To Arbitrate or Not To Arbitrate? That Is the Question

Many states permit lawyers to include in their engagement agreements arbitration provisions which would require potential clients to arbitrate future malpractice claims. It is an issue with which many states are now grappling, so it would behoove lawyers to check the law in their own states if they are considering including such a clause.

States Enforcing Arbitration Provisions

For example, California, Georgia, Michigan, Pennsylvania, New York, Texas, and Wyoming have enforced arbitration provisions for lawyers. Inman v. Grimmer, 2021 WY 55 (2021) (attorney engagement letter with an arbitration clause is enforceable and does not violate public policy); Geveran Invs., Ltd. v. Irell & Manella, LLP, 2021 Cal. App. Unpub. LEXIS 781 (fee dispute: arbitration clause enforceable in attorney engagement agreement); Avetisyan v. Silberberg, 2020 Cal. App. Unpub. LEXIS 5278 (August 2020) (legal malpractice; third party beneficiaries; arbitration provision enforceable); Innovative Images, LLC v. Summerville, 309 Ga. 675, 848 S.E.2d 75 (2020) (arbitration clause was not void as against public policy or unconscionable and was enforceable); Tinsley v. Yatooma, 2020 Mich. App. LEXIS 5297 (August 2020) (arbitration provision enforceable where client was a sophisticated businessman and consulted with independent counsel regarding the engagement agreement); Mackin Med., Inc. v. Lindquist & Vennum LLP, 2020 Pa. Super. Unpub. LEXIS 1167 (April 2020) (provided client is fully informed of the scope and effect of the agreement, arbitration provision in retainer agreement is enforceable); Am. E Grp. LLC v. Livewire Ergogenics, Inc., 432 F. Supp. 3d 390 (S.D.N.Y. 2020) (arbitration agreement in attorney engagement agreement enforceable); Royston, Rayzor, Vickery & Williams v. Lopez, 467 S.W.3d 494, 504-505 (Tex. 2015) (arbitration provisions in attorney-client employment agreements enforceable like any other contract); Watts v. Polaczyk, 619 N.W.2d 714, 717 (Mich. Ct. App. 2000) (Michigan law presumes that one who signs a contract knows and understands its contents, so lawyer need not advise prospective client that fee agreement contained an arbitration clause); Derfner & Mahler, LLP v. Rhoades, 257 A. D. 2d 431 (1999) (New York public policy considerations do not require that claims of lawyer malpractice be adjudicated solely in the courts and if agreement does not violate rule of ethics, arbitration provision is enforceable).

States Limiting Arbitration Provisions

On the other hand, the American Bar Association and other states such as Florida, Louisiana, Maine, New Jersey, New Mexico, and Ohio have imposed additional requirements before finding an arbitration provision enforceable. The ABA declared that to have an enforceable arbitration provision, a lawyer must “explain the implications of the proposed binding arbitration provision to the extent reasonably necessary to permit the client to make an informed decision about whether to agree to the inclusion of the binding interests”. ABA Formal Opinion 02-425. Many states have agreed. Delaney v. Dickey, 244 N.J. 466, 242 A.3d 257 (2020) (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); Owens v. Corrigan. 252 So. 3d 747 (Fl. Ct. App. 2018) (arbitration provision unenforceable because it did not Florida Bar rules); Snow v. Bernstein,  2017 Me. 238, 176 A.3d 729, 734 (2017) (despite State legislature’s strong policy favoring arbitration, attorney’s motion to compel arbitration denied where he failed to communicate adequate information and explanation to obtain the client’s informed consent as required by Maine’s Rules of Professional Conduct); Castillo v. Arrieta, 368 P.3d 1249, 1252 (N.M. 2016) (arbitration clause could not be enforced where attorney failed to make “full and complete disclosure” of its potential effects); Guay v. Llovd Ward. P.C.. 2014 Ohio App. LEXIS 179 (2014) (dicta: agreements requiring the arbitration of disputes arising from the attorney-client relationship run contrary to the fundamental duty to represent the client zealously); Hodges v. Reasonover, 103 So. 3d 1069, 1078 (La. 2012) (because full disclosure of the potential consequences of the arbitration clause had not been made to the client, it was not enforceable); Kamaratos v. Palias, 360 N.J. Super 76, 87, 821 A.2d 532 (2003) (fee dispute: despite New Jersey’s strong policy favoring arbitration, clause unenforceable where attorney does not make full disclosure to client of all ramifications of agreement to arbitrate).

Desirability of Arbitration

That leaves for consideration the question of whether arbitration provisions should be included in legal engagement agreements. That is, whether arbitrating legal malpractice disputes is the preferred method of resolution. As with so many things legal, the answer is, “it depends.” The pros and cons of the process should be carefully considered before  such a provision is included in a proffered engagement agreement.

Historically, the arguments in favor of arbitration are confidentiality, more efficiency, reduced cost, and increased flexibility. The idea is that arbitration is entirely confidential, so it has less of an impact on the lawyer’s reputation or livelihood. Arbitration is thought to be more efficient because there are not a lot of rules with which the parties must comply nor a bulging court docket with which to compete. Additionally, it is believed that removing the formal discovery process reduces cost. Finally, it is believed that flexibility leads to results that are more fair and more appropriate for these parties in  these circumstances. None of these thoughts is necessarily false, but neither are they always true.

1. Confidentiality

Arbitration proceedings, almost without exception, are supposed to be entirely confidential. The reality, however, is that arbitration is confidential except when it is not. First, the arbitrator has no real power. So, for example, if one of the parties disclosed what was occurring in the arbitration the arbitrator could not hold that party in contempt or impose any other sort of punishment. Without an enforcement mechanism, the promise of confidentiality is rather hollow.

Second, the dispute may be initiated by a publicly filed complaint, subsequently to be transferred by the court to arbitration. The Complaint, of course, would be of-record, as would the ultimate dismissal.

So, too, a judgment may be public. Technically, an arbitration award is not enforceable. The winning party must file a motion asking the court to enter judgment on the arbitration award, either in a new lawsuit or in the one which initiated resolution of the dispute.

Finally, as noted, the arbitrator has no legal authority. Thus, forcing compliance with a subpoena requires assistance from a court. To get that assistance, one would have to file a publicly available motion.

Plainly, then, there are a number of circumstances in which the dispute, even in arbitration is not confidential.

Moreover, confidentiality may not always be a good thing because with confidentiality comes lack of transparency. Without transparency, there are no decisions or rulings of the arbitrator that can be used to help understand his or her thinking. Additionally, the standards used by arbitrators are not clear. Although generally arbitrators are required to follow the law, they often consider the “apparent fairness” of the respective parties’ positions. That means results less favorable for the party who is favored by a strict reading of the law. All of this may make the process seem biased or unfair and certainly reduces the ability to predict outcomes accurately.

2. Efficiency

It is true arbitrations are not set on overcrowded court calendars behind all the other cases which take priority (e.g., criminal or domestic matters).  And it is true that the final hearing is set by the arbitrator and the parties, making it easier to plan and prepare for that event.

On the other hand, being pushed to conclude discovery (if it is allowed) and being forced to investigate a complex and complicated case (usually a case within a case) with access to limited discovery tools is challenging. For example, it is not uncommon for each side to be limited to three depositions and expert reports only. Consider a legal malpractice case with an underlying medical malpractice case or an underlying complex business transaction. Limited discovery may make the defense much more difficult.

Furthermore, relaxed rules of evidence may make the defense more difficult. An attitude of “it all comes in”, which is what most arbitrators have, tends to favor plaintiffs, not defendants. The attitude results in admission of documents with little or no explanation and no cross-examination, so the parties are free to argue that the documents mean whatever the party wants them to mean, regardless of what the author and/or recipient thought they meant.

Other evidentiary problems also arise in arbitration that do not exist in jury trial litigation. For example, no Rules of Evidence may mean that the entire decision is based on evidence that our judicial system has determined should not even be seen or heard by the factfinder. Additionally, even if one wins an objection or motion in limine, and the arbitrator ultimately “excludes” evidence, it will be after he or she has seen and heard all about it.

Finally, the efficiency of arbitration is increased significantly because there is essentially no appeal. This is great if you like the decision, but troubling if you don’t. The grounds upon which an arbitration award under most states’ law are limited. For example, in Georgia they are:

(1) Corruption, fraud, or misconduct in procuring the award;

(2) Partiality of an arbitrator appointed as a neutral;

(3) An overstepping by the arbitrators of their authority or such imperfect execution of it that a final and definite award upon the subject matter submitted was not made;

(4) A failure to follow the procedure of this part, unless the party applying to vacate the award continued with the arbitration with notice of this failure and without objection; or

(5) The arbitrator’s manifest disregard of the law.

O.C.G.A. §9-9-13(b). The last subsection, manifest disregard of the law, is not simply a misapplication such as would warrant reversal of a jury trial.  It is a complete and utter disregard for the applicable law. This means that, if the arbitrator provided a reasoned award and recognized the applicable law the court probably is not going to find that it was manifestly disregarded even if it was not followed.

Under federal law, the right to appeal is even more limited. One can only appeal

(1) where the award was procured by corruption, fraud, or undue means;

(2) where there was evident partiality or corruption in the arbitrators, or either of them;

(3) where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced; or

(4) where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.

9 USCS §10. Note, in federal court, there is no “disregard of the law” option. The court will not review the decision to see if the arbitrator properly applied law. The only thing the reviewing court will look at is whether the process complied with the Act.

Giving up the ability to appeal is a right that should be particularly considered. While the parties have some input into selecting the arbitrator, the process is very similar to selecting a jury. Each side strikes the potential arbitrators that are unacceptable and the one(s) who preside are the ones left over. Without any voir dire or previous opinions, it is really not possible to know the actual biases and unfairness of the arbitrator. The parties thus cede to an essential unknown complete power and authority over the dispute.

3. Cost

In large part, because it is expected that expensive and time-consuming discovery is avoided, there is a perception that arbitration is less expensive than litigation. The premise may in fact be faulty if the parties agree to a more fulsome discovery process. Most arbitrators will let the parties conduct at least the minimum discovery the parties believe is necessary to develop the evidence to present their case. So, one could be conducting expensive and time-consuming discovery in arbitration and paying an arbitrator several hundred dollars an hour to referee that process.

Moreover, for every telephone conference, discovery dispute, scheduling order, etc., in addition to attorney’s fees, each party incurs the hourly cost of the arbitrator. This generally runs $500-$1000 per hour. Obviously, this can add up quickly and is exponentially higher if there is a panel of arbitrators instead of a single arbitrator.

The costs are also expanded because there is not a standard set of rules of procedure or evidence. This may result in motions and hearings on preliminary issues like the rules of procedure that will apply.

Furthermore, arbitrators are reluctant to resolve cases before giving both sides a full opportunity to present his or her case. Thus, success at the motion stage is unusual in arbitration. Since trial is by far the most expensive part of a case, the cost savings by going to arbitration may be minimal.

4. Flexibility

The rules and procedures in arbitration are much more flexible than the rules and procedures in a lawsuit. This can be good and can help the parties get to resolution since the arbitrators generally take the parties’ direction on this. However, not having a clear set of rules and procedures can lead to obvious problems if the parties cannot agree on how the arbitration should be conducted. Some of the evidentiary and procedural challenges are noted above.

Another problem that accompanies flexibility is unpredictability. Without clear rules that govern the process, is difficult to predict exactly how the case will proceed and, of course, what the ultimate result will be.

Conclusion

There certainly are advantages to the arbitration process. Especially in our COVID-world, it is, in fact, an essential element of our dispute resolution system. The process is not appropriate, however, for every case. Each case needs to be considered on its own merits and an informed decision made about it. If the issue is simple and straightforward, for example, fees only, it might be appropriate for arbitration (if no malpractice claim is asserted by counterclaim). On the other hand, many legal malpractice cases have nuances and needs that may be better met in the court system.