Johnson v. Nextel Communications, Inc.

09-1892-cv
Johnson v. Nextel Communications, Inc.

1 UNITED STATES COURT OF APPEALS

2 FOR THE SECOND CIRCUIT

3 August Term, 2009

4

5 (Argued: June 8, 2010 Decided: September 26, 2011)

6 Docket No. 09-1892-cv

7 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

8 MICHAEL S. JOHNSON, individually and on behalf of the class,
9 DONNA DYMKOWSKI, individually and on behalf of the class,
10 PATRICIA LONG CORREA, individually and on behalf of the class,
11 ANTONIO SAMUEL, individually and on behalf of the class, VINCENT
12 HALL, individually and on behalf of the class, and ANGELETTE
13 WATERS, individually and on behalf of the class,
14
15 Plaintiffs-Appellants,
16
17 v.
18
19 NEXTEL COMMUNICATIONS, INC., a Delaware Corporation, LEEDS,
20 MORELLI & BROWN, LENARD LEEDS, STEVEN A. MORELLI, JEFFREY K.
21 BROWN, JAMES VAGNINI, FEDERIC DAVID OSTROVE, BRYAN MAZOLLA, SUSAN
22 FITZGERALD, JOHN DOE 1-10 a fictitious designation for presently
23 unknown defendants, and JANE DOE 1-10 a fictitious designation
24 for presently unknown defendants,
25
26 Defendants-Appellees.
27
28 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
29
30 B e f o r e: WINTER and HALL, Circuit Judges, and CEDARBAUM,
31 District Judge.*
32
33
34
35
36

*
The Hon. Miriam Goldman Cedarbaum of the United States
District Court for the Southern District of New York, sitting by
designation.

1
 1 Appeal from a dismissal by the United States District Court

2 for the Southern District of New York (George B. Daniels, Judge)

3 of appellants’ complaint pursuant to Fed. R. Civ. P. 12(b)(6).

4 Appellants claim that the law firm of Leeds, Morelli & Brown,

5 P.C., violated, inter alia, its fiduciary obligations by entering

6 into an agreement with Nextel, the putative defendant in

7 discrimination actions the law firm was hired to bring, which

8 involved unconsentable conflicts of interest. Principally, we

9 hold that the complaint states a claim against the law firm for

10 breaching its fiduciary obligations to appellants. We also hold

11 that the complaint states a claim against Nextel for aiding and

12 abetting a breach of fiduciary duty. We therefore vacate the

13 dismissal and remand for further proceedings.

14 KENNETH S. THYNE, Roper &
15 Twardowsky, LLC, Totowa, New
16 Jersey, for Plaintiffs-Appellants.
17
18 MICHAEL MCCONNELL (Traci Van Pelt,
19 Robert W. Steinmetz, McConnell,
20 Fleischner, Houghtaling &
21 Craigmile, LLC, Denver, Colorado;
22 Janice J. DiGennaro & Shari Claire
23 Lewis, Rivkin Radler LLP,
24 Uniondale, New York, on the brief),
25 McConnell, Fleischner, Houghtaling
26 & Craigmile, LLC, Denver, Colorado,
27 for Defendants-Appellees Leeds,
28 Morelli & Brown, Lenard Leeds,
29 Steven A. Morelli, and Jeffrey K.
30 Brown.
31
32 LAWRENCE R. SANDAK (Thomas A.
33 McKinney, on the brief), Proskauer
34 Rose LLP, Newark, New Jersey and
35 New York, New York, for Defendant-
36 Appellee Nextel Communications,
37 Inc.
38
39

2
 1 Jason S. Feinstein, Sterns &
2 Weinroth, Trenton, New Jersey, for
3 Defendants-Appellees Bryan Mazolla
4 and Susan Fitzgerald.
5
6
7 WINTER, Circuit Judge:
8
9 This is an appeal from Judge Daniel’s dismissal of

10 appellants’ class action complaint against Nextel Communications,

11 Inc., the law firm of Leeds, Morelli & Brown, P.C. (“LMB”), and

12 seven of LMB’s lawyers (also “LMB”). Appellants are former

13 clients of LMB who retained the firm to bring discrimination

14 claims against Nextel. The class is composed of approximately

15 587 clients who retained LMB for the same purpose. The complaint

16 asserts a number of claims, including one alleging that LMB

17 breached its fiduciary duty of loyalty to them and the class by

18 entering into an agreement with Nextel in which Nextel agreed to

19 pay: (i) $2 million to LMB to persuade en masse its
20 approximately 587 clients to, inter alia, abandon ongoing legal
21 and administrative proceedings against Nextel, waive their rights

22 to a jury trial and punitive damages, and accept an expedited
23 mediation/arbitration procedure; (ii) another $3.5 million to LMB

24 on a sliding scale as the clients’ claims were resolved through

25 that procedure; and (iii) another $2 million to LMB to work

26 directly for Nextel as a consultant for two years beginning when

27 the clients’ claims had been resolved. None of the payments were

28 conditioned on recovery by any of LMB’s clients. We conclude

29 that appellants have alleged facts sufficient to state a claim
30 against LMB for, inter alia, breach of fiduciary duty and against

3
 1 Nextel for aiding and abetting breach of fiduciary duty. We

2 therefore vacate and remand for further proceedings.

3 BACKGROUND

4 Because this is an appeal from a dismissal under Fed. R.

5 Civ. P. 12(b)(6), we view the facts alleged in the complaint in

6 the light most favorable to appellants. See Faulkner v. Beer,

7 463 F.3d 130, 133 (2d Cir. 2006).

8 a) The Hiring of LMB and the Dispute Resolution and Settlement

9 Agreement

10 The complaint alleges that LMB conducted a meeting at which

11 appellants and some 587 individuals (collectively, the

12 “claimants”) hired LMB to pursue employment discrimination claims

13 against Nextel, a Delaware corporation. The retainer agreement

14 with LMB, a New York law firm, was executed in New Jersey. It is

15 alleged that extravagant promises of recoveries against Nextel

16 were made at the meeting. The agreement specified a one-third

17 contingency fee to go to LMB.

18 The complaint alleges that LMB never intended to bring, and

19 never brought, any discrimination actions against Nextel.

20 Instead, LMB intended to follow a prior LMB practice of seeking

21 direct payments, including payments as a legal consultant, from

22 putative defendant-employers, in this case, Nextel. On September

23 28, 2000, LMB and Nextel met in New York and signed an agreement

24 styled the Dispute Resolution and Settlement Agreement (“DRSA”).

25 Under the DRSA, LMB was to be paid $2 million if it persuaded the

26 claimants to: (i) drop all pending lawsuits and administrative

4
 1 complaints against Nextel within two weeks (excluding already

2 filed worker’s compensation claims); and (ii) sign within ten

3 weeks individual agreements in which each claimant agreed to be

4 bound by the DRSA. The DRSA was to become effective on the date

5 upon which those conditions were met (the “Effective Date”). The

6 $2 million was to be paid to LMB within 3 days of that date.

7 The DRSA set forth a three-stage Dispute Resolution Process

8 (“DRP”) that was designated as the exclusive means of settlement

9 for all claimants then represented by LMB. The first stage

10 consisted of an interview and direct negotiation between Nextel

11 and each individual claimant. The second stage called for non-

12 binding mediation of any unresolved claims. The third stage

13 called for binding arbitration of any remaining unresolved

14 claims.

15 The DRSA provided that Nextel would pay another $1.5 million

16 to LMB upon the resolution of half of the claimants’ claims and a

17 final $2 million upon resolution of the remaining claims. All

18 claims had to be either resolved or submitted to binding

19 arbitration within 45 weeks of the Effective Date, or Nextel

20 would be entitled to withhold final payment from LMB and deduct

21 $50,000 for each month that claims remained to be resolved or

22 submitted to arbitration. The DRSA also stated that each

23 claimant would agree to be represented by LMB throughout the DRP,

24 to be bound by the result of the DRP and not to pursue any other

25 relief in any other forum for any claim against Nextel, to waive

5
 1 punitive damages and non-monetary relief, to execute a general

2 release as a prerequisite for receiving any award, and to adhere

3 to a confidentiality agreement concerning the DRSA.

4 LMB also promised not to accept any new clients with claims

5 against Nextel, not to refer any non-claimant individual with

6 claims against Nextel to another lawyer or law firm, and not to

7 accept compensation for any prior referrals. Finally, the DRSA

8 provided that Nextel would retain LMB as a legal consultant (the

9 “consultancy agreement”) for a period of two years following the

10 resolution of all claims for an additional consultancy fee of

11 $83,333.35 per month, or $2 million, bringing the total value of

12 the DRSA to LMB to $7.5 million.

13 b) The Individual Agreements and Settlements

14 The complaint alleges that, in the weeks following the

15 execution of the DRSA, LMB approached the claimants to obtain

16 signed Individual Agreements and Pledges of Good Faith. In the

17 Individual Agreement, the particular claimant had to state that

18 he or she “reviewed the [DRSA]; had the opportunity to discuss

19 that Agreement with [LMB] or any other counsel of [his or her]

20 choosing; and agree to comply fully with the terms of that
21 Agreement.” With respect to the payment of legal fees, the

22 Individual Agreements stated only that “I acknowledge and

23 understand that . . . Nextel has agreed to pay an amount of money

24 to [LMB] to cover the attorneys’ fees and expenses, other than

25 expert fees, that Claimants might otherwise pay to [LMB] . . . .”

6
 1 The Pledges of Good Faith stated that, for purposes of keeping

2 the DRSA confidential, each claimant consented to “selecting two

3 (2) representatives in my area to maintain a copy of the [DRSA].

4 Upon request to either of the area representatives, claimants

5 will be allowed to review the [DRSA].”

6 The six appellants, along with all but fourteen of the

7 claimants, signed Individual Agreements and Pledges of Good

8 Faith. The complaint alleges that, notwithstanding the

9 statements in the Individual Agreements and Pledges of Good

10 Faith, LMB did not allow the claimants to review the full DRSA,

11 but rather provided only the signature page of the DRSA, the

12 Individual Agreements, and a document entitled “Highlights of

13 Settlement Agreement” (the “Highlights Document”). The

14 Highlights Document outlined the major provisions of the DRSA,

15 including the DRP, the requirement that claimants drop all

16 pending lawsuits and complaints, the confidentiality requirement,

17 and the consultancy agreement. The Highlights Document

18 specifically stated that the consultancy agreement posed a

19 conflict of interest for LMB, which the claimant agreed to waive

20 by signing the Individual Agreement. With respect to the

21 contractual payments to LMB, the Highlights Document stated only

22 that “Nextel is paying each Claimant’s attorneys’ fees, costs,

23 and expenses (other than expert witness fees) in consideration

24 for each Claimant participating in the DRP and honoring all of

25 the conditions.” The document did not make any mention of the

7
 1 amounts LMB was to be paid or the various conditions on those

2 payments, as described above.

3 In February 2001, LMB and Nextel executed a second

4 amendment1 to the DRSA to account for the fourteen non-

5 participating claimants (“Amendment 2”). In Amendment 2, LMB

6 agreed that Nextel would reduce LMB’s final payment from $2

7 million to $1,720,000, a reduction of $20,000 per non-

8 participating claimant. The sum of $280,000 was to remain in an

9 escrow account until the end of the consultancy period, at which

10 point it would be paid to LMB minus any amount Nextel paid to

11 defend, settle, or satisfy judgments in lawsuits by the fourteen

12 non-participating claimants, up to $20,000 for each claimant.

13 Between August and December 2001, all six appellants settled

14 their disputes with Nextel through the DRP for relief not

15 specified in the complaint.
16 c) The Present Action
17 On October 12, 2006, appellants filed this action, both

18 individually and as class representatives of the remaining
19 claimants, against LMB and Nextel in the Superior Court of New

20 Jersey, Passaic County. Based on diversity of citizenship, LMB

21 and Nextel removed the case to the district court for the

22 District of New Jersey, and then filed motions to dismiss the

23 complaint. LMB also moved to change venue to the Southern

1
LMB and Nextel executed Amendment 1 on September 28, 2000, in which
Nextel agreed to a limited waiver of the DRSA’s confidentiality provisions in
order to “obtain administrative approval of the withdrawal of all Agency
Complaints. . . .”

8
 1 District of New York. The motion was granted and the case

2 transferred to the Southern District on September 21, 2007.

3 Appellants’ complaint alleges that the DRSA amounted to a

4 conspiracy between LMB and Nextel by which Nextel secretly bought

5 LMB’s loyalty through payment of the designated amounts. The

6 complaint asserted a host of claims against LMB, including breach

7 of fiduciary duty, commercial bribery, fraud, unjust enrichment,

8 legal malpractice, breach of contract, unauthorized practice of

9 law, conversion, and violation of the New Jersey RICO statute.

10 The complaint also asserted claims against Nextel for tortious

11 interference with contract, commercial bribery, and aiding and

12 abetting or conspiring with LMB in its breach of fiduciary duty,

13 fraud, legal malpractice, and breach of contract.

14 On March 31, 2009, the district court granted appellees’

15 motions to dismiss for failure to state a claim against either

16 LMB or Nextel. The court applied New York’s choice of law rules

17 and concluded that New York law governed the matter. The court

18 held that, by signing the Individual Agreements and Pledges of

19 Good Faith, appellants confirmed as a matter of law that they had

20 the opportunity to review the DRSA. It concluded, therefore,

21 that appellants failed to state a claim under New York law for

22 breach of fiduciary duty or fraud because both claims rested on

23 appellants’ allegations that LMB failed to disclose the DRSA’s

24 compensation agreement. With respect to appellants’ malpractice

25 claim, the court found that the complaint did not contain any

9
 1 “factual allegations regarding how [LMB] ineffectively or

2 inadequately represented [appellants]” during the DRP. To the

3 extent that the malpractice claims rested on the DRSA’s

4 compensation structure, the court found that appellants failed to

5 state a claim because they did not allege that the money paid by

6 Nextel to LMB would otherwise have gone to appellants. The court

7 found the remainder of appellants’ claims to be without merit.

8 This appeal followed.

9 DISCUSSION

10 Appellants have briefed on appeal the dismissal of their

11 claims of breach of fiduciary obligation, breach of contract,

12 fraud, malpractice, and New Jersey RICO claims. We deal with

13 those claims after a brief discussion of choice of law.

14 With regard to the choice of law issues, we “review the

15 district court’s choice of law de novo.” Abdullahi v. Pfizer,

16 Inc., 562 F.3d 163, 190 (2d Cir. 2009) (internal quotation marks

17 omitted). In this case, the district court erroneously applied

18 New York’s choice of law rules. In fact, New Jersey’s choice of
19 law rules apply because New Jersey law would have governed had
20 there been no change of venue. See Van Dusen v. Barrack, 376
21 U.S. 612, 639 (1964); see also Abdullahi, 562 F.3d at 190. New

22 Jersey applies a two-step “flexible governmental-interests

23 analysis.” Rowe v. Hoffman-La Roche, Inc., 189 N.J. 615, 621

24 (2007).

25 The first step in the analysis is to
26 determine whether a conflict exists between

10
 1 the laws of [New York and New Jersey]. Any
2 such conflict is to be determined on an
3 issue-by-issue basis.
4 If there is no actual conflict, then the
5 choice-of-law question is inconsequential,
6 and the forum state [here New York] applies
7 its own law to resolve the disputed issue.
8 If there is an actual conflict, the second
9 step seeks to determine the interest that
10 each state has in resolving the specific
11 issue in dispute. The Court must identify
12 the governmental policies underlying the law
13 of each state and determine whether those
14 policies are affected by each state’s
15 contacts to the litigation and to the
16 parties. We must apply the law of the state
17 with the greatest interest in governing the
18 particular issue.
19
20 Id. at 621-22 (internal citations and quotation marks omitted).

21 The parties appear to agree that there is no difference between

22 New York and New Jersey law as to all of appellants’ claims, save

23 for the New Jersey RICO claim.2 We vacate and remand that claim

24 for reconsideration in light of this opinion’s conclusion that

25 New Jersey’s choice of law rules apply and its discussion of the

26 events giving rise to this action.

27 We turn now to the merits of the other claims briefed on
28 appeal. “We review the district court's dismissal of a complaint
29 for failure to state a claim de novo . . . .” Faulkner, 463 F.3d
30 at 133. “The court accepts all well-pleaded allegations in the

31 complaint as true, drawing all reasonable inferences in the

32 plaintiff’s favor. In order to survive a motion to dismiss under

2
Nextel’s letter brief does not go into whether there is a difference
between New York and New Jersey law, but rather maintains that New York law
applies under the New Jersey choice of law rules because New York has a
greater governmental interest.

11
 1 Rule 12(b)(6), a complaint must allege a plausible set of facts

2 sufficient ‘to raise a right to relief above the speculative

3 level.’” Operating Local 649 Annuity Trust Fund v. Smith Barney

4 Fund Mgmt. LLC, 595 F.3d 86, 91 (2d Cir. 2010) (quoting Bell Atl.

5 Corp. v. Twombly, 550 U.S. 544, 555 (2007)).

6 a) Fiduciary Obligation

7 The elements of a claim for breach of a fiduciary obligation

8 are: (i) the existence of a fiduciary duty; (ii) a knowing breach
9 of that duty; and (iii) damages resulting therefrom. See Barrett
10 v. Freifeld, 883 N.Y.S.2d 305, 308 (N.Y. App. Div., 2d Dep’t

11 2009); accord F.G. v. MacDonell, 150 N.J. 550, 563-64 (1997).

12 The existence of a fiduciary duty between LMB and appellants

13 is beyond dispute. It is also plain that, if there was a breach,

14 it could not have been due to negligence but rather, given the

15 nature of the DRSA and the complaint’s allegations, had to be

16 knowing and intentional on LMB’s part.

17 Appellants contend that LMB breached its fiduciary duty to

18 the claimants by signing the DRSA because the terms of the DRSA
19 created a conflict of interest between LMB and its claimant

20 clients -- a conflict that was not consentable, that is, one that

21 could not be obviated by procuring the clients’ consent.

22 Moreover, they allege that even if the conflicts were

23 consentable, LMB failed to properly disclose them. Appellants

24 further argue that as a result of LMB’s undisclosed conflicts of

25 interest, their settlement awards were “unreasonably low and did

12
 1 not approximate the true value of the[ir] claims.” LMB and

2 Nextel contend that any conflicts of interest created by the DRSA

3 were consentable and that, as a matter of law, appellants cannot

4 claim to have been unaware of the terms of the DRSA in light of

5 their signatures on the Individual Agreements, which stated that

6 appellants had reviewed the DRSA. We conclude that the conflicts

7 were unconsentable.

8 The DRSA created overriding and abiding conflicts of

9 interest for LMB and thoroughly undermined its ability to “deal

10 fairly, honestly, and with undivided loyalty to [appellants].”

11 Elacqua v. Physicians’ Reciprocal Insurers, 860 N.Y.S.2d 229, 232

12 (N.Y. App. Div., 3d Dep’t, 2008) (quoting Matter of Cooperman, 83

13 N.Y.2d 465, 472 (1994)).

14 The DRSA on its face created enormous incentives on LMB’s

15 part to obtain from each and every one of its clients waivers of

16 important rights. If LMB were to cause all claimants to (i) waive

17 their rights to jury trials and various kinds of monetary damages

18 and non-monetary relief, (ii) drop all existing legal or
19 administrative proceedings, (iii) agree to submit all claims to

20 the DRP, and (iv) waive the right to hire new counsel during the

21 DRP, LMB would be paid $2 million by Nextel even though not a

22 single claimant had recovered anything or even begun any of the

23 DRP steps. LMB had ten weeks to obtain these waivers.

24 The overriding nature of the conflict is underscored by the

25 fact that, when fourteen of the 587 clients failed to agree,

13
 1 Nextel’s final, but pre-consultancy, payment to LMB was reduced

2 from $2 million to $1,720,000, or $20,000 per non-agreeing

3 client. Under the DRSA, after obtaining the waivers, LMB would

4 be paid $1.5 million when half of the claimants’ claims were

5 resolved through the DRP, regardless of the individual outcomes.

6 Another $2 million ($1,720,000 after Amendment 2) would be paid

7 to LMB when the remaining claims were resolved, again without

8 regard to individual outcomes. However, the $2 million would be

9 reduced on a sliding scale if less than all the claims were

10 resolved within forty-five weeks from the effective date. To

11 become entitled to the $2 million, LMB would have to process over

12 thirteen claims per week starting on the effective date, or over

13 two claims per work day.

14 Once all the claims were processed, LMB would formally go to

15 work for Nextel as a consultant for two years at $1 million per

16 year. LMB also promised in the DRSA not to accept new clients

17 with claims against Nextel, not to refer any such client to

18 another lawyer or firm, and not to accept compensation for any

19 prior referral.

20 It cannot be gainsaid that, viewed on its face alone, the

21 DRSA created an enormous conflict of interest between LMB and its

22 clients. Such a conflict is permissible only if waivable by a

23 client through informed consent. See Int’l Bus. Machs, Corp. v.

24 Levin, 579 F.2d 271, 282 (3d Cir. 1978); Filippi v. Elmont Union

25 Free Sch. Dist. Bd. of Educ., 722 F. Supp. 2d 295, 310-11

14
 1 (E.D.N.Y. 2010). However, there may be circumstances in which a

2 conflict is not consentable. See GSI Commerce Solutions, Inc. v.

3 BabyCenter, L.L.C., 618 F.3d 204, 212 n.2 (2d Cir. 2010); CenTra,

4 Inc. v. Estrin, 538 F.3d 402, 412 (6th Cir. 2008); Cohen v.

5 Strouch, No. 10 Civ. 7828, 2011 WL 1143067, at *2-3 (S.D.N.Y.

6 Mar. 24, 2011). For two reasons, this is such a case.

7 First, because LMB was not lead counsel in a class action,

8 the class-protective provisions of Fed. R. Civ. P. 23 were not
9 triggered. See In re Agent Orange Prod. Liab. Lit., 818 F.2d
10 216, 222 (2d Cir. 1987) (“Fed. R. Civ. P. 23(e) . . . places the

11 court in the role of protector of the rights of the class when

12 such a settlement is reached and attorneys’ fees are awarded.”).

13 Therefore, LMB’s clear duty as counsel to the parties seeking

14 relief from Nextel was to advise each client individually as to

15 what was in his or her best interests taking into account all of

16 the differing circumstances of each particular claim. See

17 Ziegelheim v. Apollo, 128 N.J. 250, 260-61 (1992); Jones Lang
18 Wootton USA v. LeBoeuf, Lamb, Greene & MacRae, 674 N.Y.S.2d 280,
19 284-85 (N.Y. App. Div., 1st Dep’t. 1998). The DRSA was flatly

20 antagonistic to that duty.

21 On the face of the DRSA, its inevitable purpose was to

22 create an irresistible incentive -- millions of dollars in

23 payments having no relation to services performed for, or

24 recovery by, the claimants -- for LMB to engage in an en masse

25 solicitation of agreement to, and performance of, the DRSA’s

15
 1 terms from approximately 587 claimant clients. The effectiveness

2 of the DRSA, and therefore the payments to LMB, depended on

3 Nextel’s conclusion that a sufficient number of clients had

4 agreed to it.3 Any number short of all 587, and Nextel would

5 have no obligation to pay anything, as Amendment 2 demonstrated

6 by reducing the final, pre-consultancy $2 million payment to LMB

7 to $1,720,000, a reduction of $280,000, or $20,000 apiece for the

8 fourteen clients LMB failed to deliver. By entering the DRSA,

9 agreeing to be bound by its terms and accepting the financial

10 incentives available therein, LMB violated its duty to advise and

11 represent each client individually, giving due consideration to

12 differing claims, differing strengths of those claims, and

13 differing interests in one or more proper tribunals in which to
14 assert those claims.4 See Elacqua, 860 N.Y.S.2d at 232-33;

15 accord Matter of Educ. Law Ctr., Inc., 86 N.J. 124, 133 (1981).

16 This already abiding conflict was severely aggravated by two

17 other provisions in the DRSA: (i) the sliding scale of payments

18 from Nextel to LMB depending on how quickly LMB’s clients’ claims

3
The first payment to LMB was to be made within three business days of
the effective date of the agreement, and the DRSA stated that the agreement
would become effective once all pending legal and administrative actions were
withdrawn or dismissed and all claimants had signed the Individual Agreements.

4
We do not necessarily preclude clients from giving informed consent to
some form of group treatment where manageable numbers of claimants are
involved and putative defendants are not paying the claimants’ lawyer to
aggregate the claims. Nor do we preclude the ordinary arms-length settlement
agreement in which one party agrees to pay the costs and fees of another. For
the reasons stated, the DRSA is a far cry from such an agreement,
notwithstanding transparently cosmetic language portraying it as such.

16
 1 were resolved; and (ii) the commencement of the $2 million

2 consulting contract and the payment of those fees, which would

3 occur only after all the claims were resolved. Moreover, the

4 DRSA required the claimants, LMB’s clients, to waive the right to

5 hire unconflicted counsel to pursue the claimant’s recovery in

6 the DRP. Again, LMB was being paid by Nextel in effect to ignore

7 its duty to represent clients as individuals with differing

8 claims and interests that might require differing amounts of time

9 and preparation vigorously to pursue a recovery.

10 Finally, although Nextel agreed to pay $5.5 million with

11 regard to the processing of LMB’s clients’ claims according to

12 the DRSA’s provisions, and agreed to pay LMB another $2 million

13 to serve as Nextel’s consultant, none of the payments to LMB was

14 in any way contingent on claimant clients receiving a recovery.

15 Any assertion by appellees, therefore, that the payments were

16 part of a settlement that simply included LMB’s clients’

17 attorneys’ fees does not meet the straight-face test.5 See Note
18 4, supra.
19 Indeed, we express our candid opinion that the DRSA was an

20 employment contract between Nextel and LMB designed to achieve an

21 en masse processing and resolution of claims that LMB was

5
Although the fact is in no way dispositive, we do note that the amount
deducted from the final, pre-consultancy payment was to cover not only
Nextel’s costs and attorneys’ fees, but amounts paid in settlements and
judgments to the 14 non-signing claimants. Moreover, any part of the deducted
amount not paid to resolve the claims of those claimants was to be paid to
LMB. A trier of fact might infer from this that the $2 million payment (and
all other payments for that matter) was intended to reduce Nextel’s monetary
exposure to settlement payments and judgments.

17
 1 obligated to pursue individually on behalf of each of its

2 clients. The only sensitivity shown to potential conflicts of

3 interest by the DRSA is in the provisions in which LMB promises

4 not to represent new clients, or refer new claims, against

5 Nextel. Tellingly, this sensitivity appears aimed only at

6 avoiding conflicts that could have an impact on LMB’s new-found

7 relationship with Nextel.

8 Second, we believe that, under the above circumstances, the

9 opportunity for the claimants to give informed consent was so

10 burdened that the DRSA is not consentable for that reason as

11 well. Certainly, given the conflicts described above, any advice

12 from LMB to its claimant clients could not possibly be

13 independent advice untainted by the counter-incentives of the

14 DRSA such that the resulting consent would be valid. The

15 magnitude, and -- from a lay client’s perspective -- complexity

16 of LMB’s conflict of interest is such that informed consent would

17 require the hiring of an independent lawyer to review the twenty-

18 nine page DRSA and to explain the multiple conflicts embraced by

19 LMB, including the scheduling and amount of payments to LMB, the

20 waiver of multiple rights, and the important and often difficult-

21 to-analyze consequences of abandoning ongoing legal or

22 administrative proceedings. To be sure, the claimants were

23 allowed to consult with another attorney, but an initial attorney

24 hired to bring a discrimination action does not fulfill his or

25 her representational obligations by presenting a client with a

18
 1 proposal that can be considered in an informed manner only by

2 hiring a second attorney.

3 The elements of a breach of fiduciary duty are therefore met

4 by the complaint’s allegations. There was: (i) a duty; (ii) a

5 knowing breach of the duty; and (iii) damages resulting

6 therefrom. Barrett, 883 N.Y.S.2d at 308; MacDonell, 150 N.J. at

7 563-64. The existence of a fiduciary duty on LMB’s part toward

8 the claimants is undeniable. For reasons stated, there was a

9 knowing breach. As for damages, the nature of the DRSA itself

10 creates a presumption of damages. Neither Nextel nor LMB would

11 have entered into it unless each believed that it would profit

12 more by that arrangement than by one in which a law firm
13 vigorously represented claimants as individuals. See Note 5,
14 supra. Appellants have, therefore, plausibly alleged injury in

15 the difference between what they received with representation by

16 LMB under the DRSA and what they would have received if

17 represented by unconflicted counsel. Whether other measures of

18 damages, such as disgorgement, are available must await further
19 proceedings.

20 Appellants also allege that Nextel is liable for aiding and

21 abetting LMB in the breach of its duties to appellants. Both New

22 Jersey and New York authorize civil liability for aiding and

23 abetting the commission of a tort. “The elements of aiding and

24 abetting [under New Jersey law] are: (1) the commission of a

25 wrongful act; (2) knowledge of the act by the alleged

19
 1 aider-abettor; and (3) the aider-abettor knowingly and

2 substantially participated in the wrongdoing.” Morganroth &

3 Morganroth v. Norris, McLaughlin & Marcus, P.C., 331 F.3d 406,

4 415 (3d Cir. 2003). “A claim for aiding and abetting a breach of

5 fiduciary duty [under New York law] requires: (1) a breach by a

6 fiduciary of obligations to another, (2) that the defendant

7 knowingly induced or participated in the breach, and (3) that

8 plaintiff suffered damage as a result of the breach.” Kaufman v.
9 Cohen, 760 N.Y.S.2d 157, 169 (N.Y. App. Div., 1st Dep’t, 2003).
10 Both jurisdictions look to the Restatement (Second) of Torts,

11 which does not require wrongful intent by the third party, but

12 only “that the third party knew of the breach of duty and

13 participated in it.” S & K Sales Co. v. Nike, Inc., 816 F.2d

14 843, 848 (2d Cir. 1987); Morganroth, 331 F.3d at 415 n.3;

15 Restatement (Second) of Torts § 876(b). Like New Jersey, New

16 York requires that the third party provide “‘substantial

17 assistance’ to the primary violator.” Kaufman, 760 N.Y.S.2d at

18 170. Because there is no actual conflict between the two
19 definitions, New York law applies. See Lautenberg Found. v.
20 Madoff, No. 09-816 (SRC), 2009 WL 2928913, at *16 (D.N.J. Sept.

21 9, 2009) (finding “no true conflict” between New York and New

22 Jersey regarding aiding and abetting breach of fiduciary duty).

23 For reasons stated, appellants have adequately alleged a

24 breach of fiduciary obligations by LMB. To sustain their claim

25 against Nextel for aiding and abetting, they must allege facts

20
 1 sufficient to show that Nextel knowingly provided substantial

2 assistance to LMB by “affirmatively assist[ing], help[ing]

3 conceal or fail[ing] to act when required to do so, thereby

4 enabling the breach to occur.” Kaufman, 760 N.Y.S.2d at 170.

5 Appellants have easily met that burden, for reasons stated.

6 Viewed in the light most favorable to appellants, therefore,

7 they have sufficiently alleged that Nextel negotiated and signed

8 the DRSA with the knowledge, and intent, that it would undermine

9 LMB’s ability to fairly represent appellants. We therefore

10 vacate the district court’s dismissal of appellants’ claim

11 against Nextel for aiding and abetting LMB’s breach of fiduciary

12 duty.
13 b) Breach of Contract
14 The district court also erred in holding that plaintiffs

15 failed to state a claim for breach of their original retainer

16 agreement. In order to state a claim of breach of contract, the

17 complaint must allege: (i) the formation of a contract between

18 the parties; (ii) performance by the plaintiff; (iii) failure of
19 defendant to perform; and (iv) damages. Eternity Global Master
20 Fund Ltd. v. Morgan Guar. Trust Co. of N.Y., 375 F.3d 168, 177

21 (2d Cir. 2004); accord Murphy v. Implicito, 392 N.J. Super. 245,

22 265 (App. Div. 2007). We have no difficulty holding that these

23 elements have been pled.

24 The district court held that LMB did not fail to perform

25 their obligations under the contract because they negotiated the

21
 1 DRSA with Nextel and carried out the DRP proceedings. In the

2 court’s view, those acts constituted the legal representation

3 that LMB was obligated to provide under the retainer agreements

4 with the appellants. But signing the DRSA is the very conduct

5 that appellants assert was a breach of contract. Appellants

6 allege that the retainer agreements provided that LMB would

7 represent appellants individually but, according to the

8 complaint, LMB simply aggregated the plaintiffs to gain a group

9 settlement that ultimately benefitted LMB rather than the

10 claimants. Thus, assuming the facts in the complaint to be true

11 and relying on our earlier discussion of the DRSA and LMB’s

12 fiduciary obligations, LMB never provided the type of

13 representation required by the retainer agreements.

14 The district court also stated that the settlement agreement

15 superceded the retainer agreements, extinguishing appellants’

16 claims for breach of the original agreements. As discussed

17 supra, the settlement agreement was not valid because it was

18 obtained while LMB suffered from an unconsentable conflict of
19 interest.
20 c) Fraud
21 Appellants also claim fraud in the inducement of the

22 retainer agreement. To state a claim for fraud in the

23 inducement, the party must allege: (i) a material

24 misrepresentation of a presently existing or past fact; (ii) an

25 intent to deceive; (iii) reasonable reliance on the

22
 1 misrepresentation by appellants; and (iv) resulting damages.

2 Ross v. Louise Wise Servs., Inc., 8 N.Y.3d 478, 488 (2007);

3 accord Banco Popular N. Am. v. Gandi, 184 N.J. 161, 172-73

4 (2005). In addition, the plaintiff must allege specific facts as

5 to the fraud, including the misleading statements, speaker, time,

6 place, individuals involved, and specific conduct at issue. Fed.

7 R. Civ. P. 9(b); Acito v. IMCERA Grp., Inc., 47 F.3d 47, 51 (2d

8 Cir. 1995). We believe that appellants’ allegations state a

9 claim for fraud.

10 The complaint alleges that the retainer agreements stated

11 that LMB would investigate and pursue appellants' claims

12 individually, but never intended to provide such representation.

13 Instead, LMB intended to aggregate the claimants to negotiate a

14 group settlement with Nextel benefitting LMB. Rule 9(b) is

15 satisfied by the allegations that: (i) LMB conducted a specific

16 meeting with the claimants, at which rosy promises of recovery

17 were made and agreement to the individual retainer agreements was

18 obtained; and (ii) LMB’s actual intent was demonstrated by past

19 agreements like the DRSA between LMB and putative defendant-

20 employers providing for direct payments, including consulting

21 agreements, to LMB that interfered with LMB’s professional
22 responsibilities in representing earlier clients.6

6
Appellants also assert a fraud in the inducement claim with regard to
the Individual Agreements. However, the harm to appellants from that alleged
fraud is in the Individual Agreements to abide by the DRSA. Because we have
invalidated the DRSA as a breach of LMB’s fiduciary duty, there is no need to
address this fraud claim.

23
 1 d) Malpractice

2 For reasons stated, appellants have also sufficiently stated

3 a claim for malpractice.

4 e) Claims Against Nextel

5 Finally, the district court dismissed appellants’ claims

6 against Nextel for aiding and abetting fraud, aiding and abetting

7 breach of contract, aiding and abetting malpractice, and tortious

8 interference of contract, relying on the dismissal of the

9 underlying claims against LMB and appellants’ consent to the

10 terms of the DRSA. The dismissal of these claims is also

11 vacated, and the district court shall in the first instance

12 reconsider any motions to dismiss those claims in light of the

13 discussion above.

14 CONCLUSION

15 For the reasons stated we vacate and remand.

16

17

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