Matthew B. Weisberg ()
Over fierce opposition, U.S. and Pennsylvania courts have repeatedly held that there is a strong public policy favoring the enforcement of extrajudicial contractual binding arbitration provisions, generally involving the sale of goods and services (as statutorily codified).
While arbitration provisions are strictly construed against the drafter and are unenforceable if waived by substantive litigation or by common-law contractual defenses, because arbitrations bear only faint resemblance to judicial court proceedings, are for the most part unappealable and those provisions are traditionally contained in contracts of adhesion, those contentions have generally been held nonpersuasive. So, too, has the constitutional right to trial been likewise held not applicable to the enforcement of an arbitration provision.
While contractual affirmative defenses to arbitration remain, they are required to be proven with specific admissible evidence. For example, it is universally recognized that a cost-prohibitive arbitration will render the arbitration provision unenforceable; however, proof that the arbitration provision is cost-prohibitive is hard to come by, with courts holding that the mere anticipated presumption that the arbitration fees and costs will exceed the value of the claim is not enough to overcome. Similarly, defenses of duress or fraud in the inducement may result in the court allowing an evidentiary hearing, but the ultimate adjudication will likely tend toward compelling arbitration.
In the beginning, arbitration was a litigation and thus cost-saving mechanism for complex domestic or international commercial contractual disputes. The Federal Arbitration Act (and state courts’ similar codifications) anticipated parties’ equal bargaining power and sophistication entering into mutually negotiated arbitration provisions in the event of contractual default with parties having the money and resources to expend but with time and efficiency being of the essence. In arbitration, rules of evidence, procedure, venue and precedent resulting in consistent adjudication for public viewing and precedential effect has all fallen by the wayside. In fact, the waiver of certain claims (such as class actions) to arbitration has likewise been upheld.
In sum, Goliath has beaten David.
Therefore, in order to most successfully attack an arbitration provision, counsel must attack its language—not just the conduct surrounding (if at all). Words should be parsed (i.e., “may” versus “shall”) and phrases intending to invoke arbitration by the drafter must be broken down. Language ambiguity, inconsistency, inexactness and the like are judicially more favored defenses to defeat the enforcement of arbitration.
Statutorily, the enforcement of an arbitration clause requires the court to stay the judicial litigation while compelling parallel pending arbitration. Because a granted motion to compel arbitration results in a stay, that order is interlocutory, requiring arbitration’s adjudication prior to appeal—theoretically, the arbitrator can adjudicate the arbitration provision as being unenforceable, regardless of the likelihood of that occurring.
On the contrary, the denial of a motion to compel arbitration is immediately appealable.
So one-sided is arbitration that it is no wonder form arbitration clauses are now incorporated in almost every contract—whether it be commercial, employment, medical, nursing home, consumer and (now beginning) attorney-client fee agreements.
Before we examine arbitration in the legal malpractice context, know that: (1) legal malpractice insurance policies generally do not cover arbitration as a matter of law (but generally do as a matter of practice, given the likely defense outcome if not cost-prohibitive jurisdiction being claim-dispositive or devaluative); and (2) the average arbitration may cost between $30,000 and $50,000 in light of the administrative fees and high arbitrator hourly rates, which can be between $450 and $850 per hour.
Most pertinent to our discussion surrounding arbitration in attorney-client fee agreements, attorneys are bound by rules of professional conduct, which confine the scope of a fee agreement notwithstanding that delineation’s broad, and thus ambiguous, proscriptions.
In Sanford v. Bracewell & Giuliani, — F.Supp.2d — (March 20, 2014), the U.S. District Court for the Eastern District of Pennsylvania determined that without clear precedent to the contrary, an attorney-client arbitration provision would be enforced as to the fee agreement signatory client, but a trial must ensue as to the nonsignatory to determine arbitrability.
Under the guise of moving money to an offshore bank account, purported Navy SEAL and CIA operative Jamie Smith allegedly absconded with $2.5 million belonging to the plaintiffs. To investigate the fraud with a view toward collection, the plaintiffs hired the defendant, original counsel. The defendant failed to locate Smith or the money. The plaintiffs terminated that relationship. Successor counsel to the plaintiffs were able to locate Smith but unable to recover the money. In February 2013, the plaintiffs brought suit against the defendant, alleging legal malpractice and contending the defendant’s delay ultimately precluded recovery.
The defendant moved to stay pending arbitration pursuant to Section 3 of the FAA, pursuant to a provision in the attorney-client fee agreement.
“Client and [counsel] agree that any controversy, dispute or claim, including any dispute as to [counsel] fees for legal services, arising out of or relating to the engagement described in this engagement letter or any future engagement of [counsel], shall be resolved by arbitration in New York County before the International Institute for Conflict Prevention and Resolution.”
The retainer agreement encouraged review by independent counsel. The agreement was executed by the co-plaintiff, Craig Sanford. Sanford’s wife testified that she never signed the engagement letter nor knew of its existence.
Pursuant to Guidotti v. Legal Helpers Debt Resolution, 716 F.3d 764 (2013), the U.S. Court of Appeals for the Third Circuit held a motion to enforce arbitration applied a motion to dismiss standard. That is, if the face of the complaint and arbitration agreement read in the light most favorable to respondent required arbitration, arbitration would be enforced without more. If the face of the pleading and arbitration agreement did not resolve issues of fact, the court could permit limited discovery (converting that application essentially to one for summary judgment). To the extent there existed material issues of genuine fact, arbitration would be for trial.
In Sanford, the district court allowed limited discovery relevant to the enforceability of the arbitration clause. The court held that the plaintiffs’ claim fell within the arbitration clause.
The executor of the fee agreement, Craig Sanford, argued that the arbitration provision was unconscionable secondary to the fee agreement being a contract of adhesion that unethically requires the forfeiture of court and jury trial rights. Contrary to some other state courts throughout the country, Pennsylvania Rule of Professional Conduct 1.8(h)(1) requires only modest disclosure of an arbitration clause within a fee agreement, which was made. Therefore, the arbitration agreement was enforceable against Sanford.
As to Sanford’s wife, the court held that there existed a genuine issue of fact requiring a trial to determine whether she was a client of the firm and whether she was required to arbitrate her claims, given she did not execute and testified she did not read the retainer agreement notwithstanding movant-defendant’s estoppel argument.
In my view, the court’s holdings are consistent with the applicable legal standards for adjudication. However, I believe that the court committed error in contending Sanford’s wife not estopped from disclaiming the arbitration provision (especially in light of her implicitly claiming co-beneficiary if not third-party beneficiary status as a co-plaintiff in this legal malpractice action, which necessarily implicates the pretext of an attorney-client and thus fee agreement relationship), but trial being the most conservative mechanism renders that error harmless. Thus, it is not the court’s legal analysis nor necessarily its application that is troubling; in fact, it is consistent with the law.
To bring us full circle, what is disturbing is arbitration’s anti-plaintiff jurisprudence that appears only correctable by legislation. Said differently, notwithstanding arbitration was initially intended as a cost- and time-saving mechanism in complex commercial disputes, the jurisprudential follow-through of that intended benevolent codification has become claim-prohibitive or devaluative in every context. Courts have held receipt of a post-employment handbook, which contains an arbitration provision, followed by continued employment to be enforceable; the mere receipt post-purchase of a good or service fine print mailing would require arbitration; arbitration permissibly prohibits class actions; and the most generalized arbitration language is enforceable, even if the contract containing that language was claimed induced or executed through fraud.
When it could not get any worse, there is currently a bill pending in our state assembly that would preclude by penalty appeals from arbitration even brought in good faith, honoring the very high standard for which an arbitration can be reviewed.
Aside from being individual or class consumer claim prohibitive, the adjudicated strong public policy toward arbitrability may also render jurisprudence arising from contractual or contract-related disputes stale. Because arbitration does not necessarily produce an opinion (and any opinion would be necessarily nonprecedential, if not wholly unpersuasive), putting a large category of matters into arbitration essentially stays the evolution of stare decisis. By eliminating precedent vis-à-vis arbitration, it is quite possible that there may come a time in the near future where conduct or contract cannot be consistently counseled by reference to applicable precedent let alone globally remediated.
Most conduct is regulated by statute or common law. In either instance, that regulation’s refinement comes through precedent. Without precedent, combined with the preclusion of public scrutiny, civil lawlessness may foment. While the ability to transcend regulation may be in the drafters of arbitration clauses’ intents, that mal-intent is antithetical to our constitutional system of individual rights, as well as our judiciary providing a level playing field.
In closing, Sanford is a correct present-day analysis of what an awful law the FAA (and its state counterparts) have become.
Matthew Weisberg is the managing partner of Weisberg Law. He focuses the firm’s practice on consumer and individual rights throughout Pennsylvania and New Jersey. Weisberg Law represents victims of legal malpractice and other professional negligence resulting in financial injury, fraud, civil rights violations, consumer abuse and foreclosure actions.