     09-1892-cv
     Johnson v. Nextel Communications, Inc.

 1                          UNITED STATES COURT OF APPEALS

 2                              FOR THE SECOND CIRCUIT

 3                                August Term, 2009

 4

 5   (Argued:   June 8, 2010                      Decided: September 26, 2011)

 6                              Docket No. 09-1892-cv

 7   - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

 8   MICHAEL S. JOHNSON, individually and on behalf of the class,
 9   DONNA DYMKOWSKI, individually and on behalf of the class,
10   PATRICIA LONG CORREA, individually and on behalf of the class,
11   ANTONIO SAMUEL, individually and on behalf of the class, VINCENT
12   HALL, individually and on behalf of the class, and ANGELETTE
13   WATERS, individually and on behalf of the class,
14
15               Plaintiffs-Appellants,
16
17                     v.
18
19   NEXTEL COMMUNICATIONS, INC., a Delaware Corporation, LEEDS,
20   MORELLI & BROWN, LENARD LEEDS, STEVEN A. MORELLI, JEFFREY K.
21   BROWN, JAMES VAGNINI, FEDERIC DAVID OSTROVE, BRYAN MAZOLLA, SUSAN
22   FITZGERALD, JOHN DOE 1-10 a fictitious designation for presently
23   unknown defendants, and JANE DOE 1-10 a fictitious designation
24   for presently unknown defendants,
25
26               Defendants-Appellees.
27
28   - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
29
30   B e f o r e:      WINTER and HALL, Circuit Judges, and CEDARBAUM,
31                     District Judge.*
32
33
34
35
36

           *
            The Hon. Miriam Goldman Cedarbaum of the United States
     District Court for the Southern District of New York, sitting by
     designation.


                                              1
 1        Appeal from a dismissal by the United States District Court
 2   for the Southern District of New York (George B. Daniels, Judge)
 3   of appellants’ complaint pursuant to Fed. R. Civ. P. 12(b)(6).

 4   Appellants claim that the law firm of Leeds, Morelli & Brown,

 5   P.C., violated, inter alia, its fiduciary obligations by entering

 6   into an agreement with Nextel, the putative defendant in

 7   discrimination actions the law firm was hired to bring, which

 8   involved unconsentable conflicts of interest.   Principally, we

 9   hold that the complaint states a claim against the law firm for

10   breaching its fiduciary obligations to appellants.   We also hold

11   that the complaint states a claim against Nextel for aiding and

12   abetting a breach of fiduciary duty.   We therefore vacate the

13   dismissal and remand for further proceedings.

14                                 KENNETH S. THYNE, Roper &
15                                 Twardowsky, LLC, Totowa, New
16                                 Jersey, for Plaintiffs-Appellants.
17
18                                 MICHAEL MCCONNELL (Traci Van Pelt,
19                                 Robert W. Steinmetz, McConnell,
20                                 Fleischner, Houghtaling &
21                                 Craigmile, LLC, Denver, Colorado;
22                                 Janice J. DiGennaro & Shari Claire
23                                 Lewis, Rivkin Radler LLP,
24                                 Uniondale, New York, on the brief),
25                                 McConnell, Fleischner, Houghtaling
26                                 & Craigmile, LLC, Denver, Colorado,
27                                 for Defendants-Appellees Leeds,
28                                 Morelli & Brown, Lenard Leeds,
29                                 Steven A. Morelli, and Jeffrey K.
30                                 Brown.
31
32                                 LAWRENCE R. SANDAK (Thomas A.
33                                 McKinney, on the brief), Proskauer
34                                 Rose LLP, Newark, New Jersey and
35                                 New York, New York, for Defendant-
36                                 Appellee Nextel Communications,
37                                 Inc.
38
39

                                     2
 1                                   Jason S. Feinstein, Sterns &
 2                                   Weinroth, Trenton, New Jersey, for
 3                                   Defendants-Appellees Bryan Mazolla
 4                                   and Susan Fitzgerald.
 5
 6
 7   WINTER, Circuit Judge:
 8
 9          This is an appeal from Judge Daniel’s dismissal of

10   appellants’ class action complaint against Nextel Communications,

11   Inc., the law firm of Leeds, Morelli & Brown, P.C. (“LMB”), and

12   seven of LMB’s lawyers (also “LMB”).   Appellants are former

13   clients of LMB who retained the firm to bring discrimination

14   claims against Nextel.   The class is composed of approximately

15   587 clients who retained LMB for the same purpose.   The complaint

16   asserts a number of claims, including one alleging that LMB

17   breached its fiduciary duty of loyalty to them and the class by

18   entering into an agreement with Nextel in which Nextel agreed to

19   pay:   (i) $2 million to LMB to persuade en masse its

20   approximately 587 clients to, inter alia, abandon ongoing legal

21   and administrative proceedings against Nextel, waive their rights

22   to a jury trial and punitive damages, and accept an expedited
23   mediation/arbitration procedure; (ii) another $3.5 million to LMB

24   on a sliding scale as the clients’ claims were resolved through

25   that procedure; and (iii) another $2 million to LMB to work

26   directly for Nextel as a consultant for two years beginning when

27   the clients’ claims had been resolved.   None of the payments were

28   conditioned on recovery by any of LMB’s clients.   We conclude

29   that appellants have alleged facts sufficient to state a claim

30   against LMB for, inter alia, breach of fiduciary duty and against


                                       3
 1   Nextel for aiding and abetting breach of fiduciary duty.    We

 2   therefore vacate and remand for further proceedings.

 3                               BACKGROUND

 4        Because this is an appeal from a dismissal under Fed. R.

 5   Civ. P. 12(b)(6), we view the facts alleged in the complaint in
 6   the light most favorable to appellants.   See Faulkner v. Beer,
 7   463 F.3d 130, 133 (2d Cir. 2006).

 8   a) The Hiring of LMB and the Dispute Resolution and Settlement

 9   Agreement

10        The complaint alleges that LMB conducted a meeting at which

11   appellants and some 587 individuals (collectively, the

12   “claimants”) hired LMB to pursue employment discrimination claims

13   against Nextel, a Delaware corporation.   The retainer agreement

14   with LMB, a New York law firm, was executed in New Jersey.   It is

15   alleged that extravagant promises of recoveries against Nextel

16   were made at the meeting.   The agreement specified a one-third

17   contingency fee to go to LMB.

18        The complaint alleges that LMB never intended to bring, and

19   never brought, any discrimination actions against Nextel.

20   Instead, LMB intended to follow a prior LMB practice of seeking

21   direct payments, including payments as a legal consultant, from

22   putative defendant-employers, in this case, Nextel.    On September

23   28, 2000, LMB and Nextel met in New York and signed an agreement

24   styled the Dispute Resolution and Settlement Agreement (“DRSA”).

25   Under the DRSA, LMB was to be paid $2 million if it persuaded the

26   claimants to:   (i) drop all pending lawsuits and administrative

                                      4
 1   complaints against Nextel within two weeks (excluding already

 2   filed worker’s compensation claims); and (ii) sign within ten

 3   weeks individual agreements in which each claimant agreed to be

 4   bound by the DRSA.   The DRSA was to become effective on the date

 5   upon which those conditions were met (the “Effective Date”).          The

 6   $2 million was to be paid to LMB within 3 days of that date.

 7        The DRSA set forth a three-stage Dispute Resolution Process

 8   (“DRP”) that was designated as the exclusive means of settlement

 9   for all claimants then represented by LMB.    The first stage

10   consisted of an interview and direct negotiation between Nextel

11   and each individual claimant.   The second stage called for non-

12   binding mediation of any unresolved claims.   The third stage

13   called for binding arbitration of any remaining unresolved

14   claims.

15        The DRSA provided that Nextel would pay another $1.5 million

16   to LMB upon the resolution of half of the claimants’ claims and a
17   final $2 million upon resolution of the remaining claims.       All

18   claims had to be either resolved or submitted to binding

19   arbitration within 45 weeks of the Effective Date, or Nextel

20   would be entitled to withhold final payment from LMB and deduct

21   $50,000 for each month that claims remained to be resolved or

22   submitted to arbitration.   The DRSA also stated that each

23   claimant would agree to be represented by LMB throughout the DRP,

24   to be bound by the result of the DRP and not to pursue any other

25   relief in any other forum for any claim against Nextel, to waive


                                      5
 1   punitive damages and non-monetary relief, to execute a general

 2   release as a prerequisite for receiving any award, and to adhere

 3   to a confidentiality agreement concerning the DRSA.

 4        LMB also promised not to accept any new clients with claims

 5   against Nextel, not to refer any non-claimant individual with

 6   claims against Nextel to another lawyer or law firm, and not to

 7   accept compensation for any prior referrals.   Finally, the DRSA

 8   provided that Nextel would retain LMB as a legal consultant (the

 9   “consultancy agreement”) for a period of two years following the

10   resolution of all claims for an additional consultancy fee of

11   $83,333.35 per month, or $2 million, bringing the total value of

12   the DRSA to LMB to $7.5 million.
13   b) The Individual Agreements and Settlements
14        The complaint alleges that, in the weeks following the

15   execution of the DRSA, LMB approached the claimants to obtain

16   signed Individual Agreements and Pledges of Good Faith.     In the

17   Individual Agreement, the particular claimant had to state that

18   he or she “reviewed the [DRSA]; had the opportunity to discuss

19   that Agreement with [LMB] or any other counsel of [his or her]

20   choosing; and agree to comply fully with the terms of that

21   Agreement.”   With respect to the payment of legal fees, the

22   Individual Agreements stated only that “I acknowledge and

23   understand that . . . Nextel has agreed to pay an amount of money

24   to [LMB] to cover the attorneys’ fees and expenses, other than

25   expert fees, that Claimants might otherwise pay to [LMB] . . . .”


                                        6
 1   The Pledges of Good Faith stated that, for purposes of keeping

 2   the DRSA confidential, each claimant consented to “selecting two

 3   (2) representatives in my area to maintain a copy of the [DRSA].

 4   Upon request to either of the area representatives, claimants

 5   will be allowed to review the [DRSA].”

 6        The six appellants, along with all but fourteen of the

 7   claimants, signed Individual Agreements and Pledges of Good

 8   Faith.   The complaint alleges that, notwithstanding the

 9   statements in the Individual Agreements and Pledges of Good

10   Faith, LMB did not allow the claimants to review the full DRSA,

11   but rather provided only the signature page of the DRSA, the

12   Individual Agreements, and a document entitled “Highlights of

13   Settlement Agreement” (the “Highlights Document”).   The

14   Highlights Document outlined the major provisions of the DRSA,

15   including the DRP, the requirement that claimants drop all

16   pending lawsuits and complaints, the confidentiality requirement,
17   and the consultancy agreement.   The Highlights Document

18   specifically stated that the consultancy agreement posed a

19   conflict of interest for LMB, which the claimant agreed to waive

20   by signing the Individual Agreement.   With respect to the

21   contractual payments to LMB, the Highlights Document stated only

22   that “Nextel is paying each Claimant’s attorneys’ fees, costs,

23   and expenses (other than expert witness fees) in consideration

24   for each Claimant participating in the DRP and honoring all of

25   the conditions.”   The document did not make any mention of the


                                      7
 1   amounts LMB was to be paid or the various conditions on those

 2   payments, as described above.

 3         In February 2001, LMB and Nextel executed a second
 4   amendment1 to the DRSA to account for the fourteen non-
 5   participating claimants (“Amendment 2”).          In Amendment 2, LMB

 6   agreed that Nextel would reduce LMB’s final payment from $2

 7   million to $1,720,000, a reduction of $20,000 per non-

 8   participating claimant.       The sum of $280,000 was to remain in an

 9   escrow account until the end of the consultancy period, at which

10   point it would be paid to LMB minus any amount Nextel paid to

11   defend, settle, or satisfy judgments in lawsuits by the fourteen

12   non-participating claimants, up to $20,000 for each claimant.

13   Between August and December 2001, all six appellants settled

14   their disputes with Nextel through the DRP for relief not

15   specified in the complaint.

16   c) The Present Action

17         On October 12, 2006, appellants filed this action, both

18   individually and as class representatives of the remaining
19   claimants, against LMB and Nextel in the Superior Court of New

20   Jersey, Passaic County.       Based on diversity of citizenship, LMB

21   and Nextel removed the case to the district court for the

22   District of New Jersey, and then filed motions to dismiss the

23   complaint.    LMB also moved to change venue to the Southern

           1
             LMB and Nextel executed Amendment 1 on September 28, 2000, in which
     Nextel agreed to a limited waiver of the DRSA’s confidentiality provisions in
     order to “obtain administrative approval of the withdrawal of all Agency
     Complaints. . . .”

                                           8
 1   District of New York.   The motion was granted and the case

 2   transferred to the Southern District on September 21, 2007.

 3        Appellants’ complaint alleges that the DRSA amounted to a

 4   conspiracy between LMB and Nextel by which Nextel secretly bought

 5   LMB’s loyalty through payment of the designated amounts.   The

 6   complaint asserted a host of claims against LMB, including breach

 7   of fiduciary duty, commercial bribery, fraud, unjust enrichment,

 8   legal malpractice, breach of contract, unauthorized practice of

 9   law, conversion, and violation of the New Jersey RICO statute.

10   The complaint also asserted claims against Nextel for tortious

11   interference with contract, commercial bribery, and aiding and

12   abetting or conspiring with LMB in its breach of fiduciary duty,

13   fraud, legal malpractice, and breach of contract.

14        On March 31, 2009, the district court granted appellees’

15   motions to dismiss for failure to state a claim against either

16   LMB or Nextel.   The court applied New York’s choice of law rules

17   and concluded that New York law governed the matter.   The court

18   held that, by signing the Individual Agreements and Pledges of

19   Good Faith, appellants confirmed as a matter of law that they had

20   the opportunity to review the DRSA.   It concluded, therefore,

21   that appellants failed to state a claim under New York law for

22   breach of fiduciary duty or fraud because both claims rested on

23   appellants’ allegations that LMB failed to disclose the DRSA’s

24   compensation agreement.   With respect to appellants’ malpractice
25   claim, the court found that the complaint did not contain any


                                      9
 1   “factual allegations regarding how [LMB] ineffectively or

 2   inadequately represented [appellants]” during the DRP.     To the

 3   extent that the malpractice claims rested on the DRSA’s

 4   compensation structure, the court found that appellants failed to

 5   state a claim because they did not allege that the money paid by

 6   Nextel to LMB would otherwise have gone to appellants.     The court

 7   found the remainder of appellants’ claims to be without merit.

 8        This appeal followed.

 9                                 DISCUSSION

10        Appellants have briefed on appeal the dismissal of their

11   claims of breach of fiduciary obligation, breach of contract,

12   fraud, malpractice, and New Jersey RICO claims.    We deal with

13   those claims after a brief discussion of choice of law.

14        With regard to the choice of law issues, we “review the
15   district court’s choice of law de novo.”     Abdullahi v. Pfizer,

16   Inc., 562 F.3d 163, 190 (2d Cir. 2009) (internal quotation marks

17   omitted).    In this case, the district court erroneously applied

18   New York’s choice of law rules.    In fact, New Jersey’s choice of
19   law rules apply because New Jersey law would have governed had

20   there been no change of venue.    See Van Dusen v. Barrack, 376

21   U.S. 612, 639 (1964); see also Abdullahi, 562 F.3d at 190.     New

22   Jersey applies a two-step “flexible governmental-interests

23   analysis.”    Rowe v. Hoffman-La Roche, Inc., 189 N.J. 615, 621

24   (2007).

25                The first step in the analysis is to
26                determine whether a conflict exists between

                                       10
 1               the laws of [New York and New Jersey]. Any
 2               such conflict is to be determined on an
 3               issue-by-issue basis.
 4                    If there is no actual conflict, then the
 5               choice-of-law question is inconsequential,
 6               and the forum state [here New York] applies
 7               its own law to resolve the disputed issue.
 8               If there is an actual conflict, the second
 9               step seeks to determine the interest that
10               each state has in resolving the specific
11               issue in dispute. The Court must identify
12               the governmental policies underlying the law
13               of each state and determine whether those
14               policies are affected by each state’s
15               contacts to the litigation and to the
16               parties. We must apply the law of the state
17               with the greatest interest in governing the
18               particular issue.
19
20   Id. at 621-22 (internal citations and quotation marks omitted).
21   The parties appear to agree that there is no difference between

22   New York and New Jersey law as to all of appellants’ claims, save

23   for the New Jersey RICO claim.2        We vacate and remand that claim

24   for reconsideration in light of this opinion’s conclusion that

25   New Jersey’s choice of law rules apply and its discussion of the

26   events giving rise to this action.

27         We turn now to the merits of the other claims briefed on

28   appeal.   “We review the district court's dismissal of a complaint

29   for failure to state a claim de novo . . . .” Faulkner, 463 F.3d

30   at 133.   “The court accepts all well-pleaded allegations in the

31   complaint as true, drawing all reasonable inferences in the

32   plaintiff’s favor.      In order to survive a motion to dismiss under

           2
             Nextel’s letter brief does not go into whether there is a difference
     between New York and New Jersey law, but rather maintains that New York law
     applies under the New Jersey choice of law rules because New York has a
     greater governmental interest.


                                          11
 1   Rule 12(b)(6), a complaint must allege a plausible set of facts

 2   sufficient ‘to raise a right to relief above the speculative
 3   level.’”   Operating Local 649 Annuity Trust Fund v. Smith Barney
 4   Fund Mgmt. LLC, 595 F.3d 86, 91 (2d Cir. 2010) (quoting Bell Atl.

 5   Corp. v. Twombly, 550 U.S. 544, 555 (2007)).

 6   a) Fiduciary Obligation

 7        The elements of a claim for breach of a fiduciary obligation

 8   are: (i) the existence of a fiduciary duty; (ii) a knowing breach

 9   of that duty; and (iii) damages resulting therefrom.    See Barrett

10   v. Freifeld, 883 N.Y.S.2d 305, 308 (N.Y. App. Div., 2d Dep’t

11   2009); accord F.G. v. MacDonell, 150 N.J. 550, 563-64 (1997).

12        The existence of a fiduciary duty between LMB and appellants

13   is beyond dispute.   It is also plain that, if there was a breach,

14   it could not have been due to negligence but rather, given the

15   nature of the DRSA and the complaint’s allegations, had to be

16   knowing and intentional on LMB’s part.

17        Appellants contend that LMB breached its fiduciary duty to

18   the claimants by signing the DRSA because the terms of the DRSA

19   created a conflict of interest between LMB and its claimant

20   clients -- a conflict that was not consentable, that is, one that

21   could not be obviated by procuring the clients’ consent.

22   Moreover, they allege that even if the conflicts were

23   consentable, LMB failed to properly disclose them.   Appellants

24   further argue that as a result of LMB’s undisclosed conflicts of

25   interest, their settlement awards were “unreasonably low and did


                                     12
 1   not approximate the true value of the[ir] claims.”   LMB and

 2   Nextel contend that any conflicts of interest created by the DRSA

 3   were consentable and that, as a matter of law, appellants cannot

 4   claim to have been unaware of the terms of the DRSA in light of

 5   their signatures on the Individual Agreements, which stated that

 6   appellants had reviewed the DRSA.    We conclude that the conflicts

 7   were unconsentable.

 8        The DRSA created overriding and abiding conflicts of

 9   interest for LMB and thoroughly undermined its ability to “deal

10   fairly, honestly, and with undivided loyalty to [appellants].”
11   Elacqua v. Physicians’ Reciprocal Insurers, 860 N.Y.S.2d 229, 232
12   (N.Y. App. Div., 3d Dep’t, 2008) (quoting Matter of Cooperman, 83

13   N.Y.2d 465, 472 (1994)).

14        The DRSA on its face created enormous incentives on LMB’s

15   part to obtain from each and every one of its clients waivers of

16   important rights. If LMB were to cause all claimants to (i) waive

17   their rights to jury trials and various kinds of monetary damages

18   and non-monetary relief, (ii) drop all existing legal or

19   administrative proceedings, (iii) agree to submit all claims to

20   the DRP, and (iv) waive the right to hire new counsel during the

21   DRP, LMB would be paid $2 million by Nextel even though not a

22   single claimant had recovered anything or even begun any of the

23   DRP steps.   LMB had ten weeks to obtain these waivers.

24        The overriding nature of the conflict is underscored by the

25   fact that, when fourteen of the 587 clients failed to agree,


                                     13
 1   Nextel’s final, but pre-consultancy, payment to LMB was reduced

 2   from $2 million to $1,720,000, or $20,000 per non-agreeing

 3   client.    Under the DRSA, after obtaining the waivers, LMB would

 4   be paid $1.5 million when half of the claimants’ claims were

 5   resolved through the DRP, regardless of the individual outcomes.

 6   Another $2 million ($1,720,000 after Amendment 2) would be paid

 7   to LMB when the remaining claims were resolved, again without

 8   regard to individual outcomes.    However, the $2 million would be

 9   reduced on a sliding scale if less than all the claims were

10   resolved within forty-five weeks from the effective date.      To

11   become entitled to the $2 million, LMB would have to process over

12   thirteen claims per week starting on the effective date, or over

13   two claims per work day.

14           Once all the claims were processed, LMB would formally go to

15   work for Nextel as a consultant for two years at $1 million per

16   year.    LMB also promised in the DRSA not to accept new clients

17   with claims against Nextel, not to refer any such client to

18   another lawyer or firm, and not to accept compensation for any

19   prior referral.

20           It cannot be gainsaid that, viewed on its face alone, the

21   DRSA created an enormous conflict of interest between LMB and its

22   clients.    Such a conflict is permissible only if waivable by a
23   client through informed consent.       See Int’l Bus. Machs, Corp. v.
24   Levin, 579 F.2d 271, 282 (3d Cir. 1978); Filippi v. Elmont Union

25   Free Sch. Dist. Bd. of Educ., 722 F. Supp. 2d 295, 310-11


                                       14
 1   (E.D.N.Y. 2010).    However, there may be circumstances in which a
 2   conflict is not consentable.   See GSI Commerce Solutions, Inc. v.
 3   BabyCenter, L.L.C., 618 F.3d 204, 212 n.2 (2d Cir. 2010); CenTra,

 4   Inc. v. Estrin, 538 F.3d 402, 412 (6th Cir. 2008); Cohen v.

 5   Strouch, No. 10 Civ. 7828, 2011 WL 1143067, at *2-3 (S.D.N.Y.

 6   Mar. 24, 2011).    For two reasons, this is such a case.

 7       First, because LMB was not lead counsel in a class action,

 8   the class-protective provisions of Fed. R. Civ. P. 23 were not

 9   triggered.   See In re Agent Orange Prod. Liab. Lit., 818 F.2d

10   216, 222 (2d Cir. 1987) (“Fed. R. Civ. P. 23(e) . . . places the

11   court in the role of protector of the rights of the class when

12   such a settlement is reached and attorneys’ fees are awarded.”).

13   Therefore, LMB’s clear duty as counsel to the parties seeking

14   relief from Nextel was to advise each client individually as to

15   what was in his or her best interests taking into account all of

16   the differing circumstances of each particular claim.      See

17   Ziegelheim v. Apollo, 128 N.J. 250, 260-61 (1992); Jones Lang

18   Wootton USA v. LeBoeuf, Lamb, Greene & MacRae, 674 N.Y.S.2d 280,
19   284-85 (N.Y. App. Div., 1st Dep’t. 1998).   The DRSA was flatly

20   antagonistic to that duty.

21        On the face of the DRSA, its inevitable purpose was to

22   create an irresistible incentive -- millions of dollars in

23   payments having no relation to services performed for, or

24   recovery by, the claimants -- for LMB to engage in an en masse

25   solicitation of agreement to, and performance of, the DRSA’s


                                      15
 1   terms from approximately 587 claimant clients.           The effectiveness

 2   of the DRSA, and therefore the payments to LMB, depended on

 3   Nextel’s conclusion that a sufficient number of clients had
 4   agreed to it.3    Any number short of all 587, and Nextel would

 5   have no obligation to pay anything, as Amendment 2 demonstrated

 6   by reducing the final, pre-consultancy $2 million payment to LMB

 7   to $1,720,000, a reduction of $280,000, or $20,000 apiece for the

 8   fourteen clients LMB failed to deliver.          By entering the DRSA,

 9   agreeing to be bound by its terms and accepting the financial

10   incentives available therein, LMB violated its duty to advise and

11   represent each client individually, giving due consideration to

12   differing claims, differing strengths of those claims, and

13   differing interests in one or more proper tribunals in which to

14   assert those claims.4      See Elacqua, 860 N.Y.S.2d at 232-33;

15   accord Matter of Educ. Law Ctr., Inc., 86 N.J. 124, 133 (1981).

16         This already abiding conflict was severely aggravated by two

17   other provisions in the DRSA: (i) the sliding scale of payments

18   from Nextel to LMB depending on how quickly LMB’s clients’ claims


           3
             The first payment to LMB was to be made within three business days of
     the effective date of the agreement, and the DRSA stated that the agreement
     would become effective once all pending legal and administrative actions were
     withdrawn or dismissed and all claimants had signed the Individual Agreements.


           4
             We do not necessarily preclude clients from giving informed consent to
     some form of group treatment where manageable numbers of claimants are
     involved and putative defendants are not paying the claimants’ lawyer to
     aggregate the claims. Nor do we preclude the ordinary arms-length settlement
     agreement in which one party agrees to pay the costs and fees of another. For
     the reasons stated, the DRSA is a far cry from such an agreement,
     notwithstanding transparently cosmetic language portraying it as such.


                                          16
 1   were resolved; and (ii) the commencement of the $2 million

 2   consulting contract and the payment of those fees, which would

 3   occur only after all the claims were resolved.           Moreover, the

 4   DRSA required the claimants, LMB’s clients, to waive the right to

 5   hire unconflicted counsel to pursue the claimant’s recovery in

 6   the DRP.    Again, LMB was being paid by Nextel in effect to ignore

 7   its duty to represent clients as individuals with differing

 8   claims and interests that might require differing amounts of time

 9   and preparation vigorously to pursue a recovery.

10         Finally, although Nextel agreed to pay $5.5 million with

11   regard to the processing of LMB’s clients’ claims according to

12   the DRSA’s provisions, and agreed to pay LMB another $2 million

13   to serve as Nextel’s consultant, none of the payments to LMB was

14   in any way contingent on claimant clients receiving a recovery.

15   Any assertion by appellees, therefore, that the payments were

16   part of a settlement that simply included LMB’s clients’
17   attorneys’ fees does not meet the straight-face test.5            See Note

18   4, supra.
19         Indeed, we express our candid opinion that the DRSA was an

20   employment contract between Nextel and LMB designed to achieve an

21   en masse processing and resolution of claims that LMB was


           5
             Although the fact is in no way dispositive, we do note that the amount
     deducted from the final, pre-consultancy payment was to cover not only
     Nextel’s costs and attorneys’ fees, but amounts paid in settlements and
     judgments to the 14 non-signing claimants. Moreover, any part of the deducted
     amount not paid to resolve the claims of those claimants was to be paid to
     LMB. A trier of fact might infer from this that the $2 million payment (and
     all other payments for that matter) was intended to reduce Nextel’s monetary
     exposure to settlement payments and judgments.

                                          17
 1   obligated to pursue individually on behalf of each of its

 2   clients.    The only sensitivity shown to potential conflicts of

 3   interest by the DRSA is in the provisions in which LMB promises

 4   not to represent new clients, or refer new claims, against

 5   Nextel.    Tellingly, this sensitivity appears aimed only at

 6   avoiding conflicts that could have an impact on LMB’s new-found

 7   relationship with Nextel.

 8           Second, we believe that, under the above circumstances, the

 9   opportunity for the claimants to give informed consent was so

10   burdened that the DRSA is not consentable for that reason as

11   well.    Certainly, given the conflicts described above, any advice

12   from LMB to its claimant clients could not possibly be

13   independent advice untainted by the counter-incentives of the

14   DRSA such that the resulting consent would be valid.    The

15   magnitude, and -- from a lay client’s perspective -- complexity

16   of LMB’s conflict of interest is such that informed consent would

17   require the hiring of an independent lawyer to review the twenty-

18   nine page DRSA and to explain the multiple conflicts embraced by

19   LMB, including the scheduling and amount of payments to LMB, the

20   waiver of multiple rights, and the important and often difficult-

21   to-analyze consequences of abandoning ongoing legal or

22   administrative proceedings.    To be sure, the claimants were

23   allowed to consult with another attorney, but an initial attorney

24   hired to bring a discrimination action does not fulfill his or
25   her representational obligations by presenting a client with a


                                       18
 1   proposal that can be considered in an informed manner only by

 2   hiring a second attorney.

 3        The elements of a breach of fiduciary duty are therefore met

 4   by the complaint’s allegations.    There was:   (i) a duty; (ii) a

 5   knowing breach of the duty; and (iii) damages resulting
 6   therefrom.   Barrett, 883 N.Y.S.2d at 308; MacDonell, 150 N.J. at
 7   563-64.   The existence of a fiduciary duty on LMB’s part toward

 8   the claimants is undeniable.   For reasons stated, there was a

 9   knowing breach.   As for damages, the nature of the DRSA itself

10   creates a presumption of damages.      Neither Nextel nor LMB would

11   have entered into it unless each believed that it would profit

12   more by that arrangement than by one in which a law firm

13   vigorously represented claimants as individuals.     See Note 5,

14   supra.    Appellants have, therefore, plausibly alleged injury in

15   the difference between what they received with representation by

16   LMB under the DRSA and what they would have received if

17   represented by unconflicted counsel.     Whether other measures of

18   damages, such as disgorgement, are available must await further

19   proceedings.

20        Appellants also allege that Nextel is liable for aiding and

21   abetting LMB in the breach of its duties to appellants.     Both New

22   Jersey and New York authorize civil liability for aiding and

23   abetting the commission of a tort.     “The elements of aiding and

24   abetting [under New Jersey law] are: (1) the commission of a

25   wrongful act; (2) knowledge of the act by the alleged


                                       19
 1   aider-abettor; and (3) the aider-abettor knowingly and
 2   substantially participated in the wrongdoing.”   Morganroth &
 3   Morganroth v. Norris, McLaughlin & Marcus, P.C., 331 F.3d 406,

 4   415 (3d Cir. 2003).    “A claim for aiding and abetting a breach of

 5   fiduciary duty [under New York law] requires: (1) a breach by a

 6   fiduciary of obligations to another, (2) that the defendant

 7   knowingly induced or participated in the breach, and (3) that

 8   plaintiff suffered damage as a result of the breach.”    Kaufman v.

 9   Cohen, 760 N.Y.S.2d 157, 169 (N.Y. App. Div., 1st Dep’t, 2003).

10   Both jurisdictions look to the Restatement (Second) of Torts,

11   which does not require wrongful intent by the third party, but

12   only “that the third party knew of the breach of duty and

13   participated in it.”   S & K Sales Co. v. Nike, Inc., 816 F.2d

14   843, 848 (2d Cir. 1987); Morganroth, 331 F.3d at 415 n.3;

15   Restatement (Second) of Torts § 876(b).   Like New Jersey, New

16   York requires that the third party provide “‘substantial

17   assistance’ to the primary violator.”   Kaufman, 760 N.Y.S.2d at

18   170.   Because there is no actual conflict between the two
19   definitions, New York law applies.    See Lautenberg Found. v.

20   Madoff, No. 09-816 (SRC), 2009 WL 2928913, at *16 (D.N.J. Sept.

21   9, 2009) (finding “no true conflict” between New York and New

22   Jersey regarding aiding and abetting breach of fiduciary duty).

23          For reasons stated, appellants have adequately alleged a

24   breach of fiduciary obligations by LMB.   To sustain their claim

25   against Nextel for aiding and abetting, they must allege facts


                                      20
 1   sufficient to show that Nextel knowingly provided substantial

 2   assistance to LMB by “affirmatively assist[ing], help[ing]

 3   conceal or fail[ing] to act when required to do so, thereby
 4   enabling the breach to occur.”    Kaufman, 760 N.Y.S.2d at 170.
 5   Appellants have easily met that burden, for reasons stated.

 6           Viewed in the light most favorable to appellants, therefore,

 7   they have sufficiently alleged that Nextel negotiated and signed

 8   the DRSA with the knowledge, and intent, that it would undermine

 9   LMB’s ability to fairly represent appellants.    We therefore

10   vacate the district court’s dismissal of appellants’ claim

11   against Nextel for aiding and abetting LMB’s breach of fiduciary

12   duty.

13   b) Breach of Contract

14           The district court also erred in holding that plaintiffs

15   failed to state a claim for breach of their original retainer

16   agreement.    In order to state a claim of breach of contract, the

17   complaint must allege:    (i) the formation of a contract between

18   the parties; (ii) performance by the plaintiff; (iii) failure of

19   defendant to perform; and (iv) damages.    Eternity Global Master

20   Fund Ltd. v. Morgan Guar. Trust Co. of N.Y., 375 F.3d 168, 177

21   (2d Cir. 2004); accord Murphy v. Implicito, 392 N.J. Super. 245,

22   265 (App. Div. 2007).    We have no difficulty holding that these

23   elements have been pled.

24           The district court held that LMB did not fail to perform

25   their obligations under the contract because they negotiated the


                                       21
 1   DRSA with Nextel and carried out the DRP proceedings.      In the

 2   court’s view, those acts constituted the legal representation

 3   that LMB was obligated to provide under the retainer agreements

 4   with the appellants.    But signing the DRSA is the very conduct

 5   that appellants assert was a breach of contract.   Appellants

 6   allege that the retainer agreements provided that LMB would

 7   represent appellants individually but, according to the

 8   complaint, LMB simply aggregated the plaintiffs to gain a group

 9   settlement that ultimately benefitted LMB rather than the

10   claimants.   Thus, assuming the facts in the complaint to be true

11   and relying on our earlier discussion of the DRSA and LMB’s

12   fiduciary obligations, LMB never provided the type of

13   representation required by the retainer agreements.

14        The district court also stated that the settlement agreement

15   superceded the retainer agreements, extinguishing appellants’

16   claims for breach of the original agreements.   As discussed
17   supra, the settlement agreement was not valid because it was
18   obtained while LMB suffered from an unconsentable conflict of
19   interest.

20   c) Fraud

21        Appellants also claim fraud in the inducement of the

22   retainer agreement.    To state a claim for fraud in the

23   inducement, the party must allege:    (i) a material

24   misrepresentation of a presently existing or past fact; (ii) an

25   intent to deceive; (iii) reasonable reliance on the


                                      22
 1   misrepresentation by appellants; and (iv) resulting damages.
 2   Ross v. Louise Wise Servs., Inc., 8 N.Y.3d 478, 488 (2007);
 3   accord Banco Popular N. Am. v. Gandi, 184 N.J. 161, 172-73

 4   (2005).   In addition, the plaintiff must allege specific facts as

 5   to the fraud, including the misleading statements, speaker, time,

 6   place, individuals involved, and specific conduct at issue.              Fed.

 7   R. Civ. P. 9(b); Acito v. IMCERA Grp., Inc., 47 F.3d 47, 51 (2d

 8   Cir. 1995).    We believe that appellants’ allegations state a

 9   claim for fraud.

10         The complaint alleges that the retainer agreements stated

11   that LMB would investigate and pursue appellants' claims

12   individually, but never intended to provide such representation.

13   Instead, LMB intended to aggregate the claimants to negotiate a

14   group settlement with Nextel benefitting LMB.           Rule 9(b) is

15   satisfied by the allegations that:         (i) LMB conducted a specific

16   meeting with the claimants, at which rosy promises of recovery

17   were made and agreement to the individual retainer agreements was

18   obtained; and (ii) LMB’s actual intent was demonstrated by past

19   agreements like the DRSA between LMB and putative defendant-

20   employers providing for direct payments, including consulting

21   agreements, to LMB that interfered with LMB’s professional

22   responsibilities in representing earlier clients.6


           6
             Appellants also assert a fraud in the inducement claim with regard to
     the Individual Agreements. However, the harm to appellants from that alleged
     fraud is in the Individual Agreements to abide by the DRSA. Because we have
     invalidated the DRSA as a breach of LMB’s fiduciary duty, there is no need to
     address this fraud claim.

                                          23
 1   d) Malpractice
 2        For reasons stated, appellants have also sufficiently stated

 3   a claim for malpractice.

 4   e) Claims Against Nextel

 5        Finally, the district court dismissed appellants’ claims

 6   against Nextel for aiding and abetting fraud, aiding and abetting

 7   breach of contract, aiding and abetting malpractice, and tortious

 8   interference of contract, relying on the dismissal of the

 9   underlying claims against LMB and appellants’ consent to the

10   terms of the DRSA.   The dismissal of these claims is also

11   vacated, and the district court shall in the first instance

12   reconsider any motions to dismiss those claims in light of the

13   discussion above.

14                               CONCLUSION

15        For the reasons stated we vacate and remand.

16

17




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