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

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1 ADR LITIGATION April 2007 Attorney Advertising 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. OPINION 43 TO AFFECT OUT OF STATE ATTORNEYS SEEKING TO APPEAR IN ALTERNATIVE DISPUTE PROCEEDINGS (ADR) IN NEW JERSEY David G. Tomeo, 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 Committee on the Unauthorized Practice of Law (Committee). In Opinion 43, the Committee ruled that out of state attorneys who seek to practice in ADR proceedings both arbitrations and mediations in New Jersey must be in compliance with the New Jersey Rule of Professional Conduct (RPC) 5.5. The Committee also recommended that ADR providers, such as the American Arbitration Association (AAA), require as part of their initial filing process, that out of state attorneys submit proof of their compliance with RPC 5.5 in connection with their representation. Out of state attorneys 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 arbitration and mediation proceedings in New Jersey was first addressed by the Committee in In Opinion 28, the Committee considered whether an out of state attorney could appear before a panel of the AAA in New Jersey in the same capacity as any duly admitted New Jersey attorney to present evidence and argue questions of substantive 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-

2 torney in compliance with Court Rule 1:27-2, or the lawyer meets one of the following circumstances: the lawyer is involved in a transaction which originates in, or is otherwise related to, a jurisdiction in which the lawyer is admitted; the lawyer engages in representation of a party in an ADR proceeding and the dispute originates in or is otherwise related to the jurisdiction 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 requires that the attorney be licensed and in good standing in all jurisdictions 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 admitted in New Jersey, maintain a bona fide office in New Jersey, or use the office of local counsel as a bona fide office, 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. Opinion 43 not only imposes obligations on out of state lawyers, but also on New Jersey attorneys serving as local counsel in arbitration or mediation matters. Requirements for Practice Opinion 43 begins its analysis by summarizing Opinion 28 and then reviewing the amendments to RPC 5.5. The Committee concluded that all the criteria in RPC 5.5 must be met by attorneys seeking to practice in an ADR proceeding in New Jersey. The Committee held that the most important of these requirements is that the Clerk of the Supreme Court be authorized to accept service of process on the attorney s behalf and that the attorney comply with New Jersey s rules regarding 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 Jersey, and whether out of state attorneys may be compensated for their services in an arbitration or mediation proceeding in New Jersey. Without any analysis or commentary whatsoever, the Committee found that mediation is akin to arbitration and such required out of state attorneys participating 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 compensated for their services in connection with arbitration and mediation matters. The Committee noted that, in addition to the new requirements of 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 Committee 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 of this Opinion cannot be underestimated. Before Opinion 43 was promulgated, most attorneys gave little thought to whether they would be allowed to participate in an ADR proceeding in another state most 2

3 taking it for granted that they were permitted to do so without meeting any formal requirements. Obviously, Opinion 43 changes that way of thinking with respect to New Jersey ADR proceedings. Opinion 43 not only imposes obligations on out of state lawyers, but also on New Jersey attorneys serving as local counsel in arbitration 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 requires. To avoid the issue, ADR providers in New Jersey may want to put steps in place to ensure compliance, or at least make sure that they notify counsel of the Opinion 43 and the requirements of the RPC s. Questions also arise as to what a provider should do where an attorney has failed or refused to comply. These issues are of particular importance to ADR providers such as the CPR International Institute for Conflict Prevention and Resolution which provide minimal case administration. Finally, the Opinion places difficult burdens on neutrals themselves. Requiring 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 of trust crucial to the neutral s role. As with the providers, neutrals are faced with the question of how to implement such requirements and what to do in the face of a failure or refusal to comply. Finally, neutrals, who are themselves attorneys, may be concerned that working with an out of state attorney who is not in compliance may actually be assisting Recent disputes decided before the New Jersey Courts lend further insight to the future of arbitration 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 managing a dispute, they may be approaching 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 option of arbitrating before it is too late. 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 guidance is received, however, Opinion 43 must be carefully considered and applied 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. Background The Wein case arises from a dispute over unpaid commissions. The Plaintiffs, including Howard Wein (Wein), introduced potential tenants to the Defendants, including Jack Morris (Morris), to lease commercial space. The parties entered into lease commission agreements which entitled Plaintiffs to fees if they successfully produced a willing tenant to the Defendants. During negotiations over two properties, the Defendants allegedly bypassed the Plaintiffs and Importantly, this ruling provides litigants with guidelines as to when, in the course of managing a dispute, they may be approaching the point of no return. 3

4 arranged leases directly with the potential tenants, and terminated the lease commission agreements without paying Plaintiffs any fees. Plaintiffs sued alleging breach of contract and interference with Plaintiffs business relationships with those tenants. The lease commission agreements contained arbitration provisions. However, the parties proceeded to litigation, directly and willingly. Their lawsuit lasted almost five years. Following the close of discovery, Morris sought to compel arbitration but withdrew 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 objected. Nonetheless, the trial judge disagreed, compelled the parties to arbitration, and ordered the lawsuit dismissed. Rather than appeal, the parties followed the order and arbitrated for over two weeks. The arbitrator found in favor of the Plaintiffs and awarded them unpaid commissions in full settlement of all claims. Wein, supra. In so doing, the arbitrator failed to address Plaintiffs claims for counsel fees and future commissions on potential lease renewals. Accordingly, the arbitrator 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 reversed the trial court s decision to send the case out for arbitration and reinstated the lawsuit. Litigants must be mindful as they progress towards trial that, as either factor increases, so does the potential for prejudice to their adversary. Application Establishing Waiver of Arbitration The basic concept of waiver involves the voluntary and intentional relinquishment of a known and existing right, Quigley v. KPMG Peat Marwick, LLP, 330 N.J. Super. 252 (App. Div. 2000) (internal citations omitted). 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 arbitrate 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 patterns. At one end of the spectrum, waiver does not occur simply by commencing suit. For example, in Hudik-Ross, Inc. v 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 objection is not raised until the eve of 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 compel 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 asserted that their right to compel arbitration 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

5 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 extremes, Wein, supra. Following Wein, courts will look at factors including the duration of discovery proceedings and the trial court s extensive involvement in managing suit. Id. Litigants must be mindful 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 arbitration rights. The Effect of Waiver on Litigation The Wein case also provides a clear example of how waiver directly impacts a court s power to resolve cases. Courts are empowered to compel parties to abide by their agreements to arbitrate. Importantly, arbitration agreements do not strip courts of their jurisdiction to hear disputes. Rather, courts will hold the parties to their undertaking in recognition and enforcement of the agreement of the parties. Wein, supra. For this reason, 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 jurisdiction as arises out of the agreement to arbitrate may be lifted by the consent or waiver of the parties.) As Wein demonstrates, once waiver established, it will then preclude This timing element is especially important in cases like Wein where waiver was established during the course of prolonged litigation. enforcement of a contractual promise to arbitrate. Id. That is, a court may not relinquish its jurisdiction over a matter once the parties waive their right to resolve it through arbitration. Following this rule of timing, having waived their contractual right to arbitrate by actively litigating the matter in the trial court for a prolonged period, arbitration was no longer an option. Id. This timing element is especially important in cases like Wein where waiver was established during the course of a prolonged lawsuit. Future litigants not willing to lose their arbitration rights should be aware that, at some point during active litigation, they may unwittingly waive them. To avoid this outcome, businesses should be guided by the factors set forth in Wein and seek out arbitration before prejudice arises and the courts will be unable to oblige their requests. Conclusions and Ramifications The Wein decision illustrates a clear case for waiver of arbitration rights through active litigation. Furthermore, Wein provides guidance beyond the well-settled rule that parties may waive their rights by voluntarily choosing to litigate in lieu of arbitrating. It provides the key factors courts will consider when determining whether a party has waived its rights to arbitration. 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 litigation, they should act to preserve their rights to arbitrate the dispute at hand. 5

6 LOCATION IS EVERYTHING: ENFORCING FORUM SELECTION IN ARBITRATION Stefan B. Kalina, Esq. In another recent decision - Allen v. World Inspection Network, 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 arbitration agreements, a ruling that could pose direct impact on where businesses may be forced to arbitrate. The designated 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 businessmen to arbitrate in Washington State. Michael and James Allen (Allen), both of New Jersey, entered into a franchise agreement with World Inspection Network International (WIN), located in Washington, to open 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 terminating the franchise agreement. In accord 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 Washington State. What It Means? The ruling is significant for its rationale as much as its outcome. Allen raised a compelling objection that mandatory arbitration agreements, including forum selection clauses, are prohibited under the New Jersey Franchise Practices Act, N.J.S.A. 56:10-1 to 29 (NJFPA). The NJFPA directly applied to the parties contract and was enacted to shield [New Jersey] franchisees 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) preempts state laws, such as the NJFPA, regarding enforcement of arbitration agreements. Briefly, by way of backdrop, Congress is empowered to regulate our national economy, known as interstate commerce. At the same time, State legislatures 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 Supremacy Clause of the United States Constitution. Given the rise of arbitration in interstate commercial transactions, Congress passed the FAA in 1947, thereby preempting any state law (e.g. the NJFPA) affecting arbitration. Since then, the By this decision, businesses may reasonably anticipate that New Jersey courts will enforce forum selection clauses over their later objections. 6

7 scope of arbitration and its procedures has been largely governed by federal law. The FAA imposes a strong federal policy of enforcing agreements to arbitrate disputes arising from interstate commercial transactions. Southland Corp. v. Keating, 465 U.S. 1 (1984). It does so in two ways. First, it mandates that all arbitration agreements be strictly enforced according to their terms. According to the FAA, forum selection 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 arbitration agreements that otherwise pass muster under the FAA. Id. The FAA does not contain any prohibition against mandatory arbitration or forum selection as found in the NJFPA. Accordingly, the Allen court followed the FAA and upheld the parties franchise agreement that required arbitration to take place in Washington State. Therefore, Allen instructs that New Jersey business may not avail themselves of conflicting, albeit favorable, New Jersey laws to raise after-the fact objections to undesired, out of state arbitrations. Contractual Principles Interestingly, there is an exception. The FAA only applies in this fashion Allen raised a compelling objection that mandatory arbitration agreements, including forum selection clauses, are prohibited under the New Jersey Franchise Practices Act, N.J.S.A. provided the arbitration agreement itself is a valid contract. Interestingly, 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 person not acting under compulsion or out 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 Appellate Division rejected the trial court s finding and reinstated the arbitration 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 remarked that out of state forum selections are not per se improper because reasonable persons seeking a lucrative franchise could conclude that the cost of arbitrating disputes in Washington would be outweighed by the economic advantage 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 decision teaches that while contractual defenses may exist to avoid the long arm of the FAA, they can prove difficult to establish. New Jersey courts will consider the challenge as if it were any other contract dispute. Therefore, businesses must be prepared 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 cautionary tale of how control may be lost if the parties agree to arbitrate in an inconvenient or distant location, even unwittingly. Under the FAA, state courts must strictly enforce all integral terms of an arbitration clause, including forum selection. Accordingly, New Jersey courts, as in Allen, will likely force parties to arbitrate in their agreed-upon location over any later objections. Therefore, businesses should carefully consider where they wish to arbitrate before entering agreements to do so. 7

8 ADR LITIGATION ABOUT THE AUTHORS David G. Tomeo is a Member of the Lowenstein Sandler Litigation Department and focuses on insurance coverage disputes, telecommunications law, franchise practice matters and public contracting 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. Visit us online at www. lowenstein.com This document is published by Lowenstein Sandler PC to keep clients informed about current issues. It is intended to provide general information only. Lowenstein Sandler PC 65 Livingston Avenue 1251 Avenue of the Americas Roseland, NJ New York, NY