First Published May 2, 2013
Mandatory arbitration clauses have found a home in some law firms’ standard engagement letters, but one malpractice case in Philadelphia federal court is challenging whether such clauses violate public policy, or at least should be more detailed in explaining to a client what he or she is giving up by agreeing to arbitration.
The use of mandatory arbitration clauses, while common in partnership agreements or between two corporate entities, does not seem pervasive in Pennsylvania firm engagement letters, where some firms have said they don’t want to arbitrate with clients who they view as benefiting from the arbitration. But that isn’t to say those firms perceive an ethical or legal ban on such provisions.
A ruling by U.S. District Judge Joel H. Slomsky of the Eastern District of Pennsylvania in Sanford v. Bracewell & Giuliani would be the first in the Third Circuit on the issue of whether such clauses are permissible in engagement letters between clients and attorneys.
The parties themselves in Sanford had little case law to point to in arguing for their respective positions.
Craig and Mary Jo Sanford, through their attorney, Clifford E. Haines of Haines & Associates, relied on a 2012 Louisiana Supreme Court case, Hodges v. Reasonover, in which the court ruled an arbitration clause violates ethical rules on duty of candor and loyalty if it doesn’t enumerate seven factors a client is waiving by agreeing to arbitration.
In order for an arbitration clause to be permissible, the Hodges court required the client be informed of the waiver of a jury trial, the waiver of a right to appeal, the waiver of broad discovery, the up-front cost of arbitration, the nature of the claims to be arbitrated, that the client can still bring a disciplinary action against the attorney and that the client has a right to have the engagement letter reviewed by independent counsel. Haines argued his client was not a sophisticated business, but rather an individual whose right to a jury trial was taken away by this provision.
Bracewell’s attorney, Steven M. Schneebaum of Fox Rothschild, noted courts generally have a presumption in favor of arbitration over litigation. He said the American Bar Association’s ethics opinion on the issue says only that an engagement letter must not limit the liability of the lawyer. He also noted the Philadelphia Bar Association required a clear waiver of a jury trial, the client be advised to seek outside counsel and that there is consent from the client in writing. Schneebaum said all three of those criteria were met in this case. He added Hodges was not controlling in this case, noting further that it was a decision only by the plurality of the Louisiana court.
Are Clients Benefiting Over Firms?
The general consensus among law firm general counsel is that such policies are appropriate but must be carefully explained to the client. That doesn’t mean all firms have embraced the concept.
Lee A. Rosengard, general counsel of Stradley Ronon Stevens & Young, said his firm doesn’t use such provisions because its insurer, Attorneys’ Liability Assurance Society, prefers that its insureds don’t use them.
“The concern is that many legal malpractice cases are entirely defensible as a legal matter, but when you get into arbitration and somebody decides they’re going to split the baby, you lose the opportunity to base your defense on the law,” Rosengard said.
But in about 5 to 10 percent of the new matters coming into Stradley Ronon, Rosengard said it’s actually the clients that are returning with their own engagement letters they require all of their outside counsel to sign. In some of those cases, the engagement letters include mandatory arbitration provisions, Rosengard said. Those clients are typically large national or international clients. The firm can either agree to the provision and get the work or turn the work down, he said.
Pepper Hamilton General Counsel Barbara Mather said her firm considers every few months whether to add mandatory arbitration clauses into its standard engagement letter.
“It sort of depends on your love of arbitration,” Mather said, noting that love isn’t that intense at Pepper Hamilton. She said she doesn’t think the implementation of such clauses is uniform among large firms.
From Mather’s perspective, there are cases that are starting to come down finding mandatory arbitration clauses permissible, but they often require a complete record of the detailed explanation firms gave to clients about the ramifications of signing such agreements.
“The sophistication of the client matters hugely in terms of the nature of the explanation,” Mather said.
Some companies understand arbitration is a “pretty normal” remedy and have in-house general counsel to advise them on the issue, she said. In those cases, it’s a pretty straightforward discussion, Mather said. When dealing with an individual client, it would require a much more formal record of a discussion that warned the client and suggested getting advice of outside counsel, Mather said. She noted that firms could potentially have two different sets of engagement letters, including mandatory arbitration clauses only in those engagements with corporate clients. But she said she isn’t aware of any firm that does that.
For Pepper Hamilton, the twice-yearly debate over whether to include arbitration clauses focuses on whether the firm likes arbitration as a way to resolve disputes and whether clients would be put off by the process of explaining what the clause means, Mather said.
While arbitration is supposed to be more efficient and prompt, it has become “increasingly less so” over the years, Mather said. Firms need to weigh that with the privacy arbitration is supposed to provide coupled with the fact that arbitrators are “notorious for compromising.”
Michael Hayes, a Montgomery McCracken Walker & Rhoads partner who focuses his practice in part on attorney ethics, said that with the right disclosures, arbitration clauses would appear to be permissible. He said the courts have recognized the importance of cheaper, alternative mechanisms for resolving disputes.
Hayes pointed to the Philadelphia Bar Association’s fee disputes committee as evidence the bar and courts have endorsed alternative means of handling disputes between attorneys and clients, at least in the fee context.
White and Williams attorney John Encarnacion sits on that committee. He said most engagement letters do not include a mandatory arbitration clause. Some states, such as New Jersey and New York, require firms to offer clients a fee dispute arbitration when a conflict arises and the clients have 30 days to accept that offer or the matter goes to litigation, Encarnacion said. In Pennsylvania, there is no such mandatory provision and, from Encarnacion’s perspective, committees like his are underutilized.
Encarnacion said White and Williams’ engagement letters don’t include a mandatory arbitration provision. From a law firm’s perspective, Encarnacion said, arbitration can make it easier on the client by making it less expensive to resolve disputes.
The hearing in Sanford on the arbitration issue was continued after confusion arose as to whether Craig Sanford signed the engagement letter with Bracewell. The law firm supplemented the record Wednesday with a copy that appears to be signed by Sanford. Haines will be given the opportunity to question a Bracewell witness on this fact at a yet-to-be-scheduled hearing.