Mandatory Fee Dispute Arbitration: An Overlooked Solution to Legal Fee Disputes
By Patrick M. Maloney and Gregory M. Smith
Mr. Maloney is the founder of The Maloney Firm, APC, a boutique business litigation firm located in El Segundo, California. Mr. Smith joined The Maloney Firm three years ago, after stints with law firms in Santa Barbara and Downtown Los Angeles. Mr. Maloney and Mr. Smith are business litigators who regularly represent attorneys and clients in legal fee disputes and related matters involving legal malpractice and breaches of fiduciary duty. Both Mr. Maloney and Mr. Smith are fee dispute arbitrators and Mr. Maloney has served on the California State Bar Committee for Mandatory Fee Arbitration. Mr. Maloney may be reached at firstname.lastname@example.org; Mr. Smith may be reached at email@example.com.
The California Legislature enacted California Business & Professions Code §§ 6200-6206, known as the Mandatory Fee Arbitration Act (“MFAA”), as an efficient means for resolution of disputes between lawyers and clients over legal fees.1 Arbitrations under the MFAA have their own rules, which differ from those that govern traditional, contractual arbitration.2
Typically administered by local bar associations, proceedings under the MFAA are simple, informal and limited in scope. Because the Legislature recognized the imbalance in bargaining power between attorneys and clients, arbitration under the MFAA endeavors to put clients on an equal footing with their former attorneys.3 Traditional rules of evidence do not apply at MFAA arbitrations, and either party may seek a trial de novo within thirty days after a resulting nonbinding award is issued. MFAA arbitration “favors the client in that only the client can elect mandatory arbitration of a fee dispute; the attorney must submit the matter to arbitration if the client makes that election.”4
Because many MFAA awards initially are non-binding, some attorneys do not give MFAA arbitration the respect it deserves. The MFAA, however, can provide substantial benefits to lawyers who take the process seriously, including faster collection of unpaid fees and the avoidance of malpractice claims.
Benefits of MFAA Arbitration
There are several benefits to attorneys in arbitrations conducted under the MFAA. The process moves quickly under generally streamlined rules. For example, the Los Angeles County Bar Association sets relatively short deadlines for arbitrators to schedule and hold hearings and issue awards, with each step taking a matter of weeks. Thus, the fee dispute can be resolved in a few months, rather than years, as is now common in California’s Superior Courts.
Originally, the Legislature barred clients from raising affirmative malpractice claims in fee arbitrations due to the concern that such claims would inflate malpractice insurance premiums.5 Although clients now may raise malpractice claims in an MFAA arbitration as they relate to the value of the legal services provided, those claims cannot be afforded affirmative relief. 6 In the event the MFAA arbitrator or panel finds the attorney’s services were substandard, those findings are inadmissible in a professional liability lawsuit and are neither res judicata nor collateral estoppel.7
The fee arbitration process tolls the legal malpractice statute of limitations.8
In an MFAA fee arbitration, the arbitrators are both attorneys and lay arbitrators. A single attorney arbitrator decides disputes up to $25,000.9 Where the dispute exceeds $25,000, an arbitration panel is comprised of two attorneys and one lay member, all of whom have been trained and qualified.10 In all cases, the level of understanding of the practice of law and legal billing by the fee arbitrators can be expected to substantially exceed that found with a civil jury.
Finally, even non-binding awards issued in MFAA arbitrations are not toothless. The attorney and client each have thirty days to reject the nonbinding award.11 If neither does so on a timely basis, the award becomes final and binding, and it may then be confirmed as a judgment.12 On the other hand, if either party rejects the award and requests a trial de novo, they are exposed to paying the other side’s legal fees in the subsequent proceedings if a better result than the MFAA arbitration is not achieved.13
MFAA arbitrations do not support a subsequent claim for malicious prosecution.14
An Attorney Must Provide the Client with a Notice of the Client’s Right to Fee Arbitration When Initiating Any Legal Fee Dispute
Under the MFAA, an attorney is required to provide the client with a Notice of the Client’s Right to Fee Arbitration either prior to initiating a fee proceeding or at the time of service of the Summons and Complaint (or, if the retainer agreement allows, before or at the time of demanding a traditional, binding arbitration).15 The required notice may be issued only after an actual dispute over fees has arisen.16 This notice explains to the client the right to proceed in fee arbitration under the MFAA. When providing notice, the lawyer must use the form approved by the California State Bar, which is available on both the state and local bar association websites. Using the correct and up-to-date form ensures that all of the required language is included and prevents later disputes concerning whether proper notice was provided. The client has 30 days from the date of mailing of the notice to determine whether to elect to proceed under the MFAA.18
Fee arbitration under the MFAA is voluntary for the client, but mandatory for the attorney. If the client desires to proceed with an MFAA arbitration, the attorney is obligated to participate and the client’s initiation of fee arbitration automatically stays any suit or contractual arbitration filed by the lawyer concerning unpaid legal fees pending the resolution of the MFAA fee arbitration.19 The client waives the right to compel fee arbitration, however, if they initiate any type of suit against the attorney arising from the representation, including a legal malpractice action.20
Clients have an incentive to participate in MFAA arbitration when the action in which their former attorney represented the client is still ongoing. Under the MFAA, the waivers of the attorney-client privilege and work product privilege that usually attach to a dispute between an attorney and a client shall not “be deemed a waiver of the confidential character of such matters for any other purpose.”21 This creates some protection from a litigation adversary attempting to take advantage of the privilege waiver that would occur if the fee dispute proceeded in a public forum.
Preparing for the Hearing
When a client elects MFAA arbitration, the lawyer should review the MFAA statutes and applicable panel rules, which differ from than those that govern traditional contractual arbitration.22 Local bar associations typically promulgate specific rules for their own MFAA process.23 The rules generally outline the process, including provisions for gathering and preserving evidence at the hearing. For example, the local rules often spell out the procedure to obtain subpoenas to compel the production of third-party witnesses and documents at the hearing.24 Parties also may be granted permission by the arbitrator to require the opposing party to produce documents or witnesses at the hearing through a Notice to Appear and Produce.25
The parties to an MFAA arbitration should also review the Arbitration Advisories available that are available on the California State Bar website.26 These Advisories cover a myriad of issues and topics that may arise in any fee dispute, including requirements for engagement agreements, billing practices and conflicts of interest. It is not uncommon for fee arbitrators to cite the Arbitration Advisories in their awards.
Because MFAA hearings are short, the need for brevity and clarity cannot be overemphasized. MFAA arbitrations usually are scheduled for three hours, and the MFAA arbitrators volunteer that amount of time. Most bar associations that administer MFAA arbitrations charge the parties hourly if the fee arbitration hearing exceeds a half day. Thus, participants should be prepared to present their cases clearly and concisely and to pay for a portion of the arbitrator’s time if they fail to do so.
Each party should prepare a notebook for the arbitrators containing: a short brief articulating key points; calculations of the fees, costs, and interest sought or opposed; relevant exhibits, including the retainer agreement, fee invoices, and critical work product; and applicable authorities, including relevant Arbitration Advisories. It is also advisable to prepare a table containing the calculations of fees billed, paid, and outstanding that the party wishes the arbitrator(s) to adopt.
MFAA arbitration hearings are typically informal, and arbitrators may follow different formats. When the parties have a substantial dispute and/or are represented by counsel, the panel may adopt a more formal approach including direct and cross-examination. Modest disputes and those involving self-represented parties often involve the parties articulating their positions in narrative fashion, with each party afforded some right to cross-examine the other. MFAA fee arbitrators often ask questions to help clarify the evidence.
Although MFAA arbitrators generally encourage further settlement efforts, they are not permitted to participate in those discussions because it would compromise their position as neutral finders of fact. It is likely that the parties will have tried unsuccessfully to reach resolution prior to the eleventh hour, so settlement talks at this stage may be more likely to result in a resolution because the parties should have carefully evaluated and prepared to present their respective positions.
Irrespective of the nature or size of the dispute, the parties should anticipate being asked if they agree to binding arbitration at the beginning of the arbitration hearing. If all agree, they will be asked to sign a stipulation for binding arbitration before the process begins. The award will be non-binding unless all parties agree in writing to be bound.
Following the presentation of evidence at the hearing, the arbitrator(s) may allow a short summation of the evidence or request additional written briefing on relevant issues. Thereafter, the panel chair will prepare and circulate the award among the panel members. After preparing and signing the award, the panel sends it to the agency overseeing the arbitration, such as the local bar association. The entity administering the arbitration reviews the award to ensure compliance with the various rules concerning the format and content of the award, but will not disturb findings of fact or law. If the award is incomplete, it will be returned to the panel for correction before being sent to the parties.
After the Hearing
Upon receiving the award, the parties will have several decisions to make. First, if the award is nonbinding, each party will have to decide whether to accept or reject the award, or to explore whether the matter can be settled. If neither party rejects the nonbinding award, then it becomes binding and final after 30 days.27 If either party rejects the award, there will be a trial de novo, but this is not without risk. If the party who rejected the award does not fare better at the trial, then he or she may be required to pay the other party’s legal fees, irrespective of any legal fee provisions contained in the underlying retainer agreement.28 Thus, an attorney who receives a fee award close to what was sought should think twice before rejecting the award.
It is also worth noting that the award in an MFAA arbitration is inadmissible in the trial de novo and in any other proceeding, except proceedings to confirm the fee awardor to determine whether the party rejecting the award and requesting a trial de novo obtained a better result.29
The process for rejecting an arbitration award depends on whether an action is already pending. If so, the party need only file appropriate papers in that proceeding.30 If there is no action pending, the party rejecting the award must file suit or initiate a contractual (binding) arbitration, as appropriate.31 The date on which the bar association mails the MFAA fee award triggers the deadlines by which the parties may formally reject a nonbinding award. The parties have 30 calendar days from the date the award is mailed to reject it.32 Failure to timely reject the nonbinding award will result in the award becoming binding.
In cases where there is no action already pending, the thirty-day filing period is not extended by an additional five days due to service by mail under California Code of Civil Procedure § 101333 and the California Supreme Court has held that California Code of Civil Procedure §473 cannot provide relief for a failure to timely reject a MFAA award.34 Thus, it is critically important to carefully calculate and calendar the deadline for rejecting a nonbinding award if there is any thought of doing so.
Finally, an attorney receiving an MFAA award requiring a refund or payment to the client should take special note of the provisions of Business & Professions Code § 6203. Under Section 6203(d), the California State Bar has the power to enforce the award for the client, including removing the attorney from active status and imposing administrative and financial penalties.
Strategic Concerns for Lawyers Arising from MFAA
Mandatory fee arbitration is required for lawyers, so carefully managing the process for the best possible outcome requires several substantive considerations. To start, a lawyer should note the disparity between the one-year limitation period applicable to claims against a lawyer for breach of their professional obligations to a client and the longer two- and four-year limitations periods applicable to claims for breach of oral or written contract, typically asserted in a fee dispute. Case law holds that notwithstanding the label a client litigant attaches to their claims against counsel, such claims are nearly always governed by a one-year limitations period.37 Thus, by waiting for more than a year before serving a Notice of the Client’s Right to Fee Arbitration, a lawyer can significantly reduce the risk and exposure of a retaliatory malpractice action. This is particularly relevant when the lawyer’s malpractice policy excludes claims initiated in response to the filing of an action for legal fees.
Another consideration is whether to file suit before serving the Notice of the Client’s Right to Fee Arbitration. When counsel expects the client will decline to arbitrate and instead proceed straight to litigation, the lawyer should file suit and then serve the notice with the Summons and Complaint. By filing first, the lawyer will be the plaintiff in the court proceedings and, therefore, will be entitled to speak first at the trial. Additionally, this process allows the attorney to contend that the malpractice claim is retaliatory, invented solely to avoid paying an otherwise valid debt.
Where the fees at issue are significant, the attorney should consider hiring counsel to handle the fee dispute. Attorneys representing themselves oftentimes lack objectivity, and the guidance and insight of another attorney can prove invaluable. In any event, the parties are not entitled to recover fees incurred in the MFAA arbitration, but they may recover fees incurred to confirm the MFAA award.38
Although the MFAA “was enacted to address a disparity in bargaining power between clients and attorneys involved in fee disputes,”39 this does not preclude attorneys from taking advantage of the benefits of this streamlined process. Attorneys who understand the MFAA fee arbitration process benefit from a favorable forum and quick resolution of legal fee disputes while minimizing the impact of legal malpractice claims that clients may assert to leverage their position in a dispute over unpaid fees.
1 Schatz v. Allen Matkins Leck Gamble & Mallory LLP, 45 Cal.4th 557, 564-565 (2009).
2 Levinson Arshonsky & Kurtz LLP v. Kim, 35 Cal.App.5th 896, 904-907 (2019).
3 Dorit v. Noe, 49 Cal.App.5th 458, 466 (2020).
4 Manatt, Phelps, Rothenberg & Tunney v. Lawrence, 151 Cal.App.3d 1165, 1174-1175 (1984).
6 Cal. Bus. & Prof. Code §§ 6200(b)(2), 6203(a).
7 Cal. Bus. & Prof. Code § 6204(e).
8 Cal. Civ. Proc. Code § 340.6(a)(5).
9 Cal. Bus. & Prof. Code § 6200(e)(2).
10 Cal. Bus. & Prof. Code § 6200(e)(1).
11 Cal. Bus. & Prof. Code § 6204(b), (c); Maynard v. Brandon, 36 Cal.4th at 374; Soni v. SimpleLayers, Inc., 42 Cal.App.5th 1071, 1087-1091 (2019)
12 Cal. Bus. & Prof. Code § 6203(b).
13 Cal. Bus. & Prof. Code § 6204(d).
14 Dorit v. Noe, 49 Cal.App.5th 458.
16 Huang v. Cheng, 66 Cal. App. 4th 1230 (1998).
18 Cal. Bus. & Prof. Code § 6201(a).
19 Cal. Bus. & Prof. Code § 6201(c).
20 Cal. Bus. & Prof. Code § 6201(d).
21 Cal. Bus. & Prof. Code § 6202.
22 Levinson Arshonsky & Kurtz LLP v. Kim, 35 Cal.App.5th at 904-907.
23 The Los Angeles County Bar Association has produced a comprehensive set of procedural rules entitled Los Angeles County Bar Association Attorney Client Mediation and Arbitration Services Rules for Conduct of Voluntary Arbitration of Fee Disputes and Other Related Matters (“LACBA Rules”), available on the Los Angeles County Bar Association’s website.
27 Cal. Bus. & Prof. Code § 6204(b), (c).
28 Cal. Bus. & Prof. Code § 6204(d).
29 Cal. Bus. & Prof. Code § 6204(e).
30 Cal. Bus. & Prof. Code § 6204(b).
31 Cal. Bus. & Prof. Code § 6204 (c).
32 Cal. Bus. & Prof. Code § 6204(b), (c); Maynard v. Brandon, 36 Cal.4th 364, 374 (2005).
34 Maynard v. Brandon, 36 Cal.4th at 374.
37 Stoll v. Superior Court, 9 Cal. App. 4th 1362, 1366 (1992); Pompilio v. Kosmo, Cho & Brown, 39 Cal. App.4th 1324, 1326 (1995); Karno v. Biddle, 36 Cal. App.4th 622, 626 (1995); Hensley v. Caietti, 13 Cal. App.4th 1165, 1174 (1993).
38 Cal. Bus. & Prof. Code § 6203(c).
39 Maynard v. Brandon, 36 Cal.4th at 381.