Paul Picone v. Gary Cruciani and McKool Smith, P.C. (No. 05-22-00841-CV; December 21, 2023) arose from a complex combination of business deals and litigation that came to head in a legal malpractice case in which Picone claims that his lawyer and the law firm failed to settle with a third party for enough money.
The whole thing started in 2006, when plaintiff (Picone) owned a company that licensed his photographs to another business, OSI. Plaintiff alleged that OSI used his photos outside of the scope of the license agreement and hired counsel (WGS) to work out a settlement. The parties settled the dispute for a lump sum payment and a new licensing agreement. They agreed to resolve any disputes arising from the settlement agreement through arbitration. Some years later, plaintiff discovered his photos on the internet and sued several of OSI’s customers for copyright infringement in Massachusetts. OSI intervened in 2016 and moved to refer these disputes to arbitration. Shortly thereafter, WGS withdrew from the case. Plaintiff then sold his business to a third-party, CSL, owned by Fleeger. They concluded a stock purchase agreement, which contained a broad arbitration provision. The agreement also contained a provision that entitled plaintiff to 40% of the recovery from unresolved claims against third parties that were pending at the time.
At about the same time, plaintiff alleged that he hired McKool Smith to represent his company (which he had just agreed to sell) in the arbitration with OSI, though no written retainer agreement existed. Fleeger, however, signed a written agreement with McKool to represent the company in the arbitration, although the stock purchase agreement had not yet taken effect. The arbitration concluded with an award of $9.5 million to plaintiff, plus attorney’s fees and costs, but with no award for the copyright infringement cases against third parties. The arbitrator cited WGS’s failure to include “languge of conditions” when it drafted the 2006 settlement agreement between plaintiff and OSI. Plaintiff then hired McKool to represent him in pre-suit negotiations with WGS on a legal malpractice claim, again without a written contract. McKool asked to have Fleeger added to the retention agreement, which did occur. The agreement entitled McKool to a 30% contingency fee and contained an arbitration provision. This agreement was made in 2019.
It goes on. At a mediation of the WGS malpractice claim, plaintiff and Fleeger had an argument about the distribution of any recovery against WGS. Plaintiff claimed 40%, while Fleeger claimed it all. At the end of the mediation, WGS settled for $15 million, but the term sheet did not include an express division of the recovery between plaintiff and Fleeger. Plaintiff’s personal attorney contacted McKool and asked them to retain the funds in its client account until plaintiff and Fleeger could come to an agreement. McKool said they couldn’t do that since Fleeger (actually, Fleeger’s company) was the client. Plaintiff later signed a settlement agreement for $2.5 million of the WGS recovery. The settlement agreement contained broad release language.
Unhappy with his $2.5 million, plaintiff sued McKool, asserting negligence and other theories and seeking damages of nearly $15 million. McKool moved to compel arbitration under the 2016 stock purchase agreement and the 2019 retention agreement, asserting direct benefits estoppel. The case went to arbitration, where McKool filed a counterclaim on the basis that plaintiff’s suit breached the convenant not to sue in the 2020 settlement and release. The arbitrator agreed and awarded plaintiff nothing. McKool moved to confirm the arbitration award, which the trial court granted. Plaintiff appealed.
The court of appeals affirmed. Plaintiff argued that he never signed any agreement with McKool requiring arbitration and, consequently, no valid arbitration agreement existed. McKool argued that the doctrine of direct benefits estoppel applied because plaintiff’s malpractice claim rested squarely on the terms of the 2016 stock purchase agreement, which purported to distribute shares of proceeds from third-party claims between plaintiff and Fleeger. Because plaintiff sought “direct benefits” from that contract, the contract’s arbitration clause applied to his dispute with McKool. The court agreed, concluding that plaintiff’s “claims against McKool Smith do not merely refer to the Stock Purchase Agreement; they are in fact dependent on the agreement.” Indeed, the court observed, plaintiff “identifie[d] no other legal reason why he had a right to forty percent of his former company’s recovery from WGS.” Plaintiff also shot himself in the foot when he pleaded that McKool committed malpractice when “it failed to . . . [a]dvise me to obtain a writing confirming my entitlement to 40% of my recovery from the WGS legal malpractice claim per the October 5, 2016 Stock Purchase Agreement.” Oops.
Having concluded that plaintiff’s claims could not stand “independently” of the stock purchase agreement, the court turned to McKool’s counterclaim that plaintiff’s suit violated the 2020 settlement and release. Plaintiff argued that the 2020 release did not contain an arbitration provision, so McKool’s claim was not part of the arbitration. McKook countered that the counterclaim was compulsory because it was “inextricably enmeshed with [plaintiff’s] malpractice claims” (citation omitted). Reasoning that plaintiff hired McKool to pursue a benefit he believed he was entitled to under the stock purchase agreement and then alleged that McKool committed malpractice in doing so, the court concluded that “McKool Smith’s allegations are factually intertwined with [plaintiff’s] malpractice claims. Accordingly, those allegations were within the scope of the arbitration pending between the parties” (citation omitted). Finally, the court rejected plaintiff’s argument that a mandatory venue provision in the 2020 settlement in release “superseded” any prior arbitration agreement. As the court pointed, a mandatory venue provision only speaks to the location of the court that would confirm the arbitration, not whether the claims are arbitrable.
We have again bored you with a tedious recitation of the facts, but direct benefits estoppel assertions are heavily fact specific and, as far as we can tell, becoming more common in litigation in which a party seeks to extricate itself from an inconvienent arbitration provision.