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.)

Plaintiffs’ personal injury firm is to investment banker as . . . ?

A major issue that has dogged the legal profession in the past, and looks likely to dog it again in the near future (if you don’t happen to think it already does), is the debate over the restriction imposed under the ethics rules that prevents non-lawyers from having any ownership stake in a law firm.  In Tennessee, this prohibition is housed in two parts of RPC 5.4.  RPC 5.4(b) imposes a prohibition on partnerships with nonlawyers if any partnership activities involve the practice of law, and RPC 5.4(d) addresses restrictions on law practices taking other corporate forms.  “Third rail” analogies are overdone in general, but it would not be far from the mark to say that, at least for the American Bar Association, advocating in favor of changing the ethics rules to permit non-lawyer investment in law firms is the “third rail” of politics within that organization.  To some extent, this is not surprising as it is not a position that enjoys any sort of widespread popularity.  As but an example, in March 2015, the Tennessee Bar Association polled Tennessee lawyers and asked whether they supported or opposed allowing non-lawyer corporations to own and operate law firms and received a response that was 85% in opposition.

In 2015, D.C. is the only U.S. jurisdiction to permit such nonlawyer ownership to any extent.  There are multiple nations that now allow for such investment, including the U.K. and Australia, which has led even to public ownership in stock in publicly-traded law firms in those nations.  There are loud voices that insist that American lawyers should be empowered to obtain capital and investment from non-lawyer sources.

I do not think of myself as an advocate at this stage for the rules to shift from the current restrictions but I certainly acknowledge there is intellectual merit to arguments that, as long as certain other restrictions under the ethics rules remain, then it should not be dismissed out of hand.  For example, provided that the core concept that lawyers must not allow outside influences to interfere with their independent professional judgment set out in rules such as RPC 1.8(f) and RPC 5.4(c) survives, then the specter of a lawyer somehow being “beholden” to shareholders to “win at any cost” or to put the bottom line above client interests should not be viewed as any greater a concern or fear than when insurance companies retain and pay lawyers to represent insureds.  If those arrangements do not result in the eradication of the independent professional judgment of the lawyers hired in such an arrangement, then why should such eradication be presumed if a law firm were to be publicly-traded.  In fact, there are, in Tennessee and elsewhere, law firms that are essentially captive entities which provide only legal services to insureds of an insurance company.  If such an entity can exist without running afoul of the core tenets of RPC 1.8 and RPC 5.4, then there is no real intrinsic reason that non-lawyer investment in a law firm might not also be accomplished without eroding the attorney-client relationship or bankrupting the professional ethics of lawyers operating in such a structure.

One thing has always seemed clear to me, any significant change in the U.S. on this issue is not going to be brought about by the kind of lawsuit that was filed by Jacoby & Meyers seeking a ruling that New York’s ban on non-lawyer ownership was unconstitutional as a First Amendment violation.  That suit appears to have now received its death knell ruling earlier this month.  While I am not surprised by the outcome, I do admit to being surprised at the level of vitriol that seems to lurk beneath the surface in the district judge’s opinion.  In taking down the constitutional challenges presented to him, Judge Kaplan’s opinion seems to drip with antipathy toward the litigant as much as the litigant’s positions.  (And, worse yet, it also reads like the judge is perturbed as much by having been reversed previously in the case by the Second Circuit as anything else.)  Which is kind of a shame because some of the firm’s positions — for example, an equal protection argument with a premise that lawyers with Jacoby & Meyers and investment bankers are similarly situated — merited a real rebuke.  It isn’t quite “as a fish is to a bicycle” kind of stuff, but investment banker is not among the first things people would think of to equate with a plaintiffs’ personal injury law firm.

A cautionary tale of sorts

Recently, I wrote a little about the problems that can be presented in re-negotiating the terms of a fee agreement with an existing client in light of the requirements of RPC 1.8(a) governing business transactions with clients.  Yesterday’s big legal news in Tennessee involves something that could be flippantly described as an RPC 1.8(a) problem on steroids.

In reality, the convictions of two middle-Tennessee attorneys (one of whom has been handling two high-profile matters and the other of whom happens to be married to a sitting trial court judge) for extortion touches on several ethical infractions much more severe than a violation of RPC 1.8(a).  The jury verdict comes in response to accusations that they had repeatedly threatened their client with arrest and eventually swore out an arrest warrant as part of attempting to get the client to pay them $50,000 that prosecutors said the lawyers needed as part of coming up with a larger sum to buy some property.  Having now been convicted, these lawyers can expect to be charged with violations of RPC 8.4(b) for their criminal acts, but even had their conduct not been found to be extortion there were serious RPC 4.4(a)(2) problems with threatening to pursue a criminal action against their own client to try to get paid.  I can pretty confidently say that the intent behind RPC 4.4(a)(2) is more trying to deal with problems associated with lawyers directing such threats at adversary parties and other counsel (in part, because it is difficult to fathom that any lawyer would so threaten their own client) but not a real stretch to consider such conduct to violate that rule.

Nevertheless, the factual narrative of the whole sad case does interestingly start from an effort by the lawyers to move from one set of contract terms — $800 to accompany a client to the reading of a will — to a much more lucrative arrangement for the lawyers — a $50,000 flat fee for a much larger contemplated engagement.  Ironically (at least in the Alanis Morrisette meaning of the term), if these lawyers had gone to the trouble of complying with all of the aspects of RPC 1.8(a) – including giving the client an opportunity to consult with an independent lawyer about the proposal — perhaps the lawyers and the client would have reached agreement on the terms of an arrangement (likely not a $50,000 flat fee though) that the client would have paid willingly and the rest of the violations might never have come to pass.

Traps for the unwary – Mid-stream changes to your client’s fee agreement

When lawyers think about problematic business transactions with a client, they usually think about things like loans or, perhaps, situations in which a lawyer is joining a client as an investor in a business venture.  The ethics rule regarding business transactions with clients, RPC 1.8(a), is broader in its coverage than just those situations and, in fact, broader than many lawyers realize.  A particular issue that pops up from time-to-time to cause trouble for lawyers is failure to understand that RPC 1.8(a) applies when you renegotiate a fee agreement with a client.  Given the nature of the attorney-client relationship and the broad fiduciary duties attorneys owe their clients, it should be logical that a lawyer faces a heavier than normal burden when trying to turn an existing fee agreement with a client into something more favorable for the lawyer.

It was but one of two problems involving handling of client fees, but failure to comply with RPC 1.8(a) when changing the terms of his client’s fee agreement was part of the reason a Tennessee lawyer was publicly censured at the end of last month.

The trap for a lawyer who does not realize that RPC 1.8(a) applies to such a change is that, even a change that would still amount to a reasonable fee arrangement in compliance with RPC 1.5, amounts to a violation of the rules unless it meets all of the additional requirements of RPC 1.8(a).  (Because the purpose of this rule is to prevent the lawyer from taking advantage of the client, RPC 1.8(a) does not apply when a lawyer is re-doing the terms of a fee agreement to make it more favorable to the client (i.e. marking down or walking away from a bill for example or agreeing to lower their hourly rate)).

Though numbered as three sub-parts, there are actually five additional requirements  to be met: (1) there has to be a writing transmitted to the client that discloses the transaction and the terms in a manner reasonably understood by the client; (2) the transaction and terms have to be fair and reasonable to the client; (3) the client has to be advised in writing that it is desirable to seek independent legal counsel for advice on the transaction; (4) the client must be given a reasonable opportunity to seek independent legal counsel; and (5) there has to be a writing, signed by the client, showing the client’s informed consent to the terms and the lawyer’s role (including whether the lawyer was also representing the client in the transaction.

Comment [1] to the rule offers a pretty specific pointer to try to make it harder for a lawyer to be unwary and, thus, prevent this rule from serving as a trap.  The next sentence in Comment [1] makes clear that this rule does not apply to standard commercial transactions (e.g. you represent a large bank and you also obtain a home mortgage from that bank) not only because requiring compliance would be impracticable but also because there is no real concern of an imbalance between lawyer and client in such situations.

When there is any real doubt about what the net outcome of a midstream fee change would be, the safe course is to make sure to comply with RPC 1.8(a).  Thus, while a lawyer who has been handling a plaintiff’s case on a hourly fee basis may be able to argue that moving the arrangement over to a contingent fee agreement was for the client’s benefit to avoid a burden of continuing to pay fees on a case that might not be successful, it’s a very risky endeavor to proceed without making sure that you tick each of the boxes to comply with RPC 1.8(a).