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Retainer agreements that compel arbitration of fee disputes are permissible in New Jersey if the client signs an ironclad waiver of the right to sue, a divided New Jersey Appellate Division ruled May 6. The decision, the first appellate pronouncement on the subject, reaffirms the state courts’ commitment to alternate dispute resolution and eases its use in fee disputes. Nothing inherent in the attorney-client relationship makes a fee arbitration clause an automatic no-no, the court ruled in Kamaratos v. Palias, A-0201-01T2. To be enforceable, though, such agreements need to include clear waiver-of-rights statements that show the client understands the ramifications of being thrown into a binding arbitration, the court said in a 2-1 decision. One judge said that absent a supreme court edict, such clauses violate clients’ rights. The entire panel declined to accept an invitation to rule on a more explosive question: Can lawyers use arbitration clauses in retainer agreements as a poison pill against malpractice suits, not just fee litigation? At issue is the enforceability of a clause written into a 1997 retainer agreement between North Brunswick, N.J.’s Frank Araps and his commercial litigation client, Gus Kamaratos of Ocean Township, N.J. Rule 1:20A gives New Jersey clients the right to elect fee arbitration, but this clause made it mandatory. It said that arbitration of any dispute arising from the retention would be decided under the rules of the American Arbitration Association. Araps invoked the agreement to resolve a dispute over a $115,000 bill Kamaratos did not pay, and Monmouth County Superior Court Judge Clarkson Fisher Jr. enforced the clause. Kamaratos argued on appeal that the agreement violated the public policy interest in giving disputants their day in court. He also is suing Araps for malpractice and he wants both disputes decided together in court. Judge Dorothea Wefing, writing for herself and Judge Joseph Lisa, rejected Kamaratos’ argument that public policy considerations were dispositive. “There is nothing inherent in the attorney-client relationship which would mandate a blanket preclusion of the arbitration of fee disputes,” she wrote. Wefing cited cases trumpeting the benefits of arbitration and added, “In light of that strong judicial approval for the technique of arbitration, it would strike us as somewhat anomalous to conclude that parties may not agree in advance that arbitration will be the sole remedy for a dispute about legal fees.” Unfortunately for Araps, the particular clause in question did not meet the waiver requirement and the court remanded the case to a trial court to determine if the client did indeed make an informed and voluntary decision when he renounced his right to sue. In the separate malpractice suit against Araps before Monmouth County Superior Court Judge Alexander Lehrer, Araps is seeking dismissal on grounds the arbitration clause covers that claim, too. Kamaratos’ lawyer, Totowa solo practitioner Diane Acciavatti, sought a ruling from the Appellate Division on whether that claim was arbitratable, too, but the court declined to rule on the issue because the malpractice case was not before it. Acciavatti says she is disappointed the court rejected arbitration on narrow grounds and ordered a remand that could give Araps a chance to prove Kamaratos knew what he was bargaining for. She says Judge Jose Fuentes got it right in a concurring opinion. Fuentes wrote that a commercial arbitration clause in a retainer agreement violates the trust relationship between lawyer and client because the clause is designed solely to advance the lawyer’s interest. Only the supreme court acting in its rule making capacity — as it did when it established the elaborate client-activated fee-arbitration system — can establish rules governing what is permissible in a retainer agreement, Fuentes wrote. If commercial arbitration turns out to be a good way to resolve lawyer-client disputes, so be it, Fuentes said. But it needs to be fully aired by bench, bar and public and “the only body constitutionally authorized to answer the ultimate question is our Supreme Court,” he concluded. Araps, who did not return calls last week, has argued that Kamaratos should have no objection to arbitration because he did agree, when the fee fight broke out, to submit the dispute to a district fee arbitration committee. The committee declined to take the case under rules allowing panels to opt out of cases involving more than $100,000. He objected to arbitration only because he wants the fee fight folded into the malpractice case, Araps has argued. Acciavatti says the Appellate Division decision is essentially a “blueprint” for how to write an acceptable arbitration clause in a retainer agreement. A MULTISTATE SPECTRUM But lawyers who want to draft such clauses might want to wait for a supreme court version, or look at what other states have done. An Iowa University law review article on the subject, 84 Iowa L. Rev. 827 (1999), analyzed the spectrum of state decisions on the legality of arbitration clauses. The state most favorable to such clauses is California, where an appeals court has ruled that predispute arbitration agreements are enforceable for fee and malpractice disputes, a position the Iowa article called “problematic for the unsophisticated client.” At the other end is Ohio. The state Board of Commissioners on Grievances and Disciplines has ruled that predispute agreements are inappropriate and it adopted the kind of bright-line rule against such pacts that Fuentes appears to favor. The May 6 opinion would align New Jersey with jurisdictions in the middle ground, such as Pennsylvania, Michigan and the District of Columbia. In Pennsylvania, arbitration clauses are permitted if the lawyer discloses the advantages and disadvantages in writing, the lawyer advises the client of the opportunity to consult independent counsel before signing, and the client’s consent to the clause is in writing. In Michigan and Washington, no such clause is permissible unless the client actually consults with independent counsel. While state opinions — including the May 6 one in New Jersey — tend to make no distinctions between types of clients, a law professor who tracks the issue, David Hricik of Mercer University School of Law in Macon, Ga., says the level of client sophistication may make a difference. Few lawyers would want to begin an attorney-client relationship with the average litigant by advising the client to consult another lawyer about the retention agreement. On the other hand, he says, corporate clients accustomed to financial contracts are likely to view an arbitration clause in a retainer agreement as business as usual. “There’s a bit of irony in a lawyer saying at the outset that this is in the client’s best interest,” he says. At the same time, though, it would be hollow for sophisticated clients to claim they did not understand the implications of such an agreement, he says. Bennett Wasserman, who is of counsel to Newark, N.J.’s Stryker, Tams & Dill and teaches a class on lawyer malpractice issues at Hofstra University School of Law, says of the opinion, “it’s about time New Jersey looked at this problem.” He says he would like to see the development of a model retainer agreement that includes arbitration clauses, and he has turned the discussion into a classroom exercise. An acceptable clause would spell out what is covered, including fees or malpractice, he says. It would mention the pros and cons of arbitration and make clear the client was aware of the right to consult with another lawyer. It also might mention the specific rules of professional conduct implicated. Finally, it would make clear that the client had an opportunity to spend time thinking about the waiver.

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