This article originally appeared in Goldberg Segalla’s Professional Liability Matters. Read the issue here.
There’s a common belief among lawyers that it’s better to have disputes resolved through private arbitration rather than in court. Juries are unpredictable, and judges can be too. Litigation in court can be long and costly, and private arbitration may seem a more desirable alternative. The lawyers can choose the arbitrators, who presumably are more of a “known quantity” in terms of their legal acumen. Arbitration proceedings typically have a more truncated discovery period. The arbitration result is binding, which avoids an even lengthier and more unpredictable appeal in the court system. For these reasons, many lawyers insert provisions in their retainer agreements to require clients to raise any disputes related to the lawyers’ representation in an arbitration forum instead of court.
This article will not debate the relative merits of arbitration as opposed to litigation. However, we will note there is often a benefit to multiple decision-makers (e.g., a judge making legal decisions, and a jury of six, eight, or 12 members rendering a verdict) as opposed to just a single arbitrator, and appellate courts provide a valuable error-correcting function if any of the lower court decision-makers do something wrong. Instead, this article will focus on whether such provisions are enforceable, or even ethical.
A recent trial court decision from the Philadelphia Court of Common Pleas addressed this very issue. In that case, the judge considered the retainer agreement of a prominent large law firm to represent a medical equipment company and the company retained the firm to renegotiate a licensing agreement. The company signed a retainer agreement, which included a broad arbitration provision stating that any “dispute, controversy, or claim arising out of or relating to (the firm’s) fees, costs, billing practices or (the) engagement … will be submitted to mandatory binding arbitration before a single arbitrator in Minneapolis, Minnesota.”
The company subsequently sued the firm for legal malpractice in the Philadelphia Court of Common Pleas. The firm invoked the arbitration provision, and sought to dismiss the case and force the client to bring the claim before an arbitrator in Minneapolis.
The judge summarized longstanding legal precedent which states arbitration clauses in contracts are to be afforded great deference. However, the judge also cited the Rule of Professional Conduct, which states “a lawyer shall not make an agreement prospectively limiting the lawyer’s liability to a client for malpractice unless the client is independently represented in making the agreement.” The judge concluded that the retainer agreement failed to reasonably disclose the prospective limitations the firm was placing on its own liability for malpractice. He ruled that the client was not given sufficient objective information to understand that its attorneys were prospectively limiting their own liability for malpractice (i.e., by forcing the client to bring its claim in Minneapolis before a single arbitrator, rather than in Philadelphia before a judge and jury—with subsequent appellate court protection) without telling the client it had a right to first consult independent counsel. The judge found the arbitration clause to be invalid.
In our opinion, this judge made the correct ruling. The right to a trial by jury, and the correlative right to the protection that appellate courts provide, is a right all clients enjoy. If an attorney wishes for a client to relinquish this right as a condition of engagement, the attorney is obligated to clearly advise the client of this condition and advise them of their right to have the agreement reviewed by an independent counsel of their own choosing. Failing to do so—and then seeking to invoke the arbitration provision—will risk the ire of a judge finding the provision to be “unconscionable” as the judge in the foregoing case did. This could even subject the attorney to a disciplinary proceeding, if the judge feels the conduct is unethical and should be reported to relevant disciplinary authorities.
Professional Liability Magazine, a collaborative effort of Goldberg Segalla’s Management and Professional Liability Practice Group, examines the latest best practices, emerging developments, and influential court decisions impacting the defense of professional-service providers. Read our latest issue here.