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Hackett v. Milbank, Tweed, Hadley & McCloy, 86 N.Y.2d 146 (June 15, 1995).

ARBITRATION - PROFESSIONAL RESPONSIBILITY (RESTRICTIONS ON PRACTICE OF LAW) - PUBLIC POLICY

ARBITRATOR'S AWARD CANNOT BE VACATED UNLESS THE RESTRICTION ON THE PRACTICE OF LAW IS A CLEAR VIOLATION OF PUBLIC POLICY

[SUMMARY] | [ISSUE & DISPOSITION] | [AUTHORITIES CITED] | [COMMENTARY

SUMMARY

Hackett, a partner with Milbank, Tweed left for another law firm. He requested payments under the firm's articles of partnership for departing partners. Milbank, Tweed declined to release the withdrawal payments because the agreement provided for reducing the amount due, dollar-for-dollar, with the former partner's new earned income. Hackett maintained that the denial of payments was an impermissible restraint on the practice of law, as well as the unlawful forfeiture of earned-but-undistributed income.

An arbitrator found the partnership agreement enforceable, and thus Hackett was not entitled to the supplemental payments. Hackett moved to vacate the decision. The supreme court and appellate division dismissed the arbitrator's decision, reasoning that the scheme denied the repayment of undistributed net profits and resulted in a restriction on the practice of law. Focusing on the public policy favoring arbitration, the Court of Appeals reversed, holding that as long as the firm's payment provision did not facially restrict the practice of law, there was no clear violation of public policy and thus no reason to overturn the arbitrator's decision.

ANALYSIS

ISSUE

Whether withholding supplemental payments to withdrawing partners on the basis of their new income facially violates the public policy against restrictions on the practice of law, requiring that an arbitrator's award on the issue should be vacated.

DISPOSITION

No. Order reversed, with costs, and matter remitted to supreme court. 

CASES CITED

Discussed
Cited Only

OTHER SOURCES CITED

  • N.Y. Civ. Prac. L. & R. 7509, 7511 (Consol. 1988).
  • Model Code of Professional Responsibility DR 2-108A

COMMENTARY

1. Court's Reasoning
The court held that the contractual provision did not violate public policy. The provision was "not inevitably anticompetitive on its face" because it penalized retiring partners equally with those entering new business. The court noted that the determination whether a provision violates "strong public policy" is factually dependent, and varies from situation to situation. See Cohen v. Lord, Day & Lord, 75 N.Y.2d 95, 102 (N.Y. 1989). Under the court's previous holding in Cohen, public policy strongly favors provisions that do not restrict competition (whether by financial inducement or otherwise).

The evaluation of the clause in question was made in the light of the court's strong affirmation of arbitration. Engaging in a thorough discussion of the arbitrator's reasoning, the court noted that the arbitrator found the section in question was "competition neutral." The court noted that an arbitrator's decision may not be vacated pursuant to CPLR 7509, unless serious flaws in the decision-making process occurred (such as fraud, corruption, or unwaived procedural defects). As a result, the court reached its conclusion that the clause was not anticompetitive, in light of a certain amount of deference to the arbitrator's decision.

2. Survey of Law in Other Jurisdictions
Forty-nine states, including New York, have adopted either the Model Rules of Professional Conduct or Model Code of Professional Responsibility. The Model Rules and Code both provide that lawyers should not enter agreements restricting their ability to practice law, except where the agreement concerns retirement benefits. States are split on whether or not noncompetition clauses involving forfeiture of benefits should be upheld.

28 ALR 5th 420 considers restrictive covenants on competition between lawyers to be enforceable where the covenant is reasonable, not against public policy, supported by consideration, and ancillary to a lawful contract. In Howard v. Babcock, 863 P.2d 150 (Calif. 1994), the California court followed a similar test. The court balanced the need for diligent counsel against the business interests of the law firm and upheld the noncompetition covenant, which resulted in a forfeiture of benefits to the departing partner.

3. Unanswered Questions
It remains to be seen where the fact-dependent dividing line lies between valid and anticompetitive clauses. The "inevitably anticompetitive" characterization of the test provides a high hurdle for plaintiffs seeking to invalidate an agreement, if indeed this decision represents a departure from the Cohen test (rather than a commentary on the facts of the case).

It is unclear whether the "inevitably anticompetitive" test is the standard for future cases, or whether the court will retain the Cohen test of "functionally and realistically discourag[ing]...partner[s] from serving clients who might wish to continue to be represented by the withdrawing lawyer." Additionally, the court did not set guidelines for how anticompetitive a clause must be before the court invalidates an arbitrator's decision to uphold it.

This lack of precision may result from the court's strong support for arbitrators and the outcome of arbitration. It is doubtful that the court would provide similar deference to a lower court's decision. After all, an arbitrator's mistake of law does not support overturning an award. See, e.g., Maross Constr. Inc. v. Central N.Y. Regional Transp. Auth., 66 N.Y.2d 341, 346 (N.Y. 1985). As a result, while this decision strongly reaffirms public policy favoring arbitration, it provides minimal insight on the doctrines of DR 2-108A and Cohen.

4. Implications
The theoretical implications arising from the case center around the strong policy favoring arbitration. The court phrases the salient issue as "whether, bearing in mind the strong public policy favoring arbitration, there exists any ground on which to vacate the arbitrator's determination upon subsequent judicial review." By holding valid the arbitration award because it "does not on its face clearly violate public policy," the court focuses upon the societal benefit of arbitration in lieu of litigation.

Favoring arbitration as a solution to contract disputes does not require that courts turn away challenges to an arbiter's directives. On the contrary, the courts retain their role as the assurers of fair, rational, and legal arbitration. Despite this, the Court of Appeals merely required facial validity of the arbitration settlement to uphold it. Arbiters are not experts like administrative law judges or boards. They are merely non-judicial bodies that settle disputes according to their own, or previously agreed upon, rules. In that sense, their decisions deserve no greater deference than those of a trial court. Only judicial economy counsels that arbitration results are not scrutinized with great rigor.

Given the increasing procedural difficulties and costs of litigation, arbitration (and contracts requiring it) are increasingly palatable alternatives to the more traditional method of dispute settlement. Unfortunately, if courts regularly and unquestioningly uphold arbitration results, except where facial impropriety exists, then unseen and unremedied unfairness may increase.

Lawyers may seek to extend this case to other cases involving neutral mediators (administrative law judges or professional boards, for example), arguing that the Hackett standard should apply similarly to these proceedings. This slant would require construing the policy favoring arbitration as one that in fact favors non-litigation. Accordingly, one probable result of Hackett will be a strengthening of non-judicial dispositions, and courts will not hear parties complain that they did not get their day in court when the parties chose that option; there will be no second bite at the apple.

Prepared By:

  • Richard J. Colosimo, '97
  • Adam R. Fox, '96
  • Howard K. Jeruchimowitz, '97
  • R. Tor Liimatainen, '97
  • John R. Mayer, '96
  • Reese E. Solberg, '97
If you have views about the Court's decision or this LII commentary on it that you would like to share, the LII editors would be pleased to hear from you via an e-mail message to: editors@lii.law.cornell.edu