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Legal Ethics Rules and the Federal Arbitration Act
The Legal Intelligencer
While the U.S. Supreme Court as recently as last month has affirmed its preference to enforce contractual arbitration clauses, a federal judge in Philadelphia questioned Wednesday whether that standard is impacted by professional ethics rules when the arbitration clause involves a law firm's client engagement letter.
In a hearing on whether the legal malpractice case of Sanford v. Bracewell & Giuliani should be stayed pending arbitration, U.S. District Judge Joel Slomsky of the Eastern District of Pennsylvania said the Federal Arbitration Act has been the subject of a number of U.S. Supreme Court and Third Circuit cases supporting the presumption in favor of arbitration. But those cases didn't involve law firms, Slomsky said.
"There has to be some interplay here between the requirements of professional responsibility that lawyers have ... and the Federal Arbitration Act," the judge said.
Washington, D.C.-based Fox Rothschild partner Steven M. Schneebaum, arguing on behalf of Bracewell & Giuliani, said there are binding ethical rulings from the Philadelphia and American bar associations that support the use of mandatory arbitration clauses in client engagement letters as long as certain disclosures are made to the client. Namely, according to a 1998 Philadelphia Bar Association opinion, the client must be informed he is giving up the right to a trial, informed he can seek outside counsel before signing the agreement and give consent in writing, Schneebaum said. The ABA's opinion is more general, noting a lawyer must not include in an agreement anything that limits the lawyer's liability to the client, he said.
Schneebaum noted Bracewell's standard arbitration clause, which was part of the engagement letter client Craig Sanford signed, met all of those requirements.
Schneebaum raised the Supreme Court's 2011 ruling in AT&T Mobility v. Concepcion that found the Federal Arbitration Act pre-empted state law prohibiting the enforcement of arbitrations. Schneebaum said it could be read under Concepcion that it is no longer possible for state lawmakers of any kind, including legislators and bar associations, to impose additional impediments to arbitration clauses. He said the case might be read to mean arbitration clauses with no disclosures of what the client is giving up are acceptable. But Schneebaum repeatedly noted that hypothetical didn't need to be addressed by the court because Bracewell's arbitration clause did include the appropriate disclosures.
Slomsky asked whether, assuming lawyers' conduct in Pennsylvania was governed by the Pennsylvania Supreme Court and the court issued rules requiring certain disclosures in law firm mandatory arbitration agreements, could an agreement that didn't have those disclosures still be enforceable under the FAA?
Schneebaum said it could, but that wouldn't mean the lawyer couldn't get in "big trouble" under the ethical rules.
"An unethical lawyer can get the benefit of federal law," Slomsky asked in response.
Clifford E. Haines of Haines & Associates represents plaintiffs Craig and Mary Jo Sanford. He took pains during cross-examination of Bracewell partner Jonathan Halpern to paint Craig Sanford as a less than sophisticated businessman who shouldn't have been expected to understand the ramifications of the arbitration clause he signed.
Haines told Slomsky he wasn't arguing that arbitration clauses in law firm engagement letters were always violative of public policy. Haines said clients like Microsoft or AT&T, who have teams of in-house lawyers to review contracts, are sophisticated enough to agree to such provisions. Individual clients like Sanford are not, Haines said.
"You damn well better explain to a client what he's walking into," Haines said later in the argument.
He further noted that Schneebaum and Halpern, a New York attorney, come from different jurisdictions whose bar associations operate differently than in Pennsylvania. Haines, a former Philadelphia Bar Association chancellor, noted that Pennsylvania doesn't have an integrated bar. Membership in the Philadelphia Bar Association is voluntary and their opinions have no binding effect on any person or lawyer.
Haines said the issue before Slomsky was narrow — whether there was enough explanation within the four corners of the engagement letter to sufficiently explain what rights Sanford was giving up when he signed the agreement.
Slomsky said there are many issues to address before he can rule on the motion to stay the case pending arbitration, including the first impression issue of the enforceability of a law firm's mandatory arbitration provision.
Bracewell was sued in the Bucks County Court of Common Pleas on February 15 by the Sanfords, who allege the firm didn't do enough to recover the lost proceeds of the sale of their business. Bracewell removed the matter to federal court the following month and its next filing was a motion to stay the matter pending arbitration.
According to the complaint, the Sanfords owned and operated a medical waste disposal business. In 2005, the Sanfords sold the company for more than $14 million, ultimately leaving the couple with more than $12.5 million in U.S. bank accounts.
The Sanfords eventually turned that money over to Jamie Smith, an apparent international security expert who said he had experience moving money offshore. When it came time to collect on that money, Smith kept delaying and ultimately the money was not returned to the Sanfords, according to the complaint. The Sanfords hired Bracewell in 2009 to help investigate where the funds went and recover the money, according to the complaint. That representation ended by early 2010.
The Sanfords said in their complaint that Bracewell purportedly investigated the return of the couple's $12.5 million. But the Sanfords said the work was "incomplete, inconclusive and inadequate to accomplish the goals" of the Sanfords. According to the complaint, Bracewell took "no steps" to locate or recover the Sanfords' money.
But according to an attorney for Bracewell, the firm accomplished what it was hired to do.
Bracewell is being represented by, in addition to Schneebaum, Fox Rothschild partners Abraham C. Reich and Peter C. Buckley.
"The goals for which the firm was hired were accomplished and that's why the representation terminated," Buckley said at the time the matter was removed to federal court. "The firm was not hired to file litigation, just to investigate and tee up the next steps and when that next step was determined to be a lawsuit in Virginia where B&G doesn't have an office" the firm connected the Sanfords with a former Bracewell attorney in Virginia who proceeded with a lawsuit against Smith.
The Sanfords were successful in getting a $9.5 million judgment against Smith in the Virginia litigation. In November 2012, the U.S. Court of Appeals for the Fourth Circuit upheld that judgment.
This article originally appeared in The Legal Intelligencer.