Legal Ethics Corner

Ethics Corner is designed to present ethical issues that practitioners might well face on a daily basis. It is a service of the Legal Ethics Committee of the San Diego County Bar Association for SDCBA members.  

Requiring Binding Mandatory Fee Arbitration in Attorney Fee Agreements is Unenforceable and Contrary to the Mandatory Fee Arbitration Act. 

So, you have been faithfully reading all of the writing that the Legal Ethics Committee does via the SDCBA’s various publications (Ethics Quarterly, Ethics in Brief in The Bar News, the article in San Diego Lawyer Magazine, and Ethics Corner, such as the present piece).  As a result, you are well aware that in Schatz v. Allen Matkins Leck Gamble & Mallory, LLP (2009) 45 Cal.4th 557, the California Supreme Court held that where a fee dispute is not resolved via arbitration proceedings under the Mandatory Fee Arbitration Act (MFAA) (Bus. & Prof. Code §§ 6200 et seq.), and the fee agreement provides that any such unsolved dispute must be heard via binding arbitration, the right to trial de novo in the MFAA does not compel a trial de novo in court; where the parties have validly agreed to binding arbitration, the trial de novo is the second arbitration proceeding and not a lawsuit in court. 

“I do not want to expose myself to two different arbitration proceedings,” you think to yourself. “I am going to require from the start that the MFAA proceeding be binding,” and that is where you took a wrong turn.  In Benjamin, Weill & Mazer v. Kors (2011) 195 Cal.App.4th 40, 125 Cal.Rptr.3d 469, the Court of Appeal began its analysis with this observation:

This case vividly illustrates the confounding problems that can be created by the failure of counsel to appreciate the significant distinction between the [California Arbitration Act (C.C.P. sections 1280, et seq.)] and the MFAA with respect to pre-dispute agreements to arbitrate.

The arbitration clause the law firm had included in its agreement provided that “[a]ny dispute pertaining to the fees owed under this agreement ...shall, to the extent permitted by law, be submitted to binding arbitration pursuant to the rules of the Bar Association of San Francisco […].” (Italics added.)  The problem, explained the court, was that under the MFAA, as well as the Bar Association’s arbitration rules, “a law firm cannot require a client to submit to binding arbitration to resolve a fee dispute before the dispute arises, as was done in this case. (Bus. & Prof. Code, § 6204, subd. (a)[…].)”  To be sure, the MFAA provides, “[t]he parties may agree in writing to be bound by the award of arbitrators appointed pursuant to this article at any time after the dispute over fees, costs, or both has arisen.” (Bus. & Prof. Code § 6204, subd. (a), italics added.) 

Naturally, that the attorney and client have an arbitration agreement consistent with statutory law is important of itself, but in the Benjamin case it turned out to be of particular importance to the law firm.  After having obtained a very positive arbitration award in its favor for unpaid fees, the client moved, under the California Arbitration Act (CAA), to have it set aside on the basis that the chief arbitrator had failed to disclose “matters that could cause a person aware of the facts to reasonably entertain a doubt that the proposed neutral arbitrator would be able to be impartial,” as required by C.C.P. section 1281.9, and section 1286.2(a)(6)(A) which provides that “the court shall vacate the award if the court determines [that] [¶] ... [¶] (6) An arbitrator making the award ... (A) failed to disclose within the time required for disclosure a ground for disqualification of which the arbitrator was then aware....” (See July 2011, Legal Ethics Quarterly, distributed via July 13, 2011 email to SDCBA members, Vol. 8, No. 2, case 8.2.12, for the treatment of this issue.)  The Court of Appeal reversed the trial court’s denial of the motion to set aside the award.  However, before reaching this issue, the Court had to consider whether the arbitrator’s disclosure obligation even applied.  It does apply under the CAA, but, arguably, not under the MFAA.  Thus, if the CAA applies, as the moving party contended, the arbitration ruling would be set aside; if the MFAA applied, as the law firm desired, the award in its favor might stand.  The Court noted that both parties, by not having previously addressed the issue, had contributed to the problem but ultimately concluded that placing most of the blame on the law firm was warranted because it created the problem in drafting the fee agreement.  In that the moving party—the former client—had been consistent throughout the case that the CAA disclosure obligation applied, the Court of Appeal applied the same, and the arbitration award in favor of the law firm was set aside.

In sum, understanding that Mandatory Fee Arbitration does not mean binding fee arbitration can save attorneys, as well as clients, from a great deal of heartache.  For an MFAA proceeding to be binding, the parties must agree to the binding nature after the dispute over fees or costs arises (Bus. & Prof. Code, § 6204(a)) or not request a trial de novo within 30 days after the mailing of the notice of the arbitration award. (Bus. & Prof. Code, § 6204(b).) 

--Luis E. Ventura

**No portion of this summary is intended to constitute legal advice. Be sure to perform independent research and analysis.  Any views expressed are those of the author only and not of the SDCBA or its Legal Ethics Committee.**