E-Ethics Vol. I, No. II (April, 2001)
(c) 2001 by David Hricik
www.Hricik.com

Lawyer-Client Arbitration Agreements

I. Introduction.

The question of enforceability of an agreement requiring a client to submit malpractice claims to arbitration has not yet been squarely and definitively addressed in most jurisdictions, including California, Texas, Illinois, New York, and others. At this time, petitions for review have been filed in two cases with the Texas Supreme Court. This issue of E-Ethics analyzes the ethical issues that arise when a lawyer asks a client to agree to arbitrate fee or malpractice disputes.

I've published on this issue before, in a law journal, a cle piece, and at cleonline.com. Since then, little has changed. The law is unsettled. The uncertainty arises from the fact that an ethics rule prohibits lawyers from making prospective limitations on malpractice liability. While no authority squarely holds that arbitration provisions are such limitations, in analyzing the propriety of arbitration clauses many authorities have no doubt thought that lawyers would not require that disputes be arbitrated unless so requiring did not reduce lawyer liability.

When reading this E-Ethics, consider these three points:

If seeking to arbitrate disputes prospectively limits liability then: if the clientinsists on a provision requiring arbitration of malpractice claims, but the lawyer believes that an arbitrator will likely award more, or more often award something, to the client, can the lawyer ethically refuse to include the arbitration clause, insisting instead on a trial by jury?

Do lawyers negotiating with prospective clients owe any greater duties than they would to a third party in an arms' length transaction? A premise of many of these opinions is that lawyers owe prospective clients higher duties than other third parties. Bruce Green has been quoted to say that "lawyers are assumed to be dealing with prospective clients on an arms' length basis and are therefore free to work out the terms and manner of handling the representation for the client." Mary S. Diemer, Can You Require Client to Arbitrate Your Disputes? 24 Litig. News 5 (Jan. 1999). Texas law, last I checked, supported that view as well. Are all the following opinions irrelevant when the arbitration provision is in a letter offered to begin a representation?

Finally, at least two courts have concluded that, despite the requirements of the state's bar association's ethics committee, arbitration agreements would be enforced even if unethical. See Watts v. Polaczyk, 619 N.W.2d 714, 716 (Ct. App. Mich. 2000) (noting that violating disciplinary rules would not necessarily render agreement unenforceable); Powers v. Dickson, Carlson & Campillo, 63 Cal.Rptr.2d 261 (Ct. App. Cal. 1997) ("There is nothing ethically improper about such a provision. It did not attempt to limit Attorney Toghia's liability to the Powers for legal malpractice. It violated no conflict of interest rules and was not adverse to the Powers. Arbitration provisions are beneficial to both parties."). In those states, can a lawyer compel arbitration, but be disciplined for so doing?

II. Discussion

A. Background

B. Arbitration of Only Fee Disputes

Fee disputes are common. One survey of 3,000 Texas firms and practitioners revealed that, of firms with more than 10 attorneys, more than 85% had had at least one fee dispute in the prior five years, and nearly three in four said that they had had five or more such disputes. Alan Scott Rau, Procedural Justice and the Role of the Attorney in ADR: Resolving Disputes Over Attorneys' Fees: The Role of ADR, 46 So. Methodist L. Rev. 2005, 2007 n. 7 (1993). Overcharging is as common a basis for malpractice as is breach of fiduciary duty. Id. at 2015, n. 34. A number of articles address the benefits and disadvantages of clauses requiring arbitration of fee disputes. See, e.g., Samantha R. Turian, Drafting Fee Arbitration Provisions, 40 The Practical Lawyer 23 (Dec. 1994); Note, Lawyers' Responsibilities and Lawyers' Responses,107 Harv. L. Rev. 1547, 1664 (1994); Kathleen McKnight & Debra L. Mellinkoff, Arbitration of Legal Malpractice Claims, 3 Legal Malpractice Reporter 5 (1992) (describing pros and cons of such clauses); Mark G. Anderson, Arbitration Clauses in Retainer Agreements: A Lawyer's License to Exploit the Client, 1992 J. Dispute Resol. 341 (1993); Lester Brickman, Attorney-Client Fee Arbitration: A Dissenting View, 1990 Utah L. Rev. 277 (1990); Matthew J. Clark, The Legal and Ethical Implications of Pre-Dispute Agreements Between Attorneys and Clients to Arbitrate Fee Disputes, 84 Iowa L. Rev. 827 (1999).

There are several reasons why a fee arbitration clause may be useful. First, the response of any suit for fees "virtually guarantees" a counterclaim for malpractice. Rau, 46 So. Methodist L. Rev. at 2017. That may be overstating it: one study showed such counterclaims were brought in 40% of fee actions. R. Mallen & J. Smith, Legal Malpractice, § 2.15 (3d ed. 1989). Nonetheless, the potential for a malpractice counterclaim should not be overlooked: In one well-publicized case, a Houston firm brought a fee suit over $35,000 in unpaid fees, and the client counter-claimed for malpractice. Result? An enormous judgment for the client with a small offset in favor of the lawyer. Texas Lawyer, Jan. 28, 1991 at 6. Second, where the lawyers and clients fail to resolve fee disputes among themselves, nearly three quarters of the time the lawyers then simply dropped the matter -- giving up the earned-but-uncollected fee in its entirety. Rau, 46 So. Methodist L. Rev. at 2019. An arbitration clause could lead to some recovery in these cases. Finally, even where the lawyer brings a suit to recover fees, the net result may be a loss because a suit to recover even fairly substantial fees may be uneconomical, even if successful. For example, one commentator analyzed a firm's suit to recover a $15,000 fee. Even assuming that fee to be reasonable and even assuming it is fully recovered, there could still be a net loss to the firm, particularly if the matter is handled by another lawyer. Jeffrey M. Smith, The Pitfalls of Suing Clients For Fees, 69 Am. B. Ass'n J. 776, 777 (1983).

On the other hand, arbitration clauses may result in greater willingness by clients to challenge fees. Clients may be more willing to refuse to pay fees if they believe -- as many contend is "conventional wisdom" -- that arbitrators are more likely to "split the baby" rather than rule cleanly for one side or the other. But see Rau, 46 So. Methodist L. Rev. at 2058 (challenging perception that arbitrators are more likely to split the baby).

With exceptions, agreements to arbitrate only fee disputes are likely to be held enforceable, since the bar associations and public policy appears to favor resolution of fee disputes in arbitration. See generally, Conn. Informal Opinion Number 97-5 (1997) (fee dispute provisions generally enforceable); North Carolina Ethics Op. 107 (Apr. 12, 1991); Haynes v. Kuder, 591 A.2d 1286, 1292 (D.C. Cir. 1991) (enforcing agreement); District of Columbia Ethics Op. 211 (1990)(Be ready to find opinion 211); Lawrence v. Walzer & Gabrielson,256 Cal. Rptr. 6, 10 (Ct. App. Cal. 1989); Philadelphia Ethics Op. 88-2 (1988) (agreement requiring all fee disputes to be arbitrated is permissible if client knowingly consents in writing); Anno., Agreements for Arbitration of Fee Disputes Between Lawyers and Clients,17 ALR 4th 993 (1982); Anno., Fee Collection Practices as Ground for Disciplinary Action, 91 ALR 3d 583 (1979). The willingness to enforce fee dispute arbitration provisions is based in part upon a comment to Model Rule 1.5 that encourages lawyers to submit fee disputes to arbitration or mediation where the bar has such an established procedure. See also Tex. R. 1.04, off. cmt. 12; Mullinax, Wells, Baab and Cloutman, P.C. v. Sage, 692 S.W.2d 533 (Tex. App. -- Dallas 1985, writ ref'd n.r.e.) (upholding arbitrator's decision in fee dispute). It also no doubt is based upon the fact that there are even Model Rules for Fee Arbitration (1995). Not only are such agreements usually enforced, bar associations have fee arbitration programs. Rau, 46 So. Methodist L. Rev. 2016 n. 38 & 2022 n. 59 (listing various state and county programs, including Tarrant County); Pennsylvania Bar Association Committee on Legal Ethics and Professional Responsibility Formal Opinion Number 97-140 (Sept. 26, 1997) (noting that "[n]o less than 18 states and major cities have recognized or established arbitration as a means of lawyer-client dispute resolution.") Those programs have been upheld by the courts. See, e.g., Guralnick v. New Jersey Supreme Court, 747 F. Supp. 1109 (D.C.N.J. 1990), aff'd, 961 F.2d 209 (3d Cir. 1992); Anderson v. Elliott, 555 A.2d 1042 (Maine), cert. denied, 493 U.S. 978 (1989).

However, arbitration clauses between attorney and client are at least subject to the same requirements as any arbitration clause. Such requirements may arise from state, e.g., Tex. Civ. Pract. & Rem. Code Sec. 171.001, or federal law, e.g., 9 U.S.C. Sec. 1 et seq. For example, under Texas law arbitration clauses may be held unenforceable "upon such grounds as exist at law or in equity for the revocation of any contract" and a court may refuse to enforce a clause if the clause "was unconscionable at the time the agreement or contract was made." Tex. Civ. Pract. & Rem. Code. Sec. 171.001.

Interestingly, Ohio has taken a dim view of even suggesting to a prospective client to hire independent counsel to advise on a fee arbitration provision. Although it is not clear, Ohio seems to suggest that lawyers should wait until after representation has begun before broaching the subject. See S.Ct. Ohio Board of Comm'r on Grievances and Discipline Op. No. 96-9 (Dec. 6, 1996) (noting that advising clients about to hire a lawyer to go hire a lawyer "sends the wrong message to the public.") But see Virginia Ethics Op. 1707 (Jan. 12, 1998).

C. Arbitration of Malpractice Claims

A sophisticated plaintiffs' lawyer could make a strong jury case out of an malpractice case. Suppose, for example, a patent inventor's right to a patent was lost due to delay by the lawyer, such that a statutory bar to patentability arose. A jury may be predisposed to favor the small inventor, and the specter of enormous lost profits and royalties would be raised by the plaintiffs' lawyer to exact a high settlement.

Large malpractice judgments have no doubt motivated some lawyers to use provisions in their engagement letters that require arbitration of malpractice claims. If the lawyer and client are agreeing to arbitrate any fee disputes, they should carefully consider whether to specifically include (or exclude) malpractice claims. Including them may make sense: many fee disputes are accompanied by malpractice claims, and requiring arbitration only of the former may result in little actual savings.

There is much that has been said about whether arbitration favors lawyers. As with fee dispute clauses, clauses requiring arbitration of malpractice claims could arguably lead to additional claims, or greater or more frequent awards. But if a lawyer decides to include a provision, then the lawyer should consult the various state and federal substantive law, as well as applicable ethics rules and their interpretations. The following provides some guidance to those seeking to draft an enforceable malpractice arbitration clause.

Although no ethical rule expressly precludes the use of arbitration agreements, their use may be viewed as implicating Model Rule 1.8(h). Like its Texas counterpart, Texas Rule 1.08(g), it provides that a lawyer "shall not make an agreement prospectively limiting the lawyer's liability to a client for malpractice unless permitted by law and the client is independently represented in making the agreement. . . ." It is clear that this rule prohibits a lawyer from prospectively holding himself harmless from a malpractice claim. E.g., People v. Foster, 716 P.2d 1069, 1071 (Colo. 1986) (while assisting two corporate shareholders resolve dispute, lawyer drafted share purchase agreement that included release of his own personal liability arising from the transaction); In re Lawandus, 476 N.Y.S.2d 225 (1994) (lawyer cannot include hold harmless provision in retainer agreement). Likewise, the only opinion on the subject held that this rule prohibits a lawyer from requiring arbitration after he knows he has committed malpractice. Cal. St. Bar Standing Comm. on Professional Responsibility and Conduct 1989-116 (1989).

Most authority holds that requiring arbitration of malpractice claims does not constitute a "prospective limitation" on malpractice. Generally without success, clients have argued that an arbitration clause -- no matter how well-informed the client was in agreeeing to it -- amounts to a "limitation on malpractice" liability. E.g., Cal. St. B. Standing Comm. on Professional Responsibility and Conduct, Op. 1989-116 (1989).

However, no doubt based upon the view that a lawyer would not require arbitration if it did not serve his best interests, several jurisdictions have stated that lawyers who use such clauses should:

1. Ensure that the clause is clear enough so that the client understands it covers malpractice claims;
2. Require or recommend that the client obtain outside legal advice before agreeing to the clause; and
3. Ensure the effects of the clause are fully disclosed to the client

The devil, of course, is in the details.

First, to ensure that the client understands the clause covers malpractice claims, obviously it should include the word "malpractice." A court may be concerned that a vague but broad arbitration provision failed to give notice that it required arbitration of malpractice claims as well as fee disputes, and thus be given limited scope. See, e.g., Lawrence v. Walzer & Gabrielson, 256 Cal. Rptr. 6 (Cal. Ct. App. 1989); Cal. Ethics Op. 1989-116; Maryland Ethics Op. 90-12 (1990); Michigan Ethics Op. RI-257 (1996)(be ready to search for RI-257 once you click that link); Philadelphia Ethics Op. 88-2 (1988). Any arbitration clause that does not mention malpractice will likely be challenged as not covering malpractice claims. E.g., Hanes v. Kuder, 591 A.2d 1286 (D.C. App. 1991). Clients will argue that the firm has used a misleading arbitration clause that reads as if it merely subjected fee disputes to arbitratation. See id. (rejecting client's argument). Ambiguous provisions may be construed against the drafter -- the lawyer. Lawyers who want to arbitrate malpractice claims should be sure to say so -- in writing.

Second, to ensure that the client have the opportunity to obtain independent legal advice, the clause should so suggest.

Third, fully disclosing the effect of the clause, is more fact intensive.. Most authorities agree that the client should understand that it is waiving trial by jury. Beyond that, there is less guidance. Indeed, the Viriginia opinion refused to provide insight into the type of disclosure required. Other opinions have amplified on the requirement for full disclosure, however. For instance, the Connecticutt Bar Association explained:

The Committee is further concerned that the clause is not a neutrally worded arbitration provision. It specifically mentions perceived benefits of the arbitration process, such as confidentiality, speed and economy, but does not mention factors that may be perceived as drawbacks to arbitration, such as the loss of the right to a jury trial. The Committee believes that the duty of candor and fair dealing require that the arbitration clause be formulated in neutral language. We do not suggest that a lawyer, in a discussion with the client of the benefits and drawbacks of arbitration, may not express a favorable opinion of arbitration. However, placing such opinions in the arbitration clause itself may preempt the discussion from taking place, and leave the client with the impression that there are no drawbacks to mandatory arbitration clauses.

A lawyer would be well advised to include in the engagement letter a discussion as to the advantages and disadvantages of ADR. This would include such things as privacy, promptness of decision, protection of privileged communications, waiver of the right to trial by jury, waiver of the right of appeal, limited right to discovery, and inability to join parties not signatory to the engagement letter. Further, if the relationship is expected to be a continuing one, it should be clearly stated whether the ADR procedure will be applicable to any dispute which may thereafter arise out of the lawyer client relationship. Otherwise, the ADR procedure might well be limited to the initial matter which brings the client to the lawyer. The scope of any ADR of lawyer-client disputes need not be limited to fee disputes only but may not include disciplinary matters.

[A] provision requiring arbitration of disputes must be reasonable and based on consent of the client after full disclosure of the consequences of the provision for the client. In our view, such consent cannot be knowing without disclosure of the material differences between arbitration and litigation. Chief among these differences is that an agreement to arbitrate amounts to a waiver of the right to a jury trial. Even outside the context of an attorney-client relationship, a waiver of the right to a jury trial may be unenforceable unless the choice to do so was knowing; the heightened duty of a lawyer to be fair in any relationship with a client can only increase the burden on the lawyer to make clear that a significant consequence of an arbitration clause is that the client will not be free to seek a jury to resolve the dispute. The right to a jury trial is not the only material difference between litigation and arbitration. Other differences may include, but may not be limited to, the extent of discovery rights, the right to compel production of witnesses and documents, the availability of relief, the availability of appellate review on the merits, the fees and costs payable to the arbitrator, the availability of a public forum, and the like. Arbitration may be faster and less expensive, a factor that may benefit the client in some respects yet also have adverse consequences for the client's freedom of choice in pursuit of the client's claim against the lawyer.

D. Note on PTO Practice.

E. Texas Case Law.

The dissenting opinion in Henry v. Gonzalez provides the only published views of a Texas judge on the ethical issues that these provisions create. Dissenting from an opinion which ordered arbitration, Chief Judge Hardberger wrote:

Are we to then allow attorneys, who represent [clients in their time of need, such as personal injury plaintiffs], to take away their rights to a jury trial should legal malpractice occur? I agree with the commentators... and with the laws established in other jurisdictions that conclude that such a practice is against public policy. Certainly it should be against public policy in the absence of some additional protections for the client, which do not exist in this case.

The traditional advantages of arbitration may not be so advantageous in the context of a legal malpractice claim. For example, the savings of cost and time would likely be more of disadvantage to the attorney alleged to have committed malpractice than to the client beause the client's new attorney will typically be limited to handling the claim on a contingency basis. In addition, the ability to pursue the claim in court may provide the client with a bargaining advantage in negotiating with an attorney who seeks to avoid litigation and its potential negative publicity.

More importantly, the fundamental fiduciary nature of the attorney-client relationship dictates against an attorney's ability to impose an arbitration condition on a client. ... Applying general contractual principles to an arbitration provision in the attorney-client context ignores the practical reality that in most instances the attorney and his or her client are not engaged in an arm's length transaction during their initial negotiations.

III. Conclusion

A. Checklist for Arbitration Clauses

For examples of "model" arbitration clauses, see Kathleen McKnight and Debra L. Mellinkoff, Arbitration of Legal Malpractice Claims, 3 Legal Malpractice Reporter 5 (1992); Samantha R. Turian, Drafting Fee Arbitration Provisions, 40 The Practical Lawyer 23 (Dec. 1994); Walter Steele has models on his home page, stored in an old newsletter.

Some guidelines come from the authorities discussed above:

1. Make the Arbitration Clause Noticeable. Either set it apart within the engagement letter (through capital letters, bold type, etc.); better still, place it in a separate agreement, separately signed.
2. Make the Arbitration Clause Broad. The clause should state that any legal theory upon which a claim is based against the attorney -- such as breach of fiduciary duty, breach of contract, negligence, etc. -- are subject to arbitration.
3. State in Writing that the Client is Waiving Right to Trial by Jury. The client should be advised in writing that arbitration proceedings differ from court proceedings, and that by accepting the arbitration clause, the client is waiving his or her right to trial by jury.
4. At Least Encourage, in Writing, that the Client Obtain Independent Legal Advice. If the client has been referred to you, or if it is a corporation with its own in-house counsel, this step may be easier. If the client chooses not to use independent counsel, have them indicate that waiver in writing.

B. A Model Form to Consider and Review.

With little to guide lawyers in most states, the following is suggested as a starting point for a "model" arbitration provison. Obviously, anyone intending to use it needs to consult applicable ethics rules and interpretations, state common law, the FAA, and any state statutes that may apply. As written, this suggestion may not be enforceable in any state, given the variety of arbitration statutes and ethics opinions on this issue:

Arbitration of Fee and Malpractice Disputes. Any dispute arising out of this agreement or our representation of you will be resolved exclusively by submission to arbitration under the rules of the American Arbitration Association. This includes but is not limited to any claim for malpractice, negligence, breach of fiduciary duty, deceptive trade practices, breach of contract, or the like that you may later wish to assert against us. There are advantages to arbitration, but also disadvantages. Arbitrating our disputes may be more efficient, and it will be done in private. However, any claim for malpractice will not be decided in court or in a trial by jury. Also, unlike courts which are an arm of government, private arbitrators have no ability to require third parties to participate in an arbitration or to provide documents or witnesses. There may be other disadvantages to arbitration. Consequently, you should carefully consider whether arbitration is acceptable to you, and should consult with independent counsel if you believe it appropriate to do so. By signing this letter, you agree that the arbitrator's decision shall be binding, conclusive, and nonappealable.

E-Ethics is a free monthly e-mail based newsletter concerning ethical issues in the practice of law, ranging from conflicts of interest, to in-house counsel licensing requirements, to the ethics issues created by the use of high-technology. Links to numerous sites relating to those topics, as well as other discussions, can be found on Hricik.com. Obviously, as is the case with any legal question, the matters discussed in E-Ethics are time-sensitive and subject to change. No one should rely on E-Ethics in place of actual legal advice addressed to a specific set of known facts.

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