Consider using mandatory arbitration provisions to recover fees

Fee disputes with clients are never pleasant, but they are especially painful when such disputes result in litigation. Not only do lawsuits against clients for the recovery of unpaid fees require the attorney's time and expense, but they can often prompt the client to bring a responsive claim for legal malpractice. For that reason, some attorneys are willing to forgo the collection of fees rather than deal with messy and protracted litigation.

One option that attorneys are considering to avoid the messiness of litigation over legal fees is the inclusion of a mandatory arbitration provision in the attorney's engagement letter. Mandatory arbitration provisions can vary in scope and effect. For example, some mandatory arbitration provisions are limited to fee disputes, while other broader provisions require arbitration for any dispute arising out of the attorney-client relationship, including legal malpractice claims.

As discussed below, the enforceability and mechanics of mandatory arbitration provisions necessarily varies from state to state. However, there are some steps that attorneys and law practices can consider to increase the likelihood that a mandatory arbitration clause will be enforced.

California

A California statute specifically provides for mandatory arbitration, but only for fee disputes. Pursuant to Business and Professions Code Section 6200, attorneys are required to submit fee disputes to mandatory arbitration when requested by the client. Such arbitrations are run by county bar associations or, where a county does not have a program in place, the state bar.

However, while attorneys are required to participate in a fee arbitration when one is requested by a client, it does not automatically work the other way around. Instead, unless there is a written agreement between the attorney and the client providing for the arbitration of all disputes concerning fees and costs, participation in a fee arbitration is only voluntary for the client when it is requested by the attorney.

Notably, however, the arbitration provided by California statute is non-binding unless the parties agree to be bound after the dispute has arisen. Thus, because an arbitration provision in an engagement letter would typically be entered into before the fee dispute arises, there once had been some question as to whether a provision that provides for binding arbitration with respect to fee disputes was enforceable in California. However, in Schatz v. Allen Matkins Leck Gamble & Mallory LLP, the California Supreme Court addressed the interplay between the mandatory arbitration provision in Section 6200 and the parties' ability to contract for binding arbitration and held that, while clients may choose to first submit their dispute to the non-binding arbitration provided for by statute, they remain bound by contractual provisions providing for the submission of their fee dispute to binding private arbitration if the arbitration with the local or state bar is unsuccessful. See 45 Cal. 4th 557, 572 (2009), as modified (Mar. 11, 2009).

Moreover, the court in Schatz made clear that, because Section 6200 specifically excludes malpractice and other types of claims based on professional misconduct from its scope, such fee claims can be the subject of private arbitration without the initial step of engaging in non-binding arbitration pursuant to the statute. Thus, while the Section 6200 adds a wrinkle to prospect of mandatory arbitration with clients, many attorneys still choose to include mandatory binding arbitration provisions in their fee agreements.

Other Jurisdictions

While this issue has been addressed in California, the outcome in other states may be less clear. For example, some states hold for public policy reasons that any contract for the employment of an attorney that imposes a penalty on the client for exercising the legal right to end the attorney-client relationship is unenforceable. Some courts, therefore, would look for whether a mandatory arbitration provision limits the client's ability to terminate the relationship.

Other states might permit mandatory arbitration provisions but impose additional disclosure obligations that do not exist in the context of other commercial transactions. For example, in Hodges v. Reasonover, 103 So.3d 1069 (La. 2012), the Louisiana Supreme Court held that an arbitration clause between an attorney and client is permitted as long as it meets other requirements, including that: (i) it "does not limit the attorney's substantive liability"; (ii) it is reasonable and fair to the client; and (iii) the client has the opportunity to seek independent counsel in connection with the agreement.

Tips for Mandatory Arbitration Provisions

Although the relevant considerations may vary by jurisdiction, attorneys and law firms can take certain steps to ensure that their arbitration clause meets ethical and civil rules.

First, as a general matter, many attorneys seeking to employ an arbitration clause will use judicially tested language. For states that have decided to treat attorney-client agreements like other commercial transactions, a generally accepted and commercially enforceable arbitration clause can be a significant asset.

In addition, firms can consider the potential ethical implications and seek to address those through the engagement letter. For example, a 2002 ABA Formal Opinion concluded as follows: "It is ethically permissible to include in a retainer agreement with a client a provision that requires the binding arbitration of fee disputes and malpractice claims provided that (1) the client has been fully apprised of the advantages and disadvantages of arbitration and has been given sufficient information to permit her to make an informed decision about whether to agree to the inclusion of the arbitration provision in the retainer agreement, and (2) the arbitration provision does not insulate the lawyer from liability or limit the liability to which she would otherwise be exposed under common and/or statutory law." ABA Formal Opinion 02-425.

Thus, although generally not controlling, courts considering whether to enforce a mandatory arbitration provision may look to ABA Formal Opinion 02-425 and consider whether, for example, the client was sufficiently apprised regarding the advantages and disadvantages of the provision.

Finally, where the enforceability of mandatory arbitration claim may be uncertain, it can be helpful to include a severability clause in retainer agreements. Then, if a particular state or jurisdiction finds the binding arbitration agreement unenforceable, other protections included the agreement still may remain in effect.