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Current Developments in the Commercial Divisions of the
New York State Courts by Schlam Stone & Dolan LLP
Posted: May 6, 2019

Arbitrator, Not Court, to Decide if Provision of Contract Unenforceable as a Matter of New York Public Policy

On April 22, 2019, Justice Scarpulla of the New York County Commercial Division issued a decision in Selendy v. Quinn Emanuel Urquhart & Sullivan, LLP, 2019 NY Slip Op. 29119, holding that an arbitrator, not the court, should decide whether a contract provision was unenforceable as a matter of New York public policy, explaining:

When determining whether a particular dispute is arbitrable, a court must determine whether the dispute falls within the scope of the arbitration agreement, and whether the dispute is one that may be submitted to arbitration without violation of any law or public policy. Here, the Arbitration Provision is broad, unambiguous and requires arbitration of disputes related to the Partnership Agreement, including the arbitrability of any dispute. Petitioners argue, however, that the question of arbitrability in this context is not for the arbitrator in the first instance because it raises issues of public policy.

Petitioners contend that section 5.1(a)(ii) of the Partnership Agreement is a void forfeiture-for-competition provision in violation of rule 5.6 of the New York Rules of Professional Responsibility. That rule provides, in relevant part, that a lawyer shall not participate in offering or making a partnership agreement that restricts the right of a lawyer to practice after termination of the relationship. The rule prohibits restrictions on the practice of law, and courts apply the rule for purposes of assessing the availability of civil remedies for claims such as those Quinn Emanuel raises in the arbitration proceeding.

New York courts, for example, have denied enforcement of anticompetition clauses as violative of public policy. The issue then is whether the alleged violation of rule 5.6, which implicates New York public policy, should be determined preliminary by a New York court. Quinn Emanuel argues that such public policy concerns do not preempt the Arbitration Provision and cites Hackett v Milbank, Tweed, Hadley & McCloy, 80 NY2d 870 (1992) (hereinafter, “Hackett”) as support.

Hackett involved a dispute between a lawyer and his former law firm. The lawyer sought supplemental payments upon his withdrawal, but the law firm refused based on the terms of the partnership agreement. To resolve the dispute, the law firm demanded arbitration pursuant to the partnership agreement. The lawyer objected and filed a petition for a stay, arguing that public policy exempted the dispute from arbitration.

The trial court in Hackett granted the petition for a permanent stay. The Appellate Division, First Department affirmed, agreeing with the trial court that the partnership agreement incorporated a forfeiture-for-competition clause in violation of the lawyer code and therefore, required resolution by a court of law. The Court of Appeals, however, reversed and instead held that the controversy should be decided in these circumstances by an arbitrator in the first instance.

In a second proceeding challenging the arbitrator’s determination, the Court of Appeals confirmed its holding in Hackett, noting that petitioner’s argument that an arbitration decision denying him benefits would be contrary to public policy was insufficient to preempt the arbitration: the arbitrator’s decision, once made, could be subsequently challenged on a motion to vacate or confirm.

In accordance with Hackett and Hackett II, the public policy issue here, i.e., whether section 5.1(a)(ii) of the Partnership Agreement is prohibitively anticompetitive under New York law, does not overcome the broad Arbitration Provision, which must be given effect as overriding policy. Petitioners’ argument to the contrary — that the provision at issue here is facially anticompetitive and therefore, distinguishable from Hackett and Hackett II — is unpersuasive.

As the Court of Appeals noted in Hackett II, a contested competition provision must be assessed within its own particular litigation context. The provision in dispute here is neither identical to provisions previously determined as anticompetitive under New York law nor does it outright prohibit the practice of law. Although Petitioners submit competent proof supporting their argument that section 5.1(a)(ii) of the Partnership Agreement is anticompetitive under New York law, including John Quinn’s emails and Lieberman’s declaration, it is for the arbitrator in the first instance to consider these submissions when determining whether the provision at issue is an unenforceable forfeiture-for-competition clause. Any further inquiry on my part is precluded by the broad arbitration provision and the strong public policy compelling its enforcement.

Petitioners may also raise before the arbitrator the important issue of whether the Partnership Agreement’s choice of law provision, which provides that California law is applicable, should apply to determine the enforceability of section 5.1(a)(iii) against New York attorneys. As Petitioners note, unlike New York courts, California courts are more likely to enforce restrictive covenants in law firm agreements, despite the same prohibition in that state’s lawyer code.

However, it is for the arbitrator to pass upon whether to apply the choice of law provision in the context of resolving the parties’ payment dispute where, as here, a broad arbitration provision exists.

Moreover, resolution of the choice of law issue by an arbitrator would not impermissibly interfere with the New York judiciary’s ability to discipline New York attorneys.

For the foregoing reasons, I grant Quinn Emanuel’s motion to dismiss the petition and direct the parties to proceed with the Arbitration Proceeding.

(Internal quotations and citations omitted).

Complex commercial litigation involves more than courts. Disputes often are–by agreement–decided by private arbitrators. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have a question regarding a dispute that is subject to an arbitration agreement.

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