United States: The Virtues And Vices Of Arbitrating Legal Malpractice Cases

California courts recognize that arbitration is a favored method of resolving disputes. (Lawrence v. Walzer & Gabrielson (1989) 207 Cal.App.3d 1501, 1505 (Lawrence).) Arbitration can be fast, private, and provide a more sophisticated trier of fact. As such, lawyers frequently draft retainer agreements that require their clients to arbitrate legal malpractice claims. Courts uphold these provisions when they are clear, explicit, and entered voluntarily. (Mt. Holyoke Homes, L.P. v. Jeffer Mangels Butler & Mitchell, LLP (2013) 219 Cal.App.4th 1299, 1309 (Mt. Holyoke Homes, L.P); Powers v. Dickson, Carlson & Campillo (1997) 54 Cal.App.4th 1102 (Powers).) Sometimes, however, attorneys are better served litigating a client's legal malpractice claim in a court of law, with its formality, wide-ranging discovery, and rights of appeal. Where arbitration is appropriate, attorneys must be careful to avoid waiver, by waiting too long after being sued to seek enforcement of an arbitration provision.

1. Arbitration Clauses are Enforceable in Legal Malpractice Cases

California Code of Civil Procedure section 1281.4 provides that a written arbitration agreement is enforceable. Section 1281.2 provides, in pertinent part: "On petition of a party to an arbitration agreement alleging the existence of a written agreement to arbitrate a controversy and that a party thereto refuses to arbitrate such controversy, the court shall order the petitioner and the respondent to arbitrate the controversy if it determines that an agreement to arbitrate the controversy exists . . . ."

Section 1281.2 applies in legal malpractice cases. (Powers, supra, 54 Cal.App.4th at p. 1106-1107.) In Powers, an attorney included a mandatory arbitration provision in his initial and subsequent retainer agreements with a client. The attorney was sued for malpractice and petitioned the Trial Court to compel arbitration. The Trial Court denied the attorney's petition. The Court of Appeal reversed. It found that the arbitration provision in the initial retainer agreement did not attempt to limit the attorney's liability for legal malpractice, was not ethically improper and violated no conflict of interest rules. The arbitration provision in the later amendment merely confirmed the existing arbitration agreement. (Id. at pp. 1114–1115.) Subsequently, in Mt. Holyoke Homes, L.P., supra, 219 Cal.App.4th at p. 1310, the court held that an attorney owes no duty to point out to his or her clients a clear and conspicuous provision compelling arbitration.

2. Should Attorneys Seek to Compel Arbitration of Legal Malpractice Disputes?

Attorneys may seek to compel arbitration for several reasons. An attorney may be concerned that a jury will sympathize with a likeable, injured plaintiff. An attorney may face certain liability and seek arbitration to try to contain damages, or to shield himself from embarrassment or from future claims from similarly situated potential plaintiffs, who may learn about an adverse judgment. Additionally, attorneys may select arbitration to ensure that a trained finder of fact will decide technical and complex legal and factual issues. Alternatively, an attorney, who is confident of his or her blamelessness, and who feels that extensive discovery is unnecessary, may compel arbitration in order to obtain a speedy resolution of the dispute. This may be easier said than done.

Although arbitration can be speedy, private, and informal, compelling arbitration is not without its downsides. Pleadings are less formal, and discovery may be limited. Thus, attorneys and their insurance carriers may be unable to properly analyze the full scope of liability or damages early in an arbitration proceeding. Demurrers and motions for summary judgment, which are effective tools to eliminate legal malpractice claims, are often unavailable. And, there is no right to appeal most arbitration awards, except under very unusual circumstances.

Additionally, many insurance policies provide the insurer the right to control the defense. Thus, before seeking arbitration, an attorney should know her insurer's position and obtain written consent. The attorney should evaluate the claim and make sure she understands what is being alleged, and her potential exposure. Finally, the attorney must be confident in her selection of a trustworthy arbitrator; she will not be able to appeal the arbitrator's decision, in all likelihood.

The Mt. Holyoke Homes, L.P., decision demonstrates one risk of arbitration. The claimant waited until a defense award to challenge the arbitrator's impartiality. The Court of Appeal found an appearance of bias on a sketchy record merely because one of the partners in the defendant law firm had given a testimonial for the arbitrator many years earlier.

3. Avoiding Waiver When Arbitration is Preferred

Legal malpractice defendants may be tempted to avoid some of arbitration's downsides by ensuring that pleadings are settled and undertaking limited discovery prior to petitioning the court to compel arbitration. Attorneys may rely on California's "strong policy favoring arbitration agreements [which] requires close judicial scrutiny of waiver claims. . . ." (St. Agnes Medical Center v. PacifiCare of California (2003) 31 Cal.4th 1187, 1195 (St. Agnes).) Waiver is not lightly inferred, and any doubts regarding waiver are resolved in favor of arbitration. (Ibid.)

The California Supreme Court has held that participating in litigation does not, in and of itself, result in waiver. (Iskanian v. CLS Transportation Los Angeles, LLC (2014) 59 Cal.4th 348, 377 (Iskanian).) Waiver is also not found just because a party caused the other side to incur expenses as part of litigation.

Waiting to file a petition to compel arbitration is risky, however, because California law provides no single test as to what will constitute waiver of an arbitration right. (St. Agnes, supra, 31 Cal.4th at pp. 1195-1196.) Instead, courts are directed to a six-factor test in assessing a waiver claim:

(1) Whether the party's actions are inconsistent with the right to arbitrate;

(2) Whether the litigation machinery has been substantially invoked and the parties are well into preparation of a lawsuit before the party notified the opposing party of an intent to arbitrate;

(3) Whether a party either requested arbitration enforcement close to the trial date or delayed for a long period before seeking a stay;

(4) Whether a defendant seeking arbitration filed a counterclaim without asking for a stay of proceedings;

(5) Whether important intervening steps [e.g., taking advantage of judicial discovery procedures not available in arbitration] had taken place; and

(6) Whether the delay affected, misled, or prejudiced the opposing party

(Iskanian, supra, 59 Cal.4th at p. 375.)

Two recent cases, with similar facts, but different outcomes, highlight the risk involved in participating in litigation prior to seeking to compel arbitration. In Khalatian v. Prime Time Shuttle, Inc. (2015) 237 Cal.App.4th 651, 662 (Khalatian), the Trial Court found that a defendant waived contractual arbitration after it delayed petitioning to compel arbitration for 14 months. The Trial Court explained that the defendants actively participated in discovery and case management conferences and meetings with opposing counsel. "Only after exhausting all other means (Defendants' demurrer was overruled, Defendants' Motion to Strike was denied, Defendants were required to file an answer to Plaintiff's Second Amended Complaint, and Defendants filed said answer) and with an impending trial looming, did the Defendants seek arbitration." (Id. at p. 662.)

The Court of Appeal reversed and rejected the Trial Court's reading of the record. The Court of Appeal highlighted the defendants taking their demurrer and motion to strike off calendar and answering the second amended complaint. While the filing of a demurrer may lead to a determination on the merits, no determination was ever made because the defendants answered the second amended complaint. "Answering a complaint does not result in waiver." (Gloster v. Sonic Automotive, Inc. (2014) 226 Cal.App.4th 438, 449.) The Court of Appeal also rejected the Trial Court's claim that trial was looming. "The trial date was more than a year away when defendants filed their motion to compel." (Khalatian, supra, 237 Cal.App.4th at pp. 662.)

Further, to waive a right to compel arbitration, delay -- even a 14 month delay -- must be coupled with "evidence that defendants stretched out the litigation process, gained information about plaintiff's case they could not have learned in an arbitration, or waited until the eve of trial to move to compel arbitration." (Id. at pp. 662-663.) "Because plaintiff demonstrated no prejudice from defendants' delay in moving to compel arbitration, the court erred in finding waiver." (Ibid.)

Conversely, in Oregel v. PacPizza, LLC (2015) 237 Cal.App.4th 342, the Court of Appeal affirmed the Trial Court's denial of a petition to compel arbitration. The plaintiff filed a class action complaint against his employer for the employer's alleged failure to fully reimburse delivery drivers for necessary expenses associated with using their personal vehicles to deliver pizza. (Id. at p. 345.) The defendant filed a motion to compel arbitration 17 months after the complaint was filed -- citing the plaintiff's job application, which contained a clause requiring his lawsuit to be arbitrated. (Ibid.) Prior to filing its petition, the parties conducted class action discovery, and the plaintiff had prepared and filed its motion for class certification.

The Oregel Court explained that the defendant employer waived its right to arbitration because it had invoked the litigation machinery by propounding and responding to class based discovery, which would be irrelevant if the plaintiff was forced to arbitrate his claims. (Id. at p. 355-356.) It found that the defendant acted inconsistently with its intent to arbitrate, by failing to allege arbitration as an affirmative defense in its answer and failing to raise arbitration at case management conferences. The plaintiff was allegedly prejudiced because he was deprived of the advantages of arbitration by the 17-month delay, which forced him to spend time and money filing a class certification motion and undertaking discovery, neither of which would not have been allowed in arbitration. (Ibid.)

Neither the Trial Court nor the Court of Appeal was convinced by the defendant's argument that its delay was justified, given the state of the law at the time it filed its answer. (Id. at p. 356.) The defendant argued that, prior to Iskanian, supra, 59 Cal.4th 348, it was unclear whether arbitration provisions in job applications would be enforced. The court criticized the argument as an attempt to "rely on an erroneous interpretation of the law to justify its delay in seeking to enforce an arbitration agreement. (Id. at p. 358.)

In both Oregel and Khalatian, the court focused on the same six factors to determine whether extended delay created a waiver of a right to arbitration. In Oregel, the court seemed convinced that the delay was prejudicial because, among other things, the defendant engaged in discovery and law motion that would not have been available in arbitration. By contrast, in Khalatian, the court emphasized that all the discovery in which the defendant participated would have been equally available in arbitration.

The Oregel Court noted that a defendant can waive its right to arbitrate with a short delay as well. It cited various cases, wherein defendants had waived rights to arbitrate in only a few months because the defendants challenged the pleadings with demurrers and motions to strike or sought other merit based determinations. (Id. at p. 361.)

Thus, a defendant wishing to arbitrate a legal malpractice claim must be careful before engaging in discovery and law motion. It may be tempting to file a demurrer prior to seeking arbitration, when the grounds for demurrer could have been litigated in arbitration or do not affect the merits of a claim, i.e., the statute of limitations. In Zamora v. Lehman (2010) 186 Cal. App. 4th 1, 17, the court held "[a]s a preliminary matter, the demurrer, which was based on the statute of limitations, did not affect Lehman's and Weiss's right to arbitrate because that issue could have been properly raised in arbitration." Similarly, in Groom v. Health Net (2000) 82 Cal.App.4th 1189, 1196–1197, the court held, "where complaint was vague, defendant did not waive arbitration by bringing demurrers that forced plaintiff to clarify legal theories and identify parties sued."

However, filing any motion that affects the merits is risky. Filing a demurrer initiates the litigation machinery and can be viewed as antithetical to a desire to arbitrate. If a demurrer is lost, a later motion to compel arbitration may be seen as forum shopping. In Lewis v. Fletcher Jones Motor Cars Inc. (2012) 205 Cal.App.4th 436, 450, the court explained "that litigating issues through demurrers may justify a waiver finding. The court was particularly skeptical of "engaging in multiple rounds of demurrers." (Ibid.)

Thus, a defendant desiring to arbitrate a legal malpractice action should promptly seek arbitration. The defendant must raise arbitration as an affirmative defense in its answer, advise the court of its intent to arbitrate at case management conferences, and limit discovery and law motion to those arguments and devices that would be equally available in arbitration.

4. Should An Attorney Include A Mandatory Arbitration Provision in Her Retainer Agreement?

Since clear arbitration provisions which require arbitration of legal malpractice claims will routinely be enforced, attorneys may be tempted to include these provisions in their retainer agreements. An attorney should check with his malpractice carrier before doing so. Additionally, the attorney should weigh the risk of a client using the arbitration clause to force the attorney to arbitrate a legal malpractice claim, which could likely have been dismissed by demurrer or summary judgment. Although demurrers and summary judgments may theoretically be available in arbitrations, due to the general lack of appealability arbitrators may be particularly reluctant to grant such motions.

On the other hand, individual plaintiffs rarely are interested in arbitration, so they typically will not seek arbitration even if there is an arbitration provision in a retainer agreement, inclusion of such a provision, this may lead to a would-be plaintiff to have more realistic settlement expectations. Indeed, they may believe the cost of arbitration is more expensive than going forward via litigation, particularly due to the cost of an arbitrator's fees. (Sometimes retainer agreements call for three arbitrators.) This may lead to more realistic expectations from a plaintiff in terms of a settlement at the outset of the dispute.

5. Conclusion

There are virtues and vices associated to arbitrations in a legal malpractice claim. Attorneys should be conversant with the pros and cons of seeking arbitration.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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