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Fee Disputes And Binding Arbitration

A recent California Supreme Court ruling raises questions about the future of mandatory fee arbitration

By Arne Werchick

Arne Werchick
Werchick

Arbitration enjoys tremendous popularity with California courts, and lawyers are by no means immune from the “strong public policy in favor of arbitration.” Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 9. Lawyers increasingly are including in retainer agreements language providing that disputes between attorney and client shall be submitted to binding arbitration, and agreements to binding arbitration of legal malpractice cases have been upheld. Powers v. Dickson, Carlson & Campillo (1997) 54 Cal. App.4th 1102. On the other hand, anticipatory agreements to binding arbitration of fee disputes are problematic. Alternative Systems Inc. v. Carey (1998) 67 Cal.App.4th 1034, 1041. This article explores the effect of such arbitration clauses in light of the Supreme Court decision in Aguilar v. Lerner (2004) 32 Cal.4th 974.

Some arbitration clauses purport to deal with attorney-client disagreements globally, while others specifically require disputes over fees or costs to be handled separately from other disputes, such as claims of malpractice. Too many lawyers are unaware of Business & Professions Code §6200 et seq., which creates a system governing fee disputes distinct and separate from the California Arbitration Act, Code of Civil Procedure §§1280 et seq. Referred to commonly as “mandatory fee arbitration” (MFA), the statutory scheme in the B&P Code “provides a procedure by which a client may resolve fee disputes with his or her attorney efficiently and without the necessity and expense of hiring a second attorney . . . The intent of the legislation was to provide an effective, expeditious, simple, low cost forum in which an attorney and a client may resolve a dispute over legal fees.” [Citation omitted.] Liska v. Arns Law Firm (2004) 117 Cal.App.4th 275, 281-282.

Seventeen of 44 State Bar-approved local fee arbitration programs responding to a recent survey reported more than 3,500 fee arbitration applications resolved in the period 2002-2003. Family law issues comprised 46 percent of the cases, 43 percent other civil cases, and 11 percent criminal. Approximately one-third of fee arbitration filings requested binding awards. The results of fee arbitration tended to be in favor of the attorneys in a rough ratio of nine to seven (based upon admittedly limited statistical input), close enough to confirm that the program is fulfilling the legislative intention of providing a simple, inexpensive and expeditious alternative to litigation between lawyers and clients. (Internal Program Survey, State Bar Committee on Mandatory Fee Arbitration, 2004.)

Before an attorney can sue a client for fees or costs, the attorney must offer the client the option of fee arbitration and is required to go through the MFA process conducted under the auspices of a State Bar-approved local bar association fee arbitration program (or the State Bar fee arbitration program under some circumstances) if the client elects arbitration; if there is an arbitration clause in the retainer agreement, the client can be required to participate in the MFA process, but only to the extent of non-binding arbitration. B&P Code §6200(c). Failure of an attorney to give a client notice of the right to MFA after the fee dispute has arisen may be fatal to any legal action filed by the attorney. Huang v. Cheng (1998) 66 Cal.App. 4th 1230 (dismissal affirmed); Richards, Watson & Gerson v. King (1995) 39 Cal.App.4th 1176 (dismissal discretionary at that time).

Prior to, or concurrently with, bringing any claim against a client for recovery of fees or costs, an attorney must provide the client with the specific form of notice of right to fee arbitration approved by the State Bar. B&P Code §6201(a). Any lawsuit filed by the attorney must be stayed at the request of the client until completion of MFA. B&P Code §6201(b) and (c). Unless the client has agreed in writing to arbitration of disputes concerning fees, costs, or both, fee arbitration is “voluntary for a client and shall be mandatory for an attorney if commenced by a client.” B&P Code §6200(c).

Alternative Systems Inc. v. Carey, supra, 67 Cal. App.4th 1034, held that the MFA statute pre-empts a binding arbitration clause in a fee agreement if it purported to govern disputes as to fees and costs. The client in Alternative Systems invoked his rights under MFA and was entitled to a trial de novo under the MFA scheme. “With the 1996 amendments the legislature made it clear that prospective waivers of trial after arbitration are not allowed.” Id., at 1042. After non-binding MFA, the client retained the right to access the courts rather than being compelled by an arbitration agreement to submit the dispute as to fees or costs to subsequent binding arbitration. Id., at 1044.

In many attorney-client fee contracts — whether in ignorance of the MFA statutes, or desiring to circumvent them, or simply betraying a reluctance to specify the types of disputes a client may develop with an attorney — retainer agreements call for binding arbitration of all prospective attorney-client disputes without excepting MFA or providing for separate consideration of disputes regarding fees and costs. The conundrum, however, is how to apply such arbitration agreements. Lawyers and clients are free to enter into anticipatory agreements for binding arbitration of other disputes such as malpractice claims. By contrast, MFA arbitrations are binding only if both parties agree in writing after the dispute has arisen to make them binding (B&P Code §6204(a)) or the parties do not elect for a trial after non-binding arbitration within the narrow 30-day window permitted by B&P Code §6203(b) or (c). Thus enter Aguilar v. Lerner presenting “the question whether the parties’ agreement to arbitrate is enforceable or is superseded by the MFAA . . .” Id., at 32 Cal.4th at 985.

In Aguilar, the plaintiff (himself an attorney) hired counsel in a marital dissolution proceeding and signed a contract committing to binding arbitration of any dispute “concerning fees . . . or any other claim” against his attorney. Aguilar discharged Lerner and subsequently filed a malpractice action against her; Lerner cross-complained for fees and costs and also petitioned to compel arbitration of the entire dispute under the terms of the agreement. Aguilar contended the entire arbitration agreement was invalid since, on its face, it contravened the MFA by not providing a separate approach for disputes involving fees versus those involving malpractice. The petition to compel binding arbitration was granted. In arbitration, Aguilar lost his malpractice claim and was also on the receiving end of a substantial arbitration award for fees and costs in favor of Lerner. Aguilar v. Lerner, supra, at 980-981.

The Aguilar court discusses at length the differences between the California Arbitration Act generally and the mandatory fee arbitration program which represents “a separate and distinct arbitration scheme.” (Aguilar at 983.)

“The primary limitation of the MFAA is that it applies only to disputes concerning “[legal] fees, costs, or both” (§6200, subd. (a)) and is specifically inapplicable to “[c]laims for affirmative relief against the attorney for damages or otherwise based upon alleged malpractice or professional misconduct” (id., subd. (b)(2)). By contrast, virtually any civil dispute, including claims of legal malpractice, can be the subject of arbitration under the CAA.” (Id. at 984.) The court noted important distinctions between MFAA and CAA arbitration. First, “the obligation to arbitrate under the MFAA is based on a statutory directive and not the parties’ agreement”; second, “whereas a client cannot be forced under the MFAA to arbitrate a dispute concerning legal fees, at the client’s election an unwilling attorney can be forced to do so.” Id., at p. 984.

The MFA statute provides only for arbitration of disputes involving fees and costs, not resolution of other components of disputes or claims between attorney and client. In MFA proceedings “[e]vidence relating to claims of malpractice and professional misconduct shall be admissible only to the extent that those claims bear upon the fees, costs, or both, to which the attorney is entitled. The arbitrators shall not award affirmative relief, in the form of damages or offset or otherwise, for injuries underlying any such claim.” B&P Code §6203(a).

B&P Code §6201(d) explicitly removes a client’s right to demand MFA if the client inter alia commences legal action seeking any affirmative relief against the attorney. Aguilar, however, asserted a novel proposition: that filing a malpractice action might terminate his right to demand fee arbitration but it did not impair his protection against binding arbitration of the cross complaint for fees if the arbitration agreement predated the fee dispute. In an extended discussion (at pages 987-988), the court rejected this argument. The legislative scheme plainly contemplates that the client can decline the option of MFA, and filing suit against the attorney constitutes complete — rather than partial — rejection of the entire statutory scheme. “In light of plaintiff’s waiver, we have no occasion to address how we might reconcile a client’s rights under the MFAA with a client’s preexisting agreement with counsel to arbitrate under the CAA.” Aguilar v. Lerner, supra, at page 979.

By statute, either party who adheres to the strict provisions of the statute may institute or proceed with court action de novo after MFA arbitration (B&P Code §6204(b) or (c)), and Alternative Systems Inc. v. Carey, supra, 67 Cal. App.4th 1034, 1042 n5, tells us that access to court means court and not another arbitral tribunal. But Aguilar provokes additional controversy in at least two particulars. First, the majority opinion, written by Justice Werdeger and signed by Chief Justice George and Justices Kennard, Baxter and Chin, is silent as to the impact — if any — of Aguilar on the viability of Alternative Systems, supra, which preserved the right of the client to access the courts after arbitrating a fee dispute under the MFA program notwithstanding the existence of an otherwise applicable global arbitration agreement.

Justice Chin, however, joined by Justices Baxter and Brown (who did not sign the majority opinion), authored a separate concurrence opining that, insofar as it promises access to the courts in the face of an agreement to submit all attorney-client disputes to binding arbitration, “Alternative Systems . . . cannot survive today’s ruling.” Aguilar v. Lerner, supra at 992, concurring opinion by Chin. Justice Moreno, however, wrote separately to concur in the judgment but differed with Justice Chin and “express[ed] no opinion about whether Alternative Systems was correctly decided.” Aguilar v. Lerner, supra at 993, concurring opinion by Moreno.

The vote seems to stand at 3-1, with the Chief Justice and Justices Kennard and Werdeger yet to be heard from, on the vitality of Alternative Systems. Given this fractured holding in Aguilar, it has to be assumed that Alternative Systems may still be good law, and efforts by a party to compel post-MFA arbitration before yet another arbitral forum may not succeed absent further comment by another appellate court.

A second problem created by Aguilar concerns the interplay between the MFA program and the Federal Arbitration Act (FAA), 9 U.S.C. §§1 et seq. For reasons which are not at all clear from the opinion, the court comments, “Because neither party has raised it, we decline to address any issue concerning the Federal Arbitration Act (9 U.S.C. §1).” Aguilar at 989 n.8. Justice Moreno, concurring, states, “I also express no opinion about whether a state statute that precludes binding predispute arbitration agreements of legal fees would be pre-empted by the Federal Arbitration Act.”

The pre-emptive effect of the FAA on state arbitration law generally is a much litigated and still somewhat unsettled area. See e.g., Hedges v. Carrigan (2004) 117 Cal.App.4th 578, 583-586. Since it is easy to conceive of many instances where the matter for which attorneys are retained may have interstate commerce ramifications — even in such matters as marital dissolutions involving out-of-state property, business transactional or litigation matters, or a wide variety of other civil litigation matters even though venued in state courts — we must anticipate that (whether or not provoked by the gratuitous footnote) parties seeking to enforce binding arbitration agreements may seek to invoke the FAA in support of their positions, and the MFA system may be in jeopardy.

In theory, Aguilar v. Lerner should not significantly alter the mandatory fee arbitration landscape in routine fee disputes. Filing of legal action by the client against the attorney still ousts the MFA program of jurisdiction over a fee dispute. In dealing with other aspects of the Aguilar decision, the State Bar Committee on Mandatory Arbitration has recommended that MFA arbitrators continue to adhere to the literal provisions of the statute.

Insofar as issues raised in Aguilar v. Lerner, the committee recommends that — unless and until contrary guidance is provided by a court of competent jurisdiction — when confronted with what appears to be an otherwise binding arbitration agreement in an attorney-client fee contract, arbitrators continue to follow the holding in Alternative Systems, and continue to issue non-binding arbitration awards in the absence of stipulations making such awards binding, and continue to advise the parties — through the use of the approved form of Notice of Rights after Arbitration — of their available rights to trials de novo following non-binding arbitration.

With respect to the relationship between the Federal Arbitration Act and California MFA, unless a court directs otherwise, the State Bar Committee has recommended that arbitrators consider the California MFA statutory scheme to be an acceptable and enforceable dispute resolution program even in arbitrations which may have interstate commerce overtones. Advisory 04-01, “Arbitration Agreements,” Sept. 22, 2004, Mandatory Fee Arbitration Advisories, available at cal bar.ca.gov. Attorneys are well advised to comply with the requirements of providing notice of rights to arbitration to clients in fee disputes.

It is interesting to reflect that the Court of Appeal had affirmed confirmation of the arbitration award against Aguilar, had distinguished (without questioning the validity of) Alternative Systems, supra, and had cogently discussed the effect of Aguilar’s filing a malpractice action before any claim for fees was made by the attorney. Aguilar v. Lerner (2001) 90 Cal.App.4th 177, 185. One must wonder why the Supreme Court chose to enter this fray only to reach virtually the same — albeit differently expressed — conclusions.

But done is done. The question now is what is to become of mandatory fee arbitration, particularly in this era of increasing use of arbitration agreements, and how will the interplay between malpractice arbitration under the CAA and fee arbitration under MFA evolve. While it is frustrating to end on such a note of uncertainty, perhaps the best message is that the earlier this issue receives further legislative or judicial attention, the better.

Arne Werchick chairs the State Bar Committee on Mandatory Fee Arbitration and is a former president of the California Trial Lawyers Association (now CAOC). His practice includes legal malpractice and other client-attorney disputes, with a related sub-emphasis on disputes among attorneys involving division of fees. He also offers mediation services in disputes involving professionals. He can be reached through www.Werchick.com.

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Self-assessment test

Indicate whether the following statements are true or false after reading the MCLE article on the Unauthorized Use of Patents and Copyrights by the United States. Use the answer form provided to send the test, along with a $25 processing fee, to the State Bar. If you do not receive your certificate within four to six weeks, call 415-538-2504.

  1. There is a strong public policy in favor of upholding agreements to arbitrate disputes.
  2. Specific agreements to arbitrate legal malpractice cases are void as against public policy.
  3. The mandatory fee arbitration system is a completely separate statutory scheme from the California Arbitration Act.
  4. A survey of local programs shows that there are approximately 750 fee arbitrations in California each year.
  5. More fee arbitrations arose out of representation in family law matters than any other type of attorney-client relationships.
  6. If an attorney simultaneously files legal action against the client for fees and notifies the client of the right to demand fee arbitration, the client has an absolute right to have the court action stayed pending the fee arbitration proceeding.
  7. An attorney may require the client to submit fee arbitration disputes to a private arbitration service specified in the attorney-client retainer agreement.
  8. The decision whether to offer the client the choice of fee arbitration or file a court action without arbitration is optional with the attorney.
  9. The attorney should carefully craft the notice to the client regarding the option of fee arbitration to insure that it is fairly and objectively worded.
  10. Fee arbitration programs responding to a survey reported that clients generally win disputes submitted to mandatory fee arbitration.
  11. If a client demands fee arbitration, the attorney may decline.
  12. Unless otherwise agreed by the parties, fee arbitration awards are binding upon the parties.
  13. Alternative Systems v. Carey held that either party may seek de novo review of the fee dispute following fee arbitration unless there is a contractual agreement to submit all disputes to binding arbitration.
  14. A party who disagrees with a non-binding mandatory fee arbitration award has only 30 days after service of the fee award to commence a court action, or, if there is already an action pending, to activate a pending court action or loses the right to a de novo hearing.
  15. Mandatory fee arbitration applies only to disputes concerning legal fees, costs, or both and is specifically inapplicable to claims for affirmative relief against the attorney for damages or otherwise based upon alleged malpractice or professional misconduct.
  16. An important distinction between Mandatory Fee Arbitration and arbitration under the California Arbitration Act is that the obligation to arbitrate under the former arises from statute while under the latter arises from an agreement of the parties.
  17. Evidence of malpractice or other misconduct by an attorney is specifically excluded in fee arbitrations.
  18. If the client sues the attorney for legal malpractice, the client waives the right to demand that the attorney participate in mandatory fee arbitration.
  19. Based upon Aguilar v. Lerner, lawyers may now include binding arbitration clauses in their fee agreements with assurance that such an agreement will require that all fee disputes be resolved by binding arbitration and not by court action.
  20. The Federal Arbitration Act, where applicable, pre-empts proceedings under the Mandatory Fee Arbitration statute.
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