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special / Legal Ethics

Mandatory fee arbitration: a primer

Bacon ken web

Kenneth E. Bacon

Mastagni Holstedt APC

It is an unfortunate side effect of the practice of law that attorneys and clients occasionally become embroiled in attorney fee disputes. Unpaid fees often reflect poor communication and client dissatisfaction and suing a client to recover those fees can be like throwing salt on a wound, which far more often than not leads to a malpractice claim. But fear not, mandatory fee arbitrations (MFAs) provides an alternate forum to resolve such disputes that can dramatically reduce the risk of a malpractice claim or a State Bar complaint by the client.

Suing a client for fees should be avoided and never taken lightly. Fee disputes account for numerous complaints about lawyers. A 1973 special committee of the American Bar Association observed that "disputes concerning fees are universally recognized as constituting the most serious problem in the relationship between the Bar and the public." In response, California implemented mandatory fee arbitration in 1979, providing for the arbitration of fee disputes between clients and their attorneys upon the client's request, codified at Business and Professions Code Sections 6200 et seq.

The benefits of MFAs are varied. They are confidential, speedier and less costly than litigation; less formal than court proceedings; counsel is optional; they stay pending litigation and they reduce the chance of malpractice counter-claims. A 2012 study by the State Bar Committee on Mandatory Fee Arbitration showed that approximately 85 percent of nonbinding fee arbitrations resulted in the dispute being resolved without a request for trial de novo. The reason is that, by and large, MFA arbitrators are conscientious, fair, knowledgeable and thorough. They are trained to provide explanations for their decisions so that, whether or not the parties all agree with the outcome, all will know that they have been heard and that their issues have been considered and weighed in the arbitrators' deliberations.

The best way to deal with an MFA is taking steps to avoid it altogether. Some of the best ways not to have a fee dispute with a client include always having a detailed and understandable written fee agreement with the client at the outset. It also is essential for the attorney to communicate with the client often and honestly, including responding to all questions, managing expectations and reporting on and explaining events that affect the representation, especially bad news. Billing should be regular and reasons for billing practices explained, including establishing and regularly updating realistic budgets for the matter.

If a dispute does arise despite the attorney's best efforts to keep the client fully informed about the matter and all relevant billing issues, then the second best way for avoiding an MFA is to be realistic about the dispute, and about the practical aspects of fee disputes in general. Suing a client can mean that, at best, the attorney has to put in the time to earn the fee a second time with no additional benefit and, at worst, can become the proverbial lightening rod for a malpractice claim.

Types of MFA-Covered Disputes and Allowed Participants

Mandatory fee arbitrations apply to fee and cost disputes between attorneys and their clients or nonclients who paid the attorney fees or are liable to pay them. However, MFAs don't apply to attorney versus attorney fee disputes, court-ordered attorney fees or fees set by statute.

How Do MFAs Work?

When an attorney and a client have a dispute regarding fees, Section 6200(a) requires that the attorney provide the client with written notice of the client's right to fee arbitration prior to or at the time of service of a summons and complaint or the commencement of any other proceeding for fees. The written notice must be provided using the Notice of Client's Right to Fee Arbitration form approved by the State Bar Board of Trustees.

The client's participation in an MFA is voluntary. Upon receipt of the notice, the client has 30 days to file a request for fee arbitration with a county bar program, along with a filing fee. The client waives the right to an MFA if they fail to file the request within the 30-day period, if they initiate a civil action against the attorney or if they file a responsive pleading in an action filed by the attorney. But, if the client timely files the request for an MFA, participation is mandatory for the attorney.

Mandatory fee arbitrations are nonbinding by default. However, if both parties agree to binding arbitration, the award will be binding.

After the attorney files his or her response, the program will assign a sole arbitrator or a panel of three arbitrators (depending on the amount in dispute). The arbitrators will hear all pertinent evidence and arguments regarding the fee dispute, make appropriate findings and issue an award. While evidence of malpractice or professional misconduct is admissible in MFA proceedings, it is permitted only to the extent that those claims bear upon the fees. Mandatory fee arbitration arbitrators cannot award affirmative relief in the form of damages or offset based on alleged malpractice or professional misconduct and, by statute, an MFA award and the factual determinations of the arbitrators are not admissible and shall not operate as collateral estoppel or res judicata in any other proceeding. Thus, nonbinding MFAs provide attorneys with a low risk trial run of potential malpractice claims.

Attorneys can increase their chances of a successful MFA outcome primarily by embracing the process and participating in it openly and constructively. This includes thorough preparation and presenting clear and concise arguments and documentation in support of the fee claim. This also includes demonstrating respect for the client throughout the process.

What Happens after the Award Is Served?

If the award is nonbinding, either party may reject the award and request a trial de novo in court, or a private arbitration pursuant to an arbitration clause in the fee agreement, within 30 days following service of the award. If a trial or arbitration de novo is not requested within the 30 days by either party, the award automatically becomes binding. The 30-day period is jurisdictional so relief due to mistake, inadvertence, surprise or excusable neglect pursuant to Code of Civ, Proc. Section 473(b) is not available. Attorneys should carefully assess the award and decide whether the result is something they can live with, or whether they want to risk the time and expense of further litigation and a likely malpractice claim if they reject the award.

If the lawyer is ordered to refund "unearned" fees to the client, does the amount of the refund justify the time, expense and risks of a trial de novo? If not, attorneys may want to accept the award and thereby secure a final resolution of the fee dispute. However, attorneys should promptly pay the refund, otherwise the client can request assistance from the State Bar in enforcing the award.

#206

Ben Armistead


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