Embracing International Arbitration: California Acts. Other States Should, Too.

As mentioned in an earlier article in this series 1, arbitration of cross-border disputes has many advantages. Surprisingly, foreign courts are more likely to enforce arbitration awards from another country than court judgments. This is because several international treaties provide for such enforcement. Apprehension about an unfamiliar court system may make arbitration more attractive to some parties. And, done right, arbitration can offer a faster, less expensive resolution to a business dispute than court proceedings.

A preferred method of resolution
No wonder international arbitration is in favor in the international business community. Ninety-seven percent of in-house lawyers polled in 2018 by Queen Mary University of London said they preferred international arbitration of cross-border disputes. 2

The unauthorized practice problem
But international arbitration can have problems with unauthorized practice. As mentioned in an earlier article in this series 3, states in the United States take varying approaches to out-of-state lawyers in arbitration. The Ohio Supreme Court found that out-of-state lawyers representing a client in a securities arbitration were guilty of the unauthorized practice of law. Disciplinary Counsel v. Alexicole, Inc., 822 N.E. 2d 348 (Ohio 2004).

At one time, the law in California was to the same effect. See Birbrower v. Superior Court of Santa Clara County, 949 P.2d 1 (Cal. 1998). But in reaction to that case, legislation was enacted to allow out-of-state lawyers to associate local counsel and participate in arbitration after following certain procedural steps.

Interestingly, some states do not regard representing a party in arbitration as practicing law, eliminating this concern. See, e.g., Williamson, P.A. v. John D. Quinn Constr. Corp., 537 F. Supp. 613, 616 (S.D.N.Y. 1982). And it is somewhat rare for the issue to be raised in arbitration, perhaps because opposing counsel either doesn’t recognize the issue or doesn’t see the advantage of fighting about it.

Still, most lawyers do not want to risk a charge of unauthorized practice, which can be at best an ethics violation and at worst a crime. This generally can be avoided by associating local counsel and following any special procedure states have put in place, if any, for obtaining permission to appear in an arbitration in the state. But what of lawyers from foreign countries in international arbitration?

California acts
California recognized a problem and dealt with it. As noted, California’s legislature dealt with the outcry caused by the Birbrower case by allowing lawyers licensed in other states to associate local counsel and take other procedural steps to obtain permission to participate in the arbitration. But that didn’t help foreign counsel who wanted to participate in arbitration. As a result, California wasn’t seen as a good site for international arbitration. 4 That is not a good situation for a state with a huge economy with plenty of international business.

The California legislature has now enacted SB No. 766. That legislation labels as “qualified lawyers” members of a recognized legal profession in a foreign jurisdiction who are authorized to practice, subject to regulation by a professional body or public authority, and are in good standing in every jurisdiction in which they are admitted to practice.

Generally, a qualified lawyer may represent a party in an international arbitration so long as he or she associates with local counsel, the matter relates to the attorneys’ practice in a jurisdiction or a client located where he or she is admitted, or the dispute is governed primarily by international law or a foreign or out-of-state jurisdiction. The statute is somewhat detailed and has some exceptions 5, so you will need to check it closely if you encounter this issue in one of your cases. But California now has clear rules that favor participation by foreign counsel in international arbitration.

Other jurisdictions
With this change in law, California has eliminated uncertainty regarding participation of foreign lawyers in international arbitration in matters seated there. But what of the other states? As noted above and in earlier articles, addressing the issue of unauthorized practice requires navigating arbitration rules, ethics rules, state statutes, and court decisions. This hardly leads to any certainty that foreign counsel may take part in arbitrations located in states without the kind of clear guidance California has now provided.

Uncertainly is not a good thing in arbitration. It can lead to problems in enforcing awards and entanglement in the legal system. That is the just the sort of thing people want to avoid when choosing arbitration to resolve disputes.

One way to achieve some certainty is to specify California as the seat of the arbitration. At least the legal status of foreign counsel is clear. But this may not be particularly convenient or cost effective for, say, a business in the Midwest or on the East Coast.

In those jurisdictions where the courts have found participation in arbitration is not practicing law, there is little problem. But in others where one must work through a series of rules, statutes, and court decisions, only to find no clear guidance or to find foreign lawyers cannot participate, use of arbitration in cross-border disputes will be discouraged.

Going global
This all suggests that, as commerce becomes more and more global, many states would be wise to take a cue from California and enact legislation to legitimize the role of foreign counsel in international arbitration.

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End notes:

  1. Going International? Consider Arbitration. Available at http://www.daveadr.com/going-international-consider-arbitration/
  2. 2018 International Survey, The Evolution of International Arbitration, 2 (2018). Available at https://www.whitecase.com/publications/insight/2018-international-arbitration-survey-evolution-international-arbitration
  3. Commercial Arbitration Potholes: The Locally Unlicensed Lawyer, available at http://www.daveadr.com/commercial-arbitration-potholes-the-locally-unlicensed-lawyer/
  4. This was found by a study group commissioned by the California Supreme Court. See California Looks to Attract International Arbitrations by Removing Restrictions on Foreign Lawyers, Available at https://www.gtlaw.com/en/insights/2018/7/california-looks-to-attract-international-arbitrations-by-removing-restrictions-on-foreign-lawyers
  5. SB No. 766 reads in part:

[A[ qualified attorney may provide legal services in an international commercial arbitration or related conciliation, mediation, or alternative dispute resolution proceeding, if any of the following conditions is satisfied:

(1) The services are undertaken in association with an attorney who is admitted to practice in this state and who actively participates in the matter. (2) The services arise out of or are reasonably related to the attorney’s practice in a jurisdiction in which the attorney is admitted to practice. (3) The services are performed for a client who resides in or has an office in the jurisdiction in which the attorney is admitted or otherwise authorized to practice. (4) The services arise out of or are reasonably related to a matter that has a substantial connection to a jurisdiction in which the attorney is admitted or otherwise authorized to practice. (5) The services arise out of a dispute governed primarily by international law or the law of a foreign or out-of-state jurisdiction.

(b) This section does not apply to a dispute or controversy concerning any of the following: (1) An individual’s acquisition or lease of goods or services primarily for personal, family, or household use. (2) An individual’s coverage under a health insurance plan or an interaction between an individual and a healthcare provider. (3) An application for employment in California. (4) The terms and conditions of, or right to, employment in California, unless the dispute or controversy primarily concerns intellectual property rights, including those involving trademarks, patents, copyright, and software programs.