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A breach of fiduciary duty lawsuit could be costly

On Behalf of | Jul 8, 2022 | Commercial Litigation |

A fiduciary owes a duty of personal loyalty and trust toward the person he or she represents. Fiduciaries are obligated by law to act solely in their clients’ best interest and to avoid any conflicts of interest – including personal conflicts. You should be able to trust a fiduciary to responsibly act in your interest.

There are many examples of fiduciaries in society. Lawyers are fiduciaries. Others include trustees, personal representatives, certain members of limited liability companies and agents who are hired to represent sports and media figures.

What happens when a fiduciary doesn’t act responsibly or allows a conflict of interest to develop? This is called a breach of fiduciary duty and generally results in a legal dispute. These disputes can be high-stakes and costly, sometimes with millions of dollars on the line.

A recent example of such a lawsuit is New York Knicks center Nerlens Noel’s lawsuit against his former agent, Rich Paul. Noel claims Paul lost interest in his career after Noel was injured and stopped pitching him to basketball clubs and sponsors. Noel claims that Paul’s faulty advice cost him a $70-million contract with the Dallas Mavericks, and that Paul failed to secure Noel the equivalent or better contract he had promised him.

What is a sports agent’s duty?

At issue in the case is whether Paul’s representation of Noel fell beneath that required of a fiduciary. In 2017, Paul allegedly promised Noel he would maximize his income if he dropped his then-agent Happy Walters and turn down the $70-million contract with the Mavericks that Walters had negotiated.

Noel agreed to sign with Paul. According to reports, however, Noel’s thumb ligament was injured later that year, which caused him to miss 42 games, and which led to a drop in his statistics.

According to Noel, this injury caused Paul to lose interest in representing Noel. Paul and his company, Klutch Sports, allegedly failed to garner any “real” proposals for Noel. However, Noel did sign with the Oklahoma City Thunder for two years for $3.75 million. This was the league minimum in 2018.

After a more successful season with the Thunder, Paul allegedly advised Noel to decline the second year. Noel doesn’t seem to have played in 2019. In November 2020, Noel signed on with the Knicks – but Noel says Paul played “virtually no role” in securing that contract. In December 2020, Noel engaged a new agent, who negotiated a three-year, $27.7-million-plus contract with the Knicks.

According to Noel’s lawsuit, Paul and Klutch Sports were unresponsive to him and to teams that contacted them about Noel. It accuses Paul and the company of focusing instead on serving “marquee” clients such as Lebron James and Ben Simmons. The lawsuit also alleges that “Paul had a history of mismanaging and ignoring other clients and costing them significant money.”

It’s certainly arguable that Paul breached his duty as a fiduciary if Noel’s allegations are true. Fiduciaries should not favor one client over another but should apply themselves diligently toward the interest of each one. If those clients’ interests are in potential conflict, the fiduciary should not represent both.

Noel’s lawsuit estimates that the bad representation by Paul and Klutch Sports cost him about $58 million in potential earnings.

Paul’s response: a motion to dismiss the lawsuit and a counterclaim in arbitration

In response to Noel’s lawsuit, Rich Paul argued that the lawsuit must be dismissed because the underlying contract requires disputes to be arbitrated by the National Basketball Players’ Association. He also filed a grievance in arbitration claiming that Noel has refused to pay Paul’s share of the 2020-2021 season contract with the Knicks. This is the contract Noel alleges Paul played “virtually no role” in negotiating.

Noel has responded to the arbitration grievance by filing a grievance of his own. He claims Paul breached his fiduciary duty, breached the contract, was negligent and grossly negligent, and breached the general duty of good faith and fair dealing in any contract.

Noel does not appear to have dropped his lawsuit at this time. The grievance and counter-grievance in arbitration are pending before a National Basketball Players’ Association arbitrator.

Mediation might be a better choice

A multimillion-dollar dispute like this one might best be handled in mediation. When both parties agree to mediation, a neutral third party steps in to help them set realistic goals and develop a resolution they can both live with. It is much less formal than arbitration or court, with relaxed standards of evidence and fewer procedural hurdles.