Lawyers, Fee Agreements, & Arbitration Clauses — A Conflict of Interest

On Behalf of | Feb 16, 2016 | Firm News |

Recently, there has been noteworthy news coverage of corporations compelling consumer disputes be resolved in private arbitration, not the public court systems.  This accomplished by including in consumer contracts waivers of constitutional rights to a jury trial and use of the federal and state civil courts. Whether it is Comcast Corporation in your cable bill or ATT in you phone bill, the United States Supreme Court has suggested these are permissible contractual clauses.  Locally,the Philadelphia County Court of Common Pleas addresses thissue in the context of attorneys asking their clients (legal consumers) to waive these same rights in legal fee agreements when hiring counsel.

The facts of giving rise to this dispute may be well known to many.  In April 2012 fire consumed a  storied Villanova, Pennsylvania estate. Jerald Batoff owned the estate.  It was rented it to a Canadian couple. During the term of the lease, which required rental insurance, the historic and refurbished mansion burned down. The insurance litigation between Batoff, the tenant and the rental insurance company, Chartis Insurance, apparently resolved with an $18.5 million dollar insurance payout. Batoff was to receive more than $7 million dollars.
Batoff originally hired Douglas Windin, Esquire and Reed Smith, LLP, to represent him in the dispute over the rights to the insurance proceeds.  The attorney contract into which Batoff entered with Reed Smith included an arbitration agreement clause encompassing all disputes arising from the inception of the attorney-client relationship.
Soon after reaching the global settlement, the tenants filed suit against Chartis, freezing the insurance proceeds that Windin and Reed Smith secured.  Batoff was now damaged as he was sucked back into the tenants’ litigation with Chartis through the settlement release indemnification clauses.  Batoff may have even been required to pay Chartis’ attorney’s fees incurred in fighting the tenant’s continuing litigation.
In 2014, as a result of the tenants’ continuing litigation,  Batoff  files suit against Windin and Reed Smith, claiming the attorney negotiated a settlement on behalf of Batoff without any notice to Batoff or participation of the tenants. Batoff also claims the terms of the settlement release, which  require  Batoff to indemnify and hold harmless Chartis of any further claims made by the tenants, is negligently negotiated.

Reed Smith objects to Batoff’s legal malpractice claim, seeking to compel contractual arbitration and dismiss the claim from the Philadelphia County Court of Common Pleas. The Court determines the issue is one of first impression in the First Judicial District of Pennsylvania. The issue is phrased as “under what circumstances c and attorney enter into an arbitration agreement with a client from the inception of the attorney client relationship?” “Does the attorney have an ethical obligation of advising the client of such waiver in the unfortunate and event that a dispute as to the quality of representation arises?”  Stated another way, will the courts allow a sophisticated attorney to take advantage of a client and require arbitration when a dispute arises as to that representation.

The court finds that attorneys have an ethical obligation to not engage in a conflict of interest by including mandatory arbitration clauses in their attorney client representation contracts. The court finds that a conflict of interest in their legal representation is created when attorneys seek to have a potential clients waive civil jury rights in favor of contractual, mandatory arbitration clauses.  The court determines that it is unethical to represent someone conditioned upon a waiver of their civil jury right and basic pretrial discovery procedures.
The court reviews various cases and local bar association ethics committee discussions of thissue. Some cases hold arbitration clauses within contract/retainer agreements infringe upon the fiduciary and ethical obligations attorneys owe their clients. Some suggest the clauses are properly enforceable only if the client is represented by counsel and there is a separate contract page fully informing the potential client of the scope and effect of the waiver clauses.
Pennsylvania Rules of Professional Conduct, Rule 1.8,  comment 14, emphasizes the legality of these types of arbitration clauses but mandates that the client before informed pre-signing of the scope and affect of these clauses.  This “notice provision” requires a separate page in the fee agreement with separate acknowledgments of each waiver clause and its “scope and affect” on the client’s constitutional rights.   A 2014 Federal court decision discussing thissue found that Rule 1.8 of the Pennsylvania Rules of Professional Conduct imposes a “special duty” on attorneys to put their clients on notice of the scope and effect of an arbitration agreement.
The Constitutional rights of which attorneys can request waiver are broad and significant.  The Louisiana Supreme Court states that the client must be specifically informed of their 1) right to a jury trial, 2) waiver of the right to appeal to the civil courts, 3) waiver of their right to the broad discovery rules under either Louisiana or federal civil procedure, 4) the costs of arbitration, 5) the specific issues to which the arbitration clause applies, and 5) the ability of the client to make a disciplinary complaint.  Pennsylvania contract law will allow these “arms’ length” transactions between legal consumers and their counsel, with these same caveats.
In reviewing these extra jurisdiction notice provisions, Philadelphia County Court of Common Pleas determined that the arbitration clause included in Reed Smith’s standard  Attorney client fee agreement did not contain these appropriate and proper notice provisions.  Read Smith attempted to suggest that Batoff, a experienced real estate investor, deserved a higher standard of proof warranting imposition of the arbitration clause. The court disagreed, finding no authority for a higher standard of care of disclosure required between sophisticated and the average legal client.
This case teaches that it is the law firm that requests a waiver of civil jury rights and free court systems, in favor of expensive – attorney controlled arbitration – of which the legal consumer must beware.  Why hire an attorney who, from the outset, limits your right to sue him/her if they make a mistake?  Why choose the attorney who, from the out set, creates a conflict of interest in their representation?  Why choose the attorney who seeks to protect themselves over their clients when the proverbial sh-t hits the fan?  Why choose an attorney whose first inclination in the representation is anticipating their own mistake rather than success in the representation.