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October 21, 2002

City of Hope v. Bryan Cave (2002) 102 Cal.App.4th 1356

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The Second District holds that attorneys are not third party beneficiaries to their client’s settlement agreements.

The relationship between the Board of Directors of the City of Hope and its Chief Executive Officer, Sanford Shapero, and its Chief Operating Officer, Andrew Leeka, was deteriorating due, in part, to claims by employees against the officers.  The City of Hope retained employment consultants The Fairfax Group, whose principal was Michael J. Hershman, to investigate the employment issues.

During this period Shapero utilized City of Hope’s counsel Lynn K. Thomson, a Bryan Cave partner, to draft an employment contract for Leeka with a “golden parachute” provision triggered by Shapero’s departure.  After Shapero resigned and entered into a settlement Leeka invoked the provisions of his employment contract, resigned, and demanded his “golden parachute” payment.  Another settlement ensued that required payments by the City of Hope to both Shapero and Leeka.

The City of Hope filed a lawsuit against The Fairfax Group alleging that Hershman had actually been aligned with Shapero and Leeka during the turmoil.  The City of Hope claimed that Hershman passed Shapero and Leeka confidential information, and allowed the City of Hope to enter into generous settlement agreements with them.  The suit alleged that after the settlements, Fairfax passed confidential information to Shapero and Leeka, who in turn passed the information to the media.  The suit also named the City of Hope’s former counsel, Weil, Gotshal & Manges alleging that it, too, had conspired with Shapero, Leeka and Fairfax to harm its client, the City of Hope.

In a separate lawsuit, the City of Hope alleged that Thompson violated her duties to Bryan Cave’s client by assisting Shapero and Leeka in drafting Leeka’s “golden parachute” employment contract with knowledge of the deteriorating relationship between the Board and Shapero and Leeka.  The suit also alleged that Thompson knew Shapero was concealing the Leeka contract negotiations from the Board, and that the contract provisions were contrary to the interests of City of Hope.  The City of Hope alleged that Thompson drafted other employment agreements that she knew were being concealed from the Board by Shapero.  It was also alleged that Thompson failed to report to the Board when Leeka called her asking for advice about triggering the “golden parachute” provisions in his employment contract.

The two cases were consolidated and the City of Hope filed an amended pleading alleging that all defendants conspired with Shapero and Leeka against the City of Hope.  The defendants then moved to compel arbitration arguing that as alleged co-conspirators, they were third party beneficiaries to the settlement agreements with Shapero and Leeka requiring arbitration of disputes.  The trial court denied the motion.

The Court held that release agreements using boilerplate language purporting to excuse the world from liability cannot be enforced by non-parties to the agreement.

Weil, Gotshal & Manges and Bryan Cave did not file formal petitions but argued in other pleadings that The City of Hope was estopped from denying the arbitration provision applied to the disputes.  While estoppel can sometimes allow a non-signatory to compel arbitration of a dispute, fairness is the cornerstone of this equitable remedy.  Thus, Weil, Gotshal & Manges and Bryan Cave could not, while denying that they represented the interests of Shapero and Leeka, at the same time invoke the benefits of Shapero and Leeka’s agreements as their agents.

Comment: Boilerplate language in settlement agreements often purport to include attorneys for the parties within the ambit of the agreement.  City of Hope makes clear that attorneys cannot rely on such terms to provide them with benefits of the underlying settlement.

The Court of Appeal held that a petition to compel arbitration is essentially a suit in equity for specific performance of a contract.  Fairfax, Weil, Gotshal & Manges, and Bryan Cave had the burden to prove that the Shapero/Leeka settlement agreements applied to them personally as third party beneficiaries.

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