BY JEFF MASON
The First and Ninth Circuits recently issued opinions concerning the validity of state laws requiring “informed consent” to, or “full disclosure” of, arbitration clauses in attorney retainer agreements. Although the First Circuit found its way around the issue, the Ninth Circuit took it squarely on, holding that such requirements, at least as set forth by Washington state law, are not preempted by the FAA.
In Bezio v. Draeger, __ F.3d __, No. 13-1910, 2013 WL 6570920 (1st Cir. Dec. 16, 2013), an investment adviser sued a law firm that had represented him in a securities enforcement action, alleging malpractice and disputing the firm’s fees. The firm moved to compel arbitration under the arbitration clause in the parties’ engagement agreement. In opposition, the adviser argued the arbitration clause was unenforceable because the Maine Rules of Professional Conduct demand “informed consent” for agreements requiring arbitration of malpractice claims.
To support this interpretation of Maine law, the adviser relied on Hodges v. Reasonover, 103 So. 3d 1069 (La. 2012), in which the Supreme Court of Louisiana held that “attorney[s] must disclose the following legal effects of binding arbitration, assuming they are applicable” to the attorney’s retainer agreement:
• Waiver of the right to a jury trial;
• Waiver of the right to an appeal;
• Waiver of the right to broad discovery under . . . Federal Rules of Civil Procedure;
• Arbitration may involve substantial upfront costs compared to litigation;
• Explicit disclosure of the 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 to the appropriate authorities; [and]
• The client has the opportunity to speak with independent counsel before signing the contract.
The district court in Bezio concluded that the holding in Hodges would be preempted by the FAA, and it thus compelled arbitration of the adviser’s claims against the law firm.
On appeal, the First Circuit found it unnecessary to opine on the viability of Hodges, holding instead that Maine law clearly rejected the necessity of “informed consent” for arbitration clauses in attorney retainer agreements (and noting that the ABA has released an ethics opinion giving a stamp of approval to arbitration clauses within retainer agreements). “That other jurisdictions may follow different interpretations of their professional liability rules,” the First Circuit noted, “is of no moment.”
While Maine may not require special informed consent to arbitration with counsel, Washington state does. In Smith v. JEM Group, Inc., __ F.3d __, No. 11-35810, 2013 WL 6570899 (9th Cir. Dec. 16, 2013), a debt-settlement company appealed the denial of a motion to compel arbitration of claims asserted against it by a debtor. The relevant arbitration clause was found in the attorney retainer agreement embedded in a contract for debt-settlement services. The district court found the arbitration clause unconscionable under Washington state law that makes arbitration clauses material provisions in attorney retainer agreements and, as such, enforceable only if “fully disclosed.”
On appeal, the debt-settlement company contended the FAA preempts relevant Washington case law interpreting the Washington Rules of Professional Conduct. The Ninth Circuit disagreed. It held the relevant Washington state law is not preempted because (1) it does not make arbitration “slower, more costly, [or] more likely to generate [a] procedural morass”; (2) it does not specify “the manner in which the arbitration could or should be conducted,” but relates instead only to “defects in the process of contract formation” under “general principles of contract law”; and (3) it does not “single out or place any additional burden on arbitration provisions” since it merely “clarifies” that arbitration clauses are material provisions of attorney retainer agreements and that, accordingly, they must be fully disclosed like other material provisions of such agreements.
Although the debt-settlement company had not argued that the arbitration clause in question complied with Washington state law, the Ninth Circuit noted (perhaps tellingly) that “[t]here was no explanation of the arbitration clause” in the attorney retainer agreement or the larger debt-settlement contract. Therefore it affirmed the district court’s conclusion that the arbitration clause was unenforceable.
This leaves us asking a similar question to the one from last week. Are lawyers’ clients really such a special group of consumers that their arbitration clauses should be held to different standards?