Lawyers and Arbitration: A Special Case?

Many lawyers include arbitration clauses in their retainer agreements with their clients. Arbitration offers a faster, less expensive, and more private way to deal with fee disputes or claims made by clients in response to claims for payment of fees. But will the agreement hold up when the client challenges the enforceability of the arbitration clause in court?

Given the special role of lawyers, are arbitration clauses with lawyers a special case? Let’s see.

The FAA favors arbitration
As I have mentioned in earlier articles, some courts were at one time hostile to arbitration. Dispute resolution was, the way they saw it, the province of courts – not arbitrators.
Congress did not see it that way and enacted the Federal Arbitration Act, 9 U.S.C. § 1, et seq., in 1925. The FAA applies in state and federal court and preempts any inconsistent state laws. Courts, says the Supreme Court, are to enforce agreements to arbitrate like any other contract.  AT&T Mobility v. Concepcion, 522 U.S. 333, 339 (2011).

Still, states haven’t all supported arbitration and some have required special language to bring a party’s attention to arbitration clauses. For example, in Doctor’s Associates, Inc. v. Casarotto, 517 U.S. 681 (1996), the Supreme Court of Montana refused to uphold an arbitration clause because it violated the state-law requirement that “[n]otice that a contract is subject to arbitration” be “typed in underlined capital letters on the first page of the contract.” Mont. Code Ann. §27-5-114(4).

But the U.S. Supreme Court found that the FAA preempted the Montana statute. The Court said the FAA means what it says. Generally applicable contract defenses, such as fraud, duress, or unconscionability, may be applied to invalidate arbitration agreements. But courts may not invalidate arbitration agreements under state laws applicable only to arbitration.

Special situations and the FAA
From time to time, courts find a special situation where they just don’t believe that an arbitration clause should be enforced like any other contract provision. Take Kindred Nursing Centers v. Clark, 581 U. S. ___ (2017. The Kentucky Supreme Court refused to enforce agreements requiring nursing home residents to arbitrate their disputes. The agreements had been signed by a wife and daughter when moving their loved ones to the nursing home. The Kentucky Justices found that because the Kentucky Constitution declares rights of access to courts and trial by jury as “sacred” and “inviolate,” an agent could not deprive a principal of these rights unless the power of attorney expressly provided they could. The arbitration clause was not enforceable in this special situation.

The U.S. Supreme Court thought otherwise. It said, as it did in Doctor’s Associates, that a court may invalidate an arbitration agreement based on “generally applicable contract defenses,” but not on legal rules that “apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue.” Finding the Kentucky Supreme Court based its decision on arbitration being at issue, it reversed.

Which brings us to lawyers, Maine, and Snow v. Bernstein, Shur, Sawyer & Nelson, WL 6520900 (Me. Dec. 21, 2017). Ms. Snow hired the Bernstein firm to handle her civil law suit. She signed the firm’s standard engagement letter, which required her to arbitrate disputes with the firm. Ms. Snow was dissatisfied with the firm’s work and sued for malpractice.

“Not so fast,” said the firm. “You need to arbitrate.”

“Not so fast,” said the courts, responding to the firm’s motion to compel arbitration. “The arbitration agreement violates public policy.” The Maine Supreme Court noted that the ABA’s standing ethics committee has said that, because of the special relationship between lawyers and client, lawyers must explain to clients that they are giving up important rights in arbitration, including the right to jury trial, discovery and appeal if they agree to arbitrate. Maine’s state ethics committee has said the same, it noted. The arbitration agreement was unenforceable.

Ethics opinions in several jurisdictions take a similar approach, requiring that the client be informed of the rights they are giving up when they agree to arbitrate, or that the client be advised by independent counsel about the matter. E.g., D.C. Bar Ethics Opinion 211; State Bar of Michigan Opinion RI-2; Philadelphia Bar Association Opinion 88-2.

Not so fast
In her excellent blog, Arbitration Nation, Liz Kramer notes that the Snow court did not mention Kindred Nursing Centers, even though it had been decided by the time the Snow court ruled. But the Snow court did address FAA preemption and found the ethics rules did not single out arbitration. Still, as Liz notes, the decision, in fact, “hinges on the primary characteristics of arbitration, just like Kentucky’s ill-fate rule” in the Kindred case. Fair point.

Now what?
How does this all affect what lawyers should do in their next retainer agreement with a client? It may be that one day the Supreme Court will take up the Snow case and say the FAA preempts the approach of the Snow court. But it may not. Certiorari is hard to get.

Besides, most lawyers can’t really afford to take a client dispute all the way to the Supreme Court to enforce the arbitration clause. That defeats the purpose of requiring arbitration in the first place.

So, a word to the wise: even though the FAA and Supreme Court appear to say otherwise, check the case law and ethics opinions in the state in which you find yourself and comply with the state’s ethical and legal requirements. This may make arbitration clauses in client retainers impractical in states that require independent advice of counsel. In other states, it may just require some additional language in the retainer agreement to clarify how arbitration differs from court.

Lawyers and arbitration are special for now
So, FAA preemption or not, you likely will want to comply with the ethics rules and state law as they stand unless and until this issue is clarified. At least for now, in Maine and other states, lawyers and arbitration are a special case.