Commercial Arbitration Potholes: The Locally Unlicensed Lawyer


shutterstock_74822323With this post, we are going to move from efficiency in commercial arbitration to tricky issues that can come up.

Let’s start with one that does not often come up, but that you will want to be ready for:  a lawyer who is not licensed in the state where the arbitration is held.  In the 65 or 70 arbitrations in which I have served as an arbitrator, many in different states,  this has never come up.  But when I looked into this, I was surprised to see how the issue has been handled by various courts and legislatures.

The dispute in arbitration

Consider this situation.  You have represented a client for the past decade or so and have a great relationship.  Your firm has helped the client with employment issues, contract issues, sales issues, you name it.

Your client has a new problem.  It bought a complex, integrated software system to run its accounting operations, purchasing, billing, inventory, payables, etc.  But the system simply does not work as your client expected and as it believes the specifications provide.  Its business is suffering because basic functions are very difficult and riddled with errors, you are told.

Your client is not the only one that has had problems with this software company.  There is an online “gripe site” where owners of similar systems describe their problems and generally disparage the software company.  The software company has repeatedly promised that new releases of the software, always three months off, it seems, will address the problems.  But they never do, according to your client.

You have gone over the contract documents, specifications and key documents and have become convinced your client has a decent case for breach of contract and breach of warranty.  You also note that the contract states that California law will apply. There is an arbitration clause specifying AAA arbitration in Palo Alto, California, before a panel of three arbitrators.

You are from Minnesota, as is  your client.  Your client wants you to represent it in an arbitration claim, which you proceed to do.  You file a demand.

The issue is raised

At the scheduling hearing, opposing counsel — from California — says,  “We have  a problem, ladies and gentleman of the panel.  Counsel for Claimant is not licensed in California.  Representing a client here in California is an unauthorized practice of law this panel should not allow.  They are going to need new counsel.  We are happy to delay for two weeks to let them do that.  But in the meantime, we need to stop this proceeding right here and now!”  The panel goes ahead and issues a scheduling order, but asks the parties to brief the issue of whether you can continue as counsel.

You are surprised.  You have done arbitrations in other states, and no one has ever raised this.  You go over the problem with your client.  First off, the president of the company wants you on the case.  You have represented his company on everything in the past, and he isn’t about to change now, he says.  Besides, he is convinced the software company is just making more trouble.  He wants you to stay on rather than hire new counsel.  And he would rather you not engage local counsel if you can avoid it.  That would just add to the cost.

This is an arbitration, so the rules don’t change by state.   The substantive state law issues will be governed by the U.C.C., so you have had to bone up on California law on some specifics, but you are used to working on these types of issues all around the country.

You initial reaction is that this should present no problem.  After all, you know that a party doesn’t even normally need a lawyer in arbitration.  The whole idea of arbitration is to get to a decision without the kind of procedures and expense as in court.  If there doesn’t need to be a lawyer at all, why would you need a lawyer particularly licensed in a specific place?

Still, you know that in court that you are usually required to have local counsel and get admitted pro hac vice. And representing a client at an arbitration hearing, while a little more informal, is a lot like representing a client in court.  You, of course, plan on using the legal, evidence presentation and cross-examination skills of a lawyer. That sure seems like practicing law.  You decide you better do some checking.

The rules

You first check the AAA Commercial Rules which will govern this dispute. You find rule 26.   It says:

Any party may participate without representation (pro se), or by counsel or any other representative of the party’s choosing, unless such choice is prohibited by applicable law. A party intending to be so represented shall notify the other party and the AAA . . .(Emphasis added.)

Under this rule, your only real problem is whether or not having your client choose to use you is “prohibited by applicable law.” So you need to see what California law says.

The law

You do a search and are, at first, pretty worried.  You find the Birnbrower case, 949 P.2d 1 (Cal. 1998).  There the California Supreme Court found that a New York Law firm engaged in the unauthorized practice of law by extensive participation in a California arbitration.  It summarized its decision, saying: “Although we are aware of the interstate nature of modern law practice and mindful of the reality that large firms often conduct activities and serve clients in several states, we do not believe these facts excuse law firms from complying with section 6125 [forbidding unauthorized practice of law.]”   Ouch!

You are relieved to find, though, that in reaction to this decision, the California legislature enacted Cal. Civ. Proc. Code § 1282.4.   Basically, that section allows an attorney admitted to the bar of any other state to represent a party in a California arbitration proceeding if the attorney associates a member of the California bar as an attorney of record, files a certificate in a specified form, the arbitrators approve it, and the certificate is filed with the state bar of California and served on the opponent.

So, you are going to have to have local counsel and do a little extra work.  But you can still represent your client.  He will be disappointed that he has to have the expense of local counsel, but overall things are not so bad.

Other states – unauthorized practice

You are fortunate, in this regard anyway, that you landed in California.  It could be worse.  The Ohio Supreme Court found in Disciplinary Counsel v. Alexicole, Inc., 822 N.E. 2d 348 (Ohio 2004) that out-of-state lawyers representing clients in a securities arbitration engaged in the unauthorized practice of law.  Yikes.  You would need to do a little more checking to see how things have fared since if you end up in arbitration in Ohio.

Ethical rules

The ABA has weighed in on the issue in its model rules of professional conduct.  For those jurisdictions adopting it or a rule like it, Rule 5.5 says that representing clients in arbitration is not unauthorized practice so long as the representation is reasonably related to the lawyer’s home state practice.   It also requires filing for admission pro hac vice in those states that require it.  This would likely allow you to represent the  client we have been thinking about in arbitration in many states, at least according the committee comments.  Those refer to prior representation as one example of arising from home practice.  You’ll need to read the comments for other examples.  Or course, you need to see whether the state you are thinking about has adopted the model rule or not.

Other states – specific rules

And some states have put their own spin on things. Florida, for example, allows arbitration representation of a client from the lawyer’s home state arising out of or related to the lawyer’s home state practice, but may require pro hac vice admission.  And the lawyer is limited to three cases in Florida absent a finding of good cause allowing more.  The lawyer also has to pay a filing fee to the Florida Bar.  Fla. Bar Reg., Rule 1-3.11(e).

FAA preemption?

You may wonder whether all this regulation of a parties’ choice of counsel in arbitration is pre-empted by the Federal Arbitration Act.  At least some commentators have said they think it is.  They note that the practice of out-of-state lawyers representing clients in out-of-state arbitrations is so common it could be thought to be an implied condition of an arbitration contract. If so,  the FAA could pre-empt states’ attempts to further burden the process.  See Estreicher and Bennett, Is Arbitration the Unauthorized Practice of Law, N.Y.L.J. (January 6, 2005)(cited in Spector and Romero, Arbitration and The Unauthorized Practice of Law, ARIAS Quarterly U.S., Vol. 13, No. 1, 16 – 19 (2006)).

So far, that hasn’t worked out in practice.  A lawyer charged with unauthorized practice of law by representing clients in a security arbitrations argued the FAA pre-empted Florida’s unauthorized practice law.  But the Supreme Court of Florida dismissed the argument in a couple of sentences. The Florida Bar v. Rapoport, 845 So.2d 874 (Fla. 2003).  The Florida legislature later enacted the regulation that now applies, mentioned above,  apparently in response to the case.  But that doesn’t mean FAA preemption was established.

Of course, the Florida Supreme Court does not have the last word on the subject of federal pre-emption.  But making new law on FAA preemption probably isn’t in the cards in your case.  You are looking for an efficient resolution of your client’s dispute and sure don’t want the FAA preemption sideshow to take over the circus.

What can go wrong?

You may also wonder what will happen to you if you decide to represent your client in an arbitration in an out-of-state jurisdiction and simply ignore the possible problem.  Probably nothing.  Out-of-state lawyers represent clients all the time in arbitrations and nobody usually raises any issue about it.

Still, you do not want to face a charge of unauthorized practice, so you need to be careful. And, although a statute fixed the problem in part, the Birnbrower court found the law firm’s contract for payment was void because of unauthorized practice by its New  York lawyers in California.

The arbitrator’s role

An arbitrator asked to address this issue in the arbitration will likely rule on it.  After all, rule 26 specifically allows any representation the party wants, but only if it is lawful.  So, whether or not to allow representation by an out-of-state lawyer is something for the arbitrator to determine.

In fact, it is probably a good idea to get the arbitrator’s ruling on the issue if somebody raises it.  In most cases you find the issue comes before an ethics board policing unauthorized practice or in court where a client is trying to avoid paying the lawyer.  While the arbitrator’s decision won’t trump the ethics board or a court decision, a thoughtful decision in your favor should help if a later issue is raised based on your representation.

Grounds to vacate the award?

One final worry comes to mind.  Will a court later hold that representation by a lawyer not licensed in the state of the arbitration is grounds to vacate the award?  If the award has gone in your client’s favor, that would be a real disaster.

So far, courts have not found this to be grounds for vacating the award. The court summed things up pretty well in Hines v. Everest Institute, 2014 WL 2779722 (E.D Mich. 2014).  It noted that vacating an award based on unauthorized practice alone, without evidence of a fraud on the opponent or arbitrator, would be an impermissible expansion of limited grounds for vacating an award under the  FAA.

What to do?

Chances are you will be able to represent your client in an out-of-state arbitration.  In  most cases this issue isn’t even raised.

But a cautious lawyer will do this: (1)  check the applicable rules, (2) check the states’ statutes, which can vary, (3)  check the case law if there is any, and (4)  check the ethics rules and decisions.  You are likely to find that, at most, you will need to associate local counsel, fill out a form, and maybe pay the state’s bar association. But you are better off knowing exactly what you need to do before you start working on the arbitration.

If you really want to be careful, and you have input into drafting the arbitration clause, you will want to avoid having the arbitration in states that present difficulties regarding out-of-state lawyers.

Next up

In the next post, the plot thickens.  We will take up arbitration and the disbarred lawyer.