Meierhenry Sargent LLP v. Williams et al

Filing 26

Memorandum Opinion and Order granting in part and denying in part 16 Motion for Order to Declare the Scope of the Arbitration Proceedings; granting in part and denying in part 16 Motion for Relief from Stay. Signed by U.S. District Judge Lawrence L. Piersol on 11/20/2017. (JLS)

filed

UNITED STATES DISTRICT COURT
DISTRICT OF SOUTH DAKOTA

2 0 201?

SOUTHERN DIVISION
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MEIERHENRY SARGENT LLP, a
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South Dakota limited liability partnership, *

CIV 16-4180

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Plaintiff,

MEMORANDUM OPINION

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vs.

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AND ORDER ON PLAINTIFF'S

* MOTION FOR RELIEF FROM STAY
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AND FOR ORDER

BRADLEY WILLIAMS and

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TO DECLARE THE SCOPE OF

KERRY WILLIAMS,

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ARBITRATION PROCEEDINGS

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Defendants.

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Pending before the Court is Plaintiffs Motion for Relieffrom Stay and Motion for Order to
Declare the Scope ofArbitration Proceedings,Doc. 16. A hearing was held and argument was heard

on the Motion on October 26, 2017 with Plaintiffs counsel appearing in person and Defendant's
counsel appearing by telephone. For the reasons set forth herein. Plaintiffs Motion is granted.

BACKGROUND

In 2015 and part of 2016, Defendants, residents of Mendota Heights, Minnesota, owned
agricultural land in Lincoln County,South Dakota. During this time, Dakota Access,LLC("Dakota
Access")was seeking to acquire easements from landowners in various counties,including Lincoln
County, in order to build an oil pipeline. In January of 2015, Defendants hired Plaintiff, a Sioux
Falls, South Dakota law firm,to advise and consult with them about various legal matters related to
the proposed pipeline ("First Hiring"). The First Hiring representation ended sometime before
October of 2015.

In the First Hiring, the parties agreed Defendants would pay Plaintiff on a per hour basis at
the rate of $275/hour for Mark Meierhenry's time, $160/hour for Christopher Healy's time, and

$75/hour for their legal assistant's time. At the time the First Hiring ended. Plaintiff alleged that

Defendants had an outstanding bill for services rendered in the amount of$593.60. There was not
an arbitration provision in the terms ofthe First Hiring.

In October of2015, Dakota Access initiated an eminent domain action against Defendants.

In December of2015,Defendants retained Plaintiffto represent them in those proceedings("Second
Hiring"). Plaintiff and the Defendants entered into an Attorney Fee Contract ("Contract") which

provided that Defendants would pay Plaintiff one-third of the amount of settlement negotiated by
the Plaintiff, less the $101,082.56 settlement offer negotiated by the Defendants prior to retaining

Plaintiff.' The Contract also contained a "Fee on Termination" clause, which provided:

If Client terminates Firm's employment before conclusion ofthe case without good
cause. Client shall pay Firm a fee and expenses based on the fair and reasonable
value of the services performed by Firm before terrnination. If any disagreement
arises about the termination fee, the client may choose two persons from a service
profession, and the Firm may choose one person. The firm will be bound by a
majority decision of the three persons as to a fair fee. If the Firm terminates the
representation, then it shall receive no fee or expenses.

Notably,the provision is silent as to who,the panel of arbitrators or the Court, decides the scope of
arbitration. Ultimately, Plaintiff and Defendants had a falling out, resulting in the termination of

Plaintiffs services. There is now a dispute regarding the fees and expenses owed as a result ofthe
termination.

On November 17, 2016, Plaintiff filed a two-count Complaint against Defendants in

Miimehaha County state court, seeking payment for its fees for the First and Second Hirings. On
^ The Contract provided the contingent fee would be calculated as follows:
STEP 1: Ifthe case is settled, start with the total settlement amount;

If the case is tried to a verdict, add together the amount of the verdict, and the amounts
awarded by the Court for attomey fees, statutory disbursements and interest, if any;
STEP 2: Subtract the amount of the Pipeline Company's offer to purchase the property, which in
this case is $101,082.56;

STEP 3:The attomey fee shall be 33 1/3% of the amount remaining after deduction of the
Pipeline Company's offer; plus gross receipts tax at the lawful rate at the time of
payment.

December 30,2016, Defendants filed a timely notice ofremoval pursuant to 28 U.S.C. § 1441 and
28 U.S.C. § 1332. On January 6, 2017, Defendants filed a motion requesting this Court to stay the
action and compel arbitration of Count 11 pursuant to the Federal Arbitration Act, 9 U.S.C. § 1 et
seq., and Fed. R. Civ. P. 12(b0(l). On May 1,2017,this Court issued a Memorandum Opinion and
Order on Defendants' Motion to Stay Action and Compel Arbitration, granting the stay and

compelling arbitration of PlaintifFs claim for money owed under the Contract.

After Defendants' Motion was granted. Defendants presented Plaintiff with an Answer,
Affirmative Defenses, and Counterclaims. The first three of the twelve counterclaims involve the

First Hiring and the remainder the Second Hiring. The parties subsequently began discussing

protocols and procedures for the arbitration. Plaintiff asserts that throughout these discussions.
Plaintiff filed submissions stating that the arbitrators do not have authority to determine the

arbitrability of Defendants' Counterclaims and that the Counterclaims were not arbitrable. On
August2,2017,the Arbitration Panel("Panel")proposed procedures based on the parties' competing
proposals, including that the Counterclaims were arbitratrable, and on August 9, 2017, the parties
and the Panel held a phone conference to discuss the parties' positions. The arbitrability of Count
I and Counterclaims I-III was not submitted to the Panel. On August 23, 2017, Plaintiff filed this

Motion for Relief from Stay and Motion for Order to Declare the Scope of the Arbitration
Proceedings. The following day, the Panel issued an order on the parties' positions, but because
Plaintiff had added new counsel and filed this motion with the Court,the Panel deferred addressing

arbitrability in its order.

Ultimately,Plaintiffchallenges the arbitrability ofCounterclaimsIV,V,and IX-XII. Plaintiff
argues that it is for the Court, not the Panel,to determine the arbitrability ofthe Counterclaims and
therefore asks the Court to determine the scope of the arbitration proceedings. In response.

Defendants argue Plaintiffshould be estopped from submitting to the Court the issue ofarbitrability
of Defendants' Counterclaims and that the arbitration provision ofthe Contract is broadly drafted
to include all of Defendants' Counterclaims. For the reasons set forth herein, the Court finds

Plaintiffs are not estopped from submitting this issue to the Court. Therefore, the Court sets forth

the seope of arbitration proceedings below.

DISCUSSION

ESTOPPEL

Defendants argue that, because Plaintiff submitted the issue of arbitrability to the Panel by
arguing arbitrability in its own Briefin Support ofArbitration Protocols,"Plaintiffs request that the
Court now stop the Panel from hearing the Counterclaims is untimely and waived." Plaintiff
maintains, however,that it has firmly argued that the arbitrators do not have authority to determine
the scope of the arbitration provision of the Contract through the entirety of the arbitration

discussions. The Court need not tarry long with the issue of estoppel, however, as the question of
whether a party submits the question ofarbitrability to arbitration by merely arguing the arbitrability
issue to an arbitrator has been squarely addressed by the Supreme Court in First Options ofChicago,
Inc. V. Kaplan, 514 U.S. 938 (1995).

In addressing the question,the Court noted its practical importance "because a party who has
not agreed to arbitrate will normally have a right to a court's decision about the merits of the

dispute."First Options,514 U.S. at 942."Where the party has agreed to arbitrate,he or she,in effect,
has relinquished much ofthat right's practical value."Id. Accordingly,"[t]he question whether the
parties have submitted a particular dispute to arbitration, i.e., the 'question of arbitrability,' is 'an
issue for judicial determination [ujnless the parties clearly and unmistakably provide otherwise.'"
Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 83 (2002) {citing AT&T Techs., Inc. v.
Commc'ns Workers,475 U.S. 643,649(1986)(emphasis added); First Options, 514 U.S. at 944).

The question ofwhether the parties have waived their right to have the issue ofarbitrability decided
by the Court is similarly substantive,requiring resolution by the courts, because the question speaks
to whether or not the parties haye agreed to arbitrate the issue. See First Options, 514 U.S. at 943
("[T]he question 'who has the primary power to decide arbitrability' turns upon what the parties
agreed about that matter.") Thus, the question is not whether the parties waived their agreed upon

right to arbitrate, a procedural matter left to the arbitrator to decide,see Howsam,537 U.S. at 84-85

(citing Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983), but
whether the parties demonstrated an agreement to arbitrate an issue at all.

"[AJrbitration is simply a matter of contract between the parties; it is a way to resolve those
disputes-but only those disputes-that the parties have agreed to submit to arbitration."First Options,

514 U.S. at 943. "When deciding whether the parties agreed to arbitrate a certain matter(including
arbitrability), courts generally (though with a qualification...) should apply ordinary state-law

principles that govern the formation of contracts." Id. at 944. The referenced qualification applies
when courts decide whether a party has agreed that arbitrators should decide arbitrability: "Courts
should not assume that the parties agreed to arbitrate arbitrability unless there is 'clea[r] and
unmistakabl[e] evidenee that they did so.'" Id. (quoting AT&T Techs., Inc. v. Commc'ns Workers,
475 U.S. 643,649(1986)).

"[MJerely arguing the arbitrability issue to an arbitrator does not indicate a clear willingness
to arbitrate that issue, i.e., a willingness to be effectively bound by the arbitrator's decision on that
point."Id. at 946. Here,as the defendants did in First Options,Plaintiffhas continuously forcefully
objected to the arbitrators deciding the Counterclaims.See id. As the Supreme Court concluded,this

does not demonstrate a clear willingness to arbitrate. See id. Instead,"one naturally would think that
they did not wantthe arbitrators to have binding authority over them."Id. The basic objective ofthis
area oflaw is "to ensure that commercial arbitration agreements,like other contracts,'are enforced
aecording to their terms." M at 947(citFagMastrobuonov. Shearson Lehman Mutton, /nc.,514U.S.
52,54(1995)(quoting VoltInfo. Scis., Inc. v. Bd. ofTrs. ofLeland Stanford Junior Uh/v.,489 U.S.
468, 479 (1989))). Accordingly, because the arbitration provision of the Contract is silent on the

issue and because Plaintiff did not clearly agree to submit the question ofarbitrability to arbitration,
the arbitrability ofthe Counterclaims is subject to independent review by the Court.

SCOPE OF ARBITRATION PROCEEDINGS

The way the law treats silence or ambiguity about the question of who decides arbitrability
is different from the way it treats silence or ambiguity about the question "whether a particular

merits-related dispute is arbitrable beeause it is within the seope of a valid arbitration agreement."
Id. at 944-45. With respect to the latter question,the law reverses the presumption,and"any doubts

concerning the seope of arbitrable issues should be resolved in favor of arbitration." Mitsubishi
Motors Corp. v. Soler Chrystler-Plymouth, Inc.,473 U.S.614,626(1985)(quotingMosesH. Cone
Mem'lHosp. v. Mercury Constr. Corp., 460 U.S. 1, 24—25 (1983)).

The Court has previously held that there is a binding arbitration agreement. The next

question now presented is "as to whether a valid arbitration agreement applies to the subject matter
at hand" and that "is a question for a court to consider." EFCO Corp. & Const. Prods., Inc., 359

F.3d 954,956(8th Cir. 2004). The Court does determine that the arbitration clause in this Attorney
Fee Contract is narrow. It is a typical contingent attorney fee contract based upon a percentage of
the lift over an existing offer. The arbitration clause itself is limited to deterniining fees upon
termination of the Firm's employment before conclusion of the case without good cause. By

comparison, the Eighth Circuit has held a clause which provides for arbitrating any "claim arising
out ofor relating to th[e contract]" constitutes a broad arbitration clause. Fleet Tire Serv. ofN. Little
Rockv. Oliver Rubber Co., 118 F.3d619, 620-21 (8th Cir. 1997).

When the Court stayed this lawsuit and referred the amount ofthe fee dispute to arbitration

by its Order and Memorandum Opinion of May 1, 2017,there was no counterclaim pending. The
Court retained jurisdiction over the case. On August 23, 2017 Defendants filed their Answer and
a 34 page Counterclaim in the Arbitration proceedings which also incorporated the Answer. The 12
counts in the Counterclaim are:

Court I(Breach of Contract as to the "First Fliring")
Count n (Declaratory Judgment as to the "First Hiring")
Count III (Estoppel as to the "First Hiring")

Count TV (Breach of Contract as to the "Second Hiring" ADR Provision)
Count V (Anticipatory Breach of Contract as to the "Second Hiring")
Count VI(Estoppel as to the "Second Hiring")

Count Vn (Declaratory Judgment as to the "Second Hiring")
Count Vni(Fee Forfeiture as to the "Second Hiring")
Count IX (Breach of Fiduciary Duty as to the "Second Hiring")
Count X (Negligence as to the "Second Hiring")
Count XI(Forfeiture of Fees for Deceit as to the "Second Hiring")
Count Xn (Defamation as to the "Second Hiring")

Also on August 23,2017 Plaintifffiled its Motion for Relieffrom Stay and Motion for Order
to Declare the Scope ofthe Arbitration Proceedings.

Counts I, n and III of the Counterclaim deal with the first hiring of counsel and are by

agreement ofthe parties not before the Court.

Fhe Court finds that the Attorney Fee Contract and clause 4in particular are not ambiguous.
Fhe Court must determine in examining the Counterclaim whether sending those issues to arbitration

would be forcing arbitration on a matter the parties "reasonably would have thought ajudge, not an
arbitrator, would decide." Express Scripts, Inc. v. Aegon Direct Mktg. Servs., Inc., 516 F.3d 695,

701 (8th Cir. 2008)(rehearing and rehearing en banc denied 2008).

Fhe heading ofparagraph 4"FEE ON FERMtNAFlON"ofthe Attomey Fee Contract,is not
conclusive on this inquiry but it does provide some guidance on the intent ofthe parties when they
contracted. Paragraph 4 states:

4. FEE ON FERMINAFION. If Client terminates Firm's employment before
conclusion ofthe case without good cause. Client shall pay Firm a fee and expenses
based on the fair and reasonable value of the services performed by Firm before
termination. If any disagreement arises about the termination fee, the client may
choose two persons from a service profession, and the firm may choose one person.
Fhe firm will be bound by a majority decision of the three persons as to a fair fee.
If the Firm terminates the representation, then it shall receive no fee or expenses.

Fhe clients did terminate the firm's employment. Fhe first question in arbitration then

becomes, was that termination without good cause.

Ifthe arbitrators find that the termination when objectively considered was with good cause,
then the Arbitration panel will determine what fees Plaintiff might receive. That is for the
Arbitration panel to determine, but there could be a situation where there was a breakdown in the

attorney-client relationship that provided cause for the termination ofthe relationship but atthe same
time there had been significant advance toward a conclusion ofthe case. The arbitration clause does
not rule out that possibility, nor does it rule out no fees being recovered. Ifthe termination was not
for good cause,then the Arbitration panel must determine Plaintiffs fees. The arbitration clause in

the Attorney Fee Contract provides those fees and expenses will be based on the fair and reasonable
value of the services performed by Firm before termination. The above is what was sent to
arbitration May 1, 2017 when the Court at the same time reserved jurisdiction over the case.

Other issues are presented by the subsequently filed Counterclaim. In summary, there are

counterclaims for deceit including a demand for treble damages(Count XI). The arbitration panel
is not in a position to consider and determine an award of treble damages. In addition, there are
claims of unethical conduct. The unethieal conduct claims have ramifications beyond a fee and a
dispute as to its reasonableness. A claim ofunethical conduct with a resulting negative fmding could
be the basis for further proceedings concerning the license to practice in this Court and in this state.

Finally, there is a counterclaim for defamation for acts subsequent to the termination(Count Xll).
\

Once an attorney fee determination is made by the Arbitration panel,there will be issues yet
to be tried before this Court. However, there is some question about that as in a document filed
September 14, 2017 "Plaintiffs Brief in Support of Arbitration Protocol," paragraph 1 of the
conclusion requested "That the counterclaims asserted by Defendants be dismissed for any purpose
other than defenses against Plaintiffs claim." That request is outstanding.

A REVffiW OF EACH COUNT OF THE COUNTERCLAIM AS TO
SECOND HIRING IS AS FOLLOWS:

Count IV although entitled "Breach of Contract" also includes a claim for false and
defamatory statements. The parties could anticipate a breach of contract claim going to arbitration

when they entered into the Attomey Fee Contract, but the parties would not have contemplated a
defamation claim going to arbitration.

Count V entitled "Anticipatory Breach of Contract" claims damages outside of the fee

dispute,claiming damages caused by Defendants retaining other counsel and damages caused"when
Dakota Access refused to increase their settlement offers for a 3.41-acre easement beyond the

$750,000 amount resulting from Plaintiffs unauthorized offer and the threat of an attomey's lien."

The parties would reasonably have thought a judge, not an arbitrator, would decide those issues.
Count VI entitled "Estoppel" is a claim to remain before the Arbitration panel. Such a claim
could have been reasonably contemplated by the parties as arising out of a termination fee dispute
when the Attomey Fee Contract was entered into.

Count Vn requests a declaratoryjudgment. The parties agree the declaratoryjudgmentcount
should remain in arbitration.

Count Vin entitled "Fee Forfeiture." The parties agree it may remain in arbitration. (See

page 11 ofDocument 17 regarding Count VIII and Defendants' counter in In. 3 ofDocument 19 and
Plaintiffs Reply(Doe. 22)that "parties agree that Plaintiff has challenged the arbitrators' authority
to determine arbitrability of Defendants' Counterclaims FV, V, and IX-XII...")

Count IX is entitled "Breach of Fiduciary Duty." A breach of fiduciary duty claim as a

defense to a fee dispute could reasonably have been contemplated by the parties when they entered

into the Attomey Fee Contract with an arbitration clause as to a termination fee dispute. This overly
broad pleading, however, goes further and goes on to claim "Plaintiff should have to pay damages

to Defendants,and/or Plaintiffshould recover attorneys' fees only as offset by the damages Plaintiff

has caused Defendants." Paragraph 232. Arbitrators determining damages against Plaintiff was not
reasonably contemplated by the parties when they entered into the Attorney Fee Contract arbitration
clause.

Count X is entitled "Negligence." In examining this Count as with the other Counts, the

Court disregards the opening paragraph, 228, which incorporates "by reference the foregoing

Paragraphs." Ifone literally does so,then the claim encompasses all claims and lacks any limitation.
A negligence claim to defeat a fee claim in a termination fee dispute would reasonably be

contemplated by the parties when they entered into the Attorney Fee Contract with one exception,
that the parties would not have contemplated a separate award of damages against Plaintiff except
as an offset against claimed attorney fees.

Count XI is entitled "Forfeiture of Fees for Deceit." As previously noted, this Count

demands among other things, treble damages for deceit. The awarding of treble damages against
Plaintiff would not have been reasonably contemplated by the parties when they entered into the
Attomey Fee Contract and its arbitration clause.

Count Xn is entitled "Defamation." That claim arises for claimed acts after the termination

of representation by Plaiptiff. Any determination in a defamation action arising subsequent to
termination would be before this Court, not an arbitration panel. This defamation action going to

an arbitration panel would not have been contemplated by the parties when they entered into the
Attomey Fee Contract and its arbitration clause.

The Court appreciates the Arbitration panel awaiting this direction from the Court. The
Court also observes that despite this dispute being in arbitration and also before this Court, the

dispute could also be mediated before Magistrate Judge Duffy ifall parties agreed to such mediation,
as the Court will not order mediation.

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Accordingly, IT IS ORDERED that the following Counts of the Counterclaim remain in
arbitration:

1.

Count IV except for the defamation claim.

2.

Count VI. This estoppel issue is a different estoppel issue discussed earlier
in the opinion where Defendants claimed that Plaintiff was estopped from
questioning the scope of the arbitration. That estoppel claim by the
Defendants was denied, that being a separate estoppel claim from Count VI
which will remain in arbitration.

3.

Count VII.

4.

Count VIU.

5.

Count IX,exceptthat the arbitrator will not determine damagesto be awarded
against Plaintiff but only the Plaintiffs attorney fee question.

6.

Count X except for any award of damages against Plaintiff.

IT IS FURTHER ORDERED that the Counts which are not before the Arbitration panel are
Counts V,XI and XII.

IT IS FURTHER ORDERED that Plaintiffs Motion for Relief From Stay and Motion for

Order to Declare the Scope ofthe Arbitration Proceedings, Doc. 16,is granted in part and denied in
part.

Dated this olO day of November, 2017.
BY THE COURT;

^wrence L. Piersol
United States District Judge

ATTEST:

JOSEPH HAAS,CL^RK
BY:

DEPUTY

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