Everything is arbitrable in New Jersey. (Sort of)

Lawyers and law firms have long struggled – at least during the length of my career – with whether they can, or should, include a provision in their contracts with clients that would require arbitration of some, or all, kinds of disputes.

In situations where a local or state bar association offers a free, voluntary fee dispute arbitration forum, the decision to put something into an engagement letter requiring participation in such a tribunal upon demand tends to be an easier call.

Seeking to have clients agree to arbitrate fee disputes and only fee disputes also tends to be an easier call even in the absence of bar association provided venues.

Whether a lawyer can, or should, seek to have a client agree to arbitrate all claims or disputes, is much trickier stuff. Many jurisdictions do not offer much in the way of formal ethics guidance beyond making clear that you cannot avoid having to take a trip through your state’s disciplinary process by trying to claim that an agreement to arbitrate disputes would include preventing a client from pursuing a grievance against the lawyer’s license. (In fact, in some places, simply trying to do that could get you into disciplinary trouble.) Another issue that exists in this realm but is often not fully focused upon is any impact that federal law, and specifically the Federal Arbitration Act, would have on enforceability in that it can be difficult for a client to try to argue that the nature of a legal matter does not affect interstate commerce. If the FAA is recognized as applying, then obstacles to enforcing an arbitration agreement with a client should be significantly reduced.

In advising lawyers on the topic, I have tried to be practical about the risk associated with such provisions and the need to be exceedingly clear and transparent about how any such provision is explained to a client. (I also make an effort to strongly suggest that the lawyer communicate with their professional liability insurance carrier as those folks tend to have strong opinions about whether arbitration is a good forum for resolving a legal malpractice claim or whether it is more likely to result in a “split-the-baby” outcome.) I have not actually written anything about this topic here in more than five years though.

Recently, the New Jersey Supreme Court has issued a thorough, and pretty good, opinion navigating the waters of how an attorney may balance their ethical duties of communication with obtaining an enforceable arbitration agreement from a client. Unfortunately, for the law firm in question that was involved in the litigation, the decision is only applicable on a going-forward basis. In that regard, it is helpful to know that the nature of the dispute in question was an engagement agreement between a lawyer and a sophisticated business client, a fee dispute was being arbitrated and the client then brought a lawsuit for legal malpractice. The engagement agreement established arbitration through JAMS and included a hyperlink in the engagement agreement where the 33-pages of JAMS rules were available, but the lawyer did not provide the actual JAMS rules to the client at that time.

One can certainly quibble with the New Jersey court’s analysis of application of the FAA given that it still clearly treats a contract between a lawyer and a client differently from other commercial contracts. The New Jersey court doesn’t actually confront the fact that it is treating an arbitration provision in an attorney-client contract differently from one in another type of contract. Instead, it compares arbitration provisions in an attorney-client contract with all other provisions in an attorney-client contract and says:

“When viewed through the lens of the RPCs, arbitration provisions are not treated differently from other provisions in a retainer agreement. Requiring attorneys to explain to a client the advantages and disadvantages of arbitration so that the client can make an informed decision whether to arbitrate a future fee dispute or legal malpractice claim against the firm does not single out a retainer agreement’s arbitration provision for disparate treatment and therefore does not run afoul of the FAA or NJAA. See Snow, 176 A.3d at 739; see also Hodges, 103 So. 3d at 1077.”

One can also argue about the fact that the opinion makes no effort to address the notion that a person who hasn’t yet signed an engagement agreement isn’t a client of the lawyer and so all of the arguments about fiduciary duties attorneys owe to clients and ethical obligations to clients are not actually on point unless you assume and agree that the law should treat a potential client as a client during the process of negotiating a fee agreement.

For lawyers generally though, even if you are not in New Jersey, the opinion provides pretty safe guidance to look to follow if you want to head down the path of pursuing such a provision.

You can access and read the full opinion here, but I’ll close by offering what I think are the two best excerpts:

We now hold that, for an arbitration provision in a retainer agreement to be enforceable, an attorney must generally explain to a client the benefits and disadvantages of arbitrating a prospective dispute between the attorney and client. Such an explanation is necessary because, to make an informed decision, the client must have a basic understanding of the fundamental differences between an arbitral forum and a judicial forum in resolving a future fee dispute or malpractice action. See RPC 1.4(c).
An arbitration provision in a retainer agreement is an acknowledgement that the lawyer and client may be future adversaries. That the retainer agreement envisions a potential future adverse relationship between the attorney and client — and seeks to control the dispute-resolution forum and its procedures — raises the specter of conflicting interests. An arbitral forum and judicial forum, and their accompanying procedures, are significantly different.
We do not make any value judgment about whether an arbitral or a
judicial forum would be more beneficial to a client if the client and attorney part as adversaries. We conclude, however, that an attorney’s fiduciary obligation mandates the disclosure of the essential pros and cons of the arbitration provision so that the client can make an informed decision whether arbitration is to the client’s advantage. See RPC 1.4(c). That obligation is in keeping with an attorney’s basic responsibility to explain provisions of a retainer agreement that may not be clear on their face. Accordingly, the disclosures required of an attorney in explaining an arbitration provision in a retainer agreement stand on an equal footing with the disclosures required in explaining other material provisions in the agreement. Such comparable treatment does not offend the Federal Arbitration Act (FAA), 9 U.S.C. §§ 1 to 16, or the New Jersey Arbitration Act (NJAA), N.J.S.A. 2A:23B-1 to -36.

and

Consistent with ABA Formal Opinion 02-425, the weight of authority as
expressed in professional advisory opinions and judicial case law in other jurisdictions, and this Court’s interpretation of its own RPCs, we hold that attorneys who insert provisions in their retainer agreements to arbitrate future fee disputes or legal malpractice claims must explain the advantages and disadvantages of the arbitral and judicial forums. Attorneys can fulfill that requirement in writing or orally — or by both means.
Attorneys may explain, for example, that in arbitration the client will not have a trial before a jury in a courtroom open to the public; the outcome of the arbitration will not be appealable and will remain confidential; the client may be responsible, in part, for the costs of the arbitration proceedings, including payments to the arbitrator; and the discovery available in arbitration may be
more limited than in a judicial forum.
Additionally, a lawyer who drafts a retainer agreement that channels any future legal malpractice action into an arbitral forum must say so directly in the written agreement. The client should not be left to discern the meaning of language that is clothed in ambiguity.

The New Jersey Supreme Court also referred the topic to the state bar’s Advisory Committee on Ethics for the issuance of any further ethical guidance deemed appropriate about the obligations of disclosure for New Jersey attorneys.

Some arbitrary thoughts related to attorney-client arbitration agreements

It is undeniable that the American judicial system long ago embraced arbitration as a valid form of alternative dispute resolution.  As a result, it is also hornbook law at this point that agreements to arbitrate disputes are to be enforced just like any other contract.  As a practical matter, there isn’t anything empirically wrong with the concept of enforcing agreements to arbitrate like any other contract as they are just that, contracts.

Nevertheless, you have to turn a blind eye to reality to think that arbitration provisions cannot be used by parties with superior bargaining power to impose a non-judicial forum upon parties with no real choice beyond a take-it-or-leave-it option as to the contract.  This is not always the case, of course.  But it is not credible to say it does not happen in some circumstances and, unless you read the terms and conditions for that extremely popular smartphone in your hands and refused to “agree”, then I’m pretty sure it has happened to you.

Given the fiduciary duties owed by attorneys to clients (and the fact that in some jurisdictions those duties can be extended even to the time of the events surrounding formation of the attorney-client contractual relationship itself), it should come as no surprise that there are many lawyers who react to the concept of mandatory arbitration provisions in engagement agreements with clients as being unsettling.  For some lawyers, they draw a line of distinction between their view of requiring clients to agree to arbitrate all fee disputes rather than all disputes, but given the interrelated dynamic of fee disputes and legal malpractice claims drawing a line in that regard can just result in multiplication of proceedings.

From time-to-time, I’ve addressed variations of the ethical issues associated with including agreements to arbitrate disputes in their engagement agreements and also tried to talk about the practical issues – such as the fact that some larger insurance carriers will discourage firms from doing so on the basis that arbitration might not actually be a better forum than litigation.  But usually the tips I’ve offered are largely common sense approaches that would look to authority on enforcing arbitration provisions in other situations where there is a real imbalance of power between the contracting parties.  And, of course, one bastion that seems never likely to fall is that an arbitration provision in an agreement with a client cannot serve to allow the lawyer to contract out of any ethical obligation and will not serve to prevent the client from pursuing a disciplinary complaint against the lawyer.  Thus, as just an example, RPC 1.8(h) in Tennessee and some other jurisdictions prohibits lawyers from making “an agreement prospectively limiting the lawyer’s liability to a client or prospective client for malpractice.”  So, if the arbitration forum being mandated would be one that actually limits remedies in some significant fashion, then what might otherwise be an enforceable provision could well end up unenforceable.

I think those tips are still solid ones, but July has brought at least two news reports of court rulings sending client disputes to arbitration that, at least, reiterate the point that growing acceptance of agreements to arbitrate disputes in the lawyer-client arena is a real thing.

The first is a July 2, 2015 opinion from the Third Circuit that ruled that arbitration was required with respect to the dispute of a client who was not even a party to the engagement agreement containing the arbitration provision.  There are at least some obvious extenuating circumstances to help justify the first result.  The client who had not signed an engagement agreement was claiming to be a joint client of the firm along with her husband who did sign and, the court concluded, in suing the firm for malpractice she was essentially trying to enforce the engagement agreement that also included the arbitration provision.  That, for the Third Circuit, justified holding her to the arbitration requirement as a matter of equitable estoppel.

The second is an extremely sordid matter in which a Hollywood actress who is being allowed to pursue her case under a pseudonym will be required to arbitrate her claims that a Beverly Hills lawyer essentially forced her to engage in sexual activity and perform sexual favors over a number of years.  There is really no extenuating circumstance I can manage to decipher to justify this result; the only justification appears to be the court’s conclusion that the claims being made against the lawyer arose out of the attorney-client relationship and since the arbitration provision said that the parties were agreeing to arbitrate all such claims it would have to include even these claims of sexual abuse.  Let me try to opt for understatement and say that outcome surprises me.  Let me also try to find the silver lining in the gray cloud and say that an arbitration forum — and its inherently private rather than public nature — should at least make it easierharder for the actress’s identity to be publicly-outed.  (Edited thanks to a wonderful reader catching that error on my part.)