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Time to Update Your Client Arbitration Agreements (Pt. 1)

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.

In the past twenty years arbitration has become associated with sharp business practices in an era of consumer protection.  Consumer financial services companies, manufacturers and distributors of consumer goods and other businesses sought to control consumer liability claims through mass distribution of adhesive dispute resolution provisions. These arbitration clauses sought to systematically refer ordinary "small claims court" consumer complaints to arbitration tribunals that were originally founded to resolve commercial disputes pursuant to arms-length contract arbitration clauses.

Initially, courts followed the traditional path of upholding such provisions in light of precedent and strong policies supporting contract arbitration under the Federal Arbitration Act.  However, over the long term, courts and legislatures had difficulty reconciling the mass referral of consumer claims to arbitration with principles of due process.  Increasingly the practice of funneling consumer disputes into non-judicial forums originally created for sophisticated business persons were found to be substantively or procedurally unconscionable by the courts.  Legislatures followed with restrictions and disclosure requirements designed to protect consumers from being herded into arbitration without adequate advance warning and consent.

Lawyers as Providers of Consumer Services

The practice of law is a highly regulated field with numerous fiduciary disclosure requirements the most comprehensive consisting of the so-called "informed consent" doctrine embodied in ABA Model Rule 1.4.  Model Rule 1.5 (b) (5) provides: :A lawyer shall explain a matter to the extent reasonably necessary to permit the client to make informed decisions regarding the representation."

Arbitration agreements in attorney legal service agreements are common.  However, the level of discussion of these provisions at client intake meetings is typically minimal in light of the usual focus of attention on the engagement.  Prudent lawyers highlight the critical provisions regarding waiver of the right to proceed in court in bold type in their fee agreements and/or require the client to initial the arbitration provisions.  In theory, the regulatory framework necessary to ensure informed consent and thus due process in agreeing to arbitration already exists in light of the rules of professional conduct applicable to attorneys practicing in all states.

As a result, many attorneys are likely not aware that, though providers of consumer services, they are not immune from a growing body of legislation and arbitral rules that govern consumer arbitration.

[Editor's Note: This is the first of a three-part series from Ed Donohue on this topic]