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To Arbitrate or Not to Arbitrate Legal Fees? That is the Question.

After several years of uncertainty, under a recent decision by the California Supreme Court (Schatz v. Allen Matkins, et al. (2009) DJDAR 1190), lawyers can safely include binding arbitration clauses in their fee agreement to cover both disputes over legal fees and other disputes, including claims for professional negligence. However, the ruling, due to the provisions of the Mandatory Fee Arbitration Act ("MFAA," Bus. & Prof. Code §6200 et seq.), still leaves the possibility of cumbersome procedural issues.

In 1997, the appellate court took on the issue of whether attorneys may compel their clients to arbitrate claims for malpractice when their fee agreement includes an arbitration clause. In Powers v. Dickson, Carlson, et al. (1997) 54 Cal.App.4th 1102, the attorney's fee agreement included a clause requiring the parties to arbitrate claims for professional negligence. The client argued that the provision was not enforceable because it was ambiguous and adhesive. The court of appeals disagreed and held that properly drafted arbitration clauses are not contracts of adhesion and a client can be required to arbitrate his malpractice claims against his attorney. The sole issue in Powers, however, was the client's claim for malpractice. There was no claim by the attorney for failure to pay fees.

As we all know, defensive claims of malpractice are often made by clients who are pursued for their unpaid fees. Lawyers are well-advised to wait until a year has past since they last did work for the delinquent client before pursuing the client for payment because the statute of limitations for a claim for professional negligence is one year. Code Civ. Proc. §340.6. Assuming no tolling applies, the client is then limited in his defensive claim for malpractice to the amount of the outstanding fees. Code Civ. Proc. §431.70. Under the MFAA, because clients have the absolute right to have their fee disputes heard by either binding arbitration or non-binding arbitration by a panel of arbitrators chosen by the State Bar or a local bar association, even if an attorney had a binding arbitration clause in his fee agreement, the client (as long as he does not sue for affirmative relief) could, in the past, argue malpractice as an offset, and if he sought a trial de novo, regardless of the arbitration clause, the client could force the attorney into litigating the malpractice offset in a superior court action. See Alternative Systems, Inc. v. Carey (1998) 67 Cal.App.4th 1034, (client's rights under the MFAA trump an arbitration clause in a fee agreement).

In Aguilar v. Lerner (2004) 32 Cal.4th 974, a client with an arbitration clause in her fee agreement filed a complaint in the superior court for legal malpractice. The attorney petitioned the court to compel arbitration and made a claim for unpaid fees. The trial court granted the petition and the arbitrator ruled in favor of the attorney. The trial court awarded judgment for the attorney and denied the client's request to vacate the award. The appellate court affirmed the trial court and the Supreme Court affirmed the appellate court, finding that when the client sued for malpractice, she waived her right to have her fees dispute arbitrated under the MFAA and the corresponding right to a trial de novo. The court did not, however, reach the issue raised in Alternative Systems, i.e., whether a client who did not file a malpractice complaint can be required to submit the dispute to binding arbitration if he sought a trial de novo after a MFAA arbitration, though Justice Chin in his concurring opinion, did reach that issue and his analysis ultimately carried the day in Schatz.

Prior to Schatz, effectively only in situations like Powers, where the attorney had no corresponding fee claim or Aguilar, where the client sued for affirmative relief, thereby waiving her right to arbitrate under the MFAA, was the attorney ever able to compel arbitration of the malpractice claim in a private binding arbitration. Although the benefits of private arbitration versus lawsuits filed in the superior court are much debated, many, if not most, attorneys would prefer to have a defensive malpractice claim against them heard by an arbitrator than a jury.

In Schatz, the Supreme Court, in an unanimous opinion, recognizing the tension between the California Arbitration Act, the MFAA as well as the holdings in Aguilar and Alternative Systems, concluded that if a client and his attorney entered into a fee agreement which contains a binding arbitration clause and a fee dispute arises, the client, at his option and providing he acts timely, may seek to have the dispute arbitrated under the MFAA. However, if the client requests a trial de novo, he cannot, thereafter, have his dispute heard in the superior court and instead, he must submit his dispute to private arbitration pursuant the arbitration provisions in the fee agreement. If the defenses include malpractice, the attorney, after the MFAA arbitration, will have the right to have those defensive malpractice claims against him heard in arbitration. Since the right to a trial in the superior court no longer exists, this may result in disgruntled clients foregoing the MFAA in the first instance. Instead, they may head straight to private arbitration since that is where the parties will ultimately end up if they are not satisfied with the arbitrator's decision under the MFAA.

_{Laurie Murphy
Valensi Rose, PLC
2029 Century Park East, Ste. 2050
Los Angeles, CA 90067
Main Number: (310) 277-8011
Fax: (310) 277-1706
E-mail: mlm@vrmlaw.com
Web: www.vrmlaw.com}

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