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special / Legal Ethics

Mandatory Attorney Fee Arbitrations

By David B. Owen and Shawnell J. Russell

A dispute over legal fees is a serious problem?one that should be avoided. (See Schatz v. Allen Matkins Leck Gamble & Mallory LLP 45 Cal.4th 557, 564 (2009).) While this advice may seem obvious, it is not always the working reality for busy attorneys. The fact is, disputes with clients over fees can, and do, arise.

If that unfortunate situation should arise, the Mandatory Fee Arbitration Act (?MFAA,? Cal. Bus. & Prof. Code §§6200, et seq.) comes into play. It requires attorneys to advise clients of their right to submit the dispute to the State Bar for a free arbitration. If the client elects to do so, the attorney must participate in those proceedings. Given this landscape, a working familiarity with the rules and procedures applicable to MFAA arbitrations is critical to the successful resolution of a difficult fee dispute that cannot be avoided.

Initiating an MFAA Arbitration

Before filing a civil action or private arbitration to collect unpaid fees, an attorney must send his or her client a notice of right to arbitrate. (Cal. Bus. & Prof. Code 6201.) The client then has 30 days to initiate the MFAA proceedings. If the client opts to do so and complies with the procedural triggers, the fee dispute must be submitted to arbitration. If the client fails to timely comply, the right to MFAA arbitration is waived and the attorney is free to pursue a civil lawsuit or private arbitration to collect the unpaid fees. If the attorney files a civil action or private arbitration before sending the required MFAA notice, the proceedings will be stayed pending completion of the MFAA arbitration.

Unless the parties stipulate otherwise, MFAA arbitrations are non-binding and, absent a showing of good cause, are conducted in the county where the legal services were substantially performed. (Cal. State Bar Rules for Hearing Fee Arbitrations, Rules 3.507 & 3.508; the rules are available at http://rules.calbar.ca.gov/Portals/10/documents/Rules_Title3_Div4-Ch2-Fee-Arb.pdf.) Where the amount in controversy is below $500, the parties merely submit a written statement describing the dispute and the matter is decided without hearing. For disputes between $500 and $1,000, a hearing is only allowed, at the arbitrator?s discretion, when requested by a party. (Rules 3.536 & 3.532.)

MFAA arbitrations are limited to fee disputes. Claims for legal malpractice or other wrongdoing cannot be adjudicated in an MFAA proceeding. (Cal. Bus. & Prof. Code § 6200(b)(2).) Therefore, if the client seeks a MFAA arbitration, but also wants to pursue a claim for legal malpractice, they must either file their claims in separate forums or bring both claims in superior court. In fact, raising the fee dispute in a civil action, will result in the client waiving the right to MFAA arbitration. Thus, if the client files a legal malpractice action and also claims that the attorney?s fees were unreasonable or that they are entitled to a disgorgement of fees, MFAA arbitration will likely be waived. (Id.)

Statute of Limitations

The filing of a MFAA arbitration tolls the statute of limitations to file a civil action that seeks the same relief as that sought in the arbitration. The tolling lasts from the date that the arbitration is initiated until thirty days after an award is received. (Cal. Bus. & Prof. Code § 6206.) Since, MFAA arbitrations are strictly limited to fee disputes, a MFAA arbitration does not toll the statute of limitations for legal malpractice or other related claims.

However, there is some confusion as to which statute of limitations applies to an MFAA arbitration. Initially, Business & Profession Code section 6206 disallows an arbitration if a civil action seeking the same relief would be barred by the applicable statute of limitations. With the exception of actual fraud, there is a one year limitation for any claim against an attorney, including fee disputes, arising out of the performance of professional services. (Cal. Code Civ. Proc. § 340.6; Levin v. Graham & James 37 Cal.App.4th 798, 803-805 (1995).)

Even so, the State Bar maintains that either the four-year statute of limitations for breach of written contract, or the two-year statute of limitations for breach of an oral contract, applies to an MFAA arbitration. (See Arbitration Advisory No. 2011-02, available at http://www.calbar.ca.gov/Portals/0/documents/mfa/2011-02_Statute-of-Limitations-for-Fee-Arbitrations_r.pdf.) Notwithstanding this position, the courts hold that the one-year statute of limitations provided by section 340.6 applies to fee disputes in civil court and will likely apply in any de novo proceedings (Levin, 37 Cal.App.4th at 803-805.)

To add further confusion to the issue, the California Supreme Court recently ruled that section 340.6 does not apply to an attorney?s conversion of legal fees. (Lee v. Hanley, 61 Cal.4th 1225 (2015).) Because conversion claims can be intertwined with fee disputes, a three year limitation could also apply in some MFAA arbitrations. (See Cal. Code Civ. Proc. § 338(c); see also Bufano v. San Francisco, 233 Cal. App. 2d 61, 70 (1965).)

Response to an MFAA Demand

Once a client?s demand for arbitration is received, the attorney has 30 days to respond. (Rule 3.531.) The response should include any jurisdictional challenges which might exist and, if applicable, whether arbitration was waived. Jurisdictional challenges are limited to where: (i) the attorney is admitted in another jurisdiction, does not maintain an office in California, and no material portion of the services were rendered in California; (ii) the client is making claims against the attorney for wrongful conduct; or (iii) the fees at issue were determined pursuant to statute or court order. (See Cal. Bus. & Prof. Code § 6200(b).) The response must also assert any affirmative defenses or counter claims the attorney might have; otherwise, those claims and/or defenses are waived. (Arbitration Advisory No. 2011-02.)

An attorney who fails to respond to a demand for arbitration may be precluded from participating in those proceedings. However, the arbitration will still go forward, and the arbitrator(s) can make findings regarding whether the failure to appear was willful. In any subsequent proceedings, the superior court can consider the arbitrator?s findings on willfulness and, if the court concurs, the right to seek a trial de novo will be lost. (Cal. Bus. & Prof. Code § 6204(a); Rule 3.543(B).)

Appointment of Arbitrators

If the amount in controversy exceeds $15,000, the matter must be heard by a three arbitrator panel, one of whom must be a non-attorney. (Cal. Bus. & Prof. Code § 6200(e)(1).) Otherwise, a single arbitrator is appointed. (Rule 3.536(B). Where a three arbitrator panel is appointed, the client can request that one of the arbitrators practice primarily civil or criminal law. In single arbitrator cases, the client can request an arbitrator practice either civil or criminal law. (Cal. Bus. & Prof. Code § 6200(e)(1).)

After appointment, either party can disqualify one arbitrator without cause and has unlimited challenges for cause. While ?cause? is not defined, it is likely the same grounds for disqualification of a judge under Code of Civil Procedure section 170.1. A party seeking to disqualify an arbitrator must notify the State Bar within 15 days of service of the Notice of Assignment. (See Rule 3.537.)

Discovery

Once appointed, the arbitrator can issue subpoenas to produce documents and to compel witnesses to attend the hearing. A party seeking a subpoena must submit a completed, unsigned, subpoena to the Bar Association administering the proceedings. Upon a showing of good cause, the presiding arbitrator will then issue the subpoena. (Cal. Bus. & Prof. Code § 6200(g)(3); Rule 3.540(D).) If a party fails to comply with a subpoena the arbitrator can issues sanctions, including the preclusion of evidence. (See Arbitration Advisory No. 2002-01, available at http://www.calbar.ca.gov/portals/0/documents/mfa/2002-01_Imposition-of-Sanction-by-Arbitrators-in-Conducting-Fee-Arbitration-Matters_r.pdf.) No other forms of discovery are allowed. (Rule 3.540(A).) Thus, absent agreement, in an MFAA arbitration neither party can take depositions or to serve written discovery.

Evidentiary Considerations

MFAA arbitrations use a preponderance of the evidence standard. (Arbitration Advisory No. 1996-03, available at http://www.calbar.ca.gov/Portals/0/documents/mfa/2015/1996-03_Burden-of-Proof-in-Fee-Arbitrations_r.pdf.) However, the formal rules of evidence do not apply. Rather, all evidence is admissible, ?if it is of the sort responsible persons customarily rely on in the conduct of serious affairs, regardless of any common law or statutory rule to the contrary.? (Rule 3.541(A).)

Additionally, the arbitrators have discretion to determine who bears the burden of proof on any particular issue. (See generally Arbitration Advisory No. 1996-03, supra.) Generally, if there is a retainer agreement that complies with Business & Profession Code section 6147 or 6148, the client will have the burden of proving that the attorney?s fees were unearned or unreasonable. (Arbitration Advisory No. 1993-02, available at http://www.calbar.ca.gov/portals/0/documents/mfa/1993-02_Standard-of-Review-in-Fee-Disputes-where-there-is-a-Written-Fee-Agreement_r.pdf.) If the retainer agreement does not strictly comply with sections 6147 or 6148, the agreement is voidable at the client?s option, and the attorney will bear the burden of proving the reasonable value of their services. (Arbitration Advisory 1996-03, supra; Spires v. American Bus Lines, 158 Cal.App.3d 211 (1984).)

To prove the reasonable value of services, detailed time records are not necessarily required. Rather, in many situations, such as contingency fee or flat fee cases, it is generally understood that time records are not maintained and oral testimony can suffice to meet the attorney?s burden. (Arbitration Advisory No. 1998-03, available at http://www.calbar.ca.gov/portals/0/documents/mfa/1998-03_Determination-of-a-Reasonable-Fee_r.pdf.) In hourly cases, however, the lack of detailed billing records will be viewed with suspicion and can violate Business & Professions Code section 6148, making the fee agreement voidable. (Arbitration Advisory No. 1998-03, supra.)

Regardless of the billing arrangement, to prove the reasonable value of the services, an attorney must substantiate the number of hours spent on the matter and their reasonable hourly rate. (Id.). While an agreed upon rate usually serves as the benchmark, where there is no prior agreement, the reasonable hourly rate must be proved. Notably, MFAA awards cannot be based upon an hourly rate that exceeds the rate that was actually charged. (Id.) Thus, an attorney who provided their client with a discounted rate, can only recover fees based on that rate, even though it was below the reasonable rate.

In calculating the reasonable value of the services, the arbitrator will typically multiply the number of substantiated hours by attorney?s reasonable hourly rate. (Id.) This formula can be problematic in contingency fee cases where the attorney was able to negotiate a speedy resolution, but their retainer agreement was voided. In that situation, the attorney will only recover fees based on the actual time spent on the matter, rather than the contingency rate, which may be significantly less.

While damages based upon an attorney?s wrongful conduct cannot be awarded, evidence of wrongful conduct can be presented and fees can be reduced based upon any such wrongdoing. (Cal. Bus. & Prof. Code § 6203(A); Rule 3.541(B).) Fees can also be reduced or eliminated if the client did not receive sufficient value from the attorney?s services. Thus, fees that were incurred as a result of the attorney?s error or procedural misstep will not likely be awarded. (Arbitration Advisory No. 1998-03, supra.)

Additionally, neither party can be awarded their fees incurred in the proceedings, even if there is a fee provision in the retainer agreement. Rather, the arbitrator can only apportion the arbitration filing fee between the parties. (Cal. Bus & Prof. Code § 6203(a).)

Correcting, Amending or Vacating an MFAA Award

Within 30 days of service, either party can request that the arbitrator correct or amend the award. (Rule 3.545(A). An award can only be corrected if there is a mistake in calculation or in the description of a person or property, or other defect of form that does not affect the merits. (Cal. Code Civ. Proc. § 1286.6.) Amendment is only permitted when the award is inadvertently incomplete and the amendment does not prejudice either party. (Id.) The arbitrator then has 30 days to either issue a corrected award or deny the request. Notably, a request to correct or amend an award does not extend the deadline to request a trial de novo. (Rule 3.545(A)(2).) A binding arbitration award can also be vacated on the grounds specified in section 1286.2 of the Code of Civil Procedure,. (See Cal. Bus. & Prof. Code § 6203(b).) To vacate an award, a petition must be filed in the superior court having jurisdiction over the matter, within 10 days of service of the award. (Cal. Code Civ. Proc. § 1284.)

Trial De Novo

Within 30 days of service, either party in a non-binding arbitration can file a rejection of arbitration award with a request for a trial de novo. (Cal. Bus. & Prof Code § 6204.)

If a lawsuit is already pending between the parties, the request for trial de novo must be filed in that case. Otherwise, the party requesting a trial de novo must institute a new action and file the request there. If a de novo request is not timely filed, the MFAA award becomes binding. (Cal. Bus. & Prof. Code § 6203(b) see also Loeb v. Record, 162 Cal.App.4th 431, 444-447 (2008).

In the de novo action, the MFAA award and findings, except those regarding a party?s failure to respond or participate, are inadmissible and have no force or effect. (Cal. Bus. & Prof. Code § 6204(e).) The superior court can, however, award the prevailing party their attorney?s fees. The party filing the request for trial de novo is deemed prevailing only if they obtain a judgment more favorable than the arbitration award. Otherwise, the other party is prevailing. (Id.)

An Ongoing Conversation

Fee disputes can be complicated, time consuming and invariably result in dissatisfied clients. As such, they should be avoided whenever possible. To avoid fee disputes, there should be a clear understanding and agreement regarding the anticipated costs of the representation and how the attorney will charge fees and costs. Because unanticipated contingencies often occur, this should be an ongoing conversation between lawyer and client. Fees and costs should be discussed on a regular basis and all important decisions and/or recommendations should be documented. It is important to remember that, when assessing different strategies, the costs involved are often as important to the client as the potential success. Frequent and transparent communication is critical.

Retainer agreements must strictly comply with Business and Profession Code 6147 or 6148. If not, an attorney is only entitled to receive the reasonable value of their services and will have the burden of proving that value. Time records, invoices and/or fee statements should be maintained?even in flat fee or contingency cases?and should be as detailed as possible. Not only are these records invaluable in proving the reasonable value of services, but they can demonstrate to the client how much time and effort was actually spent on their behalf, thereby potentially avoiding the dispute altogether. If despite best efforts, a fee dispute does arise, , attorneys must participate in the MFAA proceedings and adhere to the rules discussed above. By so doing, a hard working attorney will minimize the risk that fees will be reduced by an arbitrator or judge.

David B. Owen is partner at Nemecek & Cole in Sherman Oaks, California and is a certified specialist in legal malpractice law. Shawnell J. Russell is an associate at Nemecek & Cole and practices primarily in the defense of professional liability claims.

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