The Supreme Court of New Jersey recently issued its ruling and opinion in the closely watched case of Delaney v. Trent S. Dickey and Sills Cummins & Gross, P.C. (Dec. 21, 2020)(“Sills”), relating to enforcement of a mandatory arbitration agreement in the Sills engagement letter. The Court refused to compel arbitration in that case because Sills had not adequately communicated with its client about the risks and benefits of agreeing to mandatory arbitration in order to make an informed decision. The Court did not go so far as to declare all mandatory arbitration provisions in engagement letters unenforceable, as some feared it might, but it requested additional guidance from the New Jersey Advisory Committee on Professional Ethics on the scope of an attorney’s disclosure requirements in this context.
On January 18, 2022, the Advisory Committee did that and more. The Committee expanded the scope of its mandate by asking the Court to reconsider its decision in Delaney and pronounce that New Jersey lawyers are prohibited from including mandatory arbitration provisions in their engagement agreements, even with appropriate disclosures and counseling. The Committee further proposed uniform guidelines for a separate rider addressing arbitration provisions and stressed the need for oral discussion with a client and recommendation to seek review by independent counsel.
The Committee expressed the surprising view that lawyers and law firms seek to incorporate arbitration clauses in their engagement letters for purposes contrary to the clients’ best interests, notwithstanding the fact that such clauses are ubiquitous in contractual agreements of all kinds, and will often serve the salutary purposes of reducing time and client expense, as well as affording confidentiality if the parties so agree.
The Committee’s position that arbitration provisions should be barred from attorney-client engagement letters ignores the mandate of the Federal Arbitration Act which precludes enforcement of state laws or rules that discriminate against arbitration. The Report does not address preemption, or for example, the holding in Smith v. Lindemann that “[a] New Jersey rule prohibiting the inclusion of an arbitration provision in an attorney-client representation agreement . . . would be preempted by the FAA.” Lindemann, 710 F. App’x 101, 105 (3d Cir. 2017).
In light of the Committee’s glaring omission of the preemption doctrine and the common use of mandatory arbitration provisions, including in law firm engagement letters throughout the country, the Committee’s expression of support for reconsideration of Delaney and an outright ban on arbitration provisions in engagement letters should not gain traction.
The Committee next proposes its recommendations for appropriate protection of clients. The Committee’s guidance is for lawyers to hold an oral discussion with clients about the effect of agreeing to mandatory arbitration and use a separate rider with uniform language. The format of the rider would include “check boxes” outlining the benefits and downsides of mandatory arbitration, explain the specific disputes subject to mandatory arbitration, suggest that a client consider securing the advice of independent legal counsel, and state whether a client may reject mandatory arbitration and still be represented by the lawyer.
The New Jersey Committee exhibited a high degree of skepticism about the motivation of lawyers who include mandatory arbitration provisions at the outset of a representation and the relative bargaining power between a lawyer and client, but its recommendations with respect to ensuring a client’s informed consent are not completely out of line with the ethics guidance in other jurisdictions.
Practically speaking, what should lawyers outside of New Jersey seeking to preserve their arbitration provisions do in light of these recent developments?
- Consider adding a recommendation that the client obtain independent counsel to review the arbitration provision. Such a recommendation is not required in Pennsylvania, per the Supreme Court’s holding that requiring such clauses single out arbitration agreements for “disparate treatment” and violate the “equal footing” principle mandated by the FAA. Taylor v. Extendicare Health Facilities, Inc., 147 A.3d 490, 501 (Pa. 2016). Nevertheless, the recommendation may aid in supporting a conclusion that the client’s consent to mandatory arbitration was informed.
- Take steps to ensure that the client understands the effect of agreeing to mandatory arbitration. In addressing an issue of first impression in Pennsylvania, the Philadelphia Court of Common Pleas was asked to determine the ethical obligations of lawyers when including mandatory arbitration provisions in their engagement letters. Batoff v. Widin, 2015 Phila. Ct. Com. Pl. LEXIS 436. The court noted that the Pennsylvania Supreme Court has not adopted a rule to determine what constitutes effective communications about a mandatory arbitration provision and looked to an Eastern District of Pennsylvania decision on the issue. Sanford v. Bracewell & Guiliani, LLP, 6 F. Supp. 3d 568 (E.D. PA 2014). The Sanford court in turn relied on a test outlined by the Louisiana Supreme Court in Hodges v. Reasonover. stating that clients must be informed of the effect of agreeing to mandatory arbitration, e.g., that they are waiving their rights to jury trial, appeals and broad discovery. Further, clients must be informed that they may have significant upfront costs in an arbitration as compared to litigation and they must be aware of which claims would be covered by the arbitration clause. Finally, clients should be advised that they may still pursue disciplinary complaints against the attorney and they have the right to seek independent counsel review prior to agreeing to the provisions. 103 So.3d 1069, 1077 (LA 2012).
- Set out the mandatory arbitration provisions in a format that clients may easily understand and recognize either in a rider or in your engagement letter. Reasonable minds may differ as to whether a separate rider constitutes a higher level of protection for clients, as suggested by the New Jersey Committee or effectively buries the provisions in legalese as a plaintiff (unsuccessfully) argued in challenging the effectiveness of an arbitration provision in a separate attachment to the engagement letter. Mackin Medical, Inc. v. Lindquist & Vennum, 236 A.3d 1078 (PA 2020).
- Continue to follow developments in your jurisdiction as the caselaw in this area is rapidly developing.
