Winning in California Mandatory Attorney-Client Fee Arbitration

According to a study by Steele and Nimmer, the top two concerns that clients have about their attorneys are that fees are too high, and that performance is delayed.  Perhaps because of this, the California Legislature passed laws in 1978 requiring that the State Bar establish a fee arbitration program. It may also establish a fee dispute mediation program. (Business and Professions Code, thereafter sometimes BPC section 6200(a)).

Arbitration and mediation have been shown to be faster. cheaper, more affective, less disruptive, more confidential, and better at preserving important relationships than litigation.

To ensure that clients are able to take advantage of these characteristics of arbitration, but retain their right of access to the courts, if requested the arbitration process is mandatory for attorneys, but voluntary for clients, as provided by BPC 6200 (c). Mediation is voluntary for both parties.

Let’s suppose that you are drawn into a fee dispute over a legal fee or cost bill. What can you do to improve your chances of winning arbitration?

Know the Scope of the Process

The fee arbitration program does not apply in all cases. This article shall not apply to any of the following:

  1. Disputes where a member of the State Bar of California is also admitted to practice in another jurisdiction or where an attorney is only admitted to practice in another jurisdiction, and he or she maintains no office in the State of California, and no material portion of the services were rendered in the State of California.
  2. Claims for affirmative relief against the attorney for damages or otherwise based upon alleged malpractice or professional misconduct, except as provided in subdivision (a) of Section 6203.
  3. Disputes where the fee or cost to be paid by the client or on his or her behalf has been determined pursuant to statute or court order.” (BPC section 6200 (b)).

In addition, a person not liable for payment of the fees (such as a third-party beneficiary) may not take advantage of the process.  Likewise, claims that have been assigned may not be heard. Additionally, fee disputes between attorneys are not covered. (California Rules of Procedure for Fee Arbitrations, State Bar Rules 3.503).

California State Bar Rule 3.503 discusses not only exceptions to the mandatory fee arbitration scheme outlined in the statute, it added several more as well. This emphasizes the need to be aware of both the statute and the relevant rule. There is significant overlap, but they are not coextensive. Careful attention must be paid to the Rules, just as arbitration participants in other contexts must study the rules of the selected arbitration provider

Despite subdivision (b), evidence of misconduct or malpractice Is admissible when it concerns the appropriateness of the fees charged: “If the arbitrator determines that the attorney’s malpractice or professional misconduct reduced the value of legal services provided, the arbitrator can reduce the attorney’s fees.” (https://www.calbar.ca.gov/Public/Complaints-Claims/Fee-Disputes/FAQ; see also BPC section 6204).

Upon receiving notice that a dispute exists, be sure that it is within the scope of the process outlined by statute. While the Bar should reject disputes outside the scope of the statute of its own accord, do not rely on this. Make your objections known. Provide adequate evidence, such as a court order for fees, malpractice complaint for damages, or a declaration that the subject dispute arises from work performed outside of California.

Know the Statute Controlling the Fee Arbitration Process and the Relevant State Bar Rules

Normally, arbitration is a matter of contract between the parties. However, fee arbitration is a statutory matter controlled by BPC sections 6200 through 6206. Just as you must know any contractual provisions controlling arbitration, it is vital that you are fully aware of each of the Business and Professions Code sections. They contain a number of specific, deadline-driven requirements that will affect your success or failure.

For example, attorneys are required to give notice of the right to mandatory fee arbitration upon serving a lawsuit or notice of other proceedings concerning recovery of fees and/or costs.  The failure to do so will lead to the dismissal of the action or proceeding.

A client who fails to request arbitration within 30 days of service of such a notice waives the right to mandatory fee arbitration. (BPC section 6201).

Another important procedural issue is the statute of limitations under BPC section 6206. Arbitration may not be commenced if a civil action for the same relief would be time barred. But while a client may not use mandatory fee arbitration offensively if the statute of limitation has passed, he or she may invoke its provisions defensively in response to an action brought by an attorney.

Waiver of the Right to Arbitrate

In addition to failure to timely respond to a notice of right to arbitration, (State Bar Rules 3.502(a)), other actions can be deemed incompatible with the right to arbitration of a fee dispute.  As with other forms of arbitration, these incompatible acts, like beginning or answering a suit, involve litigation (State Bar Rule 3.502).

Maintain the Non-Binding Nature of the Arbitration

Although it is mandatory for attorneys to participate in the arbitration process, it is not binding except in special circumstances.

The three ways that non-binding arbitration can become binding are set forth in BPC 6204(a):

  1. A written agreement signed by all parties consenting to binding arbitration. The agreement must be signed after the dispute has arisen but before the taking of evidence is the arbitration.
  2. Failure to request trial de novo with insurance companies that will help us was 30 days of service of the mandatory fee arbitration award.
  3. Willful failure to attend or participate in a hearing result in a binding award against the recalcitrant party under State Bar Rule 3.543.

By avoiding these situations, a dissatisfied party may move forward to a new trial.

That said, fee arbitration is remarkably effective at resolving disputes. Only about 10% of participants file for a new trial after a fee arbitration award.

Thus far, we have looked at winning as a procedural matter: Exclusions, failure to respond within deadlines, waiver of the right to arbitration by incompatible litigation behavior and a statute of limitations defense.  These are ways to avoid fee arbitration, and can be counted as winning, but suppose you end up in arbitration How can you win then?

Start with a Proper Fee Agreement

Business and Professions Code sections 6147 and 6148 address the requirements for attorneys’ fee agreements. Section 6147 addresses contracts for contingency fees, while 6148 addresses hourly and other arrangements. With minor exceptions, the agreements must be in writing, and must fully explain the hourly rate and other basis for the calculation of amount due.  Clients may request bills every 31 days and are entitled to a copy of the contract. Costs must be clearly described. Non-compliant contracts are voidable by the client. But the reasonable value of services is still owed.

Compliance with these code sections is important because it eliminates the need to show the fee is reasonable. The only limitations are that the fee cannot be unconscionable (California Rule of Professional Conduct 1.5), and that the attorney use reasonable care, skill and diligence.

A showing of reasonableness requires a so-called lodestar analysis. The California Supreme Court defined the lodestar method for determining the amount of reasonable attorney fees in Serrano v Priest (Serrano III) (1977) 20 C3d 25, 48. Under Serrano III, a lodestar amount is calculated by multiplying the number of hours reasonably spent by each person billing by the reasonable hourly rate for each biller.  The reasonableness of the hourly rates is dependent on the average rate for the community, the experience, reputation and skill of the attorneys or staff members involved, and the practice area.   Establishing these factors typically requires expert testimony.  The need for this complex analysis is eliminated by using proper fee agreements.

Assuming fee agreements are used, the questions at arbitration are limited to whether the time charged for was actually expended, whether it was reasonably necessary, and whether reasonable care, skill and diligence was exercised.

Be Aware of the Limitations on Discovery

Unlike traditional arbitration, there is no discovery in California mandatory fee arbitration. Experts and other witnesses may be used, and subpoenaed by the arbitrator, but not deposed. Documents may also be subpoenaed. And they should be, to be certain that both sides are working with the same evidence.  But most of the evidence is going to be the content of the attorney’s file, much of which will have been copied to the client.  So review your files, and especially your bills, in preparation for arbitration.  As standard practice, when you become aware of a billing dispute, communicate in writing with the client, asking for a detailed explanation of the problem.

Remember, you won’t be able to perform discovery.  Correspondence will not only alert you to the contentions being made, it will demonstrate that you are a reasonable person trying to resolve a conflict. It may also help you to understand the situation and settle it before arbitration.  If a new contention is raised at the arbitration, you can point out that it was never complained about before.

Use Contemporaneous Billing Records

Business and Professions Code section 6148(b) envisions the use of contemporaneous billing records, with time spent on each task recorded as it is performed. Although such billing is technically not required, it is the industry standard. Though a sworn declaration detailing time spent will support a fees request, it will also leave the arbitration panel wondering why bills weren’t provided.  Even in contingent and flat fee cases, it is a good practice why it took as long as it did, and how it benefited the client, or could have if the court were persuaded. If the question was a close one, that should be emphasized.

Use an Attorney Familiar with the Fee Arbitration Process in your Area

Retain expert counsel active in the fee arbitration process in your area. Studies of consumer arbitration have shown that repeat players, and those who know the arbitrators fare better than those who are unfamiliar with local practice and personalities. Other studies show that parties with attorneys do better than those without them, even when those parties are experienced in arbitration.

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