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Category: Attorney-Client Relationship

NJ Case Has Lessons on Arbitration Clauses in Attorney Retainers

February 14, 2021

A recent Law 360 article by Hilary Gerzhoy, Deepika Ravi, and Amy Richardson, “NJ Case Has Lessons On Arbitration Clauses in Atty Retainers”, reports on arbitration clauses in attorney retainers in New Jersey.  This article was posted with permission.  The article reads:

On Dec. 21, 2020, the New Jersey Supreme Court issued Delaney v. Dickey, an opinion that severely limits the enforceability of arbitration provisions in law firm retainer agreements.  The court held that an arbitration provision in a retainer agreement is only enforceable if an attorney provides "an explanation of the advantages or disadvantages of arbitration" to a client before the client signs the retainer agreement.

The decision, which applies prospectively, tracks and builds on other jurisdictions' limitations on the enforceability of arbitration provisions in retainer agreements.  Attorneys wishing to resolve client disputes via arbitration should take close note of these heightened disclosure obligations.

Delaney v. Dickey

Delaney v. Dickey addressed whether an arbitration provision contained within Sills Cummis & Gross PC's four-page retainer agreement was enforceable.  A Sills attorney provided the retainer agreement to client Brian Delaney during an in-person meeting.  The retainer agreement contained a provision stating that any disputes about the law firm's fees or legal services would be resolved by arbitration.

The arbitration provision stated that the result of any arbitration would not be subject to appeal, and that Delaney's agreement to arbitration waived his right to a trial by jury:

The decision of the Arbitrator will be final and binding and neither the Firm nor you will have the right to appeal such decision, whether in a court or in another arbitration proceeding.  You understand that, by agreeing to arbitrate disputes as provided in this retainer letter, you are waiving any and all statutory and other rights that you may have to a trial by jury in connection with any such dispute, claim, or controversy.

The retainer agreement included a one-page attachment that contained a hyperlink to the JAMS rules.  However, the Sills attorney did not provide Delaney with a hard copy of the JAMS rules at the meeting.  The attachment also stated that the arbitration would be conducted by one impartial arbitrator; that the parties waived any claim for punitive damages; that the arbitration would be binding, nonappealable and confidential; and that the parties would share the arbitrator's fees and expenses, except that the arbitrator could award costs, expenses, and reasonable attorney fees and expert witness costs.

The New Jersey Supreme Court held that the arbitration provision was unenforceable "[b]ecause Delaney was not given an explanation of the advantages or disadvantages of arbitration."

The court recognized that the Sills attorney had disclosed, in the retainer agreement and attachment, several of the differences between an arbitral and judicial forum — but it found that disclosure insufficient.  Instead, the court required that the attorney provide an "explanation" of these differences — but it did not provide clear guidance on what is required for a sufficient explanation.  Importantly, the court held that an attorney must explain the differences between an arbitral and judicial forum, even when the client is "a sophisticated businessman."

The mere recitation of these differences in the retainer agreement, and the Sills attorney's "[offer] to answer any questions" Delaney had about the retainer agreement was insufficient to meet the attorney's fiduciary obligations.  Instead, the court imposed an obligation to explain the advantages and disadvantages of an arbitration provision either orally or in writing.

Although the court did not explicitly so state, its opinion suggests that an attorney cannot merely list the differences between an arbitral and judicial forum, but rather must explain how those differences might affect the client's interests in the event of a future dispute.

What Happens Outside of New Jersey?

The New Jersey Supreme Court pointed to a string of ethics opinions and case law from other states that support heightened disclosure obligations on an attorney where an arbitration provision is included in a retainer agreement.  The court also pointed to jurisdictions that require a lawyer to go even further and advise a client to seek independent counsel before agreeing to arbitrate future disputes.  Delaney closely tracks the American Bar Association's Formal Opinion 02-425, Retainer Agreement Requiring the Arbitration of Fee Disputes and Malpractice Claims, issued in 2002.

The opinion concluded that a binding arbitration provision requiring all "disputes concerning fees and malpractice claims" to be resolved via arbitration does not violate ABA Model Rule of Professional Conduct 1.4(b), "provided that the client has been fully apprised of the advantages and disadvantages of arbitration and has given her informed consent to the inclusion of the arbitration provision in the retainer agreement" and the arbitration provision does not "insulate ... or limit the liability to which she would otherwise be exposed under common and/or statutory law."

Because a lawyer has a fiduciary "duty to explain matters to a client," she must "advise clients of the possible adverse consequences as well as the benefits that may arise from the execution of an agreement" that includes an arbitration provision.  Accordingly, compliance with Rule 1.4(b) requires that the lawyer "'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 [provision's] inclusion" in the retainer agreement.

Unlike the New Jersey opinion, the ABA concluded that just how extensie that disclosure must be will depend on "the sophistication of the client."  However, consistent with Delaney, the lawyer "should make clear that arbitration typically results in the client's waiver of significant rights, such as the waiver of the right to a jury trial, the possible waiver of broad discovery, and the loss of the right to appeal."

For these reasons, the Sills attorney's failure to explain these differences to Delaney would similarly fail under the ABA standard.  While ABA opinions are persuasive, not binding, authority on the states, they are an important road map for attorneys seeking to understand their ethical and practical obligations.

The District of Columbia takes a similar approach.  D.C. Ethics Opinion 376, published in November 2018, concludes that an agreement to arbitrate fee disputes and legal malpractice claims is otherwise permitted by the rules, provided that the lawyer has adequately informed the client about "material risks of and reasonably available alternatives to" the proposed arbitration clause such that the client is "fully informed."

That requires, at minimum, that the attorney inform the client about differences between a judicial and arbitral forum as to (1) the fees to be charged; (2) the scope of discovery; (3) a right to a jury; and (4) a right to an appeal.  Like ABA Formal Opinion 02-425, the D.C. opinion also advises that the scope of the discussion depends on the level of sophistication of the client.

What Should an Attorney Explain to a Client, and How?

While the Delaney case is only controlling in New Jersey, it provides useful guidance for attorneys hoping to create binding arbitration provisions in retainer agreements.  As the Delaney court noted, the differences between resolving an attorney-client dispute in arbitration or before a judicial forum can be communicated orally, in writing, or both.

The New Jersey Superior Court's Appellate Division stated in Delaney that it did not hold that the "reasonable explanation" required of an attorney cannot be contained in the written retainer agreement.  However, the New Jersey Supreme Court's opinion did not directly address that question, suggesting that an attorney can sufficiently explain the advantages and disadvantages of the arbitral forum within the retainer agreement.

Rather, the court held that the disclosure in the case before it — which merely recited several of the differences between a judicial and arbitral forum, with no additional explanation provided orally or in writing about these or other differences — was insufficient.  Recognizing that not all arbitration provisions are alike, the court enumerated several differences between an arbitral and judicial forum about which a client might need to be advised including the following:

1.  An arbitration resolves a dispute before a single arbitrator and not a jury of one's peers.

2.  The arbitrator's decision is final and binding with no right of appeal.

3.  Unlike court proceedings, arbitration proceedings are conducted privately and the outcome will remain confidential.

4.  Unlike court proceedings, the arbitration process offers a more limited right to discovery.

5.  The client may be responsible, in part, for the costs of the arbitration proceedings, including payments to the arbitrator.

6.  A plaintiff prevailing in a judicial forum may be entitled to punitive damages, but that right may be waived in an arbitral forum.

7.  A judicial forum generally does not permit reasonable attorney fees to be imposed against a nonprevailing client in a nonfrivolous malpractice action, whereas an arbitral forum may permit an award that imposes costs, expenses and reasonable attorney fees against the nonprevailing party.

However, the court was silent as to how an attorney is to translate that list into a compliant explanation to a client.  Practically then, attorneys should, at a minimum, explain — not merely recite — these differences to a client prior to the client agreeing to a mandatory arbitration provision.

The attorney's explanation should include, for example, that applicable arbitration procedures offer limited discovery — for instance, the JAMS procedures "limit each party to 'one deposition of an opposing [p]arty or of one individual under the control of the opposing [p]arty'" whereas judicial rules do not have a set limitation on the number of depositions available.

The attorney should also explain that, unlike a court proceeding where neither party pays for a judge's time, parties in arbitration often split the cost of the arbitrator's hourly rate, which can be costly.  And, at least in New Jersey, an attorney must provide a hard copy of the rules governing the arbitration — but note that neither D.C. Ethics Opinion 376 nor ABA Formal Opinion 02-425 imposes that requirement.  And, perhaps most importantly, an attorney must understand the relative benefits and disadvantages of arbitration so as to answer any client questions.

Conclusion

While agreements to arbitrate attorney-client disputes are routinely permitted, attorneys' ability to enforce such agreements will turn on the client's ultimate understanding of the implications of agreeing to arbitration.  Attorneys should, as always, consult the ABA Model Rules of Professional Conduct and related guidance in their jurisdiction — and when in doubt, should err on the side of explaining, both orally and in writing, the benefits and disadvantages of an arbitral forum.

Hilary Gerzhoy is an associate, and Deepika Ravi and Amy Richardson are partners, at Harris Wiltshire & Grannis LLP.

Second Circuit: No Second Shot for Milberg in $12M Fee Dispute

February 9, 2021

A recent Law 360 story by Justin Wise, “2nd Circ. Says No 2nd Shot For Milberg in $12M Fee Dispute”, reports that the Second Circuit upheld a lower court's dismissal of Milberg Coleman Bryson Phillips Grossman PLLC predecessor Milberg LLP's pursuit of nearly $12 million in contingency fees from former clients, saying its petition failed to comply with a timing provision of federal arbitration law.  The decision came down in a long-running dispute between Milberg LLP, which has since merged with multiple firms, and clients it represented in Germany and Luxembourg in their suit for recovery on defaulted Argentine bonds.

The firm in 2019 sued in the Southern District of New York seeking to vacate an arbitration award that said it was entitled to only a fraction of a $11.9 million fee it claimed it earned for its work on the case.  However, the court dismissed the firm's effort over failing to adequately plead diversity of parties and for not serving proper notice of the petition within the three-month statute of limitations.  While a three-judge panel differed with the lower court on the subject of diversity, "nevertheless, we hold that Milberg failed to comply with the timing provisions of the Federal Arbitration Act."

An attorney for Milberg had previously argued in court that Hague Convention protocol made it impossible to serve notice to overseas adversaries within 90 days.  But the appeals court was not convinced, saying the firm did not "demonstrate diligence" when it came to the three-month deadline to warrant a "possible equitable extension."

"Milberg did not even notify opposing counsel of its petition to vacate the arbitral award until [the] three-month window closed, and only after opposing counsel stated it was not authorized to accept service did Milberg set the wheels in motion for service overseas," the panel wrote, citing the firm's after-hours attempt to serve notice on the day the statute of limitations expired.

Milberg had represented 10 Luxembourg and German retirement funds and two German individuals as they sought to enforce payment on defaulted Argentine bonds.  The clients stopped working with Milberg in 2016 and hired another firm before settling the dispute with Argentina for $162.3 million.  Court documents show that the settlement was similar to the terms Milberg had obtained before being discharged.

Milberg initiated arbitration seeking contingency fees in 2017, but a panel on Feb. 5, 2019, declined to award the firm what it sought. Milberg filed suit in court on May 6, 2019, and late that evening — the last day it could serve a notice for its motion — emailed counsel for their former clients asking whether it could accept service on their behalf.  The clients' counsel said it was not authorized to accept service, court documents show.

Defense Firms and Clients Can Boast About Attorney Fee Wins

January 25, 2021

A recent Law.com story by Christine Simmons, “Both Law Firms and Clients Can Boast About Fee Wins,” reports that, several organizations have reported that, despite the Am Law 200’s worst fears, the legal industry enjoyed growth in 2020.  Citi Private Bank Law Firm Group and Hildebrandt Consulting have projected mid-single digit growth in revenue and mid to high single digit growth in profits. 

Last year, large firms managed to raise rate about 5%, according to James Jones, a senior fellow at the Georgetown Law Center on Ethics and the Legal Profession.  That’s remarkable considering the chaotic and depressing environment of 2020, and even more remarkable that the average annual rate increase for firms since 2008 has been about 3%.

But weren’t general counsel in cost control mode?  After all, according to survey data collected in June 2020 from 223 corporate legal departments, 89% of respondents said controlling outside counsel costs was a high priority.  So what gives?  How could law firms push through high rates at a time of such fee pressure?

Reconciling legal departments’ pressing need to cut costs with law firms’ revenue, profit and rate growth in 2020 requires a closer look at law firm segmentation, sector performance and the trajectory of the year.  But in the legal industry, 2020 is also a story about demand and the benefits of close cooperation on fee agreements, allowing both law firms and legal departments to have some bragging rights.

The Conversation

The lucrative year extended up and down the Am Law 100 and likely into the Second Hundred, but it came at different client relations strategies.  For the elite, rate and fee pressure was so little they could give out double bonuses to associates without billable hour requirements.  Wall Street firms and the Am Law 20 saw the benefit of ‘fight to quality” during an unpredictable year in business.  Meanwhile, some law firms did work with their clients on a mix of fee strategies and arrangements, to the benefit of both.

For instance, at Akerman, ranked No. 88 in the Am Law 100 last year, CEO Scott Meyers said collections remained steady last year, although Akerman worked with its clients to help them meet their own budgets while paying their legal bills.  “We’re close to our clients,” he said.  “We reached out to each one to understand, ‘what’s your financial position?  What’s your cash position?  What can you do, what can’t you do?’”  At the end of the financial year, the firm said it had a 6.5% increase in gross revenue in 2020.

Fee pressure, of course, depends on the industry.  And those with insurance industry clients and municipal clients are among those seeing the most discount pressure.  Mark Thompson, president and CEO of Marshall Dennehey Warner Coleman & Goggin, said while the firm’s hospital clients have returned to their pre-COVID payment rates, the firms’ base of municipal government clients haven’t yet returned to pre-COVID fee arrangements as a result of financial distress. “That is going to remain a problem going forward,” Thompson said in a Dec. 22 article. 

But nearly all sectors saw pressure in the beginning of the pandemic. At General Motors, the automaker reached out to the 19 firms on its panel of “strategic legal partners.” The second quarter presented an enormous, worrisome question mark, and the automaker—like so many businesses of all sizes—was looking to preserve cash.

GM general counsel Craig Glidden said the company didn’t know what would happen in the auto markets, which meant asking firms for help. And those firms stepped up, agreeing to deferred billing and alternative fee arrangements to relieve some of the company’s pressure.

The Significance

Yes, law departments are seeking high cost savings.  The 2021 Report on the State of the Legal Market from Thomson Reuters and Georgetown Law said spending on outside counsel did, in fact, decrease in the second and third quarters of 2020.  The report said 81% of legal departments found that general enforcement of billing guidelines, including reductions of invoice fees and expenses, was the most effective way to keep billing down.  Meanwhile, 53% of respondents requested standard discounts; 49% of respondents reduced timekeeper rate increases; and 45% used volume discounts.

At the same time work, the report shows that the average daily demand for law firm services per lawyer, based on billable hours, increased in the second half of the year, picking up in November to almost match the previous two year average.  So what happened to the portrait of the general counsel scrutinizing every line item and grilling firms about rate increase and discounts?

That picture is becoming increasingly faint.  Instead, the portrait emerging from 2020 is one of cooperation and demand.  Clients rushed to law firms for urgent legal advice during the pandemic, including counseling for workplace laws, PPP loans, restructuring and data security concerns.  Secondly, the circumstances from the pandemic gave rise to conversations about pricing, driving both sides of the law firm-client relationship to seek common ground—both in the form of tried-and-true alternative fee arrangements and those that reflect a more innovative approach.

Law firms have some leverage.  Just because a client wants a discount doesn’t mean a firm has to provide it.  “Clients understand the difficulty of onboarding new external counsel,” says McKinsey & Co. senior partner Alex D’Amico.  “There’s a real cost to bringing on a new firm.”

Polsinelli Sued Over Billing Issues

January 22, 2021

A recent Law 360 story by Craig Clough, “Polsinelli Says Clients’ ‘Slacking Off’ Claims are “Meritless”, reports that Polsinelli PC urged a Pennsylvania federal judge to toss a lawsuit accusing the firm of overcharging and underperforming while representing a pharmacy and its former CEO in an investigation by the U.S. Securities and Exchange Commission, saying claims the firm "slack[ed] off" are not plausibly alleged.  Philidor Rx Services LLC and former CEO Andrew Davenport said in the suit that Polsinelli shifted much of its legal work to another firm and added unnecessary third-party legal fees, but those arguments don't belong in a breach of contract claim, Polsinelli said.

"Plaintiffs do not allege that Polsinelli breached any specific provision of the engagement letters but instead allege that it negligently performed its obligations such that Philidor allegedly paid more than it should have," Polsinelli said.  "That is a negligence claim.  And as explained below, plaintiffs' negligence claim fails for multiple reasons."

Philidor and Davenport alleged in their November lawsuit that Polsinelli transferred much of its legal work to another firm working on their case, WilmerHale, which charged by the hour and added unnecessary third-party fees.  This way, Polsinelli received the same $14 million capped flat fee, and WilmerHale billed more hours than anticipated, the complaint said.

Davenport was convicted in 2018 for his involvement in a $9.7 million kickback scheme after the SEC investigated Philidor's relationship with Valeant Pharmaceuticals International Inc.  Philidor hired Polsinelli and former partner Jonathan N. Rosen in 2016 when the SEC investigation was first launched.  Gary Tanner, a former Valeant executive who was a co-defendant in the investigation and trial, hired WilmerHale. Tanner and Davenport agreed to have a joint defense with WilmerHale and Polsinelli attorneys, with Philidor agreeing to pay the flat fee for Polsinelli and the hourly fees for WilmerHale.

The investigation eventually led the government to charge Davenport and Tanner with honest services wire fraud and conspiracy to commit money laundering in 2017.  Philidor claims that once Polsinelli realized the case would likely face trial, the capped flat fee agreement was looking "less and less lucrative" to the firm.  Polsinelli began pushing work to WilmerHale and adding third-party legal fees for work the plaintiffs say the firm should have been able to do in-house and should've been included in the $14 million they paid, such as hiring an outside counsel for Davenport's defense, the complaint alleges.

Philidor was charged over $5 million in expert fees instead of the $2 million initially agreed to and more than $13 million in counsel fees instead of the $2 million agreed to, among other millions of dollars in third-party fees, the complaint alleges.  The company is accusing Polsinelli of one count of breach of contract, one count of unjust enrichment and a third count of mismanagement of litigation.  Philidor is asking for damages in the form of the costs of suit and the counsel fees they were charged because the firm's effort "represented a slacking off and willful rendering of imperfect performance."

Polsinelli said all the claims are "meritless," including the negligence claim, which is time-barred and fails even if it wasn't.  Under Pennsylvania law, there is a two-year statute of limitations for tort claims, and because the trial wrapped in May 2018, all of the alleged breaches occurred before then and the claim is untimely, Polsinelli said.  Under Pennsylvania law, the plaintiffs must also allege Polsinelli failed to "exercise ordinary skill and knowledge" to properly plead the negligence claim, but the claim does not make that allegation, Polsinelli said.  The firm also argued, among other things, that the unjust enrichment claim should be tossed because it "is a quasi-contractual doctrine that does not apply in cases where the parties have a written or express contract."

Defense Rates Expected to Rise at Lower Pace in 2021

January 15, 2021

A recent Legal Intelligencer story by Andrew Maloney, “Rate Pressure and Rising Expenses Are Expected to Challenger Firms in 2021,” reports that law firms may have weathered the COVID-19 financial storm last year, but firm leaders and legal observers say economic pressures could bear down again in 2021, including increased expenses, rate pressure and cash-strapped clients.

Big Law likely won’t be able to count on government loans this time , either.  Overall, firms and analysts are optimistic about business this year.  Firms mostly said they expect a return to some version of normalcy by the second or third quarter of the year, according to a report this week from Thomson Reuters and Georgetown Law’s Center on Ethics and the Legal Profession.

At the same time, the pandemic “is likely to continue to pose economic challenges for law firms” this year, the report said, even as vaccines are being distributed en masse.  “First, it is not clear that the same tools used by firms to address the crisis since March will be as readily available in 2021.  Some law firms may well not enter the new year with the same cash cushions they had from 2019,” the report stated.  It notes many firms used the pandemic to increase billing and collections efforts, and as a consequence, may not have as much on-hand heading into this year as usual.

In addition, there’s growing concern about the ability to raise rates this year, while corporate legal departments, with 2021 budget goals, are looking for areas to trim.  ”It may be harder to implement the same level of rate increases at the end of 2020 that firms enjoyed at the end of 2019,” the authors added.

James Jones, a senior fellow at the Georgetown Law Center on Ethics and the Legal Profession and lead author of the report, said he was “dubious” firms could boost rates at the same level they did last year—about 5%.  The average annual rate increase for firms since 2008 has been about 3%, he said.

Jones also pointed to a recent Thomson Reuters survey of more than 200 legal departments that found about 89% said holding down outside counsel costs was one of their highest priorities for 2021.  He noted that corporations have significantly increased personnel whose job is to oversee outside counsel agreements.  According to Reuters’ Legal Department Operations Index, about 57% of companies had people in those roles in 2019. In 2020 that number shot up to 81%.  “So, given the economic uncertainties and enormous pressure that companies are under, I would be surprised if they sit still for a 5% increase,” Jones said in an interview.

Joshua Lorentz, a partner at Dinsmore & Shohl who chairs the firm’s finance committee, said the firm ended 2020 “on a solid note” and expects 2021 to be a “net gain” for business.  But he said one wrinkle to the budgeting process this year is figuring out where to set rates, as clients try to forecast how much COVID-19 will alter their bottom lines again.  “I don’t know that a majority of companies are asking for discounts, but perhaps discounts for new work, COVID discounts. For some clients, we’re willing to lean into that,” Lorentz said.

He said the firm is evaluating which clients needed breaks in 2020 and having discussions about their projections for 2021.  ”And with all that information, we’re able to see who needs us to lean in, who appears to be weathering the COVID situation.  Then we try to budget conservatively on top of that,” he said.  As an example of that conservative budgeting approach, Lorentz said Dinsmore is preparing this year’s numbers as if expenses such as conferences and business travel will still go forward as they would in a pre-pandemic year.

“And if it ends up that things get canceled in February and March and in the summer, then it’s additional profit for the partnership and the attorneys,” he said.  “But if we don’t budget for it, and things suddenly get clear, it’s tough to go find the money.”

Rising Expenses

The Georgetown and Thomson Reuters report noted that “almost all firms” significantly reduced costs by being more efficient about physical office space, staffing, in-person meetings and business travel in 2020, and such drastic changes could amount to a “tipping point” that permanently alters how firms do business.

Lathrop GPM could be one of those firms. Managing partner Cameron Garrison said this week that while he hopes to have a firmwide return to in-person work later this year, “I do expect that our typical work week may look very different once we return to the office.”  He said in an email that’s a result of the firm likely continuing to leverage remote work options for its staff.

At the same time, for many firms, the savings created through remote work and reduced travel are likely a one-time deal.  “I think the challenge that we’re going to have in 2021 is the very sharp expense reductions that we saw when we went into lockdown.  Those expense reductions—they’re not going to repeat, and we’re going to see our expense numbers rising again,” said Michael McKenney, managing director of Citi Private Bank’s Law Firm Group.  “So that margin expansion that we saw is unlikely to repeat.”

However, McKenney said many firms are “very, very strong” in terms of how much cash they have on-hand entering 2021.  He noted rate increases have been “very steady” since the financial crisis of 2008, and there are plenty of signs COVID-19 won’t hamstring the market this year the way it did in 2020.  “The outlook, particularly if vaccine distribution is handled better than it has been initially, is for a fairly vigorous rebound in a level of activity,” McKenney said, noting that some of the most leveraged practices that were hit hard almost a year ago are starting to come back.

“We saw corporate M&A shut down, capital markets activity was reduced, litigation was hampered because it was very hard to take depositions.  Juries were not sitting,” he said.  “Those things have begun to reopen, and people are doing them very successfully virtually.  Corporate M&A is back up, capital markets is back up, so many of our leverageable practices—practices that generate strong hours—are coming back.”  Garrison, the Lathrop firm leader, said the long-term economic and societal effects of COVID-19 are still unknown.  But one area that could pick up as a result of economic pain in the short term is pro bono.

“While not an economic challenge, I also believe that firms will be challenged with increased pro bono requests due to an increase in people facing financial hardship,” he said.  “We are very focused on balancing the pro bono time we can offer to support our communities while increasing the support that we add to our clients.”