Legal Malpractice

Arbitration Clauses in Retainers and Legal Malpractice

By (Andrew Lavoott Bluestone)

A trend in legal malpractice retainer agreements, especially in the Intellectual Property field is the all encompassing Arbitration clause.  Beyond the statutory required arbitration in attorney fee disputes below a certain dollar figure, these arbitration clauses require arbitration of all disputes, whether in tort, contract or other claims. 

Arbitration has long been said to be quick and economic, but recent experience has led to a different take.  In a $1 million dollar legal malpractice case, the fees to the arbitration company and to the arbitrator may approach $ 75-$100,000.  Of course to bring the same action in Supreme Court costs about $ 385. 

Matter of Brady v Williams Capital Group, L.P. ;2010 NY Slip Op 02434 ;Decided on March 25, 2010 ;Court of Appeals ;Jones, J. investigates the situation in which a litigant can't afford arbitration, and the consequences.  Without deciding the case [it requires further fact finding in Supreme Court] the Court of Appeals reviewed Federal law in pursuit of an answer.
 

in Green Tree Financial Corp-Ala. v Randolph (531 US 79 [2000]). In Green Tree, the Supreme Court, applying Gilmer, recognized that "the existence of large arbitration costs could preclude a litigant . . . from effectively vindicating her federal statutory rights in the arbitral forum" (531 US at 90), a result which cuts against the broad public policy in favor of arbitration. Further, the Supreme Court adopted a case-by-case approach by ruling that "where . . . a party seeks to invalidate an arbitration agreement on the ground that arbitration would be prohibitively expensive, that party bears the burden of showing the likelihood of incurring [the] costs" that would deter the party from arbitrating the claim (id. at 92). Although the Green Tree Court did not set forth a standard of how detailed a showing the party seeking to invalidate an arbitration agreement must make, the Court held the "risk" of "prohibitive costs is too speculative to justify the invalidation of an arbitration agreement" (id. at 91). "
 

In adopting the standard New York courts are to apply in resolving the question of a litigant's financial ability, we are mindful of the strong State policy favoring arbitration agreements and the equally strong policy requiring the invalidation of such agreements when they contain terms that could preclude a litigant from vindicating his/her statutory rights in the arbitral forum. We believe that the case-by-case, fact-specific approach employed by the federal courts (see e.g. Bradford; Morrison v Circuit City Stores, Inc., 317 F3d 646 [6th Cir 2003]; Spinetti v Service Corp. Intl., 324 F3d 212, 218 [3d Cir 2003]), as well as the principles set forth in Gilmer and Green Tree, properly acknowledge and balance these competing policies.

Based on the foregoing, we hold that in this context, the issue of a litigant's financial ability is to be resolved on a case-by-case basis and that the inquiry should at minimum consider the following questions: (1) whether the litigant can pay the arbitration fees and costs; (2) what is the expected cost differential between arbitration and litigation in court; and (3) whether the cost differential is so substantial as to deter the bringing of claims in the arbitral forum (see Bradford, 238 F3d at 556). Although a full hearing is not required in all situations, there should be a written record of the findings pertaining to a litigant's financial ability. Finally, we do not see the need to detail the precise documentation a court should request to resolve this issue. Such matters are best left to the court's discretion.

Full post as published by New York Attorney Malpractice Blog on April 27, 2010 (boomark / email).