## Facts

- Approximately 587 employees retained Leeds, Morelli & Brown, P.C. (LMB) on contingency terms to pursue employment-discrimination claims against Nextel Communications, Inc. (Nextel).
- LMB and Nextel entered a Dispute Resolution and Settlement Agreement (DRSA) intended to serve as the exclusive mechanism to resolve the clients’ claims through an expedited mediation/arbitration process.
- The DRSA required clients to abandon ongoing legal and administrative proceedings, waive jury trial and punitive damages, and accept the DRSA process.
- Nextel agreed to pay LMB (1) $2 million to secure client participation in the DRSA, (2) $3.5 million on a sliding scale as claims were resolved through the DRSA process, and (3) $2 million for LMB to serve as a paid consultant to Nextel for two years after the claims concluded.
- LMB’s initial $2 million payment was reduced for each client who refused to participate; fourteen clients did not join.
- Clients signed individual documents stating they had reviewed the DRSA and had an opportunity to consult LMB or other counsel, but plaintiffs alleged they were not allowed to review the full DRSA and were not told about the compensation and consulting arrangements between LMB and Nextel.
- Plaintiffs alleged the DRSA created a direct financial incentive for LMB to steer clients into the process, resolve claims quickly, and align with Nextel’s interests rather than pursuing clients’ best outcomes.

## Issues

1. Whether the complaint plausibly alleged that LMB breached its fiduciary duty of loyalty to its clients by entering and implementing the DRSA with undisclosed, conflict-creating compensation arrangements.
2. Whether the complaint plausibly alleged that Nextel aided and abetted LMB’s breach of fiduciary duty.
3. Whether various related state-law claims (including contract-based theories) were adequately pleaded or were duplicative of the fiduciary-duty theory.

## Decision

- The Second Circuit vacated the Rule 12(b)(6) dismissal in substantial part and remanded.
- The court held the complaint plausibly alleged a breach of fiduciary duty by LMB based on the DRSA’s structure and the alleged nondisclosure preventing informed client consent.
- The court held the complaint plausibly alleged Nextel aided and abetted LMB’s breach by knowingly structuring and participating in the payment and consulting arrangements tied to client participation and speedy resolution.
- The court reinstated certain additional claims while limiting or rejecting others where they were duplicative or otherwise insufficiently pleaded.

## Legal Principles

- Attorneys owe clients a stringent fiduciary duty of loyalty and may not place personal financial interests in conflict with clients’ interests without informed consent.
- Informed consent to a conflict requires adequate disclosure; at the pleading stage, allegations that clients did not receive the full agreement and were not told of material side payments can defeat a consent defense.
- Under New York law, aiding and abetting breach of fiduciary duty requires: (1) a fiduciary breach, (2) knowing participation by the non-fiduciary, and (3) resulting damages; a counterparty’s design and execution of conflict-creating payments can satisfy the “knowing participation” element at the pleading stage.
- Rule 12(b)(6) requires accepting well-pleaded factual allegations as true and drawing reasonable inferences for the plaintiff; plausibility is assessed under Twombly/Iqbal.

## Conclusion

The Second Circuit held that plaintiffs plausibly alleged their attorneys compromised loyalty through a mass-claims resolution agreement funded and structured by the opposing party, and that the opposing party could face aiding-and-abetting liability for knowingly participating in the conflicted arrangement; the case was remanded for further proceedings.


Johnson v. Nextel Commc’ns, Inc., 660 F.3d 131 (2d Cir. 2011)