Resolving Fee Disputes Using Mandatory Arbitration

There are many states which have recognized the advantages of resolving a lawyer-client fee dispute through arbitration. However, since such arbitrations are not always binding and may also not be mandatory, lawyers and clients who want to avoid any doubt about the proper forum for a fee dispute may opt to include certain mandatory arbitration clauses in their engagement letters.

Provisions such as these have been the subject of litigation in the past few years, even with regards to the interplay of these provisions with fee arbitrations which are mandatory under state law and the application of the Federal Arbitration Act. For example, lawyers and clients in California usually enter into agreements which require binding arbitration of fee dispute as well as legal malpractice claims at the start of their relationship. Such an agreement, however, does not affect clients’ rights to a nonbinding mandatory fee arbitration. In California, lawyers and their clients may enter into a two-step process where they first engage in a non-binding MFA, after which, if they fail to resolve the matter, they go on with the binding arbitration mentioned in the engagement letter.

While state law provisions may apply, some courts have recognized that using mandatory arbitration clauses in an engagement letter may be subject to federal law, particularly the Federal Arbitration Act. In 2017, for example, the U.S. Court of Appeals for the Third Circuit issued an opinion where they concluded that while mandatory arbitration clauses in engagement letters could be overlooked on the basis of fraud, unconscionability or duress, it is federal law which typically governs such a provision’s application. The U.S. Supreme Court has also indicated that state law cannot prohibit the arbitration of any type of claim.

Although the Federal Arbitration Act may govern arbitration clauses without any restriction by the parties involved, a state’s rules of professional conduct may still affect whether such a provision is in violation of public policy. Federal law requirements aside, a lawyer does have certain duties to their clients which can be reflected in the arbitration provision in the engagement letter.

Mandatory Arbitration Provisions – What Are the Benefits?

Submitting fee disputes to binding arbitration typically has the same benefits as arbitrations generally do. For example, litigation is usually slower than arbitration, which can also be less formal. Arbitration also helps parties keep the outcome of the proceedings confidential, which, depending on the circumstances, may be to the advantage of both the client and the law firm.

Law firms and practitioners may also find it helpful at the start of a representation to think about whether they would prefer if claims are handled by private arbitration. There are law firms which include broad mandatory arbitration clauses in all their engagement letters, while others only limit arbitration clauses to fee disputes.

Some law firms find that there are benefits to using arbitration only for fee disputes. When a lawyer sues their client for unpaid fees, the client is also entitled to counterclaim on the grounds of legal malpractice. As such, many law firms state in their engagement letters that all fee disputes are to be resolved through private arbitration.

Clients’ Informed Consent

When a mandatory arbitration clause is included in an engagement letter, it is always a good idea to take into consideration the requirements of the applicable Rules of Professional Conduct and the lawyer’s obligations toward their client. For example, to ensure that there are no misunderstandings, a lawyer may choose to describe in the engagement letter the differences between litigation and arbitration.

This may provide details into the fact that arbitration means foregoing a jury trial and that there is usually a limited scope of an appeal of an arbitration. Clients may also want to consider the procedural issues which apply to arbitrations, such as confidentiality, the speed of the issue’s resolution, as well as the generally relaxed procedure.

Considering these issues is consistent with the ABA’s guidance in Formal Opinion 20-425, where the ABA states that there are no ethical issues with lawyers including mandatory arbitration provisions in engagement letters. They do, however, recommend that the client is “fully apprised of the advantages and disadvantages of arbitration and has given her informed consent to the inclusion of the arbitration provision in the retainer agreement.”

Regardless if the application of the arbitration clause is typically governed by federal law, a lawyer can avoid any public policy issues and ensure that their clients understand the importance of agreeing to an arbitration provision by anticipating the requirements of any ethical rules which may apply.