Mandatory Fee Arbitration

by Joseph P. McMonigle and Jessica R. MacGregor

In the event of a fee dispute with a client, the Mandatory Fee Arbitration Act (MFAA) requires lawyers to notify the client about nonbinding arbitration (Cal. Bus. & Prof. Code §§ 6200?6206). The arbitration procedure is voluntary for the client, and in many cases it resolves the dispute.

But not always. If either the client or the attorney is dissatisfied with an MFAA arbitration, a trial de novo may be requested. But when such a request is made, do the parties proceed to court, or, assuming they have a binding arbitration agreement in their fee agreement, to a second arbitration? Until recently, the answer to that question was the subject of great debate. However, the California Supreme Court's decision in Schatz v. Allen Matins Leck Gamble & Mallory LLP (45 Cal. 4th 557, (2009)) now offers attorneys guidance as to the availability of arbitration?as opposed to litigation?following the conclusion of an unsuccessful MFAA arbitration.

Basic Fee Rules
The basic rules regarding attorneys fees are relatively straightforward. For noncorporate clients in both contingency and noncontingency cases in which the anticipated fee exceeds $1,000, the agreement must be in writing and cannot provide for an unconscionable fee (Cal. Bus. & Prof. Code §§ 6147, 6148; Rules of Professional Conduct, Rule 4-200 (A)). Although the definition of unconscionability is vague, the Rules of Professional Conduct provide some guidance by outlining a number of relevant factors for judging the legitimacy of a lawyer's fee: the amount of the claimed fee in relation to the value of the services performed; the relative sophistication of the lawyer and the client; the novelty and difficulty of the issues involved and the skill requisite to perform the legal services; the results obtained; and the experience and reputation of the lawyer. Additional considerations include the time and labor required and, of course, the informed consent of the client to pay the fee in the first place. (See Rule 4-200 (B)(1)-(11).)

Resolving Fee Disputes
Even in a well-defined attorney-client relationship, fee disputes can arise. And when they do, lawyers should be aware that before any lawsuit or other proceeding can go forward, they must comply with the MFAA. In every case the lawyer must give the client a preliminary notice of the right to participate in nonbinding fee arbitration. The notice must be delivered "prior to or at the time of service of summons." (Cal. Bus. & Prof. Code § 6201(a).) If the attorney fails to provide the required notice, the client may stay the action or other proceeding by filing a request for MFAA arbitration. If the attorney has sued the client, the MFAA request must be filed prior to answering the complaint. Failure to do so amounts to a waiver of the client's rights under the MFAA (§ 6201(b)). When MFAA notice is given before a proceeding commences, the client must respond within 30 days (§ 6201(a)). Failure to do so also results in a waiver.

A client is not required to invoke MFAA arbitration or to participate in it: For clients, MFAA arbitration is completely voluntary. However, if a client requests fee arbitration, the MFAA procedure is mandatory for the lawyer involved. Though an MFAA arbitration is nonbinding, the parties can make it binding by a specific agreement reached after the dispute has arisen (§ 6204(a)).

An MFAA arbitration award must be in writing and must include a determination on all the questions submitted to the arbitrators. The governing statute prohibits an award of attorneys fees in connection with the arbitration proceeding even if a contract between the parties provides to the contrary (§ 6203(a)).

However, MFAA arbitration is not the only alternative dispute resolution process available to attorneys and clients. California also has a long-standing policy expressed in the California Arbitration Act (CAA) (Cal. Code Civ. Proc. §§ 1280-1294.2) favoring arbitration as a "speedy and relatively inexpensive means of dispute resolution." (See Moncharsh v. Heily & Blase, 3 Cal. 4th 1, 9 (1992).) The California Supreme Court has repeatedly stated its steadfast support for arbitration.

Given this strong public policy stance, it is not surprising that arbitration agreements between attorneys and their clients are enforceable. Indeed, "[a]n attorney may ethically and without conflict of interest, include in an initial retainer agreement with a client a provision requiring the arbitration of both fee disputes and legal malpractice claims." (Powers v. Dickson, Carlson & Campillo, 54 Cal. App. 4th 1102, 1108?1109 (1997).) As a result, attorneys and clients have routinely entered into arbitration agreements covering legal malpractice or other disputes between them.

When a client waives MFAA arbitration, a pre-dispute arbitration agreement between the client and the attorney will be enforced as to all disputes, including fees (Aguilar v. Lerner, 32 Cal. 4th 974 (2004)). However, even with the bright-line Aguilar rule and case law endorsing binding arbitration agreements between attorneys and clients, one significant issue remained unclear: whether fee disputes could ever be the subject of a binding arbitration once a client had initiated MFAA arbitration.

The MFAA's trial de novo procedure forced resolution of this unresolved issue. Under the MFAA, both attorney and client are entitled to request a trial de novo. The request must be made within 30 days after notice of the arbitration award is mailed (§ 6201(b)). But this still left an unanswered question: If a client requests a trial de novo but the attorney asserts that the original fee agreement's arbitration clause is in effect, does the request result in a second (and this time around, binding) arbitration, or does the dispute proceed in court? After many years of ambiguity, the California Supreme Court finally decided this issue with its ruling in the Schatz case.

Binding Arbitration After All
Schatz presented the typical client arguments against enforceability of arbitration clauses contained in fee agreements. The client argued that though he might be required to arbitrate legal-malpractice claims against his former attorneys, under the MFAA he had the right to a trial de novo in court. The client's essential argument was that the MFAA repealed the CAA. In response, the attorneys argued that public policy required enforcement of valid agreements to submit disputes to arbitration.

The California Supreme Court rejected the client's argument, holding that "the MFAA does not limit the ability of attorneys and clients to enter into binding contractual arbitration." (Schatz, 45 Cal. 4th at 562.) The decision was based in part on language in the MFAA anticipating that an attorney and client could resolve disputes through a complaint or "some other proceeding," and on a determination that the statutory scheme did not in any way render the right to trial de novo available under the MFAA immune from valid defenses, such as an enforceable agreement to arbitrate (Schatz, 45 Cal. 4th at 570-571.)

Harmonizing the Statutes
In sum, the state Supreme Court rejected the argument that the MFAA repealed the CAA. The court reasoned that such repeal would contravene the public policy favoring arbitration (Schatz, 45 Cal. 4th at 575-576.)

Instead, the court reconciled the MFAA and CAA by expressly adopting language from Justice Ming Chin's concurring opinion in Aguilar: Nothing in the MFAA, said the court, makes a binding arbitration agreement unenforceable. The MFAA and the CAA create two very different types of arbitration, and both may be given effect. Clients may, if they wish, request and obtain nonbinding arbitration under the MFAA. That arbitration may, and often will, resolve the dispute. But if an MFAA arbitration does not resolve the dispute, then the statutory procedure has played its role, and the matter can continue without it. In addition, if the dispute continues after the MFAA procedure, the court concluded: "Either party may then pursue judicial action unless the parties had agreed to binding arbitration. In that event, the CAA would apply, and the dispute would go to binding arbitration." (Schatz, 45 Cal. 4th at 574 (quoting from Aguilar, 32 Cal. 4th at 991.)

The Schatz case teaches that clients retain their rights under the MFAA, and that both attorneys and their clients retain their rights under valid arbitration agreements.

Post-Schatz Recommendations
In the wake of the Schatz decision, attorneys should carefully consider whether to include a binding arbitration provision in their attorney-client fee agreements. Many attorneys prefer arbitration because it is private and confidential, and may be less expensive and more efficient than a court proceeding. Privacy and confidentiality certainly apply between the parties and their ADR service provider. Nevertheless, it is important to consider that arbitration awards must be confirmed via a petition that is filed in court (Cal. Code Civ. Proc. § 1285). This process can and often does deprive the parties of complete privacy and confidentiality.

No one has the foresight to determine which cases will produce a fee dispute and whether arbitration or court litigation will be the better option for a swift, fair, and cost-effective resolution. However, the inclusion of an arbitration agreement in the underlying fee agreement will provide the opportunity to assess these issues if a dispute does arise. After all, consider this reality: Most clients sue their attorneys in court, rather than initiate arbitration. If this occurs and the fee agreement includes an arbitration agreement, the defending attorney will have the opportunity to assess forum strategy and either opt to remain in court or move to compel arbitration.

Drafting an Arbitration Provision
If an attorney elects to include an arbitration provision in a fee agreement, there are several decisions to make. Begin by answering the following questions: Which ADR service provider should be designated? Who should preside over the arbitration-an attorney, a retired judge, or some other neutral? How many neutrals should participate? Which arbitration rules will apply? (Each ADR provider publishes its own rules.) What type of discovery should be allowed? And where should the arbitration hearing occur?

After these questions are answered, focus on the basic requirements for drafting an enforceable agreement. Here are three key elements for enforceability.

First, although the Powers court held that attorneys are not required to comply with statutory requirements for arbitration of medical-malpractice claims (Code of Civil Procedure section 1295 requires medical-malpractice arbitration clauses to include specific language regarding waiver of jury trial in bold red type), it is a good practice to provide for specific notice and waiver of the client's right to jury trial.

Second, keep in mind that any ambiguities in an attorney-client fee agreement will be construed against the attorney. Draft an agreement that is specific, comprehensive, and broad enough to cover all potential client claims. Courts have held that agreements calling for arbitration of "all disputes ... arising on account of attorney's representation of client" or requiring arbitration of all disputes "arising out of or related to petitioner's engagement" are too ambiguous to compel arbitration. (See Lawrence v. Walzer & Gabrielson, 207 Cal. App. 3d 1501, 1506 (1989); Mayhew v. Benninghoff, 53 Cal. App. 4th 1365 (1997).)

Third, although the Powers court found "nothing ethically improper" in including an arbitration clause in a fee agreement (Powers v. Dickson, Carlson & Campillo, 54 Cal. App. 4th at 1113?1114), the better practice is to notify clients that they have the right to consult with independent counsel concerning the entire agreement. And note: When proposing an arbitration agreement to an existing client, such notice is not only good practice; it is required (Rule of Professional Conduct 3-300).

Never forget that while binding arbitration may not be perfect for every case, nonbinding MFAA arbitration of fee disputes is mandatory if a client requests it. And if that procedure does not end the matter and a trial de novo is in the offing, the parties can conduct that proceeding in arbitration too, if they so provide in an agreement, including the original fee agreement that brought lawyer and client together.

The key to resolving contention over fees is not just appreciating the value of arbitration as a procedure, but knowing the nuts and bolts to effectively provide for it in advance of a dispute.

Joseph P. McMonigle and Jessica R. MacGregor are partners at Long & Levit in San Francisco, where they specialize in counseling and representing attorneys.

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