Are arbitration clauses in attorney engagement agreements enforceable in legal malpractice actions in Pennsylvania? Although not routinely utilized, there is no prohibition on arbitration clauses between lawyers and clients in Pennsylvania. Several recent cases have reinforced the ability of attorneys to include arbitration clauses that are enforceable in legal malpractice cases, but also the difficulties inherent in enforcing such provisions.

Twenty years ago, the Pennsylvania Bar Association issued an advisory opinion (Advisory Opinion 97-140) regarding the permissibility of alternative dispute resolution clauses in attorney engagement agreements. Although largely focused on alternative dispute resolution in the context of fee disputes, the opinion stated: “Relative to the other areas of potential lawyer-client disputes, certainly fee disputes would be an appropriate subject of arbitration and, since a frequent defense to a fee claim is that of malpractice, malpractice claims should also be a permissible subject of arbitration.” Indeed, this is entirely consistent with our Rules of Professional Conduct. Pennsylvania Rule of Professional Conduct 1.8(h)(1) states “a lawyer shall not … make an agreement prospectively limiting the lawyer's liability to a client for malpractice unless the client is independently represented in making the agreement.” Comment 14 to Rule 1.8 explains: agreements prospectively limiting a lawyer's liability for malpractice are prohibited unless the client is independently represented in making the agreement because they are likely to undermine competent and diligent representation. Also, many clients are unable to evaluate the desirability of making such an agreement before a dispute has arisen, particularly if they are then represented by the lawyer seeking the agreement. This paragraph does not, however, prohibit a lawyer from entering into an agreement with the client to arbitrate legal malpractice claims, provided such agreements are enforceable and the client is fully informed of the scope and effect of the agreement … .

Arbitration clauses in engagement agreements are not without their critics. In Sanford v. Bracewell & Guiliani, 6 F. Supp. 3d 568, 579-80 (E.D. Pa. 2014), Judge Joel Slomsky of the Eastern District of Pennsylvania wrote: Arbitration clauses in fee agreements is a topic of great debate within the legal community. As one scholar put it, 'there is at least an appearance that when attorneys propose arbitration agreements it is because they, not the clients, stand to benefit, Steven Quiring, “Attorney-Client Arbitration: A Search for Appropriate Guidelines for Pre-Dispute Agreements,” 80 Tex. L. Rev. 1213, 1213 (2002). There is concern in the legal community that certain clients may not understand all of the legal implications that accompany arbitration agreements. Therefore, some scholars argue that the agreements violate public policy because of the inherit (sic.) inequality of bargaining power between the parties.

Judge Slomsky's opinion set out a thorough analysis of the debate on this issue. Slomsky noted the “Pennsylvania Supreme Court has yet to clarify the necessary steps that an attorney must take in order to inform a client of the 'scope and effect' of an arbitration agreement.”

The Sanford case was particularly interesting because it involved the representation of a husband and wife in an attempt to recover $12.5 million “invested” by Jamie Smith, a “professed … former Navy Seal, Harvard graduate, and CIA operative.” The engagement letter in question was only addressed to the husband, although the wife testified that the retention check was drawn from a joint account, and she had conversations with the attorneys which led her to believe she was represented along with her husband. The engagement agreement included language stating that only the “client” was represented, and that representation did not include other family members.

The engagement agreement in Sanford included a specific section regarding arbitration which stated:

Agreement Concerning Arbitration

Client and B&G agree that any controversy, dispute or claim, including any dispute as to B&G's fees for legal services, arising out of or relating to the engagement described in this Engagement Letter or any future engagement of B&G, shall be resolved by arbitration in New York County before the International Institute for Conflict Prevention and Resolution (the IICPR), an arbitral forum outside Part 137 of the Rules of the chief administrator of the courts (22 NYCRR). Such arbitration shall be governed by IICPR Rules for Nonadministered Arbitration (the IICPR Rules).

By signing this engagement letter, client and B&G agree to waive their rights with regard to arbitration pursuant to Part 137, which includes the right to reject the arbitrator's award by commencing an action on the merits (trial de novo) in a court of law.

Client and B&G acknowledge that by entering into this agreement, they waive their rights to a trial by jury and the procedural rights related thereto.

The engagement agreement also included a section encouraging the client to seek independent counsel with respect to the engagement agreement. Judge Slomsky found this language sufficiently set forth the scope and effect of the arbitration agreement. Judge Slomsky ruled the husband's claims had to proceed to arbitration, but the wife was entitled to a jury trial on whether she was a client of the firm, and whether she was required to arbitrate her claims. The U.S. Court of Appeals for the Third Circuit reversed and remanded Slomsky's finding with respect to the wife because she elected to pursue a breach of contract claim which was necessarily based upon the engagement agreement.

A 2015 Philadelphia Court of Common Pleas decision makes it clear how difficult it is to enforce compulsory arbitration provisions in engagement agreements. In Batoff v. Widin, No. 02350, 2015 Phila. Ct. Com. Pl. LEXIS 436, at *6 (C.P. Phila 2015), the Judge John Younge wrote: This appeal presents an issue of first impression in this jurisdiction, It squarely places at issue the circumstances under which an attorney can enter into an arbitration agreement with a client at the inception of the attorney-client relationship. It calls into question the ethical obligations of counsel when seeking to have a client waive the right to seek judicial redress in the unfortunate event that a dispute as to quality of representation arises.

Noting it was cited favorably by the Sanford court, Judge Younge relied on the principles for enforcement of an arbitration clause in an engagement letter set forth by the Louisiana Supreme Court in Hodges v. Reasonover, 103 So.3d 1069 (La. 2012). That court required that a client must be informed of: the client's waiver of the right to a jury trial; the client's waiver of a right to an appeal; the client's waiver of the right to broad discovery under the Louisiana Code of Civil Procedure and/or Federal Rules of Civil Procedure; the fact that arbitration may involve substantial upfront costs compared to litigation; explicit disclosure of the nature of the claims covered by the arbitration clause, such as fee dispute or malpractice claims; the fact that the arbitration clause does not impinge upon the client's right to make a disciplinary complaint to the appropriate authorities; and the fact that the client has the opportunity to speak with independent counsel before signing the contract. Judge Younge refused to enforce the arbitration clause because: The defendants were unable to establish that the plaintiff ever read the arbitration clause, or was even aware of its existence, because it was found in an addendum to the engagement letter that was neither signed nor initialed by the Plaintiff. Based on the language of the arbitration agreement, the defendants were also unable to establish that the plaintiff was informed of the ramifications and scope of arbitration.

Although permissible under Pennsylvania's Rules of Professional Conduct, courts will generally regard arbitration clauses in attorney engagement letters with caution. Any waiver by a client of substantive rights in an engagement letter will meet with a high level of scrutiny. The Sanford and Batoff cases illustrate the difference between an enforceable arbitration clause in an engagement agreement and an unenforceable clause.

Josh J.T. Byrne is a partner with Swartz Campbell's professional liability group. He speaks throughout Pennsylvania on malpractice avoidance. Byrne also regularly contributes blog entries to Swartz Campbell's professional liability blog.