• Ex-Wife of Springsteen Bandmate Challenges Mandatory Fee Arbitration Agreement
  • July 6, 2007
  • Law Firm: Pepper Hamilton LLP - Philadelphia Office
  • What do Bruce Springsteen, a mandatory fee arbitration provision and the California Supreme Court have in common? It’s Federici v. Gursey Schneider & Co., LLP, No. B183945, 2006 WL 2775212 (Cal. Ct. App. Sept. 28, 2006), a matter arising out of the divorce proceedings between Bruce Springsteen’s keyboardist, Danny Federici, and his wife, Kathlynn Federici. Federici raises the issue of the enforceability of a mandatory fee arbitration agreement between Kathlynn Federici and the accounting firm she retained during the divorce.

    In 2002, after 15 years of marriage, Kathlynn Federici filed for divorce. Before and during their marriage, Danny had enjoyed a financially rewarding career as a member of Bruce Springsteen’s E Street Band, earning money primarily from concerts, record royalties and merchandising royalties. Kathlynn retained the accounting firm of Gursey Schneider & Co., LLP (Gursey) to provide accounting services in connection with the divorce.

    Gursey’s retainer agreement contained an arbitration provision that provided for mandatory arbitration of “[a]ny controversy, claim, or dispute relating to . . . unpaid fees for professional services.” Further, the arbitration clause provided that:

    • if Kathlynn should have any claims of professional malpractice against Gursey, she must raise such claims as a defense to Gursey’s arbitration action for unpaid fees
    • the only way that Kathlynn can bring an action in court against Gursey for accounting malpractice is if she (i) prevails in the arbitration (i.e., the arbitrator determines that Kathlynn does not owe Gursey any money), and (ii) the arbitrator does not limit Kathlynn’s relief to the amount of Gursey’s contended fees
    • if, however, the arbitrator determines that Kathlynn does not owe Gursey any money for its services, but that her malpractice claim does not exceed Gursey’s contended fees, Kathlynn “will be prevented from bringing the same contention in any separate civil action.”

    In 2002, Kathlynn’s attorney negotiated a marital settlement agreement in which she gave up the rights to certain cash and virtually all of Danny’s E Street Band royalties. Kathlynn later believed that the settlement was extremely unfavorable and that Gursey was partly to blame. She refused to pay Gursey for its services.

    In June 2003, Gursey initiated an arbitration proceeding against Kathlynn for unpaid fees. Kathlynn did not oppose the arbitration or raise a counter-claim for accounting malpractice. In July 2003, the arbitrator awarded Gursey over $29,000.

    On February 10, 2005, Kathlynn filed a professional negligence complaint in California state court against Gursey alleging that due to Gursey’s malpractice, Kathlynn failed to receive any portion of significant assets in the marital settlement. Gursey filed a demurrer – California’s equivalent of a motion to dismiss – asserting that Kathlynn’s malpractice claim was barred by the doctrines of waiver and res judicata. Among other things, Gursey argued that the arbitration clause obligated Kathlynn to raise the malpractice claim during the arbitration, and her failure to do so effectively waived her malpractice claim. The trial court sustained the demurrer.

    On appeal, Kathlynn argued that even if the arbitration provision required her to assert her malpractice claim in connection with the arbitration, such a requirement is unconscionable. The appellate court rejected this argument for two reasons. First, Kathlynn waived the right to argue “unconscionability” because she failed to do so during the arbitration. Second, even assuming that the arbitration provision was procedurally unconscionable (i.e., a contract of adhesion), Kathlynn also failed to show that the provision is substantively unconscionable (i.e., overly harsh or one-sided). Under California law, both types of unconscionability must be established to invalidate a contract.

    The appellate court did not believe that Gursey’s arbitration clause was substantively unconscionable, because the arbitration agreement only required Kathlynn to arbitrate Gursey’s claim for unpaid fees. If such arbitration took place, Kathlynn was further obligated to assert any related malpractice claims as a defense/offset to Gursey’s claim for unpaid fees. The court believed that these requirements, by themselves, are not unconscionable. In reaching this conclusion, the court stated: “It is important to note, however, that the arbitration provision did not attempt to impose a monetary ceiling on a potential malpractice recovery; plaintiff did not contract away her right to receive a malpractice award exceeding her accountancy fees.”

    The arbitration clause authorized Kathlynn to file a civil action for the amount in damages that exceeded Gursey’s fee. Although this aspect of the arbitration provision essentially meant that Kathlynn potentially would have to litigate her malpractice claims in two forums – arbitration and civil court – the appellate court did not find this to be “onerous.”

    In January 2007, the California Supreme Court agreed to review the decision of the Court of Appeal. The case will be watched closely as it will certainly provide guidance concerning how fee arbitration provisions will be drafted in the future.