R-23

July 22, 2016

SYLLABUS

A provision in a fee agreement for legal services purporting to require the parties to arbitrate any future dispute relating to the representation that might arise between them is not ethically permissible unless, prior to signing the fee agreement, the client either consults with independent counsel or consults with the contracting lawyer and is fully informed in writing regarding the scope and practical consequences of the arbitration provision.

References: Michigan Rules of Professional Conduct ("MRPC") 1.0 and 1.8(h); RI-2; RI-196; RI-257; Castillo v. Arrieta, 368 P3d 1249 (2016); Sanford v. Bracewell & Guiliani, LLP, 6 F Supp 3d 568 (ED Pa, 2014); Hodges v. Reasonover, 103 So 3d 1069 (La, 2012); Bezio v. Draeger, 737 F3d 819 (1st Cir, 2013); Watts v. Polaczyk, 242 Mich App 600 (2000); District of Columbia Ethics Opinion 211 (1990); ABA/BNA Lawyers Manual on Professional Conduct, § 41:118 (2005); Hazard and Hodes, The Law of Lawyering 4th ed, § 13.35; Restatement of the Law Governing Lawyers § 126, comment e.

TEXT

A Michigan law firm asks whether a provision in a fee agreement is ethically permissible. The provision documents the client's agreement that any dispute over the law firm's services will be resolved through arbitration with the American Arbitration Association.

Issues relating to lawyers inserting arbitration clauses in fee agreements appear to be occurring more frequently and have generated recent opinions from courts, ethics committees, and legal commentators. See, e.g., Castillo v. Arrieta, 368 P3d 1249 (2016); Sanford v. Bracewell & Guiliani, LLP, 6 F Supp 3d 568 (ED Pa, 2014); Hodges v. Reasonover, 103 So 3d 1069 (La, 2012); Bezio v. Draeger, 737 F3d 819 (1st Cir, 2013); District of Columbia Ethics Opinion 211 (1990); ABA/BNA Lawyers Manual on Professional Conduct, § 41:128 (2005); and Hazard and Hodes, The Law of Lawyering, 4th ed, § 13.35.

A review of the cases, ethics opinions, and treatises cited in the preceding paragraph makes it clear that state courts and ethics committees have arrived at different conclusions regarding the propriety of including a mandatory arbitration clause in a fee agreement. Some states prohibit such clauses outright; some states allow them so long as the language regarding the arbitration clause is clear; and some states judge them on a case-by-case basis. Those states that analyze the propriety of an arbitration clause on a case-by-case basis typically look at factors such as the sophistication of the client, whether the fee agreement was a "take it or leave it" agreement or was negotiated, whether consultation with independent counsel was encouraged or required (or actually occurred), and whether the agreement articulated the legal rights that the client would be waiving by agreeing to arbitration.

The Committee has addressed this issue previously. In RI-2 (1989), the Committee determined that such a clause was allowable, but only if the client actually consulted with independent counsel prior to signing the fee agreement.

In RI-196 (1994), the Committee determined that this issue is governed by MRPC 1.8(h)(1) and concluded that an arbitration clause was permissible if the client was advised of his or her right to independent counsel and the advisability of same, and the fee agreement contained the information regarding the arbitration clause necessary for the client to make an informed decision.

In RI-257 (1996), the Committee considered a clause that would require arbitration of all issues between the lawyer and client arising out of the representation, including ethics disputes that might otherwise be addressed by the Attorney Grievance Commission (AGC). The Committee determined that (1) an arbitration clause could be binding on the client if the client had been given an opportunity to consult with independent counsel and (2) under no circumstances could the arbitration process be used to bar the client from filing a Request for Investigation with the AGC.

In Watts v. Polaczyk, 242 Mich App 600 (2000), the Court of Appeals found that a four-page fee agreement containing an arbitration clause was enforceable simply because the client signed it. The court indicated that it would have arrived at the same conclusion even if the client had not read the agreement before signing or if client had not been advised of the right to consult with independent counsel prior to signing. The Watts arbitration clause noted that the arbitration would result in a final and binding decision with a judgment to be entered by a court, but there was no discussion regarding the lack of appeal or giving up the right to a jury trial.

The Committee believes that the three opinions referenced above and Watts cannot be read to be entirely consistent with each other and that some clarification is necessary.

When a lawyer agrees to represent a client and begins to create a fee agreement, the lawyer is in the process of taking on a fiduciary duty to the client, and he or she is, therefore, held to a higher standard than other contracting parties, even other licensed professionals. See, e.g., ABA/BNA Lawyers' Manual § 104 ("the 'common law of contracts frequently treats lawyers differently from lay persons and even from other professionals'" (cite omitted); "ordinary contract principles . . . give way [to] higher ethical and professional standards" in matters involving attorneys' fee agreements (cite omitted)). By court rule, fees for certain types of cases are controlled. Certain types of fees are barred, regardless of the client's consent. A fee might be clearly unreasonable, regardless of client consent. Unlike other contracting parties, a lawyer may only acquire an interest in a client's business if certain additional precautions are followed. A lawyer may not take advantage of a client's lack of business or legal knowledge or sophistication in order to create a fee agreement more favorable to the lawyer than one to which a reasonable business person would agree. For these reasons, the MRPC require a lawyer to take reasonable steps to ensure both that his or her fee agreements are, in fact, objectively reasonable and that his or her clients understand the ramifications of decisions before they are made.

An arbitration provision is generally not included in a fee agreement to benefit the client; it is included to benefit the lawyer. As such, "some courts and most ethics committees advise that a lawyer may not include a mandatory arbitration clause in a fee agreement unless its consequences are fully explained and the client is allowed to seek independent counsel." ABA/BNA Lawyers' Manual § 41:128. While the Committee believes that there are limited instances where parties to a fee agreement may ethically agree to arbitrate any and all disputes arising out of the attorney-client relationship, these instances are limited to those situations where it is clear that the client fully understands what rights the client is waiving by agreeing, at the inception of the attorney-client relationship, to arbitrate all disputes and the practical implications of such a waiver. Consistent with RI-2, if the client actually consults with independent counsel regarding the arbitration clause before agreeing to it, inclusion of such a provision in the fee agreement is ethically permissible.

In the absence of consultation with independent counsel, we believe that, at a minimum, the lawyer is required to consult1 with the client and advise the client, in writing, of the information reasonably necessary to make an informed decision regarding the arbitration clause. This should include, but is not limited to, the following: (1) the client has the right to consult with independent counsel, and such consultation is recommended; (2) by agreeing to the arbitration clause, the client is waiving the right to a jury, potentially waiving the right to take discovery, and waiving the right to appeal the result of the arbitration proceeding; (3) the arbitrator(s) may well be attorneys; (4) the body that will administer the arbitration, if any; (5) the client's financial responsibilities for arbitrator compensation and administrative fees, if any; (6) if the client refuses to agree to arbitration at the onset of the attorney-client relationship, there is no prohibition against the lawyer and the client agreeing to arbitrate the matter at a later date; and (7) the client maintains the right to file a Request for Investigation with the AGC.

CONCLUSION

A provision in a fee agreement for legal services purporting to require the parties to arbitrate any future dispute relating to the representation that might arise between them is not ethically permissible unless, prior to signing the fee agreement, the client either consults with independent counsel or consults with the contracting lawyer and is fully informed in writing regarding the scope and practical consequences of the arbitration provision.

1 "Consult' or 'consultation' denotes communication of information reasonably sufficient to permit the client to appreciate the significance of the matter in question." MRPC 1.0, Preamble—Terminology.