2nd Circuit Scorches Nextel for Cozy Contract

MANHATTAN (CN) - The 2nd Circuit revived claims that Nextel Communications hired their employees' lawyers while they were fighting a discrimination class action, inviting a conflict of interest, to pressure them into a lowball settlement.

A three-judge appellate panel described that settlement agreement as little more than Nextel's "employment contract" for their adversaries' firm, Leeds, Morelli & Brown.

The contract stipulated that 587 employees would split $2 million to waive all claims, while the firm collected $3.5 million in fees and an additional $2 million to work as a consultant for Nextel, the 24-page opinion states.

Leeds Morelli also promised not to accept new clients with claims against Nextel, refer any client to another lawyer, or accept compensation for any prior referral.

Nextel employees say that the firm encouraged them to skip over the pages describing the consultancy agreement and head straight to the signature page.

In October 2006, they sued Nextel and the law firm for a host of claims including breach of fiduciary duty, commercial bribery, fraud, unjust enrichment, legal malpractice, breach of contract, unauthorized practice of law, conversion, and violation of the New Jersey RICO statute.

U.S. District Judge George Daniels had dismissed all of the charges for failure to state a claim, but the federal appeals court reinstated several of those claims last week.

"It cannot be gainsaid that, viewed on its face alone, the [settlement agreement] created an enormous conflict of interest between LMB and its clients," Judge Ralph K. Winter wrote for the court, using the initials of Leeds, Morelli & Brown

"On the face of the [settlement], its inevitable purpose was to create an irresistible incentive - millions of dollars in payments having no relation to services performed for, or recovery by, the claimants - for LMB to engage in an en masse solicitation of agreement to, and performance of, the [settlement's] terms from approximately 587 claimant clients."

The other members of the appellate panel were Circuit Judge Peter W. Hall and U.S. District Judge Miriam Goldman Cedarbaum, sitting by designation from New York's Southern District.

They say the settlement agreement stipulated that Nextel would not have to pay a dime if the claimants could not prove 587 employees in their class, and would pay the law firm based on the speed with which they resolved the claims.

"Indeed, we express our candid opinion that the [settlement] was an employment contract between Nextel and LMB designed to achieve an en masse processing and resolution of claims that LMB was obligated to pursue individually on behalf of each of its clients," Winter wrote. "The only sensitivity shown to potential conflicts of interest by the [settlement] is in the provisions in which LMB promises not to represent new clients, or refer new claims, against Nextel. Tellingly, this sensitivity appears aimed only at avoiding conflicts that could have an impact on LMB's new-found relationship with Nextel."

The allegations will return to the Southern District of New York on remand.

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