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Dentons Loses Arbitration Question in Ex-Partner Fee Dispute (1)

July 16, 2021, 5:03 PMUpdated: July 16, 2021, 7:42 PM

A Los Angeles County judge this week granted a fired Dentons partner’s request for a temporary stay of an arbitration proceeding with his former firm that stems from a $35 million contingency fee dispute.

Judge James Chalfant ruled Jinshu “John” Zhang was likely to win an argument that the delegation clause in his partnership agreement with Dentons was not “clear and unmistakable.” Delegation clauses grant arbitrators the right to decide what issues fall under their judgment.

The sides had a falling out after Zhang successfully represented a Chinese client in an arbitration that netted a contingency fee worth about $35 million, the ruling says. Zhang and Dentons were at odds over how the fee would be split.

Dentons, one of the largest law firms in the world with more than 12,000 lawyers, has failed on multiple procedural arguments since Zhang filed his complaint in Los Angeles County court in late May.

A federal judge in New York in May denied Dentons a request to file under seal its petition to confirm an arbitrator’s ruling. And a California federal judge in June rejected Dentons’ effort to move the case to federal court.

“While the Judge agreed to a ‘momentary pause’ of the underlying arbitration, we are pleased that he declined to enjoin Dentons’ lawsuit in New York, seeking confirmation of the Emergency Arbitrator’s three awards in Dentons’ favor and compelling Mr. Zhang to arbitrate this matter,” a spokeswoman for Dentons said in a statement.

Paul Murphy, a partner at Murphy Rosen who represents Zhang, said he was pleased with the ruling to stay the arbitration since it suggested his client could prevail on some of the most important issues in the case.

“We think this is a very significant and favorable ruling and we are delighted with it,” he said.

The dispute arose after Zhang won a contingency fee matter but before the eight-figure fee was collected. Zhang contends the firm’s former U.S. CEO, Mike McNamara, conspired with fellow Dentons partners to collect the fee directly from the client, including by drafting a “forgery” on the client’s letterhead that would direct payment from a counter-party to the law firm.

Dentons says Zhang demanded 90% of the contingency fee for himself, then negotiated an agreement with the client that would have netted him 85% of the proceeds. The firm contends he made “false and slanderous” allegations against firm leadership after his “self-dealing” was rebuked.

Zhang was fired in early May, shortly after he says he called for McNamara’s “immediate termination” in an email to the firm’s board. The firm simultaneously began an arbitration proceeding with him.

McNamara was replaced as Dentons’ U.S. CEO on July 2, with the firm naming a transitory leadership structure as it reportedly seeks a formal replacement. He’d been in leadership roles at the firm for a decade.

“While anyone can hurl reckless allegations, I can say unequivocally that there was never any forgery of any documents in this matter by anyone at Dentons,” Patrick Collins, a partner at King & Spalding who represents Dentons, said in a statement. “The allegation is false and defamatory and will be proven so in the appropriate arbitral forum.”

Judge Chalfant’s stay opens the door for a later court ruling on the issue that could help decide whether the high-stakes dispute will stay public. Dentons has been attempting to keep its dispute with Zhang under wraps since the fired Los Angeles-based partner filed a complaint against the firm in May.

It is too early to determine whether the dispute will play out in arbitration or a courtroom. Dentons is seeking to compel the case to arbitration through a New York court, and it is separately seeking to enforce three arbitration awards it said it has won.

The judge this week said Zhang was also likely to prevail on a second argument: That despite his status as an “equity partner,” his relationship with Dentons was more akin to that of an employee. If he is ultimately successful in that argument, it would help Zhang avoid arbitration in New York due to a California law that precludes the state’s citizens from adjudicating claims outside the state. Even if he is successful on that claim, an arbitration could still take place in California, Chalfant noted.

Zhang argued he was more like an employee than a partner since he was not allowed to negotiate his partnership agreement; he could be fired by the firm’s board rather than a vote of partners; and the firm’s leadership had control over large portions of his work.

Chalfant pointed to a ruling involving a former Winston & Strawn partner that said law firm partners can be considered employees when there is a “power imbalanace analogous to that of an employer-employee relationship.” That case, Ramos v. Winston & Strawn, ended with the law firm’s unsuccessful petition to the U.S. Supreme Court.

“The mere fact that Zhang held the title of equity partner and was financially successful does not change this imbalance,” Chalfant wrote.

The case is: Jinshu “John” Zhang v. Dentons U.S. LLP et al. Cal.Super.Ct., No. 21STCV19442, 7/13/2021.

(Adds comment from Paul Murphy. )

To contact the reporter on this story: Roy Strom in Chicago at rstrom@bloomberglaw.com

To contact the editors responsible for this story: Chris Opfer at copfer@bloomberglaw.com;
John Hughes in Washington at jhughes@bloombergindustry.com