Opinions

Ethics Opinion 218

Retainer Agreement Providing for Mandatory Arbitration of Fee Disputes Is Not Unethical

* [NOTE: See how Opinion 218 has been substantively affected by the amendments to the D.C. Rules of Professional Conduct that became effective on February 1, 2007]

A retainer agreement providing for mandatory arbitration of fee disputes before the DC Bar Attorney-Client Fee Arbitration Board is not unethical provided the client is advised in writing of the availability of counseling by the staff of the ACAB and provided the client consents in writing to the mandatory arbitration.

Applicable Rules

  • 1.5 (Fees)
  • 1.6(a)(5) (Confidentiality)
  • 1.8 (Conflict of Interest: Prohibited Transactions)

Inquiry
In Opinion 211, we decided that a law firm retainer agreement that provided for mandatory arbitration of all disputes between the lawyer and law firm, including disputes concerning lawyer malpractice, was improper unless the client is counseled by another attorney prior to entering into the retainer agreement. We specifically reserved the question of whether a retainer agreement requiring arbitration limited to fee disputes only would be a violation of the Rules of Professional Conduct. Now we are asked to address that very issue.

The inquiry comes from the Attorney-Client Arbitration Board (ACAB, formerly known as the Fee Arbitration Board) which is concerned about the status under the new rules of agreements mandating arbitration of fee disputes in light of Opinion 211. The ACAB regularly receives requests for arbitration of fee disputes based on mandatory arbitration clauses providing for arbitration before the ACAB. We are informed that approximately per cent of the arbitrations handled by the ACAB involve mandatory arbitration agreements. Of these, the majority of the arbitrations are initiated by the client.

Discussion
No provision of the Rules of Professional Conduct specifically prohibits retainer agreements providing for mandatory arbitration of fee disputes between lawyer and client. Comment 15 to Rule 1.5 recommends that lawyers consider submitting to arbitration or mediation of fee disputes where procedures have been established by the Bar. Rule 1.6(d)(5) encourages the lawyer to minimize disclosure of client confidences in a fee collection action. The comments suggest that the lawyer should file John Doe pleadings and seek protective orders to protect client confidences. Arbitration, which is not open to the public, furthers the purposes of 1.6(d)(5) by protecting the client from a public airing of confidential matters.

Rule 1.8(g)(1) prohibits a lawyer from making "an agreement prospectively limiting the lawyer's liability to a client for malpractice[.]" In Opinion 211, we determined that Rule 1.8(g)(1) was not applicable as a prohibition on mandatory arbitration provisions in a retainer agreement. Id. at n. 3. Even if 1.8(g)(1) were deemed to apply to arbitration provisions in a retainer agreement, a mandatory arbitration provision limited to fee disputes does not by its terms implicate Rule 1.8(g)(1) because a provision for mandatory arbitration of the lawyer's claim against the client for fees is not a prospective limitation of the lawyer's liability to the client for malpractice. The client's right to have malpractice claims determined by a court remains intact.

In Opinion 211, we determined that Rule 1.8(a) governs the use of mandatory arbitration provisions in retainer agreements. Rule 1.8(a) provides:

(a) A lawyer shall not enter into a business transaction with a client or knowingly acquire an ownership, possessory, security, or other pecuniary interest adverse to a client unless:

(1) The transaction and terms on which the lawyer acquires the interest are fair and reasonable to the client and are fully disclosed and transmitted in writing to the client in a manner which can be reasonably understood by the client;

(2) The client is given a reasonable opportunity to seek the advice of independent counsel in the transaction; and

(3) The client consents in writing thereto.

The retainer agreement before us in Opinion 211 required mandatory arbitration of all disputes before either the ACAB or the American Arbitration Association (AAA), required the client to consent to the jurisdiction of the D.C. Superior Court for all purposes connected with the arbitration, and provided a two-year statute of limitations within which arbitration must be started. We concluded that the complex nature of the arbitration provided for by the retainer agreement in question could not adequately be disclosed to a lay client. Thus, we determined that mandatory arbitration agreements covering all disputes between lawyer and client are not permitted "unless the client is in fact counseled by another attorney." Id. at 9.

The concerns which led us to the conclusion we reached in Opinion 211 either do not exist where the retainer agreement provides for fee only arbitration or are adequately addressed by the procedures of the ACAB. For instance, the agreement in Opinion 211 provided for ACAB or AAA arbitration, but did not disclose the AAA fees, nor that AAA arbitrators must be paid, and that in some instances the costs of AAA arbitration can be substantial. Here we address a fee agreement providing only for arbitration before the ACAB where the fees are only $25 and the arbitrators are not compensated.

More importantly, we believed the lawyer entering into a retainer agreement with a client for arbitration of all disputes, including malpractice, could not adequately explain the tactical considerations of arbitration versus litigation to the lay client—considerations such as lack of formal discovery, lack of a jury trial, and the closed nature of arbitration proceedings. We are informed that the staff of the ACAB is equipped to advise clients who are asked to sign retainer agreements with mandatory arbitration provisions of the nature of fee arbitration, the advantages and disadvantages, and the alternatives to fee arbitration. Moreover, the ACAB's procedures are relatively simple and its rules, which are also relatively simple to understand, are readily available to interested lawyers and their clients. We believe the counseling provided by the ACAB staff and the ready availability of the ACAB's rules are sufficient to adequately inform the lay client of the information necessary to make a decision about whether to agree to a provision for mandatory arbitration of fees.

We therefore conclude that a fee agreement providing for mandatory arbitration of fee disputes before the ACAB is ethically permissible provided the agreement informs the client in writing that counseling and a copy of the ACAB's rules are available through the ACAB staff and further that the lawyer encourage the client to contact the ACAB for counseling and information prior to deciding whether to sign the agreement. Moreover, the client must consent in writing to the mandatory arbitration. Rule 1.8(a)(3).

A final issue to be addressed relates to the possibility that a fee arbitration arising from a mandatory arbitration provision could preclude the client from later raising a malpractice claim against the lawyer. In many fee disputes the client's defense is the lawyer's inadequate representation. Would the client, after having raised such a defense in a fee arbitration based on a retainer agreement, be precluded on res judicata or collateral estoppel grounds from later prosecuting a malpractice claim? The rules of the ACAB provide that the result of the arbitration is an award (or the denial of an award) without any written factual findings or conclusions. Moreover, no recording or transcription is made of the testimony presented to the arbitrators. It is difficult to see how a client in such an arbitration could later be precluded from prosecuting a malpractice claim based on an adverse award in the arbitration. However, this raises a question of law and the Legal Ethics Committee does not make rulings on questions of law.

Because the legal effect of an arbitration award to the lawyer is unclear, we conclude that a lawyer relying on a mandatory fee only arbitration agreement may not ethically use the existence of an arbitration award in the lawyer's favor in an attempt to preclude a subsequent malpractice claim unless the lawyer has complied with the dictates of Opinion 211.

 

June 1991