Court Allows Most Arbitration Clauses, but Splits on Need for Extensive Disclosure

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By Joan C. Rogers  

A binding arbitration clause in a retainer agreement is not enforceable in a malpractice action if the lawyer or law firm did not fully explain it to the client, the Louisiana Supreme Court ruled July 2 (Hodges v. Reasonover, La., No. 2012-CC-0043, 7/2/12).

Most of the court's seven justices found no per se prohibition against fair and reasonable arbitration clauses that do not function as a limitation of the lawyer's liability to the client. A smaller group concluded, however, that in this case the law firm's arbitration clause is unenforceable for lack of adequate explanation.

Justice Jeannette Theriot Knoll, joined by Justices Greg G. Guidry and Marcus R. Clark, stated in the lead opinion that the client must be fully informed about what types of disputes the clause covers and what rights the client gives up by agreeing to arbitration. In this instance, Knoll said, the arbitration agreement is invalid because the lawyer did not make these specific disclosures.

Justice Bernett J. Johnson concurred in the result, without indicating why she viewed the arbitration clause as unenforceable.

In his concurring opinion, Justice John L. Weimer contended that binding arbitration clauses in retainer agreements can never be considered fair and reasonable because clients' malpractice claims may become irrevocably time-barred during the arbitration proceeding.

In separate dissents, Chief Justice Catherine D. Kimball and Justice Jeffrey P. Victory argued that the detailed disclosure requirements Knoll announced are not required by professional conduct rules and should not apply retroactively in this case.

AAA Arbitration Clause.

Jacqueline and Stephen Hodges hired Kirk Reasonover to sue a business that had purchased the assets of a company that Jacqueline Hodges owned. The retainer agreement that Reasonover's firm presented the Hodgeses, and which they signed, included a clause calling for mandatory arbitration by the American Arbitration Association of any disputes about the agreement.

After losing on summary judgment, Hodges and her company sued Reasonover and his firm for malpractice. The defendants moved to compel arbitration. The trial court found that the mandatory arbitration clause was a prospective limitation of liability and that it was invalid because the clients were not represented by independent counsel as required by Louisiana Rule of Professional Conduct 1.8(h)(1).

That rule, which is identical to ABA Model Rule 1.8(h)(1), states: “A lawyer shall not make an agreement prospectively limiting the lawyer's liability to a client for malpractice unless the client is independently represented in making the agreement.”

Using different reasoning, the supreme court concluded that the arbitration clause in the retainer agreement between Reasonover and the Hodgeses is not enforceable.

No Per Se Barrier.

Regarding the overall enforceability of lawyer-client arbitration agreements, Knoll agreed with ABA Formal Ethics Op. 02-425, 18 Law. Man. Prof. Conduct 224 (2002), which concluded that an arbitration clause does not violate Model Rule 1.8(h)(1) unless some aspect of the clause limits the lawyer's substantive liability.

Most state bar ethics committees have held that an arbitration clause is not a prospective limitation of liability so long as the arbitrator has authority to award full compensation to the client, Knoll said, citing opinions from Arizona, Maine, and Vermont.


Disclosures for Binding Arbitration Clause

According to the lead opinion in Hodges v. Reasonover, a lawyer who wishes to get a client's informed consent to a binding arbitration clause must disclose, at a minimum:

• the right to a jury trial is waived;

• the right to an appeal is waived;

• the right to broad discovery is waived;

• arbitration may involve substantial up-front costs compared to litigation;

• the precise nature of claims covered by the arbitration clause, such as fee disputes or malpractice claims;

• the arbitration clause does not impinge upon the client's right to make a disciplinary complaint; and

• the client has the opportunity to speak with independent counsel before signing the contract.

 


The clients argued that the initial filing fee required for AAA arbitration, which can be costly in high-stakes disputes, functions as a prospective limitation of liability under Rule 1.8(h)(1). Knoll disagreed, emphasizing that arbitration involves lower costs than litigation in most respects.

“In summary, we find arbitration clauses in attorney-client agreements may be enforceable, provided the contract does not limit the attorney's substantive liability, is fair and reasonable to the client, and does not impose any undue procedural barrier to a client seeking relief,” Knoll wrote.

Extensive Disclosures Required.

Knoll went on to state, however, that a lawyer must make abundant disclosures to obtain a client's informed consent to a binding arbitration clause:

[A]n attorney must make full and complete disclosure of the potential effects of an arbitration clause, including the waiver of a jury trial, the waiver of the right to appeal, the waiver of broad discovery rights, and the possible high upfront costs of arbitration. The contract must explicitly list the types of disputes covered by the arbitration clause, e.g., legal malpractice, and make clear that the client retains the right to lodge a disciplinary complaint.  

 

These disclosures are required by a lawyer's fiduciary duties of candor and loyalty, Knoll said. The duty of candor under Rule 1.4 obligates a lawyer to explain matters enough to enable a client to make informed decisions, and the duty of loyalty under Rule 1.7 prohibits a lawyer from taking any action in his own self-interest that would have an adverse effect on the client, she explained.

Inherent in these duties, Knoll said, is the principle that a lawyer cannot take action that could adversely affect the client's interest unless the client gives informed consent, as defined in Rule 1.0(e), after being fully apprised of the risks and possible consequences.

The disclosures in this case fell short, Knoll found, because, first, the arbitration clause did not enumerate the types of disputes it was meant to cover and, second, although the agreement advised the clients of their right to speak with independent counsel, it did not warn that they were waiving their rights to jury trial, appeal, and broad discovery.

Jacqueline Hodges was entitled to the same disclosures as any other client despite her alleged business sophistication and familiarity with arbitration, Knoll added.

Dissents.

In his dissenting opinion, Justice Victory agreed that binding arbitration clauses can be enforceable but dissented from the holding that the attorney here did not disclose enough to enforce the arbitration clause. The simple arbitration clause plainly stated that it applied to “any disputes,” and Reasonover expressly advised the Hodgeses to review the agreement with independent counsel, he said. It was unfair and unnecessary, Victory argued, to adopt new disclosures rules that apply retroactively in this case.

Chief Justice Kimball also dissented, arguing that the specific disclosures mandated in this case are not required by Louisiana's existing professional conduct rules and should not be applied retroactively to a lawyer who had no prior notice of them.

Pauline M. Warriner and Robert H. Matthews of Matthews & Warriner, New Orleans, represented Jacqueline Hodges and HRC Solutions.

Ian L. Atkinson, William P. Gibbens, and Kyle D. Schonekas of Schonekas, Evans, McGoey & McEachin, New Orleans, represented Reasonover and his firm.


Full text at http://op.bna.com/mopc.nsf/r?Open=kswn-8vurfh.

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