Zuckerman Spaeder has prevailed in a federal appeals court in Washington in the firm's legal fight to force a former client in a tax fraud case to pay $834,000 in fees.
A three-judge panel of the U.S. Court of Appeals for the D.C. Circuit unanimously upheld a trial judge’s ruling in March 2010 to deny staying the proceedings in Washington federal district court.
The former client, James Auffenberg Jr., and his lawyers tried to convince the appeals court that the dispute belongs in arbitration, not in federal court.
U.S. District Judge Reggie Walton last year said Auffenberg failed to invoke arbitration “prior to actively participating in this litigation.”
Judge Douglas Ginsburg, sitting with Judge Merrick Garland and Senior Judge Stephen Williams, said in the appeals court ruling it’s undisputed Auffenberg failed to invoke arbitration in or before filing his answer to Zuckerman’s suit.
“In this appeal, we affirm the district court’s denial of the stay because Auffenberg failed to make a timely assertion of his right to arbitrate, and his litigation activity after he filed his initial answer and counterclaim imposed substantial costs upon Zuckerman and the district court,” Ginsburg wrote in the opinion.
Zuckerman represented Auffenberg in a tax fraud case in U.S. District Court for the District of the Virgin Islands. Auffenberg, who was indicted in 2007, was acquitted two years later. The firm sued him in Washington in April 2009.
Zuckerman litigation partner Francis Carter argued for the firm in the D.C. Circuit in February. Carter declined to comment today. Carter noted the case faces the potential of returning to the trial court for litigation.
Auffenberg sued the firm in a counterclaim for malpractice, saying the firm agreed to cap fees at $1.5 million. He alleged the $834,000 beyond that was unreasonable.
A year into the litigation, Auffenberg sought arbitration through the D.C. Attorney/Client Arbitration Board, a part of the D.C. Bar. After Walton refused to stay the case, Auffenberg appealed to the D.C. Circuit.
Auffenberg’s attorney, David Holzworth of Washington’s Holzworth & Kato, said today the D.C. Circuit’s decision continues a split among the circuits on the procedural question of when to invoke the right to arbitrate.
Holzworth said it’s too early to determine whether Auffenberg will ask the full D.C. Circuit to hear the dispute or whether he will petition the U.S. Supreme Court to review the decision.
The D.C. Circuit today sought to provide clarity on the timing of the invocation to arbitrate.
“By this opinion we alert the bar in this Circuit that failure to invoke arbitration at the first available opportunity will presumptively extinguish a client’s ability later to opt for arbitration,” the appeals court said.
Holzworth said the opinion “clarifies that issue very clearly, saying it must happen at the earliest possible opportunity. Unfortunately we didn’t have that standard in front of us in the case below.”