Thursday, October 31, 2013

A New Wrinkle on Arbitration Clauses in Retainer Agreements

Many lawyers nowadays have arbitration clauses in their retainer agreements, whereby the Clients agree that any dispute that may arise out of the lawyers' representation of the clients shall be submitted to arbitration.  However, a recent case from the 4th District Court of Appeal puts a new wrinkle on the enforceability of such clauses.  Depending on the circumstances, the lawyer seeking to compel arbitration may have to pay the arbitration costs to enforce that provision.

In Roldan v. Callahan & Blaine (4th Dist. 2013) 219 Cal. App. 4th 87, 161 Cal.Rptr. 3d 493, the Plaintiffs (former clients) filed suit against their former lawyers based upon a claim that the settlement they reluctantly agreed to in the underlying action was inadequate. The lawyers successfully moved to compel arbitration based upon an arbitration clause in the attorney retainer agreement. The plaintiffs then filed a motion in the trial court seeking an order compelling the lawyers to advance the entire upfront cost of the arbitration, which the trial court denied. 

The appellate court reversed and remanded for the trial court to do the following: (1) calculate the reasonable cost of the arbitration previously ordered; (2) determine whether the plaintiffs are financially able to pay their share of the anticipated costs; and (3) if any of the plaintiffs are unable to pay, issue an order specifying that the lawyers have the option of either paying or else waiving their right to arbitrate.  Thus, the Appellate Court basically said that if the Court determines that clients cannot afford the costs of the arbitration, the attorneys' option is to pay "full freight" or waive the right to arbitration and proceed to trial in court.

(It should be noted that the Appellate Court in Roldan had a number of criticisms of the particular retainer agreement involved, including the observation that the plaintiffs had been required to initial all pages of the retainer agreement except for the page including the arbitration clause, and that their signatures on the agreement were on a different page from the arbitration provision.  This may have factored into the Court's ultimate conclusion.)  

This case is significant because the court invoked a "public policy" exception to compelling indigent clients to arbitrate.  Despite a recent spate of cases from the US Supreme Court holding that Courts should "rigorously enforce" arbitration agreements, this California case seems to impose limits on the enforceability of arbitration provisions, similar to the holding in Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 6 P.3d 669, 99 Cal.Rptr.2d 745, in the employment agreement context.