December 2014 | Earn one hour of MCLE Credit in General
When clients don’t pay: Complying with California’s Mandatory Fee Arbitration Act
An unfortunate fact of professional life is that disputes arise and clients refuse to pay their bills. When this occurs, the lawyer cannot immediately proceed with a lawsuit without taking a necessary first step. The lawyer must first notify the client of the opportunity for arbitration pursuant to California’s Mandatory Fee Arbitration Act (the “MFAA”). Failure to properly comply with the MFAA can result in the dismissal of an attorney’s lawsuit to recover fees. So understanding the MFAA procedures and complying with them is critical for any attorney who needs to collect hard-earned fees from non-paying clients.
The MFAA is embodied in Sections 6200 through 6206 of the State Bar Act. The Legislature created the MFAA to be a “separate and distinct arbitration system applicable to disputes between clients and attorneys over legal fees, costs, or both.” (Bernard Rosenson v. Greenberg Glusker Fields Claman & Machtinger LLP, (2012), 203 Cal.App.4th 688, 693.) The State Bar regulates and administers the arbitration program, and has promulgated rules for the conduct of arbitrations found in the State Bar Rules 3.500 – 3.566. In most cases, local bar associations conduct the arbitrations, but in certain circumstances discussed below, the State Bar may oversee the arbitration directly.
As a creature of California, the MFAA does not apply when the fee dispute involves an attorney also admitted to practice in another jurisdiction, or solely in another jurisdiction, as long as the attorney maintains no office in California and no “material portion” of the legal services were rendered in California. (Bus. & Prof. Code, § 6200(b)(1) and State Bar Rule 3.503(D).) In disputes involving non-California clients or attorneys, the question may arise whether the Federal Arbitration Act (the “FAA”) preempts the MFAA. The FAA embodies a strong federal policy in favor of arbitration, and therefore, preempts conflicting state laws. (Southland Corp. v. Keating, (1984) 465 U.S. 1, 10-16.) The effect of the FAA on MFAA arbitration is unclear. (See Aguilar v. Lerner, (2004) 32 Cal.4th 974, 990 n.8 [declining to address any issue concerning the Federal Arbitration Act].)
The “mandatory” in MFAA applies only to the attorney. A client may initiate MFAA arbitration, in which case the arbitration is mandatory for the attorney. However, a client cannot be forced under the MFAA to arbitrate the dispute. (Aguilar v. Lerner, (2004) 32 Cal.4th 974, 984.) The procedures by which a client may opt out of the MFAA are discussed below.
Attorney responsibilities under the MFAA
The prerequisite to pursuing a client for fees is termination of the attorney-client relationship. (See Cal. State Bar Form. Opn. 2009-178; Los Angeles County Bar Ass’n Form. Opn. No. 521 (1994).) Once the relationship is terminated, an attorney who wants to proceed with a lawsuit or non-MFAA arbitration must first give the client written notice of the client’s right to arbitrate any fee or cost dispute under the MFAA. Failure to give the required notice is grounds for dismissal. (Bus. & Prof. Code, § 6201(a); State Bar Rule 3.501; Huang v. Cheng, (1998) 66 Cal.App.4th 1230, 1234.) The notice must be in a form prescribed by the State Bar, and served before or with service of summons of any complaint filed by the attorney against the client. (See Bus. & Prof. Code, § 6201; State Bar Rule 3.501.) The attorney should not, however, provide the notice until an actual dispute has arisen. For example, it is not appropriate to mail the final bill to a client and mail an MFAA notice the next day, because no fee dispute exists until the client disputes the bill or fails to pay. (Huang v. Cheng, (1998) 66 Cal.App.4th 1230, 1234.)
Many contracts for legal services include binding arbitration provisions. Even if an engagement agreement provides for binding arbitration, the client may still elect to participate in non-binding MFAA arbitration. In that case, the parties complete the MFAA before binding contractual arbitration. (See Schatz v. Allen Matkins Leck Gamble & Mallory LLP, (2009) 45 Cal.4th 557, 565.) After the MFAA arbitration is complete, contractual binding arbitration provisions become enforceable in lieu of the statutory right to request a trial de novo following an MFAA arbitration award. (Bernard Rosenson v. Greenberg Glusker Fields Claman & Machtinger LLP, (2012) 203 Cal.App.4th 688.) A provision in a fee agreement for binding MFAA fee arbitration is unenforceable against the client because under the MFAA the client can elect binding MFAA arbitration only after the fees/costs dispute has actually arisen. (See Bus. & Prof. Code, § 6204(a) & (c).)
MFAA arbitration stays other actions
The client may stay the attorney’s lawsuit for fees by filing a “Request for Arbitration” within 30 days of receipt of the notice of right to arbitration. A timely request stays the attorney’s lawsuit until the arbitration award issues, the arbitration is otherwise terminated, or the stay is vacated by court order that the dispute is not arbitrable under the MFAA. (Bus. & Prof. Code, § 6201(a), (b), & (c), State Bar Rule 3.511.) Other pending arbitrations are also stayed, along with small claims court actions if they relate to fees and costs. (Bus. & Prof. Code, §§ 6201(b) & 6201(c) – applies to all actions.) In a superior court action, the party who causes the stay (generally the client) must file a notice of the stay with the court. (See State Bar Rule 3.650(a), (b)(3), & (c).) When the stay ends, the party who filed the notice of stay must immediately serve and file a notice of termination of the stay. (State Bar Rule 3.650(d).) Mandatory Judicial Council forms are used for notice of the stay, and for notice of termination of the stay.
A court may vacate the stay, in whole or in part, after a noticed hearing. In order to vacate or modify the stay, the court must find that the matter is “not appropriate” for MFAA arbitration. (Bus. & Prof. Code, § 6201(c).) For example, in a complex dispute between a sublessor attorney and a sublessee law firm concerning the lease, unrelated legal fees, malpractice and misconduct allegations, the court determined that MFAA arbitration was not appropriate. (Fagelbaum & Heller, LLP v. Smylie, (2009) 174 Cal.App.4th 1351, 1362.) The court determined that MFAA arbitration was inappropriate because it was unlikely to resolve the parties’ disputes given the intertwined and complex issues of malpractice and attorney misconduct at the heart of the claims and defenses. (Fagelbaum, at p. 1362.)
Clients may waive MFAA rights
An attorney may avoid the need for the MFAA arbitration if the client waives those rights under the MFAA. The Business & Professions Code sets forth several ways a client may waive MFAA rights:
- If the client fails to file the Request for Arbitration within 30 days of receiving the notice of arbitration rights (Bus. & Prof. Code, § 6201; State Bar Rule 3.502(A)(1));
- If an attorney gives proper notice of the MFAA rights, and serves a lawsuit, the client may waive arbitration rights by filing an answer to the lawsuit before requesting arbitration. (Bus. & Prof. Code, § 6201(b); State Bar Rule 3.502(A)(3));
- If the client commences an action, or files any pleading seeking judicial resolution of the fees/costs dispute or “affirmative relief against the attorney for damages or otherwise based upon alleged malpractice or professional misconduct.” (Bus. & Prof. Code, § 6201(d); State Bar Rule 3.502(A)(2); Fagelbaum & Heller, LLP v. Smylie, (2009) 174 Cal.App.4th 1351, p. 1362 [client waived right to an MFAA arbitration because he sought affirmative relief for legal malpractice]; Liska v. Arns Law Firm, (2004) 117 Cal.App.4th 275, 283.)
Case law provides grounds for a client’s waiver of MFAA arbitration beyond those stated in Business & Professions Code section 6201. (Law Offices of Dixon R. Howell v. Valley, (2005) 129 Cal.App.4th 1076, 1094.)
In Dixon Howell, the client raised the law firm’s failure to provide MFAA right to arbitrate as an affirmative defense in the client’s answer. However, the client did not ask the court for a stay in order to pursue arbitration until 13 months into the case, on the eve of trial and following significant discovery in the case. In such circumstances the court held that the client had waived its right to MFAA arbitration.
In reaching its decision, the court in Dixon Howell established a five-factor test to evaluate whether a client has waived the right to MFAA arbitration:
- whether the party’s actions are inconsistent with the right to arbitrate;
- 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;
- whether a party either requested arbitration enforcement close to the trial date, or delayed for a long period before seeking a stay;
- whether important intervening steps have taken place such as judicial discovery procedures not available in arbitration;
- whether the delay affected, misled, or prejudiced the opposing party.
(Dixon Howell, at 1099-1103.)
MFAA does not apply to all disputes
Not all disputes between attorneys and clients are subject to the MFAA. (See Bus. & Prof. Code, § 6200(b); State Bar Rule 3.503.) Fee disputes are not subject to the MFAA if no material portion of the services were provided in California, as long as the attorney does not maintain an office in California, and is also licensed or solely licensed in another jurisdiction. (Bus. & Prof. Code, § 6200(b)(1); State Bar Rule 3.503(D).) Malpractice claims and professional misconduct claims for affirmative relief need not be submitted to MFAA arbitration. If evidence regarding such claims bears on the amount owing, however, the arbitrator may receive evidence on such topics. (Bus. & Prof. Code, § 6200(b)(2); 6203(a); State Bar Rule 5.503(C).) The MFAA also does not apply to disputes about fees or costs to be paid by the client that have been determined pursuant to statute or court order. (Bus. & Prof. Code, § 6200(b)(3); State Bar Rule 3.503(A).) Finally, non-client requests are not subject to the MFAA. (State Bar Rule 3.503(B)(E).) For example, “cumis counsel” fees are not subject to the MFAA because the insurer, rather than the client, is obligated to pay those fees. Disputes over cumis fees are resolved by a single neutral arbitrator selected by the parties. (Civ. Code, § 2860(C).)
The hearing and award
Arbitration under the MFAA is administered by local bar associations around the state pursuant to the rules promulgated by the State Bar. Fee arbitration is conducted by the bar association for the county where the subject legal services were substantially performed, or where at least one of the attorneys involved had an office when the services were performed. (State Bar Rule 3.505(A).) Fee arbitration may be conducted by the State Bar if no local bar association has jurisdiction, one of the parties submits a declaration showing why that party cannot obtain a fair hearing at the local association, or the local bar association demonstrates to the State Bar that it has no jurisdiction, or is unable to arbitrate the matter. (State Bar Rule 3.505(B).)
The award rendered in an MFAA arbitration will determine the amount of fees and/or costs owed to the attorney, if any. The award may also order the attorney to refund fees/costs to the client. The award will not include “prevailing party” attorney’s fees. Although many attorney-client fee agreements provide for prevailing party awards, they are not awardable in MFAA arbitrations. (Bus. & Prof. Code, § 6203(a) & (c); State Bar Rule 3.544(D)(1).) Fees may be awarded for confirming, vacating or correcting the award in superior court, unless the prevailing party did not appear at the arbitration. (Bus. & Prof. Code, § 6203(c).)
The MFAA award determines the amount of fees owed, but has no evidentiary, or res judicata/collateral estoppel effect. The award and the arbitrators’ determinations are not admissible in evidence in any other action or proceeding. (Bus. & Prof. Code, § 6204(e); Liska v. Arns Law Firm, (2004) 117 Cal.App.4th 275, 285.) This is true even if the parties agree to be bound by the MFAA arbitration, which they may agree to after the dispute arises. (Liska v. Arns Law Firm, (2004) 117 Cal.App.4th 275, 285.) The MFAA was designed to provide a speedy and inexpensive method for determining the amount owed, if any. To maintain this “informality and economy, both the client and the attorney must be assured that the consequences of the arbitration will extend no further.” (Liska v. Arns Law Firm, (2004) 117 Cal.App.4th 275, 287.)
Post-arbitration award options
The State Bar, or local bar association that conducts the arbitration, has the responsibility to notify the parties of their rights to judicial relief after the arbitration. (Bus. & Prof. Code, § 6204.5(b); State Bar Rule 3.544(F).) Once the award is issued, the parties have several options which are subject to specific deadlines.
If the parties have not agreed in writing to be bound by the MFAA award, either party may request a trial de novo. (Bus. & Prof. Code, § 6204(a)-(c); State Bar Rule 3.508(B) & 3.513.) If neither party requests a trial de novo within 30 days of service of the notice of the award, the award becomes final and binding. (Bus. & Prof. Code, § 6203(b).) This procedure places the burden on the party dissatisfied with the award to take steps to prevent it from becoming binding. (Glaser, Weil, Fink, Jacobs, & Shapiro, LLP v. Goff, (2011) 194 Cal.App.4th 423, 443-444.) A party who willfully fails to appear at the arbitration hearing, however, shall not be entitled to a post-arbitration trial de novo. (Bus. & Prof. Code, § 6204(a); State Bar Rules 3.543, 3.544.)
The client’s right to trial de novo review is trumped where the fee agreement contains a provision requiring binding arbitration of fee/costs disputes. (See Schatz v. Allen Matkins Leck Gamble & Mallory LLP, (2009) 45 Cal.4th 557, 565.) A binding contractual arbitration can follow non-binding arbitration under the MFAA. (Schatz v. Allen Matkins Leck Gamble & Mallory LLP, (2009) 45 Cal.4th 557, 565.) Once the arbitration under the MFAA has either been waived by the client or given effect, the MFAA has played its role. Either party can pursue judicial action and, if the parties had agreed to binding arbitration, the California Arbitration Act would apply. In order to stop the MFAA award from becoming binding, the party must file a demand for the binding contractual arbitration within 30 days of service of the notice of the MFAA award. (Bus. & Prof. Code, § 6204.) The procedures then follow the normal contractual arbitration rules.
Where there is no contractual arbitration clause, the post MFAA trial de novo procedure depends on whether an action is already pending between the parties. If an action is already pending in court, then the party rejecting the arbitration award must file the request for trial de novo in the action within the 30-day deadline. (Bus. & Prof. Code, § 6204(b); Loeb v. Record, (2008) 162 Cal.App.4th 431, 445 [The term “action pending” used in the MFAA refers to a lawsuit in which the parties include both the attorney and the client].) Judicial Council forms exist for both notices.
When no action is pending between the parties, filing a lawsuit against the other party to the arbitration within 30 days is sufficient to invoke the trial de novo remedy. (Bus. & Prof. Code, § 6204(c).) The 30-day deadline runs from the date of service of the notice of arbitration award, and is jurisdictional. (Bus. & Prof. Code, § 6203(b); Bus. & Prof. Code, § 6204(b) & (c).) Because the deadline is jurisdictional, relief to file a late de novo request is unavailable under Code of Civil Procedure, Section 473(b). (Maynard v. Louise Brandon, (2005) 36 Cal.4th 364.) Thus, proper calendaring of the deadline and compliance with the deadline are critical steps in obtaining the trial de novo.
If an MFAA award becomes binding, or if a subsequent, binding contractual arbitration becomes final, the prevailing party must confirm the award via a petition to the appropriate court. (See Code Civ. Proc., §§ 1285, 1286.) If the award is confirmed, it has the same effect as a civil judgment. (Code Civ. Proc., § 1287.4.)
State Bar collection procedure
Apart from the normal judgment collection procedures, the State Bar Act provides for an internal collection procedure against attorneys. If an arbitration award ordering an attorney to refund fees/costs to a client becomes binding, and the attorney fails to comply, then the State Bar “shall enforce” the award. (Bus. & Prof. Code, § 6203(d).) The State Bar will place the attorney on involuntary inactive status until the award is paid. (Bus. & Prof. Code, § 6203(d)(1).) As directed by the State Bar, the attorney “shall pay” administrative penalties of up to 20 percent of the amount awarded or $1,000, whichever is greater, and/or reasonable costs. The unpaid penalties and/or costs will be added to the attorney’s membership fees for the next year. (Bus. & Prof. Code, § 6203(d).)
Procedures exist for attorneys to show that they are not responsible for the award, or that they cannot pay. (Bus. & Prof. Code, § 6203(d)(2).) There is also a 100-day stay on any request for administrative enforcement under Business & Professional Code, § 6203 in order to allow the attorney an opportunity to pay the award. (Bus. & Prof. Code, § 6203(d)(5).)
If an attorney does not comply with the requirements of the MFAA before pursuing a client for payment, the attorney’s efforts may be wasted and may lead to further expense and disagreement with the client that may fuel claims of malpractice. Taking the time to understand and comply with the MFAA is necessary for any attorney trying to recover unpaid fees.
Richard Egger is the managing partner of the Ontario office of Best, Best & Krieger LLP and the firm’s general counsel. His practice focuses on probate and trust litigation, business and real estate litigation, and complex litigation for public entities. He is a member of the State Bar of California’s Standing Committee on Professional Responsibility and Conduct. The opinions expressed herein are his own.