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Arbitration Agreement Void Where Clients Weren’t Fully Informed About Implications

Thursday, April 24, 2014

By Samson Habte  

April 16 --The arbitration provision in a Texas law firm's retainer agreement with debt adjustment services clients is procedurally unconscionable and cannot be enforced, the Washington Court of Appeals, Division Three, held April 8.

Judge Stephen M. Brown said the arbitration agreement was invalid because the plaintiff “was not informed of the advantages or disadvantages of arbitration, including the requirement that she must bring arbitration claims in Texas.”


Losing on Two Fronts: Ohio Court Rejects Argument That Rule 1.8(h) Is Preempted by Federal Law

The defendants in Gorden are battling a similar consumer protection lawsuit in Ohio, where a state appeals court April 10 issued an order that also rejected their motion to compel arbitration (Helbling v. Lloyd Ward, P.C., Ohio Ct. App. 8th Dist., No. 99991, 4/10/14).

The ruling in that case was based, in part, on Ohio Rule of Professional Conduct 1.8(h), which provides that a lawyer must ensure that a client receives independent counsel before entering into an agreement that requires the client to prospectively acquiesce to binding arbitration of disputes arising out of the representation. See Guay v. Lloyd Ward, P.C., No. 13 CA 42, 30 Law. Man. Prof. Conduct 98 (Ohio Ct. App. Jan. 17, 2014).

Here, Ward argued that Rule 1.8(h) is preempted by the Federal Arbitration Act. He pointed to AT&T Mobility LLC v. Concepcion, 2011 BL 110648 (U.S. April 27, 2011), which recognized that “when state law prohibits outright the arbitration of a particular type of claim, the analysis is straightforward: the conflicting rule is displaced by the FAA.”

Judge Kathleen Ann Keough rejected that argument.

“Rule 1.8(h) does not 'prohibit outright' the arbitration of claims relating to a legal services agreement,” she wrote. “In fact, it allows arbitration of such claims on the condition that a client be represented by independent counsel before prospectively agreeing to arbitrate his or her claims.”


'Predatory' Fees

After seeing an Internet advertisement, Washington residents Sherrie K. Gorden and Debbie K. Miller separately enrolled in a debt settlement program administered as a joint venture by Texas attorney Lloyd Ward, his law firm and other parties (collectively, LWG). The clients signed a service contract that included a retainer agreement. The contracts stated that the agreements were governed by Texas law, and that any disputes relating to them would be resolved through binding arbitration in Texas. Those provisions were not discussed with the clients, the court said.

Gorden and Miller alleged that monthly payments they made as required by LWG's settlement program had not been turned over to creditors and were instead applied to LWG's own fees. Accordingly, they filed a lawsuit alleging that LWG violated state consumer protection laws by charging “predatory fees.” That action was brought on behalf of Gorden and Miller, as well as a proposed class of Washington residents who retained LWG's services.

Gorden agreed to settle her individual claim for $11,147. Miller rejected a settlement, however, and LWG moved to compel arbitration of her claim.

Open and Shut

A trial court denied LWG's motion to compel arbitration, concluding that the parties' arbitration provision was unconscionable. The appellate panel agreed, ruling that the provision was procedurally unconscionable.

Citing Smith v. Jem Grp., Inc., 737 F.3d 636, 30 Law. Man. Prof. Conduct 7 (9th Cir. 2013), Brown noted that arbitration agreements between attorneys and clients are permissible under Washington law, but only “if the client has been given 'sufficient information to permit her to make an informed decision about whether to agree to the inclusion of the arbitration provision in the retainer agreement.'”

“Here, no attorney or attorney's representative discussed the arbitration provisions with Ms. Miller, or advised her of the rights at stake,” Brown said. “She was not counseled or advised regarding the consequences of relinquishing the legal protections provided by Washington law or of the protections provided by Texas law. Ms. Miller was not informed of the advantages or disadvantages of arbitration, including the requirement she must bring arbitration claims in Texas.”

Brown also rejected the argument that Washington courts lack personal jurisdiction over LWG. There are no jurisdictional problems, he said, because “LWG purposely advertised on the Internet to Washington residents, made service promises to Washington residents, entered into contracts with Washington residents, and received payments from Washington residents.”

Judges Kevin M. Korsmo and Evan E. Sperline joined Brown's opinion.

The Ward defendants were represented by Freimund, Jackson & Tardif LLP, Olympia, Wash. Miller was represented by The Scott Law Group P.S., Spokane, Wash.


Full text of Gorden at http://www.bloomberglaw.com/public/document/GORDEN_v_LLOYD_WARD__ASSOCIATES_PC_No_313999III_2014_BL_99013_Was.

Full text of Helbling at http://www.bloomberglaw.com/public/document/Helbling_v_Ward_2014Ohio1513_App_8th_Dist_2014_Court_Opinion.

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