Bernhard B. Porzig v. Dresdner, Kleinwort, Benson, North America, LLC, et al., ___F.3d___, 2007 WL 2241592 (2d. Cir. 2007)

Brief Summary
The Second Circuit Court of Appeals held that an arbitration panel in an age discrimination suit had improperly and with some impudence disregarded the law regarding recovery of attorney fees in a fee-shifting civil rights suit for age discrimination. The court further held that the arbitration panel had exceeded in bounds in becoming involved in the fee arrangement between the plaintiff and his attorney.

Complete Summary
Bernhard Porzig was employed in 1995 as Vice President of Central Bank Sales by Dresdner Securities (“Dresdner”), a subsidiary of Dresdner Bank. As a condition of employment, Mr. Porzig was required to sign an agreement to arbitrate any future disputes with his employer. In 1998, Mr. Porzig was fired from his position and he retained Michael K. O’Donnell, a solo practitioner, to represent him in an age discrimination action against Dresdner.

Suit was initially filed in the Southern District of New York for a claim under the Age Discrimination in Employment Act, 29 U.S.C. § 623, et. seq. Based on the arbitration agreement, the suit was removed to a three member Arbitration Panel (“Panel”) at the NASD, the industry self-regulatory organization. Id. at *1. The Panel determined that age was a factor in Mr. Porzig’s termination, and it awarded him $96,200 in compensatory damages, $27,679 of interest and $96,200 in punitive damages. The Panel did not award Mr. Porzig attorney fees or costs and assessed him $13,840.75 in costs. Id. at *1. Mr. Porzig appealed the award to the Southern District of New York based on the failure to award him any fees or costs and the award of costs against him. The District Court held the arbitrators acted in manifest disregard of the law regarding the attorney fees and costs issue, and despite “ample evidence” chose to ignore the law or refused to apply it. The court remanded the case to the Panel to determine appropriate fees and costs. Id. at *1.

On remand, Mr. Porzig submitted supporting documents setting forth detailed billing records that totaled $249,996.95 in fees and $12,050.09 in costs. These figures included time spent in arguing Mr. Porzig’s right to receive fees and costs in the first appeal to the District Court. In response, Dresdner asserted that based on the contingency fee agreement between Mr. Porzig and his attorney, the maximum amount of recovery for fees should be $73,359.67. Dresdner went so far as to state, contrary to law, that “an award of attorneys’ fees may…be unnecessary to achieve the purposes of the statutory fee-shifting provision.” Id. at *2. In response, the Panel required Mr. Porzig’s attorney to provide copies of his fee agreement with the client, which was based on a one-third contingency fee plus client responsibility for costs. Id. at *2. The Panel then issued its second order in the case; this time ordering an award for fees and costs of $83,500 but requiring the attorney to remit to Mr. Porzig the approximate $82,500 he had already been paid by his client. Id. at *3. Mr. Porzig appealed this modified award to the District Court, requesting that the court instruct the Panel to use the lodestar method to calculate fees and vacate the order that O’Donnell reimburse Mr. Porzig’s paid contingency fee, and to modify the award to include all additional fees and expenses for the time spent in appealing the Panel’s original and modified awards. The District court denied the motion and this appeal resulted. Id. at *3

The court noted that while strong deference is accorded arbitration awards, such awards are not “totally impervious to judicial review.” Id. at *4. “An arbitral award may be vacated for manifest disregard only where a petitioner can demonstrate ‘both that (1) the arbitrators knew of a governing legal principle yet refused to apply it or ignored it altogether, and (2) the law ignored by the arbitrators was well-defined, explicit and clearly applicable to the case.’” Id. at *4, citing Wallace v. Buttar, 378 F.3d 182 (2d Cir.2004). The court proceeded to find several issues in this case that caused it “great concern.” Despite the fact that the district court held that the original attorney fee award disregarded the law and was vacated, the same Panel “acted without authority with respect to a portion of the award” even though Mr. Porzig had set forth the accurate controlling law. Dresdner had submitted misstatements of the law to the Panel and the Panel provided no explanation as to how its fee award was almost identical to the contingency fee amount. “Taken together…these circumstances create, if not the perfect storm, then a disturbance ample enough to give us pause.” Id. at *4.

The court noted that the panel did not have jurisdiction over the attorney-client relationship between Mr. Porzig and O’Donnell. The power of arbitrators is based on contract, and there was no agreement that fee issues between Mr. Porzig and O’Donnell would be arbitrated before the Panel. For this reason, the Panel had no jurisdiction to order O’Donnell to return any portion of the contingency fees. Id. at *5. The court did note some concern that a conflict of interest may be created when a lawsuit for fees is filed in the client’s name. However, as “any attorney’s fee award ultimately belongs to Mr. Porzig, the client, and not the attorney, we conclude the decision reached here does not create any conflict between Mr. Porzig and his counsel.” Id. at n.4. The court assumed that Mr. Porzig and his attorney would settle the issue of fees according to their contract.

The court then noted that for fee-shifting purposes, reasonable attorney fees are generally based on determining the reasonable hourly rate and the number of hours reasonably expended. Contingency fees may not act as a cap on an attorney fee award. Id. at *6, citing Blanchard v. Bergeron, 489 U.S. 87 (1989). The court stated that Mr. Porzig and the District Court had made it clear to the panel that it was obligated to award Mr. Porzig attorney’s fees under the ADEA and also to award fees for pursuing the statutory right to fees. Id. at *6. To do otherwise would decrease the value of the hourly rate for the case, and discourage attorneys from taking cases for indigent clients to act “as private attorneys general in vindicating congressional policies.” Id. at *6. Dresdner had argued, contrary to established law, that an award of attorneys’ fees may not be necessary to achieve the purposes of the fee-shifting statute and the contingency fee should set the limit on the amount Mr. Porzig could recover for the same. Because these misstatements appeared to influence the Panel’s determination, and the lack of any “transparent fee calculation” by the Panel, the court concluded the modified award was issued in manifest disregard of the law. In addition, the District Court was ordered to determine the reasonable amount of attorney fees to be awarded for time Mr. Porzig spent appealing the modified award. Id. at *7.

It should also be noted that the court found “troubling” Dresdner’s “insinuations” that O’Donnell’s hourly fee rate should be reduced because he is a solo practitioner. Id. at FN6.

Significance of Case
In a footnote, the court stated that the Panel, despite a “hand slap” from the District Court, had subsequently issued its second award “without any authority whatsoever, chose not to explain its methodology and then apparently ignored the law again.” Id. at FN7. Arbitration panels will not be permitted to flagrantly ignore the law when awarding attorney fees under these fee-shifting statutes. The opinion is also significant in that the court emphasizes that an arbitration panel is only to address issues regarding parties to the arbitration contract, and not go beyond it to interfere in the attorney-client relationship.

This alert has been prepared by Hinshaw & Culbertson LLP to provide information on recent legal developments of interest to our readers. It is not intended to provide legal advice for a specific situation or to create an attorney-client relationship.