Dentons Dispute with Former Partner Headed to Arbitration (Again)

UPDATE on September 7, 2021:  Last week, the Second Appellate District stayed Superior Judge Sotelo’s ruling that the dispute between Dentons and Zhang should be resolved through arbitration.  The Court found that it needed to resolve a potential dispute between section 925 of the California Labor Code, which prohibits employers from requiring employees to arbitrate labor disputes outside of the state, and a provision of the California Code of Civil Procedure, which requires California courts to stay litigation when a petition to compel arbitration is pending in any court of “competent” jurisdiction.  The Court ordered the parties to answer questions about the competing proceedings in New York and California and how the case implicates section 925.

For the past three months, Global powerhouse Dentons has been embroiled in a nasty public dispute with a former partner concerning a $34 million contingency fee.  That dispute is now moving behind the closed doors of arbitration as a consequence of two California state court rulings last week.

The former partner, Jinshu “John” Zhang, represented one of the firm’s clients, a Chinese company, in successful proceedings to enforce a foreign arbitral award against another Chinese company.  Under the terms of Denton’s engagement agreement, the Chinese client owed Dentons shares of stock as a contingency award for the arbitration worth approximately $34 million.  Zhang’s victory precipitated a public, months-long dispute concerning who “owned” the award.

According to Dentons, Zhang claimed the lion’s share of the award for himself—85%—and when the firm proved unwilling to accede, Zhang went to the client directly to negotiate his payout.  Dentons fired Zhang on May 5, 2021, claiming he violated his partnership agreement by diverting client funds to himself.  Then, the firm claims, Zhang reacted to the termination by slandering the firm and taking confidential client information from Dentons.

Zhang offered a different story.  Zhang alleges that Dentons fired him because he exposed a scheme by Dentons’ CEO and General Counsel to forge documents transferring millions of dollars of the Chinese client’s money to firm leadership.  By his account, Dentons terminated him in retaliation for reporting the scheme to the board of Dentons.  Zhang claims the firm’s justification for his termination is pretextual, pointing to the fact that it did not interview him about his allegations before firing him.

On the same day as the termination, Zhang and Dentons entered into arbitration proceedings in New York to resolve the dispute concerning the division of the contingency award, but Zhang withdrew from arbitration on May 26, 2021 after an adverse ruling.  The next day, Zhang filed a complaint in Los Angeles Superior Court alleging wrongful termination, racial discrimination, and intentional infliction of emotional distress.

On June 8, 2021, asserting that a federal court would have jurisdiction over the case pursuant to the New York Convention on the Recognition of Foreign Arbitral Awards, Dentons removed the case to the Central District of California.  However, on June 11, 2021 the federal court rejected the firm’s basis for removal and remanded the matter back to a California Supreme Court in Los Angeles.

On Friday, August 20, 2021, Supreme Court Justice Barry Ostrager concluded at the end of the hearing on Denton’s motion to compel arbitration that Zhang could not escape the arbitration clause in his partnership agreement with the firm.  Earlier in the week, Superior Court Judge David Sotelo had granted Denton’s motion to stay the proceedings, noting that the partnership agreement clearly states that “all disputes relating to the validity, breach, interpretation or enforcement” of the arbitration agreement must be resolved by the arbitrator.

The Zhang case offered industry observers a rare, three-month peek into an internal dispute between a top AmLaw firm and one of its equity partners concerning the distribution of a large contingency award.  AmLaw 100 firms are increasingly venturing into contingency fee litigation, particularly for patent litigation and arbitration.  It is critical that law firms and the partners who source the litigation agree, prior accepting the representation, how – if at all – the originating partner and the firm will be compensated through the award.  Typically, fees generated or originating by a partner are the property of the firm.

However, with eye-popping contingency awards, like here, in the tens or hundreds of millions, the firm and the partner should agree in advance (1) to first reimburse the firm for costs advanced in the litigation; (2) how the originating partner will be compensated; (3) how other partners critical to the success of the litigation will be compensated; and (4) how the remaining fee will be allocated between the remaining equity partners.  We can recall situations over the years where a large contingency fee award has been a death-knell of a national law firm.