Firms Eschew Mandatory Arbitration Clauses With Clients

, The Legal Intelligencer

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Lee A. Rosengard
Lee A. Rosengard

First Published May 2, 2013

Analysis

Mandatory arbitration clauses have found a home in some law firms' standard engagement letters, but one malpractice case in Philadelphia federal court is challenging whether such clauses violate public policy, or at least should be more detailed in explaining to a client what he or she is giving up by agreeing to arbitration.

The use of mandatory arbitration clauses, while common in partnership agreements or between two corporate entities, does not seem pervasive in Pennsylvania firm engagement letters, where some firms have said they don't want to arbitrate with clients who they view as benefiting from the arbitration. But that isn't to say those firms perceive an ethical or legal ban on such provisions.

A ruling by U.S. District Judge Joel H. Slomsky of the Eastern District of Pennsylvania in Sanford v. Bracewell & Giuliani would be the first in the Third Circuit on the issue of whether such clauses are permissible in engagement letters between clients and attorneys.

The parties themselves in Sanford had little case law to point to in arguing for their respective positions.

Craig and Mary Jo Sanford, through their attorney, Clifford E. Haines of Haines & Associates, relied on a 2012 Louisiana Supreme Court case, Hodges v. Reasonover, in which the court ruled an arbitration clause violates ethical rules on duty of candor and loyalty if it doesn't enumerate seven factors a client is waiving by agreeing to arbitration.

In order for an arbitration clause to be permissible, the Hodges court required the client be informed of the waiver of a jury trial, the waiver of a right to appeal, the waiver of broad discovery, the up-front cost of arbitration, the nature of the claims to be arbitrated, that the client can still bring a disciplinary action against the attorney and that the client has a right to have the engagement letter reviewed by independent counsel. Haines argued his client was not a sophisticated business, but rather an individual whose right to a jury trial was taken away by this provision.

Bracewell's attorney, Steven M. Schneebaum of Fox Rothschild, noted courts generally have a presumption in favor of arbitration over litigation. He said the American Bar Association's ethics opinion on the issue says only that an engagement letter must not limit the liability of the lawyer. He also noted the Philadelphia Bar Association required a clear waiver of a jury trial, the client be advised to seek outside counsel and that there is consent from the client in writing. Schneebaum said all three of those criteria were met in this case. He added Hodges was not controlling in this case, noting further that it was a decision only by the plurality of the Louisiana court.

Are Clients Benefiting Over Firms?

The general consensus among law firm general counsel is that such policies are appropriate but must be carefully explained to the client. That doesn't mean all firms have embraced the concept.

Lee A. Rosengard, general counsel of Stradley Ronon Stevens & Young, said his firm doesn't use such provisions because its insurer, Attorneys' Liability Assurance Society, prefers that its insureds don't use them.

"The concern is that many legal malpractice cases are entirely defensible as a legal matter, but when you get into arbitration and somebody decides they're going to split the baby, you lose the opportunity to base your defense on the law," Rosengard said.

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