Fees: New York Trial Judge Finds Law Firm's Retainer Arbitration Clause Unethical (Web)

In Larrison v. Scarola Reavis & Parent LLP, No. 600194/05 (N.Y. Sup. Ct. N.Y. County Nov. 21, 2005)(order staying arbitration), available at http://decisions.courts.state.ny.us/fcas/FCAS_docs/2005DEC/30060019420051SCIV.PDF, a New York state supreme court judge held that--as a matter of law--a party who participates in an arbitration does not waive her right to object to that arbitration, if the agreement to arbitrate was obtained without "knowing and informed consent."

The decision–the Supreme Court is New York state’s trial court--involved a dispute over a fee arbitration between a law firm and its client; the order called the arbitration clause “one-sided” and unethical.

Petitioner Larrison, a former executive at American Strip Steel Co., in Kearney, N.J., and the law firm, Scarola Reavis & Parent LLP of New York, arose out of an arbitration clause in an engagement letter that Larrison signed when she hired the firm in connection with a bitter employment dispute, which involved a criminal complaint against a company officer on the petitioner’s behalf.

The arbitration clause specified that fee disputes would go before the American Arbitration Association, without de novo judicial review. But Larrison couldn’t submit “a claim, counterclaim, or otherwise” to arbitration unless the firm consented, and “unless there is also specific written agreement by any insurance carrier which may have [c]overage for any potential liability” for the law firm.

Larrison signed the agreement and paid the firm a $10,000 retainer. Eventually, the lawyer-client relationship broke down and Larrison fired the firm. Scarola Reavis, which is now know as Reavis Parent Lehrer, claimed that it had incurred $56,000 in legal fees. By that point, Larrison had paid $28,000. The law firm commenced arbitration proceedings pursuant to the engagement letter’s terms to recover the balance.

The issue was whether the firm’s failure to provide Larrison with a copy of Part 137 of the New York Rules of the Chief Administrator invalidated the arbitration clause in the engagement letter. Part 137 describes a party's rights in connection with disputes over legal fees. The rules require attorneys filing suit for fees to notify the client that the client may proceed through a fee dispute resolution program, which usually is conducted via local bar associations.

The firm conceded that it never advised Larrison about her Part 137 rights when it proffered the engagement letter. Nor did it advise the petitioner about her Part 137 rights when it instituted an action to recover a fee, pursuant to Section 137.6(b).

State Supreme Court Justice Ronald A. Zweibel, in his 15-page order, explained that Part 137 was promulgated to "instill confidence in attorneys and the legal system by providing clear guidelines as to what duties are incumbent on, and what rights inure to the benefit of the attorney and the client."

Part 137 outlines specific rights and responsibilities in connection with legal fee disputes. Two rules were directly applicable to the case:

(1) All attorneys suing for fees must notify the client that it has the option of proceeding to the fee dispute resolution program in lieu of court. The attorney must inform the client about this right in the retainer agreement, or in the absence of a retainer providing for arbitration, the attorney must send notice to the client by certified mail or personal service with the heading "Notice of Client's Right to Arbitrate." See Section 137.6.

(2) An attorney that institutes an action to recover a fee must allege in the complaint that it has complied with Part 137 of the Rules. See Section 137.6(b).

In the case at hand, the law firm acknowledged that it did not follow either of these procedural requirements. Zweibel writes that "Trust is the bedrock upon which the attorney/client relationship is built." Any agreement that potentially pits the lawyer's interest--i.e., arbitrating fee disputes on its own terms--against the client's--i.e., right to access fee dispute programs or the courts to resolve fee disputes--is inherently unenforceable.

Consequently, the order states that "to allow the respondent to circumvent the Rules of the Chief Administrator would be against public policy," and therefore, the engagement letter’s arbitration agreement was void.

The question remained whether Larrison could waive her right to object to the arbitration proceedings when she, and her new attorney, already had participated in the proceedings. The law firm argued that Larrison's participated because her current attorney had a telephone conference with Scarola Reavis relating to the arbitration and didn’t object during the call. Furthermore, the firm argued that Larrison shouldn’t be allowed to object to the arbitration since New York law requires an application to stay arbitration must be made within 20 days after service of the demand. See N.Y. C.P.L.R. 7503(c).

The court summarily dismissed both of the law firm’s arguments:

There is no anomaly in not enforcing a statute of limitations when to do so would aid and assist the party claiming its protection in violating the law. To permit the arbitration to continue and then refuse to confirm the award is a waste of time and effort. Judicial economy suggests that the process be stopped now, rather than wait. . . . If the issue to be arbitrated is against public policy, the arbitrator does not have the jurisdiction to reach a conclusion concerning a provision of an agreement which is patently illegal. . . . Thus, even if the Statute of Limitations has expired, the commencement and continuation of this arbitration with respect to that provision is void ab initio.

Citations omitted.)

            Accordingly, Justice Zweibel stayed the arbitration. Since Larrison never consented to binding arbitration of the law firm’s claims for legal fees pursuant to Part 137, she could not, as a matter of law, waive her right to object by allegedly "participating" in the arbitration.

--By Eric Laufgraben, Associate, Dewey Ballantine LLP