Practioners -- Time to Update Your Client Arbitration Agreements, Part II
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. We'll pick it up where we left off, in mid-outline...
B. Arbitration Providers as the New Gate Keepers of Consumer Protection
In Rent-A-Center West v. Jackson, 56 U.S. 63 (2010) the United States Supreme Court created a unique dilemma for major arbitration administration companies such as JAMS and AAA. On the one hand, the Supreme Court empowered private arbitrators to decide arbitrability when the issue had traditionally been litigated as a threshold jurisdictional question in court. On the other hand, this meant that the first and last forum for consumers to assert their due process rights and question the fairness of the arbitration provision itself was before an arbitrator.
In recent years both AAA and JAMS have enacted rules and protocols that are designed to conform with the consumer fairness principles that govern arbitration generally. JAMS enacted basic Minimum Fairness Standards of Procedural Fairness for Consumer Arbitrations in 2009. JAMS established guidelines under which it would entertain consumer arbitration claims couched in terms of mandatory notice and fairness terms within the arbitration itself. AAA ultimately developed much more detailed rules and "protocols" which were enacted in the Fall of 2014 and revised again in 2016.
C. Who is a Consumer?
The virtually unanswerable question both without and within the major arbitration forums is whether the arbitration genuinely involves a protected consumer. The arbitration organizations are burdened with the fact that the meaning of consumer is either unclear under local law or incredibly broad. As discussed below, this has had a direct impact on attorneys that choose to use AAA or JAMS clauses in their fee agreements.
The JAMS and AAA definitions follow suit with local law on their unclear scope. The JAMS standard is as follows:
These standards are applicable where a company systematically places an arbitration clause in its agreements with individual consumers and there is minimal, if any, negotiation between the parties as to the procedures or other terms of the arbitration clause. A consumer is defined as an individual who seeks or acquires any goods or services, primarily for personal family or household purposes, including the credit transactions associated with such purchases, or personal banking transactions. These standards do not apply to the use of arbitration in resolving disputes arising from commercial transactions between a lender and commercial borrowers or a company and commercial customers, other financial services such as investment transactions, real estate transactions, or to matters involving underinsured motorists. Nor do they apply if the agreement to arbitrate was negotiated by the individual consumer and the company.
This "know it when I see it standard" is echoed by the AAA effort to define consumer arbitration:
The AAA defines a consumer agreement as an agreement between an individual consumer and a business where the business has a standardized, systematic application of arbitration clauses with customers and where the terms and conditions of the purchase of standardized, consumable goods or services are non-negotiable or primarily non-negotiable in most or all of its terms, conditions, features, or choices. The product or service must be for personal or household use.
In addition, AAA makes efforts to define providers to consumers in Consumer Rule R-1. The laundry list of potentially covered parties is obvious in the case of certain providers such as credit card companies and non-covered parties such as parties to commercial leases and loans.
However, each of these organizations is subject to local law. As such, if you are an attorney in California where local law is wide open in identifying any "individual" as a consumer, these organizations have little choice but to follow local law and treat attorney fee agreements as within their reach.
Thus, for many years, California has prohibited fee shifting in consumer arbitrations. Cal. Code of Civ. Pro. Section 1284.3. The law received little notice among practitioners because its obvious intent was to inject economic fairness into low amount in controversy arbitrations with financial institutions, retailers, manufacturers, distributors and other companies that mass produced adhesive service or warranty agreements with arbitration clauses.
In addition, to the extent a fee shifting provision might not be enforced, it was still assumed for many years that the matter was still referable to arbitration and the fee shifting provision would be ignored. A California court has the liberty to sever and treat as ineffective an arbitration provision that violates local law and order the case to arbitration based on the remaining provisions. Cal. Civ. Code Section 1670.5; Gutierrez v. Autowest, Inc., 114 Cal. App. 4th 77, 97 (2004).
In addition, until recently, a practitioner in California would assume "consumer" would be interpreted in a common sense way, that is, not to refer to a high wealth individual that chooses to operate as a sole proprietorship and/or personally guarantees a corporation's obligations under a fee agreement.
However, arbitration providers must abide by the substantive rules on arbitration of the forum state. Thus, the literal language of Section of the Code of Civil Procedure provides that "no neutral arbitrator or private administration company shall administer a consumer arbitration agreement under any agreement or rule" that provides for prevailing party fee shifting to a consumer. Cal. Code of Civ. Pro. Section 1284.3. Thus, the literal language of the statute actually prohibits JAMS or AAA from allowing the arbitration to proceed if there is such a fee shifting provision.
Complicating matters further, in a state such as California, these major arbitral providers are not free to apply their general national definitions of consumer arbitrations which might otherwise exempt lawyers. Thus, decisions such as Gutierrez have explicitly held that there is no "rich man / poor man" dichotomy as to who is a consumer in California. A consumer is any individual resident of the state regardless of the wealth of the consumer. 114 Cal. App 4th at 97.
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