A recent New York Law Journal, “Client Sues After Gibson Dunn Pursues $1M Fee,” reports that after Gibson Dunn pursued arbitration against a client for nearly $1 million in unpaid legal fees, the client turned around and sued the firm, claiming its work for an independent audit committee is not subject to arbitration.
Liquid Holdings Group, a technology company serving hedge funds, claims Gibson Dunn's work for an audit committee established by Liquid's board of directors was not governed by Liquid's initial engagement letter, signed years earlier, that contained an arbitration agreement. But Gibson Dunn argues the matter belongs in fee arbitration.
"Liquid's desire to avoid arbitration is undercut by the law, the facts, common sense and New York's strong policy in favor of arbitration," the firm asserted in Liquid v. Gibson.
In 2012, Liquid Holdings and Gibson Dunn signed an engagement letter in which the firm agreed to provide legal services for an initial public offering, providing a 10 percent discount of hourly rates. In February 2015, an audit committee appointed by Liquid's board of directors retained Gibson Dunn to perform an internal investigation into allegations of wrongful conduct involving a shareholder.
In its arbitration documents, the firm described its cooperation with an outside auditor that requested the firm take on additional work. But Gibson Dunn says the auditor in late April decided it would not accept Gibson Dunn's reports or findings because of the firm's prior representation of Liquid and concerns that the firm could not conduct an objective investigation.
Gibson Dunn said that prior to rejecting its report, the auditor had never raised any questions or concerns. Due to the auditor's "about-face," the firm said, Liquid's audit committee retained another law firm to redo Gibson Dunn's investigation. The second firm was not named in court papers.
But Gibson Dunn said Liquid continued to use its services, including having Gibson Dunn join Liquid at a meeting with Securities and Exchange Commission staff in May to summarize the investigation and answer questions about the company.
Gibson Dunn billed nearly $1 million for legal services rendered to the audit committee from February 2015 to April 2015. Its arbitration papers said Liquid has indicated it was waiting until it could review the second law firm's investigative findings before determining whether to pay the outstanding invoices.
Liquid's deteriorating financial situation and its intent to indefinitely delay payment of the invoices prompted Gibson Dunn partner Adam Offenhartz to submit a demand for arbitration in June claiming Liquid failed to pay $970,977 in fees and costs, Gibson said.
"It is patently unfair for Liquid to hold payment hostage while Law Firm 2 explores ... a far broader array of issues than [Gibson Dunn] was asked (or allowed) to investigate," the arbitration papers stated.
Theodore Katz, a retired Southern District magistrate judge, was selected as the arbitrator.
In court papers seeking to stay the arbitration, Liquid argued the 2012 engagement letter, which provides that fee disputes must be submitted to arbitration, governs only legal services performed on behalf of Liquid Holdings or its affiliates.
The legal services in question, Liquid argued, were performed for an autonomous entity established to investigate and oversee Liquid's financial reporting obligations, and Gibson Dunn never confirmed whether it was a party to the engagement letter.
Meanwhile, Gibson Dunn is urging the court to dismiss the suit and compel arbitration, saying the audit committee is composed of three of the six members of Liquid's board.
"Liquid is the entity that executed the engagement agreement, the entity whose chief executive officer and general counsel were intimately involved in the management and execution of the investigation ... the entity that benefited from Gibson Dunn's services and also the entity that received" invoices for the investigation, the firm said.
Professional liability lawyers said the case may offer lessons for others. "The best practice is to have a different engagement letter for each matter even for the same client," said Howard Elman, a partner at Matalon Shweky Elman who represents law firms, but "in practice, this doesn't always happen."