Shari Klevens, left, and Alanna Clair, Dentons. Courtesy photo

Many states, including California, have recognized the benefits of resolving attorney-client fee disputes through the use of arbitration by enacting statutes providing for arbitrations often conducted through local or state bar associations. However, because such arbitrations are often non-binding and may not be mandatory in all circumstances, attorneys and clients wishing to avoid any doubt regarding the proper forum for fee disputes may choose to include mandatory arbitration clauses in engagement letters or by other agreements.

Such provisions have been the subject of litigation in recent years, including with respect to the interplay of such provisions with fee arbitrations required under state law and the application of the Federal Arbitration Act (FAA). For example, California attorneys and clients may typically enter into valid and enforceable agreements requiring binding arbitration of both legal malpractice and fee dispute claims at the initiation of their relationship. Powers v. Dickson, Carlson & Campillo, 54 Cal.App.4th 1102 (1997). However, those agreements do not extinguish a client's right to nonbinding mandatory fee arbitration (MFA) under Business & Professions Code §6200, which applies where such arbitration is requested by the client. Benjamin, Weill & Mazer v. Kors, 195 Cal.App.4th 40, 53 (2011). Thus, in California, attorneys and clients may proceed in a two-step process whereby the parties first engage in a nonbinding MFA and then, if the matter remains unresolved, proceed with the binding arbitration as provided for in the engagement letter (if agreed).

While such state law provisions may apply, courts have recognized that the use of mandatory arbitration clauses in engagement letters may be subject to federal law, specifically the Federal Arbitration Act (FAA). For example, in 2017, the U.S. Court of Appeals for the Third Circuit issued an unpublished opinion in which it concluded that, although a mandatory arbitration clause in an attorney engagement letter could be set aside on the basis of fraud, duress or unconscionability (which analysis may be governed by state law), federal law generally governs the application of such a provision. Smith v. Lindemann, 710 F. App'x 101 (3d Cir. 2017). Indeed, the U.S. Supreme Court has indicated that state law may not prohibit the arbitration of any specific type of claim. AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 341 (2011).

However, although the FAA may govern an arbitration clause absent any restriction by the parties, a state's rules of professional conduct may still impact whether an arbitration provision violates public policy, such as to the extent such clauses infringe on a client's right to be informed about the scope of the representation and the potential waiver of rights. Indeed, separate from the requirements of federal law, attorneys have certain duties to clients that can be reflected in the use of an arbitration provision in an engagement letter.

With that framework in mind, the arbitration of fee disputes can be efficient and effective in resolving disputes when used properly.

The Benefits of Mandatory Arbitration Provisions

The advantages of submitting fee disputes to binding arbitration mirror many of the benefits of arbitrations generally. For example, arbitration can be faster than litigation and may be less formal than litigating in court, which some attorneys view as an advantage. Using arbitration can also help the parties keep the proceedings and the outcome confidential, which can be an advantage to both the law firm and the client, depending on the circumstances.

It can also be helpful for law firms and practitioners to give thought at the outset of a representation as to whether they would like any fee disputes or other claims to be resolved by private arbitration. Some firms adopt a broad mandatory arbitration clause in every engagement letter they use, while others may limit the use of an arbitration clause to address fee disputes only.

For some, there is an advantage to using arbitration to address fee disputes only. It is well-recognized that, when an attorney sues a client for unpaid fees, the client may also bring a counterclaim for legal malpractice. Some firms thus elect to include in their engagement letters a provision that requires all fee disputes to be resolved by private arbitration. That can help attorneys pursue fee claims, which can be unpleasant in and of itself, and can allow them to carve out malpractice claims for separate resolution.

The Client's Informed Consent

Once the decision is made to include a mandatory arbitration clause in the engagement letter, it is helpful to consider the requirements of the applicable Rules of Professional Conduct and the obligations owed by the attorney to the client. For example, to avoid any potential misunderstanding, attorneys may wish to include additional language in the engagement letter describing the differences between arbitration and litigation.

Such disclosures may detail the fact that proceeding to arbitration necessarily involves foregoing a jury trial, and may also explain that there is typically a limited scope of any appeal of an arbitration. At the same time, the client may likewise wish to consider the differing procedural issues that apply to arbitrations, such as the speed of resolution, confidentiality (if applicable), and the typically relaxed procedure.

Considering those issues is consistent with the guidance provided by the ABA in Formal Opinion 02-425. There, the ABA recognized that it is generally ethically permissible for attorneys to include mandatory arbitration provisions in their engagement letters. However, Formal Opinion 02-425 recommends ensuring that the client has been “fully apprised of the advantages and disadvantages of arbitration and has given her informed consent to the inclusion of the arbitration provision in the retainer agreement.”

Even if federal law governs the application of the arbitration clause generally, by anticipating the requirements of any applicable ethical rules attorneys can avoid public policy issues and, most importantly, ensure that the client fully appreciates the significance of agreeing to an arbitration provision at the outset of the representation.

Shari L. Klevens is a partner at Dentons US and serves on the firm's US Board of Directors. She represents and advises lawyers and insurers on complex claims, is co-chair of Dentons' global insurance sector team, and is co-author of “California Legal Malpractice Law” (2014). Alanna Clair is a partner at Dentons US and focuses on professional liability defense. Shari and Alanna are co-authors of “The Lawyer's Handbook: Ethics Compliance and Claim Avoidance.”