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Practitioners -- Time to Update Your Client Arbitration Agreements (Pt. III)

          Many attorneys have been using the same engagement agreements for decades designating standard commercial providers such as the American Arbitration Association to resolve client disputes.  In recent years some have learned the hard way that their agreements do not comply with consumer protection rules that have developed in recent years.  The failure to incorporate new standards into fee agreements means not only that non-conforming provisions will be deemed unenforceable.  In some cases attorneys will find that their arbitration agreements are wholly unenforceable.

Ed. Note: The remainder of the post is the continuation of Ed Donohue's discussion of arbitration agreements between clients and lawyers, posted originally on June 20, 2016 and June 28, 2016. We'll pick it up where we left off, in mid-outline...

          D.        Guess What? Your Fee Agreement is Non-Compliant

             Against this background practitioners should be prepared for notices from the major arbitration firms that they will not entertain claims under fee agreements that fail to comply with the Consumer Protocols or the actual Rules of the organizations.  Attorneys in California now routinely receive notices that, even when filed by the client, the arbitration proceeding will not be entertained unless both parties stipulate to waive defects in the arbitration agreements that are inconsistent with local law or the Rules of the tribunal.

            As an example, a typical AAA notice will include the following:

  • A written stipulation by attorney and client that fee shifting or any other provision in the engagement agreement that is contrary to local law is waived.
  • A requirement that the attorney stipulate that any omitted term required by the AAA Consumer Arbitration Rules be agreed upon as a condition to accepting the referral.  For example, a standard term that is now required of any party that is subject to the Consumer Arbitration Rules is an opt out provision that allows the consumer to elect to proceed in Small Claims Court if the amount in controversy would be the subject of that court's jurisdiction.
  • A notice that the very failure to file and pre-screen your AAA arbitration provisions violates the AAA Consumer Arbitration Rules.  The Association now requires those who would access its jurisdiction to pre-file its provisions precisely to allow AAA to evaluate whether the language invoking its jurisdiction violates the due process Protocols.   
  • A notice that, on payment of the required fees, expedited review of the arbitration agreement will be granted on as a discretionary basis (although the Association reserves the right to reject a claim under an arbitration agreement that has not been previously reviewed in conformity with the Rules).
  • A notice that your arbitration provisions, once approved will be subject to publication on the Association's "Publicly-accessible Consumer Clause Registry".   

                         E.        If Your Wealthiest Client is a "Consumer" Should You Abandon Arbitration Clauses?

            There is little doubt arbitral forums will apply and enforce their consumer rules in attorney-client disputes.  In some states there is no alternative and in the remaining states prudence dictates consistent application of the rules to the legal services industry.

            The obvious question is when and whether to opt out of arbitration a fora in which the economic rules are one-sided in favor of the client.

            As one example, lawyers rely on fee shifting provisions precisely because substantial amounts of time is expended and money is routinely advanced by attorneys on an unsecured good faith basis.  Without fee shifting an unscrupulous client can derive substantial benefits from the engagement and refuse to pay significant amounts with impunity, calculating that the cost-benefit to the attorney is a losing proposition irrespective of the merits.  Fee shifting provisions are important to practitioners in general and often most important to small firms that would not take on the case of true consumers without adequate assurance that the client takes on a reasonable financial stake in the engagement such as reimbursing costs.

            These claims would typically be resolved in an arbitration that spanned no more than a few hours in California and often a fee arbitrator would succeed in bringing the parties to a stipulated resolution of the outstanding fees.  Freezing such cases out of the arbitration process is not a stride forward in alternative dispute resolution.  Consumer attorneys often need the club of fee shifting more than other attorneys in order to justify the economic risk of the engagement.

            On the other hand, many attorneys request arbitration in engagement agreements not because of their collection risk but because arbitration is seen as a more reasonable forum to resolve professional lability disputes. Service related disputes often involve highly confidential issues that neither attorney nor client are well-served to litigate in open court.  Arbitration provides a controlled, relatively predictable and private forum to resolve such disputes. 

            The obvious question is whether there is a feasible way to resolve the economic disputes in court and the fiduciary disputes in the confidence of private contract arbitration.  Traditionally an engagement agreement would be integrated and refer all or no disputes to arbitration.  In theory it might be possible to sever the payment obligations of the relationship from the service aspect of the engagement and agree that disputes relating to the services provided be referred to arbitration. Many malpractice claims involve no unpaid fee claims by the attorney and many fee disputes do not involve affirmative or defensive claims of malpractice.

            However, the entire prospect that fewer attorney-client disputes of any kind will be referred to arbitration is an unfortunate unintended consequence of rules that ultimately interfere with the freedom of contract that, of all things, facilitates the risk taking involved in taking on true consumer engagements.   

             F.        If You Still Want to Arbitrate Catch Up With the Rules

             As noted, providers such as AAA no longer allow lawyers or any other provider of services to consumers to use its trade name without following the rules and essentially the partnership to follow the due process protocols embodied in the Consumer Arbitration Rules.  Firms identifying AAA or other companies requiring advance clearance in their consumer agreements need to submit model agreements for review and comment.    

            There is an obvious "peace dividend" to playing by the rules.  If your agreement has been reviewed and approved by the provider the chances of successfully challenging attacks on the arbitration agreement are likely enhanced in the actual arbitration. Plus it is ultimately an offer your firm cannot refuse. If you represent consumers and want to invoke the name of such a tribunal, advance notice and approval may be required.