Whistleblower Alleges Conspiracy Between Plaintiffs Attorneys and Employer
Voids Arbitration Agreement


Henry Gottlieb
New Jersey Law Journal
April 13, 2006
Posted April 21, 2006


Lawyers for a former Prudential Insurance Co. agent with a whistleblower claim asked an appeals court April 5 to buck a national trend in favor of alternate dispute resolution and rule that litigation alleging fraud in an arbitration clause belongs before a judge, not an arbitrator.

And Bloomberg News, ABC-TV and The Record of Hackensack, N.J., asked the appeals judges to reverse a sealing order that has kept details of the allegations against Prudential secret for three years.

The media group won a small victory even before the argument began in a packed Morris County, N.J., courtroom.

Presiding Appellate Division Judge Harvey Weissbard announced that the tribunal had rejected a request that the hearing be closed to the public. "We're not sealing anything," he said.

He expressed confidence that the lawyers would be circumspect about confidential facts, and they were. They referred only obliquely to the plaintiff's claim that he and 358 other Prudential employees were defrauded into a bogus arbitration by Prudential and their own law firm, New York's Leeds, Morelli & Brown.

Openness aside, the case of Lederman v. Prudential, A-1449-04T5, could add to the long-running debate between plaintiffs lawyers and corporations over confidential arbitrations. The question this time: Are ADR agreements that cover large numbers of employees enforceable if the workers claim that their own lawyers conspired with the corporation to limit recoveries and enrich the lawyers?

Prudential and Leeds Morelli argued -- and staunch advocates of ADR will agree -- that a plaintiff in arbitration can obtain a full measure of justice, even on the question of whether the arbitration agreement was a fraud. If the arbitrator decides that fraud invalidated the process, the arbitrator will do the right thing and bow out, they argue.

Lawyers for former Prudential agent Lawrence Lederman argued that parties who claim the arbitration clauses were fraudulent have the right to sue to have them invalidated, especially if the workers' lawyer was in cahoots with the company.

FOCUS ON SIDE DEAL

According to the complaint, Prudential targeted 359 employees for dismissal in 1999 but had reason to believe they might file wrongful discharge suits. And the workers, particularly agents like Lederman, had reason to sue: They were facing dismissal for complaining about redlining and other abuses by Prudential, the complaint says.

So the company reached agreement with Leeds Morelli, which represented some of the employees, to call in the American Arbitration Association or equivalent neutrals to arbitrate claims by the 359 in secret. The employees went along, though whether they actually signed the pact remains a fact question.

On its face, the agreement seemed like a good deal for all. The employees, most of whom were at will, would have a forum to argue for severance pay and Prudential would pay their fees.

The company would avoid the potential embarrassment of court claims, including whistleblower suits alleging corporate wrongdoing. And it would avoid big payouts.

Lederman alleged in his suit, filed in November 2002, that Leeds Morelli and Prudential had reached a side agreement to cap the settlements at $15 million, of which Leeds Morelli would receive one-third. That, the suit said, was fraud and commercial bribery that violated the rules of professional conduct and fooled the workers into thinking the ADR process would protect their rights.

The issue the appeals court took under advisement after the April 5 hearing is whether the plaintiffs must arbitrate the fraud claim and the malpractice claim against their own lawyers. And that includes the open question of whether they actually signed the agreement.

Paragraph 20 of the ADR package calls for arbitration of disputes arising from the terms or application of the agreement and that Prudential and Leeds Morelli shall pick two of the three arbitrators.

Lederman's lawyer, Stephen Snyder of Baltimore's Snyder, Slutkin & Snyder, argued that the arbitration agreement, dealing as it did with claims against Prudential, lacked the scope to encompass the commercial bribery suit by Lederman against the company and the law firm.

"There is no way possible Lederman would have agreed" if he knew a commercial bribery claim was a possibility, Snyder told Weissbard and the other judges, Paulette Sapp-Peterson and Michael Winkelstein.

Snyder argued that Lederman, looking back at his decision to agree, has the right to say, "I don't know my lawyer is sleeping with the enemy."

Snyder said Essex County Superior Court Judge Theodore Winard, who compelled arbitration, erroneously failed to assign significance to the certifications alleging improprieties in the fee deal between Prudential and Leeds Morelli.

"You can't have divided loyalties," Snyder said of Leeds Morelli's side deal with Prudential. Among the precedents listed on the plaintiffs' side was Kameratas v. Palias, 360 N.J. Super. 76 (2003). That decision voided an arbitration clause in an attorney-client retainer agreement because the lawyer didn't explain its ramifications to the client.

"You have to make crystal clear what the arrangements are," Snyder argued.

Prudential lawyer Theodore Wells Jr. of New York's Paul, Weiss, Rifkind, Garrison & Wharton, responded to a judge's query about whether the arbitration clause was plausible, given the fraud claim. It was, he responded.

The Federal Arbitration Act requires that there be no plenary hearings by a court into the meaning of the language in the arbitration clause, "otherwise we would be reopening contracts all the time," Wells argued. "There is nothing wrong with an arbitrator deciding a commercial bribery case," he said.

Leeds Morelli's lawyer, Janice DiGennaro of Rivkin Radler in Uniondale, N.Y., said the case fits the requirement that issues that are interrelated and intertwined with the initial agreement are arbitrable when disputes arise.

HIGH COURT RULING MAY CONTROL

One of the questions before the court is the applicability of the U.S. Supreme Court's latest pro-arbitration pronouncement, Buckeye Check Cashing Inc. v. Cardegna, decided Feb. 21. Wells argued that the Prudential dispute is covered by the ruling, which says, in effect, that a dispute over the legality of a contract that contains an arbitration clause is to be decided by an arbitrator.

Lederman's lawyers argue that the decision and the precedents it stands on also stand for the notion that a challenge to the arbitration clause itself can be decided by a judge. And that, Snyder argued, is what he is challenging: the arbitration clause in the overall ADR pact.

Stephen Ware, a University of Kansas law professor who follows the twists of ADR law, says the facts of the case suggest to him that Buckeye wouldn't apply if there was a question of whether there was fraud in the arbitration clause. Buckeye added illegal contracts to the list of deals that can still be covered by arbitration clauses, but it did not disturb jurisprudence that says a dispute over the arbitration clause can be in court.

For Wells and Snyder, the argument was their second confrontation. In 1996, Snyder won $25 million in punitive damages on behalf of a consulting firm with a contract dispute against Bell Atlantic Corp., represented by Wells.

Wells recouped, however. He won a reversal, and Snyder's punitives were cut to $1 million by the next jury.

SEALING ISSUE HANGS IN BALANCE

If Wells wins the argument that the Prudential case belongs in confidential arbitration, the other dispute heard at the April 5 arguments could be moot.

The lower court sealed the record on the theory that the arbitration was supposed to be confidential, hence the pleadings that could end up back in arbitration should remain confidential.

Media lawyer Bruce Rosen, of Chatham's McCusker, Anselmi, Rosen, Carvelli & Walsh, began his argument by contrasting the openness of the April 5 hearing and the three years of secrecy in the case.

"Was that so difficult?" he said of the open hearing. The answer, he suggested was, "no," because the First Amendment, common law and public policy trump any privacy interests by the parties.

Those privacy rights can be protected by sealing certain documents, but the trial judge shouldn't have sealed the entire record, he said.

Prudential's lawyer, Gregory Reilly, of Roseland's Lowenstein Sandler, argued that total sealing was necessary because Lederman violated the arbitration agreement when he filed his suit in open court instead of taking it to arbitration. He said confidentiality was at the core of what Prudential bargained for.

Leeds Morelli's counsel Evan Krinick of Rivkin Radler argued that confidentiality is necessary to protect the privacy of the vast majority of workers who agreed to the arbitration clause and have not joined Lederman's challenge.

Sapp-Peterson wondered, however, why a judge could not redact documents to protect those interests while releasing nonsensitive information.

Krinick argued, "You have to seal everything because everything relates to that agreement."

Copyright © 2006 by ALM


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