By Samson Habte
Sept. 29 — An arbitration clause in the retainer contract of a law firm that provides debt relief services is unenforceable because it does not explain in a “sufficiently broad way” that a party who signs it “is giving up her right to bring her claims in court or have a jury resolve the dispute,” the New Jersey Supreme Court decided Sept. 23.
An appellate panel previously found that “the lack of express reference to a waiver of the right to sue in court” did not bar enforcement of the clause. Voting unanimously, the supreme court reversed.
“The absence of any language in the arbitration provision that plaintiff was waiving her statutory right to seek relief in a court of law renders the provision unenforceable,” Justice Barry T. Albin wrote.
The opinion notes that New Jersey law requires “consumer contracts”—including those for debt-related legal services—to “be written in a simple, clear, understandable and easily readable way.”
The court did not address whether a standard attorney-client retainer agreement constitutes a “consumer contract.” But other authorities, citing the heightened ethical obligations of disclosure that lawyers owe to clients, have held that an arbitration clause in a standard retainer agreement will not be enforceable unless the lawyer adequately discloses to a client the differences between litigation and arbitration and the advantages and disadvantages of both. (See box.)
The ABA's ethics committee has found that retainer provisions requiring clients to submit claims against lawyers to arbitration are not per se unethical. See ABA Formal Ethics Op. 02-425, 18 Law. Man. Prof. Conduct 224 (2002).
The opinion cautions, however, that clients must be apprised of the advantages and disadvantages of arbitration.
Other authorities have similarly stressed that the ethical propriety and contractual enforceability of a binding arbitration clause may depend on whether a lawyer explains the pros and cons of arbitration to the client. See, e.g., Hodges v. Reasonover, 103 So. 3d 1069, 28 Law. Man. Prof. Conduct 428 (La. 2012) (court should decline to enforce arbitration clause where neither contractual language nor any other communication “adequately disclose[d] the full scope of the arbitration clause and the potential consequences of agreeing to binding arbitration”); Texas Ethics Op. 586, 24 Law. Man. Prof. Conduct 641 (2008).
Some ethics panels have suggested that compliance with the informed consent requirement may require a lawyer to advise the client in writing to obtain independent counsel before signing a retainer with a binding arbitration provision. E.g., Michigan Informal Ethics Opinion RI-196 (1994). Contra, Maine Ethics Op. 170, 15 Law. Man. Prof. Conduct 646 (1999).
However, courts generally have rejected the notion that clients must be advised to seek independent counsel before signing a retainer agreement with a binding arbitration clause. See, e.g., Bezio v. Draeger, 737 F.3d 819, 30 Law. Man. Prof. Conduct 6 (1st Cir. 2013) (applying Maine law); Watts v. Polaczyk, 619 N.W.2d 714, 16 Law. Man. Prof. Conduct 533 (Mich. Ct. App. 2000).
In 2011, Patricia Atalese entered into an agreement with U.S. Legal Services Group LP (USLSG), a California-based law firm that provides credit repair services nationwide.
Atalese said she paid USLSG about $5,000 in legal fees, and that the company misrepresented to her that those funds were spent on numerous attorneys negotiating with her creditors. Atalese maintained that USLSG had in fact settled just one debt on her behalf and retained just one lawyer who prepared a single-page answer for her to file in a collection action.
Atalese then filed the present action, charging USLSG with criminal usury and violating New Jersey consumer protection laws by working as an unlicensed debt adjuster and engaging in deceptive trade practices.
USLSG moved to compel arbitration based on a provision in its service contract. That clause stated that any claim or dispute relating to the agreement or USLSG's performance “shall be submitted to binding arbitration,” but did not specifically explain that a signatory was waiving the right to pursue an action in court.
A trial court said the clause was “minimally, barely … sufficient to put the [plaintiff] on notice” that any dispute would have to be arbitrated.
The lower appellate court affirmed, stating: “[W]hile the disputed provision did not explicitly state that plaintiff agreed to waive her right to try her dispute in court, it clearly and unambiguously stated that … any dispute relating to the underlying agreement shall be submitted to arbitration and the resolution of that forum shall be binding and final. Such language provides the parties reasonable notice of the requirement to arbitrate all claims under the contract and sufficiently distinguishes the arbitral forum, with its own processes and procedures, from a court of law, where the decision of the arbitrator may later be enforced.”
On appeal to the supreme court, Atalese argued that an arbitration clause is unenforceable if it “does not clearly and unequivocally state its purpose in depriving [a plaintiff] of her time-honored right to sue.”
USLSG countered that the term “arbitration” is universally understood—and, accordingly, “[n]o reasonable consumer could have any doubt that arbitration is different than litigation.”
The court sided with Atalese. “Our jurisprudence has stressed that when a contract contains a waiver of rights—whether in an arbitration or other clause—the waiver ‘must be clearly and unmistakably established,'” Albin said.
While no “particular form of words is necessary to accomplish a clear and unambiguous waiver,” it is “worth remembering [that] every ‘consumer contract' in New Jersey must ‘be written in a simple, clear, understandable and easily readable way,'” he said, citing N.J. Stat. §56:12-2.
Turning to case law, Albin said “Our courts have upheld arbitration clauses phrased in various ways when those clauses have explained that arbitration is a waiver of the right to bring suit in a judicial forum.”
That did not occur here, the court said. “Nowhere in the arbitration clause is there any explanation that plaintiff is waiving her right to seek relief in court for a breach of her statutory rights,” Albin stated, adding:
The provision does not explain what arbitration is, nor does it indicate how arbitration is different from a proceeding in a court of law. Nor is it written in plain language that would be clear and understandable to the average consumer that she is waiving statutory rights. The clause here has none of the language our courts have found satisfactory in upholding arbitration provisions—clear and unambiguous language that the plaintiff is waiving her right to sue or go to court to secure relief.
William D. Wright, Manahawkin, N.J., argued for Atalese. Thomas M. Barron, Moorestown, N.J., argued for USLSG.
To contact the reporter on this story: Samson Habte in Washington at email@example.com
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The ABA/BNA Lawyers’ Manual on Professional Conduct is a joint publication of the American Bar Association Center for Professional Responsibility and Bloomberg BNA.
Copyright 2014, the American Bar Association and The Bureau of National Affairs, Inc. All Rights Reserved.
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