Mcle Article: Law Firm Growth Mandatory Fee Arbitration: the Overlooked Solution to Legal Fee Disputes

• Publication year: 2020
• Author: By Patrick M. Maloney and Gregory M. Smith

MCLE Article: Law Firm Growth Mandatory Fee Arbitration: The Overlooked Solution to Legal Fee Disputes

By Patrick M. Maloney and Gregory M. Smith

Patrick M. Maloney is the founder of The Maloney Firm, APC, a boutique business litigation firm located in El Segundo, California. Gregory M. Smith joined The Maloney Firm three years ago, after stints with law firms in Santa Barbara and Downtown Los Angeles. Mr. Maloney and Mr. Smith are business litigators who regularly represent attorneys and clients in legal fee disputes and related matters involving legal malpractice and breaches of fiduciary duty. Both Mr. Maloney and Mr. Smith are fee arbitrators and Mr. Maloney has served on the California State Bar Committee for Mandatory Fee Arbitration. Mr. Maloney may be reached at pmaloney@maloneyfirm.com; Mr. Smith may be reached at gsmith@maloneyfirm.com.

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The California Legislature enacted the Mandatory Fee Arbitration Act ("MFAA"), California Business Professions Code sections 6200-6206, to be an efficient means for resolution of disputes between lawyers and clients over legal fees.¹ Arbitrations under the MFAA proceed under a different set of rules than traditional, contractual arbitration.² Typically administered by local bar associations, MFAA arbitrations are simple, informal, and limited in scope. Because the Legislature recognized the imbalance in bargaining power that attorneys hold in resolving fee disputes with clients, arbitration under the MFAA endeavors to put clients on equal footing with their former attorneys.³ Traditional rules of evidence do not apply, and either party may opt out of the resulting award by seeking a trial de novo. For these and other reasons, MFAA arbitration "favors the client."⁴ Because an MFAA award initially is non-binding, many attorneys do not give MFAA arbitration the respect it deserves. But the MFAA can provide substantial benefits to lawyers who take the process seriously, including faster collection of unpaid fees, and the avoidance of pesky malpractice claims.

BENEFITS OF MFAA ARBITRATION

Attorneys enjoy several benefits in arbitrations conducted under the MFAA. To start, the process moves quickly under generally streamlined rules. The Los Angeles County Bar Association, for example, sets relatively short deadlines for arbitrators to schedule and hold hearings and issue awards, with each step taking a matter of weeks. Thus, the fee dispute can be resolved in months, rather than years, as is now common in California's Superior Courts.

When enacting the MFAA process, the Legislature barred clients from including affirmative malpractice claims in fee arbitration due to concerns such claims would inequitably inflate malpractice insurance premiums.⁵ Although clients can raise malpractice claims relative to the value of the legal services provided, they cannot be afforded affirmative relief.⁶ In the event the MFAA arbitration panel finds the attorney's services were substandard, those findings are inadmissible and cannot be used for res judicata and collateral estoppel arguments.⁷ As a counterbalance, the fee arbitration process tolls the legal malpractice statute of limitations.⁸

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In a MFAA fee arbitration, the fact finders are lawyers. A single attorney arbitrator decides disputes under $25,000.⁹[9] Where the dispute exceeds $25,000, an arbitration panel comprised of two attorneys and one lay member who has been trained and qualified.¹⁰ In either circumstance, a lawyer can expect a level of understanding of the practice of law and legal billing from the fee arbitrators that substantially exceeds that found in a civil jury.

Finally, though awards issued in MFAA arbitrations are initially non-binding, they are not toothless. The attorney and client each have thirty days to reject the award.¹¹ If neither does so timely, the award becomes final and binding, and can be confirmed as a judgment.¹² On the other hand, if either party rejects the award and requests a trial de novo, he or she is exposed to paying the other side's legal fees in the subsequent proceedings if a better result than the MFAA arbitration is not achieved.¹³ Lastly, because MFAA arbitrations are informal, they will not support a subsequent claim for malicious prosecution.¹⁴

AN ATTORNEY MUST PROVIDE THE CLIENT WITH A NOTICE OF THE CLIENT'S RIGHT TO FEE ARBITRATION WHEN INITIATING ANY LEGAL FEE DISPUTE

Under the MFAA, an attorney is required to provide the client with a Notice of the Client's Right to Fee Arbitration prior to initiating a fee proceeding, or at the time of service of the Summons and Complaint (and if the retainer agreement allows, before or at the time of demanding a traditional binding arbitration).¹⁵ The lawyer must use the form approved by the California State Bar, available on both the state and local bar association websites. Using the correct and up-to-date form ensures all of the required language is included and prevents later disputes concerning whether proper notice was provided. The required notice may be issued only after an actual dispute over fees has arisen.¹⁶ The client has thirty days from the date of mailing of the notice to determine whether to elect to proceed under the MFAA.¹⁷

Fee arbitration under the MFAA is voluntary for the client, but mandatory for the attorney. If the client desires to proceed with an MFAA arbitration, the attorney must participate. The client's initiation of fee arbitration automatically stays any suit or contractual arbitration filed by the lawyer concerning unpaid legal fees pending the resolution of the MFAA fee arbitration.¹⁸ However, the client waives the right to compel fee arbitration if they initiate any type of suit against the attorney arising from the representation, including a legal malpractice action.¹⁹

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