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February 05, 2018 Top Story

Attorney-Client Arbitration Agreement Controlled by Federal Law

FAA controls in showdown with Rules of Professional Conduct

Benjamin E. Long

Attempts by states to regulate the enforceability of mandatory arbitration clauses in attorney-client agreements via the Rules of Professional Conduct will likely have to yield to federal law.

States will likely have to yield to federal law.

States will likely have to yield to federal law.

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The Federal Arbitration Act (FAA) supersedes state law to allow attorney client agreements to include arbitration clauses. To be enforceable, clients must understand that they are giving up their right to a trial by judge or jury. There are arguments for and against practitioners using an arbitration clause in attorney-client agreements, but if desired they should be written with care, Section leaders caution.

Arbitration Clause in Attorney-Client Agreement Enforced

In Smith v. Lindeman, an individual sued her former divorce attorney for malpractice. Their services agreement contained a relatively standard arbitration clause that states if a disagreement arose between the parties, they “agree to submit such disagreements in binding arbitration.” The attorney asked the trial court to enforce the clause, and the court agreed. The client appealed to the U.S. Court of Appeals for the Third Circuit, claiming that the agreement should be invalidated because the clause violated New Jersey law and the New Jersey Rules of Professional Conduct. The Third Circuit disagreed with the client and affirmed the trial court’s order to compel arbitration. While the case is technically a non-binding opinion, the court provides valuable insight based on precedent.

Federal Arbitration Law Preempts Conflicting Rules of Professional Conduct

The court explained that the FAA federalizes arbitration law and creates substantive law that regulates the duty to honor an agreement to arbitrate. The court was clear that whenever state and federal law conflict regarding arbitration provisions, the FAA controls. However, 9 U.S.C. § 2 provides an exception to the general mandate of the FAA. Agreements to arbitrate may be invalidated by “generally applicable contract defenses such as fraud, duress, or unconscionability.” In this case, the client made two arguments: first, that New Jersey law prohibits the enforcement of arbitration provisions by attorneys facing malpractice claims, and second, that the New Jersey Rules of Professional Conduct invalidate the agreement because under those Rules, the attorney must advise the client of the implications of any retainer agreement.

The court rejected the first argument on the ground that the client failed to identify any New Jersey case law that prohibited arbitration clauses in attorney-client agreements. The court pointed out that even if support under New Jersey law exists, the FAA would preempt it.

As to the second argument, the court held that so long as the client has informed consent regarding the arbitration provision, the clause did not violate the Rules of Professional Conduct. The court also rejected any contention that the provision should be analyzed with heightened scrutiny due to its interplay with the Rules of Professional Conduct, noting that the FAA “requires courts to put arbitration agreements ‘on equal footing with all other contracts’ and that [courts] may not interpret state law differently in the context of arbitration.”

Informed Consent is Essential

The court cited the New Jersey Rules of Professional Conduct, which require that an attorney advise his or her client regarding the implication of any retainer agreement, and that attorneys explain them to their clients to the extent necessary to allow their clients to reach an informed decision. The court pointed out that the ABA Model Rules of Professional Conduct permit a retainer agreement that requires arbitration, but the ABA Standing Committee on Ethics and Professional Responsibility determined that the client should be “fully apprised of the advantages and disadvantages of arbitration.”

The court reasoned that because the agreement in this case clearly states all disputes regarding the representation shall be submitted to binding arbitration, the client was reasonably informed that arbitration means giving up the right to have a dispute resolved by a judge and jury. The court also pointed out that the client herself attempted to use the same arbitration clause in a related matter to require her attorney to arbitrate a civil claim against her to collect unpaid fees. The court considered this as evidence that she was clearly aware of the meaning of the arbitration clause.

Practical Considerations

“Practitioners should be certain that if they are going to include a mandatory arbitration clause in their attorney client agreements, the agreements should include the language necessary to provide clients with informed consent that they understand they are waiving their right to have their claims resolved by a court,” says Edward B. Lozowicki, Palo Alto, CA, cochair of the ABA Section of Dispute Resolution’s Arbitration Committee. Given how states in many jurisdictions recognize that the FAA is controlling, the result in this case was not surprising, he adds.

There are several reasons an attorney may want to include an arbitration clause in their attorney client agreements, suggests Harrie R. Samaras, West Chester, PA, chair-elect of the ABA Section of Dispute Resolution. “Arbitration provides private means to resolve disputes that may help to protect confidential communications or avoid having to publicly disclose damaging information,” she explains. The emotions that often come up during heated litigation that prevent resolution are more easily avoided with arbitration, Samaras notes.

There are other examples of when attorneys may prefer to arbitrate. “Often times in fee dispute litigation, former clients may counterclaim against the attorney with malpractice allegations. In those instances, it may be hard for a jury to understand complicated standard of care arguments,” Lozowicki explains. Though there are times when practitioners may not want to be locked into an arbitration clause, he counters. Litigation may be preferable when an attorney has a winning procedural argument like a statute of limitations defense.

Attorneys should check with their malpractice insurance carriers before adding an arbitration clause to their attorney-client agreements, warns Lozowicki. Some carriers bar such clauses in their insured’s attorney-client agreements. Given how fee and other basic disputes between attorney and clients often involve malpractice claims, this is an extremely important issue, he adds.

 

Benjamin E. Long is a contributing editor for Litigation News.


Hashtags: #Arbitration, #ADR, #FederalArbitrationAct

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