A mandatory arbitration clause in Bracewell & Giuliani’s client engagement letter meets the limited criteria in Pennsylvania for such clauses to be enforceable, a federal judge has ruled, declining to step into what he said was the sole purview of the state Supreme Court to expressly outline what steps a law firm must take to make such clauses fair for the client.
Plaintiffs Craig and Mary Jo Sanford argued in Sanford v. Bracewell & Giuliani that mandatory arbitration clauses were unconscionable in client engagement letters and gave law firms an unfair advantage. They urged the court not to enforce the clause in their engagement letter with Bracewell & Giuliani and apply moving forward the more stringent notice requirements for using a mandatory arbitration clause that were laid out in a 2012 Louisiana Supreme Court case, Hodges v. Reasonover.
“Plaintiff’s argument highlights a topic of great debate within the legal community,” said U.S. District Judge Joel Slomsky of the Eastern District of Pennsylvania in his opinion issued Thursday.
Slomsky, who noted this is an issue of first impression in the Third Circuit, said there is a concern in the legal community that certain clients may not understand all of the legal implications of agreeing to arbitration. He said some scholars therefore argue the clauses violate public policy because of the inherent inequality of bargaining power between the parties.
As a reaction to those concerns, some state courts and ethics committees have imposed specific notice requirements on attorneys who want to use mandatory arbitration clauses in engagement letters, Slomsky said. In Hodges, the court required an attorney provide the potential client notice of the client’s waiver of a jury trial, waiver of appeal rights, waiver of broad discovery rights, the upfront costs associated with arbitration, what specific claims would be covered under the arbitration, the right to still file a disciplinary action if warranted, and the ability to speak with independent counsel before signing the agreement, Slomsky said.
Slomsky noted that, in Pennsylvania, the state Supreme Court has exclusive authority to prescribe rules governing the practice of law. One such Rule of Professional Conduct outlined by the court stated a lawyer shall not enter an agreement prospectively limiting the lawyer’s liability to a client for malpractice unless the client has independent representation in entering the agreement, Slomsky said. The rule further notes, however, that a lawyer is not prohibited from agreeing to arbitrate legal malpractice claims, provided the agreements are enforceable and the client is fully informed of the “scope and effect” of the agreement.
“The Pennsylvania Supreme Court has yet to clarify the necessary steps that an attorney must take in order to inform a client of the ‘scope and effect’ of an arbitration agreement,” Slomsky said. “Due to the dearth of authority in Pennsylvania, plaintiffs urge this court to follow Hodges‘ notice requirements and invalidate the arbitration clause in the engagement letter because it does not fully communicate that Mr. Sanford relinquished the rights set forth in Hodges when he signed.”
Slomsky said the “scope and effect” requirement would appear to mandate certain terms be included in an attorney-client arbitration agreement. But he said it isn’t the function of the district court to sua sponte create ethical rules for attorneys in Pennsylvania.
“Although the provisions satisfy this court that Mr. Sanford received sufficient notice, whether these or different notice provisions are required in the future to be part of an engagement letter with an arbitration clause should be addressed by the Supreme Court of Pennsylvania,” Slomsky said.
Slomsky said the Bracewell & Giuliani engagement letter contained some language meant to put Craig Sanford on notice of its scope and effect. It advised Sanford that he was giving up his right to a jury and encouraged him to seek outside counsel before signing the document. Slomsky further noted the clause wasn’t “buried inside a lengthy engagement letter,” but rather was several paragraphs of a four-page letter.
In considering the elements to prove procedural unconscionability under the Federal Arbitration Act, Slomsky said the arbitration clause was not procedurally unconscionable.
While the arbitration agreement is enforceable as to Craig Sanford, there was a dispute as to whether his wife, Mary Jo Sanford, was a client of Bracewell & Giuliani and whether she was a party to the engagement letter. Mary Jo Sanford never signed the engagement letter, while Craig Sanford did.
Bracewell & Giuliani has argued that Mary Jo Sanford is not a client and therefore has no standing to pursue claims of professional negligence and breach of contract. In the alternative, the firm argues that, if she is a client, she is bound by the arbitration agreement. Mary Jo Sanford argues an implied attorney-client relationship was created when she handed a Bracewell & Giuliani attorney a check for the retainer from the couple’s joint bank account. She said she is not bound by the arbitration clause because she never signed the engagement letter.
Slomsky said Mary Jo Sanford raised a genuine issue of material fact as to whether she had an implied attorney-client relationship with Bracewell & Giuliani. Slomsky said Mary Jo Sanford is entitled to a jury trial as to whether she is a client of the firm, and, if so, whether she is required to arbitrate her claims.
Slomsky had to interpret a 2013 decision from the U.S. Court of Appeals for the Third Circuit in Guidotti v. Legal Helpers Debt Resolution, which he said clarified the proper standard for evaluating a motion to compel arbitration under the Federal Arbitration Act.
Using Guidotti as a guide, Slomsky applied a motion to dismiss standard as to whether the motion to compel arbitration applied to Craig Sanford given he signed the agreement that included the arbitration clause. Under that standard, Slomsky looked only at the complaint and court filings in the case to determine whether the claims at issue were covered by the arbitration clause.
For Mary Jo Sanford, Slomsky used a summary judgment standard, which includes looking at the discovery in the case, in determining whether her claims should be sent to arbitration.
The Sanfords have sued Bracewell & Giuliani for legal malpractice and breach of contract. They argue the firm failed to help them locate and recover $12.5 million they gave to purported Navy Seal and CIA operative Jamie Smith under the guise of moving the money offshore, according to Slomsky’s opinion.
The suit was brought in February 2013 in the Bucks County Court of Common Pleas. Bracewell & Giuliani removed the case to the Eastern District and filed a motion to compel arbitration.
Clifford E. Haines of Haines & Associates represents the Sanfords and said he was delighted to get the chance to go before a jury on Mary Jo Sanford’s behalf.
“I feel very strongly about the idea that lawyers can assert in their fee agreements a provision which is really meant to protect them,” Haines said as to the issue of mandatory arbitration clauses. “Clients don’t appreciate what an arbitration is or that they are giving up rights. But I also understand why Judge Slomsky is troubled” by the issue.
Steven M. Schneebaum of Fox Rothschild represented Bracewell & Giuliani along with Abraham C. Reich and Peter Buckley of Fox Rothschild.
“We were gratified to see that the judge was not prepared to conclude that lawyers are not allowed to include arbitration provisions in their engagement letters,” Schneebaum said.
Schneebaum said it “strikes me as weird” that the judge would conclude there was a possibility Mary Jo Sanford was a client of Bracewell & Giuliani when the complaint argues the pair became clients of the firm through the engagement letter, which Schneebaum said Mary Jo Sanford never signed.
(Copies of the 31-page opinion in Sanford v. Bracewell & Giuliani, PICS No. 14-0414, are available from The Legal Intelligencer. Please call the Pennsylvania Instant Case Service at 800-276-PICS to order or for information.) •