Hackett v. Milbank, Tweed, Hadley & McCloy

• Decision Date: 05 July 1995
• Citation: 86 N.Y.2d 146,630 N.Y.S.2d 274,654 N.E.2d 95
• Parties: , 654 N.E.2d 95, 64 USLW 2099 Kevin R. HACKETT, Respondent, v. MILBANK, TWEED, HADLEY & McCLOY, Appellant.
• Court: New York Court of Appeals Court of Appeals

Page 274

630 N.Y.S.2d 274

86 N.Y.2d 146, 654 N.E.2d 95, 64 USLW 2099

Kevin R. HACKETT, Respondent, v. MILBANK, TWEED, HADLEY & McCLOY, Appellant.

Court of Appeals of New York.

July 5, 1995.

Milbank, Tweed, Hadley & McCloy, New York City (Russell E. Brooks and David R. Gelfand, of counsel), for appellant pro se.

Fryer & Ross, New York City (Gerald E. Ross, of counsel), and Charles W. Wolfram, Ithaca, for respondent.

OPINION OF THE COURT

SIMONS, Judge.

Petitioner was formerly a partner in respondent but now is a member of another firm. He contends that respondent owes him a supplemental payment, authorized for withdrawing partners under the Milbank, Tweed Articles of Partnership, and that its denial of the payment constitutes an impermissible forfeiture of earned but undistributed income and an impermissible restraint on the practice of law under the rule in Cohen v. Lord, Day & Lord, 75 N.Y.2d 95, 551 N.Y.S.2d 157, 550 N.E.2d 410, and similar cases. Respondent claims that petitioner is not entitled to any withdrawal payments because the amount of his annual income at his new firm forecloses payments under the Milbank, Tweed scheme (which reduces the amount of the supplemental payments in proportion to a withdrawing partner's new earned income) and that the provisions of the partnership's agreement are not unlawfully anticompetitive.

The matter was submitted to an arbitrator, as required by the partnership agreement. He concluded after a hearing that the agreement was enforceable and that under its terms petitioner was not entitled to any supplemental withdrawal payments.

Petitioner then instituted this proceeding challenging both the arbitrator's power to resolve the question and his determination in respondent's favor. The courts below vacated the arbitrator's award, holding that the sums authorized by the agreement represented a withdrawing partner's share of undistributed earned income and thus any provision in the partnership agreement reducing them constituted a forfeiture for competition which violated public policy.

There is a second, and arguably stronger, policy concern in this case, however, the public policy favoring arbitration. Under the parties' broad arbitration agreement, whether the supplemental payment represents earned but undistributed income and whether the supplemental payment agreement constitutes a noncompetition clause were matters to be decided in the first instance by the arbitrator. The question before us, therefore, is 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.

We conclude that the courts below erred in granting petitioner's motion to vacate. The arbitrator's award, whether or not its factual conclusions are correct, does not on its face violate the public policy against restrictions on the practice of law. Accordingly, we reverse the order of the Appellate Division.

I.

The focus of this litigation is section 15.4 of the 30th Amendment to the Milbank, Tweed Articles of Partnership.

In order to avoid the dissolution and subsequent accounting which would ordinarily follow a partner's departure, many law firms, respondent among them, include in their articles of partnership an agreement under which a withdrawing partner waives his or her right to an accounting in exchange for certain payments specified in the articles. Milbank, Tweed's agreement provides for several types of payments to departing partners: repayment of capital, distribution of undistributed net profits, and, in section 15.4, supplemental payments upon withdrawal or death. Payments awarded by section 15.4 equal 150% of the withdrawing partner's final percentage of the firm's profits, calculated by averaging the firm's net profit for the three years preceding the withdrawal, and are spread out over a period of five years. A withdrawing partner below retirement age must have served a prescribed period with the firm. The total payments to all withdrawing partners are capped out at 3% of the firm's annual net income.

Originally, the Articles of Partnership provided in the 28th Amendment that only those withdrawing partners retiring from the practice of law were entitled to the supplemental payments. In Cohen v. Lord, Day & Lord (supra), however, we held that a provision of a law firm partnership agreement that "condition[ed] payment of earned but uncollected partnership revenues" upon the withdrawing partner's obligation to refrain from competition with the former law firm constituted an unenforceable restraint on the practice of law in violation of DR 2-108(A) (22 NYCRR 1200.13[a] (id., 75 N.Y.2d at 96, 551 N.Y.S.2d 157, 550 N.E.2d 410). ¹ Accordingly, Milbank, Tweed altered its partnership agreement on October 1, 1990, by enacting the 30th Amendment to the Articles. Under this Amendment, the supplemental payments are available to all withdrawing partners, whether retiring or entering new employment; however, the payments are reduced dollar-for-dollar to the extent that the withdrawing partner's annual earned income, from any source, exceeds $100,000.

In January 1991, petitioner, a Milbank, Tweed partner since 1982, withdrew from the firm to become a partner at Fried, Frank, Harris, Shriver & Jacobson. He received repayment of his capital contribution and a share of undistributed net profits calculated according to the formula specified in the Articles of Partnership but not benefits under section 15.4. He subsequently demanded an additional $641,339 for these supplemental payments. ² Respondent rejected petitioner's claim and demanded arbitration, contending that the 30th Amendment applied to petitioner and that the amount of petitioner's annual compensation from Fried, Frank precluded his receiving any supplemental payment.

Petitioner then sought to stay the arbitration, contending that the 28th Amendment, not the 30th Amendment, applied, and that because the limitation of supplemental payments to retiring partners in that earlier Amendment was an impermissible noncompetition agreement, the agreement was unenforceable as against public policy. Alternatively, petitioner contended that even if the 30th Amendment applied to him, its dollar-for-dollar reduction deprived withdrawing partners of already earned but undistributed income to which they were entitled. Thus, in petitioner's view, the 30th Amendment was also unenforceable as a "forfeiture-for-competition" clause under our ruling in Cohen v. Lord, Day & Lord (supra).

Supreme Court granted petitioner's motion to permanently stay the arbitration, ruling that pursuant to Cohen both the 28th and 30th Amendments violated DR 2-108(A), and the Appellate Division affirmed. We reversed, holding that the broad arbitration clause of the parties' agreement, and the existence of disputed factual issues, required that the controversy be decided in the first instance by the arbitrator (see, Hackett v. Milbank, Tweed, Hadley & McCloy, 80 N.Y.2d 870, 587 N.Y.S.2d 598, 600 N.E.2d 229). In denying the petition, we noted 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. By this proceeding petitioner now challenges the arbitrator's determination.

The arbitrator held first that the 30th Amendment was applicable to petitioner's claim to supplemental payments. The parties do not dispute that determination. In the second phase of the arbitration, the arbitrator heard the testimony of nine witnesses over a period of several days, and received more than 1,200 pages of exhibits. In reviewing the history of the Milbank, Tweed partnership agreement, he concluded that section 15.4 as originally conditioned under the 28th Amendment was a noncompetition provision, and intended as such. He noted that under the new provision, however, the withdrawal payments "include a series of limitations on eligibility and amounts of payments (in addition to the earnings set-off) that are inconsistent with an intention to approximate a share of undistributed earned income." Thus, he determined that the withdrawal payment presently contemplated by the amended Articles of Partnership was intended primarily to "provide insurance to withdrawing partners" (even though it was also drafted with an eye to denying withdrawal payments to competitive former partners) and did not run afoul of Cohen. In his words:

"[t]he Partnership makes no bones about the fact that a primary motive for adopting the provisions of § 15.4 was to avoid payments to withdrawing partners who competed while at the same time both (1) complying with DR 2-108A as interpreted in Cohen and (2) providing a 'safety net' for partners who left for lower-income pursuits."

The arbitrator concluded that the provisions for payment under section 15.4 "looked at in their entirety" are not now intended to represent a withdrawing partner's share of undistributed earned income; thus, the agreement does not work the type of forfeiture that rendered the agreement at issue in Cohen unenforceable. Instead, it was intended primarily to provide an economic safety net for partners departing to less lucrative positions.

The arbitrator's conclusion was based in part on a Milbank, Tweed "Memorandum to the Partners" circulated by the committee formed to consider changes in the firm's provision for supplemental payment after the Cohen ruling had rendered the existing provision unenforceable. The Memorandum noted that two equally undesirable alternatives were available: to eliminate the payment altogether, or to give it to all departing partners. Although the Memorandum concluded that retaining the payment would also retain the possibility of providing it to some withdrawing partners who would in the...