Firms Eschew Mandatory Arbitration Clauses With Clients

, The Legal Intelligencer

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Lee A. Rosengard
Lee A. Rosengard

But in about 5 to 10 percent of the new matters coming into Stradley Ronon, Rosengard said it's actually the clients that are returning with their own engagement letters they require all of their outside counsel to sign. In some of those cases, the engagement letters include mandatory arbitration provisions, Rosengard said. Those clients are typically large national or international clients. The firm can either agree to the provision and get the work or turn the work down, he said.

Pepper Hamilton General Counsel Barbara Mather said her firm considers every few months whether to add mandatory arbitration clauses into its standard engagement letter.

"It sort of depends on your love of arbitration," Mather said, noting that love isn't that intense at Pepper Hamilton. She said she doesn't think the implementation of such clauses is uniform among large firms.

From Mather's perspective, there are cases that are starting to come down finding mandatory arbitration clauses permissible, but they often require a complete record of the detailed explanation firms gave to clients about the ramifications of signing such agreements.

"The sophistication of the client matters hugely in terms of the nature of the explanation," Mather said.

Some companies understand arbitration is a "pretty normal" remedy and have in-house general counsel to advise them on the issue, she said. In those cases, it's a pretty straightforward discussion, Mather said. When dealing with an individual client, it would require a much more formal record of a discussion that warned the client and suggested getting advice of outside counsel, Mather said. She noted that firms could potentially have two different sets of engagement letters, including mandatory arbitration clauses only in those engagements with corporate clients. But she said she isn't aware of any firm that does that.

For Pepper Hamilton, the twice-yearly debate over whether to include arbitration clauses focuses on whether the firm likes arbitration as a way to resolve disputes and whether clients would be put off by the process of explaining what the clause means, Mather said.

While arbitration is supposed to be more efficient and prompt, it has become "increasingly less so" over the years, Mather said. Firms need to weigh that with the privacy arbitration is supposed to provide coupled with the fact that arbitrators are "notorious for compromising."

Michael Hayes, a Montgomery McCracken Walker & Rhoads partner who focuses his practice in part on attorney ethics, said that with the right disclosures, arbitration clauses would appear to be permissible. He said the courts have recognized the importance of cheaper, alternative mechanisms for resolving disputes.

Hayes pointed to the Philadelphia Bar Association's fee disputes committee as evidence the bar and courts have endorsed alternative means of handling disputes between attorneys and clients, at least in the fee context.

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