Copyright Anjula Gupta

Inside Look at Mandatory Fee Arbitrations in California

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The following resource aims to help California lawyers and the public navigate the attorney fee arbitration programs run by the county bar associations and the State Bar of California. This article is written in conjunction with a presentation hosted by the State Bar of California Solo & Small Firm Section.

As background, I’m a full-time mediator/arbitrator with JAMS. As part of my practice, I decide fee petitions in class actions and resolve fee disputes for the Riverside, San Mateo, Santa Clara and San Francisco County Bar Associations. In all material respects, the programs are run in the same way. The only major difference is that San Mateo and Riverside don’t offer Fee Mediations.

If you’d like 1.5 hours of MCLE Ethics credit, listen to the webinar of this program through the State Bar of California (and pay a fee).

APPLICABLE ETHICS RULES

RESOURCES 

BRIEF HISTORY & POLICY

  1. The Mandatory Fee Arbitration Act (1978), Bus & Prof. Code 6200- 6206, was enacted to provide cheaper, faster, and a confidential means to resolve fee disputes for all parties- lawyers and clients. Hargarten, Fine Tuning California’s Mandatory Attorney Fee Arbitration Statute, 16 U.S.F. L.Rev. 411, 415 (1982).
  2. Before then, attorneys & clients had to sue each other in court or file an arbitration action (assuming that the contract allowed it). That process was weighted toward the attorney because the client often had to hire an attorney for the fee dispute. So, the legislature enacted a process that would be less onerous and with simple procedures.
  3. To incentivize clients to participate, neither party can recover any legal fees incurred in participating in the MFA. Clients were concerned that if they participated and lost, the attorney would also bill them for the MFA.
  4. To incentivize attorneys, the statute requires lawyers to participate if the client elects it.
  5. A request for arbitration, any record of an arbitration proceeding, and the award are all confidential. Cal Bar Rule 3.512 (Confidentiality) But the confidentiality is blown if anyone files a court action to confirm the award.

HOW IT WORKS

  1. Counties vs. State Program
    1. The county bar associations have initial jurisdiction unless:
      1. The county does not have a program. About half of the counties do not have a program including such large counties as Alameda, San Joaquin and Santa Cruz. Because of the administrative burden of running a program and the declining number of arbitrations, counties are increasingly closing their programs.
      2. The county declines to hear the arbitration for whatever reason.
      3. The county bar does not offer non-binding arbitration. (Email me if you know of any bars that don’t offer non-binding arb).
      4. Either party believes that the county bar cannot offer a fair hearing/process.
  2. Mandatory for attorneys but not clients
    1. A client may compel an attorney to MFA.
    2. An attorney may not compel a client to MFA. Unless there’s a MFA clause in the engagement letter, the county bar has no authority to proceed with an attorney-requested arbitration if the client refuses. Bus & Prof. Code 6200(c)
      1. I have had arbitrations withdrawn because the client never responded to the attorney’s request for arbitration.
      2. Likewise, attorneys cannot require clients to “opt out” of the protections of the MFAA in advance of a fee dispute. Alternative Systems, Inc. v. Carey, 67 Cal. App. 4th 1034, 1043 (1998).
  3. Deadlines/Statute of Limitations
    1. The statute of limitations for a client to file a claim for arbitration is 1-year. Code Civ. Pro. 340.6(a)
      1. If the client can fashion its claim as conversion instead of a fee dispute, it may be able to extend the 1-year SoL period. Lee v. Hanley, S220775 (Cal. 2015)
    2. But once an attorney serves the client with Notice of Client’s Right to Fee Arbitration, that window is shortened to 30-days.
    3. Once the 30-day window expires, the county only has jurisdiction if all parties consent.
  4. Binding/non-binding
    1. The award is binding only if both parties consent.
    2. The parties may not consent to binding arbitration until after the dispute arises. Bus & Prof. Code 6204(a) So, a clause in the engagement letter requiring the parties to submit to binding MFA will be reformed to read as non-binding MFA.
    3. However, even if it is non-binding, the award becomes binding if no one files an action for trial de novo within 30 days. Bus & Prof. Code 6203(b) That way, nearly every non-binding award becomes binding.
  5. Panel composition
    1. The panel is selected by the administrator (county bar or state) based on availability, subject matter expertise and lack of conflicts. On occasion, I have rejected an assignment because I knew a party well and did not want to even give the appearance of bias.
    2. For smaller matters, one arbitrator will be appointed. What counts as smaller varies by county ($5k, $7,500, $10k, $15k, $25k).
    3. Otherwise, it’ll be a 3-arbitrator panel, one of whom has to be a lay (non-lawyer) arbitrator and another has to be, at the option of the client, a civil or criminal lawyer. Bus & Prof. Code 6200(e)
    4. The parties have an opportunity to challenge the selection and the administrator will replace that arbitrator. Usually you get 1 challenge w/o cause and unlimited challenges for cause. Cal Bar Rule 3.537(A) (Disqualification or discharge of arbitrators) The last thing I want is for someone to challenge my appointment after I’ve issued the award. So, it’s best to ding the arbitrator at the outset if you have any reservations on their ability to be impartial.
  6. Filing fee
    1. The party filing the arbitration pays the filing fee and the panel can apportion that fee as part of the award. Cal Bar Rule 3.534 (Fees) It is not the case that the panel always splits the fee among the parties.
    2. The fee is based on the amount at issue and can often exceed the filing fee for a civil action.
    3. The fees vary by county ($25-$7k+)
    4. Arbitrators donate their time up to 4 hours. Cal Bar Rule 3.536(E) (Arbitrators) After that, we usually get $150 per hour per arbitrator, split between the parties.
  7. Discovery
    1. Very limited and only upon a showing good cause. Bus & Prof. Code 6200(g)(3) I’ve only had someone ask for a subpoena once.
    2. The client has the right to inspect and obtain her file kept by the attorney. Cal Bar Rule 3.540(B) (Preparation for hearing)
  8. Notice of Hearing
    1. Usually sent by bar after checking the parties’ and arbitrators’ calendars. It sets the date/time/location of the hearing.
    2. On occasion, a party will choose not to attend the hearing. The arbitrator has the ability to conduct the hearing without that party if notice has been given and may make findings about the failure to appear. If the non-appearing party challenges the award in court and the court determines that the failure to appear was willful, then that party loses the right to a trial after arbitration. Bus & Prof. Code 6204(a)
      1. Takeaway- attend the hearing!
  9. The Hearing
    1. As formal or informal as the arbitrators want it to be
    2. Closed to the public, no transcription, no recording Cal Bar Rule 3.541(F) (Hearing)
    3. Unlike a court action, a corporate client need not be represented by an attorney. That makes the fee arb process potentially cheaper than a court action.
    4. Testimony under oath: I swear in everyone offering testimony at the beginning of the hearing using the bar issued oath. Bus & Prof. Code 6200(g)(2) To make the process more efficient, I allow witnesses to stay in the hearing room.
    5. Time limits: The arbitrators have substantial leeway to set time limits on the hearing. Typically, I give each side up to 1 hour to present their evidence and argument. Rarely have we exceeded it.
    6. Documentary evidence: The typical documents submitted are:
      1. Engagement letter
      2. Parol evidence if the engagement letter does not memorialize all agreed upon terms
      3. Modifications of the terms of engagement
      4. Invoices/billings
      5. Payments/canceled checks
      6. Emails/letters about the issues in dispute
    7. Direct & cross examination
    8. The attorney may disclose client confidences and work product without violating her ethical duty of confidentiality. Bus & Prof. Code 6202
    9. Closing arguments – optional and most people don’t do it.
  10. Ex Parte Communications Cal Bar Rule 3.538 (Contact with arbitrator)
    1. To minimize the chance of ex parte communications, I try to route all communications through the bar staff or my case manager. The less I interact with the parties during a pending arbitration, the less the chance my award will be overturned if challenged.
    2. Once the award has issued, the ex parte restrictions are lifted, but I still avoid discussing the case with the lawyer/party.
  11. Deliberation
    1. The arbitrators do not communicate prior to the hearing for anything other than scheduling and procedure.
    2. We don’t talk about the case or our evaluation of the expected evidence.
    3. After the matter is submitted, we meet briefly to discuss our evaluation of the issues and how we should rule. The deliberations can last anywhere from 10 minutes to an hour. In rare cases, we’ve had follow-up deliberation calls. The norm is a relatively quick unanimous ruling.
  12. Dissents are extremely rare. Since 2010, I’ve never been on a panel where there’s been a dissenting opinion. I’ve only threatened to do one once but didn’t have to follow through when my fellow panelists and I came to agreement.
  13. The Award
    1. Timing: Depends on the county, but I try to get it in within 5 days of hearing.
    2. Written & signed by the arbitrators. Bus & Prof. Code 6203(a)
    3. Reasoned
    4. On the Bar’s form- I’ve had my award rejected because I didn’t use the right form.
    5. The awards are reviewed by the bar for errors and procedural issues (wrong form) but not for substance.
    6. The bar will issue the award to the parties along with a Notice of Your Rights After Fee Arbitration form. Bus & Prof. Code 6204.5(b) This will start the 30-day clock to file for trial de novo for non-binding awards.
  14. Amending/correcting the award
    1. After the award has issued, the panel has limited ability to correct it- only for a calculation error. Otherwise, the award is final. Only once have I had a party contact me to have the award corrected/amended and the bar let them know that we did not have the authority to do so.
    2. A court also has very limited authority to amend/correct a binding award. Code of Civ. Pro. 1286.2
  15. Subsequent Action
    1. The 30-day window to file an action for trial de novo is firm. Maynard v. Brandon, 36 Cal. 4th 364 (Cal. 2005)
    2. Small claims: if the amount at issue is $5k or less, then a subsequent action may be brought in small claims court by filing form SC-101: Attorney Fee Dispute (After Arbitration).
    3. There is a strong disincentive to file an action after a non-binding award has issued because of the legal fees that’ll be incurred plus the potential for being on the hook for the other side’s fees if you do worse in the trial de novo. Bus & Prof. Code 6204(d)
    4. The non-binding arbitration award is not admissible in a future proceeding and does not serve as res judicata or collateral estoppel. Bus & Prof. Code 6204(e)
  16.  Collections
    1. The client may file a Client‟s Request for Enforcement of an Arbitration Award with the State Bar if the attorney has not satisfied the Award within 100 days.
    2. The Award is different from other arbitration awards.
      1. The Bar can place the attorney on involuntary inactive status until the refund is paid. Bus & Prof. Code 6203(d)(1) An attorney on inactive status may not practice law.
      2. The Bar can fine the attorney up to 20% of amount owed (up to $1k) to ensure collections. Bus & Prof. Code 6203(d)(3)
    3. If it is confirmed by a court and converted to a judgment, statutory post-judgment interest will accrue.

Shirish Gupta is an award-winning mediator and arbitrator with JAMS. As part of his practice, he mediates/arbitrates attorney fee disputes. He is a past-Chair of the California State Bar Solo and Small Firm Section Executive Committee and had his own solo practice from 2008 through 2015.

Book a mediation with Shirish.