Mandatory Arbitration of Fee Disputes: Still No Definitive Answers
LACBA Update, March 2005
By Jeffrey Tidus of Baute & Tidus. Tidus is a member of LACBA's Professional Responsibility & Ethics Committee. The opinions expressed are his own.
The California Supreme Court in Aguilar v. Lerner (2004) 32 Cal. 4th 994 considered the enforcement of a mandatory arbitration provision in a retainer agreement for fee disputes if the client objects. Unfortunately, the majority opinion left this issue unaddressed. However, a concurring opinion by Justice Chin may provide a clue as to the direction the Supreme Court ultimately will take.
The California Legislature, by enacting the California Arbitration Act (Code of Civ. Proc. Sec. 1280 et seq.) articulated a strong public policy in favor of arbitration. Moncharsch v. Heile & Blase (1992) 3 Cal. 4th 1, 9. The use of a mandatory arbitration clause in fee agreements has been approved because such clauses only mandate how disputes will be resolved. State Bar Ethics Committee Opinion 1989-116.
However, the Mandatory Fee Arbitration Act (Cal. Bus. & Prof. Code Sec. 6200, et seq.) is a separate scheme from the CAA. Under the MFAA, the arbitration must be conducted by a local bar association pursuant to State Bar rules. The MFAA differs from the CAA because arbitrations under the CAA occur based on a private agreement between the parties. By contrast, the MFAA applies to all retainer agreements by statute. Attorneys cannot require clients to "opt out" of the protections of the MFAA in advance of a fee dispute. Alternative Systems, Inc. v. Carey (1998) 67 Cal. App. 4th 1034, 1043.
The MFAA is voluntary for the client but mandatory for the attorney. However, the client can waive the protections of the MFAA by instituting a legal action in court or by filing a malpractice claim. Unless both parties agree otherwise, MFAA arbitration is not binding, and either party can seek trial de novo. (Bus. & Prof. Code Sec. 6201(c).) The question left unanswered is whether a client can be compelled to arbitrate its fee claim following an MFAA arbitration.
The California Supreme Court in the recent decision of Aguilar v. Lerner (2004) 32 Cal. 4th 974 faced this issue. In Aguilar, the client (who was also an attorney) hired a family lawyer to represent him. The client filed a malpractice suit against his attorney, who, in turn, cross-complained for outstanding fees. The case went to binding arbitration under the CAA because of the mandatory arbitration clause in the fee agreement.
The majority opinion held that the filing of the malpractice claim by Aguilar waived any right under the MFAA to compel a fee arbitration. Bus. & Prof. Code Sec. 6201(c). The majority of the court left open the issue of whether the MFAA precluded the use of a mandatory arbitration provision in the retainer agreement and the interplay between the CAA and MFAA.
The decision did not address the earlier court of appeal opinion in Alternative Systems, Inc. v. Carey (1998) 67 Cal. App. 4th 1034. The court in Alternative Systems found that the Legislature, in enacting the MFAA, had rejected the ability of an attorney to require a fee dispute to go to mandatory arbitration following a State Bar fee arbitration. The court of appeal relied on the language in Business and Professions Code Sec. 6204(c), which provides, in pertinent part, that "the trial after arbitration shall be initiated by the commencement of an action in the court having jurisdiction over the amount of money in controversy." Alternative Systems specifically rejected the use of a CAA arbitration in lieu of a trial following an MFAA arbitration.
Although the majority opinion in Aguilar specifically avoided commenting on the Alternative Systems case, Justice Chin in a concurring opinion expressed the view that Alternative Systems was wrongly decided. Justice Chin explained that, under the MFAA, Business and Professions Code Sec. 6201 requires an attorney to inform the client of the client's right to arbitrate under the MFAA "prior to or at the time of service of summons or claim in an action against the client, or prior to or at the commencement of any other proceeding against the client under a contract between attorney and client which provides for an alternative to arbitration under this article." The language in Sec. 6201 acknowledging the right of an attorney and a client in their fee agreement to provide for an alternative forum, such as binding arbitration, to resolve a fee dispute was added by the Legislature in 1996. The addition of this language would seem to validate the use of mandatory arbitration following a MFAA arbitration.
Justice Chin acknowledged the language in Sec. 6204. Justice Chin, however, departs from the Alternative Systems opinion by pointing out that its reading of Sec. 6204 makes the language in Sec. 6201 meaningless. Justice Chin opined that, read in context, Sec. 6204's the use of the term "judicial hearing" also encompasses binding arbitration.
Justice Chin points out that the Alternative Systems decision allows the client an easy out from binding arbitration. Under Alternative Systems, once the client opts for MFAA arbitration, the dispute must then go to court, not arbitration. This result is inconsistent with the strong legislative intent of encouraging arbitration under the CAA, and would be inconsistent with the 1996 amendments to Sec. 6201.
Given the public policy in favor of arbitration and Justice Chin's well-reasoned concurrence in Aguilar, the courts will likely reconsider the Alternative Systems decision to clarify the interplay between the CAA and the MFAA.