Parallel Networks, LLC v. Jenner & Block LLP ( 2015 )

Affirmed and Opinion Filed October 9, 2015
Court of Appeals
S In The
Fifth District of Texas at Dallas
No. 05-13-00748-CV
PARALLEL NETWORKS, LLC, Appellant
V.
JENNER & BLOCK LLP, Appellee
On Appeal from the 101st Judicial District Court
Dallas County, Texas
Trial Court Cause No. DC-13-01146-E
MEMORANDUM OPINION
Before Justices Bridges, Francis, and Lang-Miers
Opinion by Justice Bridges
On August 27, 2015, we withdrew our opinion and vacated our judgment in this case.
The following is now the opinion of the Court.
Parallel Networks, LLC1 appeals the trial court’s judgment confirming an arbitration
award under the Federal Arbitration Act (FAA) in favor of Jenner & Block, LLP. In four issues,
Parallel argues the trial court erred in confirming an arbitration award that allowed recovery of
attorney’s fees based upon a termination provision that was unconscionable and against public
policy; an award under the alternative theory of quantum meruit was also against public policy;
Jenner abandoned its client, Parallel, and thereby forfeited all compensation; and the trial court
1
Parallel succeeded epicRealm Licensing LP in the contingent fee agreement in September 2007. All references herein are therefore to
Parallel.
erred by confirming the arbitration award after the arbitrator refused to hear certain evidence.
We affirm the trial court’s judgment.
Jenner, a law firm, represented Parallel in patent infringement litigation against two
defendants pursuant to a contingent fee agreement. Parallel and its managing partner and lead
counsel, Terry Fokas, had negotiated numerous other contingent fee agreements with other firms
in connection with Parallel's patent infringement program. In fact, the contingent fee agreement
between Parallel and Jenner was based upon a prior contract with similar terms that Parallel had
with another law firm. Parallel proposed the contract to Jenner as a basis for the contingent fee
agreement which the parties later executed after minor revisions.
The agreement provided Parallel would be solely responsible for paying the up-front
expenses associated with patent infringement lawsuits and that Parallel agreed to pay any third-
party vendor’s invoices promptly upon receipt of such invoices or to reimburse Jenner for
expenses paid by Jenner on behalf of Parallel. In consideration for Jenner undertaking a patent
infringement lawsuit, Jenner was to receive a percentage of net proceeds paid to Parallel
according to a sliding percentage scale depending on the amount of the proceeds.
The agreement provided the parties would submit disputes to arbitration:
8. Arbitration of Disputes
(a) Generally: The parties acknowledge that situations may arise which are
not specifically addressed or contemplated in this Agreement. In that event, the
Parties shall make a good faith effort to resolve any dispute relating in any
manner to the Agreement or to any services provided pursuant to this Agreement
in accordance with the general spirit of this Agreement. If the Parties cannot
reach a satisfactory resolution, the Parties (or their authorized successors or
assigns) agree that such dispute shall be finally adjudicated by arbitration
conducted in Dallas, Texas under the auspices of JAMS®. The details concerning
such arbitration, will be agreed upon by the Parties prior to the commencement of
arbitration or, failing such agreement, by JAMS®. The arbitrator shall be selected
by the mutual agreement of the Parties or, failing such agreement, from a panel of
three arbitrators nominated by JAMS®, with each Party having the right to strike
one of the arbitrators nominated by the other Party.
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The agreement further provided Texas law would govern any dispute. The contingent fee
agreement contained a provision addressing the termination of the agreement by either party:
9. Termination.
a. Termination by [Parallel]. This Agreement may be terminated by
[Parallel] at any time by providing 30 days prior written notice to Jenner & Block.
If [Parallel] elects to terminate this Agreement, [Parallel] shall: (i) compensate
Jenner & Block for all time expended by Jenner & Block on any Enforcement
Activity undertaken on behalf of [Parallel] at the regular hourly billing rates
charged by Jenner & Block for its attorneys and legal assistants (in lieu of the
Contingent Fee Award applicable to such Enforcement Activity); provided,
however, that [Parallel] has not terminated this Agreement as a result of a material
breach of this Agreement by Jenner & Block (and such breach was not cured
within thirty (30) days of the receipt by Jenner & Block of written notice from
[Parallel] of such material breach); (ii) reimburse Jenner & Block for all
previously unreimbursed Enforcement Expenses incurred by Jenner & Block
under this Agreement; and (iii) at the conclusion of any Enforcement Activity,
pay Jenner & Block an appropriate and fair portion of the Contingent Fee Award
based upon Jenner & Block [sic] contribution to the result achieved as of the time
of termination of this Agreement (to the extent that Jenner& Block has not
already been compensated under Section 9.a.(i) hereunder).
b. Termination by Jenner & Block. If Jenner & Block determines at any time
that it is not in its economic interest to continue the representation of [Parallel]
pursuant to this Agreement, Jenner & Block may terminate this Agreement by
providing 30 days prior written notice to [Parallel] provided that the timing of
such a termination shall be in full accord with any applicable ethical or legal
responsibilities (e.g. those promulgated by the American Bar Association (ABA)
or those outlined by the Illinois Disciplinary Rules of Professional Conduct),
which bind or otherwise control the behavior or actions of Jenner & Block.
Subsequent to the termination, Jenner & Block shall use best efforts to secure
substitute counsel for [Parallel]. If Jenner & Block terminates this Agreement, it
shall continue to be entitled to receive compensation from [Parallel] pursuant to
(i), (ii) and (iii) in the preceding paragraph up to the date of such termination
LESS the reasonable costs incurred by [Parallel] to transition any pending or on-
going Enforcement Activities that had been commenced with Jenner & Block to
successor legal counsel.
Jenner continued representing Parallel in the two patent infringement lawsuits. However, by
December 2008, Parallel owed Jenner approximately $500,000 in unpaid expenses associated
with the lawsuits. Although Parallel paid the $500,000 out of a settlement in another patent
infringement lawsuit, Jenner concluded it needed to terminate the representation. After logging
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approximately 24,000 hours in the patent infringement cases, Jenner withdrew in February 2009
and transferred the cases along with the trial preparation materials to successor counsel.
In April 2009, Parallel settled one of the patent infringement lawsuits, and it settled the
other lawsuit in April 2010, with the possibility of further settlement proceeds. In December
2011, Jenner filed a demand for arbitration before JAMS pursuant to the arbitration provision in
the parties’ agreement. The arbitration demand alleged Jenner provided more than $10 million
worth of legal services to Parallel, yet Parallel refused to pay any amount for those services.
Jenner alleged claims for breach of contract, quantum meruit, and promissory estoppel based on
the contingent fee agreement. Jenner also sought to recover attorney’s fees for its services in
connection with the two lawsuits and the fees associated with the enforcement of the contingent
fee agreement.
Parallel argued that the agreement was unenforceable, as interpreted by Jenner, because it
violates public policy and is unconscionable. Parallel also argued Jenner abandoned Parallel
without cause.
In October 2012, the arbitrator conducted hearings on the parties’ claims. The arbitrator
made written findings and an award. The arbitrator found Jenner had just cause to withdraw
from representing Parallel. The arbitrator found that Parallel’s history of failing to pay expenses
timely and not having resources to pay expenses made the prospect of proceeding with the
pending cases “less than attractive to Jenner.”
The arbitrator next turned to a discussion of the theories under which Jenner could
recover and the amount of such recovery. First, the arbitrator discussed paragraph 9.a.(i)
incorporated by 9.b of the agreement, which provided Jenner was entitled, if the agreement was
terminated, to receive compensation for all of its time incurred at its regular hourly billing rates
in lieu of a contingent fee. The arbitrator stated this provision “raises questions about whether
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the [9.a.(i)] clause creates an undue burden on the client and violates public policy because it
arguably creates an incentive for the attorney to escape the contingent fee agreement and shifts to
the client all of the risks of both contingent fee and hourly fee agreements.” However, the
arbitrator concluded it was “not necessary to reach any issues about [9.a.(i)]” because Jenner was
“not seeking to enforce or to recover on Paragraph [9.a.(i)], and other provisions of the contract
may be enforced without that provision.”
The arbitrator cited paragraph 9.a.(iii), which provided for “an appropriate and fair
portion of the Contingent Fee Award” to be paid to Jenner after Parallel received a payment or
settlement at “the conclusion of an Enforcement Activity.” Such a payment, the arbitrator
continued, would be only after Parallel received a payment in a lawsuit and would not require
immediate payment at the time the representation was terminated. The payment would also be
limited in scope to an “appropriate and fair” portion of “the contingent fee award that Jenner
otherwise might have recovered from an actual settlement or successful outcome, based on its
contribution to that outcome, had Jenner continued its representation until the time that the
settlements were achieved.” He also found, “with Paragraph [9.a.(iii)], the attorney and client
continue to share the risk of recovery, and the attorney’s interest does not supersede the client’s.”
In summing up the considerations underlying the application of paragraph 9.a.(iii) in this case,
the arbitrator stated the following:
Given the prodigious amount of time typically required and invested to prevail in
complex patent infringement cases, like the underlying case here, it is reasonable
for the very sophisticated parties in this case, both experienced in high stakes
litigation, to agree in advance that if the representation is terminated after Jenner
had invested huge amounts of time and services, that Jenner is entitled to receive
some reasonable compensation such as that outlined in paragraph 9.b.(iii). It
reflects their intent to be fair and reasonable, in the event of a recovery, to both
parties in that situation: fair for Parallel not to pay the entire contingent fee but
instead only a fair and appropriate portion of that, fair for Jenner to receive a fair
and appropriate portion of a contingent fee based on its contribution to the result,
and fair by avoiding the injustice of Parallel enjoying all the benefits of Jenner’s
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services and the fruits of the settlements, such as those here, without paying any
fee whatsoever to Jenner.
Based on this reasoning, the arbitrator found that the termination fee set out in paragraph
9.a.(iii) did not “violate the overlay of ethical principles” and, because it did not violate public
policy and was not unconscionable, the provision was enforceable.
Alternatively, the arbitrator determined that Jenner was also entitled to recover on a
quantum meruit claim. The arbitrator stated Jenner provided significant legal services to
Parallel; Fokas, Parallel’s managing partner and lead counsel, reported being “very pleased” with
Jenner’s work; Fokas engaged three of Jenner’s partners to represent Parallel after Jenner
terminated its representation; successor counsel used and relied upon Jenner’s work product to
obtain settlements in the two patent infringement actions; and Jenner’s work product was
therefore a “meaningful factor in providing significant recoveries to Parallel.” The arbitrator
noted Parallel argued Jenner’s quantum meruit claims were barred by the doctrine of “unclean
hands” but rejected Parallel’s argument because Jenner had just cause to terminate the
representation.
As to damages, the arbitrator noted the measure of damages on the contract claim was an
“appropriate and fair portion” of the contingent fee award, and the measure of damages on the
quantum meruit claim was “the reasonable value of the services provided.” The arbitrator stated
the two measures of damages were similar, as were the considerations to be taken into account in
determining damages under each measure. For Jenner’s breach of contract claim, the arbitrator
determined that $3,000,000 was an appropriate and fair portion of the contingent fee award based
on Jenner’s contribution to the result achieved with the patent infringement actions.
Alternatively, on Jenner’s quantum meruit claim, the arbitrator concluded $3,000,000 was the
reasonable value of the services Jenner provided. Under either the breach of contract claim or
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the quantum meruit claim, the arbitrator determined Jenner should recover sixteen percent of
future settlement proceeds in the April 2010 settlement.
The arbitrator next addressed Parallel’s counterclaims for breach of contract, breach of
fiduciary duty, and legal malpractice. The arbitrator stated Parallel’s breach of contract claim
was premised upon Parallel’s allegation that Jenner prematurely terminated its representation
without just cause. The arbitrator concluded Jenner had just cause to terminate the
representation and “did a very professional job” in effecting a smooth transition to successor
counsel. The arbitrator also rejected Parallel’s claim that Jenner breached the agreement by
refusing to take on an additional patent infringement case. Because Jenner had just cause to
terminate the representation it had already undertaken, the “entire obligation to represent
Parallel” ceased. The arbitrator stated Parallel’s breach of fiduciary duty claim was also based
on Parallel’s claim Jenner “breached its duties by abandoning Parallel without just cause” and by
failing to disclose Jenner’s plans to terminate the agreement. The arbitrator concluded none of
Parallel’s examples showed any injury to Parallel or improper benefit to Jenner, and there was
nothing improper about Jenner “considering the economics of a contingent representation mid-
case.” Thus, the arbitrator concluded Parallel was not entitled to recover on its breach of
fiduciary duty claim. As to legal malpractice, Parallel’s claim was based on “essentially the
same fact allegations Parallel made in its breach of contract and breach of fiduciary duty claims,
which Parallel alleges here as breaches of its duty of care.” The separate argument the arbitrator
identified was Parallel’s assertion the April 2009 settlement was “settled for drastically reduced
value.” The arbitrator set out the testimony of Parallel’s expert that the April 2009 settlement
should have been higher and Jenner’s expert testimony that the April 2009 settlement could not
have been higher. The arbitrator found the credentials and analysis of Jenner’s expert
“substantially more credible and convincing” than Parallel’s expert. Further, the arbitrator found
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Parallel failed to prove the April 2009 settlement “had any greater value than the settlement
obtained.” The arbitrator thus concluded Parallel failed to establish a right to recovery under its
legal malpractice claims. The arbitrator awarded Jenner $3,000,000 as damages for breach of
contract or, alternatively, for quantum meruit and sixteen percent of future settlement proceeds
paid in the April 2010 settlement.
In January 2013, Parallel filed its petition and motion to vacate the arbitration award in
which it raised essentially the same issues it raised at the arbitration. In April 2013, the trial
court confirmed the award and denied Parallel’s motion to vacate the arbitration award. This
appeal followed.
In its first issue, Parallel argues the trial court erred by confirming the arbitration award
based upon a termination provision that is unconscionable and against public policy.
Specifically, Parallel argues that public policy prohibits agreements allowing attorneys to convert
a contingency fee contract into another type of fee contract and that the provision is vague. In its
second issue, Parallel argues that, because the quantum meruit recovery substitutes for the very
recovery under the contract that is unconscionable as against public policy, the quantum meruit
recovery was also against public policy. In its third issue, Parallel argues an attorney who has
abandoned a client without just cause before completing a contingency fee contract forfeits all
compensation, and the trial court therefore erred in confirming an award of attorney’s fees based
upon quantum meruit.
We review de novo a trial court’s confirmation of an arbitration award under the FAA
based on the entire record. Ancor Holdings, LLC v. Peterson, Goldman & Villani, Inc., 294
S.W.3d 818, 825-26 (Tex. App.—Dallas 2009, no pet.); Myer v. Americo Life, Inc., 232 S.W.3d
401, 407 (Tex. App.—Dallas 2007, no pet.). An arbitration award is treated the same as the
judgment of a court of last resort. Bailey & Williams v. Westfall, 727 S.W.2d 86, 90 (Tex.
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App.—Dallas 1987, writ ref’d n.r.e.). All reasonable presumptions are indulged to uphold the
arbitrator’s decision, and none is indulged against it. Bailey, 727 S.W.2d at 90; see also CVN
Grp., Inc. v. Delgado, 95 S.W.3d 234, 238 (Tex. 2002). An arbitration award is presumed valid
and entitled to great deference. Myer, 232 S.W.3d at 407–08; Crossmark, Inc. v. Hazar, 124
S.W.3d 422, 429 (Tex.App.—Dallas 2004, pet. denied). When reviewing an arbitration award,
we may not substitute our judgment merely because we would have reached a different decision.
Bailey, 727 S.W.2d at 90; see also CVN Grp., Inc., 95 S.W.3d at 238. Judicial review of an
arbitration award adds expense and delay and thereby diminishes the benefits of arbitration as an
efficient, economical system for resolving disputes. CVN Grp., Inc., 95 S.W.3d at 238;
Crossmark, 124 S.W.3d at 429. Accordingly, our review of the arbitration award is
“extraordinarily narrow.” Myer, 232 S.W.3d at 408; see also Statewide Remodeling, Inc. v.
Williams, 244 S.W.3d 564, 568 (Tex. App.—Dallas 2008, no pet.). Importantly, our review is so
limited that we may not vacate an award even if it is based upon a mistake in law or fact.
Crossmark, 124 S.W.3d at 429 (citing Anzilotti v. Gene D. Liggin, Inc., 899 S.W.2d 264, 266
(Tex. App.—Houston [14th Dist.] 1995, no writ)). Because of the deference given to arbitration
awards, judicial scrutiny focuses on the integrity of the process, not the propriety of the result.
See Ancor, 294 S.W.3d 833.
Under the terms of the FAA2, an arbitration award must be confirmed unless it is vacated,
modified, or corrected under one of the limited grounds set forth in sections 10 and 11 of the Act.
See 9 U.S.C. §§ 9–11. Section 10(a) permits a court to vacate an arbitration award:
(1) where the award was procured by corruption, fraud, or undue means;
(2) where there was evident partiality or corruption in the arbitrators, or either of
them;
2
The agreement did not expressly provide that the FAA applied; instead, the agreement provided for arbitration to be “conducted in Dallas,
Texas under the auspices of JAMS®.” Because the parties both refer to the FAA, and neither party disputes that the FAA applies, we apply the
FAA.
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(3) where the arbitrators were guilty of misconduct in refusing to postpone the
hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent
and material to the controversy; or of any other misbehavior by which the rights
of any party have been prejudiced; or
(4) where the arbitrators exceeded their powers, or so imperfectly executed them
that a mutual, final, and definite award upon the subject matter submitted was not
made.
Id. § 10(a). Although, over time, the courts have recognized certain common law
exceptions for vacating an arbitration award, the United States Supreme Court has held that the
grounds listed in the statute are the exclusive grounds for vacating an arbitration award under the
FAA. Hall St. Assocs., L.L.C. v. Mattel, Inc., 552 U.S. 576 (2008) (statutory grounds for
vacating or for modifying or correcting arbitration award are exclusive grounds for expedited
vacatur and modification of award pursuant to FAA); see also Citigroup Global Mkts., Inc. v.
Bacon, 562 F.3d 349, 350 (5th Cir. 2009) (concluding Hall Street restricts grounds for vacatur to
those set forth in section 10).
Hall Street forecloses our review of non-statutory grounds. Ancor, 294 S.W.3d at 827. If
we were to overturn the arbitration award as unconscionable and violative of public policy, we
would be substituting our judgment merely because we would have reached a different decision.
See Campbell Harrison & Dagley, L.L.P. v. Hill, 782 F.3d 240, 245-46 (5th Cir. 2015) (reversing
federal district court’s judgment vacating contingency fee portion of arbitration award as
unconscionable; in rejecting arbitrators’ determination regarding unconscionability, court
substituted its judgment for that of arbitrators merely because court would have reached different
decision). Further, the record shows the arbitrator did not reach any issues concerning the
provision that Jenner was entitled, if the agreement was terminated, to receive compensation for
all of its time incurred at its regular hourly billing rates in lieu of a contingent fee. Thus, we
overrule Parallel’s first, second, and third issues. See Ancor, 294 S.W.3d at 827.
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In its fourth issue, Parallel argues the arbitrator improperly excluded and refused to hear
the expert testimony of Keith Lowery, “one of the inventors of the technology that formed the
basis of the relevant patents-in-suit.” Parallel argues the exclusion of this testimony and
associated exhibits amounted to a refusal to hear evidence pertinent and material to the
controversy, specifically the patent infringement action that settled in April 2009.
The two excluded exhibits, Exhibits 142 and 144, are printouts of computer source code
consisting of arcane words and short phrases interspersed with numbers and symbols. At the
arbitration hearing, Parallel’s counsel stated:
what I would – I would question Mr. Lowery on is to show him the pieces of the
configuration files and ask him if the open source files that we discussed, like
jk_mount and workers.properties, et cetera, are present in the [defendant’s]
documents. And if your ruling is that we are not permitted do that, then I would
respectfully submit Exhibits 144 and 142 in addition to the patents and the
demonstrative [sic] as our offer – as Parallel Network’s offer of proof on this
issue.
The arbitrator stated the files in Exhibits 144 and 142 were beyond a non-expert witness’s
and beyond Lowery’s personal knowledge. Parallel was therefore not allowed to question
Lowery about the configuration files. However, Lowery then testified that he was a consultant
for Parallel beginning in 2007. Lowery testified on cross-examination that the presence or
absence of four modules or programs he described “doesn’t tell you anything about whether
they’re infringing.” Parallel did not submit an affidavit from Lowery indicating what his
testimony would have been concerning the source code in Exhibits 142 and 144.
The arbitrator is not bound to hear all of the evidence tendered by the parties;
however, he must give each of the parties to the dispute an adequate opportunity
to present its evidence and argument. An evidentiary error must be one that is not
simply an error of law, but which so affects the rights of a party that it may be
said that he was deprived of a fair hearing.
Cowle v. Dain Raushcer, Inc., 66 F.App’x. 525 (5th Cir. 2003), quoting Forsythe Intern., S.A. v.
Gibbs Oil Co. of TX., 915 F.2d 1017, 1023 (5th Cir. 1990).
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Here, Parallel did not indicate in what manner Lowery’s testimony concerning the
presence of certain open source files in a particular defendant’s documents were relevant to any
issue involving Jenner’s representation or the April 2009 settlement with that defendant. Lowery
himself testified the presence or absence of certain modules or programs he described “doesn’t
tell you anything about whether they’re infringing.” The record is silent as to what Lowery
would have testified concerning the source code in Exhibits 142 and 144. Under these
circumstances, we conclude the exclusion of Lowery’s testimony and Exhibits 142 and 144 did
not so affect Parallel’s rights that it may be said Parallel was deprived of a fair hearing. See
Cowle., 66 F.App’x. 525. Thus, the trial court did not err in denying Parallel’s motion to vacate
the arbitrator’s award on the basis the arbitrator refused to hear evidence pertinent and material
to the controversy. See 9 U.S.C. § 10(a); Crossmark, 124 S.W.3d at 429. We overrule Parallel’s
fourth issue.
We affirm the trial court’s judgment.
130748F.P05 /David L. Bridges/
DAVID L. BRIDGES
JUSTICE
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S
Court of Appeals
Fifth District of Texas at Dallas
JUDGMENT
PARALLEL NETWORKS, LLC, Appellant On Appeal from the 101st Judicial District
Court, Dallas County, Texas
No. 05-13-00748-CV V. Trial Court Cause No. DC-13-01146-E.
Opinion delivered by Justice Bridges.
JENNER & BLOCK LLP, Appellee Justices Francis and Lang-Miers
participating.
In accordance with this Court’s opinion of this date, the judgment of the trial court is
AFFIRMED.
It is ORDERED that appellee JENNER & BLOCK LLP recover its costs of this appeal
from appellant PARALLEL NETWORKS, LLC.
Judgment entered October 9, 2015.
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