Fee Disputes And Binding Arbitration
A recent California Supreme Court ruling raises questions about the
future of mandatory fee arbitration
By 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.
Certification
- This self-study activity has been approved for Minimum Continuing Legal
Education credit by the State Bar of California in the amount of one hour.
- The State Bar of California certifies that this activity conforms to the
standards for approved education activities prescribed by the rules and regulations
of the State Bar of California governing minimum continuing legal education.
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.
- There is a strong public policy in favor of upholding agreements to arbitrate
disputes.
- Specific agreements to arbitrate legal malpractice cases are void as against
public policy.
- The mandatory fee arbitration system is a completely separate statutory
scheme from the California Arbitration Act.
- A survey of local programs shows that there are approximately 750 fee arbitrations
in California each year.
- More fee arbitrations arose out of representation in family law matters
than any other type of attorney-client relationships.
- 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.
- An attorney may require the client to submit fee arbitration disputes to
a private arbitration service specified in the attorney-client retainer agreement.
- The decision whether to offer the client the choice of fee arbitration
or file a court action without arbitration is optional with the attorney.
- 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.
- Fee arbitration programs responding to a survey reported that clients generally
win disputes submitted to mandatory fee arbitration.
- If a client demands fee arbitration, the attorney may decline.
- Unless otherwise agreed by the parties, fee arbitration awards are binding
upon the parties.
- 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.
- 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.
- 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.
- 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.
- Evidence of malpractice or other misconduct by an attorney is specifically
excluded in fee arbitrations.
- If the client sues the attorney for legal malpractice, the client waives
the right to demand that the attorney participate in mandatory fee arbitration.
- 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.
- The Federal Arbitration Act, where applicable, pre-empts proceedings under
the Mandatory Fee Arbitration statute.
|