Ethical Considerations and Fee Arbitration
Nearly all new engagements for legal services should include a written agreement which spells out the terms and scope of the engagement, the fees to be charged and their means of computation if something other than a straight hourly or fixed-fee arrangement, the identity of the client, and any limitations on the engagement. When contingent fees are involved, Business & Professions Code section 6147 imposes a number of requirements, including a written agreement.
A failure to comply with any provision of section 6147 may render an engagement agreement voidable at the option of the client, leaving the attorney to seek a reasonable fee based upon quantum meruit.[1] When setting forth fee provisions, the inclusion of a reference to California’s Mandatory Fee Arbitration Act (“MFAA”)[2] may be a good idea, particularly when a client is new or if it is recognized the fees are likely to be high due to the complexity of the matter.
While the California Rules of Professional Conduct set forth considerations for determining when an attorney’s fee is unconscionable,[3] the MFAA seeks to balance the playing field when a client disputes legal fees. If a lawyer files an action against a client for fees, the lawyer is required to include a notice informing the client of the right to mandatory fee arbitration.[4] A failure to do so may result in dismissal of the case.
Lawyers should inform their clients that timely compliance is essential in MFAA cases, even in situations where a retainer agreement may contain provisions seemingly replacing MFAA provisions. For example, in Ervin, Cohen & Jessup, LLP v. Kassel[5] the law firm included in its retainer agreement a provision that the parties would resolve any and all claims against each other by means of binding arbitration before the American Arbitration Association (“AAA”).
When a dispute over fees arose, the law firm served the required “Notice of Client’s Right to Arbitration” under the MFAA and also explained that the client had 30 days to file an application for arbitration with the local bar association. After the client failed to file for arbitration under the MFAA within the required time, the law firm sued him to collect the fees.
The client then seemingly awakened and sought to arbitrate under the MFAA. The law firm sought to compel arbitration by the AAA. The trial court denied a motion to compel arbitration, ruling, in part, that the arbitration provision in the retainer agreement violated Businessand Professions Code section 6204(a) because “agreements for binding arbitration of fee disputes cannot be made before a dispute over fees arises.”
The order denying the motion to compel arbitration was reversed. The Court of Appeals agreed that the provision in the retainer agreement requiring binding arbitration of the fee dispute by the AAA was unenforceable under the MFAA. The client had a full and fair opportunity to take advantage of the protection the MFAA affords, but declined to do so and waived his right to proceed under the MFAA. All disputes – fee and otherwise – were subject to arbitration in accordance with the provisions of the retainer agreement.
Citing Aguilar v. Lerner,[6] the Court of Appeals ruled that where a client fails to invoke his or her rights under the MFAA, such rights are waived entirely, and a pre-existing arbitration agreement is enforceable “with no residual MFAA protections standing as an obstacle.”[7] The Court further ruled that the client could have forced the law firm to non-binding arbitration under the MFAA – notwithstanding the provision in the retainer agreement for binding arbitration under AAA rules – but the failure to do so meant that the provisions of the retainer agreement were enforceable. Section 6204(a) does not render a pre-dispute agreement for binding arbitration invalid or unenforceable so long as the client retains the right to try to resolve the fee dispute via non-binding arbitration under the MFAA.
Provisions under the MFAA are strict. An arbitration award rendered under the MFAA becomes binding if it is not challenged by the proper procedure. A party dissatisfied with an award has 30 days after the mailing of the notice of the award to take steps to prevent the award from becoming binding,[8] i.e., filing an action. Failure to do so will result in the award becoming binding.[9]
The MFAA is limited to the amount of the reasonable fees and costs to which an attorney is entitled.[10] MFAA arbitrators cannot award affirmative relief or damages against attorneys for negligence or professional misconduct, except for a refund of unearned fees or costs,[11] nor can they award either party attorney fees or costs related to the arbitration, regardless of any provisions in the parties’ retainer agreement. They can allocate the filing fee between the parties.[12]
As noted in Dorit v. Noe,[13] arbitration under the MFAA differs from arbitration under other rules and procedures in two important ways. The obligation to arbitrate under the MFAA is based on a statutory directive and not the parties’ agreement, meaning a client may invoke the MFAA and proceed to arbitration despite the absence of any prior agreement to do so. Second, arbitration under the MFAA is voluntary for a client and mandatory for an attorney if commenced by a client. Whereas a client cannot be forced to arbitrate a dispute concerning legal fees under the MFAA, the client can compel an unwilling attorney to do so.[14]
Conscientious counsel will apprise themselves and their clients of how and when a right to arbitration may affect a professional relationship, and will include the necessary disclosures in their engagement agreements.
[1]Bus. & Prof. Code § 6147(b).
[2]Bus. & Prof. Code, § 6200 et seq.
[3]See Rule of Professional Conduct 1.5(b).
[4]See State Bar Rules, Title 3, Chapter 2, Article 1, Rule 3.501(B).
[5](2007) 147 Cal. App. 4th 821.
[6](2004) 32 Cal. 4th 974, 989.
[7]Id.
[8]Bus. & Prof. Code, § 6204, subds. (b), (c).
[9]See Loeb v. Record (2008) 162 Cal. App. 4th 431.
[10]See Liska v. The Arns Law Firm (2004) 117 Cal.App.4th 275, 282.
[11]See Liska, supra, at p. 282; § 6200, subds. (a) & (b)(2), § 6203, subd. (a).
[12]Bus. & Prof. Code, § 6203(a).
[13](2020) 49 Cal. App. 5th 458, 467-468.
[14]See Schatz v. Allen Matkins Leck Gamble & Mallory LLP (2009) 45 Cal.4th 557, 564–565.