It was the worst of times, it was the somewhat less worst of times for two California law firms involved in two recent appellate decisions involving the binding arbitration clauses in their fee agreements. No, it’s not Dickens, but one of these cases, Roldan, might scare the dickens out of lawyers using binding arbitration clauses in their fee agreements with unsophisticated clients. The other, Mt. Holyoke, might cause them to reconsider whom to designate as their arbitrator.
Roldan v. Callaghan & Blaine. The plaintiffs were indigent senior citizens with mold claims. Their attorney associated the defendant law firm to help litigate those claims. The law firm presented these unsophisticated clients with a fee agreement with a long dense arbitration clause providing for binding arbitration of all claims. The arbitration clause was not explained and that page of the fee agreement was not signed or initialed by the clients. It was silent regarding who would bear the cost of the arbitration.
During the litigation, the law firm attempted to have their clients declared incompetent and a guardian ad litem appointed. Plaintiffs, unhappy with the settlement, sued for malpractice; the law firm move to arbitrate pursuant to the fee arbitration clause. Plaintiffs filed a motion to force the law firm to pay the full cost of the expensive private arbitrator. The trial court denied the motion. The court of appeal reversed.
While one who signs a contract is presumed to have read it and understood it, the arbitration clause was unfair in that it reflected no effort to ensure that clients of limited means had access to a forum to litigate their claims. Unlike a public court, there is no provision for a fee waiver in a private arbitration.
The California Supreme Court in Schatz v. Allen Matkins, et al held that an attorney and client could agree to binding arbitration under the California Arbitration Act notwithstanding the existence of the mandatory fee arbitration remedy, including trial de novo, under Bus. & Prof. Code section 6200 et seq.
Part of the rationale of the decision is that the Legislature has expressed a "strong public policy in favor of arbitration as a speedy and relatively inexpensive means of dispute resolution." Schatz, at 564. After Schatz, many attorneys revised their fee agreements to include binding arbitration clauses typically requiring arbitration through ADR providers like JAMS.
The problem highlighted by the Roldan decision, is that such arbitration is not inexpensive, especially when it is being conducted by a retired judge who may be charging $500 or more for his or her time. Such arbitration clauses can have the effect of shutting the door to resolution of legal malpractice clauses and I have reviewed clauses that seemed designed to do exactly that.
Unsophisticated clients, like the indigent and impecunious clients in Roldan, are not likely to understand the ramifications of such an arbitration clause, and, as in Roldan, often the lawyers will not explain these ramifications.
As the court of appeals noted, in the real world, "where parties to the contract have widely divergent levels of sophistication, a written contract is often less the embodiment of true mutual agreement than it is the product of the drafting party's desire and a series of legal fictions."
Mt. Holyoke Homes, L.P. v. Jeffer Mangels Butler & Mitchell, LLP. The Plaintiff in this legal malpractice is this case challenged the granting of the law firm’s motion to compel arbitration and the denial of their motion to vacate the arbitration award. They contended that the binding fee arbitration clause was unenforceable because it was not adequately disclosed or explained to them.
The court of appeals was not persuaded; it pointed out that not only that the arbitration clause unambiguously states that any dispute arising out of the firm’s engagement as counsel, specifically including claims of professional negligence, is subject to binding arbitration, but also that the last paragraph before the signature line further states that Jones, as the undersigned, has read the agreement and acknowledges that it is subject to binding arbitration.
The court also pointed out that Jones, the partner in Mt. Holyoke Homes LP, a real estate investment partnership “had substantial experience with litigation and legal representation before signing the legal services agreement.”
While the Mt. Holyoke plaintiffs failed in their attempt to void the arbitration clause, they succeeded in voiding the arbitration award by successfully arguing the arbitrator, a retired Los Angeles Superior Court judge, failed to disclose that a partner in the law firm had been listed on his resume as a reference. This is a subject that deserves a column all its own, but for now it’s enough to observe that some care should be given in deciding who the potential arbitrator might be.
Lawyers and law firms justifiably see binding arbitration clauses as important risk management tools but Roldan gives unsophisticated clients a powerful tool that could be used to void or blunt the effect of those clauses; those clauses must be drafted with care, fully explained to the client and consented to in an ambiguous matter. The issue of who pays for the arbitration should be explicitly acknowledged and addressed. But what about the sophisticated client, the type of client in Mt. Holyoke? Since the dividing line between unsophisticated and sophisticated client might not be so bright, the best approach would be to treat all clients the same way.
Carr is an attorney in private practice in San Diego. Since 2001 he has specialized in representing attorneys involving legal ethics and the law of lawyering. After practicing in business litigation and commercial law, Carr spent 12 years as staff attorney, discipline prosecutor and manager at the State Bar of California, before returning to private practice 10 years ago.