A recent Daily Report article by Shari Klevens and Alanna Clair, “Consider Mandatory Arbitration to Resolve Fee Disputes,” reports on the most effect manner to resolve attorney fee disputes.  This article was posted with permission.  The article reads:

Although many state bars recognize that attorney-client disputes may be resolved through arbitration, the use of mandatory arbitration clauses in engagement letters may be subject to federal law. The FAA (Federal Arbitration Act) governs requests for arbitration and, on its face, is supreme to state law on the issue.

Recently, the U.S. Court of Appeals for the Third Circuit reviewed the application of the FAA to a mandatory arbitration clause in an attorney engagement letter. Smith v. Lindemann, No. 16-3357 (3d Cir. 2017). In a nonprecedential opinion, the court concluded that, although a mandatory arbitration clause could be set aside on the basis of fraud, duress or unconscionability (which analysis may be governed by state law), federal law generally governs the application of such a provision. Indeed, the U.S. Supreme Court has indicated that state law may not prohibit the arbitration of any specific type of claim. AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 341 (2011).

Though the FAA may govern an arbitration clause absent any restriction by the parties, the state-level rules of professional conduct may still have some impact. Indeed, those rules bearing on a client’s right to be informed about the scope of the representation and the potential waiver of rights may impact whether an arbitration provision violates public policy.

Indeed, separate from the requirements of federal law, attorneys have certain duties to clients that can be reflected in the use of an arbitration provision in an engagement letter.

Consider the Advantages of Mandatory Arbitration

It is helpful for law firms and practitioners to give thought at the outset of a representation as to whether they would like any fee disputes or other claims to be resolved by private arbitration. Some firms adopt a mandatory arbitration clause in every engagement letter they use, while others may limit the use of an arbitration clause to address fee disputes only.

For some, there is an advantage to using arbitration to address fee disputes only. It is well-recognized that often, when an attorney sues a client for unpaid fees, the client will bring a counterclaim for legal malpractice. Some sources indicate that the likelihood of receiving such a counterclaim could be as high as 40 percent; others place it even higher.

Therefore, some firms elect to include in their engagement letters a provision that requires all fee disputes to be resolved by private arbitration. That can help attorneys pursue fee claims, which can be unpleasant in and of themselves and can allow them to carve out malpractice claims for separate resolution.

Other potential advantages of binding arbitration for fee disputes or malpractice claims include that arbitration can be faster than litigation. The procedure can be less formal than litigating in court, which some attorneys view as an advantage. Using arbitration can also help the parties keep the proceedings and the outcome confidential, which may be a great advantage to some law firms.

FAA May Apply Absent Restriction

Courts read the FAA expansively in interpreting arbitration clauses. The default understanding of a general demand for arbitration in an engagement letter or other form is usually that it is a demand being made consistent with the FAA.

Generally, if a law firm and client want a state’s arbitration statute to apply to any future dispute, they will take steps to ensure that the engagement letter specifically says as much. Otherwise, a general reference to arbitration in an engagement letter is understood to invoke the FAA and federal law, rather than state law.

Obtaining Informed Consent

If a law firm or lawyer has determined that they want to use a mandatory arbitration clause in the engagement letter, it is helpful at this point to consider the requirements of the Rules of Professional Conduct. Indeed, most attorneys considering a mandatory arbitration clause will consider additional language to help ensure that the client understands the differences between arbitration and litigation.

The engagement letter can detail many factors relating to the use of mandatory arbitration should a dispute arise between lawyer and client, including that proceeding to arbitration necessarily involves foregoing a jury trial. The engagement letter can also explain that there is typically a limited scope of any appeal of an arbitration. Others will consider the procedural issues, such as the speed of resolution, confidentiality (if applicable) and the potentially relaxed procedure.

Considering these issues is consistent with the guidance provided by the ABA in Formal Opinion 02-425. There, the ABA recognized that it is ethically permissible for attorneys to include mandatory arbitration provisions in their engagement letters. However, Formal Opinion 02-425 recommends ensuring 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.”

Notably, in Smith v. Lindemann, the Third Circuit approved of a mandatory arbitration clause that did not detail all the risks and advantages of proceeding with an arbitration, but simply confirmed that agreeing to arbitration meant waiver of the right to have disputes heard by a jury.

Therefore, even if federal law governs the application of the arbitration clause generally, attorneys can anticipate the requirements of any applicable ethical rules to help ensure that the clause will not be stricken down as contrary to public policy or the attorney’s ethical duties.

Does the Bar Provide Help?

The State Bar of Georgia has a fee arbitration program that assists in the resolution of fee disputes between attorneys and clients. The hearing is conducted by a panel of three arbitrations: two Georgia attorneys and one nonlawyer. A client can elect to have a fee dispute arbitrated—even over the attorney’s objection—but the parties may seek to reference this program in an engagement letter.

Comment 9 to Rule 1.5 of the Georgia Rules of Professional Conduct recognizes that “[i]f a procedure has been established for resolution of fee disputes, such as an arbitration or mediation procedure established by the Bar, the lawyer should conscientiously consider submitting to it.”

Shari L. Klevens is a partner at Dentons US in Atlanta and Washington and serves on the firm’s U.S. board of directors. She represents and advises lawyers and insurers on complex claims and is co-chair of Dentons’ global insurance sector team.  Alanna Clair is a partner at Dentons US in Washington and focuses on professional liability and insurance defense. Shari and Alanna are co-authors of “The Lawyer’s Handbook: Ethics Compliance and Claim Avoidance” and the upcoming 2019 edition of “Georgia Legal Malpractice Law.”