Legal and Ethical Guide."

This makes the judge's decision in the Nixon Peabody case "very typical," said Don Foster, the commercial litigation practice group chair at Offit Kurman, who has written about the complexities of leaving firms.

"The judge is enforcing the alternative dispute resolution provision of a commercial contract," Foster said. "And 100% of the time, a judge is going to kick that back to the arbitrator."

That's why roving lawyers should carefully read partnership agreements before making a move, experts said.

"Attorneys shouldn't expect that either the firm or the courts will be willing to entertain complaints outside of the terms of that contract," said Jeffrey Lowe, global practice leader of consultancy Major Lindsey & Africa's law firm practice group.

Some attorneys are unaware of what their partnership agreements stipulate about leaving for another firm. Like the Nixon Peabody contract in dispute, some agreements may require that partners repay bonuses. Others may prevent a partner from collecting a bonus for their performance in the prior year if they've left the firm before payout. Agreements might also stipulate how much notice a firm needs before an attorney leaves, and govern capital repayment and giving notice to clients.

Partners switching firms has become more common in recent years as the legal industry favors a market where firms can freely compete for top talent.

A recent American Bar Association opinion restricted a firm's ability to impose fixed notice periods for departing lawyers before they transition to a new practice, finding they can be unenforceable. The December 2019 opinion also found firms cannot prohibit departing lawyers from contacting clients without client consent.

"The fundamental notion is attorneys should be free to move to other firms," Lowe said. "It's not really to protect the attorney's interests but rather to protect the client's interests."

While it's too soon to say whether the Nixon Peabody case will have a wider impact on the issue, a published arbitration decision in the case could have some effect on similar cases, Foster said.

"We're really early on in the game, and this decision isn't going to have much influence one way or the other, at least for now," he said.

A lawyer representing the DLA Piper attorneys didn't return an email seeking comment Friday. A representative for Nixon Peabody had no comment.

The DLA Piper attorneys are represented by Andrew G. Celli Jr. and Samuel Shapiro of Emery Celli Brinckerhoff Abady Ward & Maazel LLP.

Nixon Peabody is represented in-house by Richard A. McGuirk.

The case is Thomas Gaynor et al. v. Nixon Peabody LLP, case number 654451/2020, in the Supreme Court of the State of New York, County of New York.

--Editing by Aaron Pelc.

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